UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
three months ended March 31, 2010
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from _______________ to __________________
Commission
File No. 001-31332
nCoat,
Inc.
(Exact
name of Registrant as specified in its charter)
Delaware
|
98-0375406
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
No.)
|
7237
Pace Dr.
PO
Box 38
Whitsett,
NC 27377-9118
(Address
of principal executive office, zip code)
Registrant’s
telephone number, including area code: (336) 447-2000
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
at least the past 90 days.
Yes x No o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act. (Check one):
Large
accelerated filer [ ]
|
Accelerated
filer [ ]
|
Non-accelerated
filer [ ]
|
Smaller
reporting company [X]
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b
2 of the Exchange Act).
Yes o No x
As of May
10, 2010, there were 133,828,605 shares of the registrant’s common stock,
$0.0001 par value, outstanding.
nCoat,
Inc.
FORM
10-Q
FOR
THE QUARTER ENDED MARCH 31, 2010
FORWARD-LOOKING
INFORMATION
Statements
in this report concerning the future sales, expenses, profitability, financial
resources, product mix, market demand, product development and other statements
concerning the future results of operations, financial condition and business of
nCoat, Inc., are “forward-looking” statements as defined in the Securities Act
of 1933 and Securities Exchange Act of 1934. Investors are cautioned that the
Company’s actual results in the future may differ materially from those
projected in the forward-looking statements due to risks and uncertainties that
exist in the Company’s operations and business environment, including
competition, need for increased acceptance of products, ability to continue to
develop and extend our brand identity, ability to anticipate and adapt to a
competitive market, ability to effectively manage rapidly expanding operations,
amount and timing of operating costs and capital expenditures relating to
expansion of our business, operations and infrastructure, ability to provide
superior customer service thereon , dependence upon key personnel and the like.
Additionally, words such as “anticipates,” “expect,” “intend,” “estimates,”
“seeks,” “may,” “could,” “plan,” “believes,” and similar words and phrases may
indicate forward-looking statements. The Company’s most recent
filings with the Securities and Exchange Commission, including reports on Form
8-K, contain additional information concerning many of these risk factors, and
copies of these filings are available from the Company upon request and without
charge. The Company disclaims any obligation or intention to update any forward
looking statement in this report. THE FINANCIAL STATEMENTS INCLUDED HEREIN ARE
NOT AUDITED OR REVIEWED. NCOAT HAS NOT ACCUMULATED ENOUGH CASH TO PAY THE AUDIT
FEE TO COMPLETE THE AUDIT OF ITS ANNUAL AND QUARTERLY FINANCIAL STATEMENTS FROM
OCTOBER 2008 UP TO AND INCLUDING THIS 2010 FORM 10QSB PRIOR TO SUBMISSION OF THE
REPORTS. FOLLOWING PAYMENT OF THE AUDIT FEE, NCOAT AUDITORS WILL COMPLETE THE
AUDIT AND NCOAT WILL FILE AN AMENDED REPORT FOR ALL FORM 10K AND FORM 10QSB
REPORTS THAT HAVE NOT BEEN PREVIOUSLY AUDITED OR REVIEWED.
1
TABLE
OF CONTENTS
Part
I – FINANCIAL INFORMATON
|
||
Item
1.
|
Financial
Statements
|
|
Condensed
Consolidated Balance Sheets as of March 31, 2010, and December 31, 2009
(Unaudited)
|
3
|
|
Condensed
Consolidated Statements of Operations for Three Months Ended March 31,
2010 and 2009 (Unaudited)
|
4
|
|
Condensed
Consolidated Statement of Shareholders’ Deficit for the Three Months
Ended March 31, 2010 (Unaudited)
|
5
|
|
Condensed
Consolidated Statements of Cash Flows for the Three Months Ended March 31,
2010, and 2009 (Unaudited)
|
6
|
|
Notes
to Condensed Consolidated Financial Statements (Unaudited)
|
7
|
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
13
|
Item
3.
|
Quantitative and Qualitative Disclosures About Market Risk | 20 |
Item
4T.
|
Controls
and Procedures
|
20
|
Part
II – OTHER INFORMATION
|
||
Item
1.
|
Legal
Proceedings
|
21
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
21
|
Item
3.
|
Defaults
Upon Senior Securities
|
21
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders
|
21
|
Item
5.
|
Other
Information
|
21
|
Item
6.
|
Exhibits
|
22
|
Signature
Page
|
24
|
2
THE
FINANCIAL STATEMENTS INCLUDED HEREIN ARE NOT AUDITED OR REVIEWED. NCOAT HAS NOT
ACCUMULATED ENOUGH CASH TO PAY THE AUDIT FEE TO COMPLETE THE AUDIT OF ITS ANNUAL
AND QUARTERLY FINANCIAL STATEMENTS FROM OCTOBER 2008 UP TO AND INCLUDING THIS
2010 FORM 10QSB PRIOR TO SUBMISSION OF THE REPORTS. FOLLOWING PAYMENT OF THE
AUDIT FEE, NCOAT AUDITORS WILL COMPLETE THE AUDIT AND NCOAT WILL FILE AN AMENDED
REPORT FOR ALL FORM 10K AND FORM 10QSB REPORTS THAT HAVE NOT BEEN PREVIOUSLY
AUDITED OR REVIEWED.
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
||||||||
March
31
|
December
31
|
|||||||
2010
|
2009
|
|||||||
ASSETS
|
(Unaudited)
|
(Unaudited)
|
||||||
Current
Assets
|
||||||||
Cash
|
$ | (431 | ) | $ | 17,062 | |||
Trade
receivables, net
|
251,676 | 450,626 | ||||||
Inventory
|
125,798 | 162,710 | ||||||
Other
current assets
|
55,036 | 55,036 | ||||||
Total
Current Assets
|
432,079 | 685,434 | ||||||
Property and Equipment,
net
|
1,109,571 | 1,234,994 | ||||||
Intangible Assets,
net
|
1,713,375 | 1,845,717 | ||||||
Total
Assets
|
$ | 3,255,025 | $ | 3,766,145 | ||||
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||||||||
Current
Liabilities
|
||||||||
Accounts
payable
|
$ | 3,462,692 | $ | 3,501,602 | ||||
Accrued
liabilities
|
1,225,445 | 1,103,403 | ||||||
Accrued
Interest
|
94,047,319 | 83,762,099 | ||||||
Accrued
Registration Liability
|
154,382,468 | 132,683,572 | ||||||
Deferred
revenue
|
425,840 | 425,840 | ||||||
Current
portion of notes payable
|
695,147,223 | 696,800,082 | ||||||
Derivative
Premium Payable
|
120,348 | 120,348 | ||||||
Current
portion of obligations under capital leases
|
127,218 | 123,419 | ||||||
Total
Current Liabilities
|
948,938,553 | 918,520,365 | ||||||
Long-Term
Liabilities
|
||||||||
Notes
payable, net of current portion
|
468,899 | 523,181 | ||||||
Obligations
under capital leases , net of current portion
|
8,895 | 40,475 | ||||||
Deferred
income taxes
|
97,262 | 97,262 | ||||||
Total
Long-Term Liabilities
|
575,056 | 660,918 | ||||||
Stockholders'
Equity (Deficit)
|
||||||||
Common
stock - $0.0001 par value; 500,000,000 shares
authorized;
|
||||||||
135,828,605
and 122,775,272 shares outstanding respectively
|
13,382 | 12,277 | ||||||
Additional
paid-in capital
|
24,009,996 | 22,324,601 | ||||||
Accumulated
deficit
|
(970,281,962 | ) | (937,752,016 | ) | ||||
Total
Stockholders' Equity (Deficit)
|
(946,258,584 | ) | (915,415,138 | ) | ||||
Total
Liabilities and Stockholders' Equity (Deficit)
|
$ | 3,255,025 | $ | 3,766,145 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
n
COAT, INC.
