(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
A-SUMMARY OF ACCOUNTING POLICIES
General
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States of America for interim financial information and with the
instructions to Form 10-QSB. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements.
In
the
opinion of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair presentation have been included. Accordingly,
the results from operations for the nine month period ended September 30,
2007
are not necessarily indicative of the results that may expected for the year
ending December 31, 2007. The unaudited condensed financial statements should
be
read in conjunction with the December 31, 2006 financial statements and
footnotes thereto included in the Company's SEC Form 10-KSB.
Business
and Basis of Presentation
Seawright
Holdings, Inc. (the "Company") was formed on October 14, 1999 under the laws
of
the state of Delaware. The Company is a "development stage
enterprise" (as defined in statement of Financial Accounting Standards No.
7).
The Company is currently engaged in the spring water bottling and distribution
business. From its inception through the date of these financial
statements, the Company has recognized minimal revenues and has incurred
significant operating expenses. Consequently, its operations are subject
to all
risks inherent in the establishment of a new business enterprise. For the
period
from inception through September 30, 2007, the Company has accumulated losses
of
$6,159,663.
The
consolidated financial statements include the accounts of the Company, and
its
wholly-owned subsidiary, Seawright Springs LLC. Significant intercompany
transactions have been eliminated in consolidation.
Reclassification
Certain
reclassifications have been made to conform prior periods’ data to the current
presentation. These reclassifications had no effect on reported
losses.
Stock
Based Compensation
On
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which
requires the measurement and recognition of compensation expense for all
stock-based awards made to employees based on estimated fair values.
SFAS No. 123(R) supersedes previous accounting under Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” for periods beginning in fiscal 2006. In March 2005, the SEC issued
Staff Accounting Bulletin (“SAB”) No. 107, providing supplemental
implementation guidance for SFAS 123(R). The Company has applied the
provisions of SAB No. 107 in its adoption of
SFAS No. 123(R).
SFAS No. 123(R)
requires companies to estimate the fair value of stock-based awards on
the date
of grant using an option pricing model. The value of the portion of the
award
that is ultimately expected to vest is recognized as expense over the requisite
service periods. The Company adopted SFAS No. 123(R) using the
modified prospective application, which requires the application of the
standard starting from January 1, 2006, the first day of the Company’s year. The
Company’s unaudited condensed consolidated financial statements for the nine
months ended September 30, 2007 and 2006 reflect the impact of
SFAS No. 123(R).
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
A-SUMMARY OF ACCOUNTING POLICIES (Continued)
No
stock-based compensation expense related to employee stock options was
recognized under SFAS No. 123(R) for the nine months ended
September 30, 2007 and 2006. As of September 30, 2007,
there was no stock-based compensation cost related to non-vested stock
options.
Revenue
Recognition
For
revenue from product sales, the Company recognizes revenue in accordance
with
Staff Accounting Bulletin No. 104, Revenue Recognition (“SAB104”),
which superseded Staff Accounting Bulletin No. 101, Revenue Recognition
in Financial Statements (“SAB101”). SAB 101 requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists; (2) delivery has occurred; (3) the selling
price is fixed and determinable; and (4) collectibility is reasonably assured.
Determination of criteria (3) and (4) are based on management’s judgments
regarding the fixed nature of the selling prices of the products delivered
and
the collectibility of those amounts. Provisions for discounts and
rebates to customers, estimated returns and allowances, and other adjustments
are provided for in the same period the related sales are recorded. The Company
defers any revenue for which the product has not been delivered or is subject
to
refund until such time that the Company and the customer jointly determine
that
the product has been delivered or no refund will be required. SAB 104
incorporates Emerging Issues Task Force 00-21 (“EITF 00-21”),
Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses
accounting for arrangements that may involve the delivery or performance
of
multiple products, services and/or rights to use assets.
Recent
Accounting Pronouncements
In
February 2007, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value
Option for Financial Assets and Financial Liabilities.” SFAS No. 159
allows an entity the irrevocable option to elect fair value for the initial
and
subsequent measurement for certain financial assets and liabilities on a
contract-by-contract basis. Subsequent changes in fair value of these
financial assets and liabilities would be recognized in earnings when they
occur. SFAS No. 159 is effective for the Company’s financial
statements for the year beginning January 1, 2008, with earlier adoption
permitted. The Company is currently evaluating the effect and timing
that adoption of this statement will have on its consolidated financial position
and results of operations.
NOTE
B - MARKETABLE SECURITIES
The
Company classified all of its marketable securities as trading as the securities
are bought and held principally for the purpose of selling them in the near
term. The Company actively and frequently traded securities with the
objective of generating profits on short-term differences in
price. The trading securities are marked to market on a monthly
basis. At September 30, 2007, the Company’s trading securities are
carried at fair value of $24,878. The Company had a net loss of $255
and $1,268 and a net gain of $37,102 on trading securities during the nine-month
period ended September 30, 2007 and 2006, and for the period from October
14,
1999 (date of inception) through September 30, 2007, respectively.
