UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2008 |
o | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 001-15789
STRATUS SERVICES GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware | 22-3499261 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
149 Avenue at the Common, Shrewsbury, New Jersey 07702 | ||
(Address of principal executive offices) | ||
(732) 866-0300 | ||
(Registrant’s telephone number, including area code) | ||
Securities registered under Section 12(b) of the Exchange Act: Not Applicable | ||
Securities registered under Section 12(g) of the Exchange Act: | ||
Common Stock, $.04 par value | ||
(Title of class) |
Indicate by check mark whether the registrant has (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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 o No ý
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. (Check One):
Large Accelerated Filer o | Accelerated Filer o | Non-Accelerated Filer o | Smaller Reporting Company T |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of Common Stock, $.04 par value, outstanding as of May 8, 2008 was 71,318,617.
STRATUS SERVICES GROUP, INC.
Condensed Consolidated Balance Sheets
(Unaudited)
March 31, | September 30, | |||||||
Assets | 2008 | 2007 | ||||||
Current assets | ||||||||
Cash | $ | 78,037 | $ | 144,849 | ||||
Accounts receivable–less allowance for doubtful accounts of $200,000 and $75,000 | 1,080,612 | 1,104,650 | ||||||
Unbilled receivables | 336,319 | 176,690 | ||||||
Prepaid insurance | 54,034 | 53,351 | ||||||
Prepaid expenses and other current assets | 312,778 | 269,988 | ||||||
1,861,780 | 1,749,528 | |||||||
Property and equipment, net of accumulated depreciation | 224,240 | 186,279 | ||||||
Intangible assets, net of accumulated amortization | 77,778 | 94,444 | ||||||
Goodwill | 1,766,336 | 1,766,336 | ||||||
Other assets | 20,592 | 8,820 | ||||||
$ | 3,950,726 | $ | 3,805,407 | |||||
Liabilities and Stockholders’ Equity (Deficiency) | ||||||||
Current liabilities | ||||||||
Loans payable (current portion) | $ | 130,142 | $ | 130,983 | ||||
Loans payable – related parties | 371,916 | 85,721 | ||||||
Notes payable – acquisitions (current portion) (including $54,420 and $52,859 to related party) | 401,396 | 349,673 | ||||||
Note payable – related party (current portion) | 589,196 | 506,233 | ||||||
Line of credit | 835,005 | 642,570 | ||||||
Insurance obligation payable | 24,561 | 13,154 | ||||||
Accounts payable and accrued expenses | 4,398,590 | 4,349,523 | ||||||
Accrued payroll and taxes | 324,340 | 190,969 | ||||||
Payroll taxes payable | 3,128,203 | 3,218,455 | ||||||
Series A redemption payable | 300,000 | 300,000 | ||||||
10,503,349 | 9,787,281 | |||||||
Loans payable (net of current portion) | 25,765 | 35,013 | ||||||
Notes payable – acquisitions (net of current portion) (including $81,895 and $109,664 to related party) | 364,750 | 430,241 | ||||||
Note payable – related party (net of current portion) | 27,654 | 110,617 | ||||||
Notes payable – minority interest investors | 750,000 | 675,000 | ||||||
11,671,518 | 11,038,152 | |||||||
Commitments and contingencies | ||||||||
Minority interest | 402,252 | 547,135 | ||||||
Stockholders’ equity (deficiency) | ||||||||
Preferred stock, $.01 par value, 5,000,000 shares authorized | ||||||||
Series F voting convertible preferred stock, $.01 par value, 6,000 | ||||||||
shares issued and outstanding, liquidation preference of $600,000 | ||||||||
(including unpaid dividends of $154,000 and $133,000) | 754,000 | 733,000 | ||||||
Common stock, $.04 par value, 100,000,000 shares authorized; 71,318,615 | ||||||||
and 69,568,615 shares issued and outstanding | 2,852,745 | 2,782,745 | ||||||
Additional paid-in capital | 9,735,116 | 9,760,516 | ||||||
Accumulated deficit | (21,464,905 | ) | (21,056,141 | ) | ||||
Total stockholders’ equity (deficiency) | (8,123,044 | ) | (7,779,880 | ) | ||||
$ | 3,950,726 | $ | 3,805,407 |
See notes to condensed consolidated financial statements
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STRATUS SERVICES GROUP, INC.
