UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q/A
Amendment
no. 2
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the
quarterly period ended March 31, 2009
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 ¨
No ¨
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 ¨ No x
As of
August 17, 2009, the Company had 15,344,654 shares of common stock, $0.10 par
value, issued and outstanding.
Explanatory
Note
We are
filing this Amendment No. 2 to Form 10-Q for the three-month period ended
March 31, 2009, to include the review report of our independent registered
public accounting firm. We have not updated any other information
included in this report, except to currently date our certifications, as
required by Sections 302 and 906 of the Sarbanes Oxley Act.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q/A 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/A.
NEW
CENTURY COMPANIES, INC.
INDEX
|
|
Page No.
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
|
|
Item
1. Financial Statements
|
|
F-1
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-1
|
|
|
|
Condensed
Consolidated Balance Sheets - March 31, 2009 (Restated) (Unaudited) and
December 31, 2008
|
|
F-2
|
|
|
|
Condensed
Consolidated Statements of Operations (Restated) (Unaudited) - Three
Months Ended March 31, 2009 and 2008
|
|
F-3
|
|
|
|
Condensed
Consolidated Statements of Cash Flows (Restated) (Unaudited) - Three
Months Ended March 31, 2009 and 2008
|
|
F-4
|
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
|
F-5
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
|
3
|
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
|
7
|
|
|
|
Item
4T. Controls and Procedures
|
|
7
|
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
|
|
Item
1. Legal Proceedings
|
|
9
|
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
|
9
|
|
|
|
Item
3. Defaults Upon Senior Securities
|
|
9
|
|
|
|
Item
4. Submission of Matters to a Vote of Security
Holders
|
|
9
|
|
|
|
Item
5. Other Information
|
|
9
|
|
|
|
Item
6. Exhibits
|
|
9
|
|
|
|
SIGNATURES
|
|
10
|
Part
I - Financial Information
ITEM
1. FINANCIAL STATEMENTS
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of New Century Companies, Inc. and Subsidiary
We have
reviewed the accompanying condensed consolidated balance sheet of New Centuries
Companies, Inc. and Subsidiary (the “Company”) as of March 31, 2009, and the
related condensed consolidated statements of operations and cash flows for the
three-month period ended March 31, 2009. These condensed consolidated financial
statements are the responsibility of the Company’s management.
We
conducted our review in accordance with the standards of the Public Company
Accounting Oversight Board (United States). A review of interim financial
information consists principally of applying analytical procedures and making
inquiries of persons responsible for financial and accounting matters. It is
substantially less in scope than an audit conducted in accordance with standards
of the Public Company Accounting Oversight Board (United States), the objective
of which is the expression of an opinion regarding the condensed consolidated
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on
our review, we are not aware of any material modifications that should be made
to the accompanying interim condensed consolidated financial statements for them
to be in conformity with accounting principles generally accepted in the United
States of America.
/s/ KMJ
Corbin & Company LLP
Costa
Mesa, CA
August
31, 2009
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED BALANCE SHEETS
March
31, 2009 and December 31, 2008
|
|
(Unaudited)
|
|
|
|
|
|
|
March
31,
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Restated - See
Note
6)
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
|
|
$
|
268,095
|
|
|
$
|
31,889
|
|
Contract
receivables, net of allowance of $0 and $24,000 for March 31, 2009 and
December 31, 2008, respectively
|
|
|
334,391
|
|
|
|
237,787
|
|
Inventories
|
|
|
412,889
|
|
|
|
564,022
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
102,028
|
|
|
|
416,664
|
|
Deferred
financing costs
|
|
|
370,933
|
|
|
|
252,305
|
|
Prepaid
expenses and other current assets
|
|
|
165,933
|
|
|
|
168,668
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
1,654,269
|
|
|
|
1,671,335
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment, net
|
|
|
172,876
|
|
|
|
186,906
|
|
Deferred
Financing Costs, net
|
|
|
173,803
|
|
|
|
233,702
|
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
2,000,948
|
|
|
$
|
2,091,943
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
$
|
32,152
|
|
|
$
|
15,329
|
|
Accounts
payable and accrued liabilities
|
|
|
1,519,171
|
|
|
|
1,417,464
|
|
Dividends
payable
|
|
|
459,275
|
|
|
|
459,275
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
607,061
|
|
|
|
1,388,348
|
|
Capital
lease obligation, current portion
|
|
|
28,542
|
|
|
|
27,874
|
|
Derivative
liability
|
|
|
4,306,028
|
|
|
|
1,975,298
|
|
CAMOFI
Convertible note payable, net of discount of $1,756,612 at March 31, 2009
and $2,089,443 at December 31, 2008, respectively
|
|
|
1,070,670
|
|
|
|
737,838
|
|
CAMHZN
Convertible note payable, net of discount of $294,813 at March 31, 2009
and $350,090 at December 31, 2008, respectively
|
|
|
455,187
|
|
|
|
399,910
|
|
CAMOFI
Convertible Note, net of discount of $288,039
|
|
|
413,161
|
|
|
|
-
|
|
CAMHZN
Convertible Note, net of discount of $71,778
|
|
|
102,022
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
8,993,269
|
|
|
|
6,421,336
|
|
|
|
|
|
|
|
|
|
|
Long
