Market Cap:1,33 Mio (also mir ist keine Verwässerung bekannt bisher oder habe ich was verpaßt?
21-Dec-2004
Annual Report
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
Certain Statements contained in this Form 10-KSB contain "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and involve risks and uncertainties that could cause actual results to differ materially from the results, financial or otherwise, or other expectations described in such forward-looking statements. The statements speak only as of the date on which such statements were made, and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or reflect the occurrence of unanticipated events. Therefore, forward-looking statements should not be relied upon as prediction of actual future results.
The independent registered public accounting firm's report on the Company's financial statements as of September 30, 2004, and for each of the years in the two-year period then ended, includes a "going concern" explanatory paragraph, that describes substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to the factors prompting the explanatory paragraph are discussed below and also in Note 2 to Notes to the Consolidated Financial Statements.
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RESULTS OF OPERATIONS
On October 20, 2003, the Company acquired a controlling 60% equity interest in Brunetti for a $700,000 cash contribution to Brunetti. On January 30, 2004, the Company acquired the remaining 40% equity interest in Brunetti for a $300,000 cash contribution to Brunetti. Brunetti is a Denver, Colorado-based company that provides consulting, design, engineering and construction services designed to enable and enhance voice, data and video communications through fiber and wireless systems. Brunetti provides services primarily to state, municipal and local governments in the United States.
The allocation of the purchase price was made to the major categories of assets and liabilities in the accompanying consolidated financial statements, of which $636,500 was allocated to client contracts and relationships, which represented management's best estimate of the fair value of the client contracts and relationships as of the date of the acquisition. The client contracts and relationships were assigned a useful life of three years and were being amortized to general and administrative expense. Amortization expense of $194,487 was recorded for the fiscal year ended September 30, 2004.
During the fourth quarter ended September 30, 2004, the Company made a decision to impair the value of the client contracts and relationships and certain fixed assets. This decision was based on factors including the Company's evaluation of past and current operating results, and the cessation of the operational activities of Brunetti on October 11, 2004. As a result of this decision, the Company recorded an impairment charge of $494,317 in the fourth quarter ended September 30, 2004.
The Company recognized $599,520 of revenues from operations during the fiscal year ended September 30, 2004 compared to $0 in the fiscal year ended September 30, 2003. This revenue was generated from services provided by Brunetti.
Cost of revenues for the fiscal year ended September 30, 2004, were $359,935 resulting in a gross profit for the fiscal year ended September 30, 2004 of $239,585.
GENERAL AND ADMINISTRATIVE EXPENSES
General and Administrative expenses were $1,771,266 in the year ended
September 30, 2004 compared to $254,011 for the year ended September 30, 2003.
The $1,517,255 increase is primarily attributable to an increase in expenses as
a result of the acquisition of Brunetti DEC. As a result of the acquisition,
such general and administrative expenses increased primarily as set forth on the
table below:
Expense 2004 2003 Increase
------- ---- ---- --------
Amortization expense $194,487 $ - $ 194,487
Bad debt expense $118,048 $ - $ 118,048
Legal & accounting expense $ 98,663 $51,577 $ 47,086
Payroll expense $888,278 $48,807 $ 839,471
Travel expense $143,236 $ 7,725 $ 135,511
OTHER INCOME/EXPENSE
The Company recognized gains of $272,494 for the year ended September 30, 2004 on the sale and exchange of NanoPierce common stock, compared to gains of $99,225 on the sale and exchange of NanoPierce common stock for the year ended September 30, 2003.
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During the year ended September 30, 2004, the Company sold to an unrelated third-party, 5,911,894 shares of NanoPierce common stock held by the Company along with an option to purchase 2,000,000 shares of the Company's common stock for cash of $332,301. The closing market price of the NanoPierce common stock on the date of the sale was $0.25 per share. The carrying value of the NanoPierce shares on the transaction date was $0. The sale price was allocated between the estimated fair value of the NanoPierce shares ($272,494) and the option ($59,807), resulting in a gain on the sale of stock of $272,494. In April 2004, the option was exercised for $200,000 cash.
During the year ended September 30, 2003, the Company entered into an agreement, with an unrelated third party, to sell 100,000 shares of NanoPierce common stock held by the Company along with warrants to purchase up to 300,000 restricted shares of NanoPierce common stock held by the Company. In exchange for the NanoPierce common stock and warrants, the Company received $50,000 cash. The warrants have an exercise price of $0.50 per share. The closing bid price of the NanoPierce common stock was $0.69 per share at the date of grant. The first warrant to purchase 150,000 shares has a term of 2 years. The second warrant to purchase 150,000 shares has a term of 5 years. Both warrants provide for cashless exercise of the warrants and are exercisable immediately. The warrants were valued at $32,000 at the date of the issuance.