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
March 31, | March 31, | |||||||||||||||
2008 | 2007 | 2008 | 2007 | |||||||||||||
Revenues | $ | 2,977,914 | $ | 1,810,705 | $ | 5,636,934 | $ | 3,673,559 | ||||||||
Cost of revenues | 2,120,383 | 1,251,101 | 3,976,502 | 2,524,904 | ||||||||||||
Gross profit | 857,531 | 559,604 | 1,660,432 | 1,148,655 | ||||||||||||
Selling, general and administrative expenses | 1,130,045 | 726,358 | 2,207,341 | 1,374,561 | ||||||||||||
Operating (loss) from continuing operations | (272,514 | ) | (166,754 | ) | (546,909 | ) | (225,906 | ) | ||||||||
Interest expense | (69,438 | ) | (56,249 | ) | (133,853 | ) | (118,672 | ) | ||||||||
Loss from continuing operations before minority interests | (341,952 | ) | (223,003 | ) | (680,762 | ) | (344,578 | ) | ||||||||
Minority interests in net (income) loss of consolidated subsidiaries | 92,178 | 36,386 | 174,283 | 14,578 | ||||||||||||
(Loss) from continuing operations | (249,774 | ) | (186,617 | ) | (506,479 | ) | (330,000 | ) | ||||||||
Discontinued operations - (loss) from discontinued operations | (23,000 | ) | - | (23,000 | ) | - | ||||||||||
Gain on sale of discontinued operations | 59,607 | 100,635 | 120,715 | 276,494 | ||||||||||||
Net (loss) | (213,167 | ) | (85,982 | ) | (408,764 | ) | (53,506 | ) | ||||||||
Dividends on preferred stock | (10,500 | ) | (10,500 | ) | (21,000 | ) | (21,000 | ) | ||||||||
Net (loss) attributable to common stockholders | $ | (223,667 | ) | $ | (96,482 | ) | $ | (429,764 | ) | $ | (74,506 | ) | ||||
Net earnings (loss) per share attributable to common stockholders | ||||||||||||||||
Basic: | ||||||||||||||||
(Loss) from continuing operations | $ | - | $ | - | $ | - | $ | - | ||||||||
Earnings from discontinued operations | - | - | - | - | ||||||||||||
Net (loss) | $ | - | $ | - | $ | - | $ | - | ||||||||
Diluted: | ||||||||||||||||
(Loss) from continuing operations | $ | - | $ | - | $ | - | $ | - | ||||||||
Earnings from discontinued operations | - | - | - | - | ||||||||||||
Net (loss) | $ | - | $ | - | $ | - | $ | - | ||||||||
Weighted average shares outstanding per common share | ||||||||||||||||
Basic | 71,318,615 | 65,573,033 | 70,534,462 | 65,526,870 | ||||||||||||
Diluted | 71,318,615 | 65,573,033 | 70,534,462 | 65,526,870 |
See notes to condensed consolidated financial statements
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STRATUS SERVICES GROUP, INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Cash flows from (used in) operating activities | ||||||||
Net (loss) | $ | (408,764 | ) | $ | (53,506 | ) | ||
Adjustments to reconcile net earnings to net cash used by operating activities | ||||||||
Depreciation | 39,459 | 38,799 | ||||||
Amortization | 16,666 | - | ||||||
Stock compensation | 20,000 | - | ||||||
Gain on sale of discontinued operations | (120,715 | ) | (276,494 | ) | ||||
Imputed interest | 12,440 | 21,654 | ||||||
Changes in operating assets and liabilities | ||||||||
Accounts receivable | (135,591 | ) | (143,263 | ) | ||||
Prepaid insurance | (683 | ) | (23,183 | ) | ||||
Prepaid expenses and other current assets | (42,790 | ) | 2,303 | |||||
Other assets | (11,772 | ) | - | |||||
Minority interest | (174,283 | ) | (14,578 | ) | ||||
Insurance obligation payable | 11,407 | 9,449 | ||||||
Accrued payroll and taxes | 133,371 | 48,516 | ||||||
Payroll taxes payable | (90,252 | ) | (446,394 | ) | ||||
Accounts payable and accrued expenses | 8,391 | (31,921 | ) | |||||
Accrued interest | 40,676 | 22,099 | ||||||
Total adjustments | (293,676 | ) | (793,013 | ) | ||||
(702,440 | ) | (846,519 | ) | |||||
Cash flows from investing activities | ||||||||
Purchase of property and equipment | (77,420 | ) | (29,689 | ) | ||||
Cash received in connection with sale of discontinued operations (including $377,500 from a related party in 2007) | 120,715 | 650,901 | ||||||
43,295 | 621,212 | |||||||
Cash flows from (used in) financing activities | ||||||||
Net proceeds from line of credit | 192,435 | 143,867 | ||||||
Payments of loans payable | (10,089 | ) | (8,371 | ) | ||||
Proceeds from loans payable – related parties | 301,195 | 120,000 | ||||||
Payments of loans payable – related parties | (15,000 | ) | (101,000 | ) | ||||
Payments of notes payable – acquisitions | (26,208 | ) | (7,033 | ) | ||||
Proceeds from exercise of warrants | - | 9,375 | ||||||
Proceeds from minority interest investors | 150,000 | - | ||||||
592,333 | 156,838 | |||||||
Net change in cash | (66,812 | ) | (68,469 | ) | ||||
Cash – beginning | 144,849 | 84,881 | ||||||
Cash – ending | $ | 78,037 | $ | 16,412 |
See notes to condensed consolidated financial statements
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Supplemental disclosure of cash paid | ||||||||
Interest | $ | 148,529 | $ | 96,573 | ||||
Schedule of noncash investing and financing activities | ||||||||
Sale of discontinued operations: | ||||||||
Gain on sale | $ | 120,715 | $ | 276,494 | ||||
Due from related party | - | 377,500 | ||||||
Accrued earn-out | - | (3,093 | ) | |||||
Net cash received | $ | 120,715 | $ | 650,901 | ||||
Cumulative dividends on preferred stock | $ | 21,000 | $ | 21,000 | ||||
Assignment of note receivable in exchange for notes payable - acquisitions | $ | - | $ | 80,000 |
See notes to condensed consolidated financial statements
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STRATUS SERVICES GROUP, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – | BASIS OF PRESENTATION |
The accompanying condensed consolidated financial statements have been prepared by the Company, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States have been condensed or omitted pursuant to such rules and regulations. These condensed financial statements reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the financial position, the results of operations and cash flows of the Company for the periods presented. It is suggested that these condensed financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K.
