Unassociated Document
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment no. 1
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended September 30, 2009
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT OF
1934
|
Commission
file number: 000-09459
NEW
CENTURY COMPANIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
061034587
|
(State
or other jurisdiction of
incorporation
or organization)
|
(I.R.S.
Employer
Identification
Number)
|
9831
Romandel Ave.
Santa
Fe Springs, CA 90670
(Address
of principal executive offices)
(562)
906-8455
(Registrant’s
telephone number, including area code)
Not
applicable
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes No x
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). Yes o No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).
Large
accelerated filer
|
Accelerated
filer
|
Non-accelerated
filer
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes o No x
As of
November 5, 2009, the Company had 21,045,500 shares of common stock, $0.10 par
value, issued and outstanding.
Explanatory
Sentence
We are
filing this amendment No. 1 to our Form 10-Q for the period ended September 30,
2009, to amend and currently date our certifications, which are filed as
Exhibits 31.1 and 32.1 to this Form 10-Q/A. We have not updated any other
information included in this report.
NEW
CENTURY COMPANIES, INC.
INDEX
|
|
Page No.
|
|
PART
I - FINANCIAL INFORMATION
|
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|
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Item
1. Financial Statements
|
|
|
F-1 |
|
|
|
|
|
|
Condensed
Consolidated Balance Sheets - September 30, 2009 (Unaudited) and December
31, 2008
|
|
|
F-1 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Operations (Unaudited) -
|
|
|
|
|
Three
and Nine Months Ended September 30, 2009 and 2008
|
|
|
F-2 |
|
|
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Unaudited) -
|
|
|
|
|
Nine
Months Ended September 30, 2009 and 2008
|
|
|
F-3 |
|
|
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
|
F-4 |
|
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|
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|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
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|
4 |
|
|
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
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|
9 |
|
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Item
4T. Controls and Procedures
|
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|
9 |
|
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PART
II - OTHER INFORMATION
|
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|
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|
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|
Item
1. Legal Proceedings
|
|
|
11 |
|
|
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
|
11 |
|
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|
Item
3. Defaults Upon Senior Securities
|
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|
11 |
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|
Item
4. Submission of Matters to a Vote of Security
Holders
|
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|
11 |
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|
Item
5. Other Information
|
|
|
11 |
|
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|
Item
6. Exhibits
|
|
|
11 |
|
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|
|
SIGNATURES
|
|
|
12 |
|
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains certain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the
Securities Exchange Act of 1934. For example, statements regarding the Company’s
financial position, business strategy and other plans and objectives for future
operations, and assumptions and predictions about future product demand, supply,
manufacturing, costs, marketing and pricing factors are all forward-looking
statements. These statements are generally accompanied by words such as
“intend,” “anticipate,” “believe,” “estimate,” “potential(ly),” “continue,”
“forecast,” “predict,” “plan,” “may,” “will,” “could,” “would,” “should,”
“expect” or the negative of such terms or other comparable terminology. The
Company believes that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to it
on the date hereof, but the Company cannot provide assurances that these
assumptions and expectations will prove to have been correct or that the Company
will take any action that the Company may presently be planning. However, these
forward-looking statements are inherently subject to known and unknown risks and
uncertainties. Actual results or experience may differ materially from those
expected or anticipated in the forward-looking statements. Factors that could
cause or contribute to such differences include, but are not limited to,
regulatory policies, available cash, research results, competition from other
similar businesses, and market and general economic factors. This discussion
should be read in conjunction with the condensed consolidated financial
statements and notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q.
Part
I - Financial Information
ITEM
1. FINANCIAL STATEMENTS
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
September 30, 2009
and December 31, 2008
|
|
(Unaudited)
|
|
|
|
|
|
|
September
30,
|
|
|
December
31,
|
|
|
|
2009
|
|
|
2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$ |
3,154 |
|
|
$ |
31,889 |
|
Contract
receivables, net of allowance of $0 and $24,000 for September 30, 2009
and
|
|
|
|
|
|
|
|
|
December
31, 2008, respectively
|
|
|
16,367 |
|
|
|
237,787 |
|
Inventories
|
|
|
399,500 |
|
|
|
564,022 |
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
124,516 |
|
|
|
416,664 |
|
Deferred
financing costs
|
|
|
201,779 |
|
|
|
252,305 |
|
Prepaid
expenses and other current assets
|
|
|
160,466 |
|
|
|
168,668 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
905,782 |
|
|
|
1,671,335 |
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
131,572 |
|
|
|
186,906 |
|
Deferred
Financing Costs, net
|
|
|
91,844 |
|
|
|
233,702 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
1,129,198 |
|
|
$ |
2,091,943 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$ |
20,202 |
|
|
$ |
15,329 |
|
Accounts
payable and accrued liabilities
|
|
|
1,968,865 |
|
|
|
1,367,464 |
|
Dividends
payable
|
|
|
500,550 |
|
|
|
459,275 |
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
64,660 |
|
|
|
1,388,348 |
|
Capital
lease obligation, current portion
|
|
|
17,008 |
|
|
|
27,874 |
|
Derivative
liability
|
|
|
24,296,537 |
|
|
|
2,025,298 |
|
Convertible
notes payable, net of discounts of $1,374,359 at
|
|
|
|
|
|
|
|
|
September
30, 2009 and $2,439,533 at December 31, 2008, respectively
|
|
|
3,200,922 |
|
|
|
1,137,748 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
30,068,744 |
|
|
|
6,421,336 |
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
Capital
lease obligation, long term portion
|
|
|
- |
|
|
|
9,804 |
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
30,068,744 |
|
|
|
6,431,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders'
Deficit
|
|
|
|
|
|
|
|
|
Cumulative,
convertible, Series B preferred stock, $1 par value,
|
|
|
|
|
|
|
|
|
15,000,000
shares authorized, no shares issued and outstanding
|
|
|
|
|
|
|
|
|
(liquidation
preference of $25 per share)
|
|
|
- |
|
|
|
- |
|
Cumulative,
convertible, Series C preferred stock, $1 par value,
|
|
|
|
|
|
|
|
|
75,000
shares authorized, 26,880 shares issued and outstanding
|
|
|
|
|
|
|
|
|
(liquidation
preference of $981,000)
|
|
|
26,880 |
|
|
|
26,880 |
|
Cumulative,
convertible, Series D preferred stock, $25 par value,
|
|
|
|
|
|
|
|
|
75,000
shares authorized, 11,640 shares issued and outstanding
|
|
|
|
|
|
|
|
|
(liquidation
preference of $482,000)
|
|
|
291,000 |
|
|
|
291,000 |
|
Common
stock, $0.10 par value, 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
15,315,500 shares
issued and outstanding
|
|
|
|
|
|
|
|
|
at
September 30, 2009 and 15,344,654 at December 31,
2008
|
|
|
1,531,551 |
|
|
|
1,534,466 |
|
Notes
receivable from stockholders
|
|
|
(564,928 |
) |
|
|
(564,928 |
) |
Deferred
equity compensation
|
|
|
(46,668 |
) |
|
|
(101,667 |
) |
Additional
paid-in capital
|
|
|
6,886,444 |
|
|
|
7,355,007 |
|
Accumulated
deficit
|
|
|
(37,063,825 |
) |
|
|
(12,879,955 |
) |
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(28,939,546 |
) |
|
|
(4,339,197 |
) |
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' deficit
|
|
$ |
1,129,198 |
|
|
$ |
2,091,943 |
|
See
accompanying notes to the condensed consolidated financial
statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
For
the Three and Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
For
the Three Months Ended September 30,
|
|
|
For
the Nine Months Ended September 30,
|
|
|
|
|
|
|
(As
Restated)
|
|
|
|
|
|
(As
Restated)
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CONTRACT
REVENUES
|
|
$ |
644,609 |
|
|
$ |
997,890 |
|
|
$ |
3,058,941 |
|
|
$ |
3,959,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
653,060 |
|
|
|
1,328,845 |
|
|
|
2,665,683 |
|
|
|
4,000,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT (LOSS)
|
|
|
(8,451 |
) |
|
|
(330,955 |
) |
|
|
393,258 |
|
|
|
(41,770 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consulting
and other compensation
|
|
|
424,126 |
|
|
|
121,058 |
|
|
|
563,899 |
|
|
|
466,440 |
|
Salaries
and related
|
|
|
122,129 |
|
|
|
124,193 |
|
|
|
358,625 |
|
|
|
305,919 |
|
Selling,
general and administrative
|
|
|
46,992 |
|
|
|
90,711 |
|
|
|
414,980 |
|
|
|
753,074 |
|
TOTAL
OPERATING EXPENSES
|
|
|
593,247 |
|
|
|
335,962 |
|
|
|
1,337,504 |
|
|
|
1,525,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(601,698 |
) |
|
|
(666,917 |
) |
|
|
(944,246 |
) |
|
|
(1,567,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
on write off of accounts payable
|
|
|
- |
|
|
|
- |
|
|
|
5,680 |
|
|
|
60,205 |
|
Loss
on valuation of derivative liabilities
|
|
|
(19,649,947 |
) |
|
|
(791,700 |
) |
|
|
(21,225,850 |
) |
|
|
(5,995 |
) |
Interest
expense
|
|
|
(1,064,798 |
) |
|
|
(485,802 |
) |
|
|
(2,685,653 |
) |
|
|
(1,340,215 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER EXPENSES, net
|
|
|
(20,714,745 |
) |
|
|
(1,277,502 |
) |
|
|
(23,905,823 |
) |
|
|
(1,286,005 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET LOSS
|
|
$ |
(21,316,443 |
) |
|
$ |
(1,944,419 |
) |
|
$ |
(24,850,069 |
) |
|
$ |
(2,853,208 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
Stock Dividends
|
|
$ |
- |
|
|
|
- |
|
|
$ |
(41,275 |
) |
|
$ |
(41,275 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS APPLICABLE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TO
