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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act
of 1934
For the quarterly period ended June 30, 2004
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______ to _______.
Commission File No. 814-00631
CELERITY SYSTEMS, INC.
(Exact name of registrant as specified in its charter)
Delaware 52-2050585
--------------------------- -----------------------------------
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
122 Perimeter Park Drive, Knoxville, Tennessee 37922
- ---------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(865) 539-5300
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months, and (2) has been subject to such filing requirements for the past 90
days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filed (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
There were 4,660,453,032 shares of common Stock outstanding as of August
10, 2004.
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
2
CELERITY SYSTEMS, INC.
Condensed Balance Sheets
(unaudited)
Assets June 30, 2004 December 31,2003
------------ ------------
Cash $ 10,037 $ 56,156
Other current assets 5,244 6,764
------------ ------------
Total current assets 15,281 62,920
------------ ------------
Fixed assets, net 40,600 38,317
Investment in Yorkville Advisors Management, LLC, at cost which
approximates fair value 5,240,000 5,240,000
Investment in and advances to Celerity Systems-NV, at fair value -- --
Debt offering costs, net 116,916 165,903
------------ ------------
Total assets $ 5,412,797 $ 5,507,140
============ ============
Liabilities and Stockholders' Equity
Accounts payable $ 519,627 $ 463,552
Judgments and defaults payable (including $213,400 to a related party 428,400 570,781
Accrued interest ( including $152,413 and $126,416 to a related party) 247,340 270,746
Notes payable - related party 10,000 115,000
Other current liabilities 19,850 16,867
------------ ------------
Total current liabilities 1,225,217 1,436,946
Convertible debentures - related party, net 523,801 570,727
Convertible debentures, net 1,705,762 1,518,758
------------ ------------
2,229,563 2,089,485
------------ ------------
Total liabilities 3,454,780 3,526,431
------------ ------------
Commitments and contingencies -- --
Stockholders' Equity
Common stock, $.001 par value, 5,000,000,000 shares authorized,
4,660,453,032 issued and outstanding at June 30, 2004 and
4,553,473,409 issued and outstanding at December 31, 2003 4,660,453 4,553,473
Additional paid-in capital 40,601,051 40,544,690
Net unrealized depreciation on investments (1,067,082) (842,121)
Accumulated deficit (42,236,405) (42,275,333)
------------ ------------
Total stockholders' equity 1,958,017 1,980,709
------------ ------------
Total liabilities and stockholders' equity $ 5,412,797 $ 5,507,140
============ ============
The accompanying notes are an integral part of these condensed financial statements
3
CELERITY SYSTEMS, INC.
Condensed Statements of Operations
Unaudited
Prior to Prior to
Becoming Becoming
As a Business As a Business Business As a Business As a Business Business
Development Co. Development Co. Development Co. Development Co. Development Co. Development Co.
--------------- --------------- --------------- --------------- --------------- ---------------
Three Months Period from Period from Six Months Period from Period from
Ended June 3, 2003 to April 1, 2003 to Ended June 3, 2003 to January 1, 2003 to
June 30, 2004 June 30, 2003 June 2, 2004 June 30, 2004 June 30, 2003 June 2, 2003
--------------- --------------- --------------- --------------- --------------- ---------------
Unrealized loss
on investments $ (121,578) $ -- $ -- $ (224,961) $ -- $ --
Dividend income
- related party 350,000 695,000 -- --
--------------- --------------- --------------- --------------- --------------- ---------------
228,422 -- -- 470,039 -- --
General and
administrative
expenses 135,785 74,811 141,690 332,574 74,811 301,483
--------------- --------------- --------------- --------------- --------------- ---------------
Operating income
(loss) -
related party 92,637 (74,811) (141,690) 137,465 (74,811) (301,483)
--------------- --------------- --------------- --------------- --------------- ---------------
Other income (expense)
Amortization of
debt offering costs (11,863) 9,357 (53,445) (48,987) 9,357 (95,062)
Beneficial
conversion feature
- convertible
debentures (48,252) 15,250 (127,002) (223,578) 15,250 (196,080)
Interest expense (43,819) (8,933) (101,584) (92,026) (8,933) (202,402)
Settlement of debt 39,979 21,655 13,278 39,979 21,655 176,095
Other income 1,114
--------------- --------------- --------------- --------------- --------------- ---------------
Total other
income (expense) (63,955) 37,329 (268,753) (323,498) 37,329 (317,449)
--------------- --------------- --------------- --------------- --------------- ---------------
Net income (loss)
attributable to
common shareholders $ 28,682 $ (37,482) $ (410,443) $ (186,033) $ (37,482) $ (618,932)
=============== =============== =============== =============== =============== ===============
Loss per common share,
basic and diluted Net
loss per common share
attributable to
common shareholders $ -- $ -- $ -- $ -- $ -- $ --
=============== =============== =============== =============== =============== ===============
Weighted average
shares outstanding
- basic and diluted 4,794,080,467 487,036,609 398,677,194 4,824,716,663 487,036,609 647,230,033
=============== =============== =============== =============== =============== ===============
The accompanying notes are an integral part of these condensed financial statements
4
CELERITY SYSTEMS, INC.
