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EX-31.2 - EXHIBIT 31.2 - GRANDPARENTS.COM, INC.v301981_ex31-2.htm
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EX-32.1 - EXHIBIT 32.1 - GRANDPARENTS.COM, INC.v301981_ex32-1.htm

 

 

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 quarterly period ended December 31, 2011

 

¨ 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. 0-21537

 

NorWesTech, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware 93-1211114

(State or other jurisdiction of incorporation

or organization)

(I.R.S. Employer Identification No.)

 

220 West Harrison Street

Seattle, Washington

(Address of principal executive offices)

 

98119

(Zip Code)

   

(206) 436-3945

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

 

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 or Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes x No ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer ¨ Smaller reporting company S

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes x No ¨

  

As of February 8, 2012, there were 16,796,151 shares of the registrant’s common stock, $0.01 par value per share, outstanding.

 

1
 

  

NORWESTECH, INC.

 

INDEX TO FORM 10-Q

 

  Page
PART I - FINANCIAL INFORMATION  
   
ITEM 1 - FINANCIAL STATEMENTS  
   
Consolidated Balance Sheets as of December 31, 2011 (unaudited) and June 30, 2011 4
   
Consolidated Statements of Operations for the three- and six-month periods ended December 31, 2011 and December 31, 2010 (unaudited) 5

   
Consolidated Statements of Cash Flows for the six-month periods ended December 31, 2011 and December 31, 2010 (unaudited)

6

   
Notes to Consolidated Financial Statements (unaudited) 7
   
ITEM 2 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

13

   
ITEM 4 - CONTROLS AND PROCEDURES 19
   
PART II - OTHER INFORMATION  
   
ITEM 6 - EXHIBITS 19

 

2
 

 

EXPLANATORY NOTE

 

Unless otherwise indicated or the context otherwise requires, all references in this Report to “we,” “us,” “our,” and the “Company” are to NorWesTech, Inc. and our wholly-owned subsidiaries.

 

CAUTIONARY NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q contains certain forward-looking statements, including statements about:

 

·our ability to identify and successfully engage in a business combination with a suitable operating company;
·our expectations for timing for engaging in a business combination with an operating company;
·our estimate for ongoing expenses for the public shell company;
·our estimate of the impact on our stockholders from a reverse merger or other potential future business combination; and
·our ability to develop, commercialize or license our dormant technology assets or intellectual property.

 

The forward-looking statements in this Report reflect management’s current views and expectations with respect to our business, strategies, services, future results and financial performance. All statements other than statements of historical fact, including statements addressing projected results of operations or our future financial position, made in this Quarterly Report on Form 10-Q are forward looking. In particular, the words “expect,” “anticipate,” “estimate”, “desire”, “goal”, “ believe”, “may”, “will”, “should”, “could”, “intend”, “objective”, “seek”, “plan”, “strive”, variations of such words, or similar expressions, or the negatives of these words, are intended to identify forward-looking statements, but are not the exclusive means of identifying forward-looking statements. The absence of these words does not mean that any particular statement is not a forward-looking statement.

 

These forward-looking statements are subject to risks and uncertainties. Our actual results, performance or achievements could differ materially from historical results as well as those expressed in, anticipated or implied by these forward-looking statements. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained in this Report to reflect any change in management’s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

 

For a discussion of some of the factors that may affect our business, results and prospects, see the Risk Factors discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2011. Readers are urged to carefully review and consider the various disclosures made by us in this Report and in our other reports previously filed with the Securities and Exchange Commission, including our periodic reports on Forms 10-K, 10-Q and 8-K, and those described from time to time in our press releases and other communications, which attempt to advise interested parties of the risks and factors that may affect our business, prospects and results of operations.

 

3
 

 

NORWESTECH, INC.

CONSOLIDATED BALANCE SHEETS

 

   December 31,   June 30, 
  2011   2011 
   (unaudited)     
ASSETS           
Current assets:          
Cash and cash equivalents  $1,745,274   $870,726 
Note receivable   500,000    - 
Other receivables   111    - 
Prepaid expenses and other assets   19,724    - 
Assets held for sale   -    4,001,056 
Total current assets   2,265,109    4,871,782 
           
Total assets  $2,265,109   $4,871,782 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Current liabilities:          
Accounts payable  $52,516   $345 
Accrued liabilities   32,300    - 
Liabilities held for sale   -    5,285,828 
Total current liabilities   84,816    5,286,173 
           
Total liabilities   84,816    5,286,173 
           
Commitments and contingencies   -    - 
           
Stockholders' equity:          
Common stock, $0.01 par value, 30,000,000 shares authorized, 16,796,151 shares issued
and outstanding at December 31, 2011, 16,909,501 shares issued and outstanding at June 30, 2011
   167,961    169,096 
Additional paid-in-capital   28,449,307    27,974,271 
Accumulated deficit   (26,436,975)   (28,557,758)
Total stockholders' equity (deficit)   2,180,293    (414,391)
           
Total liabilities and stockholders' equity  $2,265,109   $4,871,782 

 

See accompanying notes to these consolidated financial statements.

