Attached files
file | filename |
---|---|
EX-31 - EXHIBIT 31.1 - iSatori, Inc. | exhibit311.htm |
EX-32 - EXHIBIT 32.1 - iSatori, Inc. | exhibit321.htm |
EX-32 - EXHIBIT 32.2 - iSatori, Inc. | exhibit322.htm |
EX-31 - EXHIBIT 31.2 - iSatori, Inc. | exhibit312.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________
Form 10-Q
________
ý
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED December 31, 2010.
¨
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______________ TO ______________.
Commission file number 1-11900
Integrated Security Systems, Inc.
(Exact name of small business issuer as specified in its charter)
Delaware |
| 75-2422983 |
(State of Incorporation) |
| (I.R.S. Employer Identification No.) |
2009 Chenault Drive, Suite 114, Carrollton, TX |
| 75006 |
(Address of principal executive offices) |
| (Zip Code) |
(972) 444-8280
(Issuers telephone number)
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the Exchange Act) during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o
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
Indicate by check mark whether the registrant is a (See definitions in Rule 12b-2 of the Exchange Act:
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ý
As of January 31, 2011, 560,910,018 shares of the registrants common stock were outstanding.
Page 1 of 17
INTEGRATED SECURITY SYSTEMS, INC.
INDEX
| Page |
|
|
PART I. FINANCIAL INFORMATION |
|
|
|
Item 1. Financial Statements |
|
Consolidated Balance Sheets at December 31, 2010 (unaudited) and June 30, 2010 | 3 |
Consolidated Statements of Operations (unaudited) for the three and six months ended December 31, 2010 and 2009 | 4 |
Consolidated Statements of Cash Flows (unaudited) for the six months ended December 31, 2010 and 2009 | 5 |
Notes to Financial Statements | 6 |
Item 2. Managements Discussion and Analysis or Plan of Operation | 13 |
Item 4. Controls and Procedures | 14 |
|
|
PART II. OTHER INFORMATION |
|
|
|
Item 1. Legal Proceedings | 15 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
Item 3. Defaults upon Senior Securities | 15 |
Item 4. (Removed and Reserved) | 15 |
Item 5. Other Information | 15 |
Item 6. Exhibits | 15 |
|
|
SIGNATURES | 16 |
Page 2 of 17
PART I. FINANCIAL INFORMATION | |||||
|
|
|
| ||
Item 1. Financial Statements. |
|
|
| ||
|
|
|
| ||
INTEGRATED SECURITY SYSTEMS, INC. | |||||
Consolidated Balance Sheets | |||||
|
|
|
| ||
| December 31, |
| June 30, | ||
| 2010 |
| 2010 | ||
ASSETS | Unaudited |
|
|
| |
Current assets: |
|
|
|
|
|
Cash and cash equivalents | $ | 211,272 |
| $ | 22,690 |
Short term investments |
| 14,669 |
|
| 32,420 |
Other current assets |
| 78,082 |
|
| 192,390 |
Assets related to discontinued operations |
| 3,767,551 |
|
| 3,495,143 |
Total current assets |
| 4,071,574 |
|
| 3,742,643 |
|
|
|
|
|
|
Property and equipment, net |
| 1,558 |
|
| 2,869 |
Other assets |
| 51,322 |
|
| 68,000 |
|
|
|
|
|
|
Total Assets | $ | 4,124,454 |
| $ | 3,813,512 |
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
Accounts payable | $ | 25,674 |
| $ | 48,721 |
Accrued liabilities |
| 302,223 |
|
| 193,142 |
Liabilities related to discontinued operations |
| 1,843,974 |
|
| 1,776,902 |
Total current liabilities |
| 2,171,871 |
|
| 2,018,765 |
|
|
|
|
|
|
Long term liabilities related to discontinued operations |
| 135,488 |
|
| 150,544 |
|
|
|
|
|
|
|
|
|
|
|
|
Equity: |
|
|
|
|
|
Convertible preferred stock, $0.01 par value, 750,000 shares authorized; 22,500shares issued and outstanding ($450,000 of liquidation value) |
| 225 |
|
| 225 |
Common stock, $0.01 par value, 800,000,000 shares authorized; 561,188,540 and 559,193,604 shares issued, respectively. |
| 5,611,885 |
|
| 5,591,936 |
Treasury stock, at cost 278,522 common shares |
| (125,606) |
|
| (125,606) |
Additional paid in capital |
| 38,048,929 |
|
| 37,999,910 |
Accumulated deficit |
| (41,804,653) |
|
| (41,849,478) |
Accumulated other comprehensive loss (available for sale security) |
| (54,977) |
|
| (36,394) |
Total stockholders equity |
| 1,675,803 |
|
| 1,580,593 |
Noncontrolling interest in discontinued operations |
| 141,292 |
|
| 63,610 |
Total equity |
| 1,817,095 |
|
| 1,644,203 |
|
|
|
|
|
|
Total liabilities and equity | $ | 4,124,454 |
| $ | 3,813,512 |
The accompanying notes are an integral part of the consolidated financial statements.