The warrants are considered derivative financial instruments and are therefore recorded in the balance sheet at fair value. Changes in the fair value of the warrants (unrealized gains and losses) are recognized currently in the earnings (losses) of the Company. At September 30, 2004, the fair value of the derivatives was estimated to be $1,050. The Company recorded an unrealized gain of $33,870 on the derivative instruments during the year ended September 30, 2004 and an unrealized loss of $2,777 during the year ended September 30, 2003.
Interest income during the year ended September 30, 2004 was $4,464 compared to $830 during the year ended September 30, 2003. Interest expense during the year ended September 30, 2004 was $1,060 compared to $96 during the year ended September 30, 2003.
In connection with the purchase of the 60% interest in Brunetti during the year ended September 30, 2004, the Company recorded a $54,944 minority interest in the losses of Brunetti.
NET LOSS
The Company recognized a net loss of $1,661,285 during the year ended September 30, 2004 compared to a net loss of $214,503 during the year ended September 30, 2003. The $1,446,782 increase in net losses was primarily due to the $1,517,255 increase in general and administrative expenses, as a result of the acquisition of the controlling interest in Brunetti, as explained above.
LIQUIDITY AND CAPITAL RESOURCES
During the year ended September 30, 2004, the Company's cash and cash equivalents increased by $189,390. Cash used in operations was $1,375,189. Cash proceeds from financing activities was $1,282,902. Cash provided by investing activities was $281,677.
During the year ended September 30, 2004, the $1,375,189 of cash used in operations was used primarily to support the operations of Brunetti, from the date of acquisition.
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During the year ended September 30, 2004, the Company issued 1,714,285 shares of its common stock for cash of $120,000. The shares were issued at a 50% discount from the closing market price of $0.14 per share to an officer/director of the Company and a related party. The 50% discount did not represent compensation, but instead the stock was issued at a discount due primarily to the restrictions imposed on the marketability of the shares.
During the year ended September 30, 2004, the Company received $200,000 in cash as payment for the exercise of an option exercisable into 2,000,000 shares of its restricted common stock.
During the year ended September 30, 2004, the Company issued 10,750,000 shares of its restricted common stock and warrants exercisable into 3,255,000 shares of its restricted common stock as part of an equity financing for $1,075,000. The cash was used to purchase a 60% interest in Brunetti and to support future operations of the Company. The warrants have an exercise price of $0.10 per share and have a term of 5 years. The warrants provide for cashless exercise.
During the year ended September 30, 2004, the Company issued warrants to purchase 1,933,926 restricted common shares for cash of $19,339 to use as working capital. The warrants have an exercise price of $0.10 per share and a term of 5 years, the warrants provide for cashless exercise.
During the year ended September 30, 2004, the Company issued warrants to purchase 500,000 restricted common shares for cash of $500 to use as working capital. The warrants have an exercise price of $0.25 per share and a term of 5 years, the warrants provide for cashless exercise.
During the year ended September 30, 2004, the Company issued 200,000 shares of restricted common stock for cash of $2,000 to an investor in exchange for certain warrants previously issued to this investor.
During the year ended September 30, 2004, the Company's subsidiary paid $143,744 on lines of credit and a note payable and paid $50,000 of existing liabilities to former minority members.
The Company had capital expenditures of $26,777 during the year ended September 30, 2004 compared to $0 during the year ended September 30, 2003. Capital expenditures consisted mainly of computer equipment and office equipment, by Brunetti.
To the extent the Company's operations are not sufficient to fund the Company's capital requirements, the Company may enter into a revolving loan agreement with a financial institution, attempt to raise additional capital through the sale of additional capital stock or through the issuance of debt, or sell shares of NanoPierce common stock held as an investment by the Company. At September 30, 2004, the Company owned 464,870 shares of Nanopierce common stock with a market value of approximately $55,784 based upon the closing bid price of $0.12 per share (of which 300,000 shares with a market value of $36,000 are subject to warrant agreements). At the present time the Company does not have a revolving loan agreement with any financial institution nor can the Company provide any assurances that it will be able to enter into any such agreement in the future or be able to raise funds through the further issuance of debt or equity in the Company.
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123(R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted and recognized in the statement of income based on their fair value. SFAS No. 123(R) will be effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005. SFAS No. 123(R) offers the Company alternative methods of adopting this standard. At the present time, the Company has not yet determined which alternative method it will use and the resulting impact on its financial position or results of operations.