COMMON STOCKHOLDERS
|
|
$ |
(21,316,443 |
) |
|
$ |
(1,944,419 |
) |
|
$ |
(24,891,344 |
) |
|
$ |
(2,894,483 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss available to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
stockholders per common share
|
|
$ |
(1.39 |
) |
|
$ |
(0.13 |
) |
|
$ |
(1.62 |
) |
|
$ |
(0.20 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
15,358,665 |
|
|
|
15,344,656 |
|
|
|
15,349,376 |
|
|
|
14,478,506 |
|
See
accompanying notes to the condensed consolidated financial
statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Nine Months Ended September 30, 2009 and 2008
(Unaudited)
|
|
|
|
|
As
Restated
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(24,850,068 |
) |
|
$ |
(2,853,208 |
) |
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
62,032 |
|
|
|
61,708 |
|
Bad
debt expense
|
|
|
- |
|
|
|
2,260 |
|
Gain
on write off of accounts payable
|
|
|
(5,680 |
) |
|
|
(60,205 |
) |
Amortization
of deferred financing cost
|
|
|
337,384 |
|
|
|
216,298 |
|
Amortization
of stock-based consulting fees
|
|
|
54,999 |
|
|
|
208,254 |
|
and
employee compensation
|
|
|
|
|
|
|
|
|
Amortization
of BCF and debt discount
|
|
|
1,901,039 |
|
|
|
1,808,684 |
|
Estmated
fair value of options issued to employees and consultants
|
|
|
365,520 |
|
|
|
- |
|
(Gain)
/ loss on valuation of liabilities
|
|
|
21,225,850 |
|
|
|
5,995 |
|
Warrants
issued in connection with debt extension
|
|
|
80,000 |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Contracts
receivable
|
|
|
221,420 |
|
|
|
385,937 |
|
Inventories
|
|
|
164,522 |
|
|
|
216,991 |
|
Costs
and estimated earnings in excess of billings on
|
|
|
|
|
|
|
|
|
uncompleted
contracts
|
|
|
292,148 |
|
|
|
48,042 |
|
Prepaid
expenses and other current assets
|
|
|
8,202 |
|
|
|
(274,579 |
) |
Accounts
payable and accrued liabilities
|
|
|
607,079 |
|
|
|
(859,705 |
) |
Billings
in excess of costs and estimated earnings on
|
|
|
|
|
|
|
|
|
uncompleted
contracts
|
|
|
(1,323,688 |
) |
|
|
361,140 |
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(859,242 |
) |
|
|
(732,388 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(6,698 |
) |
|
|
(32,225 |
) |
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
4,873 |
|
|
|
(12,355 |
) |
Proceeds
from issuance of convertible notes payable
|
|
|
853,000 |
|
|
|
600,000 |
|
Principal
payments on notes payable and capital lease
|
|
|
(20,668 |
) |
|
|
(100,413 |
) |
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
837,205 |
|
|
|
487,232 |
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash
|
|
|
(28,735 |
) |
|
|
(277,381 |
) |
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
31,889 |
|
|
|
281,729 |
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$ |
3,154 |
|
|
$ |
4,348 |
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
cumulative dividends on preferred stock
|
|
$ |
41,275 |
|
|
$ |
41,275 |
|
|
|
|
|
|
|
|
|
|
Debt
discount recorded on convertible notes payable, net of
financing
|
|
|
|
|
|
|
|
|
costs
|
|
$ |
588,695 |
|
|
$ |
2,827,643 |
|
|
|
|
|
|
|
|
|
|
Stock
and warrants issued for financing costs
|
|
$ |
- |
|
|
$ |
102,500 |
|
|
|
|
|
|
|
|
|
|
Cashless
exercise of stock options
|
|
$ |
6,591 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Reclassification
of the estimated fair value of non-employee options
|
|
|
|
|
|
|
|
|
and
warrants to derivative liability
|
|
$ |
129,524 |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
Cumulative
effect to retained earnings due to reclassification of
|
|
|
|
|
|
|
|
|
non-employee
options and warrants to derivative liability
|
|
$ |
707,474 |
|
|
$ |
- |
|
See
accompanying notes to the condensed consolidated financial
statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008 (As
Restated)
1.
ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization
And Nature Of Operations
New
Century Companies, Inc. and its wholly owned subsidiary, New Century
Remanufacturing, Inc., (collectively, the "Company"), a California corporation,
was incorporated March 1996 and is located in Southern California. The Company
provides after-market services, including rebuilding, retrofitting and
remanufacturing of metal cutting machinery. Once completed, a remanufactured
machine is "like new" with state-of-the-art computers and the cost to the
Company's customers is substantially less than the price of a new
machine.
The
Company currently sells its services by direct sales and through a network of
machinery dealers across the United States. Its customers are generally medium
to large sized manufacturing companies in various industries where metal cutting
is an integral part of their businesses. The Company grants credit to its
customers who are predominately located in the western United
States.
The
Company trades on the OTC Bulletin Board under the symbol "NCNC ".
On
October 9, 2009, the Company entered into a share exchange agreement with
Precision Aerostructures, Inc. ("PAI") pursuant to which the sole shareholder of
PAI agreed to transfer all capital stock of PAI to the Company (see Note
6). The Company and PAI are currently in the process of determining
and settling the final acquisition price. PAI is a world class supplier of
precision machined details and assemblies for many of the major aircraft
builders in the United States and around the world. PAI specializes in
engineering, and manufacturing of precision CNC machined multi-axis structural
aircraft components. PAI’s production facility is in Rancho Cucamonga, CA. The
share exchange was consummated on October 9, 2009.
Principles
Of Consolidation
The
condensed consolidated financial statements include the accounts of New Century
Companies, Inc. and its wholly owned subsidiary, New Century Remanufacturing,
Inc. All significant intercompany accounts and transactions have been eliminated
in consolidation.
Basis
Of Presentation
The
accompanying unaudited interim condensed consolidated financial statements have
been prepared by the Company, pursuant to the rules and regulations of the
United States Securities and Exchange Commission (the "SEC"). Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States of America (“GAAP”) have been omitted pursuant to such SEC rules
and regulations; nevertheless, the Company believes that the disclosures are
adequate to make the information presented not misleading. These financial
statements and the notes hereto should be read in conjunction with the financial
statements, accounting policies and notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2008, filed with the
SEC. In the opinion of management, all adjustments necessary to present fairly,
in accordance with GAAP, the Company's financial position as of September 30,
2009, and the results of operations and cash flows for the interim periods
presented, have been made. Such adjustments consist only of normal
recurring adjustments. The results of operations for the three and
nine months ended September 30, 2009 are not necessarily indicative of the
results for the full year ending December 31, 2009. Amounts related to
disclosure of December 31, 2008 balances within these interim condensed
consolidated financial statements were derived from the audited 2008
consolidated financial statements and notes thereto.
The
Company has evaluated subsequent events through November 16, 2009, the filing
date of this quarterly report on Form 10-Q, and determined that no subsequent
events have occurred that would require recognition in the condensed
consolidated financial statements or disclosure in the notes thereto other than
as disclosed in the accompanying notes.
Restatements
The
statement of operations for the three and nine months ended September 30, 2008
and the statement of cash flows for the nine months ended September 30, 2008
included herein were restated to reflect the effect of changes to the original
accounting for the 12% CAMOFI Note issued in February 2006. The
original accounting did not record the separate derivative liability for the
conversion option and warrants in accordance with U.S. accounting
standards. For additional information regarding the restatement, see Note 5
and see Note 11 to our Consolidated Financial Statements included in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2008.
Reclassifications
The
Company has reclassified the presentation of prior-year information to conform
to the current presentation.
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. As of September 30, 2009, the Company has an
accumulated deficit of approximately $37,064,000, had recurring losses, a
working capital deficit of approximately $29,163,000, and was also in default on
its convertible notes. These factors raise substantial doubt about the Company's
ability to continue as a going concern. The Company intends to fund operations
through anticipated increased sales along with renegotiated or new debt and
equity financing arrangements which management believes may be insufficient to
fund its capital expenditures, working capital and other cash requirements for
the year ending December 31, 2009. Therefore, the Company will be required to
seek additional funds to finance its long-term operations. The
successful outcome of future activities cannot be determined at this time and
there is no assurance that if achieved, the Company will have sufficient funds
to execute its intended business plan or generate positive operating
results.
In
response to these problems, management has taken the following
actions:
·
|
continued
its aggressive program for selling
machines;
|
·
|
continued
to implement plans to further reduce operating costs;
and
|
·
|
is
seeking investment capital through the public and private
markets.
|
The
condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
Inventories
Inventories
are stated at the lower of cost or net realizable value. Cost is determined
under the first-in, first-out method. Inventories represent cost of work in
process on units not yet under contract. Cost includes all direct material and
labor, machinery, subcontractors and allocations of indirect
overhead. At each balance sheet date, the Company evaluates its
ending inventories for excess quantities and obsolescence. Among other factors,
the Company considers historical demand and forecasted demand in relation to the
inventory on hand and market conditions when determining obsolescence and
net realizable value. Provisions are made to reduce excess or obsolete
inventories to their estimated net realizable values. Once established,
write-downs are considered permanent adjustments to the cost basis of the excess
or obsolete inventories.