Page 3 of 17
INTEGRATED SECURITY SYSTEMS, INC. | |||||||||||
Consolidated Statements of Operations | |||||||||||
(Unaudited) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| For the Three Months Ended |
| For the Six Months Ended | ||||||||
| December 31, |
| December 31, | ||||||||
| 2010 |
| 2009 |
| 2010 |
| 2009 | ||||
Revenue: |
|
|
|
|
|
|
|
|
|
|
|
Sales | $ | - |
| $ | - |
| $ | - |
| $ | - |
Other revenue |
| 3,981 |
|
| 1,423 |
|
| 9,464 |
|
| 3,981 |
Total revenue |
| 3,981 |
|
| 1,423 |
|
| 9,464 |
|
| 3,981 |
Cost of sales |
| - |
|
| - |
|
| - |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
| 3,981 |
|
| 1,423 |
|
| 9,464 |
|
| 3,981 |
|
|
|
|
|
|
|
|
|
|
|
|
Selling, general and administrative |
| 233,622 |
|
| 214,026 |
|
| 411,229 |
|
| 407,684 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
| (229,641) |
|
| (212,603) |
|
| (401,765) |
|
| (403,703) |
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
| (17,640) |
|
| (7,946) |
|
| (31,344) |
|
| (14,431) |
Transaction costs |
| (152,381) |
|
| - |
|
| (152,381) |
|
| - |
|
|
|
|
|
|
|
|
|
|
|
|
Net loss from continuing operations |
| (399,662) |
|
| (220,549) |
|
| (585,490) |
|
| (418,134) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations |
| 388,171 |
|
| 171,635 |
|
| 812,997 |
|
| 360,180 |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
| (11,491) |
|
| (48,914) |
|
| 227,507 |
|
| (57,954) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations attributable to the noncontrolling interest |
| (90,411) |
|
| (276) |
|
| (182,682) |
|
| (26,069) |
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to common stockholders | $ | (101,902) |
| $ | (49,190) |
| $ | 44,825 |
| $ | (84,023) |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic |
| 559,088,555 |
|
| 559,327,450 |
|
| 559,001,818 |
|
| 559,087,867 |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - diluted |
| 559,088,555 |
|
| 559,327,450 |
|
| 559,516,818 |
|
| 559,087,867 |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share - continuing operations | $ | - |
| $ | - |
| $ | - |
| $ | - |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share - net loss | $ | - |
| $ | - |
| $ | - |
| $ | - |
The accompanying notes are an integral part of the consolidated financial statements.
Page 4 of 17
INTEGRATED SECURITY SYSTEMS INC | |||||
Consolidated Statements of Cash Flows | |||||
(Unaudited) | |||||
|
|
|
|
|
|
| For the Six Months Ended | ||||
| December 31, |
| December 31, | ||
| 2010 |
| 2009 | ||
Cash flows from operating activities: |
|
|
|
|
|
Net income (loss) | $ | 44,825 |
| $ | (84,023) |
Income from discontinued operations |
| (812,997) |
|
| (360,180) |
Income from discontinued operations attributable to the noncontrolling interest |
| 182,682 |
|
| 26,069 |
Loss from continuing operations |
| (585,490) |
|
| (418,134) |
Adjustments to reconcile loss from continuing operations to net cash used in operating activities: |
|
|
|
|
|
Depreciation |
| 1,311 |
|
| 1,443 |
Stock option expense |
| 56,468 |
|
| 34,922 |
Expenses paid with stock |
| 12,500 |
|
| 43,125 |
Changes in assets and liabilities: |
|
|
|
|
|
Other assets |
| 130,151 |
|
| 39,705 |
Accounts payable |
| (23,048) |
|
| (91,812) |
Accrued liabilities |
| 146,191 |
|
| (14,828) |
Net cash used in operating activities |
| (261,917) |
|
| (405,579) |
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
Net cash used in investing activities |
| - |
|
| - |
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
Net payments of debt |
| (80,049) |
|
| (65,270) |
Net cash used in financing activities |
| (80,049) |
|
| (65,270) |
|
|
|
|
|
|
Cash flows from discontinued operations: |
|
|
|
|
|
Operating activities |
| 566,107 |
|
| 368,534 |
Investing activities |
| (4,691) |
|
| (4,600) |
Financing activities |
| (30,868) |
|
| 99,063 |
Net cash provided by discontinued operations |
| 530,548 |
|
| 462,997 |
|
|
|
|
|
|
Net increase (decrease) in cash |
| 188,582 |
|
| (7,852) |
|
|
|
|
|
|
Cash at beginning of period |
| 22,690 |
|
| 30,944 |
Cash at end of period | $ | 211,272 |
| $ | 23,092 |
The accompanying notes are an integral part of the consolidated financial statements.