Term Liabilities
|
|
|
|
|
|
|
|
|
Capital
lease obligation, long term portion
|
|
|
2,482
|
|
|
|
9,804
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
8,995,751
|
|
|
|
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 $672,000)
|
|
|
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 $291,000)
|
|
|
291,000
|
|
|
|
291,000
|
|
Common
stock, $0.10 par value, 50,000,000 shares authorized;
15,344,654 shares issued and outstanding at March 31, 2009 and
December 31, 2008
|
|
|
1,534,466
|
|
|
|
1,534,466
|
|
Notes
receivable from stockholders
|
|
|
(564,928
|
)
|
|
|
(564,928
|
)
|
Deferred
equity compensation
|
|
|
(81,667
|
)
|
|
|
(101,667
|
)
|
Additional
paid-in capital
|
|
|
7,355,007
|
|
|
|
7,355,007
|
|
Accumulated
deficit
|
|
|
(15,555,561
|
)
|
|
|
(12,879,955
|
)
|
|
|
|
|
|
|
|
|
|
Total
stockholders' deficit
|
|
|
(6,994,803
|
)
|
|
|
(4,339,197
|
)
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders' deficit
|
|
$
|
2,000,948
|
|
|
$
|
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 Months Ended March 31, 2009 and 2008
(Unaudited)
|
|
For
the Three Months Ended
March
31,
|
|
|
|
(Restated - See Note 6)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
CONTRACT
REVENUES
|
|
$
|
1,054,702
|
|
|
$
|
1,526,602
|
|
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
818,893
|
|
|
|
1,308,479
|
|
|
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
235,809
|
|
|
|
218,123
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES
|
|
|
|
|
|
|
|
|
Consulting
and other compensation
|
|
|
62,615
|
|
|
|
271,384
|
|
Salaries
and related
|
|
|
153,087
|
|
|
|
53,496
|
|
Selling,
general and administrative
|
|
|
232,021
|
|
|
|
438,029
|
|
TOTAL
OPERATING EXPENSES
|
|
|
447,723
|
|
|
|
762,909
|
|
|
|
|
|
|
|
|
|
|
OPERATING
LOSS
|
|
|
(211,914
|
)
|
|
|
(544,786
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSES)
|
|
|
|
|
|
|
|
|
Gain
on writeoff of accounts payable
|
|
|
5,681
|
|
|
|
56,628
|
|
(Loss)
/ gain on valuation of derivative liabilities
|
|
|
(1,800,978
|
)
|
|
|
1,300,762
|
|
Interest
expense
|
|
|
(668,395
|
)
|
|
|
(486,769
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
OTHER INCOME (EXPENSES)
|
|
|
(2,463,692
|
)
|
|
|
870,621
|
|
|
|
|
|
|
|
|
|
|
INCOME
(LOSS) BEFORE PROVISION FOR INCOME TAXES
|
|
|
(2,675,606
|
)
|
|
|
325,835
|
|
|
|
|
|
|
|
|
|
|
PROVISION
FOR INCOME TAXES
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME ( LOSS)
|
|
$
|
(2,675,606
|
)
|
|
$
|
325,835
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
|
|
$
|
(2,675,606
|
)
|
|
$
|
325,835
|
|
|
|
|
|
|
|
|
|
|
Basic
net income (loss) available to common stockholders per common
share
|
|
$
|
(0.17
|
)
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
Diluted
net income (loss) available to common stockholders per common
share
|
|
$
|
(0.17
|
)
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
Basic
weighted average common shares outstanding
|
|
|
15,344,654
|
|
|
|
14,033,089
|
|
|
|
|
|
|
|
|
|
|
Diluted
weighted average common shares outstanding
|
|
|
15,344,654
|
|
|
|
41,981,711
|
|
See
accompanying notes to the condensed consolidated financial
statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
For
the Three Months Ended March 31, 2009 and 2008
(Unaudited)
|
|
(Restated - See Note 6)
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
Net
(loss) income
|
|
$
|
(2,675,606
|
)
|
|
$
|
325,835
|
|
Adjustments
to reconcile net (loss) income to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization of property and equipment
|
|
|
14,030
|
|
|
|
20,757
|
|
Gain
on write off of accounts payable
|
|
|
(5,681
|
)
|
|
|
(56,628
|
)
|
Amortization
of deferred financing costs
|
|
|
116,271
|
|
|
|
89,574
|
|
Amortization
of stock-based consulting fees and employee compensation
|
|
|
20,000
|
|
|
|
125,343
|
|
Amortization
of BCF and debt discount
|
|
|
508,044
|
|
|
|
251,894
|
|
Estimated
fair value of common stock issued for services
|
|
|
-
|
|
|
|
75,000
|
|
(Gain)
/ loss on valuation of derivatives liabilities
|
|
|
1,800,978
|
|
|
|
(1,300,962
|
)
|
|
|
|
|
|
|
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Contracts
receivable
|
|
|
(96,604
|
)
|
|
|
(60,178
|
)
|
Inventories
|
|
|
151,133
|
|
|
|
170,900
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
|
314,636
|
|
|
|
(22,635
|
)
|
Prepaid
expenses and other current assets
|
|
|
2,735
|
|
|
|
(222,867
|
)
|
Accounts
payable and accrued liabilities
|
|
|
157,388
|
|
|
|
(94,354
|
)
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(781,287
|
)
|
|
|
410,089
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in operating activities
|
|
|
(473,963
|
)
|
|
|
(288,232
|
)
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
Bank
overdraft
|
|
|
16,823
|
|
|
|
12,699
|
|
Proceeds
from issuance of convertible notes payable, net of financing
costs
|
|
|
700,000
|
|
|
|
-
|
|
Principal
payments on notes payable and capital lease
|
|
|
(6,654
|
)
|
|
|
(6,196
|
)
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities
|
|
|
710,169
|
|
|
|
6,503
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash
|
|
|
236,206
|
|
|
|
(281,729
|
)
|
|
|
|
|
|
|
|
|
|
Cash
at beginning of period
|
|
|
31,889
|
|
|
|
281,729
|
|
|
|
|
|
|
|
|
|
|
Cash
at end of period
|
|
$
|
268,095
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of non-cash financing and investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt
discount recorded on convertible notes payable
|
|
$
|
479,752
|
|
|
$
|
923,610
|
|
See
accompanying notes to the condensed consolidated financial
statements.