The results of operations for the interim periods presented are not necessarily indicative of the results to be expected for the full year.
Certain prior period financial statement amounts have been reclassified to be consistent with the presentation for the current period.
NOTE 2 - | DESCRIPTION OF BUSINESS AND SEGMENT INFORMATION |
Description of Business
Until December 2005, Stratus Services Group, Inc. (“Stratus”) , together with its 51%-owned joint venture, Stratus Technology Services, LLC (“STS”), was a national provider of staffing and productivity consulting services. In December 2005, Stratus completed a series of asset sales transactions pursuant to which it sold substantially all of the assets it used to conduct its staffing services (see Note 7). In August 2007, Stratus’ newly formed subsidiary, Transworld Assets, LLC (“Transworld”) (see Note 4) acquired substantially all of the assets used by Green-Tech Assets, Inc. and its affiliate, CC Laurel, Inc. in their technology asset disposal business (see Notes 4 and 8). Following the transaction, Transworld Assets, LLC changed its named to Green-Tech Assets, LLC (“GTA”). Stratus, STS and GTA are herein referred to as the “Company”.
Segment Information
The operating segments reported below are the segments for which operating results are evaluated regularly by management in deciding how to allocate resources and in assessing performance. The Company’s reportable segments are strategic divisions that offer different services and are managed separately as each division requires different resources and marketing strategies. Intersegment sales are not significant.
Prior to the acquisition of the technology asset disposal business in August 2007, the Company operated as one business segment.
Net revenues and operating income (loss) by segments for the three and six months ended March 31, 2008 were as follows:
Three Months Ended March 31, 2008 | Six Months Ended March 31, 2008 | |||||||
Revenues: | ||||||||
Information technology services | $ | 2,128,419 | $ | 4,089,301 | ||||
Technology asset disposal business | 849,495 | 1,547,633 | ||||||
Consolidated revenues | $ | 2,977,914 | $ | 5,636,934 | ||||
Operating (loss): | ||||||||
Information technology services | $ | (28,352 | ) | $ | (90,098 | ) | ||
Technology asset disposal business | (108,138 | ) | (168,367 | ) | ||||
Corporate expenses | (136,024 | ) | (288,444 | ) | ||||
Consolidated operating (loss) | $ | (272,514 | ) | $ | (546,909 | ) |
Management reviews the Company’s assets on a consolidated basis because it is not meaningful to allocate assets to the various segments. Management evaluates segment performance based on revenues and operating income. The Company
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does not allocate income taxes or charges determined to be non-recurring in nature. Unallocated amounts of operating (loss) consist of corporate expenses.
The Company primarily operates in the United States.
NOTE 3 – | LIQUIDITY |
At March 31, 2008, the Company had limited liquid resources. Current liabilities were $10,503,349 and current assets were $1,861,780. The difference of $8,641,569 is a working capital deficit, which is primarily the result of losses incurred during the last several years. These factors, among others, indicate that the Company may be unable to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management recognizes that the Company’s continuation as a going concern is dependent upon the continued cooperation of its creditors, its ability to generate sufficient cash flow to allow it to satisfy its obligations on a timely basis, to fund the operation and capital needs, and to obtain additional financing as may be necessary.
Management of the Company has taken steps to revise and reduce its operating requirements, which it believes will be sufficient to assure continued operations and implementation of the Company’s plans. The steps include closing branches that are not profitable, consolidating branches and reductions in staffing and other selling, general and administrative expense, and most significantly, the asset sales transactions that were completed in December 2005 (see Note 7) and the acquisition of the technology asset disposition business that took place in August 2007 (See Notes 4 and 8).
The Company continues to pursue other sources of equity or long-term debt financings. The Company also continues to negotiate payment plans and other accommodations with its creditors.
NOTE 4 - | NEWLY-FORMED SUBSIDIARY |
In July 2007, Stratus, in exchange for 5,000,000 shares of its common stock received a 51% interest in an entity created to acquire substantially all of the assets of Green-Tech Assets, Inc. and its affiliate, CC Laurel, Inc. Following the acquisition, Transworld changed its name to Green-Tech Assets, LLC. Minority interest investors in GTA, through a private offering, purchased units at the price of $100,000 which was comprised of a pro-rata share of the minority interest and a $50,000 note bearing interest at 6% per year and due July 31, 2012. In addition, each unit owner received 50,000 shares of Stratus’ common stock which was held by GTA. The private offering was closed in October 2007 with 15 units sold, representing $750,000 in contributed capital and $750,000 in notes payable.
NOTE 5– | NEW ACCOUNTING STANDARDS |
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or the Company’s fiscal year ending September 30, 2009. The Company is currently assessing the impact the adoption of this pronouncement will have on the financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” and is effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. The Company is currently assessing the impact the adoption of this pronouncement will have on the financial statements.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” and is effective for fiscal years beginning after December 5, 2008. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The Company is currently assessing the impact the adoption of this pronouncement will have on the Company’s financial statements.
In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) is effective for fiscal years beginning after December 13, 2008. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities
7
assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The Company is currently assessing the impact the adoption of this pronouncement will have on the Company’s financial statements.
NOTE 6 – | EARNINGS/LOSS PER SHARE |
Basic “Earnings Per Share” (“EPS”) excludes dilution and is computed by dividing earnings available to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted EPS assumes conversion of dilutive options and warrants, and the issuance of common stock for all other potentially dilutive equivalent shares outstanding. There were no dilutive shares for the three and six months ended March 31, 2008 and 2007. Outstanding common stock options and warrants not included in the computation of earnings per share for the three and six months ended March 31, 2008 and 2007, totaled 17,963,653 and 17,221,153, respectively. These options and warrants were excluded because their inclusion would have an anti-dilutive effect on earnings per share.