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
||||||||
For
the Three Months Ended
|
||||||||
March
31
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Net
Sales
|
$ | 1,129,127 | $ | 2,423,542 | ||||
Cost
of Goods Sold
|
800,703 | 1,141,793 | ||||||
Gross
Profit
|
328,424 | 1,281,749 | ||||||
Operating
Expenses
|
||||||||
General
and Administrative Expense
|
632,327 | 1,087,833 | ||||||
Research
and Development Costs
|
78,360 | 79,709 | ||||||
Sales
and Marketing Expenses
|
151,520 | 153,930 | ||||||
Total
Operating Expenses
|
862,207 | 1,321,472 | ||||||
(Loss)
from Operations
|
(533,783 | ) | (39,723 | ) | ||||
Redemption
premium interest expense
|
(31,984,116 | ) | (486,181,192 | ) | ||||
Other
Interest expense
|
(12,047 | ) | (21,640 | ) | ||||
Net
Loss
|
$ | (32,529,946 | ) | $ | (486,242,555 | ) | ||
Basic
and Diluted Loss per Share
|
$ | (0.28 | ) | $ | (4.76 | ) | ||
Basic
and Diluted Weighted-Average Shares Outstanding
|
114,941,939 | 102,108,606 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
4
nCOAT,
INC. AND SUBSIDIARIES
|
||||||||||||||||||||
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
|
||||||||||||||||||||
(Unaudited)
|
||||||||||||||||||||
Additional
|
Total
|
|||||||||||||||||||
Common
Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
|||||||||||||||||
Shares
|
Amount
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||
Balance
- December 31, 2009(Unaudited)
|
122,775,272 | $ | 12,277 | $ | 22,324,601 | $ | (937,752,016 | ) | $ | (915,415,138 | ) | |||||||||
Shares
issued upon conversion of
|
||||||||||||||||||||
accrued
interest
|
- | |||||||||||||||||||
Compensation
related to vested and
|
||||||||||||||||||||
nonvested shares issued to employees,
|
||||||||||||||||||||
net of forfeitures
|
- | |||||||||||||||||||
Reclassification
of fair value of warrants
|
||||||||||||||||||||
to derivative liability.
|
- | |||||||||||||||||||
Partial
conversion of convertible note
|
- | |||||||||||||||||||
Conversion
of convertible note 2/24/2010
|
4,333,333 | 433 | 6,067 | 6,500 | ||||||||||||||||
Conversion
of convertible note 2/15/2010
|
280,000 | 28 | 69,972 | 70,000 | ||||||||||||||||
Conversion
of convertible note 2/15/2010
|
2,440,000 | 244 | 609,756 | 610,000 | ||||||||||||||||
Conversion
of convertible note 3/15/2010
|
2,000,000 | 200 | 499,800 | 500,000 | ||||||||||||||||
Conversion
of convertible note 3/15/2010
|
2,000,000 | 200 | 499,800 | 500,000 | ||||||||||||||||
Net
Loss
|
(32,529,946 | ) | (32,529,946 | ) | ||||||||||||||||
Balance
- March 31, 2010 (Unaudited)
|
133,828,605 | $ | 13,382 | $ | 24,009,996 | $ | (970,281,962 | ) | $ | (946,258,584 | ) |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
5
nCOAT,
INC.
|
||||||||
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
||||||||
For
the Three Months Ended
|
||||||||
March
31,
|
||||||||
2010
|
2009
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
Flows From Operating Activities
|
||||||||
Net
loss
|
$ | (32,529,946 | ) | $ | (486,242,555 | ) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Depreciation
|
125,423 | 149,949 | ||||||
Amortization
of intangible assets
|
132,342 | 183,012 | ||||||
Redemption
premium on notes payable recognized as interest
expense
|
31,984,116 | 486,182,192 | ||||||
Changes
in assets and liabilities:
|
||||||||
Accounts
receivable
|
198,950 | 210,433 | ||||||
Inventory
|
36,912 | 14,582 | ||||||
Other
current assets
|
- | (5,776 | ) | |||||
Accounts
payable
|
(38,910 | ) | (21,118 | ) | ||||
Deferred
revenue
|
- | (83,334 | ) | |||||
Accrued
liabilities
|
121,153 | (368,695 | ) | |||||
Net
Cash Provided by Operating Activities
|
30,040 | 18,690 | ||||||
Cash
Flows From Investing Activities
|
||||||||
Purchase
of property and equipment
|
- | (440 | ) | |||||
Net
Cash Used in Investing Activities
|
- | (440 | ) | |||||
Cash
Flows From Financing Activities
|
||||||||
Changes
in stock and paid in capital
|
1,686,500 | |||||||
Principal
payments on notes payable
|
(1,722,786 | ) | (12,289 | ) | ||||
Principal
payments under capital lease obligations
|
(11,247 | ) | (16,135 | ) | ||||
Net
Cash Used in Financing Activities
|
(47,533 | ) | (28,424 | ) | ||||
Net
Increase (Decrease) in Cash
|
(17,493 | ) | (10,174 | ) | ||||
Cash
At Beginning of Period
|
17,062 | 42,134 | ||||||
Cash
At End of Period
|
$ | (431 | ) | $ | 31,960 | |||
Supplemental
Disclosures of Cash Flow Information
|
||||||||
Cash
paid for interest
|
$ | 12,047 | $ | 21,640 |
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
6
NCOAT,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
THE
FINANCIAL STATEMENTS INCLUDED HEREIN ARE NOT AUDITED OR REVIEWED. NCOAT HAS NOT
ACCUMULATED ENOUGH CASH TO PAY THE AUDIT FEE TO COMPLETE THE AUDIT OF ITS ANNUAL
AND QUARTERLY FINANCIAL STATEMENTS FROM OCTOBER 2008 UP TO AND INCLUDING THIS
2010 FORM 10QSB PRIOR TO SUBMISSION OF THE REPORTS. FOLLOWING PAYMENT OF THE
AUDIT FEE, NCOAT AUDITORS WILL COMPLETE THE AUDIT AND NCOAT WILL FILE AN AMENDED
REPORT FOR ALL FORM 10K AND FORM 10QSB REPORTS THAT HAVE NOT BEEN PREVIOUSLY
AUDITED OR REVIEWED.
Note
1. Basis of Presentation
Interim Financial
Statements – The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (“generally accepted accounting
principles”) for interim financial information and with the instructions to Form
10-Q. Accordingly, they do not include all of the information and notes
required by generally accepted accounting principles for complete financial
statements. The accompanying unaudited condensed consolidated financial
statements should be read in conjunction with the Company’s annual consolidated
financial statements included in the Company’s annual report on Form 10-K filed
with the Securities and Exchange Commission on April 15, 2010. In the opinion of
management, all adjustments (consisting only of normal recurring accruals)
considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2010, are not necessarily
indicative of the results that may be expected for any future periods or for the
year ending December 31, 2010.
Nature of
Operations – nCoat, Inc., and its subsidiaries specialize in
nanotechnology research, licensing, and the commercialization, distribution and
application of nano-structured as well as multiple non-nano structured surface
coatings. The Company’s specialized coatings are used by the automotive, diesel
engine, trucking, recreational vehicle, motorcycle, aerospace and oil and gas
industries for heat management, corrosion resistance, friction reduction, bond
strength and appearance. Corporate offices and operations
headquarters are located in Whitsett, North Carolina, and application operations
are conducted at facilities located in Oklahoma City, Oklahoma; Tempe, Arizona;
and Whitsett, North Carolina.
Principles of
Consolidation – The accompanying unaudited
consolidated financial statements include the operations, accounts and
transactions of nCoat Automotive Group, Inc., High Performance Coatings, Inc.,
nTech, Inc., and MCCI for all periods presented. These entities are
collectively referred to herein as the “Company” or “nCoat.” All intercompany
transactions and balances have been eliminated in consolidation.
Business
Condition– The accompanying unaudited condensed consolidated financial
statements have been prepared on a going-concern basis, which contemplates the
realization of assets and the satisfaction of liabilities in the normal course
of business. The Company has incurred losses of $ 32,529,946 and $486,242,555
and provided $30,040 and $18,690 of cash in operating activities during the
three months ended March 31, 2010 and 2009, respectively. At March
31, 2010, the Company has a working capital deficiency of $948,506,474 an
accumulated deficit of $970,281,962 and a stockholders’ deficit of $
946,258,584. Based on current operations, cash flows from operations
have become positive and should remain positive for the remainder of the year;
however, the Company will likely face negative income for the first half of the
year ending December 31, 2010. As of March 31, 2010, the Company’s
principal sources of liquidity were $(431) of cash and $251,676 of trade
accounts receivable, while current liabilities totaled $ 948,938,553 at that
date, of which $944,045,909 relates to notes payable that are due currently.