Page 5 of 17
INTEGRATED SECURITY SYSTEMS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Six Months Ended December 31, 2010 and 2009
Note 1 Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (all of which are normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the interim period are not necessarily indicative of the results that may be expected for the fiscal year ending June 30, 2011. Prior periods have been reclassified to conform to the current period presentation.
The accompanying financial statements include the accounts of Integrated Security Systems, Inc. (the Company) and all of its subsidiaries, with all significant intercompany accounts and transactions eliminated. For further information, refer to the consolidated financial statements and footnotes thereto included in the Companys fiscal 2010 Annual Report on Form 10-K filed on September 28, 2010 with the Securities and Exchange Commission.
Note 2 Stock-based Compensation
The Company accounts for equity instruments issued to employees in accordance with ASC 718 Compensation Stock Compensation (formerly SFAS No. 123 (revised 2004), Share-Based Payment (SFAS 123R)). Under ASC 718, the cost of employee services received in exchange for an award of equity instruments is based on the grant-date fair value of the award, and that cost is recognized over the vesting period. Our forfeiture rate is a graded 20% rate, which averages out to an overall forfeiture rate of 48.8%. An expense of $56,468 was recorded in the six months ended December 31, 2010. The known amount of compensation expense to be recognized in future periods through fiscal 2012 is $49,366.
Note 3 Recent Accounting Pronouncements
In December 2007, the FASB issued ASC 810 Consolidation (formerly SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements, an amendment of Accounting Research Bulletin No. 51" ("SFAS No. 160")). ASC 810 requires (a) that noncontrolling (minority) interest be reported as a component of shareholders' equity; (b) that net income attributable to the parent and to the noncontrolling interest be separately identified in the consolidated statement of operations; (c) that changes in a parent's ownership interest while the parent retains its controlling interest be accounted for as equity transactions; (d) that any retained noncontrolling equity investment upon the deconsolidation of the subsidiary be initially measured at fair value; and (e) that sufficient disclosures are provided that clearly identify and distinguish between the interest of the parent and the interests of the noncontrolling owners. ASC 810 is effective for fiscal years beginning after December 15, 2008, and applied to the Company in the quarter ended September 30, 2009. The Company revised its reporting and disclosures regarding noncontrolling interest, but there was no material effect from the adoption of ASC 810.
In June 2009, the FASB issued ASC 105, Generally Accepted Accounting Principles (formerly SFAS No. 168, FASB Accounting Standards CodificationTM and the Hierarchy of Generally Accepted Accounting Principles. SFAS No. 168 replaces SFAS No. 162, The Hierarchy of Generally Accepted Accounting Principles). This statements objective is to communicate that the FASB Accounting Standards CodificationTM will become the single official source of authoritative U.S. generally accepted accounting principles (GAAP) recognized by the FASB to be applied by nongovernmental entities. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. On the effective date of this Statement, the Codification will supersede all then-existing non-SEC accounting and reporting standards. All other nongrandfathered non-SEC accounting literature not included in the Codification will become nonauthoritative. This Statement is effective for financial statements issued for interim and annual periods ending after September 15, 2009; and the Company adopted this standard in the first quarter of 2010. The adoption of ASC 105 did not have a material effect on the Companys financial statements.
Page 6 of 17
In October 2009, the FASB issued Accounting Standards Update No. 2009-13, Multiple-Deliverable Revenue Arrangements a consensus of the FASB Emerging Issues Task Force (ASU 2009-13). ASU 2009-13 provides principles for allocation of consideration among its multiple-elements, allowing more flexibility in identifying and accounting for separate deliverables under an arrangement. The ASU introduces an estimated selling price method for valuing the elements of a bundled arrangement if vendor-specific objective evidence or third-party evidence of selling price is not available, and significantly expands related disclosure requirements. This standard is effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010. Alternatively, adoption may be on a retrospective basis, and early application is permitted. The adoption of this statement did not have a material effect on the Companys consolidated financial statements or disclosures.