Condensed Statements of Cash Flows
Unaudited
Prior to becoming
As a Business As a Business a Business
Development Development Development
Company Company Company
--------- --------- ---------
Period from Period from
Six Months Ended June 3, 2003 to January 1, 2003 to
June 30, 2004 June 30, 2003 June 2, 2003
--------- --------- ---------
Cash flows from operating activities:
Net loss $(186,033) $ (37,482) $(618,932)
Adjustments to reconcile net loss to net
cash used in operating activities:
Settlement of debt (21,654) (176,095)
Unrealized loss on investments 224,961
Depreciation and amortization 4,375 3,779 17,289
Abandonment of fixed assets 46,561
Beneficial conversion - convertible notes 230,767 (15,250) 196,080
Amortization of debt offering costs 48,987 (9,357) 94,063
Changes in operating assets and liabilities:
Other current assets 1,520 (9,246) (34,322)
Accounts payable 56,075 45,496 154,541
Judgments and defaults payable (142,381) --
Accrued interest (23,407) --
Other current liabilities 2,984 (8,479) 8,479
--------- --------- ---------
Net cash provided by (used in) operating activities 217,848 (52,193) (312,336)
Cash flows from investing activities:
Purchase of fixed assets (6,658) --
Advances to Celerity Systems-NV (224,961)
--------- --------- ---------
Net cash used in investing activities (231,619) -- --
Cash flows from financing activities:
Proceeds from notes payable - related party 5,000 25,000
Payments on notes payable - related party (105,000) --
Proceeds from convertible debentures 537,500 50,000 283,500
Principal payments on debt (475,000) --
Acquisition of treasury stock (189,808)
Proceeds from issuance of common stock 200,000 --
--------- --------- ---------
Net cash (used in) provided by financing activities (32,308) 55,000 308,500
Net increase (decrease) in cash (46,079) 2,807 (3,836)
Cash, beginning of period 56,156 1,176 5,012
--------- --------- ---------
Cash, end of period $ 10,077 $ 3,983 $ 1,176
========= ========= =========
Cash paid for:
Interest $ 201,285 $ -- $ --
========= ========= =========
Taxes (State franchise taxes) $ 1,450 $ -- $ --
========= ========= =========
The accompanying notes are an integral part of these condensed financial statements
5
CELERITY SYSTEMS, INC.
Condensed Statement of Changes in Stockholders' Equity
Unaudited
Common Stock Additional Net Unrealized Total
------------------------------ Paid-In Treasury Depreciation Accumulated Stockholders'
Shares Amount Capital Stock on Investments Deficit Equity
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Balance,
December 31, 2003 4,553,473,409 $ 4,553,473 $ 40,544,690 $ -- $ (842,121) $ (42,275,333) $ 1,980,709
Issuance of
common stock 145,000,000 145,000 55,000 200,000
Conversion of
convertible
debentures to
shares of
common stock 102,578,147 102,578 50,571 153,149
Acquisition of
treasury stock (189,808) (189,808)
Retirement of
treasury stock (140,598,524) (140,598) (49,210) 189,808
Net income (loss) (224,961) 38,928 (186,033)
-------------- -------------- -------------- -------------- -------------- -------------- --------------
Balance,
June 30, 2004 4,660,453,032 $ 4,660,453 $ 40,601,051 $ -- $ (1,067,082) $ (42,236,405) $ 1,958,017
============== ============== ============== ============== ============== ============== ==============
The accompanying notes are an integral part of these condensed financial statements.
6
CELERITY SYSTEMS, INC.
Notes to Unaudited Condensed Financial Statements
Overview
The Company is a business development company that has elected to be
regulated pursuant to Section 54 of the Investment Company Act of 1940. We
intend to focus our investments in developing companies, but do not intend to
limit our focus on investment in any particular industry. We intend to seek
investments in companies that offer attractive investment opportunities.