 

4
 

 

NORWESTECH, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

   Three Months Ended   Six Months Ended 
   December 31,   December 31, 
   2011   2010   2011   2010 
                 
Revenues  $-   $-   $-   $- 
                     
Laboratory expenses and cost of sales   -    -    -    - 
Gross profit   -    -    -    - 
                     
Operating expenses:                    
Selling, general and administrative   118,734    10,795    156,848    21,945 
                     
Operating loss   (118,734)   (10,795)   (156,848)   (21,945)
                     
Other income   395    -    490    - 
                     
Net loss from continuing operations before tax expense   (118,339)   (10,795)   (156,358)   (21,945)
Income tax expense   -    -    -    - 
Net loss from continuing operations   (118,339)   (10,795)   (156,358)   (21,945)
                     
Discontinued operations:                    
Loss from discontinued operations   -    (338,423)   (1,125,157)   (529,636)
Income on asset sale   -    -    4,041,391    - 
Income tax expense   -    -    -    - 
Income (loss) from discontinued operations   -    (338,423)   2,916,233    (529,636)
                     
Net income (loss) after discontinued operations  $(118,339)  $(349,218)  $2,759,876   $(551,581)
                     
                     
Net loss per share from continuing operations before income tax  $-   $-   $-   $- 
Income tax expense (per share)   -    -    -    - 
Net loss per share before discontinued operations   -    -    -    - 
Income (loss) per share from discontinued operations   0.00    (0.02)   0.17    (0.03)
Net income (loss) per share after discontinued operations  $(0.01)  $(0.02)  $0.16   $(0.03)
                     
Weighted average common shares outstanding, basic and diluted:   16,796,151    16,909,501    16,855,637    16,909,501 

  

See accompanying notes to these consolidated financial statements.

 

5
 

 

NORWESTECH, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

   Six Months Ended 
   December 31, 
   2011   2010 
 Cash flows from operating activities:          
Net loss from continuing operations  $(156,358)  $(21,945)
Income (loss) from discontinued operations   2,916,234    (529,636)
           
Reconciliation of net loss to net cash provided by (used in) operating activities:          
Compensation expense from restricted shares and options   7,170    - 
Changes in assets and liabilities:          
Other receivable   6,888    - 
Prepaid expenses and other assets   (19,724)   - 
Accounts payable   52,516    - 
Accrued liabilities   32,300    - 
           
Net cash used in operating activities (continuing operations)   (77,208)   (21,945)
Net cash provided by (used in) operating activities (discontinued operations)   2,991,616    (120,848)
Net cash provided by (used in) operating activities   2,914,408    (142,793)
           
Cash flows from investing activities:          
           
Purchases of investments   (500,000)   - 
           
Net cash used in investing activities (continuing operations)   (500,000)   - 
Net cash used in investing activities (discontinued operations)   (1,295,516)   (133,853)
Net cash used in investing activities   (1,795,516)   (133,853)
           
Cash flows from financing activities:          
           
Net cash used in financing activities (continuing operations)   -    - 
Net cash used in financing activities (discontinued operations)   (244,344)   (471,366)
Net cash used in financing activities   (244,344)   (471,366)
           
Net increase (decrease) in cash and cash equivalents   874,548    (748,012)
           
Cash and cash equivalents, beginning of period   870,726    1,861,155 
           
Cash and cash equivalents, end of period  $1,745,274   $1,113,143 
           
Supplemental Information:          
Cash paid during the period for interest  $105,808   $210,967 
Cash paid during the period for income tax  $-   $- 
           
Non-cash investing and financing activities:          
Capital expenditures funded by capital lease borrowings  $-   $- 
Capital expenditures funded by accounts payable  $-   $- 

 

See accompanying notes to these consolidated financial statements.

 

6
 

 

NORWESTECH, INC.

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

 

1.Organization and Basis of Presentation

 

As of September 1, 2011, NorWesTech, Inc., a Delaware corporation (the “Company”) became a non-operating public shell company. Our assets primarily consist of cash and certain intellectual property assets, and our primary focus is to seek an acceptable operating company with which we can complete a business combination. Prior to September 1, 2011, we were a provider of specialty reference laboratory services to the pharmaceutical and diagnostics industries. The Company was incorporated in Delaware in May 1996. The Company’s wholly-owned subsidiaries are Bio-Newco, Inc. (formerly known as Pacific Biomarkers, Inc., a Washington corporation), Newco Tech, Inc. (formerly known as PBI Technology, Inc.), and BioQuant, Inc. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements. All references in this report to “we,” “our,” “us” or similar expressions are to the Company and its wholly-owned subsidiaries.

 

On August 31, 2011, we sold substantially all of our operating assets to Emerald Star Holdings, LLC pursuant to the terms of the Asset Purchase Agreement that we entered into on May 23, 2011. The asset sale was approved by stockholders holding a majority of our outstanding shares of common stock at our special meeting of stockholders held on August 29, 2011. Under the terms of the Asset Purchase Agreement, at closing of the asset sale we received approximately $2.32 million in cash from Emerald Star. See “Note 3. Discontinued Operations” below.

 

Following the asset sale to Emerald Star, we changed our name to NorWesTech, Inc. from Pacific Biomarkers, Inc. We also changed our telephone number to (206) 436-3945. We have an arrangement with Emerald Star for us to continue using its office located at 220 West Harrison Street, Seattle, Washington 98119 as our mailing address and for holding our corporate records, until such time as we establish a new executive office.

 

2.Summary of Significant Accounting Policies

 

There have been no significant changes in our significant accounting policies during the three-month period ended December 31, 2011 compared to what was previously disclosed in the our Annual Report on Form 10-K for the fiscal year ended June 30, 2011.