Note 4 Discontinued Operations
The Company, the Companys wholly-owned subsidiary, B&B ARMR Corporation (B&B ARMR), and B&B Roadway and Security Solutions, LLC (Buyer), entered into an Asset Purchase Agreement (the Purchase Agreement) on December 17, 2010. Pursuant to the terms and conditions of the Purchase Agreement, B&B ARMR sold substantially all of the assets of B&B ARMR on January 31, 2011. Such assets include, but are not limited to, the accounts receivable, fixed assets and intellectual property constituting B&B ARMRs business of providing anti-terrorist barriers, security gates and gate operators for perimeter security applications, along with its investment in the joint venture B&B Roadway, LLC (collectively, the Assets). The purchase price paid by Buyer to B&B ARMR for the Assets was $6 million, subject to certain potential adjustments set forth in the Purchase Agreement. Buyer has also assumed certain liabilities of B&B ARMR; see Note 15 Subsequent Event for further discussion of the sale.
The operating results for both B&B ARMR and B&B Roadway, LLC (B&B Roadway) have been aggregated and reported as discontinued operations in the Consolidated Statement of Operations and the associated assets and liabilities are classified separately in the balance sheet. Prior periods have been reclassified to conform to the current-period presentation.
Income from discontinued operations reported in the Consolidated Statements of Operations consists of the following:
| For the six months ended | ||||
| December 31, |
| December 31, | ||
| 2010 |
| 2009 | ||
Revenue |
|
|
|
|
|
Sales | $ | 5,020,593 |
| $ | 3,753,904 |
Other revenue |
| 48,795 |
|
| 4,366 |
Total Revenue |
| 5,069,388 |
|
| 3,758,270 |
Cost of sales |
| 3,262,181 |
|
| 2,434,014 |
|
|
|
|
|
|
Gross profit |
| 1,807,207 |
|
| 1,324,256 |
|
|
|
|
|
|
Selling, general and administrative |
| 968,946 |
|
| 955,250 |
|
|
|
|
|
|
Income from discontinued operations |
| 838,261 |
|
| 369,006 |
|
|
|
|
|
|
Interest expense |
| (27,819) |
|
| (8,826) |
Gain on extinguishment of liability |
| 2,555 |
|
| - |
|
|
|
|
|
|
Net income from discontinued operations |
| 812,997 |
|
| 360,180 |
|
|
|
|
|
|
Income from discontinued operations attributable to the noncontrolling interest |
| (182,682) |
|
| (26,069) |
|
|
|
|
|
|
Net income from discontinued operations attributable to common stockholders | $ | 630,315 |
| $ | 334,111 |
Page 7 of 17
Assets related to discontinued operations reported in the Consolidated Balance Sheets for December 31, 2010 and June 30, 2010 consist of the following:
Liabilities related to discontinued operations reported in the Consolidated Balance Sheets for December 31, 2010 and June 30, 2010, separated by liabilities being retained by the Company and liabilities being assumed by the Buyer, consist of the following:
| December 31, |
| June 30, | ||
| 2010 |
| 2010 | ||
Accounts payable | $ | 20,500 |
| $ | 40,553 |
Accrued liabilities |
| 127,894 |
|
| 111,797 |
Notes payable - current |
| 431,036 |
|
| 421,896 |
Notes payable - long term |
| 135,488 |
|
| 150,544 |
Total retained liabilities related to discontinued operations | $ | 714,918 |
| $ | 724,790 |
|
|
|
|
|
|
Accounts payable | $ | 1,087,883 |
| $ | 1,074,047 |
Accrued liabilities |
| 176,661 |
|
| 128,609 |
Total assumed liabilities related to discontinued operations | $ | 1,264,544 |
| $ | 1,202,656 |
|
|
|
|
|
|
Total liabilities related to discontinued operations | $ | 1,979,462 |
| $ | 1,927,446 |
Note 5 Accounts Receivable
The majority of our accounts receivable are due from companies in the perimeter security and road and bridge industries. Credit is extended based on evaluation of a customer's financial condition and credit history and, generally, collateral is not required. Accounts receivable are generally due within 30 days and are stated at amounts due from customers net of an allowance for doubtful accounts and sales allowance. Accounts that are outstanding longer than the contractual payment terms are considered past due. We determine our allowance by considering a number of factors, including the length of time trade accounts receivable are past due, our previous loss history, the customers current ability to pay its obligation to us, and the condition of the general economy and the industry as a whole. The Company writes-off accounts receivable when they become uncollectible, and payments subsequently received on such receivables are credited to the allowance for doubtful accounts. All of the Companys accounts receivable are classified as Assets related to discontinued operations; see Note 4 Discontinued Operations.