Revenue
Recognition
The
Company's revenues consist primarily of contracts with customers. The Company
uses the percentage-of-completion method of accounting to account for long-term
contracts pursuant to U.S. accounting standards, and, therefore, takes into
account the cost, estimated earnings and revenue to date on fixed-fee contracts
not yet completed. The percentage-of-completion method is used because
management considers total cost to be the best available measure of progress on
the contracts. Because of inherent uncertainties in estimating costs, it is at
least reasonably possible that the estimates used will change within the near
term.
For
contracts, the amount of revenue recognized at the financial statement date is
the portion of the total contract price that the cost expended to date bears to
the anticipated final cost, based on current estimates of cost to complete.
Contract costs include all materials, direct labor, machinery, subcontract costs
and allocations of indirect overhead.
Because
contracts may extend over a period of time, changes in job performance, changes
in job conditions and revisions of estimates of cost and earnings during the
course of the work are reflected in the accounting period in which the facts
that require the revision become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is recognized in the
financial statements.
Contracts
that are substantially complete are considered closed for financial statement
purposes. Costs incurred and revenue earned on contracts in progress in excess
of billings (under billings) are classified as a current asset. Amounts billed
in excess of costs and revenue earned (over billings) are classified as a
current liability.
For
revenues from stock inventory the Company follows U.S accounting standards,
which outline the basic criteria that must be met to recognize revenue other
than revenue on contacts, and provides guidance for presentation of this revenue
and for disclosure related to these revenue recognition policies in financial
statements filed with the SEC.
The
Company accounts for shipping and handling fees and costs in accordance with U.S
accounting standards. Shipping and handling fees and costs incurred by the
Company are immaterial to the operations of the Company and are included in cost
of sales.
In
accordance with U.S. accounting standards, revenue is recorded net of an
estimate for markdowns, price concessions and warranty costs. Such reserve is
based on management's evaluation of historical experience, current industry
trends and estimated costs. As of September 30, 2009, the Company estimated the
markdowns, price concessions and warranty costs and concluded amounts are
immaterial and did not record any adjustment to revenues.
Warranty
The
Company provides a warranty on certain products sold. Estimated
future warranty obligations related to certain products and services are
provided by charges to operations in the period in which the related revenue is
recognized. At September 30, 2009 there was no warranty obligation
balance. At December 31, 2008, the warranty obligation balance
was $50,000. There were no amounts charged to warranty expense in the
accompanying consolidated statements of operations during the three and nine
months ended September 30, 2009.
Concentrations
of Credit Risks
Cash is
maintained at various financial institutions. The Federal Deposit Insurance
Corporation (“FDIC”) insures accounts at each financial institution for up to
$250,000 at September 30, 2009 and December 31, 2008. At
times, cash may be in excess of the FDIC insured limit of
$250,000. The Company did not have any significant uninsured bank
balances at September 30, 2009 and December 31, 2008.
During
the nine montes ended September 30, 2009, sales to five customers accounted for
approximately 60% of net sales. At September 30, 2009, three
customers accounted for approximately 95% of the accounts receivable
balance.
During
the nine months ended September 30, 2008, sales to two customers accounted for
approximately 33% of net sales. At September 30, 2008, four customers
accounted for approximately 90% of the accounts receivable balance.
Management
reviews the collectability of contract receivables periodically and believes
that the allowance for doubtful accounts at September 30, 2009 and December 31,
2008 is adequate. There was no allowance for doubtful accounts at September 30,
2009 and $24,000 at December 31, 2008.
Use
of Estimates
In the
opinion of management, the accompanying balance sheets and related statements of
operations and cash flows include all adjustments, consisting only of normal
recurring items, necessary for their fair presentation in conformity with
GAAP. The preparation of financial statements in conformity with
GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting
periods. Significant estimates made by management are, among others,
deferred tax asset valuation allowances, realization of inventories,
collectability of contracts receivable, the estimation of costs for long-term
construction contracts and the valuation of conversion options, stock options
and warrants. Actual results could differ from those
estimates.
Basic
And Diluted Loss Per Common Share
Basic net
loss per share is computed by dividing net loss by the weighted average number
of common shares outstanding for the period. Diluted net loss per share is
computed by dividing net loss by the weighted average number of common shares
and dilutive common stock equivalents outstanding for each respective
period.
Common
stock equivalents, representing convertible Preferred Stock, convertible debt,
options and warrants totaling approximately 132,360,000 and 10,101,000 shares at
September 30, 2009 and 2008, respectively, are not included in the diluted loss
per share as they would be anti-dilutive.
Stock
Based Compensation
The
Company uses the fair value method of accounting for employee stock compensation
cost. Under the fair value recognition provisions of this statement, share-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense on a straight-line basis over the requisite
service period, which is the vesting period. The Company had no equity
incentive awards granted prior to January 1, 2006 that were not yet vested. For
the three and nine months ended September 30, 2009, share-based compensation
expense of $330,506 and $365,520, respectively, was recognized in the
accompanying condensed consolidated statements of operations. For the three and
nine months ended September 30, 2008, no share-based compensation expense was
recognized in the accompanying condensed consolidated statements of
operations.
From time
to time, the Company's Board of Directors grants common share purchase options
or warrants to selected directors, officers, employees, consultants and advisors
in payment of goods or services provided by such persons on a stand-alone basis
outside of any of the Company's formal stock plans. The terms of these grants
are individually negotiated and generally expire within five years from the
grant date.
Under the
terms of the Company's 2000 Stock Option Plan, options to purchase an aggregate
of 5,000,000 shares of common stock may be issued to officers, key employees and
consultants of the Company. The exercise price of any option generally may not
be less than the fair market value of the shares on the date of grant. The term
of each option generally may not be more than five years.
There is
no share-based compensation resulting from options granted outside of the
Company's Stock Option Plan for the three and nine months ended September 30,
2009 and 2008.
In
accordance with U.S. accounting standards, the Company’s policy is to adjust
share-based compensation on a quarterly basis for changes to the estimate of
expected award forfeitures based on actual forfeiture experience.
The fair
value of stock-based awards to employees and directors is calculated using the
Black-Scholes option pricing model, even though the model was developed to
estimate the fair value of freely tradable, fully transferable options without
vesting restriction, which differ significantly from the Company's stock
options. The Black-Scholes model also requires subjective assumptions regarding
future stock price volatility and expected time to exercise, which greatly
affect the calculated values. The expected term of options granted is derived
from historical data on employee exercises and post-vesting employment
termination behavior. The risk-free rate selected to value any particular grant
is based on the U.S. Treasury rate that corresponds to the pricing term of the
grant effective as of the date of the grant. The expected volatility is based on
the historical volatility of our common stock. These factors could change in the
future, affecting the determination of stock-based compensation expense in
future periods.
There
were no options granted, exercised or cancelled during the three and nine months
ending September 30, 2008. During the nine months ended September 30,
2009, 100,000 options were exercised and no options were
cancelled. During the nine months ended September 30, 2009 4,200,000
options were granted with a weighted average fair value of
$0.08. There were no shares available for grant at September 30,
2009.
All
options outstanding have vested as of September 30, 2009 and are as
follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term
in Years
|
|
|
Value
(1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
8,200,000
|
|
|
$
|
0.13
|
|
|
|
2.10
|
|
|
$
|
618,750
|
|
(1)
|
Represents the
difference between the exercise price and the closing market price of the
Company's common stock at the end of the reporting period (as of September
30, 2009 the market price of the Company's common stock was
$0.20).
|
The
Company accounts for transactions involving services provided by third parties
where the Company issues equity instruments as part of the total consideration
using the fair value of the consideration received (i.e. the value of the goods
or services) or the fair value of the equity instruments issued, whichever is
more reliably measurable. In transactions when the value of the goods and/or
services are not readily determinable the fair value of the equity instruments
is more reliably measurable and the counterparty receives equity instruments in
full or partial settlement of the transactions, the Company uses the following
methodology:
a) For
transactions where goods have already been delivered or services rendered, the
equity instruments are issued on or about the date the performance is complete
(and valued on the date of issuance).
b) For
transactions where the instruments are issued on a fully vested, non-forfeitable
basis, the equity instruments are valued on or about the date of the
contract.
c) For
any transactions not meeting the criteria in (a) or (b) above, the Company
re-measures the consideration at each reporting date based on its then current
stock value.
The
following table summarizes information related to stock options outstanding and
exercisable at September 30, 2009:
Exercise
Price
|
|
Number
of
Options
Outstanding
And
Exercisable
|
|
|
Weighted
Average
Remaining
Contractual
Life
(Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$
0.01-0.08
|
|
|
1,200,000
|
|
|
|
0.08
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.10-0.20
|
|
|
7,000,000
|
|
|
|
0.02
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,200,000
|
|
|
|
|
|
|
$
|
0.13
|
|
From time
to time, the Company issues warrants to employees and to third parties pursuant
to various agreements, which are not approved by the shareholders.