NOTE 7 – | DISCONTINUED OPERATIONS |
The gain on sale of discontinued operations is comprised of earnout payments in connection with the sales of substantially all of the Company’s then assets in December 2005. The earnout payments, which are based on sales of certain of the sold branches, continue through November 2008.
NOTE 8 – | ACQUISITION |
Effective as of August 2, 2007, the Company’s newly formed subsidiary, Transworld (see Note 4), purchased substantially all of the assets used by Green-Tech Assets, Inc. and its affiliate, CC Laurel, Inc. (the “Seller”) in their technology asset disposal business located in Providence, Rhode Island. The purpose of the acquisition was to generate future cash flow for the Company and provide cross-selling opportunities between the Company’s subsidiaries.
The purchase price was comprised of $600,000 in cash, a promissory note in the principal amount of $166,828 bearing interest at 5% per year payable in equal installments of $5,000 over 36 months, and 2,000,000 shares of Stratus’ common stock held by Transworld. Transworld guaranteed the Seller that the market price of Stratus’ common stock would be $.20 per share on the third anniversary date of the transaction. Additionally, Transworld assumed approximately $817,000 of specified liabilities. The aggregate cost of the acquisition, including finders’ fees and other costs aggregated $2,163,745, which was allocated as follows:
Accounts receivable | $ | 245,484 | ||
Property and equipment | 35,000 | |||
Other assets | 16,925 | |||
Intangible assets | 100,000 | |||
Goodwill | 1,766,336 | |||
Total | $ | 2,163,745 |
The intangible assets represent a covenant not to compete which is being amortized over three years.
The unaudited proforma consolidated results of operations presented below assume that the acquisition had occurred at the beginning of fiscal 2007. This information is presented for informational purposes only and includes certain adjustments such as amortization of intangible assets resulting from the acquisition and interest expense related to the acquisition debt.
Unaudited Three Months Ended March 31, 2007 | Unaudited Six Months Ended March 31, 2007 | |||||||
Revenues | $ | 3,083,422 | $ | 5,500,691 | ||||
Net (loss) from continuing operations attributable to common stockholders | (155,050 | ) | (317,128 | ) | ||||
Net (loss) per share attributable to common stockholders basic and diluted | $ | - | $ | - |
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NOTE 9 - | LINE OF CREDIT |
On January 3, 2006, the Company’s consolidated 51% owned joint venture, STS (see Notes 1 and 15), entered into a factoring and security agreement (the “Factoring Agreement”) with Action Capital Corporation (“Action”). The Factoring Agreement provides for the sale of up to $1,500,000 of acceptable accounts receivable of STS to Action. Action reserves and withholds an amount in a reserve account equal to 10% of the face amount of accounts receivable purchased under the Factoring Agreement. Action has full recourse against STS including, without limitation, the right to charge-back or sell back any accounts receivable, if not paid within 90 days of the date of purchase. The Factoring Agreement provides for STS to pay interest of prime plus 1% plus a monthly fee of .6% on the daily average of unpaid advances. The prime rate at March 31, 2008 was 7.25%.
NOTE 10 - | GOODWILL AND OTHER INTANGIBLE ASSETS |
Intangible assets with definite lives are amortized over their estimated useful lives.
Intangible assets consist of the following as of March 31, 2008 and September 30, 2007:
March 31, 2008 | September 30, 2007 | |||||||
Covenant-not-to-compete | $ | 100,000 | $ | 100,000 | ||||
Accumulated amortization | (22,222 | ) | (5,556 | ) | ||||
$ | 77,778 | $ | 94,444 |
Covenant not to compete is being amortized over three years.
Estimated amortization expense related to intangible assets with definite lives is as follows:
For the Twelve Months Ending December 31, | ||||
2009 | $ | 33,333 | ||
2010 | 33,333 | |||
2011 | 11,112 |
Amortization expense of amortizable intangible assets was $8,333 and $-0-, for the three months ended March 31, 2008 and 2007, respectively, and $16,666 and $-0-, for the six months ended March 31, 2008 and 2007, respectively.
The net carrying amount of goodwill at March 31, 2008 and September 30, 2007 is comprised of goodwill recorded during the year ended September 30, 2007 (See Note 8).
NOTE 11 – | PAYROLL TAX LIABILITIES |
During fiscal 2003, the Company was notified by both the New Jersey Department of Labor and the California Employment Development Department (the “EDD”) that, if certain payroll delinquencies were not cured, judgment would be entered against the Company. As of March 31, 2008, there was still an aggregate of $3.1 million in delinquent payroll taxes outstanding which are included in “Payroll taxes payable” on the balance sheet. Judgment has not been entered against the Company in California; however, the EDD has issued notices of levy to two parties that have payment obligations to the Company which, in one case, directs the party to remit amounts owed to the Company to the EDD, and, in the other case, directs the party to hold funds owed to the Company and provide certain information to the EDD pending further instruction. While judgment has been entered against the Company in New Jersey, no actions have been taken to enforce same.
