Quarterly Report — Form 10-Q Filing Table of Contents
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(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 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 ¨ (Do not check if a smaller reporting company)
Smaller reporting company x
Indicate by
check mark whether the registrant is a shell company (as defined in Rule 12b-2
of the Exchange Act). Yes
¨
No
x
The
number of shares of Common Stock, $0.001 par value, outstanding on August 10,2008, was 9,070,021 shares.
Adjustment
to reconcile net (loss) to net cash used in operating
activities:
Depreciation
and amortization
529,828
654,511
Decrease
in allowance for doubtful accounts
(4,400
)
-
Bad
debts expense
86,824
44,696
Loss
on sale of equipment
-
51,984
Imputed
interest
-
6,113
Common
stock issued for services, related party
18,000
-
Common
stock issued for services
65,705
-
Decrease
(increase) in assets:
Accounts
receivable
127,952
213,312
Inventory
50,043
147,051
Prepaid
expenses
(25,295
)
(50,190
)
Increase
(decrease) in liabilities:
Accounts
payable
12,666
44,726
Accrued
expenses
(43,888
)
1,863
Accrued
interest, related party
180,570
150,263
Customer
deposits
(137,419
)
144,014
Net
cash used in operating activities
(272,691
)
(291,771
)
Cash
flows from investing activities:
Proceeeds
from sale of equipment
-
30,000
Payments
to acquire equipment
(5,770
)
(8,497
)
Net
cash provided by (used in) investing activities
(5,770
)
21,503
Cash
flows from financing activities:
Proceeds
from issuance of notes payable, related parties
282,000
210,000
Payments
to minority interests of distributed earnings
(19,600
)
-
Net
cash provided by financing activities
262,400
210,000
Net
increase (decrease) in cash
(16,061
)
(60,268
)
Effect
of exchange rate changes
248
-
Cash,
beginning of period
40,979
113,877
Cash,
end of period
$
25,166
$
53,609
Supplemental
disclosures:
Interest
Paid
$
5,401
$
-
Income
taxes paid
$
-
$
-
The
accompanying notes are an integral part of these condensed consolidated
financial statements.
3
SEAENA,
INC.
Notes
to
Condensed Consolidated Financial Statements
NOTE
1 – BASIS OF PRESENTATION
The
unaudited condensed consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and reflect
all adjustments which, in the opinion of management, are necessary for a fair
presentation. All such adjustments are of a normal recurring nature. The results
of operations for the interim period are not necessarily indicative of the
results to be expected for a full year. Certain amounts in the prior year
statements have been reclassified to conform to the current year presentations.
The accompanying Condensed Consolidated Financial Statements include the
accounts of the Company, its wholly owned subsidiaries, and Laser Design
International, LLC (“LDI”), which is 51% owned by the Company and, as such, is
required to be consolidated. Minority interest has not been recorded since
LDI’s
accumulated losses exceed the Company’s investment in the subsidiary. All
significant inter-company accounts and transactions have been eliminated. The
statements should be read in conjunction with the financial statements and
footnotes thereto included in our Form 10-K for the period ended December 31,2007.
In
the
opinion of management, the unaudited interim condensed consolidated financial
statements furnished herein include all adjustments, all of which are of a
normal recurring nature, necessary for a fair statement of the results for
the
interim period presented. The results of the three and six months ended June30,2008 is not necessarily indicative of the results to be expected for the full
year ending December 31, 2008.
NOTE
2 – GOING CONCERN
The
accompanying condensed consolidated financial statements have been prepared
assuming that we will continue as a going concern. Our ability to continue
as a
going concern is dependent upon attaining profitable operations based on the
development of products that can be sold. We intend to use borrowings and sales
of securities to mitigate the effects of our cash position, however, no
assurance can be given that debt or equity financing, if and when required,
will
be available. The financial statements do not include any adjustments relating
to the recoverability and classification of recorded assets and classification
of liabilities that might be necessary should we be unable to continue in
existence.
Inventory
at June 30, 2008, consisted of the following:
Glass
blocks, pre-made images and related products
$
639,427
Electronic
parts and accessories
14,765
$
654,192
4
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment at June 30, 2008, consisted of the following:
Computers
and equipment
$
1,622,329
Vehicles
33,499
Furniture
and fixtures
163,423
Leasehold
improvements
54,277
1,873,528
Less
accumulated depreciation and amortization
(1,226,753
)
$
646,775
NOTE
5 – NOTE PAYABLE
On
May 3,2007 we entered into an “Agreement and Mutual Release” with U.C. Laser Ltd
(“UC”). Pursuant to the agreement, we issued a non-interest bearing promissory
note in the amount of $400,000 due in full on November 3, 2007 with a discounted
value of $380,508 based on a discount rate of 10%. The promissory note was
modified on October 29, 2007 to extend the maturity date to May 3, 2008, and
a
further extension of the note has been granted extending the maturity date
to
September 30, 2008. We granted a warrant to purchase up to 600,000 shares of
our
common stock at an exercise price of $0.575 per share, expiring on December31,2010. Imputed interest has also been recorded at the Company’s borrowing rate of
10% which resulted in a carrying value of $380,508 originally and $400,000
as of
June 30, 2008. Interest expense of $19,492 had been recorded during the year
ended December 31, 2007. Further, the Company agreed to repurchase and hold
in
treasury as collateral to the Promissory Note, 2,276,795 shares of its class
B
preferred stock that had previously been issued to UC pursuant to the 2006
acquisition agreement.
NOTE
6 – NOTES PAYABLE - RELATED PARTIES
We
had
notes payable to our CEO with principal balances totaled $3,743,072 as of the
period ended June 30, 2008. The notes accrue interest at a rate of 10% per
annum
and are payable upon demand. We recorded interest expense to related parties
in
the amount of $180,570 and $111,294 for the six months ended June 30, 2008
and
2007, respectively.