Deferred
Financing Costs
Direct
costs of securing debt financing are capitalized and amortized over the term of
the related debt. When a loan is paid in full, any unamortized financing costs
are removed from the related accounts and charged to operations. During the
three months ended September 30, 2009 and 2008, the Company amortized
approximately $103,000 and $35,000, respectively, to interest expense. During
the nine months ended September 30, 2009 and 2008, the Company amortized
approximately $337,000 and $216,000, respectively, to interest
expense.
Fair
Value Measurements
U.S.
accounting standards require disclosure of a fair-value hierarchy of inputs the
Company uses to value an asset or a liability. The three levels of the
fair-value hierarchy are described as follows:
Level 1:
Quoted prices (unadjusted) in active markets for identical assets and
liabilities. For the Company, Level 1 inputs include quoted prices on the
Company’s securities that are actively traded.
Level 2:
Inputs other than Level 1 that are observable, either directly or indirectly.
For the Company, Level 2 inputs include assumptions such as estimated life, risk
free rate and volatility estimates used in determining the fair values of the
Company’s option and warrant securities issued.
Level 3:
Unobservable inputs for the asset or liability. Beginning January 1, 2009,
Level 3 inputs may be required for the determination of fair value associated
with certain nonrecurring measurements of nonfinancial assets and liabilities.
The Company does not currently present any nonfinancial assets or liabilities at
fair value.
Determining
which category an asset or liability falls within the hierarchy requires
significant judgment. The Company evaluates its hierarchy disclosures each
quarter. Liabilities measured at fair value on a recurring basis are summarized
as follows (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September
30,
|
|
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of derivative liability
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
24,296,537
|
|
|
$
|
24,296,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,296,537
|
|
|
$
|
24,296,537
|
|
The
Company has no assets that are measured at fair value on a recurring basis.
There were no assets or liabilities measured at fair value on a non-recurring
basis during the nine months ended September 30, 2009.
Accounting
for Derivative Instruments
In
connection with the issuance of certain convertible notes payable (see Note 3),
the notes provided for a conversion into shares of the Company's common stock at
a rate which was determined to be variable. The Company determined that the
variable conversion feature was an embedded derivative instrument. The
accounting treatment of derivative financial instruments requires that the
Company record the derivatives and related warrants at their fair values as of
the inception date of the note agreements and at fair value as of each
subsequent balance sheet date. In addition, as a result of entering into the
debenture agreements and subsequent amendments, the Company did not have a
sufficient number of authorized shares to settle outstanding and exercisable
options, warrants, and convertible instruments. Therefore, the
Company was required to classify all non-employee options and warrants as
derivative liabilities and record them at their fair values (See Note
3). Any change in fair value was recorded as non-operating, non-cash
income or expense at each balance sheet date. If the fair value of the
derivatives was higher at the subsequent balance sheet date, the Company
recorded a non-operating, non-cash charge. If the fair value of the derivatives
was lower at the subsequent balance sheet date, the Company recorded
non-operating, non-cash income.
During
the three and nine months ended September 30, 2009, the Company recognized other
expense of $19,649,947 and $21,225,850, respectively, related to recording the
derivative liability at fair value. During the three and nine months ended
September 30, 2008, the Company recognized other expense of $2,327,578 and other
income of $260,838, respectively, related to recording the derivative liability
at fair value. At September 30, 2009 and December 31, 2008, the
derivative liability balance was $24,296,537 and $2,025,298,
respectively.
Warrant-related
and conversion-related derivatives were valued using the Black-Scholes Option
Pricing Model with the following assumptions during the nine months ended
September 30, 2009 and 2008: dividend yield of 0%; volatility ranging from 178%
to 670% (2009) and 160% to 216% (2008), respectively; and risk free interest
rates ranging from 0.19% to 2.54% (2009) and 0.10% to 4.04% (2008).
The
following table summarizes the activity related to the derivative liability
during the nine months ended September 30, 2009:
Derivative
liability - December 31, 2008
|
|
$
|
2,025,298
|
|
|
|
|
|
|
Derivative
liability added during the year
|
|
|
1,045,389
|
|
|
|
|
|
|
Change
in fair value of derivative liability
|
|
|
21,225,850
|
|
|
|
|
|
|
Total
derivative liability - September 30, 2009
|
|
$
|
24,296,537
|
|
Significant
Recent Accounting Pronouncements
In the
third quarter of 2009, the Financial Accounting Standards Board (“FASB”) issued
the FASB Accounting Standards Codification (the “Codification”). The
Codification is the source of authoritative accounting principles
recognized by the FASB to be applied by nongovernmental entities in preparation
of financial statements in conformity with GAAP. All accounting guidance that is
not included in the Codification will be considered to be non-authoritative. The
FASB will issue Accounting Standard Updates (“ASUs”), which will serve only to
update the Codification, provide background information about the guidance
and provide the basis for conclusions on changes in the
Codification.
ASUs are
not authoritative in their own right. The Codification does not change GAAP and
did not have an effect on the Company’s financial position or results of
operations.
2.
CONTRACTS IN PROGRESS
Contracts
in progress which include completed contracts not completely billed approximate
the following as of September 30, 2009 and December 31, 2008:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Cumulative
costs to date
|
|
$
|
2,855,000
|
|
|
$
|
6,756,000
|
|
Cumulative
gross profit to date
|
|
|
2,417,000
|
|
|
|
5,768,000
|
|
|
|
|
|
|
|
|
|
|
Cumulative
revenue earned
|
|
|
5,272,000
|
|
|
|
12,524,000
|
|
Less
progress billings to date
|
|
|
(5,212,000
|
)
|
|
|
(13,495,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
under billings
|
|
$
|
60,000
|
|
|
$
|
(971,000
|
)
|
The
following approximate amounts are included in the accompanying condensed
consolidated balance sheets under these captions:
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$
|
125,000
|
|
|
$
|
417,000
|
|
|
|
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(65,000
|
)
|
|
|
(1,388,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
under billings
|
|
$
|
60,000
|
|
|
$
|
(971,000
|
)
|
3.
CONVERTIBLE DEBT
CAMOFI
AND CAMHZN 12% AND 15% Senior Secured Convertible Debt
The
Company’s convertible debt financing, Amended 12% CAMOFI Master LDC (“CAMOFI”)
Convertible Note (“Amended 12% CAMOFI Note) and 15% CAMHZN Master LDC (“CAMZHN”)
Convertible Note (“15% CAMHZN Note”), are in default. The last
monthly contractual payment on the CAMOFI note was made in October 2008 and no
payments have made on the CAMHZN Note which were scheduled to begin on September
1, 2008. As a result, the Company is in default on these two loans,
with an aggregated balance of principal and accrued interest of $4,010,156 at
September 30, 2009. As of September 30, 2009 and December 31, 2008,
the principal balances, accrued interest and the debt discounts are presented in
the Convertible Debt Table, below.
|
|
September
30, 2009
|
|
|
December
31, 2008
|
|
CONV
NOTES
|
|
CAMOFI
|
|
|
CAMHZN
|
|
|
CAMOFI
|
|
|
CAMHZN
|
|
Principal
|
|
$
|
2,827,281
|
|
|
$
|
750,000
|
|
|
$
|
2,827,281
|
|
|
$
|
750,000
|
|
Discount
related to warrants liability
|
|
|
(62,326
|
)
|
|
|
(25,732
|
)
|
|
|
(119,369
|
)
|
|
|
(48,890
|
)
|
Discount
related to convertible option liability
|
|
|
(997,251
|
)
|
|
|
(158,526)
|
|
|
|
(1,909,996
|
)
|
|
|
(301,200)
|
|
Discount
related to stock issued with notes
|
|
|
(31,370
|
)
|
|
|
-
|
|
|
|
(60,078
|
)
|
|
|
-
|
|
Notes
presented net of debt discounts
|
|
$
|
1,736,334
|
|
|
$
|
565,742
|
|
|
$
|
737,838
|
|
|
$
|
399,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
Interest
|
|
$
|
311,001
|
|
|
$
|
121,874
|
|
|
$
|
56,546
|
|
|
$
|
37,500
|
|
During
the three months ended September 30, 2009 and 2008, the Company amortized debt
discounts of approximately $388,000 and $85,146, respectively, to interest
expense related to the 12% and 15% Convertible Notes. During the nine months
ended September 30, 2009 and 2008, the Company amortized debt discounts of
approximately $1,164,000 and $892,000, respectively, to interest expense related
to the 12% and 15% Convertible Notes.
The
Convertible Debt and Warrant Agreements include an anti-dilution feature and a
buy-in clause which cause the embedded conversion option and the warrants to be
treated as derivative liabilities which are fair valued on a quarterly basis and
the resulting change in fair value of the derivative liabilities are recorded as
a gain or loss upon valuation in the statement of operations.
In
connection with the Amended 12% CAMOFI Note, the Company issued 725,000 five
year warrants with an exercise price of $0.10 and 725,000 five year warrants
with an exercise price of $0.20. Due to the anti-dilution feature in
the warrant agreements, the warrants have a reduced exercise price of $0.04 at
September 30, 2009 and $0.07 at December 31, 2008, and adjusted total warrants
of 5,625,000 and 3,214,286 at September 30, 2009 and December 31, 2008,
respectively. As of September 30, 2009 and December 31, 2008, the
fair value of the warrant derivative liability was determined to be $1,105,472
and $151,400 respectively. Upon valuation, a loss of $896,599 was
recorded for the three months ended September 30, 2009. For the nine months
ended September 30, 2009, a total loss of $954,072 was recorded.