These factors, among others, raise substantial doubt about the Company’s ability
to continue as a going concern for a reasonable period of time. The accompanying
condensed consolidated financial statements do not include any adjustments
relating to the recoverability and classification of recorded asset amounts or
the amount and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern.
7
NCOAT,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
Licensing Revenue
Recognition – Fees received from licensing the Company’s technology to
customers is recognized over the term of the license agreements. Licensing fees
received prior to recognition are accounted for as deferred revenue. Sales
revenue excludes lease payments made by customers on facilities used by the
Company.
Loss Per Common
Share – Basic loss per share is computed by dividing net loss for the
period by the weighted-average number of common shares outstanding. The
nonvested common shares issued as employee compensation are excluded from the
calculation of basic loss per share. Diluted loss per share reflects dilutive
potential common shares outstanding during the period. During the three months
ended March 31, 2010, the following anti-dilutive potential common shares were
excluded from the calculation of diluted loss per share: 572,830 nonvested
shares of common stock; 46,344,647,067 shares of common stock issuable upon
conversion of notes payable; 32,418,750 shares of common stock issuable upon the
exercise of warrants. During the twelve months ended December 31,
2009, potential common shares consisted of 572,830 nonvested shares of common
stock; 46,344,647,067 shares of common stock issuable upon conversion of notes
payable; 32,418,750 shares of common stock issuable upon the exercise of
warrants.
Note
2. Acquisition of MCC, Inc.
On June
29, 2007, nCoat, Inc., completed the acquisition of all the capital stock of
MCC, Inc. ("MCCI"), doing business in the marketplace under the brand of
JET-HOT® Coatings. MCCI provides high performance coatings of metal parts for
industrial and personal use. In connection with the acquisition of MCCI,
the Company entered into a consulting agreement with the former majority
shareholder of MCCI whereby the Company is obligated to pay the former majority
shareholder consulting fees of $120,000 annually, performance bonuses equal to
2.5% of net sales from new customers, and to purchase, for up to $70,000, an
automobile for the consultant. The term of the obligation for the consulting
fees and the performance bonuses is through December 31, 2009, and will continue
for successive one-year periods unless terminated by either
party. Because of low cash flow, nCoat was unable to pay all
obligations to the former majority stockholder by December 31, 2009 and thereby
restructured a new agreement with him that continues until
11/01/2011.
Note
3. Notes Payable
Series A and B 6%
Convertible Promissory Notes– From May 25, 2007 through June 18, 2007
(primarily on May 31, 2007), the Company issued $9,000,000 of Series A 6%
convertible promissory notes (the “Series A Notes”) and warrants to purchase
22,500,000 shares of common stock exercisable at $1.00 per share through May 31,
2012. The Series A Notes were originally convertible into common stock at $0.40
per share through May 31, 2010, when the Series A Notes were due. Accrued
interest is payable quarterly. From May 31, 2007 through July 10,
2007, the Company also issued $3,250,000 of Series B 6% convertible promissory
notes (the “Series B Notes”) and warrants to purchase 8,125,000 shares of common
stock exercisable at $0.80 per share through May 31, 2010. The Series B Notes
were originally convertible into common stock at $0.40 per share through May 31,
2010, when the Series B Notes were due. Accrued interest is payable quarterly.
Conversion of the promissory notes is limited such that at any time a note
holder cannot own more than 4.99% of the Company’s outstanding common stock. The
conversion price is adjustable to match any additional issuances of common stock
at prices lower than the current conversion price.
8
NCOAT,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
The
common stock into which the Series A Notes are convertible and the related
warrants are subject to certain registration rights. Per the registration rights
agreement, the Company is obligated obtain the effectiveness of a registration
statement, which has not occurred, and to keep the registration statement
effective until all the registered shares of common stock are sold by the note
holders. If the company fails to obtain effectiveness of the registration
statement, the Company is required to pay partial liquidated damages of 1% per
month of the aggregate purchase price paid by the Series A note holders, or
$90,000 per month. Interest is charged on unpaid damages at the rate of 18%
per annum. The Company recognized a registration payment liability at the
date of the issuance of the Series A notes and has adjusted the liability to
$154,382,468 at March 31, 2010, for estimated payments to be made under the
registration rights agreement. The carrying value of the registration payment
liability is adjusted to reflect the fair value of the registration payment
liability at each balance sheet date.
Upon the
occurrence of certain default or triggering events, the notes holders may
demand redemption of the Series A and Series B notes. The triggering events
include failure to provide notice and pay the related partial liquidated damages
to the note holders within one day of the following events: failure to file the
registration statement or obtain its effectiveness by the required dates;
failure to respond to comments by the U.S. Securities and Exchange Commission
within 15 days of receipt of those comments; suspension from trading or listing
on a market; failure to convert shares upon request; failure to qualify new debt
as permitted debt under the terms of the Series A and Series B Notes; and
failure to make payments under the terms of the promissory notes. Upon the
occurrence of a triggering event, the holders have the right to require the
Company to redeem their notes at an amount equal to the total of unpaid accrued
interest, unpaid liquidated damages and the face amount of the notes multiplied
by the greater of (i)
125% during the first 12 months of the term of the note or 115% thereafter or
(ii) upon the
occurrence of certain of the listed triggering events, the closing market price
of the Company’s common stock on the date of the triggering event divided by the
closing market price on the first day of each month following the triggering
event. The conversion price also decreases to the closing market price on the
first day of each month following the triggering event.
In
December 2007, the Company entered into an agreement with the Series A and
Series B note holders whereby the Series A and Series B note holders agreed
to waive certain triggering events in exchange for the modification of the
conversion price to $0.25 per share and for Company agreeing to pay partial
liquidated damages to the note holders for triggering events occurring on or
after February 29, 2008. However, on February 29, 2008, the Company failed
to obtain effectiveness of the required registration statement. On April 1,
2008, and each subsequent quarter, the Company failed to pay accrued interest to
the Series A and B note holders. As a result, the Series A and B
notes became due on demand at a redemption premium as described above. At March
31, 2010, the carrying value of the Series A and B notes has been adjusted to
$695,169,706 for the increase in the redemption price. As of the date
of this report, and as event subsequent to the end of the accounting period
ending March 31, 2010, there has been only one note holder that has given demand
for the redemption of its Series A note. The note was originally
issued May 31, 2007, with the face amount of $1,500,000. The note
holder has previously converted a portion of its note ($65,000) as reflected in
the financial statements set forth herein. The demand is for the
remaining balance of the note of $1,435,000 plus interest of $253,708 multiplied
by a 115% premium factor for a total demand of $1,942,014. As of the
date of this report, the demand had not been paid. As of the date of
this report, no other demand had been made by the remaining note holders for
redemption of the Series A and B Notes. At the October 1, 2008, conversion price
of $0.015 per share, the Series A and B Notes are convertible into
46,344,647,067 shares of common stock. However, there are only 372,891,395
authorized, unissued shares of common stock available and, therefore, the notes
payable cannot all be converted.
Unpaid
accrued interest bears interest at 18% per annum. Under the terms of the Series
A and B Notes, the unpaid accrued interest and the unpaid registration payment
liability have also been increased by the redemption premium formula described
above, which resulted in accrued interest on the Series A and B Notes of $
93,824,065 and a registration payment liability $ 154,382,468 at March 31,
2010.