NEW
CENTURY COMPANIES, INC. AND SUBSIDIARY
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (RESTATED)
FOR
THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008
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 primarily in 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."
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 March 31, 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 months ended
March 31, 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.
Restatements
The
accompanying balance sheet as of March 31, 2009 and the statements of operations
and cash flows for the three months ended March 31, 2009 and 2008 have been
restated – see Note 6.
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 March 31, 2009, the Company has an accumulated
deficit of approximately $15,556,000, had recurring losses, a working capital
deficit of approximately $7,339,000, and was also in default on two of 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:
·
|
The
Company continues its aggressive program for selling
machines.
|
·
|
The
Company continues to implement plans to further reduce operating
costs.
|
·
|
The
Company is seeking investment capital through the public and private
markets.
|
·
|
The
Company is seeking strategic acquisition
candidates.
|
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 Statements of Position 81-1, “Accounting for Performance
of Construction-Type and Certain Production-Type 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.
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 Staff Accounting Bulletin
("SAB") No. 104, "Revenue Recognition," which outlines 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
EITF Issue No. 00-10, "Accounting for Shipping and Handling Fees and Costs."
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 Statements of Financial Accounting Standards ("SFAS") No. 48,
"Revenue Recognition when Right of Return Exists," 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 March 31, 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 March 31, 2009 and December 31, 2008, the warranty
obligation balance was $15,160 and $50,000, respectively. There
were no amounts charged to warranty expense in the accompanying consolidated
statements of operations during the three months ended March 31,
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 for March 31, 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 March 31, 2009 and December
31, 2008.
During
the period ended March 31, 2009, sales to two customers accounted for
approximately 46% of net sales. Further, there were no customers that
accounted for a significant amount of receivables at March 31,
2009.
During
the period ended March 31, 2008, sales to two customers accounted for
approximately 64% of net sales.
Management
reviews the collectability of contract receivables periodically and believes
that the allowance for doubtful accounts for period ended March 31, 2009 and the
year ended December 31, 2008 is adequate. There was no allowance for doubtful
accounts at March 31, 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
accounting principles generally accepted in the United States of
America. 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
earnings (loss) per share is computed by dividing net income (loss) by the
weighted average number of common shares outstanding for the period. Diluted net
income (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 61,821,000 shares at March 31,
2009 (restated) are not included in the diluted loss per share as they would be
anti-dilutive. Common stock equivalents, representing convertible Preferred
Stock, convertible debt, options and warrants totaling approximately 27,949,000
shares are included in the diluted loss per share at March 31,
2008.
Stock
Based Compensation
Effective
January 1, 2006, we adopted the fair value method of accounting for employee
stock compensation cost pursuant to SFAS No. 123(R), “Share-Based Payment.”
Under the fair value recognition provisions of SFAS 123(R), 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. For the three months ended
March 31, 2009 and 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 the application of SFAS No. 123R to
options granted outside of the Company's Stock Option Plan for the three months
ended March 31, 2009 and 2008. Share-based compensation recognized as a result
of the adoption of SFAS No. 123R use the Black Scholes option pricing model for
estimating fair value of options granted.
In
accordance with SFAS No. 123R, 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 period ended March
31, 2009.
Options
outstanding that have vested and are expected to vest as of March 31, 2009 are
as follows:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Price
|
|
|
Term in Years
|
|
|
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
3,450,000
|
|
|
$
|
0.17
|
|
|
|
1.74
|
|
|
$
|
—
|
|
Expected
to vest (2)
|
|
|
650,000
|
|
|
$
|
0.08
|
|
|
|
0.16
|
|
|
$
|
—
|
|
Total
|
|
|
4,100,000
|
|
|
|
|
|
|
|
|
|
$
|
—
|
|
|
(1)
|
Represents
the added value as 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 March 31, 2009 and December 31, 2008, the market price of
the Company's common stock was $0.08 and $0.05,
respectively).
|
|
(2)
|
The
650,000 options became fully vested on April 8, 2009 and are valued at
$35,014 based on the stock market price of the shares at the contract
date.
|
The
Company follows SFAS No. 123(R) (as interpreted by EITF Issue No. 96-18,
"Accounting for Equity Instruments That Are Issued To Other Than Employees for
Acquiring, or in Conjunction with Selling, Goods or Services") to account for
transactions involving services provided by third parties where the Company
issues equity instruments as part of the total consideration. Pursuant to
paragraph 7 of SFAS No. 123 (R), the Company accounts for such transactions
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. The Company applies EITF Issue No. 96-18 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, using 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 at
March 31, 2009:
Exercise Price
|
|
Number of
Options
outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$
0.075-0.083
|
|
|
1,300,000
|
|
|
|
0.32
|
|
|
$
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.15-0.20
|
|
|
2,800,000
|
|
|
|
1.42
|
|
|
$
|
0.19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,100,000
|
|
|
|
|
|
|
$
|
0.15
|
|
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.