Effective
April 8, 2005, we purchased a controlling interest (51%) in Laser Design
International, LLC (“LDI”) to gain control over certain patents held by LDI.
Earnings and cash flows are allocable based on ownership percentages. In May
of
2008 LDI distributed a total of $40,000 in earnings to the partnerships members,
of which, we received $20,400. LDI’s assets, liabilities, and earnings are
consolidated with ours and the minority partners’ interest in LDI is included in
our financial statements as minority interest income.
On
April30, 2008, we issued 500,000 shares of common stock for payment on a consultant’s
outstanding accounts payable balance. These shares were valued at $40,000;
the
fair market value of the underlying shares.
On
April30, 2008, we issued 546,314 shares of restricted common stock to related parties
as compensation for services rendered. These shares were valued at $43,705;
the
fair market value of the underlying shares.
During
May of 2008, our majority owned subsidiary, LDI, distributed $40,000 of
accumulated earnings, of which, we received $20,400. The remaining $19,600
was
distributed to the minority partners.
NOTE
9 – SUBSEQUENT EVENTS
On
August12, 2008, the closing date on the Letter of Intent that outlines a potential
merger with Concord Industries was extended from July 15, 2008 to a date that
is
ninety (90) days after completing a minimum of $3,000,000 in working capital
financing.
6
FORWARD-LOOKING
STATEMENTS
This
document contains “forward-looking statements” within the meaning of the Private
Securities Litigation Reform Act of 1995. All statements other than statements
of historical fact are “forward-looking statements” for purposes of federal and
state securities laws, including, but not limited to, any projections of
earnings, revenue or other financial items; any statements of the plans,
strategies and objections of management for future operations; any statements
concerning proposed new services or developments; any statements regarding
future economic conditions or performance; any statements or belief; and any
statements of assumptions underlying any of the foregoing.
Forward-looking
statements may include the words “may,”“could,”“estimate,”“intend,”“continue,”“believe,”“expect” or “anticipate” or other similar words. These
forward-looking statements present our estimates and assumptions only as of
the
date of this report. Accordingly, readers are cautioned not to place undue
reliance on forward-looking statements, which speak only as of the dates on
which they are made. We do not undertake to update forward-looking statements
to
reflect the impact of circumstances or events that arise after the dates they
are made. You should, however, consult further disclosures we make in future
filings of our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and
Current Reports on Form 8-K.
Although
we believe that the expectations reflected in any of our forward-looking
statements are reasonable, actual results could differ materially from those
projected or assumed in any of our forward-looking statements. Our future
financial condition and results of operations, as well as any forward-looking
statements, are subject to change and inherent risks and uncertainties. The
factors impacting these risks and uncertainties include, but are not limited
to:
·
inability
to raise additional financing for working
capital;
·
actions
and initiatives taken by both current and potential
competitors;
·
deterioration
in general or regional economic, market and political
conditions;
·
the
fact that our accounting policies and methods are fundamental to
how we
report our financial condition and results of operations, and they
may
require management to make estimates about matters that are inherently
uncertain;
·
adverse
state or federal legislation or regulation that increases the costs
of
compliance, or adverse findings by a regulator with respect to existing
operations;
·
changes
in U.S. GAAP or in the legal, regulatory and legislative environments
in
the markets in which we operate;
·
inability
to efficiently manage our
operations;
·
inability
to achieve future operating
results;
·
the
unavailability of funds for capital expenditures and repayment of
debt;
·
our
ability to recruit and hire key employees;
·
the
inability of management to effectively implement our strategies and
business plans; and
·
the
other risks and uncertainties detailed in this
report.
7
For
a
detailed description of these and other factors that could cause actual results
to differ materially from those expressed in any forward-looking statement,
please see “Risk Factors” in this document and in our Annual Report on Form 10-K
for the year ended December 31, 2007.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of
Operations.
Overview
of Current Operations
We
are a
publicly traded manufacturer and distributor of subsurface laser etched glass.
During the first half of 2008, our management team has focused on reducing
general and administrative expenses in part by increasing operational
efficiencies and replacing staff with individuals that are more qualified.
With
an increased reliance on production from our China facility, we feel we will
be
able to continue to improve our efficiencies in manufacturing. Transitioning
more of our production from the US to China is anticipated to allow us to focus
our US operations more on sales and marketing efforts, which should enhance
our
overall revenue growth.
Our
vision is to focus on growing the sales staff while also introducing new
products and/or technologies into our existing distribution channels. This
is
structured to allow us to diversify our product offerings and provide additional
revenue channels. We are further utilizing independent representatives across
the globe to increase our coverage without significantly increasing overhead.
These representatives have been recruited based on abilities, client base,
and
geographic location and are trained on our products, technology, and core
philosophy of superior customer service and quality.
Our
goal
to aggressively increase our client base is showing great promise, based on
new
orders and inquires. Our two-dimensional portrait line is growing rapidly and
is
anticipated to be one of our better revenue channels by the end of the 2008.
We
are currently in discussions to further enhance our distribution through other
national supply chains. We have experienced an increase in demand for new
products in the photo processing industry providing us with what management
believes to be a significant growth opportunity.
The
digital camera has changed the photo finishing market; fewer photos are being
printed, but rather stored digitally or printed at home on personal computers.