On January 7, 2005, the Company entered into a payment plan agreement with the EDD with regard to the Company’s past due and unpaid unemployment taxes. Under the terms of the agreement, the Company is required to pay $12,500 per week to be first applied to its unpaid employment tax liability, then to interest and then to penalties until all amounts are fully paid. The weekly payment of $12,500 is to increase for a three month period following any quarter in which the Company’s reported income is above $200,000 based on a percentage increase tied to the amount in excess of $200,000. The Company believes that consistent with the parties’ intentions when entering into the Plan, the gain on sale of discontinued operations, which resulted in no cash to the Company, would be excluded from reported income.
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The Company paid $12,500 per week to the EDD until July 2007 when it satisfied the outstanding employment tax liability (exclusive of interest and penalties) in full. In August 2007, the Company unilaterally reduced its payments with respect to accrued interest and penalties to $1,000 per week.
NOTE 12 – | SERIES F PREFERRED STOCK |
In July 2002, the Company’s Chief Executive Officer invested $1,000,000 in the Company in exchange for 10,000 shares of newly created Series F Convertible Preferred Stock (the “Series F Preferred Stock”), which has a stated value of $100 per share.
The holder of the Series F Preferred Stock is entitled to receive, from assets legally available therefore, cumulative dividends at a rate of 7% per year, accrued daily, payable monthly, in preference and priority to any payment of any dividend on the Common Stock and on the Series F Preferred Stock. Dividends may be paid, at the Company’s option, either in cash or in shares of Common Stock, valued at the Series F Conversion Price (as defined below). Holders of Series F Preferred Stock are entitled to a liquidation preference of $100 per share, plus accrued and unpaid dividends.
The Series F Preferred Stock is convertible into Common Stock at a conversion price equal to $.40 per share. The number of shares issuable upon conversion is determined by multiplying the number of shares of Series F Preferred Stock to be converted by $100, and dividing the result by the Series F Conversion Price.
Except as otherwise required by law, holders of Series F Preferred Stock and holders of Common Stock shall vote together as a single class on each matter submitted to a vote of stockholders. Each outstanding share of Series F Preferred Stock shall be entitled to the number of votes equal to the number of full shares of Common Stock into which each such share of Series F Preferred Stock is then convertible on the date for determination of stockholders entitled to vote at the meeting. Holders of the Series F Preferred Stock are entitled to vote as a separate class on any proposed amendment to the terms of the Series F Preferred Stock which would increase or decrease the number of authorized shares of Series F Preferred Stock or have an adverse impact on the Series F Preferred Stock and on any proposal to create a new class of shares having rights or preferences equal to or having priority to the Series F Preferred Stock.
The Company may redeem the shares of the Series F Preferred Stock at any time prior to conversion at a redemption price of 115% of the purchase price paid for the Series F Preferred Shares plus any accrued but unpaid dividends.
NOTE 13 - | NOTE PAYABLE – RELATED PARTY |
On January 13, 2006, the Company entered into an agreement with Pinnacle Investment Partners, LP (“Pinnacle”) (See Note 16), the holder of all of the outstanding shares of the Company’s Series I Preferred Stock, pursuant to which the Company issued to Pinnacle, effective December 28, 2005, a secured convertible promissory note (the “Convertible Note”) in the aggregate principal amount of $2,356,850 in exchange for all of the shares of the Company’s Series I Preferred Stock held by Pinnacle The Convertible Note, which is secured by substantially all of the Company’s assets, was or becomes due as follows:
• $1,800,000 was due and payable in cash upon the earlier of the Company’s receipt of $1,800,000 of accounts receivable or March 15, 2006. At September 30, 2006, $210,000 of this has not been paid.
• $331,850 and accrued interest at a rate of 12% per annum is payable in 24 equal installments of principal and interest during the period which commenced June 28, 2007 and ends on May 28, 2009.
• $225,000 and accrued interest thereon at the rate of 6% per annum became due and payable on December 28, 2007; and remains outstanding; provided, however, that the Company has the right to pay such amount in cash or shares of its common stock (valued at $0.0072 per share).
Pinnacle has the right to convert the principal amount of and interest accrued under the Convertible Note at any time as follows:
• $331,850 of the principal amount and unpaid interest accrued thereon is convertible into the Company’s Common Stock at a conversion price of $.06 per share.
• $225,000 of the principal amount and unpaid accrued interest thereon is convertible into the Company’s Common Stock at a conversion price of $0.0072. During the year ended September 30, 2006, $150,000 of principal was converted into 20,833,331 shares of the Company’s Common Stock.
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Pinnacle may not convert the Convertible Note to the extent that the conversion would result in Pinnacle owning in excess of 9.999% of the then issued and outstanding shares of Common Stock of the Company. Pinnacle may waive this conversion restriction upon not less than 60 days prior notice to the Company.
NOTE 14 - | DERIVATIVE INSTRUMENTS |
The Company evaluated the application of SFAS No. 133 and EITF 00-19 for its financial instruments and determined that certain warrants to purchase the Company’s Common Stock are derivatives that are required to be accounted for as free-standing liability instruments in the Company’s financial statement. As a result, the Company reports the value of those warrants as current liabilities on its balance sheet and reports changes in the value of these warrants as non-operating gains or losses on its statements of operations. The value of the warrants is required to be remeasured on a quarterly basis, and is based on the Black Scholes Pricing Model.
Variables used in the Black Scholes option pricing model include (1) 4% risk-free interest rate, (2) expected warrant life is the actual remaining life of the warrants as of each period end, (3) expected volatility is 100% and (4) zero expected dividends.