In January 2003, the FASB issued SFAS Interpretation No. 46, Consolidation of Variable Interest Entities ("FIN 46"), which changes the criteria by which one company includes another entity in its consolidated financial statements. FIN 46 requires a variable interest entity ("VIE") to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or is entitled to receive a majority of the entity's residual returns or both. In December 2003, the FASB approved a partial deferral of FIN 46 along with various other amendments. The effective date of this interpretation was extended until the first interim or fiscal period that ends after December 15, 2004. However, prior to the required application of this interpretation, a public entity that is a small business issuer shall apply this interpretation to those entities considered to be special purpose entities no later than the end of the first reporting period after December 15, 2003. As the Company does not currently have an interest in a special purpose entity or a VIE, management does not expect the adoption of FIN 46 will not impact the Company's financial position or results of operations.
CRITICAL ACCOUNTING POLICIES
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. On an on-going basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the result of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following are some of the more significant accounting policies and methods used by the Company:
- stock-based compensation;
- valuation of client contracts and relationships and other long-lived assets;
- derivative instruments; and
- litigation.
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Stock-Based Compensation
SFAS No. 123, Accounting for Stock Based Compensation, defines a fair-value-based method of accounting for stock-based employee compensation plans and transactions in which an entity issues its equity instruments to acquire goods or services from non-employees, and encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value.
The Company has chosen to account for employee stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25 (APB No. 25), Accounting for Stock Issued to Employees, and related interpretations. Accordingly, employee compensation cost for stock options is measured as the excess, if any, of the estimated fair value of the Company's stock at the date of the grant over the amount an employee must pay to acquire the stock.
Transactions in which the Company issues stock-based compensation for goods or services received from non-employees are accounted for based on the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. The Company often utilizes pricing models in determining the fair values of options and warrants issued as stock-based compensation to non-employees. These pricing models utilize the market price of the Company's common stock and the exercise price of the option or warrant, as well as time value and volatility factors underlying the positions.
In December 2004, the FASB issued SFAS No. 123(R) Share-Based Payment, which addresses the accounting for share-based payment transactions. SFAS No. 123(R) eliminates the ability to account for share-based compensation transactions using APB Opinion No. 25, Accounting for Stock Issued to Employees, and generally requires instead that such transactions be accounted and recognized in the statement of income based on their fair value. SFAS No. 123(R) will be effective for public companies that file as small business issuers as of the first interim or annual reporting period that begins after December 15, 2005. SFAS No. 123(R) offers the Company alternative methods of adopting this standard. At the present time, the Company has not yet determined which alternative method it will use and the resulting impact on its financial position or results of operations.
Valuation of Client Contracts and Relationships and Other Long-Lived Assets
The Company assesses the impairment of long-lived and intangible assets, such as client contracts and relationships, whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors the Company considers important which could trigger an impairment review include negative projected operating performance by the Company and significant negative industry or economic trends. At September 30, 2004, management assessed the carrying value of client contracts and relationships and other long-lived assets for impairment, and based on this assessment the Company believed that an impairment charge was necessary in the case of the client contracts and relationships of Brunetti and certain fixed assets; therefore, the Company recognized an impairment of $494,317. The Company does not believe that there has been any other impairment to long-lived assets as of September 30, 2004.
Derivative Instruments
Derivative instruments are recorded at fair value, and realized and unrealized gains and losses are recorded as a component of income (loss). Fair values of the Company's current derivatives are derived from pricing models that consider the current market price of the underlying financial instruments, as well as time value and volatility factors underlying the positions.
Pricing models and their underlying assumptions impact the amount and timing of unrealized gains and losses recognized, and the use of different pricing models or assumptions could produce different financial results. Changes in the underlying assumptions used in the pricing model will impact the Company's
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estimates of fair value in the future, and the changes may have a material impact on the Company's operations and financial position.
Litigation
The Company is involved in certain legal proceedings, as described in Note 9 to the consolidated financial statements included in this report.
The Company intends to vigorously defend against these legal claims and does not believe the outcome of these proceedings will have a material adverse effect on the financial condition, results of operations or liquidity of the Company. However, it is too early at this time to determine the ultimate outcome of these matters.
Contractual obligations
For more information on the Company's contractual obligations on operating leases, refer to Note 9 of the consolidated financial statements. At September 30, 2004, the Company's commitments under these obligations were as follows:
OPERATING LEASES
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Year ending September 30,
2005 $ 58,507
2006 61,927
2007 62,195
2008 63,505
2009 16,121
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$ 262,255
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ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements and related financial information required to be filed are indexed on page F-2 and are incorporated herein.
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