This has created a necessity for the photo finishers to offer ancillary products
as a way to alleviate the pressure caused by lost revenue in the finishing
process. We are focused on building strategic relationships in this industry
and
will aggressively continue to seek market share. Our customized software
platform allows companies to send the photo or image data via the Internet,
thus
providing photographers of all sizes the ability to offer our product with
little or no additional overhead. The proprietary software manipulates the
image
to allow the lasers to engrave a replica of the image in glass. Beginning in
2007, we have implemented an Internet-based order processing system with a
significant online photoproduct distributor. Our distributor represents a
growing percentage of photo developers and distributors of the ancillary
products produced from photos. As a result, our products are now available
through a number of online photo processing sites. We are also continuously
negotiating the placement of our products in photo kiosks set up by the larger
photo processors in brick and mortar retail locations.
8
We
have
secured direct glass suppliers in China who have offered more competitive
pricing, with the expectation of reducing glass and component costs
significantly. This has enabled us to approach our retail pricing matrix more
aggressively, which management believes gives us a competitive advantage over
our competition. Our facility in China has been restructured and is now fully
operational and servicing both Asia and Europe. We are establishing and
re-building existing relationships with independent representatives for product
distribution. This facility gives us a permanent presence in China to assist
in
negotiating with current and potential vendors on an ongoing basis for raw
materials, as well as, direct access to new product development. We expect
to
decrease, not only our production and raw material costs as a percentage of
sales, but also to increase our production efficiencies, which should result
in
improved gross margins. We are also in negotiations with other potential
independent operators who wish to purchase our retail laser machines.
Accordingly, we expect increases in product sales to meet or surpass
projections. This projected increase in revenues, coupled with an anticipated
increase in gross margins, should allow us to continue with plans of growth
and
profitability.
On
January 15, 2008, we entered into a binding Letter of Intent with Concord
Industries, whereby we are seeking to acquire Concord in a reverse
acquisition. Pursuant to the letter of intent, we would issue a number of
shares equal to 60% of the shares then outstanding to the Concord shareholders
in exchange for 100% of the issued and outstanding Concord shares. Upon closing,
53% of the shares would be issued to the Concord shareholders and 7% would
be
held in escrow and released upon the achievement of certain milestones over
a
three-year period following the closing. The original Letter of intent expired
on March 31, 2008 and was subsequently verbally extended until July 15, 2008.
On
August 12, 2008, we extended the closing date to be a date that is ninety (90)
days after completion of a minimum of $3,000,000 in working capital financing,
required under the Letter of Intent.
Results
of Operations for the three months ended June 30, 2008 and 2007
compared.
The
following tables summarize selected items from the statement of operations
for
the three months ended June 30, 2008 compared to the three months ended June30,2007.
INCOME:
For the three months ended
June 30,
Increase (Decrease)
2008
2007
$
%
Revenue
$
759,594
$
857,692
$
(
98,098
)
(11
)%
Cost
of Sales
387,526
443,153
(
57,627
)
(13
)%
Gross
Profit
$
372,068
$
414,539
(
42,471
)
(10
)%
Gross
Profit Percentage of Sales
49
%
48
%
-
1
%
9
Revenue
Our
revenue for the three months ended June 30, 2008 totaled $759,594 compared
to
$857,692 in 2007 representing a decline in gross revenue of $98,098. In the
three months ended June 30, 2008, approximately 46% of our total revenue was
attributable to custom orders for corporate specialty and promotional items,
which totaled $349,464 compared to $406,149 or 47% of total revenue in the
three
months ended June 30, 2008. We are focusing additional marketing efforts in
the
photo industry as well as developing relationships with similar companies
whereby we can expand our product lines and distribution channels. Our revenue
generated from royalties has increased by 102% to $60,315 in the second quarter
of 2008 compared to $29,865 for the same period in 2007, due to the addition
of
new license agreements, along with settlements of previously disputed agreements
in the prior year. We anticipate royalties to remain consistent throughout
the
upcoming year. The remainder of our revenue is generated through sales of raw
materials, glass etching, and add-on products. In the three months ended June30, 2008, this totaled $349,815 and $421,678 in the same period of 2007,
resulting in a decrease of $71,863 in 2008.
Cost
of goods sold/ Gross profit percentage of sales
Our
cost
of goods sold for the three months ended June 30, 2008 was $387,526 compared
to
$443,153 for the three months ended June 30, 2007 representing a decrease of
$57,627 or 13% in 2008. Cost of goods sold in the second quarter of 2008
consisted primarily of glass, product bases, and transportation costs.
Transportation costs of $47,466 represent approximately 12% of our total cost
of
goods sold in 2008 while it consisted of $74,610, or 17% in 2007. The reduction
in transportation costs was primarily due to improvements in logistics and
shipping management. In the second three months of 2008, our cost of materials
was $343,328 or 89% and in 2007 material costs were $298,355 or 67%. We
attribute the increase in material costs directly to the weaker currency
exchange rate of the US$ to the Chinese Yuan.
Our
general and administrative expenses were $216,273 and $276,894 for the three
months ended June 30, 2008 and 2007, respectively. The decrease of $60,621
or
22% resulted from management’s restructuring and streamlining of administrative
overhead through the elimination of redundancies previously existing between
our
subsidiaries. The majority of our efficiencies were gained through our reduction
in travel expenditures and trade show costs of 34% or $17,460 during the second
quarter of 2008.
Payroll
Expenses
Payroll
and related benefits for the three months ended June 30, 2008 decreased by
$258,851 or 58% from $448,075 for the three months ended June 30, 2007 to
$189,224 for the three months ended June 30, 2008. The decrease is the result
of
management’s ability to control expenses and implement operational
efficiencies.
Depreciation
and Amortization
Depreciation
and amortization for the three months ended June 30, 2008 decreased by $78,819
or 23% from $341,393 for the three months ended June 30, 2007 to $262,574 for
the three months ended June 30, 2008. The decrease is principally due to the
reduction in amortization as a result of a patent that was written off as
impaired at the end of 2007 and no longer amortized during 2008.