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
C - NOTES PAYABLE
Notes
payable at September 30, 2007 are as follows:
|
|
September
30, 2007
|
|
9.375
% note payable, monthly payments of $4,592 with remaining principal
and
outstanding interest due and payable June 2009, collateralized
by
land.
|
|
$ |
522,917
|
|
|
|
|
|
|
15%
note payable, monthly interest payments, principal due June 2007,
collateralized by land – The Company is in default under the terms of
the
note agreement at September 30, 2007.
|
|
|
505,000
|
|
|
|
|
|
|
7%
note payable, due on or before April 1, 2008,
uncollateralized.
|
|
|
300,000
|
|
|
|
|
|
|
12%
note payable, due on or before December 20, 2007, collateralized
by signed
put notices.
|
|
|
200,000
|
|
|
|
|
|
|
14%
note payable, due on or before March 4, 2008, collateralized by
signed
put
notices
|
|
|
250,000
|
|
|
|
|
1,777,917
|
|
Less:
current portion
|
|
|
1,259,041
|
|
|
|
|
|
|
Note
payable – long term
|
|
|
518,876
|
|
During
June and September 2007, the Company entered into promissory notes (Notes)
with
face amounts of $200,000 and $250,000, respectively. Under the terms of the
Notes, the Company received $185,000 and $235,000, respectively less closing
costs of $15,000 per Note. The Notes bear interest at fixed rates of
12% and 14%, respectively, per annum. As detailed in the agreements, the
Company
shall make mandatory monthly payments of interest, in an amount equal to
the
interest accrued on the principal balance of the Notes from the last interest
payment until such time as the current interest payments are due and payable.
As
an additional incentive, the Notes call for the Company to issue 40,000 and
50,000 shares of stock to the note holder for the June and September 2007
Notes,
respectively, if the balances remain unpaid 90 days after the inception date
of
each Note. During the third quarter of 2007, the Company determined
it would be unable to repay the outstanding balances within the stipulated
timeframe. As such, the Company has incurred an expense equal to the
fair value of the incentives being $47,700 and charged to interest expense
during the quarter. In September, the Company issued 40,000 shares valued
at
$21,600 to the note holder. An additional $26,500 is classified as
stock incentive liability at September 30, 2007. The Company valued
the stock incentives using the Black-Scholes pricing model and the following
assumptions: contractual terms of 91 days, a risk free interest rate of 4.02%,
a
dividend yield of 0%, share price of $0.53 and volatility of
69%. After the date of the Company’s registration statement for the
equity line is declared effective by the SEC, the Company shall make mandatory
monthly payments on the face amounts of the Notes in an amount equal to the
greater of 1) an amount equal to the face amounts of the Notes divided by
the
number of months from the effective date until the maturity date or 2) 100%
of
each Put given to the investor by the Company. The agreements are
collateralized by signed put notices, and the Company is required to abide
by
certain covenants as detailed in the promissory notes.
During
the second quarter of 2007 and as provided for in the investment agreement
with
Dutchess Private Equities Fund, LP, the Company issued 781,459 shares of
common
stock valued at $790,430, to a note holder as payment on its outstanding
debt
and interest expense during the six months of 2007 (Note E).
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
C - NOTES PAYABLE (Continued)
Aggregate
maturities of long-term debt as of September 30, 2007 are as
follows:
Twelve
months ended September 30,
|
|
|
|
2008
|
|
$ |
1,259,041
|
|
2009
|
|
|
518,876
|
|
2010
|
|
|
-
|
|
2011
|
|
|
-
|
|
2012
and after
|
|
|
-
|
|
Total
|
|
$ |
1,777,917
|
|
NOTE
D – PRIVATE PLACEMENT AND CONVERTIBLE PROMISSORY NOTES
PAYABLE
The
Company entered into a Private Placement Memorandum in August 2004 to offer
up
to 1,000 units of equity/notes payable instrument. Each unit consists of
2,500
shares of common stock of the Company, $1,500 of convertible promissory notes
(“Convertible Notes”), and 1 warrant to purchase 300 shares of the Company’s
common stock at $0.85 per share. The Convertible Notes accrues
interest at 11% per annum, payable and due in September 2009. The
note holder has the option to convert any unpaid note principal and accrued
interest to the Company’s common stock at a rate of $0.85 per share anytime
after six months from the issuance date of the note.
As
of
December 31, 2005, the Company received total proceeds of $2,665,116, net
of
placement costs and fees of $331,884, for 999 units
subscribed. Pursuant to the terms of the Private Placement
Memorandum, the Company issued to the investors Convertible Notes in an
aggregate of $1,498,500. The Company is obligated to issue 2,497,500
shares of its common stock, valued at $1,563,376, to the investors in connection
with the private placement. The Company also issued to investors an
aggregate of 999 warrants to purchase 299,700 shares of common stock as of
December 31, 2005.
In
accordance with Emerging Issues Task Force Issue 98-5, Accounting For
Convertible Securities With a Beneficial Conversion Feature or Contingently
Adjustable Conversion Ratios (EITF 98-5), the Company allocated, on a
relative fair value basis, the net proceeds amongst the common stock,
convertible notes and warrants issued to the investors. As of
December 31, 2005, the Company had recognized a discount to the notes in
the
amount of $280,207. The note discount is being amortized over the
maturity period of the notes, being five years. As of December 31,
2005, the Company had recognized a total of $280,207 of the proceeds, which
is
equal to the intrinsic value of the imbedded beneficial conversion feature,
to
additional paid-in capital and a discount against the Convertible Note. The
debt
discount attributed to the beneficial conversion feature is amortized over
the
Convertible Notes’ maturity period, being five years, as interest
expense.