After taking into account any reserves for bad debt and any sales allowances, to the extent any account receivable acquired by the Buyer remains outstanding one hundred twenty (120) days subsequent to the purchase, Buyer may assign to the Company any such uncollected receivable and the Company must remit the amount assigned to the Buyer.
Note 6 Inventory
Inventories are stated at the lower of cost or market with cost determined on a first-in, first-out (FIFO) method of valuation. The establishment of inventory allowances for excess and obsolete inventories is based on estimated exposure on specific inventory items. All of the Companys inventory is classified as Assets related to discontinued operations; see Note 4 Discontinued Operations.
Page 8 of 17
Note 7 Product Warranties
We have one-year, two-year and five-year limited warranties on products we manufacture both internally and externally. The length of the warranty is generally dictated by competition. We provide for repair or replacement of components and/or products that contain defects of material or workmanship. When we use other manufacturers components and manufacturing services, the warranties of the other manufacturers are passed to the dealers and end users. In some instances, we absorb the cost of these warranties internally. To date, the servicing and replacement of defective software components and products have not been material.
We record a liability for an estimate of costs that we expect to incur under our basic limited warranty when product revenue is recognized. Factors affecting our warranty liability include the number of units sold and historical and anticipated rates of claims and costs per claim. We periodically assess the adequacy of our warranty liability based on changes in these factors. The warranty liabilities were assumed by the Buyer on January 31, 2011 pursuant to the Purchase Agreement; see Note 15 - Subsequent Event.
Note 8 Net Income (Loss) per Share
The Company computes basic income (loss) per common share using the weighted average number of common shares outstanding. At December 31, 2010 and 2009 there were 515,000 shares of in-the-money potentially dilutive common shares outstanding. These shares were not included in weighted average shares outstanding for six months ended December 31, 2009 because their effect is antidilutive due to the Companys reported net loss.
At December 31, 2010 and 2009, we had 677,385,141 and 674,602,261 shares, respectively, of common stock and common stock equivalents outstanding, which comprises all of the Companys outstanding equity instruments.
Note 9 Debt
As of December 31 and June 30, 2010, our current and long-term debt consisted of the following:
| December 31, |
| June 30, | ||
| 2010 |
| 2010 | ||
Demand note payable: |
|
|
|
|
|
|
|
|
|
|
|
Demand secured promissory note with a finance company to factor accounts receivable with recourse. This accounts receivable factoring facility has a factoring fee of 0.35% per 5 day period for which each invoice is outstanding | $ | - |
| $ | 80,049 |
|
|
|
|
|
|
Line of credit with a bank secured with accounts receivable; maximum borrowing amount of $400,000; interest rate of 6.5%; principal and accrued unpaid interest due on August 2, 2010; loan guaranteed by Causey Lyon Enterprises, the noncontrolling owner of B&B Roadway. |
| - |
|
| 309,000 |
|
|
|
|
|
|
Line of credit with a bank secured with accounts receivable; maximum borrowing amount of $400,000; interest rate of 6.5%; principal and accrued unpaid interest due on August 26, 2011; loan guaranteed by Causey Lyon Enterprises, the noncontrolling owner of B&B Roadway. |
| 399,000 |
|
| - |
|
|
|
|
|
|
Liabilities related to discontinued operations |
| (399,000) |
|
| (389,049) |
Demand note payable | $ | - |
| $ | - |
|
|
|
|
|
|
Long-term debt: |
|
|
|
|
|
|
|
|
|
|
|
Unsecured non-interest bearing settlement of $235,000 payable to vendor; discounted rate of 15.0%; due in monthly installments of $4,000 commenced on March 1, 2010 and ending on May 1, 2014. | $ | 156,337 |
| $ | 168,092 |
|
|
|
|
|
|
Other |
| 11,187 |
|
| 15,299 |
|
| 167,524 |
|
| 183,391 |
Less current portion |
| (32,036) |
|
| (32,847) |
Long term liabilities related to discontinued operations |
| (135,488) |
|
| (150,544) |
Long-term debt | $ | - |
| $ | - |
Page 9 of 17
Note 10 Comprehensive Loss
The following table provides a summary of total comprehensive loss for the six months ended December 31, 2010 and 2009:
| December 31, |
| December 31, | ||
| 2010 |
| 2009 | ||
Consolidated net income (loss) | $ | 44,825 |
| $ | (84,023) |
Other comprehensive income: |
|
|
|
|
|
Unrealized holding loss |
| (18,583) |
|
| (16,289) |
Total comprehensive income (loss) | $ | 26,242 |
| $ | (100,312) |
Note 11 Noncontrolling interest in discontinued operations
Causey Lyon Enterprises (CLE) is the 35% owner of the B&B Roadway joint venture; per the joint venture agreement, CLE manufactures all products for B&B Roadway. CLE is also one of several outsourced fabrication vendors for B&B ARMR. B&B ARMRs investment in the joint venture was sold on January 31, 2011 pursuant to the Purchase Agreement; see Note 15 - Subsequent Event.