 

Principles of Consolidation

 

These consolidated financial statements include our consolidated financial position, results of operations, and cash flows. All material intercompany balances and transactions have been eliminated in the accompanying consolidated financial statements.

 

Cash and Cash Equivalents

 

Cash and cash equivalents consist of highly liquid investments with an original maturity of three months or less when purchased.

 

Income Taxes

 

We recognize deferred tax assets and liabilities based on differences between the financial reporting and tax bases of assets and liabilities using the enacted tax laws and rates that are expected to be in effect when the differences are expected to be recovered. We provide a valuation allowance for deferred tax assets due to the uncertainty of realization. The gain from the asset purchase completed on August 31, 2011 has produced an estimated deferred tax asset of approximately $1,374,000 which, net of operational losses of approximately $156,000 incurred during September and the quarter ended December 31, 2011, totaled $1,321,000 and has been applied to net operating loss carryforward of approximately $5,475,000 at June 30, 2011, leaving an approximate balance of net operating loss carryforward of $4,154,000 at December 31, 2011.

 

7
 

 

Revenue Recognition

 

We recognize revenue in the period when the related services are performed and collectability is reasonably assured. As of December 31, 2011, we do not have any operations and do not anticipate recognizing revenue until we complete an acquisition with an operating company. During the 2011 fiscal year and in the first quarter of fiscal 2012 through August 31, 2011, we derived substantially all of our revenues from laboratory services (reported on our financial statements under “discontinued operations”).

 

Net Income (Loss) per Share

 

Basic income (loss) per share is based upon the weighted average number of our outstanding common shares. Diluted income (loss) per share is computed on the basis of the weighted average number of common shares outstanding plus the effect of outstanding stock options and warrants using the “treasury stock” method, which excludes treasury shares. There were no treasury shares at December 31, 2011.

 

The net income and loss per common share for the quarters ended December 31, 2011 and 2010 is based on the weighted average number of shares of common stock outstanding during the periods. Potentially dilutive securities include 400,000 options and 342,813 warrants outstanding at December 31, 2011; however, such securities have been included in the calculation of net income, but have not been included in the calculation of the net loss per common share as their effect would be antidilutive.

 

The following table is a reconciliation of the numerator (net income or loss) and the denominator (number of shares) used in the basic and diluted EPS calculations and sets forth potential shares of common stock that are not included in the diluted net loss per share calculation as the effect is antidilutive:

 

   Three months ended   Six months ended 
   December 31,   December 31, 
   2011   2010   2011   2010 
                 
Numerator-basic and diluted net loss before discontinued operations  $(118,339)  $(10,795)  $(156,358)  $(21,945)
Numerator-basic and diluted net income (loss) after discontinued operations  $(118,339)  $(349,218)  $2,759,876   $(551,581)
                     
Denominator-basic or diluted weighted average number of common shares outstanding   16,796,151    16,909,501    16,855,637    16,909,501 
                     
Net loss per share before discontinued operations-basic and diluted  $-   $-   $-   $- 
Net income (loss) per share after discontinued operations-basic and diluted  $(0.01)  $(0.02)  $0.16   $(0.03)
                     

 The reduction in shares outstanding for the quarter ended December 31, 2011, compared to the quarter ended December 31, 2010, reflects the cancelation of 113,500 shares of common stock in satisfaction of withholdings tax obligations for restricted stock held by certain employees, which vested upon closing of the asset sale to Emerald Star.

 

Comprehensive Income

 

Comprehensive income consists of net income and other gains and losses affecting stockholders’ equity that, under generally accepted accounting principles are excluded from net income. For the quarters ended December 31, 2011 and 2010, our comprehensive loss equaled our net loss. Accordingly, a statement of comprehensive loss is not presented.

 

8
 

 

Use of Estimates

 

In preparing financial statements in conformity with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Reclassifications

 

Certain amounts in the December 31, 2010 consolidated financial statements have been reclassified to conform to the December 31, 2011 discontinued operations presentation. These reclassifications had no effect on previously reported results of accumulated deficit.

 

Accounting Changes and Recent Accounting Pronouncements

 

Initial Application of Accounting Standards

 

In the second quarter of fiscal 2012, we adopted the following accounting standards, none of which had a material impact on our financial position, results of operations or cash flows:

 

·In August 2010, the FASB issued ASU 2010-22, “Accounting for Various Topics: Technical Corrections to SEC Paragraphs” (“ASU 2010-22”), which amends various SEC paragraphs based on external comments received and the issuance of SEC Staff Accounting Bulletin (SAB) No. 112, which amends or rescinds portions of certain SAB topics.  The topics affected include reporting of inventories in condensed financial statements for Form 10-Q, debt issue costs in conjunction with a business combination, sales of  stock by subsidiary, gain recognition on sales of business, business combinations prior to an initial public offering, loss contingent and liability assumed in business combination, divestitures, and oil and gas exchange offers. 

 

·In December 2010, the FASB issued the FASB Accounting Standards Update No. 2010-29 “Business Combinations (Topic 805):Disclosure of Supplementary Pro Forma Information for Business Combinations”(“ASU 2010-29”). ASU 2010-29 specifies that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this Update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. The amended guidance is effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted.