In
connection with the placement of the Convertible Notes, the Company issued
detachable warrants granting the holders the right to acquire a total of
299,700
shares of the Company’s common stock at $0.85 per share as of December 31,
2005. The warrants expire five years from their
issuance. As of December 31, 2005, the Company had recognized
the
value
attributable to the warrants, being $190,143, to additional paid-in capital
in
accordance with Emerging Issues Task Force Issue 00-27, Application of Issue
No. 98-5 to Certain Convertible Instruments (EITF 00-27). The Company
valued the warrants in accordance with EITF 00-27 using the Black-Scholes
pricing model and the following assumptions: contractual terms of 5 years,
an
average risk free interest rate of 3.38%, a dividend yield of 0%, and volatility
of 296%.
During
the second quarter of 2007 the Company offered additional consideration on
the
convertible debt in an effort to induce conversion. The majority of
converting note holders agreed to a conversion rate of one share of common
stock
for each $0.60 of principal and unpaid interest accrued through the closing
date
while the minority of converting note holders retained the original conversion
rate of one share of common stock for each $0.85 of principal and
unpaid interest
accrued through the closing date. All converting note holders
received an additional six months of interest at the rate of 11% per
annum. The Company accounted for the conversion in accordance with
SFAS 84, Induced Conversions of Convertible Debt – An Amendment of APB
Opinion No. 26 (SFAS 84) by recognizing an expense of $273,365 which is
equal to the excess of the fair value of the additional consideration issued
pursuant to the original conversion terms. A total of $1,419,000 of
convertible notes and accrued interest of $136,722 totaling $1,555,722 was
converted at $0.60 into 2,592,870 shares of common stock while a total of
$40,500 of convertible notes and accrued interest of $1,927 totaling $42,427
was
converted at $0.85 into 49,914 share of common stock.
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
D – PRIVATE PLACEMENT AND CONVERTIBLE PROMISSORY NOTES PAYABLE
(Continued)
The
Company amortized the convertible notes discount and debt discount attributed
to
the beneficial conversion feature and recorded non-cash interest expense
of
$167,926 and $84,060 for the periods ended September 30, 2007 and 2006,
respectively. These amounts are inclusive of the unamortized portion pertaining
to the notes discount and beneficial conversion feature of the converted
notes
which was written-off upon the conversion of the notes.
Financing
costs attributable to the equity portion of the private placement totaled
$175,899 and were netted against the amount attributable to common
stock. Deferred financing costs of $155,985 attributable to the debt
portion of the private placement are being amortized over the life of the
debt
instrument, being 5 years. The Company amortized $78,903 and $23,398
for the periods ended September 30, 2007 and 2006, respectively, in relation
to
the deferred financing costs. These amounts are inclusive of the
unamortized portion pertaining to the converted notes which was written-off
upon
the conversion of the notes.
A
summary
of convertible promissory notes payable at September 30, 2007 is as
follows:
|
|
September
30, 2007
|
|
Convertible
notes payable (“Convertible Notes”); 11% per annum; maturing in September
2009; note holder has the option to convert unpaid note principal
and
interest to the Company’s common stock at $0.85 per share.
|
|
$ |
39,000
|
|
Debt
Discount – beneficial conversion feature, net of accumulated amortization
of $277,290 at September 30, 2007
|
|
|
(2,917 |
) |
Note
Discount, net of accumulated amortization of $277,290 at September
30,
2007
|
|
|
(2,917 |
) |
Total
|
|
|
33,166
|
|
NOTE
E - CAPITAL STOCK
The
Company was incorporated under the laws of the State of Delaware on October
14,
1999 under the name of Pre-Settlement Funding Corporation. The company has
authorized 100,000 shares of preferred stock, with a par value of $.001 per
share. The Company has designated 60,000 of its preferred stock as Series
A
Convertible Preferred Stock. As of September 30, 2007, the Company
has no Preferred Stock issued and outstanding. The Company has
authorized 19,900,000 shares of common stock, with a par value of $.001 per
share. As provided for in the investment agreement with Dutchess
Private Equities Fund, LP, the Company issued 781,459 shares of common stock
valued at $790,430 to a note holder as payment on its outstanding debt and
interest expense during the nine months of 2007. During the period
ended September 30, 2007, the President and majority shareholder of the Company
also contributed capital of $42,951 as further explained in Note G. The Company
issued 594,721 shares of common stock in exchange for stock options and warrants
exercised at various exercise prices per share for the price range between
$0.56
and $0.85 and received total proceeds of $347,398. Included in this
amount were 143,370 shares issued under a cashless conversion (Note F). The
Company also issued 40,000 and 250,000 shares of common stock to a note holder
in exchange for financing incentive accrued during the period ended September
30, 2007 and the year ended December 31, 2006, respectively. Further,
the Company issued 2,642,784 shares of the Company’s common stock upon
conversion of certain convertible promissory notes (Note D). As of September
30,
2007, there are 13,462,980 shares of common stock issued and
outstanding. Finally, as provided for in the investment agreement
with Dutchess Private Equities Fund, LP (Dutchess put agreement), the Company
issued 218,542 shares of common stock for cash and received
$330,905.