1. Presentation of Unaudited Interim Financial Statements
The accompanying interim condensed consolidated financial statements and
notes to the financial statements for the interim periods as of June 30, 2004
and for the six months ended June 30, 2004 and 2003, are unaudited. The
accompanying interim unaudited financial statements have been prepared by the
Company in accordance with accounting principles generally accepted in the
United States for interim financial statements and pursuant to the requirements
for reporting on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they
do not include all the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been included. Operating
results for the six month period ended June 30, 2004, are not necessarily
indicative of the results that may be expected for the year ended December 31,
2004. The condensed consolidated financial statements should be read in
conjunction with the financial statements and notes thereto included in the Form
10-K of the Company as of and for the year ended December 31, 2003. Certain
prior period balances have been reclassified to conform with the June 30, 2004
financial statement presentation.
On May 20, 2003, the Company formed a subsidiary, Celerity Systems, Inc.
(a Nevada corporation), ("Celerity NV"). The assets and liabilities related to
the existing interactive video business were transferred to Celerity NV for 100%
of the common stock. As this subsidiary is not an investment company, after June
2, 2003 it is not consolidated with the parent company. The Company's investment
in Celerity NV is recorded at fair value, represented as cost, plus or minus
unrealized appreciation or depreciation, respectively.
In accordance with Article 6 of Regulation S-X under the Securities Act of
1933 and Securities Exchange Act of 1934, the Company does not consolidate
portfolio company investments in which the Company has a controlling interest.
The Company's financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. The Company has
had recurring losses and continues to suffer cash flow and working capital
shortages. Since inception in January, 1993 through June 30, 2004 the losses
total approximately $43,303,000. As of June 30, 2004, the Company had a negative
net working capital of approximately $1,210,000. These factors taken together
with the lack of sales and the absence of significant financial commitments
raise substantial doubt about the Company's ability to continue as a going
concern.
On June 3, 2003, the Company elected to become a Business Development
Company which is regulated under Section 54 of the Investment Company Act of
1940. On June 4, 2003 the Company filed an Offering Circular Under Regulation E
to sell up to $4,500,000 of its common stock at a minimum price of $0.001 to a
maximum price of $0.02. Between June 30, 2003 and June 30, 2004 the Company sold
1,299,833,333 shares resulting in net proceeds of $1,376,500.
There can be no assurances that the Company will be successful in its
attempts to raise sufficient capital essential to its survival. To the extent
that the Company is unable to raise the necessary operating capital it will
become necessary to further curtail operations. Additionally, even if the
Company does raise operating capital, there can be no assurances that the net
proceeds will be sufficient enough to enable it to develop its business to a
level where it will generate profits and positive cash flows. The financial
statements do not include any adjustments relating to the recovery of the
recorded assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
7
Conversion to Business Development Company
The operating results for the six months ended June 30, 2004 and for the
period from June 3, 2003 to June 30, 2003 reflect the Company's results as a
business development company under the Investment Company Act of 1940, as
amended, whereas the operating results for the period from January 1, 2003 to
June 2, 2003 reflect the Company's results prior to operating as a business
development company. Accounting principles used in the preparation of the
financial statements for the interim periods are different and, therefore, the
results of operations are not directly comparable. The primary differences in
accounting principles relate to the carrying value of investments.
Stock-Based Compensation
The Company had no stock options granted in 2004 and 2003. There was no
stock-based compensation determined under the fair value method during the six
months ended June 30, 2004 and 2003 and there is no difference between net loss
as reported and proforma net loss.
2. Investment in Celerity Systems, Inc. (A Nevada corporation)
The following table represents Celerity NV's statement of operations for
the six months ended June 30, 2004.
Sales $ --
Cost of Sales --
-----------
Gross loss --
General and administrative expenses 134,772
-----------
Net loss $ (134,772)
===========
The following table represents Celerity NV's balance sheet as of June 30,
2004.
Accounts receivable, net $ 24,319
Inventories, net 299,200
-----------
Total current assets 323,519
Fixed assets, net 60,433
Other 1,600
-----------
Total assets $ 385,552
===========
Accounts payable $ 936,488
Other current liabilities 23,601
-----------
Total liabilities 960,089
Stockholders Deficit
Common stock 250
Additional paid-in capital 499,750
Accumulated deficit (1,074,637)
-----------
Total stockholder deficit (574,537)
-----------
Total liabilities and stockholder deficiency $ 385,552
===========
Celerity NV develops and manufacturers, at third party plants, digital set
top boxes and digital video servers for the interactive television and high
speed Internet markets. Celerity NV can also provide a comprehensive content
package for education users with over 1,300 titles available. Due to a lack of
funding Celerity NV has been targeting the education market, to the exclusion of
other markets available to us.
The education market, particularly the public schools segment, is a
growing area. Celerity NV believes that its products and services are more
effective than traditional VCR or analog media storage systems, and at a better
cost.