Changes in noncontrolling interest in discontinued operations for the six months ended December 31, 2010 and 2009 were as follows:
| 2010 |
| 2009 | ||
Noncontrolling interest in discontinued operations at July 1 | $ | (63,610) |
| $ | (17,113) |
Income attributable to noncontrolling interest |
| (182,682) |
|
| (26,069) |
Distributions paid to noncontrolling interest |
| 105,000 |
|
| 37,100 |
Noncontrolling interest in discontinued operations at December 31 | $ | (141,292) |
| $ | (6,082) |
Note 12 Related Party Transactions
During the six months ended December 31, 2010 and 2009, the Company had the following transactions with Causey Lyon Enterprises (CLE):
| December 31, | ||||
| 2010 |
| 2009 | ||
Purchases (from) | $ | 2,455,652 |
| $ | 1,592,102 |
Management Fees (paid to) |
| 280,920 |
|
| 280,919 |
Rent (paid to) |
| 32,490 |
|
| 32,490 |
Accounts payable arising from related party transactions reported in the Consolidated Balance Sheets as of December 31, 2010 and June 30, 2010 was $963,490 and $888,073, respectively and are classified as Liabilities related to discontinued operations; see Note 4 Discontinued Operations.
Note 13 Factoring and Security Agreement with Capital Funding Solutions
On August 15, 2008, the Company entered into a factoring and security agreement with Capital Funding Solutions (Capital Funding). The factoring agreement provided that the Company would sell to Capital Funding certain of its accounts receivable. Moreover, the factoring agreement required that we grant to Capital Funding a continuing first priority security interest in all of our then owned and thereafter acquired accounts, chattel paper, deposit accounts, inventory, equipment, instruments, investment property, documents, letter of credit rights, commercial tort claims, general intangibles and supporting obligations. The factoring agreement did not require us to grant a security interest in any of the assets of B&B Roadway. The factoring agreement was initially for a one-year term and was automatically extended by one year again on August 15, 2010. The factoring agreement was terminated on January 26, 2011 pursuant to the Purchase Agreement; see Note 15 Subsequent Event.
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For each account, Capital Funding would pay 80% of the face amount due on such Account at the time of purchase. Upon customer payment of the amount due, Capital Funding would pay 20% of the face amount due less the factoring fee (as defined in the factoring agreement). The factoring fee was calculated as follows: .35% of the face amount due on an Account at the time of purchase for each 5 day period, computed from the end of the 5 day period following the date on which the purchase price was paid to us for such account and ending when such account was paid by the account debtor.
The factored balance outstanding under the factoring agreement as of December 31, 2010 and June 30, 2010 was $0 and $80,049, respectively.
Note 14 Concentrations of Credit Risk
The Company maintains cash balances, at times, with financial institutions, which are in excess of amounts insured by the Federal Deposit Insurance Corporation (FDIC). Management monitors the soundness of these institutions and has not experienced any collection losses with these institutions.
Note 15 Subsequent Event
Disposition of Assets
On December 17, 2010, the Company and B&B ARMR, a Delaware corporation and wholly-owned subsidiary of the Company, entered into that certain Purchase Agreement with a Buyer as described in Note 4 Discontinued Operation, pursuant to which Buyer agreed to purchase from B&B ARMR substantially all of the assets constituting B&B ARMRs business of providing anti-terrorist barriers, security gates and gate operators for perimeter security applications, along with its investment in the joint venture B&B Roadway (collectively, the Assets). The Purchase Agreement, the Assets and the terms and conditions of the purchase by Buyer of the Assets are described in more detail in the Form 8-K filed by the Company with the Securities and Exchange Commission on December 20, 2010.