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
F – STOCK OPTIONS AND WARRANTS
Stock
Options
The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company’s common stock issued to the Company
employees and consultants. These options were granted in lieu of cash
compensation for services performed or other consideration.
Options
Outstanding
|
|
|
Options
Exercisable
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighed
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
$ |
0.50
- 2.00
|
|
|
|
1,500,000
|
|
|
|
3.09
|
|
|
|
1.33
|
|
|
|
1,500,000
|
|
|
|
1.33
|
|
Transactions
involving options issued to employees and consultants are summarized as
follows:
|
|
Number
of Shares
|
|
|
Weighted
Average Price Per Share
|
|
Outstanding
at January 1, 2005
|
|
|
1,600,000
|
|
|
$ |
1.35
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2005
|
|
|
1,600,000
|
|
|
|
1.35
|
|
Granted
|
|
|
75,000
|
|
|
|
0.85
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2006
|
|
|
1,675,000
|
|
|
|
1.33
|
|
Granted
|
|
|
|
|
|
|
-
|
|
Exercised
|
|
|
175,000
|
|
|
|
0.64
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2007
|
|
|
1,500,000
|
|
|
|
1.33
|
|
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
F – STOCK OPTIONS AND WARRANTS (Continued)
Warrants
In
connection with the Company’s Private Placement (Note D) the Company granted an
aggregate of 999 warrants to investors, each exercisable for 300 shares of
common stock Additionally, the Company granted 594,000 warrants to a
placement agent in exchange for services. Each warrant will be exercisable
for
one share of the Company's common stock.
The
following table summarizes the changes in warrants outstanding and the related
prices for the shares of the Company’s common stock.
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
Exercise
Prices
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Remaining Contractual Life (Years)
|
|
|
Weighed
Average Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
$ |
0.85
|
|
|
|
291,108
|
|
|
|
1.94
|
|
|
|
0.85
|
|
|
|
291,108
|
|
|
|
0.85
|
|
Transactions
involving warrants issued to investors and consultants are summarized as
follows:
|
|
Number
of Common Shares Issuable Upon Exercise of Warrants
|
|
|
Weighted
Average Price Per Share
|
|
Outstanding
at January 1, 2005
|
|
|
-
|
|
|
$ |
-
|
|
Granted
|
|
|
889,200
|
|
|
|
0.85
|
|
Exercised
|
|
|
4,500
|
|
|
|
0.85
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2005
|
|
|
893,700
|
|
|
|
0.85
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at December 31, 2006
|
|
|
893,700
|
|
|
$ |
0.85
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(570,351 |
) |
|
|
0.85
|
|
Canceled
or expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding
at September 30, 2007
|
|
|
323,349
|
|
|
$ |
0.85
|
|
During
September 2007, a warrant holder performed a cashless exercise of 294,000
warrants to purchase the Company’s common stock. The exercise
resulted in the acquisition of 143,370 shares.
SEAWRIGHT
HOLDINGS, INC.
(A
DEVELOPMENT STAGE COMPANY)
NOTES
TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL INFORMATION
September
30, 2007
(Unaudited)
NOTE
G - RELATED PARTY TRANSACTIONS
From
time
to time, the Company’s President has advanced funds to the Company for working
capital purposes. The Company had paid in full the amount due to the
Company’s President during the year ended December 31,
2006. Additionally, the total payment the Company remitted exceeded
the total balance due to the Company’s President in the amount of $42,951 during
the year ended December 31, 2006. The Company has accounted for the
excess payments to the Company’s President as a nonreciprocal transfer to a
shareholder for 2006 and, accordingly, has reflected the overpayment as
a direct
reduction of additional paid-in capital.
During
2007, the Company’s President contributed capital of $42,951 to the Company in
direct response to the excess payments. The Company has accounted for the
contribution as an addition to paid-in capital. The Company’s
President also advanced an additional $216,358 for working capital purposes
during 2007. This amount is reflected as Due to Related Party on the
unaudited condensed consolidated balance sheet.
NOTE
H - GOING CONCERN MATTERS
The
accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in
the normal course of business. As shown in the financial statements from
October
14, 1999 (date of inception of Company), the Company has generated minimal
revenues and has accumulated losses of $6,159,663.
These factors, among others, may indicate that the Company will be unable
to
continue as a going concern for a reasonable period of time.
The
Company's existence is dependent upon management's ability to develop profitable
operations and resolve its liquidity problems. Management anticipates the
Company will attain profitable status and improve its liquidity through
the
continued development of its products, establishing a profitable market
for the
Company's products and additional equity investment in the Company. The
accompanying unaudited condensed consolidated financial statements do not
include any adjustments that might result should the Company be unable
to
continue as a going concern.
In
order
to improve the Company's liquidity, the Company is actively pursing additional
debt and equity financing through discussions with investment bankers and
private investors. There can be no assurance the Company will be successful
in
its effort to secure additional equity financing.