During the fourth quarter of 2003 an informal arrangement concerning a
pending sale was terminated and the Company determined that a significant
portion of the inventory was not salable. As a result during the fourth quarter
of 2003 Celerity NV recorded a reserve adjustment of $1,068,870. The write down
results from a lower of cost of market valuation on certain parts and finished
goods. Without additional sales, there is a substantial risk that Celerity NV
will need to terminate its operations.
8
The Company charges Celerity NV for salaries and benefits and a portion of
costs as a facility charge. During the first six months of 2004, the Company
advanced $224,961 to Celerity NV to fund operations. This amount resulted in an
unrealized loss on the investment in Celerity NV of $224,961 as reflected
in the statement of operations of the Company as a BDC.
3. Loss Per Share
Basic and diluted loss per share were computed by dividing net loss
attributable to common stock by the weighted average number of common shares
outstanding during each period. Potential common equivalent shares are not
included in the computation of per share amounts in the periods because the
Company reported a net loss and their effect would be anti-dilutive.
4. Issuance of Convertible Debentures
The long-term debt of the Company includes the following items:
June 30, 2004 December 31, 2003
-------------- ---------------
4% convertible debentures $ 12,500 $ 67,500
5% convertible debentures - 2003 1,374,000 1,475,000
5% convertible debentures - 2004 537,500 -0-
10% secured convertible debenture 705,000 1,170,000
-------------- ---------------
2,629,000 2,712,500
Less: Unamortized debt discount (399,437) (623,015)
-------------- ---------------
Long-term debt less current maturities $ 2,229,563 $ 2,089,485
============== ===============
During the six months ended June 30, 2004 the Company issued 52,186,027 shares
of its common stock upon the conversion of $91,000 of 5% convertible debentures
- - 2003 and 50,392,120 shares of its common stock upon the conversion of $55,000
of 4% convertible debentures. These transactions have been treated as noncash
investing and financing activities for the statement of cash flows.
5. Dividend Income
During the six month period ended June 30, 2004, the Company received
$695,000 in proceeds from its investment in Yorkville Advisors Management, LLC
and has recorded that these amounts as dividend income in the statement of
operations. Since its investment in Yorkville Advisors Management, LLC on
December 1, 2003, the Company has received a total of $760,000 in proceeds.
Yorkville Advisors has no set dividend policy. Dividends are declared based on
the discretion of the management of Yorkville Advisors.
6. Judgments and Defaults Payable
In January 2002, the Company terminated the Equity Line of Credit entered
into on September 14, 2001 due to delays in getting related shares registered
and in order to pursue other types of financing arrangements. As a result, the
Company does not have an effective registration statement including common
shares to be issued in connection with certain debentures issued in 2001 and the
first quarter of 2002 under the 1999 Line of Credit Agreement. The Company is
required to pay liquidated damages in the form of increased interest on the
convertible debentures as a result of not filing an effective registration
statement for these debentures at a rate of 2% of the principle plus interest
per month. The liability for liquidated damages will continue to accrue until
the date a new registration statement becomes effective. The Company has accrued
and unpaid liquidated damages of $249,400 at June 30, 2004.
In December, 2001, Veja Electronics, Inc. d/b/a Stack Electronics sued the
Company for breach of contract and is seeking damages in excess of $106,000.
This action relates to amounts alleged to be owed from the cancellation of a
purchase order. During 2003 a judgment was rendered against the Company in the
amount of $71,000, which has been accrued at June 30, 2004.
On October 27, 2001, we defaulted on payment due of $100,000, plus accrued
interest, on a certain unsecured note. We are seeking to make payment
arrangements with this note holder.
9
In 2003, Del Rio Enterprises sued the Company for non-payment of services
rendered. During 2003 a judgment was rendered against the Company in the amount
of $8,000. This amount has been accrued at June 30, 2004.
In addition, certain creditors have threatened litigation if not paid. The
Company is seeking to make arrangements with these creditors. There can be no
assurance that any claims, if made, will not have an adverse effect on the
Company. These amounts are included in the Company's accounts payable and are
accruing applicable late fees and interest.
7. Common Stock
During the six months ended June 30, 2004 the Company issued 145,000,000
shares of its common stock for cash proceeds in the amount of $200,000 to third
party investors.
The Company also completed a transaction with Eagle Broadband in which the
Company purchased 140,598,524 shares of its common stock and a $350,000
convertible debenture from Eagle Broadband. The Company paid Eagle Broadband
$662,308 for the purchase of these shares, ($189,808) for the retirement of the
remaining $350,000 portion of a $500,000 convertible note held by Eagle
Broadband, and $122,500, net of a gain on the settlement of debt of $39,979, for
interest and penalties on these securities. The Company's Board of Directors has
resolved to cancel the shares and make them available for issuance in the
future.