The
following is a status of the warrants outstanding at March 31, 2009 and December
31, 2008:
|
|
Outstanding Warrants
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value (1)
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2008
|
|
|
5,586,824
|
|
|
$
|
0.21
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grants
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Exercises
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancellations/
Terminated
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
and Exercisable at
|
|
|
|
|
|
|
|
|
|
|
|
|
March
31, 2009
|
|
|
5,586,824
|
|
|
$
|
0.21
|
|
|
|
—
|
|
|
(1)
|
Represents
the added value as 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 March 31, 2009 and December 31, 2008, the market price of
the Company's common stock was $0.08 and $0.05,
respectively).
|
The
following table summarizes information related to warrants outstanding and
exercisable at March 31, 2009:
Exercise Price
|
|
Number of
Warrants
outstanding
|
|
|
Weighted
Average
Remaining
Contractual
Life (Years)
|
|
|
Weighted
Average
Exercise
Price
|
|
$
0.60-0.70
|
|
|
1,372,538
|
|
|
|
0.78
|
|
|
$
|
0.64
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.07
|
|
|
4,214,286
|
|
|
|
3.58
|
|
|
$
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,586,824
|
|
|
|
|
|
|
$
|
0.21
|
|
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 interest expense. During
the three months ended March 31, 2009 and 2008, the Company amortized deferred
financing costs in addition to amounts described in Note 3 of approximately
$3,000 and $6,000, respectively, to interest expense.
Fair
Value Measurements
The
Company adopted SFAS No. 157, “Fair Value Measurements,” in the first
quarter of fiscal 2008. SFAS 157 was amended in February 2008 by
the Financial Accounting Standards Board (“FASB”) Staff Position
(“FSP”) FAS No. 157-1, “Application of FASB Statement No. 157 to
FASB Statement No. 13 and Its Related Interpretive Accounting
Pronouncements That Address Leasing Transactions,” and by FSP FAS 157-2,
“Effective Date of FASB Statement No. 157,” which delayed the
Company’s application of SFAS 157 for nonrecurring nonfinancial assets and
liabilities until January 1, 2009. FAS 157 was further amended in
October 2008 by FSP FAS 157-3, “Determining the Fair Value of a Financial
Asset When the Market for That Asset Is Not Active”, which clarifies the
application of SFAS 157 to assets participating in inactive
markets.
Implementation
of SFAS 157 did not have a material effect on the Company’s results of
operations or financial position and had no effect on the Company’s existing
fair-value measurement practices. However, SFAS 157 requires 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) (restated):
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value of derivative liability
|
|
|
—
|
|
|
$
|
—
|
|
|
$
|
4,306,028
|
|
|
$
|
4,306,028
|
|
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 three months ended March 31, 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 pursuant to
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as
amended. 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, under the provisions of
Emerging Issues Task Force ("EITF") Issue No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock," as a result of entering into the debenture agreements, the Company was
required to classify all other non-employee options and warrants as derivative
liabilities and record them at their fair values at each balance sheet date. 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 months ended March 31, 2009 and 2008, the Company recognized other
expense of $1,800,978 (restated) and other income of $1,300,762 (restated),
respectively, related to recording the derivative liability at fair value. At
March 31, 2009 and December 31, 2008, the derivative liability balance was
$4,306,028 (restated) 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 three months ended March
31, 2009 and 2008: dividend yield of 0%; volatility ranging from 178% to
670%(2009) and 160% to 187% (2008), respectively; and risk free interest rates
ranging from 0.19% to 2.54% (2009) and 0.10% to 2.21% (2008).
The
following table summarizes the activity related to the derivative liability
during the three months ended March 31, 2009:
Derivative
liability - December 31, 2008
|
|
$
|
2,025,298
|
|
|
|
|
|
|
Derivative
liability added during the year
|
|
|
479,752
|
|
|
|
|
|
|
Increase
in fair value of derivative liability
|
|
|
1,800,978
|
|
|
|
|
|
|
Total
derivative liability - March 31, 2009
|
|
$
|
4,306,028
|
|
Significant
Recent Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification™ and the Hierarchy of Generally Accepted Accounting Principles – a
Replacement of FASB Statement No. 162 ("SFAS No. 168") . The
Codification will become the source of authoritative U.S. GAAP. The
statement is effective for financial statements issued for interim and annual
periods ending after September 15, 2009. The Company expects to adopt
this standard with the filing of its Quarterly Report on Form 10-Q for the
period ended September 30, 2009 and does not expect the standard to have a
material impact on the Company’s consolidated financial
statements.
In
April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly (“FSP FAS
157-4”), which provides additional guidance for estimating fair value in
accordance with Statement of Financial Accounting Standards No. 157, Fair Value Measurements,
(“SFAS 157”). FSP FAS 157-4 states that a significant decrease in the
volume and level of activity for the asset or liability when compared with
normal market activity is an indication that transactions or quoted prices may
not be determinative of fair value because there may be increased instances of
transactions that are not orderly in such market conditions. The
adoption of FSP FAS 157-4 did not have a material impact on the Company’s
consolidated financial position, results of operations or
liquidity.