Total
Operating Expenses
Total
operating expenses for the three months ended June 30, 2008 were $668,071
compared to $1,066,362 for the three months ended June 30, 2007. The decrease
of
$398,291 or 37% was primarily due to the operational efficiencies gained from
past acquisitions.
Loss
from Operations
Our
net
operating loss for the three months ended June 30, 2008 was $296,003 compared
to
a net operating loss of $651,823 for the three months ended June 30, 2007.
Net
operating income (loss) is the result of revenue minus total expenses, which,
despite declining revenues has improved principally due to operational
efficiencies gained from past acquisitions.
11
Other
Income (Expenses)
Interest
expense for the three months ended June 30, 2008 decreased by $7,740 from $9,751
for the three months ended June 30, 2007 compared to $2,011 for the three months
ended June 30, 2008. The decrease is principally due to the timing of credit
card payments and related interest charges.
Interest
expense due to a related party decreased for the three months ended June 30,2008 by $18,558 or 17% from $111,294 for the three months ended June 30, 2007
compared to $92,736 for the three months ended June 30, 2008 due to the timing
of additional loans and repayments made to us by the CEO.
Other
income (expense) for the three months ended June 30, 2008 decreased by $(6,406)
or 59% from $(10,890) of other expenses for the three months ended June 30,2007
to $(4,484) of other expenses for the three months ended June 30, 2008.
Net
(loss)
Our
net
loss of $395,234 for the three months ended June 30, 2008 decreased by $440,508
or 53% compared to a net loss of $835,742 for the three months ended June 30,2007. Our decreased net loss is primarily attributable to management controls
that enabled a reduction of expenditures in excess of the decrease in sales
during the three months ended June 30, 2008.
Results
of Operations for the six months ended June 30, 2008 and 2007
compared.
The
following tables summarize selected items from the statement of operations
for
the six months ended June 30, 2008 compared to the six months ended June 30,2007.
INCOME:
For the six months ended
June 30,
Increase
(Decrease)
2008
2007
$
%
Revenue
$
1,408,654
$
1,653,381
$
(244,727
)
(15
)%
Cost
of Sales
816,013
749,008
67,005
9
%
Gross
Profit
$
592,641
$
904,373
(311,732
)
(34
)%
Gross
Profit Percentage of Sales
42
%
55
%
$
-
(13
)%
12
Revenue
Our
revenue for the six months ended June 30, 2008 totaled $1,408,654 compared
to
$1,653,381 in 2007 representing a decline in gross revenue of $244,727. In
the
six months ended June 30, 2008, approximately 55% of our total revenue was
attributable to custom orders for corporate specialty and promotional items,
which totaled $772,216 compared to $837,051 or 51% of total revenue in the
six
months ended June 30, 2008. We are focusing additional marketing efforts in
the
photo industry as well as developing relationships with similar companies
whereby we can expand our product line and distribution channels. Our revenue
generated from machine sales has increased to $140,300 during the six months
ended June 30, 2008 compared to $3,500 for the same period in 2007 due to our
shift away from leasing laser etching machines in favor of outright machine
sales. We anticipate this trend to continue as existing machines age and
technological advancements improve. In addition, our royalty revenues grew
at a
modest 4% in the six months ended June 30, 2008 with revenues of $111,755
compared to $107,081 for the same period in 2007. The remainder of our revenue
is generated through sales of raw materials, glass etching, and add-on products.
In the six months ended June 30, 2008, this totaled $384,383 and $705,749 in
the
same period of 2007, resulting in a decrease of $321,366 in 2008.
Cost
of goods sold/ Gross profit percentage of sales
Our
cost
of goods sold for the six months ended June 30, 2008 was $816,013 compared
to
$749,008 for the six months ended June 30, 2007 representing an increase of
$67,005 or 9% in 2008. Cost of goods sold in the second quarter of 2008
consisted primarily of glass, product bases, and transportation costs.
Transportation costs of $86,165 represent approximately 11% of our total cost
of
goods sold in 2008 while it consisted of $209,586, or 28% in 2007. The reduction
in transportation costs was primarily due to improvements in logistics and
shipping management. During the six months ended June 30, 2008, our cost of
materials was $597,130 or 73% and in 2007 material costs were $410,949 or 55%.
We attribute the increase in material costs directly to the weaker currency
exchange rate of the US$ to the Chinese Yuan.
Our
general and administrative expenses were $613,457 and $726,011 for the six
months ended June 30, 2008 and 2007, respectively. The decrease of $112,554
or
16% resulted from management’s restructuring and streamlining of administrative
overhead through the elimination of redundancies previously existing between
our
subsidiaries. The majority of our efficiencies were gained through our reduction
in travel expenditures and trade show costs of 31% or $24,313 over the six
months ended June 30, 2007.
Payroll
Expenses
Payroll
and related benefits for the six months ended June 30, 2008 decreased by
$615,482 or 62% from $984,837 for the six months ended June 30, 2007 to $369,355
for the six months ended June 30, 2008. The decrease is the result of
management’s ability to control expenses and implement operational efficiencies
in a down market.
Depreciation
and Amortization
Depreciation
and amortization for the six months ended June 30, 2008 decreased by $124,683
or
19% from $654,511 for the six months ended June 30, 2007 to $529,828 for the
six
months ended June 30, 2008. The decrease is principally due to the reduction
in
amortization as a result of a patent that was written off as impaired at the
end
of 2007 and no longer amortized during 2008.