On January 31, 2011, the Company completed the disposition of the Assets to Buyer. The total purchase price consisted of a cash payment in the amount of $5,550,000, a promissory note of Buyer in the original principal amount of $450,000 and the assumption by Buyer of certain of B&B ARMRs liabilities. Of the cash portion of the proceeds, $450,000 was used by the Company to make an equity investment in B&B Roadway Holdings, LLC, a newly-formed Delaware limited liability company and the parent of Buyer.
The Company may retain the $450,000 promissory note issued to the Company in connection with the Asset Sale until the maturity of the promissory note (five (5) years from the date of issuance), or the Company may decide to sell the promissory note at any time in the future, at such price and on such terms as the Company deems to be reasonable at such time. The Companys $450,000 investment in B&B Holdings is expected to continue for an unknown and indefinite period of time.
The Asset Sale will be accounted for as a sale of assets transaction. At the closing of the Asset Sale, any excess in the purchase price received by B&B ARMR, less transaction expenses, over the net book value of the net assets sold will be recognized as a gain by the Company. Within sixty (60) days of the closing, Buyer will prepare a closing net working capital amount. To the extent such amount is less than $230,000, the Company will be responsible for paying Buyer such shortfall. To the extent such amount exceeds $230,000, Buyer will pay the Company such excess within approximately ninety (90) days after closing.
Following the Asset Sale, the Company will retain the net proceeds of the Asset Sale (estimated to be approximately $5 million after the payment of debt, payment of all expenses relating to the Asset Sale, and the equity investment in B&B Holdings), but will not be actively conducting any business. The Company will continue to exist, will continue to have operating expenses and its common stock will continue to be traded.
Page 11 of 17
It is the current intention of the Company that, after the Asset Sale, it will actively seek an acquisition, merger, reverse merger, or similar business combination with a company with active operations. If such a transaction occurs, the Company would thereafter be engaged in an active business. However, the Company is not currently engaged in meaningful negotiations with any such business. It is also possible that the Company might not be successful in finding a suitable company to acquire or merge with. If, over time, the Company fails to find a suitable company to acquire or merge with, then the Company may consider liquidating and dissolving. If liquidation were to occur, any remaining assets of the Company would be sold, and (after payment of the Companys remaining liabilities) the cash proceeds, together with all other cash then held by the Company, would be distributed to the Companys stockholders. The Company would then be dissolved and would cease to exist.
Reverse Stock Split
At a Special Meeting of the stockholders held on January 31, 2011, the stockholders authorized a reverse stock split of the Companys outstanding common stock, at an exchange ratio of 1- for-100 shares (the Reverse Stock Split), pursuant to an amendment to the Companys Certificate of Incorporation, as amended (the Amendment). Upon the effectiveness of the Reverse Stock Split, the approximate number of outstanding shares of common stock will decrease from 560,910,018 to 5,609,100.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
Forward Looking Statements
This quarterly report on Form 10-Q includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements can be identified by the use of forward-looking terminology such as may, believe, expect, intend, plan, seek, anticipate, estimate, or continue or the negative of those words or other variations or comparable terminology.
All statements other than statements of historical fact included in this quarterly report on Form 10-Q, including the statements under Part I. - Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations and located elsewhere in this quarterly report on Form 10-Q regarding our financial position and liquidity are forward-looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we can give no assurance that such expectations will prove to have been correct. Important factors regarding forward-looking statements, including certain risks and uncertainties that could cause actual results to differ materially from our expectations, are disclosed in this quarterly report on Form 10-Q. We do not undertake any obligation to publicly revise our forward-looking statements to reflect events or circumstances that arise after the date of this quarterly report on Form 10-Q.
Important factors that could cause actual results to differ materially from those in the forward-looking statements in this quarterly report on Form 10-Q include changes from anticipated levels of operations, valuation of investments, anticipated levels of revenues, future national or regional economic and competitive conditions, changes in relationships with our employees, access to capital, casualty to or other disruption of the operations that the Company is invested in, government regulations and our ability to meet our stated business goals. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by our cautionary statements.
Results of Operations
Sale of operations. As discussed in Note 15 Subsequent Events, the operations of the Company were sold on January 31, 2011. The Company will continue to exist, will continue to have operating expenses and its common stock will continue to be traded.