In
April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value
of Financial Instruments (“FSP FAS 107-1 and APB 28-1”), which requires
disclosures about the fair value of the Company’s financial instruments for
which it is practicable to estimate that value, whether recognized or not
recognized in the balance sheets, in the interim reporting periods as well as in
the annual reporting periods. In addition, FSP FAS 107-1 and APB 28-1 requires
disclosures of the methods and significant assumptions used to estimate the fair
value of those financial instruments. FSP FAS 107-1 and APB 28-1
became effective for the Company in its second quarter of fiscal
2009. The adoption of FSP FAS 107-1 and APB 28-1 did not have a
material impact on the Company’s consolidated financial position, results of
operations or liquidity.
In
April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of
Other-Than-Temporary Impairments (“FSP FAS 115-2 and FAS 124-2”), which
establishes a new method of recognizing and reporting other-than-temporary
impairments of debt securities and requires additional disclosures related to
debt and equity securities. FSP FAS 115-2 and FAS 124-2 does not
change existing recognition and measurement guidance related to
other-than-temporary impairments of equity securities. FSP FAS 115-2 and FAS
124-2 became effective for the Company in its second quarter of fiscal
2009. The adoption of FSP FAS 115-2 and FAS 124-2 did not have a
material impact on the Company’s consolidated financial position, results of
operations or liquidity.
Other
recent accounting pronouncements issued by the FASB (including the EITF) and the
American Institute of Certified Public Accountants did not or are not believed
by management to have a material impact on the Company’s present or future
consolidated financial statements.
2.
CONTRACTS IN PROGRESS
Contracts
in progress which include completed contracts not completely billed approximate
the following as of March 31, 2009 and December 31, 2008:
|
|
(Restated)
March
31,
2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Cumulative
costs to date
|
|
$
|
2,029,000
|
|
|
$
|
6,756,000
|
|
Cumulative
gross profit to date
|
|
|
1,547,000
|
|
|
|
5,768,000
|
|
|
|
|
|
|
|
|
|
|
Cumulative
revenue earned
|
|
|
3,576,000
|
|
|
|
12,524,000
|
|
Less
progress billings to date
|
|
|
(4,081,000
|
)
|
|
|
(13,495,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
over billings
|
|
$
|
(505,000
|
)
|
|
$
|
(971,000
|
)
|
The
following approximate amounts are included in the accompanying condensed
consolidated balance sheets under these captions:
|
|
(Restated)
March
31, 2009
|
|
|
December 31, 2008
|
|
|
|
|
|
|
|
|
Costs
and estimated earnings in excess of billings on uncompleted
contracts
|
|
$
|
102,000
|
|
|
$
|
417,000
|
|
|
|
|
|
|
|
|
|
|
Billings
in excess of costs and estimated earnings on uncompleted
contracts
|
|
|
(607,000
|
)
|
|
|
(1,388,000
|
)
|
|
|
|
|
|
|
|
|
|
Net
over billings
|
|
$
|
(505,000
|
)
|
|
$
|
(971,000
|
)
|
3.
CONVERTIBLE DEBT
CAMOFI
AND CAMHZN 12% AND 15% Senior Secured Convertible Debt
The
Company’s convertible debt financing, Amended 12% CAMOFI Convertible Note
(“Amended 12% CAMOFI Note”) and 15% CAMHZN Convertible Note (“15% CAMHZN Note”)
(together, the “Convertible Notes”), 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. The Convertible Notes aggregate to $3,784,271 principal and
interest. As of March 31, 2009 and December 31, 2008, the principal
balances, accrued interest and the debt discounts are presented in the table
below.
|
|
(Restated)
March
31, 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
|
|
|
(100,355
|
)
|
|
|
(41,170
|
)
|
|
|
(119,369
|
)
|
|
|
(48,890
|
)
|
Discount
related to convertible option liability
|
|
|
(1,605,749
|
)
|
|
|
(253,643
|
)
|
|
|
(1,909,996
|
)
|
|
|
(301,200
|
)
|
Discount
related to stock issued with notes
|
|
|
(50,508
|
)
|
|
|
|
|
|
|
(60,078
|
)
|
|
|
|
|
Notes
presented net of debt discounts
|
|
$
|
1,070,669
|
|
|
$
|
455,187
|
|
|
$
|
737,838
|
|
|
$
|
399,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
Interest
|
|
$
|
141,364
|
|
|
$
|
65,626
|
|
|
$
|
56,546
|
|
|
$
|
37,500
|
|
During
the three months ended March 31, 2009 and 2008, the Company amortized debt
discounts of approximately $388,000 (restated) and $252,000, respectively, to
interest expense related to the Convertible Notes.
The
Convertible Notes 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 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 (see Note
2).
In
connection with the Amended 12% CAMOFI Note, the Company issued 725,000 five
year warrants with an exercise price of $0.10 per share and 725,000 five year
warrants with an exercise price of $0.20 per share. Due to the
anti-dilution feature in the warrant agreements, the warrants have a reduced
exercise price of $0.07 and adjusted total warrants of 3,214,286 at March 31,
2009 and December 31, 2008. As of March 31, 2009 and December 31,
2008, the fair value of the warrant derivative liability was determined to be
$210,178 (restated) and $151,400 respectively. Upon valuation, a
loss of $58,778 (restated) was recorded for the three months ended March 31,
2009.
In
connection with the 15% CAMHZN Note, the Company issued 1,000,000 seven year
warrants with an exercise price of $0.07 per share. As of March 31,
2009 and December 31, 2008, the fair value of the warrant derivative liability
was determined to be $68,376 (restated) and $50,000 respectively. Upon
valuation, a loss of $18,376 (restated) was recorded for the three months ended
March 31, 2009.