9
NCOAT,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
Notes
payable at March 31, 2010, and December 31, 2009, are summarized as
follows:
March
31,
|
December
31,
|
|||||||
2010
|
2009
|
|||||||
6%
$9,000,000 Series A convertible promissory notes; due on
demand
|
$ | 513,487,912 | $ | 513,494,412 | ||||
6%
$3,250,000 Series B convertible promissory notes; due on
demand
|
180,675,294 | 181,675,294 | ||||||
Note
payable, bearing interest at prime plus 1.0% (3.25% at December 31,
2009); due March 2011
|
141,192 | 141,192 | ||||||
Note
payable, bearing interest at prime plus 1.0% (3,25% at December 31,
2009) payable on demand
|
280,364 | 280,364 | ||||||
Note
payable to bank; secured by equipment; interest at 8.75%, payments
due through 2010
|
4,199 | 5,893 | ||||||
Notes
payable to Investment Group; secured by equipment; bearing interest
at 17%, payments $8,523 monthly
|
255,948 | 264,471 | ||||||
Notes
payable to Consultant; secured by equipment; bearing interest at
12%, payments $3,792 monthly
|
82,496 | 86,289 | ||||||
Notes
payable to Shareholder; secured by equipment; bearing interest at
12%, payments $6,631 monthly
|
188,717 | 195,348 | ||||||
Notes
payable; bearing interest at 10%; unsecured; due on
demand
|
500,000 | 1,180,000 | ||||||
Total
Notes Payable
|
695,616,122 | 697,323,263 | ||||||
Less:
Current portion
|
695,147,223 | 696,800,082 | ||||||
Long-Term
Notes Payable
|
$ | 468,899 | $ | 523,181 |
The fair
value of notes payable was determined based upon their short-term redemption
requirements and based upon current market interest rates and totaled
$697,296,122 at March 31, 2010. Future annual maturities of notes payable as of
March 31, 2010, were as follows:
Future
maturities:
|
||||
Years
Ending December 31:
|
||||
2010
|
$ | 695,147,223 | ||
2011
|
266,264 | |||
2012
|
97,459 | |||
2013
|
74,963 | |||
2014
|
30,213 | |||
Thereafter
|
- | |||
Total
|
$ | 695,616,122 |
Note
4. Derivative Warrant Liability
On March
31, 2010 the carrying value of the Series A and B promissory notes increased and
their conversion prices decreased to a point that the Company does not have
sufficient authorized, unissued shares of common stock to enable the conversion
of the promissory notes and the exercise of outstanding warrants. Because the
Company may be required to settle the outstanding warrants for cash, they became
a derivative liability on March 31, 2008, and their fair value of $612,392 was
reclassified from additional paid-in capital to a derivative
liability.
10
NCOAT,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
Due to
decreases in the market value of the Company’s common stock, the fair value of
the derivative warrant liability decreased to $120,348 at September 30, 2008,
which resulted in the recognition of a gain on the derivative liability
valuation of $19,703 during the three months ended September 30, 2008. The fair
value of the warrants at September 30, 2008, was determined using the
Black-Scholes option pricing model with the following weighted-average
assumptions: expected future volatility of 125%, risk-free interest rate of
2.8%, expected dividend yield of 0% and an expected life of 3.17 years. At
September 30, 2008, there were 32,418,750 warrants outstanding that were
exercisable at a weighted-average price of $0.92 per share. The weighted-average
remaining contractual term was 3.17 years.
Note
5. Stock Compensation Plan
On
February 2, 2007, the Company adopted a stock award plan (the “Plan”) and began
awarding shares of common stock and shares of non-vested common stock to
employees and consultants as compensation. The non-vested shares vest over
periods ranging from immediately upon being issued to four years. If an employee
terminates employment with the Company prior to the shares vesting, the
non-vested portion of the shares are be forfeited and returned to the Company.
As of March 31, 2010, employees holding 235,000 non-vested shares have
terminated their employment with the Company but have not forfeited and returned
those shares to the Company. The Company is at risk that it may not obtain back
the forfeited shares. Accordingly, the Company has not accounted for those
shares as forfeited.
Compensation
related to the shares awarded is based upon the fair value of the awards on the
dates awarded or modified as determined by the Black-Scholes option-pricing
model applied to awards expected to vest and recognized by the graded-vesting
method applied to awards expected to vest. Compensation expense related to
non-vested shares held by terminated employees will be reversed when and if
those shares are returned to the Company.
A summary
of the status of the Company’s nonvested shares of common stock as of March 31,
2010:
Weighted-Average
|
||||||||
Award-Date
|
||||||||
Nonvested
Shares of Common Stock
|
Shares
|
Fair
Value
|
||||||
Award
|
13,309,090
|
$
|
0.144
|
|||||
Vested
|
(12,334,260
|
)
|
$
|
0.129
|
||||
Forfeited
|
(402,000
|
)
|
$
|
0.129
|
||||
Nonvested
at March 31, 2010
|
572,830
|
$
|
0.139
|
As of
March 31, 2010, there was $7,177 of total unrecognized compensation expense
related to nonvested share-based compensation arrangements granted under the
Plan. That cost is expected to be recognized over a weighted-average period of 4
years from December 31, 2009.There were no additional vestitures in the first
quarter of 2010.
Note
6. Common Stock
In
addition to shares of common stock issued as part of the stock compensation
plan, on February 2, 2007, 1,130,910 shares of common stock were issued to a
shareholder to whom the company had issued 5,666,668 shares of common stock for
$1,500,000 in June 2006. The additional shares were to increase the
number of shares issued for the original cash consideration and was recorded
during February 2007 for no additional consideration. On February 14,
2007, 3,740,000 shares of common stock were issued upon the exercise of warrants
for $170. On March 23, 2007, the Company issued 880,400 shares of
common stock to an investment banker for its services in facilitating a debt or
equity offering. The shares were valued at $113,572, or $0.129 per
share, and were recognized as deferred loan costs. On August 17,
2007, $100,000 of principal on a note payable to the former majority shareholder
of MCCI was converted into 250,000 shares of common stock.
11
NCOAT,
INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March
31, 2010
(Unaudited)
Note
7. Deferred Income Taxes
Deferred
income taxes consisted of the following:
nCoat,
Inc. and Subidiaires
|
||||||||
Income
Tax Disclosures
|
||||||||
3/31/2010
|
||||||||
March
31,
|
March
31,
|
|||||||
2010
|
2009
|
|||||||
Deferred
Tax Liabilities
|
||||||||
Property
and equipment
|
$ | 293,344 | $ | 293,344 | ||||
Intangible
assets
|
1,146,574 | 1,146,574 | ||||||
Total
Deferred Tax Liabilities
|
1,439,918 | 1,439,918 | ||||||
Deferred
Tax Assets
|
||||||||
Allowance
for doubtful accounts
|
138,555 | 120,008 | ||||||
Accrued
consulting obligation
|
- | - | ||||||
Accrued
PTO
|
155,762 | 210,477 | ||||||
Operating
loss carryforwards
|
7,418,538 | 6,640,543 | ||||||
Total
Deferred Tax Assets
|
7,712,855 | 6,971,028 | ||||||
Valuation
Allowance
|
(6,272,937 | ) | (5,531,110 | ) | ||||
Net
Deferred Tax Liability
|
$ | - | $ | - |
12
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
This
management’s discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes included elsewhere in this
report on Form10-Q.
This management’s discussion and
analysis, as well as other sections of this report on Form10-Q, may contain
“forward-looking statements” that involve risks and uncertainties, including
statements regarding our plans, future events, objectives, expectations,
forecasts, or assumptions. Any statement that is not a statement of historical
fact is a forward-looking statement, and in some cases, words such as “believe,”
“estimate,” “ project,” “expect,” “intend,” “may,” “anticipate,” “plans,”
“seeks,” and similar expressions identify forward-looking statements. These
statements involve risks and uncertainties that could cause actual outcomes and
results to differ materially from the anticipated outcomes or results, and undue
reliance should not be placed on these statements. These risks and uncertainties
include, but are not limited to uncertainties discussed in filings made with the
Securities and Exchange Commission. The Company disclaims any intention or
obligation to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise. THE FINANCIAL
STATEMENTS INCLUDED HEREIN ARE NOT AUDITED OR REVIEWED. NCOAT HAS NOT
ACCUMULATED ENOUGH CASH TO PAY THE AUDIT FEE TO COMPLETE THE AUDIT OF ITS ANNUAL
AND QUARTERLY FINANCIAL STATEMENTS FROM OCTOBER 2008 UP TO AND INCLUDING THIS
2010 FORM 10QSB PRIOR TO SUBMISSION OF THE REPORTS. FOLLOWING PAYMENT OF THE
AUDIT FEE, NCOAT AUDITORS WILL COMPLETE THE AUDIT AND NCOAT WILL FILE AN AMENDED
REPORTS FOR ALL FORM 10K AND FORM 10QSB REPORTS THAT HAVE NOT BEEN PREVIOUS
AUDITED OR REVIEWED.