If
operations and cash flows continue to improve through these efforts, management
believes that the Company can continue to operate. However, no assurance
can be
given that management's actions will result in profitable operations or
in the
resolution of its liquidity problems.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
When
used
in this Form 10-QSB and in our future filings with the Securities and Exchange
Commission, the words or phrases "will likely result", "management expects",
"we
expect", "will continue", "is anticipated", "estimated" or similar expressions
are intended to identify forward-looking statements. Readers are cautioned
not
to place undue reliance on any such forward-looking statements, each of
which
speaks only as of the date made. These statements are subject to risks
and
uncertainties, some of which are described below. We have no obligation
to
publicly release the result of any revisions that may be made to any
forward-looking statements to reflect anticipated events or circumstances
occurring after the date of such statements.
The
forward-looking statements in the discussion that follows are subject to
significant risks and uncertainties about us, our current and planned products,
our current and proposed marketing and sales, and our projected results
of
operations. There are several important factors that could cause actual
results
to differ materially from historical results and percentages and results
anticipated by the forward-looking statements. We have sought to identify
the
most significant risks to our business, but cannot predict whether or to
what
extent any of such risks may be realized nor can there be any assurance
that we
have identified all possible risks that might arise. Investors should carefully
consider all of such risks before making an investment decision with respect
to
our stock. The following discussion and analysis should be read in conjunction
with our financial statements and notes thereto. This discussion should
not be
construed to imply that the results discussed herein will necessarily continue
into the future, or that any conclusion reached herein will necessarily
be
indicative of actual operating results in the future. Such discussion represents
only the best present assessment from our management.
Plan
of Operation
In
2003,
we purchased property containing a spring located in Mt. Sidney, Virginia
in the
Shenandoah Valley with the intention of developing a spring water distribution
business. The spring has a flow in excess of 1,000,000 gallons of water
daily.
We
have
chosen to develop and acquire packaging for selling our water under the
brand
names Seawright Springs and Quibell. We have developed two proprietary
Polyethylene Terephthalate, or PET, bottles in a 16.9 ounce size and a
33.8
ounce size. In addition, in June 2005 we acquired from Quibell, glass bottle
designs for various sized bottles (including 237 ml, 385 ml, 750 ml and
1 liter
sizes) as well as labels for various sized sparkling water bottles, spring
water
bottles and tea bottles (including 237 ml, 385 ml, 750 ml, 1 liter, 1.5
liter
and 16.9 ounce bottles).
We
are
positioning our water in an effort to compete in the luxury brand category
of
the water market. We will also continue to seek opportunities to sell our
daily
supply of water to other bottlers.
In
May of
2005 and April of 2006, respectively, we closed on the purchase of two
parcels
of land located approximately 10 miles south of the Mt. Sidney property.
Both of
these properties are currently zoned for agricultural use. Although no
assurances can be given, both sites are expected to be re-zoned to commercial
use according to the master zoning plan of the city of Staunton, Virginia.
If
these properties are rezoned for commercial use, we may lease these properties
for commercial purposes.
The
further development of our business will require, among other things, further
capital expenditures on plant and equipment, developing marketing materials,
renting additional office space, and interviewing and hiring administrative,
marketing and maintenance personnel. While we have raised the capital necessary
to meet our working capital and financing needs in the past, additional
financing is required in order to meet our current and projected cash flow
deficits from operations and development. We believe that it will be necessary
to raise further capital to implement our business plan over the course
of the
next twelve months.
For
the
period from our inception through September 30, 2007, we have:
·
|
formed
our company and established our initial
structure;
|
·
|
sought
and pursued investment
opportunities;
|
·
|
reviewed
and analyzed the potential market for natural spring
water;
|
·
|
purchased
the Mt. Sidney property and procured the necessary financing
to cover the
initial purchase costs from an offering of preferred
stock;
|
·
|
purchased
two properties near the Mt. Sidney property, which we are considering
leasing for commercial purposes;
|
·
|
purchased
trademarks and other intellectual property relating to the creation
and
bottling of flavored and non-flavored bottled
water;
|
·
|
performed
required testing of water quality at spring
site;
|
·
|
began
developing a new web site as part of our marketing strategy;
and
|
·
|
made
improvements to the spring site and water collection
facilities.
|
Product
Research and Development
We
do not
anticipate performing research and development for any products during
the next
twelve months.
Acquisition
or Disposition of Plant and Equipment
We
do not
anticipate the sale of any significant property, plant or equipment during
the
next twelve months. We have made improvements to plant and equipment at
the
spring site, and we have spent approximately $250,000 to complete the renovation
of our spring catchment, which protects the water spring from outside
elements.
Number
of Employees
As
of
September 30, 2007, we had one employee, our Chief Executive Officer and
President, Joel Sens. We anticipate that the number of employees will
increase in the future. However, given our ability to contract out much
of our
required services, it is not anticipated, based on the current business
plan,
that new employees will be hired in the next twelve months. No formal contract
for the compensation of Mr. Sens exists as of September 30, 2007, but we
may
enter into an employment contract with him within the next twelve
months.
Comparison
of Financial Results
Three
and
Nine Months Ended September 30, 2007 and September 30, 2006
Revenues
During
the three and nine-month periods ended September 30, 2007, $4,183 and $6,267
of
revenue, respectively, was generated from the Mt. Sidney spring from on-site
sales as compared to $522 and $2,122 of revenue for the three and nine-month
periods ended September 30, 2006, respectively. We expect to increase our
sales
in future quarters and will remain a development stage company until revenues
increase significantly.