The
Amended 12% CAMOFI and 15% CAMHZN Notes are both convertible into shares of
common stock at a conversion price of $0.07 per share (subject to adjustment
based on the anti-dilution feature). At March 31, 2009 and December 31, 2008,
the aggregate fair value CAMOFI conversion option derivative liabilities was
$2,522,820 (restated) and $1,515,634, respectively. Upon valuation, a loss of
$1,007,186 (restated) was recorded for the three months ended March 31, 2009. At
March 31, 2009 and December 31, 2008, the aggregate fair value of the CAMHZN
conversion option derivative liabilities was $669,235 (restated) and $308,264,
respectively. Upon valuation, a loss of $360,971 (restated) was recorded for the
three months ended March 31, 2009.
CAMOFI
AND CAMHZN Senior Secured Convertible Debt
On
February 18, 2009, the Company entered into an agreement with CAMOFI Master LDC
for the issuance of a Senior Secured Convertible Note for $701,200, matured on
August 18, 2009 at 83.42857% of face amount. 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. The note is secured by all of the assets of
the Company.
On
February 18, 2009, the Company entered into an agreement with CAMHZN Master LDC
for the issuance of a Senior Secured Convertible Note for $173,800 matured on
August 18, 2009 at 83.42857% of face amount. 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.
The Notes
are convertible into shares of common stock with a conversion price of $0.07,
subject to certain anti-dilution adjustments. Per FAS 133 “Accounting for
Derivative Instruments and Hedging Activities”, the conversion option is a
derivative liability. The Company recorded at issuance a $384,460 (restated)
derivative liability for the CAMOFI Note, and a $95,292 (restated) derivative
liability for the CAMHZN Note. The conversion option liability is revalued each
quarter. At March 31, 2009 the fair value was $669,480 (restated) for the CAMOFI
Note, and $165,938 for CAMHZN Note. Upon valuation, a loss of
$285,020 (restated) and $70,646 (restated), respectively, was recorded for the
CAMOFI and CAMHZN notes for the three months ended March 31,
2009.
The
Company recorded deferred financing costs at issuance of $116,200 on the CAMOFI
Note and $28,800 on the 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 (restated) on the CAMOFI Note and
$95,292 (restated) on the CAMHZN Note are being amortized into interest expense
ratably over the life of the Notes. For the three months ended March 31, 2009,
the Company recorded amortization expense on the conversion option and issuance
costs of $96,421 (restated) and $29,050, respectively, on the CAMOFI Note and
$23,514 (restated) and $7,200, respectively, on the CAMHZN Note.
The
Company paid an additional $30,000 in financing costs in connection with the
February 2009 financing, which has been capitalized in the accompanying
condensed consolidated financial statements and is being amortized over the life
of the notes. During the three months ended March 31, 2009, the
Company recorded approximately $7,500 to interest expense.
4.
EQUITY TRANSACTIONS
Equity
Compensation
In
February 2008, the Company entered into a 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 approximately $2,000 and $5,000 were amortized to expense during the
three months ended March 31, 2009 and March 31, 2008, respectively. As of March
31, 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 three months ended
March 31, 2008 and at March 31, 2008 the balance of deferred consulting fees was
fully amortized.
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 three
months ended March 31, 2008 and at March 31, 2008 the balance of deferred
consulting fees was fully amortized.
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 March 31, 2009 and 2008. At March 31, 2009 and December
31, 2008, the remaining deferred consulting fees approximated $84,000 and
$102,000, 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 March
31, 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 March 31, 2009 and December 31, 2008, the Company’s accumulated dividends
payable is $459,275.
5.
EARNINGS (LOSS) PER SHARE
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings (loss) per share computations for the three months ended
March 31, 2008:
|
|
Three months ended March
31, 2008
|
|
|
|
|
|
|
|
|
|
Per Share
|
|
|
|
Income
|
|
|
Shares
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
325,835
|
|
|
|
|
|
|
|
Less:
Preferred stock dividends
|
|
|
-
|
|
|
|
|
|
|
|
Basic
income available to common shareholders
|
|
$
|
325,835
|
|
|
|
14,033,089
|
|
|
$
|
0.02
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add:
Preferred dividends
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Add:
Interest on convertible debt
|
|
|
254,100
|
|
|
|
-
|
|
|
|
|
|
Add:
Dilutive impact of convertible preferred stock
|
|
|
-
|
|
|
|
1,026,676
|
|
|
|
|
|
Add:
Dilutive impact of convertible debt
|
|
|
-
|
|
|
|
23,333,333
|
|
|
|
|
|
Add:
Dilutive impact of options and warrants
|
|
|
-
|
|
|
|
3,588,614
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
income available to common shareholders
|
|
$
|
579,935
|
|
|
|
41,981,711
|
|
|
$
|
0.01
|
|
The
computation of diluted earnings per share does not assume conversion or exercise
of securities that may have an anti-dilutive effect on earnings per share.
Convertible preferred stock, convertible debt, stock options and warrants that
have not been included in the diluted income per share computation approximated
61,821,000 for the period ended March 31, 2009.
6.
RESTATEMENTS
March
31, 2008
The
statement of operations and statement of cash flows for the three months ended
March 31, 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 the separate derivative
for the conversion option and the warrants in accordance with FAS 133,
“Accounting for Derivative Instruments and Hedging Activities” and EITF 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled In, a Company’s Own Stock”.