Selling, General and Administrative. Selling, general and administrative (SG&A) expenses represent the operating expenses for the corporate parent, which increased $0.02 million for the quarter ended December 31, 2010 compared to the quarter ended December 31, 2009 due to increased professional fees as we brought the Companys tax filings up-to-date. Expenses were relatively constant for the six months ended December 31, 2010 compared to the six months ended December 31, 2009. The SG&A expenses incurred for the period presented are indicative of a parent with active operating subsidiaries. Some SG&A expenses will continue to be incurred as the Company seeks acquisition, merger, reverse merger, or similar business combination with a company with active operations.
Interest Expense. Interest expense increased $0.01 million during the quarter ended December 31, 2010 from $0.01 million compared to the quarter ended December 31, 2009, and increased $0.02 million during the six months ended December 31, 2010 from $0.01 million compared to the six months ended December 31, 2009. This increase was primarily related to factored accounts receivable fees. The majority of the debt that generated this interest expense was paid pursuant to the Purchase Agreement; see Note 15 - Subsequent Event.
Transaction Costs. Transaction costs of $0.2 million during the quarter and six months ended December 31, 2010 represent expenses incurred related to the Purchase Agreement. These expenses will offset the gain on the sale that will be recorded in the quarter ending March 31, 2011.
Page 13 of 17
Liquidity and Capital Resources
Following the Asset Sale, the Company will retain the net proceeds of the Asset Sale (estimated to be approximately $5 million after the payment of debt, payment of all expenses relating to the Asset Sale, and the equity investment in B&B Holdings), but will not be actively conducting any business. The Company will continue to exist, will continue to have operating expenses and its common stock will continue to be traded. Of these net proceeds, approximately $4 million will be in cash equivalents with maturities of less than six months and is expected to be sufficient to cover ongoing operating costs for the foreseeable future.
Our cash position increased $0.2 million during the six months ended December 31, 2010. At December 31, 2010, we had $0.2 million in cash and cash equivalents and no outstanding balance under our factoring agreement with Capital Funding Solutions. The factoring agreement, which was secured by substantially all of our assets, permitted us to borrow up to $1.0 million based on eligible invoices and was terminated on January 26, 2011 pursuant to the Purchase Agreement; see Note 15 Subsequent Event.
For the six months ended December 31, 2010, our operating activities used $0.3 million of cash compared to $0.4 million of cash used during the six months ended December 31, 2009.
Item 4. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. As indicated in the certifications in Exhibit 31 of this report, our Chief Executive Officer (CEO) and Chief Financial Officer (CFO) have evaluated the effectiveness of our disclosure controls and procedures as of December 31, 2010. Based on that evaluation, we have concluded that, as of December 31, 2010, our disclosure controls and procedures were not effective to provide reasonable assurance that information required to be disclosed in the Companys periodic filings under the Securities Exchange Act of 1934 is accumulated and communicated to management, including the officers, to allow timely decisions regarding required disclosure.
Based upon this assessment, our CEO and CFO concluded that, as of December 31, 2010, there existed a material weakness in our processes, procedures and controls related to the preparation of our quarterly financial statements. We have concluded that our internal control over financial reporting was not effective as of December 31, 2010. Due to this material weakness, in preparing our quarterly financial statements, we performed compensating additional procedures designed to ensure that such financial statements were fairly presented in all material respects in accordance with generally accepted accounting principles.
(b) Changes in Internal Controls. There were no changes to our internal controls over financial reporting during our last completed fiscal quarter that have materially affected or are reasonably likely to materially affect, our internal controls over financial reporting.
Page 14 of 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
None.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. (Removed and Reserved)
Item 5. Other Information.
None.
Item 6. Exhibits.
31.1+
Officers Certificates Pursuant to Section 302
31.2+
Officers Certificates Pursuant to Section 302
32.1+
Officers Certificates Pursuant to Section 906
32.2+
Officers Certificates Pursuant to Section 906
________________________
+
Filed herewith.
Page 15 of 17
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: | February 14, 2011 |
| /s/ Brooks F. Sherman |
|
|
| Brooks F. Sherman |
|
|
| Director, Chairman of the Board, Chief Executive Officer (Principal Executive Officer) |
|
|
|
|
Date: | February 14, 2011 |
| /s/ Sharon T. Doherty |
|
|
| Sharon T. Doherty |
|
|
| Chief Financial Officer |
Page 16 of 17
EXHIBIT INDEX
31.1+
Officers Certificates Pursuant to Section 302
31.2+
Officers Certificates Pursuant to Section 302
32.1+
Officers Certificates Pursuant to Section 906
32.2+
Officers Certificates Pursuant to Section 906
________________________
+
Filed herewith.
Page 17 of 17