(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 May 20,2008,
was 8,023,707 shares.
Property,
plant and equipment net of accumulate depreciation of $1,162,465
and
$1,093,500, respectively
711,061
774,258
Other
assets:
Licenses
and related costs, net of accumulated amortization of $864,046 and
$822,900, respectively
781,756
822,901
Customer
lists and relationships, net of accumulated amortization of $610,856
and
$398,356, respectively
1,101,644
1,616,559
Patent,
net of accumulated amortization of of $176,463 and $156,820,
respectively
373,537
393,180
Artwork,
net of accumulated amortization of $186,884 and $149,384,
respectively
113,116
150,616
Total
other assets
2,373,053
2,983,256
Total
assets
$
4,277,304
$
4,601,655
Liabilities
and Stockholders’ Equity
Current
liabilities:
Accounts
payable
$
744,826
$
711,281
Accrued
liabilities
241,474
219,863
Accrued
interest – related party
587,283
499,449
Customer
deposits
487,963
487,480
Note
payable
400,000
400,000
Note
payable – related party
3,681,072
3,461,072
Total
current liabilities
6,142,618
5,779,145
Stockholders’
Equity:
Preferred
stock, class A, $0.001 par value, 10,000,000 shares authorized, no
shares
issued and outstanding
-
-
Preferred
stock, class B, $0.001 par value, 5,000,000 shares authorized, 2,276,795
shares issued and outstanding
2,277
2,277
Common
stock, $0.001 par value, 100,000,000 shares authorized 8,023,707
shares
issued and outstanding at March 31, 2008 and December 31, 2007,
respectively
8,024
8,024
Treasury
stock
(380,508
)
(380,508
)
Additional
paid-in capital
34,223,364
34,223,364
Foreign
currency translation adjustment
2,024
1,805
Accumulated
(deficit)
(35,770,495
)
(35,032,452
)
Total
stockholders’ (deficit)
(1,915,314
)
(1,177,490
)
Total
liabilities and stockholders’ (deficit)
$
4,227,304
$
4,601,655
The
accompanying notes are an integral part of these condensed consolidated
financial statements
Adjustments
to reconcile net (loss) to cash used in operating
activities:
Accounts
receivable
144,504
162,648
Inventory
30,648
(8,401
)
Other
current assets
(93,037
)
4,539
Accounts
payable
33,545
152,013
Accrued
liabilities
21,611
119,517
Accrued
interest - related party
87,834
38,968
Customer
deposits
483
(49,149
)
Net
cash used in operating activities
(182,364
)
(114,650
)
Cash
flows from investing activities
Purchase
of fixed assets
(5,770
)
(2,888
)
Net
cash used in investing activities
(5,770
)
(2,888
)
Cash
flows from financing activities
Proceeds
from note payable – related party
220,000
210,000
Net
cash provided from financing activities
220,000
210,000
Net
increase (decrease) in cash
31,866
92,462
Effects
of exchange rate
219
-
Cash
- beginning
40,979
113,877
Cash
- ending
$
73,064
$
206,339
Supplemental
disclosures:
Interest
paid
$
3,415
$
-
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 months ended March 31, 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. The Company’s ability to
continue as a going concern is dependent upon attaining profitable operations
based on the development of products that can be sold. The Company intends
to
use borrowings and sales of its securities to mitigate the effects of its 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 the
Company be unable to continue in existence.
Glass
blocks, pre-made images and related products
$
658,822
Electronic
parts and accessories
14,765
$
673,587
4
NOTE
4 –
PROPERTY AND EQUIPMENT
Property
and equipment at March 31, 2008, consist of the following:
Computers
and equipment
$
1,622,328
Vehicles
33,499
Furniture
and fixtures
163,423
Leasehold
improvements
54,277
1,873,527
Less
accumulated depreciation and amortization
(1,162,466
)
$
711,061
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
December 31, 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 March 31, 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. The note is currently in default
and
negotiations are in progress to extend the maturity date.
NOTE
6 –
NOTES PAYABLE - RELATED PARTIES
We
had
notes payable to our CEO, in which principal balances totaled $3,681,072 as
of
the period ending March 31, 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 $87,834 and $39,863 for the three months ending March31, 2008 and 2007, respectively.
Effective
April 8, 2005, the Company 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;
however, no earnings have been distributed as of March 31, 2008. LDI’s assets,
liabilities, and earnings are consolidated with those of the Company and the
minority partners’ interest in LDI is included in the Company’s financial
statements as minority interest income.
On
April30, 2008 we authorized the issuance 500,000 shares of free-trading 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. The
shares remain un-issued as of the date of this report.
On
April30, 2008 we authorized the issuance 546,314 shares of restricted common stock
to
seven different Officers and employees as a bonus for services rendered. These
shares were valued at $43,705; the fair market value of the underlying shares.
The shares remain un-issued as of the date of this report.
On
May19, 2008 the deadline on the Letter of Intent that outlines a potential merger
with Concord Industries was extended from May 15, 2008 to July 15,2008.