 

Management does not believe that any other recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

3.Discontinued Operations

 

On August 31, 2011, we sold substantially all of our operating assets and liabilities related to our core business of providing specialty reference laboratory services and clinical biomarker services to Emerald Star Holdings, LLC, pursuant to the Asset Purchase Agreement we entered into on May 23, 2011. The assets that we sold included all of our accounts receivable, customer contracts, equipment, intellectual property (other than intellectual property held by Newco Tech, Inc.), name and website, permits, office and equipment leases, other contracts and other rights, and at closing, Emerald Star assumed substantially all of the liabilities related to these assets and the business that we sold, including our accounts payable, obligations under our leases and contracts, tax liabilities, the remaining obligations under our $4 million secured loan, and all employee-related liabilities.

 

9
 

 

The results of operations for this sold business have been classified as “discontinued operations” in the consolidated statements of operations and cash flows and the assets and associated liabilities have been removed as of the close of the asset sale to Emerald Star on August 31, 2011 in the consolidated balance sheets for the fiscal quarters ended December 31, 2011 and 2010, respectively. At closing of the asset sale, we received $2,320,013 in cash after purchase price adjustments. The net income presented in our financial statements consists of a calculated gain from purchase of our assets under “discontinued operations”, less “continuing operations” which consist of the direct expenses of maintaining the Delaware parent company’s public corporate structure and the three retained inactive wholly-owned subsidiaries –Newco Tech, Inc. (formerly PBI Technology, Inc.), Bio-Newco, Inc. (formerly Pacific Biomarkers, Inc.) and Bioquant, Inc. In addition, all legal and other fees associated with maintaining the technology assets of Newco Tech, Inc. are included in these expenses.

 

4.Credit Risk

 

With the discontinuation of operations effective August 31, 2011, we no longer maintain client accounts. Therefore, we believe that our exposure to concentration of credit risk is zero.

 

We maintain cash in one insured commercial account at major financial institution. Although the financial institutions are considered creditworthy and have not experienced any losses on client deposits, our cash balance exceeded Federal Deposit Insurance Corporation (FDIC) limits by $472,022 at June 30, 2011 and by $1,485,422 at December 31, 2011. The FDIC limits per insured account is $250,000.

 

5.Stock Based Compensation

 

We did not grant any stock options or restricted shares during the three-month period ended December 31, 2011. We granted 630,000 stock options under our stock incentive plan during the three-month period ended December 31, 2010, including 30,000 stock options to non-employees. During the six-month period ended December 31, 2011, we granted performance-based stock options for a total of 400,000 shares to the current members of our board of directors. The options have a term of three years, have an exercise price of $0.30 per share and vest and become exercisable only upon consummation of an acquisition transaction with an operating company, with the effect of the transaction that NorWesTech would no longer be deemed a shell company. In comparison, during the six-month period ended December 31, 2010, we granted 1,469,900 stock options, including 30,000 stock options to non-employees. All options grants were made out of our 2005 Stock Incentive Plan.

 

Stock Options

 

We use the Black-Scholes option-pricing model to estimate the calculated fair value of our share-based payments. Stock options are valued as of the date of grant, based on the grant date market price of our common stock. The volatility assumption used in the Black-Scholes formula is based on the volatility of our common stock. We used the following assumptions to compute the fair value of option grants for the quarters ended December 31:

 

   2011   2010 
Expected volatility   194%   117%
Expected dividend yield   0.00%   0.00%
Risk-free interest rate   2.08%   2.96%
Expected life   3 years    10 years 

 

The weighted average fair value on the date of the option grant was $105,360 for the quarter ended December 31, 2011. The total unrecognized share-based compensation costs related to stock options outstanding at December 31, 2011 was $98,190 and is expected to be recognized over a weighted average period of approximately 2.7 years.

  

10
 

 

A summary of option activity from July 1, 2011 through December 31, 2011 is presented below: 

  

   Number of
Options
   Weighted
Average Exercise
Price per share
 
Options outstanding at July 1, 2011   3,057,291   $0.59 
Granted   400,000    0.30 
Cancelled   (3,057,291)   0.59 
Exercised   -    - 
Options outstanding at December 31, 2011   400,000    0.30 
Exercisable outstanding at December 31, 2011   -   $- 

 

Restricted Stock

 

Our 2005 Stock Incentive Plan authorizes the Board to make awards of Restricted Stock. Over the past several years, we granted awards of Restricted Stock to certain officers, directors and employees. The fair value of our Restricted Stock awards is based on the grant-date fair market value of the common stock, which equals the grant date market price. We did not grant any Restricted Stock awards during the second quarter of fiscal 2012. Upon closing the asset purchase on August 31, 2011, all prior outstanding awards of Restricted Stock automatically accelerated and become fully vested and we recorded an additional $22,553 in compensation expense. In connection with the vesting of these Restricted Stock awards, we cancelled 113,500 shares in satisfaction of withholdings tax obligations for certain officers and employees in the amount of $22,700. As of December 31, 2011, we had zero unrecognized compensation cost related to Restricted Stock awards.