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 months ended March 31,
2008 has been restated as summarized below:
Effect of Correction
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Balance
Sheet as of March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
Option Liability
|
|
|
-
|
|
|
|
2,737,709
|
|
|
|
2,737,709
|
|
Warrant
Liability
|
|
|
-
|
|
|
|
1,713,023
|
|
|
|
1,713,023
|
|
Accumulated
Deficit
|
|
|
12,207,494
|
|
|
|
2,445,694
|
|
|
|
14,653,188
|
|
Total
Stockholders’ Deficit (equity)
|
|
|
1,908,610
|
|
|
|
4,651,075
|
|
|
|
6,559,685
|
|
Statement
of Operations for the three months ended March 31, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Marked-to-Market
Gain (Loss)
|
|
|
-
|
|
|
|
1,300,762
|
|
|
|
1,300,762
|
|
Net
Income (Loss)
|
|
|
(974,927
|
)
|
|
|
1,300,762
|
|
|
|
325,835
|
|
Net
Income (Loss) Available to common shareholders
|
|
|
(974,927
|
)
|
|
|
1,300,762
|
|
|
|
325,835
|
|
EPS
- Basic
|
|
|
(0.07
|
)
|
|
|
0.09
|
|
|
|
0.02
|
|
EPS
- Diluted
|
|
|
(0.07
|
)
|
|
|
0.08
|
|
|
|
0.01
|
|
March
31, 2009
The
balance sheet at March 31, 2009 and the statement of operations and statement of
cash flows for the three months ended March 31, 2009 included herein reflect the
effect of changes to the original accounting for the CAMOFI and CAMZHN notes
issued in February 2009, certain adjustments related to the Company’s contract
accounting, a misclassification error and the valuation of the related
derivative liabilities at March 31, 2009. Accordingly, the effect of
the restatements on the balance sheet at March 31, 2009 and statement of
operations for the three months ended March 31, 2009 has been summarized
below:
Effect of Correction
|
|
As Previously Reported
|
|
|
Adjustment
|
|
|
As Restated
|
|
Balance
Sheet as of March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
Costs in Excess of Billings
|
|
|
15,551
|
|
|
|
86,477
|
|
|
|
102,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2)
Deferred financing costs
|
|
|
435,986
|
|
|
|
108,750
|
|
|
|
544,736
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3)
Accounts payable and accrued liabilities
|
|
|
1,625,005
|
|
|
|
(105,834
|
)
|
|
|
1,519,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4)
Billings in Excess of Costs
|
|
|
823,478
|
|
|
|
(216,417
|
)
|
|
|
607,061
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5)
February 2009 Convertible Notes
|
|
|
564,984
|
|
|
|
(49,801
|
)
|
|
|
515,183
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6)
Derivative Liability
|
|
|
4,885,000
|
|
|
|
(578,972
|
)
|
|
|
4,306,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7)Accumulated
Deficit
|
|
|
16,701,824
|
|
|
|
(1,146,263
|
)
|
|
|
15,555,561
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations for the three months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8)
Sales
|
|
|
1,298,458
|
|
|
|
(243,756
|
)
|
|
|
1,054,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9)
Cost of sales
|
|
|
1,365,543
|
|
|
|
(546,650
|
)
|
|
|
818,893
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10)
Selling, general and administrative
|
|
|
268,271
|
|
|
|
(36,250
|
)
|
|
|
232,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11)
Marked-to-Market Gain (Loss)
|
|
|
(2,738,436
|
)
|
|
|
937,458
|
|
|
|
(1,800,978
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12)
Interest expense
|
|
|
(490,498
|
)
|
|
|
(177,897
|
)
|
|
|
(668,395
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13)
Net Loss
|
|
|
(3,821,869
|
)
|
|
|
1,146,263
|
|
|
|
(2,675,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Available to common shareholders
|
|
|
(3,821,869
|
)
|
|
|
1,146,263
|
|
|
|
(2,675,606
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
– Basic
|
|
|
(0.25
|
)
|
|
|
0.08
|
|
|
|
(0.17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EPS
- Diluted
|
|
|
(0.25
|
)
|
|
|
0.08
|
|
|
|
(0.17
|
)
|
(1)
|
Adjustment
in order to reconcile the Company’s balance sheet account to the Company’s
contract accounting worksheets.
|
(2)
|
Represents
the reclassification of $145,000 of financing costs in connection with the
February 2009 notes, less amortization of
$36,250.
|
(3)
|
Adjustment
primarily reflects a classification error of $80,000 related to derivative
liabilities.
|
(4)
|
Adjustment
in order to reconcile the Company’s balance sheet account to the Company’s
contract accounting worksheets.
|
(5)
|
Adjustment
reflects an increase of $278,486 of debt discount related to the valuation
of the conversion options and an increase of $119,935 of amortization of
such options, net of reclassification of financing costs of $108,750 noted
in (2) above.
|
(6)
|
Adjustment
reflects an increase of $278,486 related to the valuation of the
conversion options of the February 2009 notes and a decrease in the loss
on fair value of $937,458 and corrections of $80,000 of misclassifications
between the change in fair value and interest
expense.
|
(7)
|
and
(13) The cumulative effect of adjustments (8) through
(12).
|
(8)
|
and
(9) Adjustment in order to reconcile the Company’s P&L accounts to the
Company’s contract accounting
worksheets.
|
(10)
|
Adjustment
relates to the reclassification of deferred financing costs to
interest expense.
|
(11)
|
Adjustment
primarily relates to an increase of $278,486 in the original valuation of
the conversion options in connection with the February 2009 notes,
misclassification of derivative liabilities noted in (3) above and an
overall decrease in the valuation of all derivatives of
$578,972.
|
(12)
|
Adjustment
relates to proper classification and recording of interest
expense.
|
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 condensed
consolidated financial statements and the notes thereto appearing elsewhere in
this Form 10-Q/A. 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.