In
connection with the 15% CAMHZN Note, the Company issued 1,000,000 seven year
warrants with an exercise price of $0.07. Due to the anti-dilution
feature in the warrant agreements, the warrants have a reduced exercise price of
$0.04 at September 30, 2009, and adjusted total warrants of 1,750,000. As
of September 30, 2009 and December 31, 2008, the fair value of the warrant
derivative liability was determined to be $347,823 and $50,000 respectively.
Upon valuation, a loss of $279,349 was recorded for the three months ended
September 30, 2009. For the nine months ended September 30, 2009, a total loss
of $297,823 was recorded.
The
Amended 12% CAMOFI and 15% CAMHZN Notes are both convertible into shares of
common stock at a conversion price of $0.04 (subject to adjustment based on the
anti-dilution feature). At September 30, 2009 and December 31, 2008, the
aggregate fair value CAMOFI conversion option derivative liabilities was
$13,762,903 and $1,516,634, respectively. Upon valuation, a loss of $11,296,007
was recorded for the three months ended September 30, 2009. For the nine months
ended September 30, 2009, a total loss of $12,246,269 was recorded. At September
30, 2009 and December 31, 2008, the aggregate fair value CAMHZN conversion
option derivative liabilities was $3,650,920 and $308,264, respectively. Upon
valuation, a loss of $2,996,521 was recorded for the three months ended
September 30, 2009. For the nine months ended September 30, 2009, a total loss
of $3,342,656 was recorded.
CAMOFI
AND CAMHZN Senior Secured Convertible Debt 83.42857% of face
amount.
On
February 18, 2009, the Company entered into an agreement with CAMOFI for the
issuance of a Senior Secured Convertible Note for $701,200 (the “February CAMOFI
Note”), maturing on August 18, 2009. The Note can be converted at $0.07 per
share at any time during the term of the convertible note subject to certain
anti-dilution adjustments.
On
February 18, 2009, the Company entered into an agreement with CAMHZN for the
issuance of a Senior Secured Convertible Note for $173,800 (the “February CAMHZN
Note”) maturing on August 18, 2009. The Note can be converted at $0.07 per share
at any time during the term of the convertible note subject to certain
anti-dilution adjustments.
Per U.S.
accounting standards, the conversion option is a derivative liability. The
Company recorded at issuance a $384,460 derivative liability for the February
CAMOFI Note, and a $95,292 derivative liability for the February CAMHZN Note.
The conversion option liability is revalued each quarter.
At
September 30, 2009 the fair values of the conversion features were $3,413,367
for the February CAMOFI Note and $846,040 for the February CAMHZN
Note. Upon valuation, a loss of $2,866,582 and $710,514,
respectively, was recorded for the February CAMOFI and February CAMHZN notes for
the three months ended September 30, 2009. For the nine months ended
September 30, 2009, a loss of $3,029,907 and $750,748, respectively, was
recorded for the February CAMOFI and February CAMZHN notes.
The
Company recorded deferred financing costs at issuance of $116,200 on the
February CAMOFI Note and $28,800 on the February CAMHZN Note for the difference
between the face amount of the notes and the net proceeds received. In addition,
the discounts resulting from the conversion options of $384,460 on the February
CAMOFI Note and $95,292 on the February CAMHZN Note were amortized into interest
expense ratably over the life of the Notes. For the three months ended September
30, 2009, the Company recorded amortization expense on the conversion option and
issuance costs of $96,039 and $30,479, respectively, on the February CAMOFI Note
and $23,896 and $7,554, respectively, on the February CAMHZN Note. For the nine
months ended September 30, 2009, the Company recorded amortization expense on
the conversion option and issuance costs of $384,460 and $116,200, respectively,
on the February CAMOFI Note and $95,292 and $28,800, respectively, on the
February CAMHZN Note.
On August
18, 2009, The Company entered into an amendment (the "2009 Amendment") of the
February CAMOFI Note and February CAMZHN Note. Pursuant to the 2009 Amendment,
the notes were amended as follows:
(a) The
maturity dates were extended to August 1, 2010.
(b) The
conversion price of the notes was reset to $0.04 per share.
In
consideration for the 2009 Amendment, the Company issued 800,000 and 200,000
seven year warrants with an exercise price of $0.000001 per share to CAMOFI and
CAMZHN, respectively. This issuance was not considered an
anti-dilution event, therefore no conversion or exercise price adjustments were
effected. The Company recorded on August 18, 2009 a derivative
liability of $64,000 for the CAMOFI warrants and $16,000 for the CAMZHN
warrants. At September 30, 2009 the fair value was $160,000 for the
CAMOFI warrants and $40,000 for the CAMZHN warrants. Upon valuation a
loss of $96,000 and $24,000, respectively, was recorded for the CAMOFI and
CAMZHN warrants for the three and nine months ended September 30,
2009.
On July
17, 2009, the Company entered into an agreement with CAMOFI for the issuance of
a Senior Secured Convertible Note for $50,400 (the “July CAMOFI Note”), maturing
on August 1, 2010. The July CAMOFI Note can be converted at $0.04 per share at
any time during the term of the convertible note, subject to certain
anti-dilution adjustments. The note is secured by all of the assets of the
Company.
On July
17, 2009, the Company entered into an agreement with CAMHZN for the issuance of
a Senior Secured Convertible Note for $12,600 (the “July CAMZHN Note”) maturing
on August 1, 2010. The July CAMZHN Note can be converted at $0.04 per share at
any time during the term of the convertible note, subject to certain
anti-dilution adjustments.
Per U.S.
accounting standards, the conversion option of the July CAMOFI and CAMZHN notes
is a derivative liability. The Company recorded at issuance a $39,154 derivative
liability for the July CAMOFI Note, and a $9,789 derivative liability for the
July CAMHZN Note. The conversion option liability is revalued each quarter. At
September 30, 2009 the fair value of the conversion features were $245,342 for
the July CAMOFI Note and $61,335 for the July CAMHZN Note. Upon
valuation, a loss of $206,188 and $51,546, respectively, was recorded for the
July CAMOFI and CAMZHN notes for the three and nine months ended September 30,
2009.
The
discounts are amortized into interest expense ratably over the life of the
Notes. For the three and nine months ended September 30, 2009, the Company
recorded amortization expense on the conversion option of $7,831 on the July
CAMOFI Note and $1,958 on the July CAMHZN Note.
On
September 25, 2009, the Company entered into an agreement with CAMOFI for the
issuance of a Senior Secured Convertible Note for $48,000 (the “September CAMOFI
Note”), maturing on August 1, 2010. The September CAMOFI Note can be converted
at $0.04 per share at any time during the term of the convertible note, subject
to certain anti-dilution adjustments. The note is secured by all of the assets
of the Company.
On
September 25, 2009, the Company entered into an agreement with CAMHZN for the
issuance of a Senior Secured Convertible Note for $12,000 (the “September CAMZHN
Note”) maturing on August 1, 2010. The September CAMZHN Note can be converted at
$0.04 per share at any time during the term of the convertible note, subject to
certain anti-dilution adjustments.
Per U.S.
accounting standards, the conversion option of the September CAMOFI and CAMZHN
notes is a derivative liability. The Company recorded at issuance a $245,736
derivative liability for the September CAMOFI Note, and a $61,434 derivative
liability for the September CAMHZN Note, corresponding debt discounts of $48,000
and $12,000 and interest expense of $197,736 and $49,434, respectively. The
conversion option liability is revalued each quarter. At September 30, 2009 the
fair value of the conversion features were $233,659 for the September CAMOFI
Note and $58,415 for the September CAMHZN Note. Upon valuation, a
gain of $12,077 and $3,019, respectively, was recorded for the September CAMOFI
and CAMZHN notes for the three and nine months ended September 30,
2009.
The
discounts will be amortized into interest expense ratably over the life of the
Notes.
As a
result of the reset of the conversion and exercise prices to $0.04 per share,
the Company did not have a sufficient number of authorized shares to settle
outstanding and exercisable options, warrants, and convertible
instruments. As a result, during the three and nine months ended
September 30, 2009, the Company reclassified non-employee warrants and stock
options that were previously recorded to additional paid-in capital
to derivative liability. The non-employee warrants and
stock options were initially valued at $836,998 and recorded as additional
paid-in capital. The $707,474 difference between the derivative
liability of $129,524 and the $836,998 amount recorded in additional paid-in
capital was recorded as a cumulative retained earnings
adjustment. The derivative liability is revalued each
quarter. At September 30, 2009, the fair value was
$371,261. Upon valuation, a loss of $241,737 was recorded for the
three and nine months ended September 30, 2009.
Convertible
notes payable, net of debt discounts, consist of the following at September 30,
2009:
Amended
12% CAMOFI Note, net of discount of $1,090,947
|
|
$ |
1,736,334 |
|
15%
CAMZHN Note, net of discount of $184,258
|
|
|
565,742 |
|
February
CAMOFI Note
|
|
|
701,200 |
|
February
CAMZHN Note
|
|
|
173,800 |
|
July
CAMOFI Note, net of discount of $31,323
|
|
|
19,077 |
|
July
CAMZHN Note, net of discount of $7,831
|
|
|
4,769 |
|
September
CAMOFI Note, net of discount of $48,000
|
|
|
- |
|
September
CAMZHN Note, net of discount of $12,000
|
|
|
- |
|
|
|
$ |
3,200,922 |
|
4.