 

A summary of Restricted Stock activity from July 1, 2011 through December 31, 2011 is presented below:

 

   Number of RS
awards
   Weighted
Average Grant
Date Fair Value
per share
 
RS nonvested at July 1, 2011   183,309   $0.63 
Granted   -    - 
Vested   (183,309)   0.63 
Forfeited   -    - 
RS nonvested at December 31, 2011   -   $- 

 

Compensation expense for share-based awards was $6,146 and $53,511 for the three months; and $496,601 and $118,462 for the six months ended December 31, 2011 and 2010, respectively. Amounts were included in our consolidated statements of operations as follows:

 

   Three months ended   Six months ended 
   December 31,
2011
   December 31,
2010
   December 31,
2011
   December 31,
2010
 
 Cost of sales  $-   $3,961   $18,801   $7,922 
                     
Selling and administrative expenses   6,146    49,550    477,800    110,540 
Total compensation expense  $6,146   $53,511   $496,601   $118,462 

   

Modification of Stock Based Compensation

  

On August 31, 2011 our outstanding stock options and restricted stock awards were automatically modified under the terms of our stock plans, in conjunction with the asset sale to Emerald Star. This modification consisted of automatic accelerated vesting of all outstanding stock options and restricted stock awards and subsequent cancellation of 3,057,291 stock options from discontinued operations. These modifications resulted in additional compensation expense of $489,431 that we recognized in the first quarter of fiscal 2012. We accounted for the modifications of equity-based awards in accordance with ASC Topic 718.

11
 

 

6. Note Receivable

 

On December 30, 2011, in connection with the non-binding letter of intent with Grandparents.com, LLC, we provided a $500,000 bridge loan to Grandparents, secured by a first priority security interest in all of the assets in Grandparents.com, LLC. The secured note has a face value of $500,000 and accrues monthly interest at a fixed 4% annual interest rate. We accrued $111 interest income on the note for the period ended December 31, 2011. Accrued interest will be paid upon maturity. The note is due and payable in full on the earlier of the following:

• the closing of the transactions contemplated by the non-binding letter of intent, pursuant to a definitive acquisition agreement;

 

• 90 days after the termination of the non-binding letter of intent;

 

• May 29, 2012, if the closing does not occur by February 29, 2012, primarily as a result of Grandparents.com having breached or failed to perform any of its obligations set forth in a definitive agreement; or

 

• August 29, 2012, if the closing does not occur by February 29, 2012, primarily as a result of (1) us having breached or failed to perform any of our obligations set forth in a definitive agreement, (2) the failure of any other closing condition outside the control of Grandparents, or (3) if the financing contingency is not satisfied.

 

If we successfully complete the proposed transaction with Grandparents, we intend that the note would be assumed and forgiven by us at closing.

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ITEM 2.         MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

  

Investors should read the following discussion and analysis in conjunction with our consolidated financial statements and related notes in this Form 10-Q and our audited financial statements and related notes for the year ended June 30, 2011, included in our Annual Report on Form 10-K.

 

Overview

 

Continuing Business

 

Effective September 1, 2011, we are classified as a non-operating shell company, because we have no active operations and our assets primarily consist of the net cash proceeds we received from the asset sale to Emerald Star, and we also continue to own certain dormant technology and intellectual property assets. Our primary focus is to seek an acceptable operating company with which we can complete a business combination, whether by merger, acquisition or other business combination by using a combination of capital stock, cash on hand, or other funding sources, if available. We intend to devote substantially all of our time to identifying potential merger or acquisition candidates. None of our officers or directors is working for us on a full-time basis. We cannot predict whether or when we will enter into such a transaction or what the terms of such a transaction would be.

 

Our board of directors, which was reconstituted upon closing of the asset sale to Emerald Star, is evaluating the future business plan for our company, including exploring and evaluating potential future business combination opportunities. Such transaction, if it were to arise, could take a number of different forms, but most likely would be with a private company that would be looking to become public and gain access to funding in the capital markets.

 

Recent Events – Letter of Intent with Grandparents.com, LLC

 

On December 30, 2011, we entered into a non-binding letter of intent with Grandparents.com, LLC for a proposed reverse acquisition (the “Proposed Transaction”) pursuant to which we would acquire substantially all of the assets and certain liabilities of Grandparents. Also on December 30, 2011, in connection with the non-binding letter of intent, we provided a $500,000 bridge loan to Grandparents, secured by a first priority security interest in all of the assets of Grandparents. The purpose of this loan was to provide bridge loan financing and working capital to Grandparents in advance of negotiation and closing of a definitive acquisition agreement. We previously announced the letter of intent and bridge loan in our Current Report on Form 8-K filed on January 5, 2012.

 

Pursuant to the letter of intent, if we successfully close the Proposed Transaction, Grandparents would contribute substantially all of its assets to us, including the grandparents.com domain, other related domain names, trademarks and related assets of Grandparents, in exchange for our assumption of certain liabilities of Grandparents and our issuance to Grandparents of a new class of Series A Convertible Preferred Stock and a warrant to purchase shares of our common stock upon the occurrence of certain events. The letter of intent also contemplates a private placement to close concurrently with the closing of the Proposed Transaction, to provide gross proceeds of not less than $3,000,000 for the issuance of a new class of Series B Convertible Preferred Stock.