Total
Operating Expenses
Total
operating expenses for the six months ended June 30, 2008 were $1,512,640
compared to $2,365,359 for the six months ended June 30, 2007. The decrease
of
$852,719 or 36% was primarily due to the operational efficiencies gained from
past acquisitions.
Loss
from Operations
Our
net
operating loss for the six months ended June 30, 2008 was $919,999 compared
to a
net operating loss of $1,460,986 for the six months ended June 30, 2007. Net
operating income (loss) is the result of revenue minus total expenses, which,
despite declining revenues has improved principally due to operational
efficiencies gained from past acquisitions.
Other
Income (Expenses)
Interest
expense for the six months ended June 30, 2008 decreased by $5,189 from $10,590
for the six months ended June 30, 2007 compared to $5,401 for the six months
ended June 30, 2008. The decrease is principally due to the timing of credit
card payments and related interest charges.
14
Interest
expense due to a related party increased for the six months ended June 30,2008
by $30,307 or 20% from $150,263 for the six months ended June 30, 2007 compared
to $180,570 for the six months ended June 30, 2008 due to additional loans
made
to us by the CEO.
Other
income (expense) for the six months ended June 30, 2008 increased by $1,016
or
4% from $26,291 of other expenses for the six months ended June 30, 2007 to
$27,307 of other expenses for the six months ended June 30, 2008.
Net
(loss)
Our
net
loss of $1,133,277 for the six months ended June 30, 2008 decreased by $566,837
or 33% compared to a net loss of $1,700,114 for the six months ended June 30,2007. Our decreased net loss is primarily attributable to management controls
that enabled a reduction of expenditures in excess of the decrease in sales
during the six months ended June 30, 2008.
Liquidity
and Capital Resources
A
critical component of our operating plan impacting our continued existence
is
the ability to obtain additional capital through additional equity and/or debt
financing. We do not anticipate generating sufficient positive internal
operating cash flow until such time as we can increase our product deliveries
to
market, complete additional corporate acquisitions and generate substantial
revenues, which may take the next few years to fully realize. In the event
we
cannot obtain the necessary capital to pursue our strategic plan, we may have
to
cease or significantly curtail our operations. This would materially impact
our
ability to continue operations.
The
following table summarizes our current assets, liabilities and working capital
at June 30, 2008 compared to December 31, 2007.
At
June30, 2008, we had a working capital deficit of $5,064,955 as compared to
$4,520,088 at December 31, 2007. We had cash and cash equivalents of $25,166
at
June 30, 2008 as compared to $40,979 at December 31, 2007. The increase in
the
working capital deficit is principally due to the additional debt required
to
fund ongoing operations and the loss generated during the six months ended
June30, 2008.
15
Cash
Flows. Since
inception, we have financed cash flow requirements through debt financing,
the
issuance of common stock and revenues generated from the sale of our products.
As we expand operational activities, we may experience net negative cash flows
from operations, pending receipt of sales and may be required to obtain
additional financing to fund operations through common stock offerings and
debt
borrowings to the extent necessary to provide working capital.
Our
current cash on hand plus cash expected to be generated from operations will
not
be sufficient to sustain our current operations and service our outstanding
debt
for the next twelve months. Without giving effect to the potential merger with
Concord, we will need to issue debt or equity securities of approximately
$600,000 in the short-term in order to sustain operations until such time that
we can generate positive cash flow from our operations.
During
the six months ended June 30, 2008, our financing activities provided cash
of
$262,400, while our operating and investing activities used cash of $272,691
and
$5,770, respectively. The cash used in operating activities was principally
a
result of the net loss we incurred.
Satisfaction
of our cash obligations for the next 12 months.
Historically,
our plan of operation has been limited by a lack of adequate working capital.
As
of June 30, 2008, we had available cash of $25,166. Over the next twelve months,
we believe that existing capital and anticipated funds from operations will
not
be sufficient to sustain operations and growth. Consequently, we will be
required to seek additional capital in the future to fund growth through
additional equity or debt financing or credit facilities. No assurance can
be
made that such financing would be available, and if available, it may take
either the form of debt or equity.
We
intend
to make appropriate plans to ensure sources of additional capital in the future
to fund growth and expansion through additional equity, or debt financing or
credit facilities. We must implement and successfully execute our business
and
marketing strategy, continue to develop and upgrade technology and products,
respond to competitive developments, and attract, retain and motivate qualified
personnel. There can be no assurance that we will be successful in addressing
such risks, and the failure to do so can have a material adverse effect on
our
business prospects, financial condition, and results of operations.
Summary
of any product research and development that we will perform for the term of
our
plan of operation
We
do not
anticipate performing any additional significant product research and
development under our plan of operation.
Expected
purchase or sale of plant and significant equipment.
We
do not
anticipate the purchase or sale of any plant or significant equipment; as such
items are not required by us at this time.
16
Going
Concern
The
accompanying condensed consolidated financial statements have been prepared
in
conformity with accounting principles generally accepted in the United States
of
America, which contemplate our continuation of us as a going concern. We
incurred a net loss for the six months ended June 30, 2008 of $1,133,277, used
cash for operating activities of $272,691 for the six months ended June 30,2008, and at June 30, 2008 had an accumulated deficit of $36,185,329 and a
working capital deficit of $5,064,955. These conditions raise substantial doubt
as to our ability to continue as a going concern. Our condensed consolidated
financial statements do not include any adjustments that might result from
the
outcome of this uncertainty. Furthermore, our condensed consolidated financial
statements do not include any adjustments relating to the recoverability and
classification of recorded asset amounts, or amounts and classification of
liabilities that might be necessary should we be unable to continue as a going
concern.