EQUITY TRANSACTIONS
Stock
Option Exercise
On
September 15, 2009, an employee exercised options to purchase shares of common
stock on a cashless basis. The holder converted a total of 100,000
options for 65,908 shares of the Company’s common stock.
Equity
Compensation
In
February 2008, the Company entered into a one year contract with a third party
for public relations services valued at $30,000. The fee was paid in the form of
150,000 shares of the Company’s common stock based on the stock market price of
the shares at the contract date. The value of the common stock on the date of
the transaction was recorded as a deferred charge and is amortized to operating
expense over the life of the agreement. Consulting fees under this contract of
$0 and $5,000 were amortized to expense during the three months ended September
30, 2009 and September 30, 2008, respectively. Consulting fees under this
contract of $2,500 and $20,000 were amortized to expense during the nine months
ended September 30, 2009 and 2008, respectively. As of September 30, 2009 the
balance of deferred consulting fees was fully amortized.
In
February 2008, the Company entered into a three month contract with a third
party for public relations services valued at $20,000. The fee was paid in the
form of 100,000 shares of the Company’s common stock based on the stock market
price of the shares at the contract date. The value of the common stock on the
date of the transaction was recorded as a deferred charge and is amortized to
operating expense over the life of the agreement. Consulting fees under this
contract of $20,000 were amortized to expense during the nine months ended
September 30, 2008.
In March
2008, the Company entered into a one month contract with a third party for
public and financial communication services valued at $25,000. The fee was
paid in the form of 125,000 shares of the Company’s common stock based on the
stock market price of the shares at the contract date. The value of the common
stock on the date of the transaction was recorded as a deferred charge and is
amortized to operating expense over the life of the agreement. Consulting fees
under this contract of $25,000 were amortized to expense during the
nine months ended September 30, 2008.
In June
2007, the Company entered into a three year contract with a third party for
internet public investor relations services valued at $210,000. The fee was paid
in the form of 300,000 shares of the Company’s common stock and valued based on
the stock market price of the shares at the contract date. The value of the
common stock on the date of the transaction was recorded as a deferred charge.
$18,000 was amortized to operating expense during the three months ended
September 30, 2009 and 2008. $53,000 was amortized to operating expense during
the nine months ended September 30, 2009 and 2008. At September 30, 2009 and
December 31, 2008, the remaining deferred consulting fees totaled $46,700 and
$101,667, respectively.
Dividends
on preferred stock
The
preferred shares Series C and preferred shares Series D shares have a mandatory
cumulative dividend of $1.25 per share, which is payable on a semi-annual basis
in September and December each year to holders of record on November 30 and May
31. The preferred shareholders have certain liquidation preferences and do not
have voting rights.
At
September 30, 2009 and December 31, 2008, the Company had a total of 26,680
preferred shares Series C and 11,640 preferred shares Series D issued and
outstanding. As of September 30, 2009 and December 31, 2008, the Company’s
accumulated dividends payable were $500,550 and $459,275,
respectively.
5.
RESTATEMENT
The
statement of operations and cash flows for the three and nine months ended
September 30, 2008 included herein were restated to reflect the effect of
changes to the original accounting for the CAMOFI Note issued in February
2006. The original accounting did not record a separate derivative
for the conversion option and the warrants.
The
effect of these changes impacted the balance sheet and the statement of
operations from February 2006 through December 31, 2008. The balance sheet
effect is due to recording the conversion option and warrant liabilities and the
effect on the statement of operations is due to the gains and losses from the
quarterly fair value adjustments and an increase in interest expense.
Accordingly, the statement of operations for the three and nine months ended
September 30, 2008 has been restated as summarized below:
Effect
of Correction
|
|
As
Previously Reported
|
|
|
Adjustment
|
|
|
As
Restated
|
|
Balance
Sheet as of September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
Option Liability
|
|
|
-
|
|
|
|
4,032,781
|
|
|
|
4,032,781
|
|
Warrant
Liability
|
|
|
-
|
|
|
|
310,389
|
|
|
|
310,389
|
|
Convertible
Note Payable
|
|
|
543,390
|
|
|
|
(348,758)
|
|
|
|
194,632
|
|
Accumulated
Deficit
|
|
|
13,860,275
|
|
|
|
1,697,812
|
|
|
|
15,558,087
|
|
Total
Stockholders’ Deficit
|
|
|
3,604,689
|
|
|
|
3,859,895
|
|
|
|
7,464,584
|
|
Statement
of Operations for the three months ended September 30,
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Marked-to-Market
Gain (Loss)
|
|
|
(37,899)
|
|
|
|
(753,801)
|
|
|
|
(791,700)
|
|
Interest
Expense
|
|
|
57,387
|
|
|
|
428,415
|
|
|
|
485,802
|
|
Net
Income (Loss)
|
|
|
(762,203
|
)
|
|
|
(1,182,216)
|
|
|
|
(1,944,419)
|
|
Net
Income (Loss) Available to common shareholders
|
|
|
(803,478
|
)
|
|
|
(1,140,941)
|
|
|
|
(1,944,419)
|
|
EPS
- Diluted
|
|
|
(0.05
|
)
|
|
|
(0.08)
|
|
|
|
(0.13)
|
|
Statement
of Operations for the nine months ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Marked-to-Market
Gain (Loss)
|
|
|
(37,899)
|
|
|
|
31,904
|
|
|
|
(5,995)
|
|
Interest
Expense
|
|
|
1,041,538
|
|
|
|
298,677
|
|
|
|
1,340,215
|
|
Net
Income (Loss)
|
|
|
(2,586,435)
|
|
|
|
(266,773)
|
|
|
|
(2,853,208)
|
|
Net
Income (Loss) Available to common shareholders
|
|
|
(2,627,710)
|
|
|
|
(266,773)
|
|
|
|
(2,894,483)
|
|
EPS
– Basic and Diluted
|
|
|
(0.18)
|
|
|
|
(0.02)
|
|
|
|
(0.20)
|
|
6.
SUBSEQUENT EVENTS
Stock
issuances
On
October 19, 2009, the Company issued 100,000 shares of common stock to a
consultant in consideration for services rendered that were valued at
$18,000
On
October 19, 2009, 630,000 options to purchase common stock that were previously
granted to a consultant were exercised at an exercise price of $0.15 per
share.
Acquisition
of 100% of the Outstanding Stock of Precision Aerostructures, Inc
On
October 9, 2009, the Company entered into a Share Exchange Agreement (the “Share
Exchange Agreement”) with PAI and Michael Cabral (“Cabral”) pursuant to which
Cabral, as the sole shareholder of PAI, agreed to transfer to the Company, and
the Company agreed to acquire from Cabral, all of the capital stock of PAI (the
“PAI Shares”) in exchange for 5,000,000 shares of the Company’s common stock
(the “NCCI shares”) and a promissory note (the “Note”) in the principal amount
of $500,000 payable from the proceeds of any equity financing with gross
proceeds of at least $2,000,000, provided that the investors in such financing
permit the proceeds thereof to be used for such
purpose.
Additionally,
at such time (the “Vesting Date”) as the cumulative net income of PAI is at
least $3,000,000 for the period commencing on January 1, 2010 and ending on
October 9, 2012 the Company will issue to Cabral warrants (the “Warrants”) to
purchase 3,000,000 shares of the Company’s common stock. The Warrants
will be for a term of the earlier of three years from the Vesting Date or
January 1, 2014, and shall have an exercise price of $0.10 per share. The share
exchange was consummated on October 9, 2009.
PAI is a
world class supplier of precision machined details and assemblies for many of
the major aircraft builders in the United States and around the world. PAI
specializes in engineering, and manufacturing of precision CNC machined
multi-axis structural aircraft components. PAI’s production facility
is in Rancho Cucamonga, California.
The terms
of the purchase were the result of arms-length negotiations.
Additionally,
the Company advanced $250,000 to PAI.
The
Company and PAI are currently in the process of determining and settling the
final acquisition price.
Following
the acquisition, the Company will report PAI' results of operations as a new
segment.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The
following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-Q. Certain statements contained herein that are not related to
historical results, including, without limitation, statements regarding the
Company's business strategy and objectives, future financial position,
expectations about pending litigation and estimated cost savings, are
forward-looking statements within the meaning of Section 27A of the Securities
Act and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act") and involve risks and uncertainties. Although the
Company believes that the assumptions on which these forward-looking statements
are based are reasonable, there can be no assurance that such assumptions will
prove to be accurate, and actual results could differ materially from those
discussed in the forward-looking statements. Factors that could cause or
contribute to such differences include, but are not limited to, regulatory
policies, and market and general policies, competition from other similar
businesses, and market and general economic factors. All forward-looking
statements contained in this Form 10-Q are qualified in their entirety by this
statement.
OVERVIEW
The
Company is engaged in acquiring, re-manufacturing and selling pre-owned Computer
Numerically Controlled ("CNC") machine tools to manufacturing customers. The
Company provides rebuilt, retrofit and remanufacturing services for numerous
brands of machine tools. The remanufacturing of a machine tool, typically
consisting of replacing all components, realigning the machine, adding updated
CNC capability and electrical and mechanical enhancements, generally takes two
to four months to complete. Once completed, a remanufactured machine is a "like
new," state-of-the-art machine with a price ranging from $275,000 to $1,000,000,
which is substantially less then the price of an equivalent new machine. The
Company also manufactures original equipment CNC large turning lathes and
attachments under the trade name Century Turn.