Costs
and Expenses
During
the three and nine-month periods ended September 30, 2007, operating expenses
were $169,001 and $1,556,938, respectively. These expenses were related
to the
establishment of our spring water business, which includes expenses for
consulting and engineering services, testing and spring maintenance, and
to the
administration and overhead of our business, which includes accounting,
legal
and office expenses. This compared with operating expenses for the three
and
nine-month periods ended September 30, 2006 of $344,763 and $906,457,
respectively. The increase in expenses is due to the increased expenditures
on
the spring site operations principally related to consulting and
marketing.
We
have
incurred interest expenses of $94,841 and $536,056 for the three and nine-month
periods ended September 30, 2007, respectively, and $125,580 and $295,710
for
the three and nine-month periods ended September 30, 2006,
respectively.
During
the three and nine-month periods ended September 30, 2007 on trading securities,
we recorded a net loss of $6 and $255, respectively. This compared with
net loss
on trading securities for the three and nine-month periods ended September
30,
2006 of $737 and $1,268, respectively.
As
of
September 30, 2007, the President of our company advanced capital of $216,358
for general working capital.
Liquidity
and Capital Resources
As
of
September 30, 2007, we had a working capital deficit of $1,519,213, an
available
cash balance of $475, a marketable securities balance of $24,878 and cash
in
excess of available funds, accounts payable and accrued liabilities balance,
including accrued interest on the convertible notes, of $273,185.
In
August
2004 we issued a private placement memorandum to offer up to 1,000 units
of
equity/notes payable instruments. Each unit consisted of 2,500 shares of
our
common stock, $1,500 of convertible promissory notes, and a warrant to
purchase
300 shares of our common stock at $0.85 per share. The convertible promissory
notes accrue interest at 11% per annum, and are payable and due in September
2009. The note holders have the option to convert any unpaid note principal
and
accrued interest to our common stock at a rate of $0.85 per share anytime
after
six months from the issuance date of the note. During the second quarter
of
2007, most of the convertible notes payable were converted into shares
of the
Company’s common stock, except for the remaining balance of
$33,166. The note holders agreed to a conversion rate of one share of
common stock for each $0.60 of principal and unpaid interest accrued through
the
closing date plus an additional six months of interest at the rate of 11%
per
annum. The private placement was closed in February of 2005. Over the
course of our private placement, we received total proceeds of $2,665,116,
net
of placement costs and fees, and issued to investors $1,498,500 of convertible
promissory notes, 2,497,500 shares of common stock and 999 warrants, of
which
451,351, have been converted to common stock. Part of the proceeds of the
private placement was used to pay off the remaining debt on the Mt. Sidney
property.
The
purchase of one of the two Staunton, Virginia properties mentioned above
was
closed on May 24, 2005. The purchase price for that parcel was $725,000,
of
which $225,000 was paid in cash. The remaining $500,000 of the purchase
price
has been financed through a bank loan. We also completed the purchase of
the
second Staunton, Virginia property on April 10, 2006. The purchase price
for the
second property was $240,000, less a previously made $10,000 refundable
deposit.
We paid $90,000 of the remaining purchase price at settlement and have
financed
the remaining $140,000.
Our
accounts payable and accrued liabilities of $268,837 is composed predominantly
of liabilities to our consultants and vendors associated with the Mt. Sidney
spring, our accountants and lawyers as well as accrued interest on our
outstanding debt.
In
order
to provide funding for operations and capital expenditures, on September
12,
2005, we entered into an investment agreement with Dutchess Private Equities
Fund, LP. The investment agreement establishes what is sometimes referred
to as
an “equity line of credit.” Under the investment agreement, Dutchess has agreed
to provide us with up to $5,000,000 during the 36-month period following
the
date a registration statement of our common stock is declared effective
by the
Securities and Exchange Commission. During this 36-month period, we may
request
a draw down under the equity line of credit by which we would sell shares
of our
common stock to Dutchess, which is obligated to purchase the shares under
the
investment agreement, subject to certain conditions set forth therein.
We may,
at our election, require Dutchess to purchase an amount equal to no more
than
either (a) 200% of the average daily volume of our common stock for the
10
trading days prior to the put notice date, multiplied by the average of
the
three daily closing bid prices immediately preceding the put notice date
or (b)
$100,000; provided that we may not request more than $1,000,000 in any
single
put notice. On the trading day following the put notice date, a pricing
period
of five trading days will begin. The purchase price for the common stock
identified in the put notice will be equal to 95% of the lowest closing
best bid
price of our common stock during the pricing period. We are under no obligation
to draw down under the equity line of credit.
On
November 20, 2006, a registration statement on Form SB-2 pertaining to
the
Company’s common stock was declared effective by the Securities and Exchange
Commission. The registration statement related to the sale of shares
of the Company’s common stock by our stockholders. The Securities and
Exchange Commission limited the amount of shares of the Company’s common stock
that the Company could register under the investment agreement to 1,000,000
shares of the Company’s common stock. Accordingly, although the
investment agreement remains a viable agreement, the Company can only require
Dutchess to purchase up to 1,000,000 shares, thereby reducing the amount
of
money available to the Company.