 

Assuming successful completion of both the Proposed Transaction and the private placement, our capitalization at closing, on an as converted basis, would be as follows: (i) the Series A Convertible Preferred Stock issued to Grandparents would represent approximately 65% of the aggregate voting power in the election of our directors; (ii) the shares of common stock held by our existing stockholders would represent approximately 20% of the aggregate voting power in the election of our directors; and (iii) the shares of Series B Convertible Preferred Stock issued in the private placement would represent the remaining approximately 15%. In addition, at closing of the Proposed Transaction, we would be required to issue warrants to Grandparents’ investment banking advisor for advisory services in connection with the Proposed Transaction and for their services as placement agent in the private placement. Upon closing, we would also reserve an additional 10% of the fully diluted shares under a new stock incentive plan. In addition, pursuant to the letter of intent, upon the closing of the Proposed Transaction, all of the current members of our Board of Directors would resign and five nominees of Grandparents would be appointed to the Board of Directors.

 

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The Proposed Transaction will be governed by the terms of a definitive agreement negotiated between us and Grandparents, which will include customary representations, warranties, covenants, indemnities and closing conditions. Either party may terminate the non-binding letter of intent if a definitive agreement has not been executed by February 29, 2012. We have not yet entered into a definitive agreement for the Proposed Transaction and there are no assurances that a definitive agreement will be executed by the parties, or that the Proposed Transaction will be consummated. There will be many conditions to closing of the Proposed Transaction, many of which are outside of our control, including the closing the private placement and we cannot predict whether these conditions will be satisfied. There are no assurances when or if closing of the Proposed Transaction will occur.

 

Any securities that may be issued in the private placement will not be registered under the Securities Act of 1933, as amended or applicable state laws and may not be offered or sold in the United States absent registration or an available exemption under applicable federal and state securities laws. The disclosures in this Form 10-Q regarding the private placement are being made pursuant to Rule 135c under the Securities Act of 1933, and this Form 10-Q shall not constitute an offer to sell or the solicitation of an offer to buy any of our securities.

 

Discontinued Operations; Cessation of Laboratory Services Business

 

During our fiscal year ended June 30, 2011 and through August 31, 2011, we were a provider of specialty reference laboratory services to the pharmaceutical, biotechnology, and diagnostics industries. Our clients included a number of the world’s largest multi-national pharmaceutical, biotechnology and diagnostic companies. Our well-recognized specialty areas included cardiovascular disease, diabetes, obesity, and rheumatology and bone diseases including osteoporosis as well as osteoarthritis and rheumatoid arthritis. Coupled with our specialty testing, we had central laboratory capability and provided full-service central laboratory support for multi-center clinical trials, including routine safety lab tests. We also performed clinical biomarker services for novel biomarkers, as well as custom assay services for our pharmaceutical and biotechnology clients. We conducted our business primarily through our wholly-owned subsidiary, Pacific Biomarkers, Inc., a Washington corporation. On August 31, 2011, we sold all of this business and our operating assets to Emerald Star Holdings, LLC.

 

Critical Accounting Policies and Estimates

 

The discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates including, among others, those affecting revenue, the allowance for doubtful accounts, and the useful lives of tangible and intangible assets. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form our basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions, or if management made different judgments or utilized different estimates.

 

There have been several material changes to our critical accounting policies and estimates since the end of our 2011 fiscal year due to the sale of assets of the operating portion of the business completed August 31, 2011. We no longer have revenue, debt financing or tangible assets with useful lives. In future filings we intend to reduce the critical accounting policy list to items that we consider critical to our continuing operations of the shell company. The five critical accounting policy items disclosed in our Annual Report on Form 10-K, for the fiscal year ended June 30, 2011:

 

● assets sold or held for sale;

● revenue recognition;

● fair value measurements – debt financing;

● stock-based compensation; and

● useful life of tangible assets.

 

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We included in our Annual Report on Form 10-K a brief discussion of some of the judgments, estimates and uncertainties that can impact the application of these policies and the specific dollar amounts reported on our financial statements. This is neither a complete list of all of our accounting policies, nor does it include all the details surrounding the accounting policies we have identified, and there are other accounting policies that are significant to us. For detailed information and discussion on our critical accounting policies and estimates, see our financial statements and notes thereto included in this Report and our Annual Report on Form 10-K. Many of our estimates or judgments are based on anticipated future events or performance, and as such are forward-looking in nature, and are subject to many risks and uncertainties, including those discussed below and elsewhere in this Report and in our Annual Report. We do not undertake any obligation to update or revise this discussion to reflect any future events or circumstances.

 

Results of Continuing Operations for the Three and Six Months Ended December 31, 2011 and 2010

 

During the first and second quarters of fiscal 2012 and 2011, we generated no revenue from continuing operations and incurred the following expenses:

 

   Three months ended   Six months ended 
Dollars in actual amounts, not rounded  December 31,   December 31, 
   2011   2010   2011   2010 
                 
Revenue  $-   $-   $-   $- 
                     
                     
NorWesTech Inc. Operating Expenses:                    
Selling, General and Administrative Expense                    
Board Fees   23,504    -    29,504    - 
Consulting Expense   (2,000)   -    -    - 
Employee Options/Restricted Shares   6,146    -    7,170    - 
Insurance Other   4,384    -    6,576    - 
Legal   57,562    -    66,312    - 
Accounting Services, Audit Fees   22,889    -    34,139    - 
Public Co./Prof. Service   4,090    9,352    6,590    12,134 
Travel Expense   2,160    -    2,160    - 
Miscellaneous   -    -    602    - 
                   
Bioquant Inc. Operating Expenses:                  
Selling, General and Administrative Expense   -    -    -    1,600 
    -    -           
Newco Tech Inc. Operating Expenses:   -    -           
Selling, General and Administrative Expense   -    1,443    3,796    8,211 
                   