CNC
machines use commands from onboard computers to control the movements of cutting
tools and rotation speeds of the parts being produced. Computer controls enable
operators to program operations such as part rotation, tooling selection and
tooling movement for specific parts and then store the programs in memory for
future use. The machines are able to produce parts while left unattended.
Because of this ability, as well as superior speed of operation, a CNC machine
is able to produce the same amount of work as several manually controlled
machines, as well as reduce the number of operators required; generating higher
profits with less re-work and scrap. Since the introduction of CNC tooling
machines, continual advances in computer control technology have allowed for
easier programming and additional machine capabilities.
A
vertical turning machine permits the production of larger, heavier and more
oddly shaped parts on a machine, which uses less floor space when compared to
the traditional horizontal turning machine because the spindle and cam are
aligned on a vertical plane, with the spindle on the bottom.
The
primary industry segments in which the Company’s machines are utilized to make
component parts are in aerospace, power generation turbines, military, component
parts for the energy sector for natural gas and oil exploration and medical
fields. The Company sells its products to customers located in United States,
Canada and Mexico. There were no significant international sales during 2009 and
2008.
Over the
last four years, the Company has designed and developed a large horizontal CNC
turning lathe with productivity features new to the metalworking industry. The
Company believes that a potential market for the Century Turn Lathe, in addition
to the markets mentioned above, is aircraft landing gear.
We
provide our manufactured and remanufactured machines as part of the machine tool
industry. The machine tool industry worldwide is approximately a 30 billion
dollar business annually. The industry is sensitive to market conditions and
generally trends downward prior to poor economic conditions, and improves prior
to an improvement in economic conditions.
Our
machines are utilized in a wide variety of industry segments as follows:
aerospace, energy, valves, fittings, oil and gas, machinery and equipment, and
transportation. With the recent downturn in the aerospace industry, we have seen
an increase in orders from new industries such as defense and medical
industries.
The
Company's current strategy is to expand its customer sales base with its present
line of machine products. The Company's growth strategy also includes strategic
acquisitions in addition to growing the current business. Plans for expansion
are funded through current working capital from ongoing sales. A significant
acquisition will require additional financing.
RESULTS
OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
SEPTEMBER 30, 2008.
Revenues. The
Company generated revenues of $644,609 for the three months ended September 30,
2009, which was a $353,281 or 35% decrease from $997,890 for the
three months ended September
30, 2008. The decrease is the result of lower than general
economic climate and a tighter credit market.
Gross Loss. Gross
loss for the three months ended September
30, 2009, was $8,451 or -1% of
revenues, compared to $330,955 or -33% of revenues for the three
months ended September 30, 2008, a 97% decrease. The decrease in gross loss is
due to management strategy to lower cost of sales through reduction of overhead
expenses and cost of materials.
Operating
Expenses. The Company incurred total operating expenses of $593,247 for
the three months ended September 30, 2009, which was a $257,285 or 77% increase
from $335,962 for the three months ended September 30, 2008. In the three months
ended September 30, 2009, compared with the three months ended September 30,
2008, operating expenses increased (decreased) as follows:
|
|
Increase/(Decrease)
%
|
|
Consulting
and other compensation
|
|
|
250
|
|
Salaries
and related
|
|
|
42
|
|
Selling,
general and administrative
|
|
|
(63)
|
|
The
increase in consulting and other compensation is due to approximately $331,000
of compensation expense related to the issuance of 4,200,000 common stock
options. Selling, general and administrative expenses decreased primarily due to
the above reclassification, and secondarily due to management’s strategy to
reduce operating expenses.
Operating
Loss. Operating loss for the three months ended September 30,
2009, was $601,698 compared to $666,917 for the three months ended September 30,
2008. The decrease in loss of $65,219 is primarily due to decreased cost of
sales and decreased selling, general and administrative expenses for the quarter
ended September 30, 2009.
Interest
Expense. Interest expense for the three months ended September
30, 2009, was $1,064,798 compared with $485,802 for the three months ended
September 30, 2008. The increase of $578,996 in interest expenses is due to
additional interest on new convertible loans. A significant component
of interest expense relates to the non-cash amortization of debt discounts,
which approximated $765,000 and $370,000 during the three months ended September
30, 2009 and 2008, respectively.
Loss on
valuation of Derivative Liabilities. In connection with its convertible
notes, the Company recorded conversion options and warrant derivative
liabilities. The derivative liabilities are revalued each reporting
period. During the three months ended September 30, 2009, we recorded
a $19,649,947 loss on the change in fair value due to the increase in stock
price and decrease in the conversion and warrant exercise prices. For the three
months ended September 30, 2009, we recorded a $14,356,701 loss from the
increase in fair value of the conversion option liability and a $992,599 loss
from increase in fair value of the warrant liability on the CAMOFI Convertible
Notes. Also, for the three months ended September 30, 2009, a $3,755,561 loss
from increase in fair value of the conversion option liability and a $303,349
loss from the increase in fair value of the warrant liability on the CAMHZN
Convertible Notes. Also, for the three months ended September 30,
2009, a $241,737 loss from increase in fair value of the derivative liability
related to the non-employee stock options and warrants.
RESULTS
OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO SEPTEMBER
30, 2008.
Revenues. The
Company generated revenues of $3,058,941 for the nine months ended September 30,
2009, which was a $900,227 or 23% decrease from $3,959,168 for the
nine months ended September
30, 2008. The decrease is the result of the general
economic climate and a tighter credit market.
Gross Profit /
(Loss). Gross profit for the
nine months ended September
30, 2009, was $393,258 or 13% of
revenues, compared to a gross loss of $41,770 or -1% of revenues for
the nine months ended September 30, 2008, a $435,028 increase. The increase in
gross profit is due to due to management strategy to lower cost of sales through
reduction of overhead expenses and cost of materials.
Operating Expenses. The
Company incurred total operating expenses of $1,337,504 for the nine months
ended September 30, 2009, which was a $187,929 or 12% decrease from $1,525,433
for the nine months ended September 30, 2008. In the nine months ended September
30, 2009, compared with the nine months ended September 30, 2008, operating
expenses increased (decreased) as follows:
|
|
Increase/(Decrease)
%
|
|
Consulting
and other compensation
|
|
|
21
|
|
Salaries
and related
|
|
|
68
|
|
Selling,
general and administrative
|
|
|
(51
|
)
|
The
increase in consulting and other compensation is due to approximately $366,000
of compensation expense related to the issuance of 4,200,000 common stock
options and the vesting of common stock options granted in 2008. Selling,
general and administrative expenses decreased primarily due to above
reclassification, and secondarily due to management’s strategy to reduce
operating expenses.
Operating
Loss. Operating loss for the nine months ended September 30,
2009, was $944,246 compared to $1,567,203 for the nine months ended September
30, 2008. The decrease in loss of $622,957 or 40% is primarily due to decreased
consulting and selling, general and administrative expenses.
Interest
Expense. Interest expense for the nine months ended September
30, 2009, was $2,685,653 compared with $1,340,215 for the nine months ended
September 30, 2008. The increase of $1,345,438, or 100%, in interest expenses is
due to additional interest on new convertible loans. A significant
component of interest expense relates to the non-cash amortization of debt
discounts, which approximated $1,901,000 and $1,808,684 during the nine months
ended September 30, 2009 and 2008, respectively.
Loss on Valuation of Derivative
Liabilities. In connection with its convertible notes, the Company
recorded conversion options and warrant derivative liabilities. The derivative
liabilities are revalued each reporting period. For the nine months
ended September 30, 2009, we recorded a $21,225,850 loss on the change in fair
value due to the increase in stock price and decrease in the conversion and
warrant exercise prices. For the nine months ended September 30,
2009,we recorded a $15,470,287 loss from the increase in fair value of the
conversion option liability and a $1,050,072 loss from the increase in fair
value of the warrant liability on the CAMOFI Convertible Notes. Also, for the
nine months ended September 30, 2009, we recorded a $4,141,931 loss from the
increase in fair value of the conversion option liability and a $321,823 loss
from the increase in fair value of the warrant liability on the CAMHZN
Convertible Notes. Also, for the three months ended September 30,
2009, a $241,737 loss from increase in fair value of the derivative liability
related to the non-employee stock options and warrants.
FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
The net
decrease in cash during the nine months ended September 30, 2009 was
$28,735.
For the
nine months ended September 30, 2009, the cash provided by financing activities
was $837,205, compared with $487,232 in the nine months ended September 30,
2008. For the nine months ended September 30, 2009, $859,242 cash was used in
operating activities, compared with $732,388 in the nine months ended September
30, 2008.
GOING
CONCERN
The
accompanying condensed consolidated financial statements have been prepared
assuming the Company will continue as a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has an accumulated deficit of
approximately $37,064,000, a net loss of approximately $24,850,000, a working
capital deficit of approximately $29,163,000 and was also in default on two of
its convertible notes payable with a combined principal and accrued interest
balance of approximately $4,100,000 at September 30, 2009. These factors raise
substantial doubt about the Company's ability to continue as a going concern.
The Company intends to fund operations through anticipated increased sales along
with renegotiated or new debt and equity financing arrangements which management
believes may be insufficient to fund its capital expenditures, working capital
and other cash requirements for the year ending December 31, 2009. Therefore,
the Company will be required to seek additional funds to finance its long-term
operations. The successful outcome of future activities cannot be
determined at this time and there is no assurance that if achieved, the Company
will have sufficient funds to execute its intended business plan or generate
positive operating results.