10
ITEM 2. MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS
Introductory Statements
Forward-Looking Statements and Associated Risks. This filing contains
forward-looking statements, including statements regarding, among other things,
(a) our company's projected sales and profitability, (b) our company's growth
strategies, (c) anticipated trends in our company's industry, (d) our company's
future financing plans and (e) our company's anticipated needs for working
capital. In addition, when used in this filing, the words "believes,"
"anticipates," "intends," "in anticipation of," "expects," and similar words are
intended to identify forward-looking statements. These forward-looking
statements are based largely on our company's expectations and are subject to a
number of risks and uncertainties, including those described in "Business Risk
Factors" of our Form 10-K for the year ended December 31, 2003. Actual results
could differ materially from these forward-looking statements as a result of
changes in trends in the economy and our Company's industry, demand for our
company's products, competition, reductions in the availability of financing and
availability of raw materials, and other factors. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires our management to
make assumptions, estimates and judgments that affect the amounts reported in
the financial statements, including the notes thereto, and related disclosures
of commitments and contingencies, if any. We consider our critical accounting
policies to be those that are complex and those that require significant
judgments and estimates in the preparation of our financial statements,
including valuation of our investments. Management relies on historical
experience and on other assumptions believed to be reasonable under the
circumstances in making its judgment and estimates. Actual results could differ
materially from those estimates.
Estimates- The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Fair Value of Financial Instruments - The carrying amount of items
included in working capital approximates fair value because of the short
maturity of those instruments. The carrying value of the Company's debt
approximates fair value because it bears interest at rates that are similar to
current borrowing rates for loans of comparable terms, maturity and credit risk
that are available to the Company.
Debt Offering Costs - Debt offering costs are related to private
placements and are being amortized on a straight line basis over the term of the
related debt, most of which is in the form of convertible debentures. Should
conversion occur prior to the stated maturity date the remaining unamortized
cost is expensed.
On May 20, 2003, the Company formed a subsidiary, Celerity Systems, Inc.
(a Nevada corporation), ("Celerity NV"). The assets and liabilities related to
the existing interactive video business were transferred to Celerity NV for 100%
of the common stock. As this subsidiary is not an investment company, after June
2, 2003 it is not consolidated with the parent company. The Company's investment
in Celerity NV is recorded at fair value, represented as cost, plus or minus
unrealized appreciation or depreciation, respectively.
Investment Valuation - Investments in equity securities are recorded at
fair value, represented at cost, plus or minus unrealized appreciation or
depreciation, respectively. The fair value of investment that have no ready
market, are determined in good faith by management, and approved by the Board of
Directors, based upon assets and revenues of the underlying investee companies
as well as general market trends for businesses in the same industry. Because of
the inherent uncertainty of valuations, management's estimates of the values of
the investments may differ significantly from the values that would have been
used had a ready market for the investments existed and the differences could be
material.
Income Taxes - The Company accounts for income taxes using the asset and
liability method, whereby deferred tax assets and liabilities are determined
based upon the differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A valuation allowance
related to the deferred tax assets is also recorded when it is more likely than
not that some or all of the deferred tax asset will not be realized.
11
Going Concern - The Company's financial statements have been prepared on a
going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. The
Company has had recurring losses and continues to suffer cash flow and working
capital shortages. Since inception in January, 1993 through June 30, 2004 the
losses total approximately $43,303,000. As of June 30, 2004, the Company had a
negative net working capital of approximately $1,210,000. These factors taken
together with the lack of sales and the absence of significant financial
commitments raise substantial doubt about the Company's ability to continue as a
going concern. The Company's source of income during 2004 has been its minority
investment in Yorkville Management Advisors, LLC. The Company's investment in
the minority interest of Yorkville Management Advisors, LLC was made on December
1, 2003 and the Company has received $760,000 in dividend proceeds since that
date.
Results of Operations
Three Months Ended June 30, 2004 Compared to Three Months Ended June 30,
2003
Unrealized loss on investments
Since the election to operate as a BDC the Company has recorded an
unrealized loss on its investment in Celerity Systems-NV. This loss is comprised
of two elements:
Effect of recording advances at fair value $ 567,082
Effect of recording equity investments at fair value 500,000
----------
$1,067,082
==========
During the three month period ended June 30, 2004, Celerity NV recorded no
sales or gross profit and other general and administrative expenses that
resulted in a net loss of $53,404 for the period. During such period Celerity NV
received parent company advances of $121,578 to fund its working capital
requirements. Management recorded a write-down of the Company's advances since
without additional sales, there is a substantial risk that NV will need to
terminate its operations.