We
have
eliminated non-critical personnel and expenditures, reduced travel and
renegotiated leases, debt and product pricing while building a strong team
of
qualified and dedicated personnel. We believe we can grow revenues during the
next twelve months without a significant increase to overhead.
Critical
Accounting Policies and Estimates
Our
discussion and analysis of our financial condition and results of operations
are
based upon our condensed consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States of America. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosures of contingent
assets and liabilities. On an ongoing basis, we evaluate our estimates,
including those related to impairment of long-lived assets, any potential losses
from pending litigation and deferred tax asset or liability. 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
the
basis for making judgments about the carrying value of assets and liabilities
that are not readily apparent from other sources. Actual results may differ
from
these estimates under different assumptions or conditions; however, we believe
that our estimates, including those for the above-described items, are
reasonable.
Machine
Sales.
Laser
equipment is sold to our independent operators/retailers, most frequently in
three installment payments as follows: 40% upon order, 40% prior to delivery,
and 20% upon completion of installation of equipment at the retail location.
We
retain ownership of the proprietary software and license use of the software
to
the distributor/retailer for a monthly fee, which is normally $500.
Product
Sales.
Revenue
from the sale of subsurface laser products (glass or equipment) is recognized
when title to the products is transferred to the customer, upon shipment, and
only when no further contingencies or material performance obligations are
warranted.
17
Royalty
Revenue.
We
recognize royalty revenue from licensing our technology only when earned, and
no
further contingences or material performance obligations are
warranted.
Stock-based
transactions.Shares
of
our common stock issued for services, compensation or financing costs is valued
at the market value of our common stock at the date of issuance. We account
for
our stock-based compensation in accordance with SFAS No. 123R, "Share-Based
Payment, an Amendment of FASB Statement No. 123." We recognize in the statement
of operations the grant-date fair value of stock options and other equity-based
compensation issued to employees and non-employees.
Intangible
Assets. Intangible
assets consist of product and laser licenses, capitalized software costs,
website development costs, artwork and copyrights, trademarks, trade names,
customer lists and relationships and were mostly acquired with the purchase
of
Laser-Tek and UC Laser. In accordance with SFAS No. 142, “Goodwill and Other
Intangible Assets”, we evaluate intangible assets and other long-lived assets
for impairment, at least on an annual basis and whenever events or changes
in
circumstances indicate that the carrying value may not be recoverable from
its
estimated future cash flows. Recoverability of intangible assets and other
long-lived assets is measured by comparing their net book value to the related
projected undiscounted cash flows from these assets, considering a number of
factors including past operating results, budgets, economic projections, market
trends, and product development cycles. If the net book value of the asset
exceeds the related undiscounted cash flows, the asset is considered impaired,
and a second test is performed to measure the amount of impairment loss.
Amortization is computed using the straight-line method over the estimated
useful life of the assets.
Off-Balance
Sheet Arrangements
We
do not
have any off-balance sheet arrangements that have or are reasonably likely
to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results or operations, liquidity, capital
expenditures or capital resources that is material to investors.
Recent
Accounting Developments
In
December 2007, the FASB issued SFAS 160, “Non-controlling Interests in
Consolidated Financial Statements - an amendment of ARB No. 51 (Consolidated
Financial Statements).” SFAS 160 establishes accounting and reporting standards
for a non-controlling interest in a subsidiary and for the deconsolidation
of a
subsidiary. In addition, SFAS 160 requires certain consolidation procedures
for
consistency with the requirements of SFAS 141, “Business Combinations.” SFAS 160
is effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 with earlier adoption prohibited. We
are
evaluating the effect, if any, that the adoption of SFAS 160 will have on our
results of operations, financial position, and the related
disclosures.
18
In
December 2007, the FASB issued SFAS 141(R), “Business Combinations.” SFAS 141(R)
expands the definition of transactions and events that qualify as business
combinations; requires that the acquired assets and liabilities, including
contingencies, be recorded at the fair value determined on the acquisition
date
and changes thereafter reflected in revenue, not goodwill; changes the
recognition timing for restructuring costs; and requires acquisition costs
to be
expensed as incurred. Adoption of SFAS 141(R) is required for combinations
after
December 15, 2008. Early adoption and retroactive application of SFAS 141(R)
to
fiscal years preceding the effective date are not permitted. We are evaluating
the effect, if any, that the adoption of SFAS 141(R) will have on our results
of
operations, financial position, and the related disclosures.
In
February 2007, the FASB issued Statement of Financial Accounting Standards
No. 159, The
Fair Value Option for Financial Assets and Financial Liabilities, including
an
amendment of FASB Statement No.115,
(“SFAS
159”). SFAS 159 permits fair value accounting to be irrevocably elected for
certain financial assets and liabilities on an individual contract basis at
the
time of acquisition or at a re-measurement event date. Upon adoption of SFAS
159, fair value accounting may also be elected for existing financial assets
and
liabilities. For those instruments for which fair value accounting is elected,
changes in fair value will be recognized in earnings and fees and costs
associated with origination or acquisition will be recognized as incurred rather
than deferred. SFAS 159 is effective January 1, 2008, with early adoption
permitted as of January 1, 2007. We anticipate adopting SFAS 159 concurrent
with the adoption of SFAS 157 on January 1, 2008, but have not yet
determined the financial impact, if any, upon adoption.
Item
3.Quantitative
and Qualitative Disclosures about Market Risk.
Not
applicable.
Item
4T. Controls and Procedures.
Our
Chief
Executive Officer, Kevin Ryan, and Principal Financial Officer, Doug Lee, have
evaluated the effectiveness of our disclosure controls and procedures (as
defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended)
as of the end of the period covered by this Report. Based on the evaluation,
Messrs. Ryan and Lee concluded that our disclosure controls and procedures
are
effective in timely altering them to material information relating to us
(including our consolidated subsidiaries) required to be included in our
periodic SEC filings.