Due to the nature of the required calculations and the large number of shares of the Company’s common stock involved in such calculations, changes in the Company’s common stock price may result in significant changes in the value of the warrants and resulting non-cash gains and losses on the Company’s statement of operations.
NOTE 15 - | COMMITMENTS AND CONTINGENCIES |
The Company is subject to legal claims and litigation in the ordinary course of business, including but not limited to, the matters described below. A negative result in one or more of such matters could have an adverse effect on the Company’s financial condition and results of operations. As of March 31, 2008, the Company was a party to the following actions:
Tymatt Associates, LLC v. Stratus Services Group, Inc. On October 15, 2007, Tymatt Associates, LLC (“Tymatt”) filed suit against the Company for breach of contract in the Supreme Court of the State of New York, County of New York, seeking damages of $300,000 plus accrued interest at a rate of 18% per annum from January 31, 2005, as well as costs and expenses, including accountant’s fees and attorney’s fees, in connection with the Company’s failure to either pay to Tymatt the sum of $250,000 or to deliver to Tymatt a number of shares of Stratus common stock with a value of $250,000 by January 31, 2005 as required by the terms of a redemption agreement pertaining to the Company’s Series A Preferred Stock. The Company has been in discussions with Tymatt in an attempt to resolve this matter; however, no assurance can be given that it will be able to resolve this matter on terms that are satisfactory to it.
Teamone Personnel Solutions, LLC vs. Stratus Services Group, Inc. On October 19, 2007, Teamone Personnel Solutions, LLC (“Teamone”) filed a Request for Entry of Default and Court Judgment in the amount of $157,004 in the Superior Court of California, County of Solano. Teamone had filed in July 2007 suit seeking enforcement of an acceleration provision of a promissory note executed by the Company in favor of Teamone on March 2, 2005 in the principal amount of $160,000. The Company has been discussions with Teamone to arrange for a deferred payment schedule for the amount owed; however, no assurance can be given that Teamone will agree to deferring payment and will not seek to enforce its judgment.
In re APX Holdings, LLC, et al. In August 2007, the Trustee in a Chapter 7 bankruptcy proceeding in the United States Bankruptcy Court for the Central District of California involving APX Holding, LLC, one of the Company’s former customers, brought an action against the Company and several other parties, including the Company’s former lender and ALS, LLC seeking to recover $860,184 of preference payments that were allegedly made by APX and its affiliates. The Company settled this matter in April 2008 by agreeing to pay $23,000 to the Trustee in four equal monthly installments.
Temporary Services Insurance Ltd. V. Stratus Services Group, Inc., ALS, LLC, U.S. Temps, Inc., et al. In September 2007, Temporary Services Insurance Ltd. (“TSIL”) instituted an action in the United States District Court, Middle District of Florida, Orlando Division, against us, ALS, LLC, certain principals and affiliates of ALS, LLC and certain other parties alleging that the Company participated in a fraudulent scheme to obtain workers compensation insurance through TSIL at a cost substantially lower than the cost of workers compensation insurance that it could have otherwise obtained through its own carriers. In its complaint, TSIL, which seeks unspecified damages, alleges that ALS, LLC failed to disclose certain outsourcing agreements with its clients, including the outsourcing agreements between the Company and ALS, LLC, that the employees provided by ALS, LLC to perform services for the Company and its clients were actually the Company’s employees, and that the Company was unjustly enriched by ALS LLC’s misrepresentations and failure to disclose material facts pertaining to its relationship with the Company. The Company intends to vigorously defend this matter.
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NOTE 16 - | RELATED PARTY TRANSACTIONS |
Joint Venture
The Company provides information technology staffing services through a joint venture, STS (see Note 1), in which the Company has a 51% interest. Prior to February 13, 2007, the Company had a 50% interest. On February 13, 2007, the Company acquired from Fusion Business Services, LLC (“Fusion”) an additional 1% interest in STS in exchange for the issuance to the members of Fusion of 70,111 shares of the Company’s common stock. As a result of the transfer, which was effective as of January 1, 2007, the Company owns a 51% interest in STS and Fusion owns a 49% interest. Fusion has a right to re-acquire the 1% interest transferred to the Company upon the occurrence of certain events, including the institution of bankruptcy or insolvency proceedings against the Company, a sale of all or substantially all of the Company’s assets, a merger or consolidation of the Company with another entity, or the liquidation or dissolution of the Company. The purchase price payable by Fusion in connection with any such re-acquisition shall be a return of the shares issued to it for the 1% interest or a cash payment of $1,262. A son of the CEO of the Company has a majority interest in Fusion.
Loans Payable
During the six months ended March 31, 2008, the brother of the Company’s CEO loaned $25,000 to STS. In addition, during the six months ended March 31, 2008, a significant shareholder of the Company loaned $7,000 to STS and $50,000 to GTA.
During the six months ended March 31, 2007, the Company’s CEO loaned $100,000 to the Company which was repaid in January 2007. In addition, during the six months ended March 31, 2007, a significant shareholder loaned $20,000 to the Company which was repaid subsequently to March 31, 2007.
Other
The nephew of the CEO of the Company is affiliated with Pinnacle Investment Partners, LP, the holder of the convertible note issued in exchange for shares of the Company’s Series I Preferred Stock (see Note 13).