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 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 will also 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
will
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 product, technology, and core
philosophy of superior customer service and quality.
Our
goal
to aggressively increase our client base has been a success based on new orders
and inquires. Our two-dimensional portrait line is growing rapidly and is
anticipated to be a major revenue channel 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 substantial 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
whereby the lasers can 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 has given us a competitive advantage over our competition.
Our facility in China has been totally 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 will acquire Concord in a reverse
acquisition. Pursuant to the agreement, we have agreed to 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,
we will issue 53% of the shares to the Concord shareholders and 7% will be
held in escrow and released upon the achievement of certain milestones over a
three-year period following the closing. It is managements’ expectation that the
consummation of this agreement will open up additional distribution channels
and product lines resulting in substantial growth for both companies. The original
Letter of intent expires on March 31, 2008. We have jointly agreed to extend
the closing until July 15, 2008.
Results
of Operations for the three months ended March 31, 2008 and 2007
compared.
The
following tables summarize selected items from the statement of operations
for
the three months ended March 31, 2008 compared to the three months ended March31, 2007.
INCOME:
For the three months ended
March 31,
Increase (Decrease)
2008
2007
$
%
Revenue
$
649,060
$
795,689
$
(146,629
)
(18
%)
Cost
of Sales
428,487
559,622
(131,135
)
(23
%)
Gross
Profit
$
220,573
$
236,067
(15,494
)
(7
%)
Gross
Profit Percentage of Sales
34
%
30
%
$
-
4
%
9
Revenue
Our
revenue for the three months ended March 31, 2008 totaled $649,060 compared
to
$795,689 in 2007 representing a decline in gross revenue of $146,629. In the
first three months of 2008, approximately 65% of our total revenue was
attributable to custom orders for corporate specialty and promotional items,
which totaled $422,752 compared to $430,902 or 55% of total revenue in the
first
three months of 2007. 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 royalties has declined by 33% to $51,439 in the first quarter of 2008
compared to $77,217 for the same period in 2007 due to decreased
royalty payments. 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 March 31, 2008, this totaled $174,869 and $287,570 in the same period
of
2007, resulting in a decrease of $130,734 in 2008.
Cost
of goods sold/ Gross profit percentage of sales
Our
cost
of goods sold for the three months ended March 31, 2008 was $428,487 compared
to
$559,622 for the three months ended March 31, 2007 representing a decrease
of
$131,135 or 23% in 2008. Cost of goods sold in the first quarter of 2008
consisted primarily of glass, product bases, and transportation costs.
Transportation costs of $47,466 represent approximately 11% of our total cost
of
goods sold in 2008 while it consisted of $110,370, or 44% in 2007. The reduction
in transportation costs was primarily due to improvements in logistics and
shipping management. In the first three months of 2008, our cost of materials
was $165,014 or 39% and in 2007 material costs were $112,872 or 37%. We
attribute the increase in material costs directly to the weaker currency
exchange rate of the US$ to the Chinese Yuan.
Our
general and administrative expenses were $397,184 and $432,584 for the three
months ended March 31, 2008 and 2007, respectively. The decrease of $35,400
or
8% 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 of 60% or $19,794 over the first quarter of 2008.
Payroll
Expenses
Payroll
and related benefits for the three months ended March 31, 2008 decreased by
$102,929 or 36% from $283,060 for the three months ended March 31, 2007 to
$180,131 for the three months ended March 31, 2008 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 March 31, 2008 decreased by $62,333
or 19% from $329,587 for the three months ended March 31, 2007 to $267,254
for
the three months ended March 31, 2008. The decrease is principally due to the
reduction in amortization as a result of a patent that was written of as
impaired at the end of 2007 and no longer amortized during 2008.
Total
Operating Expenses
Total
operating expenses for the three months ended March 31, 2008 were $844,569
compared to $1,045,231 for the three months ended March 31, 2007. The decrease
of $200,662 or 19% was primarily due to the operational efficiencies gained
from
acquisitions
Loss
from Operations
Our
net
operating loss for the three months ended March 31, 2008 was $623,996 compared
to a net operating loss of $809,164 for the three months ended March 31, 2007.
Net operating income (loss) is the result of revenue minus total expenses,
which, despite declining revenues is principally due to operational efficiencies
gained from acquisitions.
11
Other
Income (Expenses)
Interest
expense for the three months ended March 31, 2008 increased by $3,390 from
$-0-
for the three months ended March 31, 2007. The increase is due to credit card
interest of $3,390 in the first three months of 2008.
Interest
expense due to a related party increased for the three months ended March 31,2008 by $47,971 or 120% from $39,863 for the three months ended March 31, 2007
compared to $87,834 for the three months ended March 31, 2008 due to additional
loans made to us by the CEO.
Other
income (expense) for the three months ended March 31, 2008 increased by $7,478
or 49% from $15,345 of other expenses for the three months ended March 31,2007
to $22,823 of other expenses for the three months ended March 31, 2008.