There
were no changes in our internal control over financial reporting that occurred
during our most recent fiscal quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting.
PART
II—OTHER INFORMATION
Item
1. Legal Proceedings.
From
time
to time, we may become involved in various lawsuits and legal proceedings,
which
arise in the ordinary course of business. However, litigation is subject to
inherent uncertainties, and an adverse result in these or other matters may
arise from time to time that may harm our business. We are not presently a
party
to any material litigation, nor to the knowledge of management is any litigation
threatened against us, which may materially affect us.
19
Item
1A. Risk Factors.
Risks
Relating To Our Business and Marketplace
Due
to
the nature of our business and the present stage of our development, our
management believes the following risk factors apply to our operations as of
the
date of this report:
Due
to our operating losses, accumulated deficit, and working capital deficiency,
the report of our independent registered accounting firm contains a paragraph
expressing substantial doubt about our ability to continue as a going concern.
To
date,
we have not had profitable operations. We expect to continue to incur additional
losses for the current year. We had a net loss of $1,133,277 for the six months
ended June 30, 2008, used $272,691 of cash for operating activities of in the
six months ended June 30, 2008, and at June 30, 2008 had an accumulated deficit
of $36,185,329. These conditions raise substantial doubt about our ability
to
continue as a going concern. In order to become profitable and sustain
profitability, we will need to generate significant revenues to offset our
cost
of revenues and general and administrative expenses. We may never be able to
achieve or sustain our revenue or profit goals.
We
have a working capital deficiency and insufficient cash, which raises
substantial doubt about our ability to sustain business
operations.
At
June30, 2008, we had cash of $25,166 and a working capital deficiency of $5,064,955.
Accordingly, we are dependent upon external financing such as an offering of
debt and/or equity securities or continued borrowing from our CEO to continue
operations. If we can obtain this funding, we believe we will be able to
increase our revenues sufficiently to sustain and grow our operations for the
remainder of the fiscal year. However, if this funding is unavailable, we will
not be able to continue operations.
We
may be unable to pay the U.C. Laser debt, and may be required to issue
additional debt or equity securities which will dilute your investment and
could
cause a change of control.
As
mentioned, we have a significant working capital deficiency and have not
generated sufficient capital from operations to continue as a going concern
without outside financing or loans from officers. Our financial condition and
continued reliance on outside financing raises the risk that we will not be
able
to pay our debts when they become due. Obtaining additional financing could
result in a dilutive issuance of debt or equity securities on terms that are
not
favorable to us or to your investment in our shares.
20
In
2007,
we issued a $400,000 promissory note in connection with the renegotiated
transaction with U.C. Laser. Pursuant to that note, we are holding 2,276,795
shares of class B preferred stock as collateral for the note. In accordance
with
the terms of the note, if we are unable to pay the note, as extended, we may
be
required to relinquish the 2,276,795 shares of class B preferred stock to U.C.
Laser, which are convertible into 6,505,129 shares of our common stock, or
approximately 45% of outstanding common stock. If we are required to provide
U.C. Laser with the preferred shares it will negatively affect your relative
ownership position in our shares and will result in a change of control of
our
Company.
Since
we operate in the giftware industry, we are affected by economic conditions
and
consumer trends.
Since
we
manufacture and market items that would be considered giftware, our success
will
depend upon a number of factors relating to consumer spending, including future
economic conditions affecting disposable consumer income, such as employment,
business conditions, interest rates, and taxation. If existing economic
conditions continue to deteriorate, consumer spending may decline, thereby
further adversely affecting our business and results of operations.
We
must
be able to anticipate and respond to changing merchandise trends and consumer
demands in a timely manner. If we should miscalculate consumers’ purchasing
habits and tastes, we may not be able to compete.
We
may face competition from existing and potential
competitors.
We
face
competition from Seaena licensees in the glass subsurface engraving industry.
To
compete; we may be forced to offer lower prices, resulting in reduced revenues.
Additionally, we will continue to pursue enforcement of the patent for the
subsurface laser engraving process.
The
loss of our officers and directors or our failure to attract and retain
additional personnel could adversely affect our business.
Our
success depends largely upon the efforts, abilities, and decision-making of
our
executive officers and directors. Although we believe that we maintain a core
group sufficient for us to effectively conduct our operations, the loss of
Mr.
Ryan would have an adverse effect on our ability to continue operations. We
do
not currently maintain “key-man” life insurance on any of our executives or
directors, and there is no contract in place assuring their services for any
length of time. The loss of any one of them would have a material adverse affect
on us. There can be no assurance that the services of any member of our
management will remain available to us for any period of time, or that we will
be able to enter into employment contracts with any of our management, or that
any of our plans to reduce dependency upon key personnel will be successfully
implemented.
The
knowledge and expertise of our officers and directors are critical to our
operations. There is no guarantee that we will be able to retain our current
officers and directors, or be able to hire suitable replacements in the event
that some or all of our current management leaves our company. In the event
that
we should lose key members of our staff, or if we are unable to find suitable
replacements, we may not be able to maintain our business and might have to
cease operations, in which case an investment in our stock could be
lost.
21
Risks
Relating To Our Common Stock
Because
our common stock is deemed a low-priced “Penny” stock, an investment in our
common stock should be considered high risk and subject to marketability
restrictions.