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
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 MARCH 31, 2009 COMPARED TO MARCH 31,
2008.
Revenues
.. The Company generated revenues of $1,054,702 for the three months
ended March 31, 2009, which was a $471,900 or 31% decrease from $1,526,602 for
the three months ended March 31, 2008. The
decrease is the result of lower then usual sales due to a tighter credit market
and less availability of funds for companies to make capital equipment
purchases.
Gross Profit.
Gross profit for the three months ended March
31, 2009, was $235,809 or 22% of
revenues, compared to $218,123 or 14% of revenues for the three
months ended March 31, 2008, a 8% increase. The increase in gross profit 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
$447,723 for the three months ended March 31, 2009, which was a $315,186 or 41%
decrease from $762,909 for the three months ended March 31, 2008. In the three
months ended March 31, 2009, compared with the three months ended March 31,
2008, all the operating expenses increased (decreased) as follow:
|
|
Increase/(Decrease)
%
|
|
Consulting and other compensation
|
|
|
(77
|
)
|
Salaries and related
|
|
|
186
|
|
Selling, general and administrative
|
|
|
(57
|
)
|
The
decrease in consulting and other compensation is due to the reduction in the
number of consulting contracts and the expiration of the existing contracts. The
increase in salaries and related costs is due to the reclassification of certain
costs to compensation. Selling, general and administrative expenses decreased
due to management strategy to reduce operating expenses.
Operating Loss.
Operating loss for the three months ended March 31, 2009, was
$211,914 compared to $544,786 for the three months ended March 31, 2008. The
decrease in loss of $332,872 is primarily due to decreased cost of sales and
decreased selling, general and administrative expenses for the quarter ended
March 31, 2009.
Interest
Expense and Debt Discount Amortization. Interest expense for
the three months ended March 31, 2009, was $668,395 compared with $486,769 for
the three months ended March 31, 2008. The increase of $181,626 in interest
expenses is due to additional interest on new convertible
loans.
Change in Fair Value of Derivative
Liabilities. In connection with its convertible notes, the Company
recorded conversion options and warrant derivative liabilities. The derivative
liabilities are reevaluated each reporting period. During the three months ended
March 31, 2009, we recorded a loss of $1,800,978 on the change in fair value due
to the increase in our stock price from December 31, 2008.
FINANCIAL
CONDITION, LIQUIDITY, CAPITAL RESOURCES
The net
increase in cash during the three months ended March 31, 2009 was $236,206. The
increase is due to proceeds from issuance of convertible notes payable in which
we received net proceeds of $700,000.
For
the three months ended March 31, 2009, the cash provided by financing activities
was $710,169, compared with $6,503 in the three months ended March 31, 2008. For
the three months ended March 31, 2009, $473,976 cash was used by operating
activities.
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 $15,556,000, a net loss of approximately $2,677,000, a working
capital deficit of approximately $7,339,000 and was also in default on two of
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:
·
|
The
Company continues its aggressive program for selling
machines.
|
·
|
The
Company continues to implement plans to further reduce operating
costs.
|
·
|
The
Company is seeking investment capital through the public and private
markets.
|
·
|
The
Company is seeking strategic acquisition
candidates.
|
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
and inventories. 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
EITF 00-10 "Accounting for Shipping and Handling Fees and Costs." Such fees and
costs incurred by the Company are recorded to cost of goods sold and are
immaterial to the operations of the Company.
In
accordance with SFAS 48, "Revenue Recognition when Right of Return Exists,"
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.
In
December 1999, the Securities and Exchange Commission issued Staff Accounting
Bulletin 101 ("SAB 101"), "Revenue Recognition," as amended by SAB No. 104 which
outlines the basic criteria that must be met to recognize revenue and provides
guidance for presentation of revenue and for disclosure related to revenue
recognition policies in financial statements filed with the Securities and
Exchange Commission. Management believes that the Company's revenue recognition
policy for services and product sales conforms to SAB 101 amended by SAB 104.
The Company recognizes revenue of long-term contracts pursuant to SOP
81-1.
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. 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.
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 March 31, 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 Accountant is the only individual with technical accounting experience in
our company but is limited in the exposure to SEC filings and
disclosures.
We have not consulted with other outside parties with accounting experience to
assist us in the SEC filings and disclosures prior to the December 31, 2008 10-K
filing during 2009.
(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 all monthly payments on the
12% CAMOFI and 15% CAMHZN Convertible Note payable. As of March 31, 2009, the
Company’s default principal and interest aggregate
to $530,000.
Item
4. Submission of Matters to a Vote of Security
Holders
None.
Item
5. Other Information
None.
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
19, 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.
|
/s/
DAVID DUQUETTE
|
|
Name: David
Duquette
|
|
Title:
Chairman, President and Director
|
|
|
|
/s/
JOSEF CZIKMANTORI
|
|
Name:
Josef Czikmantori
|
|
Title:
Secretary and
Director
|