Net
(loss)
Our
net
loss of $738,043 for the three months ended March 31, 2008 decreased by $126,329
or 15% compared to a net loss of $864,372 for the three months ended March31,2007. 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 ending March 31, 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 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 March 31, 2008 compared to December 31, 2007.
At
March31, 2008, we had a working capital deficit of $4,996,428 as compared to
$4,520,088 at December 31, 2007. We had cash and cash equivalents of $73,064
at
March 31, 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 three months ended
March 31, 2008.
12
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 three months ended March 31, 2008, our financing activities provided cash
of
$220,000, while our operating and investing activities used cash of $182,364
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 March 31, 2008, we had available cash of $73,064. 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 insure 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.
13
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.
Going
Concern
The
accompanying 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 three months ended March 31, 2008 of $738,043, used cash for
operating activities of $182,364 for the three months ended March 31, 2008,
and
at March 31, 2008 had an accumulated deficit of $35,770,495 and a working
capital deficit of $4,996,428. 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
taken the following steps that we believe will be sufficient to provide us
with
the ability to continue in existence. On January 15, 2008, we entered into
a
binding letter of intent to acquire Concord Industries, Inc., a privately held
Connecticut corporation. The acquisition, subject to certain milestones and
conditions, is expected to be completed before the end of the third quarter
of
2008. Our management believes that the merger of our company with Concord
Industries, Inc. will enable us to continue as a going concern. While
incorporating the strengths and expertise of both Seaena and Concord Industries
with newly created economies of scale, we believe that the management team
will
be able to achieve profitable operations, but there can be no assurance that
we
will be able to raise sufficient capital and generate positive cash flows from
operations sufficient to complete the acquisition or sustain
operations.
We
have
eliminated non-critical personnel and expenditures, reduced travel and
renegotiated leases, debt and prices 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 consolidated 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.
14
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.
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.
15
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.
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.
16
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.
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 $738,043 for the three months
ended March 31, 2008, used $182,364 of cash for operating activities of in
the
three months ended March 31, 2008, and at March 31, 2008 had an accumulated
deficit of $35,770,495. 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.
17
We
have a working capital deficiency and insufficient cash, which raises
substantial doubt about our ability to sustain business
operations.
At
March31, 2008, we had cash of $73,064 and a working capital deficiency of $4,996,428.
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.
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.
We
may be unable to complete our planned change of control transaction with Concord
Industries or it may prove unsuccessful or divert our
resources.
We
have
entered into a letter of intent with Concord Industries whereby Concord will
acquire a 60% interest in our Company. If we do not complete this transaction
with Concord, we may not be able to ever earn profits from operations, pay
our
debts or continue to fund our operations. Furthermore, if we do not complete
the
transaction with Concord, we will be forced to seek other opportunities that
will allow us to increase our market presence or raise significant amounts
of
money to fund our plan of operation. The transaction with Concord or raising
additional capital will result in a dilutive issuance of equity securities
and/or the issuance of debt and the payment expenses that would lower our
margins and harm our business.
18
We
may
not be able to successfully acquire Concord. Our planned acquisition will
require an unspecified amount of additional capital expenditure in the form
of
planning, due diligence, legal, and accounting fees. We may be unable to
successfully complete this or future acquisitions. If we acquire Concord, we
may
be unable to successfully integrate Concord with our own and maintain our
standards, controls and policies. The Concord acquisition will place additional
constraints on our resources by diverting the attention of our management from
existing operations. The Concord acquisition will increase the size and expense
of our labor force. The acquisition may result in a potentially dilutive
issuance of equity securities, the incurrence of debt and amortization of
expenses related to intangible assets, all of which could lower our margins
and
materially affect our results from operations.
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 in the glass subsurface engraving industry, to compete; we may
be
forced to offer lower prices and narrow our marketing focus, resulting in
reduced revenues, if any. Additionally, we must pursue enforcement of the United
States 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.
19
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.
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 March 31, 2008.
20
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
50,000,000 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.
We
did
not issue any of our equity securities during the three months ended March31,2008.
Issuer
Purchases of Equity Securities
We
did
not repurchase any of our equity securities during the quarter ended March31,2008.
Item
3. Defaults Upon Senior Securities.
None.
21
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 first
quarter of 2008.
Item
5. Other Information.
None.
Item
6. Exhibits.
Incorporated
by reference
Exhibit
Exhibit
Description
Filed
herewith
Form
Period
ending
Exhibit
Filing
date
2.1
Amendment
to U.C. Laser Asset Purchase Agreement dated February 1,2006
8-K
2.2
04/05/06
2.2
Second
Amendment to U.C. Laser Asset Purchase Agreement dated March 9,2006
8-K
2.3
04/05/06
3.1(i)(a)
Articles
of Incorporation of Crystalix Group International, Inc.
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
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
22
10.8
Concord
Industries Binding letter of intent dated January 15, 2008
8-K
10.1
01/18/08
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
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.