Dividend Income
During the three month period ended June 30, 2004 the Company received
$350,000 in proceeds from its investment in Yorkville Advisors Management, LLC,
which has been recorded as dividend income in the statement of operations. Since
its investment in Yorkville Advisors on December 1, 2003, the Company has
received a total of $760,000 in proceeds. Yorkville Advisors has no set dividend
policy. Dividends are declared based on the discretion of the management of
Yorkville. This was the Company's only source of income for the three months
ended June 30, 2004.
Operating Expenses
Operating expenses for the second quarter of 2004 were $135,785 compared
to the second quarter of 2003 of $216,501. Operating expenses in the 2004 period
included payroll expenses of approximately $21,000, and expenses for operating,
legal, accounting and other professional services of approximately $19,000.
Expenses were reduced in the 2004 period by the lack of non-recurring charges
for corporate asset abandonment and state sales and use tax assessments equaling
approximately $91,000.
Amortization Of Debt Offering Costs
Amortization of debt offering costs for the second quarter of 2004 was
$11,863 compared to $44,088 in same period of 2003. This cost for the 2003
period was due to the reduction of debt instruments and the related cost
associated with them.
Beneficial Conversion Feature - Convertible Notes
Non-cash interest expense relating to amortization of a beneficial
conversion feature for the various convertible debentures issues amounted to
$48,252 and $111,752 for the three months ended June 30, 2004 and 2003,
respectively. This decrease results primarily from the conversion of certain
debt to equity issued in 2003 which caused full recognition of the related
beneficial conversion feature in this period compared to the longer amortization
period for debt not converted.
12
Interest Expense
Interest expense for the three months ended June 30, 2004 was $43,819
compared to $110,517 for the same period in 2003. This reduction is principally
from the lower level of debt ($1,700,000 average balance) at June 30, 2004 as
compared to the same period in 2003 ($3,100,000 average balance).
Settlement Of Debt
For the three months ended June 30, 2004, the Company settled certain
trade and notes payables wherein the total amount due was reduced by $39,979
compared to $34,933 for the three months ended June 30, 2003.
Net Income Attributable to Common Stockholders
As a result of the foregoing, Celerity had a net income of $28,682, or
$0.00 per share, for the three months ended June 30, 2004 compared to a net loss
of $447,925, or $0.00 per share, for the three months ended June 30, 2003.
Six Months Ended June 30, 2004 Compared to Six Months Ended June 30, 2003
Unrealized loss on investments
Since the election to operate as a BDC the Company has recorded an
unrealized loss on its investment in Celerity Systems-NV. This loss is comprised
of two elements:
Effect of recording advances at fair value $ 567,082
Effect of recording equity investments at fair value 500,000
-----------
$ 1,067,082
===========
During the six month period ended June 30, 2004, Celerity NV recorded no
sales or gross profit and other general and administrative expenses that
resulted in a net loss of $186,033 for the period. During such period Celerity
NV received parent company advances of $224,961 to fund its working capital
requirements. Management recorded a write-down of the Company's advances since
without additional sales, there is a substantial risk that NV will not be able
to continue operation.
Dividend Income
During the six month period ended June 30, 2004 the Company received
$695,000 in proceeds from its investment in Yorkville Advisors which has been
recorded as dividend income in the statement of operations. Since its investment
in Yorkville Advisors on December 1, 2003, the Company has received a total of
$760,000 in proceeds. Yorkville Advisors has no set dividend policy. Dividends
are declared based on the discretion of the management of Yorkville Advisors.
This was the Company's only source of income for the six months ended June 30,
2004.
Operating Expenses
Operating expenses for the first six months of 2004 were $332,574 compared
to the first six months of 2003 of $376,294. Operating expenses in the 2004
period included payroll expenses of approximately $56,000 and expenses for
operating, legal, accounting and other professional services of approximately
$13,000. Expenses were reduced in the 2004 period by the lack of non-recurring
charges for corporate asset abandonment and state sales and use tax assessments
of approximately $91,000.
Amortization Of Debt Offering Costs
Amortization of debt offering costs for the first six months of 2004 was
$48,987 compared to $85,705 in same period of 2003. This cost for the 2003
period was due to the reduction of debt instruments and the related cost
associated with them.
Beneficial Conversion Feature - Convertible Notes
Non-cash interest expense relating to amortization of a beneficial
conversion feature for the various convertible debentures issues amounted to
$223,578 and $180,830 for the six months ended June 30, 2004 and 2003,
respectively. This increase results primarily from the conversion of certain
debt to equity which causes full recognition of the related beneficial
conversion feature in this period compared to the longer amortization period for
debt not converted.