Item 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934, as amended. These statements relate to future economic performance, plans and objectives of management for future operations and projections of revenue and other financial items that are based on the beliefs of our management, as well as assumptions made by, and information currently available to, our management. The words “expect”, “estimate”, “anticipate”, “believe”, “intend”, and similar expressions are intended to identify forward-looking statements. Such statements involve assumptions, uncertainties and risks. If one or more of these risks or uncertainties materialize or underlying assumptions prove incorrect, actual outcomes may vary materially from those anticipated, estimated or expected. Among the key factors that may have a direct bearing on our expected operating results, performance or financial condition are economic conditions facing the staffing industry generally; uncertainties related to the job market and our ability to attract qualified candidates; uncertainties associated with the brief operating history of our current operations; our ability to raise additional capital; our ability to achieve and manage growth; our ability to attract and retain qualified personnel; the continued cooperation of our creditors; our ability to diversify our client base; our ability to develop new services; our ability to enhance and expand existing offices; our ability to open new offices; general economic conditions; and other factors discussed from time to time in our filings with the Securities and Exchange Commission. These factors are not intended to represent a complete list of all risks and uncertainties inherent in our business. The following discussion and analysis should be read in conjunction with the Condensed Consolidated Financial Statements and notes appearing elsewhere in this report.
Our critical accounting policies and estimates are described in our Annual Report on Form 10-K for the fiscal year ended September 30, 2007.
Introduction
From inception until December 2005, we provided a wide range of staffing services and productivity consulting services associated with such staffing services nationally through a network of offices located throughout the United States. In December 2005, we completed a series of asset sale transactions (the “Asset Sales”) pursuant to which we sold our staffing operations. As a result of such sales, we no longer actively conduct any staffing services business, other than IT staffing solutions services conducted through our 51% owned joint venture, STS. In August 2007, we entered the technology asset disposition business through our acquisition of the operations now conducted by our 51% subsidiary, GTA.
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Continuing Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
Revenues. Revenues increased 64.5% to $2,977,914 for the three months ended March 31, 2008 from $1,810,705 for the three months ended March 31, 2007. Approximately $849,000 of the increase was attributable to the acquisition of our technology asset disposition operations in August 2007. Excluding the acquisition, revenues increased 17.5%. This increase was primarily a result of an increase in billable hours and expansion of our customer base, net of a decrease in permanent placements.
Gross Profit. Gross profit increased 53.2% to $857,531 for the three months ended March 31, 2008 from $559,604 for the three months ended March 31, 2007. Approximately $268,000 of the increase was attributable to the acquisition in August 2007. Excluding the acquisition, gross profits increased 5.3%. Gross profit as a percentage of revenues, exclusive of the gross profit attributable to the acquisition, decreased to 27.7% for the three months ended March 31, 2008 from 30.9% for the three months ended March 31, 2007, primarily as a result of a decrease in permanent placements and a small reduction in our markup percentages.
Selling, General and Administrative Expenses. Selling, General and Administrative expenses (“SGA”) increased 55.5% to $1,130,045 for the three months ended March 31, 2008 from $726,538 for the three months ended March 31, 2007. Exclusive of approximately $376,000 attributable to the acquisition in August 2007, SG&A increased 3.8%. SG&A as a percentage of revenues decreased to 37.9% for the three months ended March 31, 2008 from 40.1% for the three months ended March 31, 2007. The increase in the amount of SG&A for the three months ended March 31, 2008, is primarily a result of additions to our sales and recruiting staff.
Interest Expense. Interest expense increased 23.4% to $69,438 for the three months ended March 31, 2008 from $56,249 for the three months ended March 31, 2007. Interest expense as a percentage of revenues decreased to 2.3% for the three months ended March 31, 2008 from 3.1% for the three months ended March 31, 2007.
Minority Interest in Net (income) Loss of Consolidated Subsidiaries. The minority interest in net (income) loss of consolidated subsidiaries for the three months ended March 31, 2008 and 2007 represents the minority venturers’ proportionate share of the net (income) loss of our consolidated subsidiaries.
Net Loss Attributable to Common Stockholders. As a result of the foregoing, we had a net loss attributable to common stockholders of $260,274, for the three months ended March 31, 2008 compared to a net loss attributable to common stockholders of $197,117 for the three months ended March 31, 2007.
Six Months Ended March 31, 2008 Compared to Six Months Ended March 31, 2007
Revenues. Revenues increased 53.4% to $5,636,934 for the six months ended March 31, 2008 from $3,673,559 for the six months ended March 31, 2007. Approximately $1,547,000 of the increase is attributable to the acquisition in August 2007. Excluding the acquisition, revenues increased 11.3%. This increase was primarily a result of an increase in billable hours and expansion of our customer base, net of a decrease in permanent placements.
Gross Profit. Gross profit increased 44.6% to $1,660,432 for the six months ended March 31, 2008 from $1,148,655 for the six months ended March 31, 2007. Approximately $483,000 of the increase was attributable to the acquisition in August 2007. Excluding the acquisition, gross profits increased 15.3%. Gross profit as a percentage of revenues, exclusive of the gross profit attributable to the acquisition, decreased to 28.8% for the six months ended March 31, 2008 from 31.2% for the six months ended March 31, 2007, primarily as a result of a decrease in permanent placements and a small reduction in our markup percentages.
Selling, General and Administrative Expenses. Selling, General and Administrative expenses (“SGA”) increased 60.6% to $2,207,341 for the six months ended March 31, 2008 from $1,374,561 for the six months ended March 31, 2007. Exclusive of approximately $651,000 attributable to the acquisition in August 2007, SG&A increased 13.2%. SG&A as a percentage of revenues increased to 39.1% for the six months ended March 31, 2008 from 37.4% for the six months ended March 31, 2007. The increase in SG&A for the six months ended March 31, 2008 is primarily a result of additions to our sales and recruiting staff.