Total Operating Expenses   118,734    10,795    156,848    21,945 
                   
NorWesTech Inc. Interest Income   (395)   -    (490)   - 
                     
Net Loss from Continuing Operations  $(118,339)  $(10,795)   (156,358)  $(21,945)

  

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Material components of our operating expenses for the three and six months ended December 31, 2011 include legal fees, accounting and auditing fees and Board compensation expense. For the three and six months ended December 31, 2011, we incurred legal and accounting fees in connection with preparing and filing our annual report on Form 10-K for the 2011 fiscal year. In addition, commencing during the quarter ended December 31, 2011, we incurred approximately $24,400 in expenses associated with due diligence activities and legal fees for negotiation and drafting of documents relating to the non-binding letter of intent and bridge loan with Grandparents.com, LLC. Additional legal fees and other expenses have been and will be incurred in the quarter ending March 31, 2012, as we continue negotiations toward a definitive acquisition agreement. Board compensation expense for the periods ended December 31, 2011 reflects Board fees of $6,000 per month ($1,500 per director) that commenced in September 2011.

 

Gain from sale of assets and tax benefit

 

We estimated a gain from the Assets Held for Sale at June 30, 2011 of approximately $2,252,000. The actual gain recognized increased to approximately $4,041,000 on August 31, 2011, the date the asset purchase closed. The increase in gain was mainly due to a net decrease in assets from approximately $4.3 million to $2.7 million. The components of this change were conversion of approximately $2.2 million in accounts receivable to approximately $1.1 million in accounts receivable as those outstanding balances were paid; other receivables, fixed assets and other assets decreased by approximately $315,000 and total liabilities decreased by approximately $158,000. This gain will produce an estimated deferred tax asset of approximately $1,334,000, net of the second quarter operations, and will consume the majority of the net operating losses attributable to Bio-Newco, Inc. (formerly Pacific Biomarkers, Inc., a Washington corporation). These estimates are based on the results of operations through December 31, 2011 and may change as a result of continued operations through the end of the fiscal year. As a result of these provisions, the results of the asset sale to Emerald Star, utilization of the net operating losses and credit carryforwards may be limited. Internal Revenue Code Section 382 places a limitation on the amount of taxable income that can be offset by carryforwards after a change in control (generally greater than 50% change in ownership).

 

Results of Discontinued Operations for Three and Six Months Ended December 31, 2011 and 2010

 

Due to the asset sale of the operation on August 31, 2011, the comparable quarter comparisons throughout this 10-Q are less useful.

 

Revenue from Discontinued Operations:

  

   Three Months           Six Months         
Dollars in thousands, rounded   Ended December 31,   $   %   Ended December 31,   $   % 
to nearest thousand  2011   2010   Change   Change   2011   2010   Change   Change 
Revenue  $-   $2,532    (2,532)   (100)  $907   $5,386    (4,479)   (83)

  

With respect to our discontinued operations (clinical pharmaceutical trials testing and novel biomarker development services), our revenue decreased 100% for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010 as there were no lab operations following the asset sale as of August 31, 2011. For the six months ended December 31, 2010, our revenue declined by approximately 83% from the comparable six month period in the prior year as we realized only two months of lab operations prior to the asset sale in the current fiscal year. 

 

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Laboratory Expense and Cost of Goods Sold from Discontinued Operations:

 

   Three Months           Six Months         
Dollars in thousands, rounded    Ended December 31,   $   %   Ended December 31,   $   % 
to nearest thousand  2011   2010   Change   Change   2011   2010   Change   Change 
Laboratory Expenses and Cost of Goods Sold  $-   $1,516    (1,516)   (100)  $790   $3,194    (2,404)   (75)
Percentage of Revenue    -%    60%             87%   59%          

  

With respect to our discontinued operations (clinical pharmaceutical trials testing and novel biomarker development services), our laboratory expenses and cost of goods sold decreased 100% for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010 as there were no lab operations following the asset sale as of August 31, 2011. For the six months ended December 31, 2010, our laboratory expenses and cost of goods sold declined by approximately 75% from the comparable six month period in the prior year as we realized only two months of lab operations prior to the asset sale in the current fiscal year. 

 

Selling, General and Administrative Expense from Discontinued Operations:

 

   Three Months           Six Months         
Dollars in thousands, rounded to  Ended December 31,   $   %   Ended December 31,   $   % 
nearest thousand  2011   2010   Change   Change   2011   2010   Change   Change 
Selling, General and Administrative Expense   $-   $1,208    (1,208)   (100)  $1,157   $2,420    (1,263)   (52)
Percentage of Revenue    -%    48%             128%   45%          

  

With respect to our discontinued operations, our selling, general and administrative expense decreased 100% for the quarter ended December 31, 2011 compared to the quarter ended December 31, 2010 as there were no lab operations following the asset sale as of August 31, 2011. For the six months ended December 31, 2011, our selling, general and administrative expense declined by 52% from the comparable six month period in the prior year as we incurred expenses for only two months of lab operations prior to the asset sale in the current fiscal year.