The
following Management’s discussion and Analysis of financial Condition and
Results of Operations (“MD&A”) is intended to help the reader understand
nCoat, Inc., our operations and our present business
environment. MD&A is provided as a supplement to, and should be
read in conjunction with, our consolidated financial statements and the
accompanying notes thereto contained in Item 1 of this report. This
overview summarizes MD&A, which includes the following
sections:
·
|
Overview – a general
description of our business and the markets in which we operate; our
objective; our areas of focus; and challenges and risks of our
business.
|
·
|
Significant Accounting
Policies – a discussion of accounting policies that require
critical judgments and estimates.
|
·
|
Results of Operations –
an analysis of our Company’s consolidated results of operations for the
three years presented in our consolidated financial
statements. Except to the extent that differences among our
operating segments are material to an understanding of our business as a
whole, we present the discussion in the MD&A on a consolidated
basis.
|
·
|
Liquidity and Capital
Resources – an analysis of cash flows; off-balance sheet
arrangements and aggregate contractual obligations; the impact of
foregoing exchange; an overview of financial position; and the impact of
inflation and changing prices.
|
We intend
for this discussion to provide the reader with information that will assist in
understanding our financial statements, the changes in certain key items in
those financial statements from year to year, and the primary factors that
accounted for those changes, as well as how certain accounting principles affect
our financial statements. The discussion also provides information
about the financial results of the various segments of our business to provide a
better understanding of how those segments and their results affect the
financial condition and results of operations of the Company as a
whole. This discussion should be read in conjunction with our
financial statements as of December 31, 2009, and the year then ended and the
notes accompanying those financial statements.
13
Overview
Our
principal business strategy includes the following components:
Internal Organic Growth. We
have already introduced into the existing “book of business” of our two
subsidiaries additional products, both as cross sales opportunities from the
sister company’s product lines as well as the introduction of nano-formulated
coatings. Operationally we have created common core formulations that
represent the best-of-breed from all sources acquired or owned. Our emphasis on
the after-market retail customer continues to be one of the two major segments
of our business. In additional to the aftermarket sector, we continue
to develop customers in the OEM market segment. A strong source for
internal organic growth in the next three years is the continued emphasis by the
manufacturers of diesel, gasoline and hybrid fueled engines to meet demanding
environmental requirements imposed on their respective industries as we seek to
improve emissions, fuel economy and safety. nCoat also continues to innovate new
nano-products that meet the needs of our customers. nCoat is completing the
development of a new anti-oxidation nano-coating to eliminate discoloration of
chrome on vehicle exhaust systems. This product appears to be a unique
innovation that to the knowledge of the Company is not offered by any other
competitive company. Additionally, nCoat has innovated a family of coatings for
use on internal and external engine parts which reduce friction and heat which
leads to higher fuel efficiency and increased horsepower and torque. nCoat
expects these kinds of new products to create cross selling opportunities with
existing customers and opportunities to expand the market base for product
offerings to existing and new market segments. nCoat expects these product
opportunities to add to the internal growth of customer base and
revenues.
Licensed Application and Joint
Venture Development. We continue to work to develop technology licensing
and/or joint venture business agreements to establish on-site coatings
application as part of the assembly-line process within the manufacturing and/or
assembly process of a large customer. nCoat currently has two OEM
customers employing a licensing model and continues to have discussions with
other prospects. The savings on handling, shipping, inventory,
logistics management and other similar expenses that comes from having the
on-site process is the principle benefit for our larger customers.
Licensing Intellectual
Property. We continue to seek to enter into protective “field
of use” licensing with manufacturers that are tier-one suppliers of large OEM
companies or who deploy a licensed application or joint venture model as
described above. However, unlike the licensed application and/or joint venture
model where application expertise and management control are inherent elements
of the model, our “field of use” license agreements supply proprietary coatings
to third parties already applying coating at their plants. The license
agreements will be limited to targeted applications and industries where nCoat
is not likely to engage in application services in the future and are structured
as joint ventures to avoid creating competition in our own current market
space.
Acquisitions. We
completed the acquisition, transition and integration of HPC and MCCI which have
given us a base of operations and market presence. As capital, the
economy and opportunities allow, we will identify additional specific target
companies for acquisition. The high performance coating industry
includes a number of “sub-niche” sectors, such as corrosion and thermal
management coatings solar and alternative energy equipment manufacturing,
thermal and corrosion management coatings for orbital and non-orbital aircraft
and aircraft engine manufacturing, self-healing coatings for continuous
corrosion management, hard-face coatings for the gas and oil and aerospace
industries, piston manufacturing and protection, lubritic dry film coatings,
anti-porosity/anti-oxidation coatings, conformal coatings used to control
corrosion and fugitive dust on printed circuit boards and microchips, gas and
oil tools, valves and pipelines, marine applications for engine parts, coatings
for implantable devices and equipment for the medical industry and anti-fouling
technologies to name just a few. The fragmentation of the industry
provides us with a large number of small to medium size companies that we will
prudently investigate to determine both synergies and diversification with
respect to our first two acquisitions.
14
Strengthen nTech's research and
development efforts. On January 15, 2008, nCoat announced that North
Carolina Agricultural and Technical State University (NC A&T) in Greensboro,
North Carolina, and nCoat Inc. had established a technical collaboration
agreement for characterization and development of nanotechnology based materials
and industrial coatings. The Memorandum of Understanding (“MOU”) was signed
December 20th, 2007 with the Division of Research and Economic Development at
the university’s campus in Greensboro, North Carolina. Under the MOU, nCoat
collaborates with NC A&T’s Center for Advanced Materials and Smart
Structures (CAMSS) in areas of advanced composites, carbon nanotubes, nano
enhanced slurry coatings and metallic degradation from extreme thermal and
chemical environments. CAMSS has a track record in nano-science based advanced
materials as applied to thin film research, nano-composites, tribological and
environmental coatings.
CAMSS is
an extensively equipped and staffed materials research facility located on the
campus of NC A&T in Greensboro a few miles from nCoat’s location in
Whitsett. CAMSS is a NC A&T-wide umbrella center receiving support from the
National Science Foundation (Center for Research Excellence in Science and
Technology), Department of Energy, Department of Defense (Center for Nanoscience
and Nanomaterials), Air Force, and many industries. The center has extensive
nano characterization equipment including recent multiple innovations in atomic
and electron scanning microscopy and optical technologies. NC A&T has been
recognized as one of the leading nano materials research and development centers
in the United States.
The
agreement outlines joint efforts between nCoat and NC A&T to identify,
characterize, develop and commercialize new nano technology enhancements for
functional coatings and materials with applications in aerospace, medical,
energy, automotive, industrial, textile, advance composites, diesel engine
applications and other industries.
Among
other activities, the MOU is intended to establish a framework for
conceptualization and implementation of R&D projects with subsequent
commercialization. The agreement outlines governance of jointly and separately
developed intellectual property and potential patent alliances for inventions.
The agreement is also designed to establish joint revenues through technology
licensing for commercial applications.
Some of
the initial collaborative commercialization activities will be in the
nano-structured surface engineered systems to improve thermal barrier,
corrosion, tribological properties, biocompatibility and creating surface
technologies that create a cleaner environment. The
MOU also allows nCoat to collaborate with CAMSS on testing, prototyping and
development of materials specific to enhancing nCoat industry needs. As of this
report, nCoat has an employee who is a resident scientist at NC A&T working
daily on nCoat projects. Additionally, nCoat’s Chairman and CEO serves as the
Chairman of the Industrial Advisory Board for the Engineering Research Center
grant award to NC A&T by the National Science Foundation to develop
biodegradable metals for implantable devices, maxillofacial and orthopedic
reconstruction and cardiovascular stents.
This
agreement and others under discussion with outside research and development
groups, including technology transfer offices of universities, private
laboratories and other small start-up technology companies are designed to
continue to strengthen and exploit our research and development capacities while
reducing R&D costs. All of nTech’s research activities are
focused on projects that can show commercialization within three to six months,
rather than long term R&D projects. Many research projects are driven by
direct requests from customers seeking immediate solutions to immediate critical
problems.