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Interest Expense
Interest expense for the six months ended June 30, 2004 was $92,026
compared to $211,335 for the same period in 2003. This reduction is from
liquidated damages incurred due to the late filing of certain registration
statements resulting in a charge of $-0- in the first six months of 2004
compared to a charge of $28,520 in for the same period in 2003 and from the
lower level of debt at June 30, 2004 ($1,700,000 average balance) as compared to
the same period in 2003 ($3,100,000 average balance).
Settlement Of Debt
For the six months ended June 30, 2004, the Company settled certain trade
and payables wherein the total amount due was reduced by $39,979 compared to a
benefit of $197,750 for the same period in 2003.
Net Loss Attributable To Common Stockholders
As a result of the foregoing, Celerity had a net loss of $186,033, or
$0.00 per share, for the six months ended June 30, 2004 compared to a net loss
of $656,414, or $0.00 per share, for the six months ended June 30, 2003.
Liquidity And Capital Resources
The primary source of financing for us since our inception has been
through the issuance of common and preferred stock and debt. We had cash
balances on hand of $10,037 as of June 30, 2004 and $56,156 as of December 31,
2003. Our cash position continues to be uncertain. Our primary need for cash is
to fund our ongoing operations until such time that income from our investments
generates enough proceeds to fund operations. In addition, our need for cash
includes satisfying current liabilities of $1,225,217, consisting primarily of
accounts payable of $519,627, accrued interest of $247,340 and judgments and
defaults payable of $428,400, a judgment of $71,000 obtained by Veja
Electronics, Inc. for breach of contract, and a judgment of $8,000 obtained by
Del Rio Enterprises for non-payment of services. Additionally this also includes
notes payable in default of $100,000 and liquidated damages resulting from the
lack of filing a registration statement relating to certain convertible
debentures of $249,400. We do not currently have sufficient funds to pay these
obligations. We will need significant new funding from the sale of securities or
from proceeds from our investments to fund our ongoing operations and to satisfy
the above obligations. We anticipate the dividend income from our investment in
Yorkville Advisors Management will be sufficient to operate the Company. We
currently do not have any commitments for funding.
As discussed in the overview section, on June 3, 2003 the Company elected
to become a BDC which is regulated under Section 54 of the Investment Company
Act of 1940. As a BDC the Company may sell shares of its common stock up to
$5,000,000 in a twelve month period. Shares sold are exempt from registration
under Regulation E of the Securities Act of 1933. To that end, at our Annual
Meeting of Shareholders held on January 14, 2003, the shareholders approved an
increase in our authorized capital stock to 5 billion shares of common stock. On
June 4, 2003 the Company filed an Offering Circular Under Regulation E to sell
up to $4,500,000 of its common stock at a minimum price of $0.001 to a maximum
price of $0.02. Between June 4, 2003 and June 30, 2004 the Company has sold
1,294,833,333 shares resulting in net proceeds of $1,366,500.
We are also looking at several other options in terms of improving our
cash shortage. We are continuing to seek to arrange financing, including
possible strategic investment opportunities or opportunities to sell some or all
of our assets and business, while continuing to pursue sales opportunities. We
have granted a security interest in our personal property to the investors in
the 10% convertible debentures issued in 2002. Such security interests may
hinder our efforts to obtain financing. The lack of sales or a significant
financial commitment raises substantial doubt about our ability to continue as a
going concern or to resume a full-scale level of operations.
During the six months ended June 30, 2004, we had a net decrease in cash
of $46,119. Our sources and uses of funds were as follows:
Cash provided by operating activities. We generated net cash of $217,808
in our operating activities in the six months ended June 30, 2004. Our net cash
provided from operating activities resulted primarily from non-cash expenses of
$509,050 related to the amortization of beneficial conversion feature of debt,
amortization of debt offering costs and the unrealized loss on an investment.
These non-cash items were directly offset due to the Company's net loss of
$186,033.
Cash used in investing activities. We used net cash of $231,619 in
investing activities in the six months ended June 30, 2004 of which $224,961 was
used to fund the operating activities of Celerity NV.
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Cash used in financing activities. We used $32,308 in net cash for
financing activities, consisting primarily of principal payments on long-term
debt of $475,000 and notes payable - related party of $105,000 and acquisition
of treasury stock. This was offset to a large extent by proceeds from issuance
of convertible debentures of $537,500 and issuance of common stock of $200,000.