 

Other Income (Expense) from Discontinued Operations:

 

   Three Months           Six Months         
 Dollars in thousands, rounded   Ended December 31,   $   %   Ended December 31,   $   % 
to nearest thousand  2011   2010   Change   Change   2011   2010   Change   Change 
Other Income (Expense)   $-   $(146)   146    100   $3,957   $(301)   4,258    1413 
Percentage of Revenue    -%    (6)%             436%   (6)%          

  

With respect to our discontinued operations, we had no other income or expenses for the quarter ended December 31, 2011, compared to other expense of approximately $146,000 for the quarter ended December 31, 2010 as there were no lab operations following the asset sales as of August 31, 2011. For the six months ended December 31, 2011, we had other income of approximately $3,957,000 compared to other expense of approximately $301,000 for the six months ended December 31, 2010. The main components of other income/expense for the six months ended December 31, 2011 was income on asset sale of approximately $4,041,000 and interest expense of approximately $77,000 compared to approximately $274,000 in interest expense in the comparable fiscal period last year.

 

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Net Income (Loss) from Discontinued Operations:

 

   Three Months           Six Months         
 Dollars in thousands, rounded   Ended December 31,   $   %   Ended December 31,   $   % 
to nearest thousand  2011   2010   Change   Change   2011   2010   Change   Change 
Net Income (Loss)   $-   $(338)   338    100   $2,916   $(530)   3,446    651 
Percentage of Revenue    -%    (13)%             322%   (10)%          

  

With respect to our discontinued operations, we had no net income or loss for the quarter ended December 30, 2011 as there were no lab operations following the asset sale as of August 31, 2011 compared to a net loss of approximately $(338,000) for the quarter ended December 31, 2010. For the six months ended December 31, 2011 we had net income of approximately $2,916,000 (representing two months of operations and including the income from the asset sale) compared to approximately $(530,000) in net loss for the six months ended December 31, 2010.

 

Liquidity and Capital Resources:

 

We received approximately $1,244,000 in cash and derived another $1,076,000 in existing cash balances to total $2.32 million upon the closing of the sale of substantially all of our assets to Emerald Star Holdings, LLC on August 31, 2011. At closing, Emerald Star assumed substantially all of the liabilities related to these assets and the business being sold, including our accounts payable, obligations under our leases and contracts, tax liabilities, the remaining obligations under our $4 million secured loan, and all employee-related liabilities.

 

As of December 31, 2011, we had cash and cash equivalents of approximately $1.74 million, and all balances of our asset and liability accounts related to our discontinued operations were zero as a consequence of the asset sale completed on August 31, 2011. We also had a note receivable of $500,000, reflecting our bridge loan to Grandparents.com, LLC on December 30, 2011.

 

We believe that our cash resources will be sufficient to cover our operating needs for the foreseeable future. Our auditors informally advised us that if the asset sale had not been completed, they likely would have had to qualify their audit report on our financial statements to indicate that there could be a substantial doubt about our ability to continue as a going concern. With the asset sale completed, resulting in $2.32 million in cash at closing and reduced annual expenses of maintaining the public company, no going concern issues remain.

 

Net cash used in operating activities for the six-month period ended December 31, 2011 was approximately $78,000 compared to net cash used in operating activities for the six-month period ended December 31, 2010 of approximately $22,000. These expenses were for accounting, legal, insurance expenses, board compensation, share-based compensation and public company expenses for the six-month period ended December 31, 2011. Expenses for the quarter ended December 31, 2010 were for legal services and public company expenses.

 

We used $500,000 of cash in providing a bridge loan to Grandparents.com, LLC on December 30, 2011, secured by a first priority security interest in all of the assets of Grandparents.com, LLC. See “Recent Events” described above and our Form 8-K filed on January 5, 2012. We had no net cash provided by or used in investing activities in the six-month period ended December 31, 2010 related to our continuing operations.

 

We had no net cash provided by or used in financing activities in the six-month periods ended December 31, 2011 and 2010 related to our continuing operations.

 

Off-Balance Sheet Arrangements

 

We have no off-balance sheet financing arrangements.

 

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ITEM 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and (b) accumulated and communicated to management, including our President and Treasurer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues if any, within a company have been detected.

 

As of the end of the period covered by this Report on Form 10-Q, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. This evaluation was carried out under the supervision and with the participation of management, including our President and Treasurer. Based upon that evaluation, our President and Treasurer concluded that our disclosure controls and procedures are effective at December 31, 2011.

 

During the quarterly period covered by this report, there were no changes in our internal controls or in other factors that have materially affected, or are reasonably likely to materially affect our internal controls over financial reporting.

 

PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

  31.1 Certification of Stanley L. Schloz, President
  31.2 Certification of Curtis J. Scheel, Secretary and Treasurer
  32.1 Certification of Stanley L. Schloz, President, and Curtis J. Scheel, Secretary and Treasurer, of NorWesTech, Inc., pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
  101.INS XBRL Instance Document
  101.SCH XBRL Taxonomy Extension Schema Document
  101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
  101.LAB XBRL Taxonomy Extension Label Linkbase Document
  101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
  101.DEF XBRL Taxonomy Extension Definition Linkbase Document

 

* XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

 

SIGNATURES

 

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, thereunto duly authorized.

 

Dated: February 13, 2012

 

  /s/ Stanley L. Schloz
  Stanley L. Schloz
  President
  (principal executive officer)

   

  /s/ Curtis J. Scheel
  Curtis J. Scheel
  Secretary and Treasurer
  (principal financial and accounting officer)
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