Since
our
common stock is a penny stock, as defined in Rule 3a51-1 under the Securities
Exchange Act, it will be more difficult for investors to liquidate their
investment even if and when a market develops for the common stock. Until the
trading price of the common stock rises above $5.00 per share, if ever, trading
in the common stock is subject to the penny stock rules of the Securities
Exchange Act specified in rules 15g-1 through 15g-10. Those rules require
broker-dealers, before effecting transactions in any penny stock,
to:
·
Deliver
to the customer, and obtain a written receipt for, a disclosure
document;
·
Disclose
certain price information about the
stock;
·
Disclose
the amount of compensation received by the broker-dealer or any associated
person of the broker-dealer;
·
Send
monthly statements to customers with market and price information
about
the penny stock; and
·
In
some circumstances, approve the purchaser’s account under certain
standards and deliver written statements to the customer with information
specified in the rules.
Consequently,
the penny stock rules may restrict the ability or willingness of broker-dealers
to sell the common stock and may affect the ability of holders to sell their
common stock in the secondary market and the price at which such holders can
sell any such securities. These
additional procedures could also limit our ability to raise additional capital
in the future.
If
we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board, which would limit the ability of broker-dealers
to
sell our securities and the ability of stockholders to sell their securities
in
the secondary market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. More specifically, FINRA has enacted
Rule
6530, which determines eligibility of issuers quoted on the OTC Bulletin Board
by requiring an issuer to be current in its filings with the Commission.
Pursuant to Rule 6530(e), if we file our reports late with the Commission three
times in a two-year period or our securities are removed from the OTC Bulletin
Board for failure to timely file twice in a two-year period then we will be
ineligible for quotation on the OTC Bulletin Board. As a result, the market
liquidity for our securities could be severely adversely affected by limiting
the ability of broker-dealers to sell our securities and the ability of
stockholders to sell their securities in the secondary market. We have not
been
late in any of our SEC reports through June 30, 2008.
22
We
have the ability to issue additional shares of our common stock and shares
of
preferred stock without asking for stockholder approval, which could cause
your
investment to be diluted.
Our
Articles of Incorporation authorizes the Board of Directors to issue up to
100,000,000 shares of common stock, 10,000,000 shares of Class A preferred
and
5,000,000 shares of Class B preferred stock. The power of the Board of Directors
to issue shares of common stock, preferred stock or warrants or options to
purchase shares of common stock or preferred stock is generally not subject
to
stockholder approval. Accordingly, any additional issuance of our common stock,
or preferred stock that may be convertible into common stock, may have the
effect of diluting an investment in our common stock.
FINRA
sales practice requirements may also limit a stockholder's ability to buy and
sell our stock.
In
addition to the “penny stock” rules described above, FINRA has adopted rules
that require that in recommending an investment to a customer, a broker-dealer
must have reasonable grounds for believing that the investment is suitable
for
that customer. Prior to recommending speculative low priced securities to their
non-institutional customers, broker-dealers must make reasonable efforts to
obtain information about the customer's financial status, tax status, investment
objectives and other information. Under interpretations of these rules, the
FINRA believes that there is a high probability that speculative low priced
securities will not be suitable for at least some customers. The FINRA
requirements make it more difficult for broker-dealers to recommend that their
customers buy our common stock, which may limit your ability to buy and sell
our
stock and have an adverse effect on the market for our shares.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On
April30, 2008, we issued 500,000 shares of common stock for payment on a consultant’s
outstanding accounts payable balance. We believe that the issuance of the shares
was exempt from the registration and prospectus delivery requirements of the
Securities Act of 1933 by virtue of Section 4(2).
On
April30, 2008, we issued 546,314 shares of restricted common stock to related parties
as compensation for services rendered. We believe that the issuance of the
shares were exempt from the registration and prospectus delivery requirements
of
the Securities Act of 1933 by virtue of Section 4(2).
Issuer
Purchases of Equity Securities
We
did
not repurchase any of our equity securities during the quarter ended June 30,2008.
Item
3. Defaults Upon Senior Securities.
None.
23
Item
4. Submission of Matters to a Vote of Security Holders.
We
did
not submit any matters to a vote of our security holders during the quarter
ended June 30, 2008.
Item
5. Other Information.
On
August12, 2008, we entered into an amendment to the Concord Industries letter of
intent to extend the closing date of the merger to a date that is ninety (90)
days after we complete a minimum of $3,000,000 in working capital financing.
A
copy of Amendment No. 1 to the Letter of Intent is attached hereto as Exhibit
10.9.
Agreement
and Mutual Release by and between U.C. Laser Ltd. and Seaena, Inc.
dated
as of January 8, 2007
8-K
10.1
05/24/07
10.5
Amendment
to Agreement and Mutual Release by and between U.C. Laser Ltd.
and Seaena,
Inc. dated as of May 3, 2007
8-K
10.2
05/24/07
24
10.6
Promissory
Note to U.C. Laser Ltd. dated May 3, 2007
8-K
10.3
05/24/07
10.7
Pledge
Agreement for the benefit of U.C. Laser Ltd. dated May 3,2007
8-K
10.4
05/24/07
10.8
Concord
Industries Binding letter of intent dated January 15, 2008
8-K
10.1
01/18/08
10.9
Amendment
No. 1 to Binding Letter of Intent with Concord Industries, Inc.
dated
August 12, 2008
X
31.1
Certification
of Kevin T, Ryan Chief Executive Officer, pursuant to Section 302
of the
Sarbanes-Oxley Act
X
31.2
Certification
of Doug Lee, Principal Financial Officer, pursuant to Section 302
of the
Sarbanes-Oxley Act
X
32.1
Certification
of Kevin T. Ryan, Chief Executive Officer, pursuant to Section
906 of the
Sarbanes-Oxley Act
X
32.2
Certification
of Doug Lee, Principal Financial Officer, pursuant to Section 906
of the
Sarbanes-Oxley Act
X
25
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.