During
December 2006, the Company entered into a promissory note with a face amount
of
$780,000. Under the terms of the note, the Company received $650,000
less closing costs of $50,075, creating a calculated effective interest
rate of
35%. As a further incentive, we agreed to issue 250,000 shares of
common stock to Dutchess. The fair value of the shares, $127,500, was
accounted for as a deferred financing cost and is being amortized over
the life
of the note. As detailed in the agreement, the Company shall make
payments to the holder in the amount of the greater of (a) 100% of each
Put (as
defined in the investment agreement) given to the investor from the Company
or
(b) made in 12 monthly increments of $65,000. The agreement is
collateralized by signed put notices under the investment agreement, as
well as
a lien on the Company’s goods, inventory, general intangibles, and all
associated documents and chattel paper. Moreover, Joel Sens, the
President and Chief Executive Officer of the Company, has pledged certain
personal property. As of September 30, 2007 the promissory note has been
fully
paid and converted into common stock.
Future
Funding Requirements and Going Concern
While
we
have raised the capital necessary to meet our working capital and financing
needs in the past, additional financing is required in order to meet our
current
and projected cash flow deficits from operations and development. Within
the
next year, funds will be needed to meet our obligations related to the
financing
of the purchases of the Staunton, Virginia properties and to fund improvements
to our spring site and our initial operations.
We
intend
to generate these funds primarily from our equity line of credit. We believe
that proceeds from the equity line of credit will allow us to cover our
capital
and operating expenses over the next year. If during that period or thereafter,
we are not successful in generating sufficient liquidity from operations
or in
raising sufficient capital resources on terms acceptable to us, this could
have
a material adverse effect on our business, results of operations, liquidity
and
financial condition.
Our
independent certified public accountants have stated in their report included
in
our December 31, 2006 Form 10-KSB, that we have incurred operating losses
since
our inception, and that we are dependent upon management's ability to develop
profitable operations. These factors among others may raise substantial
doubt
about our ability to continue as a going concern.
Off-Balance
Sheet Arrangements
We
have
not had and, at September 30, 2007, do not have any off-balance sheet
arrangements that have or are reasonably likely to have a current or future
effect on our financial condition, changes in financial condition, revenues
or
expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.
Inflation
We
do not
believe that inflation has had a material effect on our business, financial
condition or results of operations. If our costs were to become
subject to significant inflationary pressures, we may not be able to fully
offset such higher costs through price increases. Our inability or
failure to do so could adversely affect our business, financial condition
and
results of operations.
Trends,
Risks and Uncertainties
We
have
sought to identify what we believe to be the most significant risks to
our
business as discussed below, but cannot predict whether or to what extent
any of
such risks may be realized nor can there be any assurances that we have
identified all possible risks that might arise. Investors should carefully
consider all of such risk factors before making an investment decision
with
respect to our stock.
Limited
operating history; anticipated losses; uncertainly of future
results
We
have
only a limited operating history upon which to be evaluated. Our prospects
must
be evaluated with a view to the risks encountered by a company in an early
stage
of development. We will be incurring costs to develop, introduce and enhance
our
spring water operations and products, to develop and market an interactive
website, to establish marketing relationships, to acquire and develop products
that will complement each other, and to build an administrative organization.
To
the extent that such expenses are not followed by commensurate revenue,
our
business, results of operations and financial condition will be materially
adversely affected. There can be no assurance that we will be able to generate
sufficient revenues from sales of our products. We expect negative cash
flow
from operations to continue for at least the next 12 months, and we must
raise
additional capital to meet our expected expenses. We intend to raise this
capital primarily through the establishment of an equity line of credit
as
described above, but it is possible that we will not be able to establish
the
equity line of credit, or that proceeds from the equity line of credit
will be
insufficient to cover our future expenses.
Potential
fluctuations in quarterly operating results
Our
quarterly operating results may fluctuate significantly in the future as
a
result of a variety of factors, most of which are outside our control,
including: market acceptance of our products, the demand for the spring
water
services and related products; seasonal trends in demand; the amount and
timing
of operating costs and capital expenditures relating to the expansion of
our
business, operations and infrastructure, and the implementation of marketing
programs, key agreements and strategic alliances; our ability to obtain
additional financing in a timely manner and on terms favorable to us; the
introduction of new services and products by us or our competitors; price
competition or pricing changes in the industry; technical difficulties;
and
general economic conditions specific to the beverage market and the spring
water
industry. Our quarterly results may also be significantly affected by the
impact
of the accounting treatment of acquisitions, financing transactions or
other
matters. Particularly at our early stage of development, such accounting
treatment can have a material impact on the results for any quarter. Due
to the
foregoing factors, among others, it is likely that our operating results
will
fall below our expectations or investors’ expectations in some future
quarter.
We
are subject to substantial competition and may not have the ability or
the
capital to compete effectively
The
industry in which we expect our products to be sold is highly competitive.