15
Acquisitions
Management
believes that there is a strategic acquisition opportunities resulting from the
market dynamics of the high performance coatings markets. Acquisitions of HPC
and Jet-Hot have further validated our strategic research. We expect to
prudently search for, complete due diligence on and acquire other coatings
companies in the future as allowed by available capital, cooperative economic
conditions, internal financial conditions favorable to acquiring, and the
ability of management to negotiate structures and valuation agreements favorable
shareholder value. Key considerations for acquisitions include (i) have a
customer base that includes enterprise level customers in a mature market, (ii)
enjoy strong and stable market presence in our targeted primary markets, (iii)
are profitable, (iv) have a brand presence similar to HPC, and Jet-Hot, and (v)
have an existing product mix whose performance and functionality can be
significantly improved by the integration of nanotechnology
know-how.
Acquisition
of Jet-Hot
With
respect to the acquisition of Jet-Hot, we have realized key synergies which
include:
1.
Jet-Hot had a plant in Arizona as did HPC. The plants were about 10 miles apart.
These were consolidated into a single location.
2.
Jet-Hot plants are built for high through-put and packaging of individual
aftermarket production. HPC plants are built for high volume of OEM parts
production. Key strengths of each company have be used to create
best-of-breed know-how at all operating plants.
3.
Two corporate headquarters existed. The Jet-Hot accounting, human resources,
legal, purchasing, sales and marketing, R&D and company management were
consolidated into our North Carolina headquarter.
4.
HPC and JET-HOT sales and marketing groups were consolidated for maximum
production and efficiency, including advertising budgets.
5. Jet-Hot
R&D and technical services were consolidated to nTech, for efficiency
and intellectual property synergies.
6.
HPC and JET-HOT sales prospects include many of the same names, including
several where the two companies are the only two competitors for the account.
This list was sorted into HPC and MCCI responsibilities, creating a
non-competing sales effort.
7.
We have acquired sufficient market and operational experience to realize that a
single coating entity has a competitive disadvantage in attempting to create
high volume productions of both aftermarket parts and OEM parts. The
addition of MCCI allows us to create focused operations for each of our major
market sectors.
8.
Competition between MCCI and HPC for stand-alone coatings sales (no applications
services) has been eliminated and we are offering “best of breed” coating from
each company to customers.
9. JET-HOT
has more thermal barrier customers than HPC. HPC has more corrosion resistance
and lubritic coatings customers than JET-HOT. Cross selling now occurs in each
company’s customer base to attempt to raise same-customer revenue. In addition,
JET-HOT did not sell internal engine coatings. Their product line was for
coatings on external parts only. HPC internal engine coatings are now offered to
all of JET-HOT’s approximate 9000 annual individual aftermarket
customers.
Company contact
information
Our
headquarters’ address is 7237 Pace Drive, P.O. Box 38, Whitsett, NC 27377, and
our phone number is (336) 447-2000.
16
Results
of Operations
Performance
in First three Months of 2010 Compared to First Three Months of
2009
Performance
Overview
The
comparative revenue for the three months ending March 31, 2010, to March 31,
2009, shows a decrease of $1,294,415 or 53.4%. Much of this reduction
is attributable to automotive and trucking sales in both original equipment and
aftermarket industries. Aftermarket sales began to experience declines in
August, 2008 as consumer confidence plummeted and uncertain and negative
economic conditions began to impact consumer spending. Quarter over quarter
aftermarket sales experienced 60% reduction in the fourth quarter of 2008 as
economic conditions and consumer uncertainty worsened. In the first quarter of
2009, aftermarket sales were down quarter over quarter, but recovered a
significant portion of the reduction in the previous quarter. Additionally, OEM
sales have been negatively impacted by reductions in demand with diesel engine
manufacturers. The weakness in this sector is may continue into the
fall. One media source has cited engine build rates as being down 60%
over prior year, which was already well below ’07 levels. Year
to date 2010 aftermarket sales are slightly higher year-over-year from 2010,
however sales have still not returned to levels realized in 2007 or
2008.
Beginning
in 2007, our diesel engine manufacturing customers were required to introduce
new engine platforms to meet new Environmental Protection Agency (EPA)
requirements to lower harmful particulates in engine emissions in order to
comply with Federal clean air standards. nCoat sells and applies corrosion
resistant coatings created from that the use of new technology that aides diesel
emissions systems to meet these new standards. The standards affected those
engine platforms commencing in 2007 and the complete 2007 year was a period of
“wait and see” as the new engineering was road-proven prior to the acceptance by
the market. The downturn of active new unit purchases was further
affected by the dramatic increase in fuel prices, followed on by the recession.
Additionally, the national economic downturn and severe limitations on corporate
credit resources beginning in the fall of 2008 continued the limitations of unit
sales. The final EPA imposed clean air requirements began January 1, 2010. All
heavy-duty, over-the-road, diesel engine manufacturers were required to meet the
new standards beginning January 1 or face stiff Federally imposed fines. As a
result, a year end rush by companies to acquire 2009 model trucks created a
vacuum for truck sales for the first and second quarters of 2010. Our customers
indicate that renewed truck sales will begin in the third quarter and they
expect robust sales in late third quarter and through forth quarter and into
2011. Until economic activity shows signs of rebounding, and liquidity returns
to the financial markets, transportation companies will tend to defer capital
expenditures regarding rolling stock. Once markets begin to thaw a
combination of aging fleets, increasing EPA requirements, and potential
government incentives will ultimately produce a surge of production to relieve
this demand.
Cost
of Sales
Cost of
sales was $800,703 for the first three months of 2010, a reduction of 29.8%
from the same period last year. The company continues to realize
efficiencies stemming from closing Mississippi and Utah plant
locations. Additionally we continue to improve processes and reduce
variable cost and waste through our lean manufacturing program and Six-Sigma
management training.
General
and Administrative Expenses
General
and administrative expenses for the three months ended March 31,
2010, decreased by approximately $455,506 or 40.7%. Management
has instituted a number of steps designed to reduce these expenses
including:
1)
General and administrative layoffs occurred to right size G&A expenses to
reduced revenue.
2) Increasing
the effectiveness of communications and reducing unnecessary
travel.
3) Realigning
upper management positions to more closely track the size and present revenues
of the Company.
4) Reducing
remaining G&A staff to a four day work week to reduce
expenses.
17
Sales
and Marketing Expense
Sales and
marketing expense for the three months ended March 31, 2010, decreased by
approximately $2,410 or 1.6% compared to the same period in
2009. Management has restructured the marketing and sales group,
revamped commission structure and reduced print advertising expense. However,
management believes some expense reductions have impacted aftermarket sales and
that that further reductions to advertising and direct marketing and
sales efforts will adversely impact both aftermarket and OEM sales efforts and
thereby revenues and the overall financial condition of the Company. Management
believes that some increase in marketing and sales expenditures will be
necessary to sustain future sales and customer services.
Interest
Expense
Management’s
greatest concern remains that all of the significant positive changes that have
been made to improve and achieve operating profitability have been overshadowed
by the great impact seen in our financial reports of the interest expense which
has been attributed to the contractual redemption premium
computations. We are in technical default under the terms of the
Series A and Series B Promissory Notes and hence are subject to the premium
computed on a redemption right granted to the holders of the Notes. As of
the date of this report, and as an event subsequent to the end of the accounting
period ending September 30, 2008, management has received demand from only one
note holder for the redemption of portions of its Series A note. The
note was originally issued May 31, 2007 with the face amount of
$1,500,000. The note holder has previously converted a portion of its
note ($65,000) as reflected in the financial statements set forth
herein. The demand is for the remaining balance of the note of
$1,435,000 plus interest of $253,708 multiplied by a 115% premium factor for a
total demand of $1,942,014. As of the date hereof, the demand has not
been paid. No other demand has been made by the remaining note
holders for redemption of the Series A and B Notes. We have had no indication
from the other Note holders of demand, or other negative impacts and are working
to complete further negotiations with them in order to restructure the
triggering events which have lead to the accounting entries.
Earnings
per Share
As a
result of the share exchange transaction discussed in the overview section
above, exercise of warrants and conversion of debt, the number of outstanding
shares increased to 133,828,605 as of March 31, 2010. For the three
month period ended March 31, 2010 there was a loss per share of
.28.
Financial
Statements, One-Time Charges and Capital Expenditures
Cost
reduction activities have been underway since funding failed in
2007. We have included reductions in personnel, consolidation of
facilities and emphasis on lean manufacturing practices. Our
resulting operational savings have been encouraging.