As of June 30, 2004 we had a negative net working capital of approximately
$1,210,000. Celerity NV has ceased purchasing any material amount of inventory
until inventory levels can be reduced and has reduced overhead expenses, which
will have a favorable impact on cash required to fund the business. We had no
significant capital spending or purchase commitments at June 30, 2004 other than
a certain lease of corporate office space and the working capital needs of
Celerity NV.
We have no existing bank lines of credit.
There can be no assurances that we will be successful in our attempts to
raise sufficient capital essential to our survival. To the extent that we are
unable to raise the necessary operating capital it will become necessary to
further curtail operations. Additionally, even if we raise operating capital,
there can be no assurances that the net proceeds will be sufficient enough to
enable us to develop our business to a level where we will generate profits and
positive cash flows. These matters raise substantial doubt about our ability to
continue as a going concern.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company does not have any exposure to market risk as it relates to
changes in interest rates as all of the borrowings of the Company are at a fixed
rate of interest.
The Company has no cash equivalents or short-term investment which are
subject to market risk.
Foreign Currency Risk
The Company does not do any business that has any risk of foreign exchange
rate fluctuations.
Equity Security Price Risk
We do not have any investment in marketable equity securities; therefore,
we do not have any direct equity price risk.
Commodity Price Risk
We no not do any business involving commodities; therefore, we do not have
any commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried
out an evaluation, under the supervision and with the participation of the
Company's Principal Executive Officer/Acting Principal Financial Officer (one
person), of the effectiveness of the design and operation of the Company's
disclosure controls and procedures. The Company's disclosure controls and
procedures are designed to provide a reasonable level of assurance of achieving
the Company's disclosure control objectives. The Company's Principal Executive
Officer/Acting Principal Accounting Officer has concluded that the Company's
disclosure controls and procedures are, in fact, effective at this reasonable
assurance level. In addition, we reviewed our internal controls, and there have
been no significant changes in our internal controls or in other factors that
could significantly affect those controls subsequent to the date of their last
valuation or from the end of the reporting period to the date of this Form 10-Q.
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(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls
during the Company's three months ended June 30, 2004, the Company's Principal
Executive Officer/Principal Financial Officer (one person) has determined that
there are no changes to the Company's internal controls over financial reporting
that has materially affected, or is reasonably likely to materially effect, the
Company's internal controls over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no pending litigation against us, other than those claims
described below:
o In December 2001, Veja Electronics, Inc. d/b/a Stack Electronics
sued us for breach of contract and is seeking damages in excess of
$106,000. In June 2003, a judgment was entered against the Company
in the amount of $76,000, which has been accrued by the Company.
o On October 27, 2001, we defaulted on payments due of $150,000, plus
accrued interest, on certain unsecured notes. Written demand has
been received from one of the two note holders. We are seeking to
make arrangements with these note holders.
o On March 25, 2003, R R Donnelly & Sons sued the Company for a
delinquent account. The action was brought in the Chancery Court for
Knox County, Tennessee. In this action the plaintiff, R R Donnelly &
Sons, has sued the Company for non-payment of invoices for printing
services and is seeking $16,972. In September 2003, a default
judgment was entered against the Company.
o In 2003, Del Rio Enterprises sued the Company for non-payment of
services rendered. During 2003 a judgment was rendered against the
Company in the amount of $8,000. This amount has been accrued at
June 30, 2004.
o In addition, certain creditors have threatened litigation if not
paid. We are seeking to make arrangements with these creditors.
There can be no assurance that any claims, if made, will not have an
adverse effect on us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
During the six months ended June 30, 2004 the Company issued 52,186,027
shares of its common stock upon the conversion of $91,000 of 5% convertible
debentures - 2003 and 50,392,120 shares of its common stock upon the conversion
of $55,000 of 4% convertible debentures.
The Company also completed a transaction with Eagle Broadband in which the
Company purchased 140,598,524 shares of its common stock and a $350,000
convertible debenture from Eagle Broadband. The Company paid Eagle Broadband
$662,308 for the purchase of these shares and for the retirement of the
remaining $350,000 portion of a $500,000 convertible note held by Eagle
Broadband. The Company's Board of Directors has resolved to cancel the shares
and make them available for issuance in the future.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
On October 27, 2001, we defaulted on payments due of $150,000, of which
$100,000 is remaining unpaid, plus accrued interest, on certain unsecured notes.
We are seeking to make arrangements with this note holder.
The Company is in default on $942,500 of convertible debentures for
failure to file an effective registration statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description Location
- ----------- ----------- --------
31.1 Certification re: Section 302 Provided herewith
32.1 Certification re: Section 906 Provided herewith
(b) Reports on Form 8-K.
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: August 18, 2004 CELERITY SYSTEMS, INC.
By: /s/ Robert Legnosky
--------------------------
Robert Legnosky, President
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