We
may not have the ability or the capital to compete effectively in this
environment. The significant competition in our industry could harm our
ability
to win business and increase the price pressure on our products. We face
strong
competition from a wide variety of firms, including large, multinational
firms
with far greater resources than we possess. Many of our competitors have
considerably greater financial, marketing and technological resources than
we
do, which may make it difficult to sell our products. Many of our competitors
also have longer operating histories and presence in key markets, greater
name
recognition, larger customer bases and significantly greater financial,
sales
and marketing, manufacturing, distribution, technical and other resources.
As a
result, these competitors may also be able to devote greater resources
to the
promotion and sale of their products.
Management
of growth
Our
future success will also be highly dependent upon our ability to successfully
manage the anticipated expansion of our operations. Our ability to manage
and
support growth effectively will be substantially dependent on our ability
to
implement adequate financial and management controls, reporting systems
and
other procedures, and attract and retain sufficient numbers of qualified
technical, sales, marketing, financial, accounting, administrative and
management personnel.
Our
future success also depends upon our ability to address potential market
opportunities while managing expenses to match our ability to finance our
operations. This need to manage our expenses will place a significant strain
on
our management and operational resources. If we are unable to manage our
expenses effectively, our business, results of operations and financial
condition will be materially and adversely affected.
Risks
associated with acquisitions
Although
we do not presently intend to do so, as part of our business strategy in
the
future, we could acquire assets and businesses relating to or complementary
to
our operations. Any acquisitions by us would involve risks commonly encountered
in acquisitions of assets or companies. These risks would include, among
other
things, the following: we could be exposed to unknown liabilities of the
acquired companies; we could incur acquisition costs and expenses higher
than
anticipated; fluctuations in our quarterly and annual operating results
could
occur due to the costs and expenses of acquiring and integrating new businesses
or technologies; we could experience difficulties and expenses in assimilating
the operations and personnel of any acquired businesses; our ongoing business
could be disrupted and our management’s time and attention diverted; and we
could be unable to integrate with any acquired businesses
successfully.
Other
Risks
We
are
also subject to risks associated with economic conditions generally and
the
economy in those areas where we have or expect to have assets and operations;
competitive and other factors affecting our operations, markets, products
and
services; those risks associated with our ability to successfully negotiate
with
certain customers, risks relating to estimated contract costs, estimated
losses
on uncompleted contracts and estimates regarding the percentage of completion
of
contracts, associated costs arising out of our activities and the matters
discussed in this report; risks relating to changes in interest rates and
in the
availability, cost and terms of financing; risks related to the performance
of
financial markets; risks related to changes in domestic laws, regulations
and
taxes; risks related to changes in business strategy or development plans;
risks
associated with future profitability; and other factors discussed elsewhere
in
this report and in documents filed by us with the Securities and Exchange
Commission. Many of these factors are beyond our control.
ITEM
3. CONTROLS AND PROCEDURES
Our
chief
executive officer and chief financial officer have evaluated, as of the
end of
the period covered by this quarterly report, the effectiveness of the design,
maintenance and operation of our disclosure controls and procedures. Our
chief
executive officer and chief financial officer have determined that our
disclosure controls and procedures were effective in ensuring that the
information required to be disclosed by us in the reports that we file
under the
Exchange Act is accurate and is recorded, processed, summarized and reported
within the time periods specified in the Commission's rules and
regulations.
Disclosure
controls and procedures, no matter how well designed and implemented, can
provide only reasonable assurance of achieving an entity's disclosure
objectives. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include
the
fact that human judgment in decision making can be fully faulty and that
breakdowns in internal control can occur because of human failures such
as
errors or mistakes or intentional circumvention of the established
process.
During
the quarter ended September 30, 2007, there were no changes in internal
control
over financial reporting that materially affected, or are reasonably likely
to
materially affect, our internal control over financial reporting.
PART
II – OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS.
None.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS.
During
the quarter ended March 31, 2007, the Company issued 250,000 shares of
common
stock to a note holder in exchange for financing incentive accrued during
the
year ended December 31, 2006. This transaction was exempt from
registration pursuant to Section 4(2) of the Securities Act of
1933.
During
the quarter ended September 30, 2007, the
Company issued 40,000 shares of common stock to a note holder as an additional
interest incentive and as detailed in the note agreement. The transaction
was
exempt from registration pursuant to Section 4(2) of the Securities Act
of
1933.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
There
were no matters submitted requiring a vote of security holders during the
nine
month period ending September 30, 2007.
ITEM
5. OTHER INFORMATION.
None.
ITEM
6. EXHIBITS.
31
|
Certification
of Chief Executive Officer and Treasurer (principal executive
officer and
principal financial officer), pursuant to Rule 13a-14(a) of the
Exchange
Act, as enacted by Section 302 of the Sarbanes-Oxley Act of 2002,
as filed
herewith.
|
32
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Certification
of Chief Executive Officer and Treasurer (principal executive
officer and
principal financial officer), pursuant to 18 United States Code
Section
1350, as enacted by Section 906 of the Sarbanes-Oxley Act of
2002, as
filed herewith.
|
SIGNATURES
In
accordance with the requirements of the Securities Exchange Act of 1934,
the
registrant has caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
|
Seawright
Holdings, Inc.
|
|
|
|
|
|
Date:
November
19, 2007
|
By:
|
/s/ Joel
Sens |
|
|
|
Joel
Sens |
|
|
|
Chief
Executive Officer |
|
|
|
|
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