1. Facilities
– Since the first quarter of last year, facilities have been shut down in
Mississippi, Pennsylvania and Utah. The capacity was shifted to other
existing facilities, reducing our overhead and improving our labor
productivity.
Our plans
call for a second OEM production line in 2010 at a cost of approximately
$250,000 for its installation. Most of this cost will be for
installation of existing equipment which has been relocated due to the shutdown
of the Mississippi, Pennsylvania and Utah plant locations.
2. Personnel
- The Company has reduced the workforce from over 200 employees in July, 2007 to
approximately 80 employees. This decrease comes from operating plants
more efficiently and reducing the number of plant
locations. Additionally the first quarter of last year included some
management positions which presumed full funding of our investments and
subsequent growth. The current management staff level is in line with
existing business levels. We have focused on completion of Standard
Operating Procedure documentation, preparation of information systems,
accounting, human resource, production, communications, mixing and blending,
strategic finance and other systems to accommodate rapid growth from internal
and acquisition growth.
3. Research
and Development – Our expenditures for research and development were $78,360 and
$79,709 for the three months ended March 31, 2010 and March 31, 2009 these
numbers respectively.
4. Financing
- Expenses in the first three months of 2010 show Redemption premium interest
expense of $31,984,116. This is the current calculation for the
penalty associated with the default on the A and B notes discussed at length
elsewhere in this report.
18
Liquidity
and Capital Resources
nCoat is
a company with limited operating history and experience upon which to base an
evaluation of its performance. In September of 2005, we acquired High
Performance Coatings, Inc. (“HPC”), an operational coatings company, which was
responsible for the majority of our consolidated revenues. In 2006, we formed an
intellectual property and development entity, nTech, Inc. (“nTech”), and in June
2007, we acquired all of the common stock of Metallic Ceramic Coatings, Inc.
(“MCCI”), a primary competitor of HPC with 26 years of coatings experience and
historical revenues similar to HPC.
On April
13, 2007, we converted $2,000,000 of convertible debentures and $67,752 of
accrued interest into 4,135,503 shares of our common stock at $0.50 per share.
The remaining $500,000 of convertible debentures, along with accrued interest of
$18,107, was converted to 1,036,215 shares of common stock at $0.50 per share on
August 24, 2007.
From May
25, 2007, through July 9, 2007, we issued $9,000,000 of Series A 6% convertible
promissory notes (the “Series A Notes”) and warrants to purchase 22,500,000
shares of common stock, exercisable at $1.00 per share through May 31, 2012. The
Series A Notes are convertible into common stock at $0.40 per share through May
31, 2010 when the Series A Notes are due. On May 31, 2007, the Company issued
$3,250,000 of Series B 6% convertible promissory notes (the “Series B Notes”)
and warrants to purchase 8,125,000 shares of common stock at $0.80 per share
through May 31, 2010. The Series B Notes are convertible into common stock at
$0.40 per share through May 31, 2010 when the Series B Notes are due. The Series
A and B private placement offerings included the conversion of $800,000 of
advances from investors of which $700,000 had been received prior to March 31,
2007. The Company received $10,618,916 of proceeds from the issuance of the
Series A and Series B convertible notes, net of the $700,000 of advances
previously recognized and net of cash offering costs of $931,064.
In the
final stages of the offering, after we had closed on the purchase of MCCI, a
subscribed investor did not fund its portion of offering. Our intended use
of proceeds included retirement of debt and related accrued interest of
$3,677,286, $5,000,000 for the acquisition of MCCI, payment of significant
pre-offering liabilities and establishing a working capital reserve. The
retirement of pre-offering liabilities and the working capital portion of the
offering did not get raised prior to our contractual obligation to close the
offering. This deficiency of the expected $6,500,000 in funding, combined
with the seasonal lull in aftermarket and OEM revenues, caused us to experience
a significant liquidity crisis. A number of our vendors turned our account
over to collection agencies and at December 31, 2008, we had accounts payable in
excess of $2.0 million over 120 days past due.
At
December 31, 2008 we are in technical breech of the Securities Purchase
Agreement and the related Series A and B Convertible Notes and Registration
Agreement (collectively the “Note Agreement”). This technical breech is due to
our failure to pay partial liquidating damages and failure to pay interest nCoat
is attempting to negotiate a restructure of these debenture notes to provide a
work out arrangement favorable to both current debenture holders and
shareholders. To accomplish this restructure, nCoat must raise in the next
twelve (12) months, additional capital to satisfy negotiated demands of the
current debenture holders and to pay aged accounts payables current owed by
nCoat to its vendors. Capital raised to this end may (1) be accomplished in a
debt instrument which will incur debt to the Company, and/or (2) be raised in an
equity offering which may create significant dilution to current shareholders,
or (3) not be completed at all. nCoat is seeking in the restructured a
negotiated settlement of all outstanding penalties, interest, carrying charges
and principal accrued under the current debenture notes. Any changes
to the agreement or to accounting treatment described herein will be reflected
in subsequent periods.
Although
no demand has been made, the Note Agreement provides that in the event of a
breech, within the first 12 months following closing, the holders are entitled
to demand immediate redemption of all, or any portion of, the face value of the
Series A Notes and Series B Notes, along with a redemption
premium. This premium is the greater of 25% or the product of a
multiplicand whose numerator is the stock price on the day of the default
trigger event divided by the weighted market price at the beginning of each
month thereafter. As a result, the full face value of the Notes and
redemption premium are shown on our Balance Sheet as current liabilities at
March 31, 2010.
19
We have
been active in our attempt to reduce our losses and conserve cash. We
have had a reduction in work force and reduced the number of employees by more
than 100. We consolidated operations and eliminated three facilities
in 2008 and 2009. During the first three months of 2010 certain
members of the executive staff elected to defer all or a portion of their
salaries totaling $100,000 and we executed additional reductions in force from
administrative staff.
At March
31, 2010, we had assets of $ 3,255,025 and current liabilities of $948,938,553
including the redemption premium set forth above. Any amounts owed to related
parties have no specific terms of repayment and bear no interest.
Off
Balance Sheet Arrangements
The
Company’s off-balance sheet arrangements include operating leases for it
production facilities and office space.
Item
3 – Quantitative and Qualitative Disclosures About Market Risk
Information in this section will be added once an audit has
been completed.
Item
4T – Controls and Procedures
Management’s
Report On Internal Control Over Financial Reporting
Evaluation of disclosure
controls and procedures.
All financial information contained in this report is unaudited and
un-reviewed. The accounting firm has reviewed our quarterly filings
as of 9/30/2008. nCoat has not produced enough cash flow to pay the auditors to
complete the audit by the publication date of this report. Upon payment of the
audit fees, the auditors will complete the audit and an amended Form 10K and 10Q
will be filed. All figures are presented in accordance with Generally Accepted
Accounting Principles (GAAP), but have not been tested or validated by an
outside firm as of yet. As of the end of the period covered by this
report, an evaluation was carried out under the supervision and with the
participation of the company’s management, including its Chief Executive Officer
and Chief Financial Officer, of its disclosure controls and procedures (as
defined by Rules13a — 15(e)and 15d-15(e)under the Securities Exchange Act of
1934). Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the design and operation of these disclosure
controls and procedures were effective as of the end of the period covered by
this report.
Changes
in internal Controls over Financial Reporting
There have been no changes in
the registrant’s internal control over financial reporting that occurred during
the registrant’s most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect our internal control over financial
reporting.
20
PART
II
OTHER
INFORMATION
Item
1 – Legal Proceedings
From time
to time, we may become involved in various lawsuits and legal proceedings which
arise in the ordinary course of business. Litigation is subject to inherent
uncertainties, and an adverse result in these or other matters may arise from
time to time that may harm our business. As of the date of this Report, with the
exception of the case cited below, we were not aware of any such legal
proceedings or claims against the Company or its subsidiaries that management
believes will have a material adverse affect on business development, financial
condition or operating results.
On
January 19, 2008 and January 29, 2008, the Company issued 1,554,198 shares of
its common stock as payment of interest on the Series A Notes and Series B Notes
for interest due for the third quarter of 2007.
On August
18, 2008, the Company issued 1,250,000 shares of its common stock as the result
of a partial conversion of a Note holder’s principal, reducing that Note by
$25,000.