In
response to these problems, management has taken the following
actions:
·
|
continued
its aggressive program for selling
machines;
|
·
|
continued
to implement plans to further reduce operating costs;
and
|
·
|
is
seeking investment capital through the public and private
markets.
|
The
condensed consolidated financial statements do not include any adjustments
related to recoverability and classification of asset carrying amounts or the
amount and classification of liabilities that might result should the Company be
unable to continue as a going concern.
INFLATION
AND CHANGING PRICES
The
Company does not foresee any adverse effects on its earnings as a result of
inflation or changing prices.
CRITICAL
ACCOUNTING POLICIES
The
preparation of financial statements and related disclosures in conformity with
accounting principles generally accepted in the United States of America
requires management to make judgments, assumptions and estimates that affect the
amounts reported in our consolidated financial statements and the accompanying
notes. The amounts of assets and liabilities reported on our balance sheet and
the amounts of revenues and expenses reported for each of our fiscal periods are
affected by estimates and assumptions, which are used for, but not limited to,
the accounting for revenue recognition, accounts receivable, doubtful accounts,
inventories, and derivative liabilities. Actual results could differ from these
estimates. The accounting policies stated below are significantly affected by
judgments, assumptions and estimates used in the preparation of the financial
statements:
Revenue
Recognition
Service
revenues are billed and recognized in the period the services are
rendered.
The
Company accounts for shipping and handling fees and costs in accordance with
U.S. accounting standards. Such fees and costs incurred by the
Company are recorded to cost of goods sold and are immaterial to the operations
of the Company.
Revenue
is recorded net of an estimate of markdowns, price concessions and warranty
costs. Such reserve is based on management's evaluation of historical
experience, current industry trends and estimated costs.
Management
believes that the Company's revenue recognition policy for services and product
sales conforms to U.S. accounting standards. The Company recognizes revenue of
long-term contracts pursuant to U.S. accounting standards.
Method
of Accounting for Long-Term Contracts
The
Company uses the percentage-of-completion method of accounting to account for
long-term contracts and, therefore, takes into account the cost, estimated
earnings and revenue to date on fixed-fee contracts not yet completed. The
percentage-of-completion method is used because management considers total cost
to be the best available measure of progress on the contracts. Because of
inherent uncertainties in estimating costs, it is at least reasonably possible
that the estimates used will change within the near term.
The
amount of revenue recognized at the statement date is the portion of the total
contract price that the cost expended to date bears to the anticipated final
cost, based on current estimates of cost to complete. It is not related to the
progress billings to customers. Contract costs include all materials, direct
labor, machinery, subcontract costs and allocations of indirect
overhead.
Because
long-term contracts may extend over a period of time, changes in job
performance, changes in job conditions and revisions of estimates of cost and
earnings during the course of the work are reflected in the accounting period in
which the facts that require the revision become known. At the time a loss on a
contract becomes known, the entire amount of the estimated ultimate loss is
recognized in the consolidated financial statements.
Contracts
that are substantially complete are considered closed for consolidated financial
statement purposes. Revenue earned on contracts in progress in excess of
billings (under billings) is classified as a current asset. Amounts billed in
excess of revenue earned (over billings) are classified as a current
liability.
Accounting
for Derivative Instruments
The
Company records liabilities for embedded derivatives related to its convertible
notes payable at their fair values at the inception date of the
notes. In accordance with U.S. accounting standards, the derivative
liabilities are revalued at each subsequent balance sheet date.
Other
Significant Accounting Policies
Other
significant accounting policies not involving the same level of measurement
uncertainties as those discussed above, are nevertheless important to an
understanding of the financial statements. The policies related to consolidation
and loss contingencies require difficult judgments on complex matters that are
often subject to multiple sources of authoritative guidance. Certain of these
matters are among topics currently under reexamination by accounting standards
setters and regulators. Although no specific conclusions reached by these
standards setters appear likely to cause a material change in our accounting
policies, outcomes cannot be predicted with confidence. Also see Note 1 of Notes
to Condensed Consolidated Financial Statements, Summary of Significant
Accounting Policies, which discusses accounting policies that must be selected
by management when there are acceptable alternatives.
ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not
applicable.
ITEM
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
We
conducted an evaluation under the supervision and with the participation of our
management, including our Chief Executive Officer, who is also our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures. The term “disclosure controls and
procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
and Exchange Act of 1934, as amended (“Exchange Act”), means controls and other
procedures of a company that are designed to ensure that information required to
be disclosed by the company in the reports it files or submits under the
Exchange Act is recorded, processed, summarized and reported, within the time
periods specified in the Securities and Exchange Commission’s rules and forms.
Disclosure controls and procedures also include, without limitation, controls
and procedures designed to ensure that information required to be disclosed by a
company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the company’s management, including its
principal executive and principal financial officers, or persons performing
similar functions, as appropriate, to allow timely decisions regarding required
disclosure. Based on this evaluation, our Chief Executive Officer concluded as
of September 30, 2009 that our disclosure controls and procedures were not
effective at the reasonable assurance level due to the material weaknesses
discussed immediately below.
Material
Weaknesses
(1)
We had not effectively implemented comprehensive entity-level internal controls,
as evidenced by the following deficiencies:
We did not establish an independent Audit Committee who are responsible for the
oversight of the financial reporting process, nor was an Audit Committee Charter
defined. At the current time we do not have any independent members
of the Board who could comprise this committee.
We did not establish an adequate Whistle Blower program for the
receipt, retention, and treatment of complaints received by the issuer regarding
accounting, internal accounting controls, or auditing matters; and the
confidential, anonymous submission by employees of the issuer of concerns
regarding questionable accounting or auditing matters to the Audit Committee and
Board of Directors.
We did not have an individual on our Board, nor on the Audit Committee, who
meets the “Financial Expert” criteria.
We did not maintain documentation evidencing quarterly or other meetings between
the Board, senior financial managers and our outside general
counsel. Such meetings include reviewing and approving quarterly and
annual filings with the Securities and Exchange Commission and reviewing
on-going activities to determine if there are any potential audit related issues
which may warrant involvement and follow-up action by the Board.
We did not follow a formal fraud assessment process to identify and design
adequate internal controls to mitigate those risks not deemed to be
acceptable.
We did not conduct annual performance reviews or evaluations of our management
and staff employees.
(2)
We did not have a sufficient complement of personnel with appropriate training
and experience in GAAP, as evidenced by the following deficiencies:
We do not have a formally trained Chief Financial Officer who is responsible for
the oversight of the accounting function. Currently the CEO is
responsible for this function, but has not had formal accounting or auditing
experience.
The Controller is the only individual with technical accounting experience in
our company but is limited in the exposure to SEC filings and disclosures and is
not a full-time employee of the Company.
We have not consulted with other outside parties with accounting experience to
assist us in the SEC filings and disclosures.
(3) We
did not adequately segregate the duties of different personnel within our
accounting group due to an insufficient complement of staff and inadequate
management oversight.
(4)
We did not adequately design internal controls as follows:
·
|
The
controls identified in the process documentation were not designed
effectively and had no evidence of operating effectiveness for testing
purposes.
|
|
|
·
|
The
controls identified in the process documentation did not cover all the
risks for the specific process
|
|
|
·
|
The
controls identified in the process documentation did not cover all
applicable assertions for the significant
accounts.
|
(5)
Due to the material weaknesses identified at our entity level we did not test
whether our financial activity level controls or our information technology
general controls were operating sufficiently to identify a deficiency, or
combination of deficiencies, that may result in a reasonable possibility that a
material misstatement of the financial statements would not be prevented or
detected on a timely basis.
CHANGES
IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There
have been no significant changes in the Company's internal control over
financial reporting during the Company's most recent fiscal quarter that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting. Inherent limitations exist
in any system of internal control including the possibility of human error and
the potential of overriding controls. Even effective internal controls can
provide only reasonable assurance with respect to financial statement
preparation. The effectiveness of an internal control system may also be
affected by changes in conditions.
PART
II. OTHER INFORMATION
Item
1. Legal Proceedings
None.
Item
2. Unregistered Sales of Equity Securities and Use
of Proceeds
None.
Item
3. Defaults Upon Senior Securities
Starting
October 2008, the Company has been in default with monthly payments on the 12%
CAMOFI and 15% CAMHZN Convertible Note payable. As of September 30, 2009, the
amount of payments in arrears of principal and interest aggregate
to $1,500,000.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
Item
6. Exhibits
Exhibit
31.1 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under
Section 302 of the Sarbanes-Oxley act of 2002
Exhibit
32.1 Certification required by Rule 13a-14(a) or Rule 15d-14(d) and under
Section 906 of the Sarbanes-Oxley act of 2002
SIGNATURES
In
accordance with Section 13 or 15(d) of the Exchange Act, the Company caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
November
16, 2009
|
NEW
CENTURY COMPANIES, INC.
|
|
|
|
/s/
DAVID DUQUETTE
|
|
Name: David
Duquette
|
|
Title:
Chairman, President and Director
|
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Company and in the capacities and on the
dates indicated.
November
16, 2009
|
/s/
DAVID DUQUETTE
|
|
Name: David
Duquette
|
|
Title:
Chairman, President and Director
|
|
|
November
16, 2009
|
/s/
JOSEF CZIKMANTORI
|
|
Name:
Josef Czikmantori
|
|
Title:
Secretary and Director
|