On
December 1, 2008, the Company issued 3,031,956 share of its common stock as the
result of a partial conversion of a Note holder’s interest, reducing the Note by
$10,000.
On May
22, 2009, the Company issued 5,000,000 shares of its common stock as the result
of a partial conversion of a note holder’s interest, reducing that Note by
$7,500.
On August
4, 2009, the Company issued 5,000,000 shares of its common stock as the result
of a partial conversion of a note holder’s interest, reducing that Note by
$7,500.
On
October 12, 2009, the Company issued 5,333,333 shares of its common stock as the
result of a partial conversion of a note holder’s interest, reducing that Note
by $8,000.
On
November 24, 2009, the Company issued 5,333,333 shares of its common stock as
the result of a partial conversion of a note holder’s interest, reducing that
Note by $8,000.
On
February 24, 2010 the Company issued 4,333,333 shares of its common stock as the
result of a partial conversion of a note holder’s interest, reducing that Note
by $6,500.
On
February 15, 2010, the Company issued 280,000 shares of its common stock as the
result of a conversion of a note holder’s interest, reducing that Note by
$70,000.
On
February 15, 2010, the Company issued 2,440,000 shares of its common stock as
the result of a conversion of a note holder’s interest, reducing that Note by
$610,000.
On March
15, 2010, the Company issued 4,000,000 shares of its common stock as the result
of a conversion of a note holder’s interest, reducing that Note by
$1,000,000.
There
have been no repurchases of equity securities by nCoat during the quarter ended
March 31, 2010 or the year ended December 31, 2009.
In each
case, the securities were issued in connection with private transactions with
accredited investors pursuant to Section 4(2) of the Securities Act and
regulations promulgated there under.
Proceeds
from the sale of the above securities were and will be used for retirement of
debt, acquisition of MCCI and working capital.
Item
3 – Defaults Upon Senior Securities
As set
forth above, the Company was in technical breach of the underlying financing
agreements until it obtained waivers as described in the 10-KA report filed by
the Company on August 1, 2008.
Item
4 – Submission of Matters to a Vote of Security Holders
None.
Item
5 – Other Information
None.
21
The
following documents are filed as an exhibit to this Report:
Exhibit
Description
3.1
|
Certificate
of Incorporation (previously filed as an exhibit to a registration
statement on Form SB-2, filed with the Commission on December 27, 2004,
and incorporated herein by this
reference).
|
3.2
|
Certificate
of Amendment to Certificate of Incorporation (previously filed as an
exhibit to a Current Report on Form 8-K, filed with the Commission on
February 8, 2007, and incorporated herein by this
reference).
|
3.3
|
Bylaws
(previously filed as an exhibit to a registration statement on Form SB-2,
filed with the Commission on December 27, 2004, and incorporated herein by
this reference).
|
4.1
|
Convertible
Debenture, dated October 24, 2006 (previously filed as an exhibit to a
Current Report on Form 8-K, filed with the Commission on November 3, 2006,
and incorporated herein by this
reference).
|
4.2
|
Convertible
Debenture, dated November 9, 2006 (previously filed as an exhibit to a
Quarterly Report on Form 10-QSB, filed with the Commission on January 17,
2007, and incorporated herein by this
reference).
|
4.3
|
Convertible
Debenture, dated November 28, 2006 (previously filed as an exhibit to a
Quarterly Report on Form 10-QSB, filed with the Commission on January 17,
2007, and incorporated herein by this
reference).
|
4.4
|
Convertible
Debenture, dated February 6, 2007 (previously filed as an exhibit to a
Registration Statement on Form SB-2, filed with the Commission on July 12,
2007, and incorporated herein by this
reference).
|
4.5
|
Convertible
Debenture, dated May 14, 2007 (previously filed as an exhibit to a
Registration Statement on Form SB-2, filed with the Commission on July 12,
2007, and incorporated herein by this
reference).
|
10.1
|
Form
of Securities Purchase Agreement (previously filed as an exhibit to the
Company’s Current Report on Form 8-K, filed with the Commission on June 1,
2007, and incorporated herein by this
reference).
|
10.2
|
Form
of Series A Notes (previously filed as an exhibit to the Company’s Current
Report on Form 8-K, filed with the Commission on June 1, 2007, and
incorporated herein by this
reference).
|
10.3
|
Form
of Series A Warrants (previously filed as an exhibit to the Company’s
Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
incorporated herein by this
reference).
|
10.4
|
Form
of Series B Notes (previously filed as an exhibit to the Company’s Current
Report on Form 8-K, filed with the Commission on June 1, 2007, and
incorporated herein by this
reference).
|
10.5
|
Form
of Series B Warrants (previously filed as an exhibit to the Company’s
Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
incorporated herein by this
reference).
|
10.6
|
Form
of Registration Rights Agreement (previously filed as an exhibit to the
Company’s Current Report on Form 8-K, filed with the Commission on June 1,
2007, and incorporated herein by this
reference).
|
10.7
|
Form
of Escrow Agreement (previously filed as an exhibit to the Company’s
Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
incorporated herein by this
reference).
|
10.8
|
Form
of Amendment to Escrow Agreement (previously filed as an exhibit to the
Company’s Current Report on Form 8-K, filed with the Commission on June 1,
2007, and incorporated herein by this
reference).
|
22
10.9
|
Form
of Lockup Agreement (previously filed as an exhibit to the Company’s
Current Report on Form 8-K, filed with the Commission on June 1, 2007, and
incorporated herein by this
reference).
|
10.10
|
Stock
Purchase Agreement by and among nCoat, Inc., MCC, Inc., and Michael
Novakovic and Phebe Novakovic, dated June 19, 2007 (previously filed as an
exhibit to the Company’s Current Report on Form 8-K, filed with the
Commission on June 22, 2007, and incorporated herein by this
reference).
|
10.11
|
Lease
Agreement, dated May 15, 2001, between Remco Management Company, LLC, and
HPC, (previously filed as an exhibit to a Registration Statement on Form
SB-2, filed with the Commission on October 12, 2007, and incorporated
herein by this reference).
|
10.12
|
Lease
Extension Agreement, dated June 1, 2006, between Remco Management Company,
LLC, and HPC (previously filed as an exhibit to a Registration Statement
on Form SB-2, filed with the Commission on October 12, 2007, and
incorporated herein by this
reference).
|
10.13
|
Industrial
Lease, dated October 15, 2005, between Ralf LLC, and HPC (previously filed
as an exhibit to a Registration Statement on Form SB-2, filed with the
Commission on October 12, 2007, and incorporated herein by this
reference).
|
10.14
|
Lease
Agreement, dated February 21, 2006, between Mebane Warehouse, LLC, and HPC
(previously filed as an exhibit to a Registration Statement on Form SB-2,
filed with the Commission on October 12, 2007, and incorporated herein by
this reference).
|
10.15
|
Memorandum
of Sublease, dated November 1, 2005, between Heritage One, L.L.C., Rocky
Mountain Seed and Grain, and HPC(previously filed as an exhibit to a
Registration Statement on Form SB-2, filed with the Commission on October
12, 2007, and incorporated herein by this
reference).
|
10.16
|
Commercial
Lease Agreement, dated October 13, 2005, between Philadelphia Suburban
Development Corporation and MCCI(previously filed as an exhibit to a
Registration Statement on Form SB-2, filed with the Commission on October
12, 2007, and incorporated herein by this
reference).
|
10.17
|
Lease
Agreement, dated January 22, 2007, between Milford Business Centre and
MCCI (previously filed as an exhibit to a Registration Statement on Form
SB-2, filed with the Commission on October 12, 2007, and incorporated
herein by this reference).
|
31.1
|
Certification
of the Chairman and Chief Executive Officer, Section 302 of Sarbanes-Oxley
Act of 2002
|
32.1 |
Certification
of the Chairman and Chief Executive Officer, Section
1350
|
23
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned hereunto
duly authorized.
nCoat,
Inc
|
|
(Registrant)
|
|
Date:
May 14, 2010
|
/s/
Paul Clayson
|
Paul
Clayson
|
|
Chief
Executive Officer
|
|
(Principal
Executive Officer)
|
|
Date: May 14, 2010
|
/s/
Paul Clayson
|
Paul
Clayson
|
|
Acting
Chief Financial Officer
|
|
(Principal
Financial and Accounting Officer)
|
24