Interest Expense. Interest expense increased 12.8% to $133,853 for the six months ended March 31, 2008 from $118,672 for the six months ended March 31, 2007. Interest expense as a percentage of revenues decreased to 2.4% for the six months ended March 31, 2008 from 3.2% for the six months ended March 31, 2007.
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Minority Interest in Net (income) Loss of Consolidated Subsidiaries. The minority interest in net (income) loss of consolidated subsidiaries for the six months ended March 31, 2008 and 2007 represents the minority venturers’ proportionate share of the net (income) loss of our consolidated subsidiaries.
Net Loss Attributable to Common Stockholders. As a result of the foregoing, we had a net loss attributable to common stockholders of $527,479, for the six months ended March 31, 2008 compared to a net loss attributable to common stockholders of $351,000 for the six months ended March 31, 2007.
Liquidity and Capital Resources
Cash flows have not been segregated between continuing operations and discontinued operations in the accompanying condensed consolidated statements of cash flows. Cash provided to us from discontinued operations (included in the consolidated cash flow discussions below) during the six months ended March 31, 2008 and 2007 was comprised of the following:
Six Months Ended | ||||||||
March 31, | ||||||||
2008 | 2007 | |||||||
Cash used in operating activities | $ | (57,000 | ) | $ | (498,184 | ) | ||
Cash provided by investing activities | 120,715 | 650,901 | ||||||
Cash used in financing activities | - | - | ||||||
Net | $ | 63,715 | $ | 157,217 |
Although there is no assurance we will continue to receive earnout payments in connection with discontinued operations, we estimate that we will receive approximately $20,000 per month, through November 2008.
At March 31, 2008, we had limited liquid resources. Current liabilities were $10,503,349 and current assets were $1,861,780. The difference of $8,641,569 is a working capital deficit, which is primarily the result of losses incurred during the last several years. This condition raises substantial doubts about our ability to continue as a going concern. The financial statements do not include any adjustments to reflect the possible future effect on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
Our continuation of existence is dependent upon the continued cooperation of our creditors, our ability to generate sufficient cash flow to meet our continuing obligations on a timely basis, to fund the operating and capital needs, and to obtain additional financing as may be necessary.
We have taken steps to revise and reduce our operating requirements, which we believe will be sufficient to assure continued operations and implementation of our plans. The steps include closing branches that are not profitable, reductions in staffing, and other selling, general and administrative expenses, and most significantly, the asset sales transactions that were completed in December 2005. We continue to pursue other sources of equity or long-term debt financings. We also continue to negotiate payments plans and other accommodations with our creditors. We believe that the cash flow from operations and earnout payments to which we are entitled in connection with the Asset Sales will provide us with sufficient cash flow to support our operations in the next twelve months provided that we continue to receive cooperation and accommodations from our creditors. No assurance can be given that our creditors will not seek to pursue all remedies available to them, which could result in a voluntary or involuntary bankruptcy proceeding.
Net cash used in operating activities was $702,440 and $846,519 in the six months ended March 31, 2008 and 2007, respectively.
Net cash provided by investing activities was $43,295 and $621,212 in the six months ended March 31, 2008 and 2007, respectively. Net cash received in connection with the sale of discontinued operations (comprised of earnout payments) was $120,715 and $650,901, in the six months ended March 31, 2008 and 2007, respectively. Cash used for capital expenditures was $77,420 and $29,689 in the six months ended March 31, 2008 and 2007, respectively.
Net cash provided by financing activities was $592,333 and $156,838 in the six months ended March 31, 2008 and 2007, respectively. We had net borrowings of $192,435 and $143,867 under our line of credit in the six months ended March 31, 2008 and 2007, respectively. Net short-term borrowings were $276,106 and $10,629 in the six months ended March 31, 2008 and 2007, respectively. Net short-term borrowings in the six months ended March 31, 2008 includes $76,195 loaned to us by the brother of our Chief Executive Officer (“CEO”) and $210,000 (net of repayments of $15,000) loaned to us by a significant shareholder. Net short-term borrowings in the six months ended March 31, 2007 includes $100,000 loaned to us
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by our CEO, which was repaid in January 2007 and $20,000 which was loaned to us by a significant shareholder. Payments of notes payable - acquisitions was $26,208 and $7,033 in the six months ended March 31, 2008 and 2007, respectively. During the six months ended March 31, 2008, we received net proceeds of $150,000 from the minority investors in Green-Tech Assets, LLC of which $75,000 is represented by notes payable and the balance is contributed equity.
Our principal uses of cash are to fund temporary employee payroll expense and employer related payroll taxes, investment in capital equipment, expansion of services offered, workers’ compensation, general liability and other insurance coverages, and debt service.
In January 2006, STS entered into a Factoring and Security Agreement (the “Factoring Agreement”) with Action Capital Corporation (“Action”) which provides for the sale of up to $1,500,000 of accounts receivable of STS to Action. Action reserves and withholds in a reserve account, an amount equal to 10% of the face amount of accounts receivable purchased under the Factoring Agreement. Action has full recourse against STS, including the right to charge-back or sell back any accounts receivable if not paid within 90 days of the date of purchase. The Factoring Agreement provides for interest at an annual rate of prime plus 1% plus a monthly fee of .6% on the daily average of unpaid balances. The prime rate at March 31, 2008 was 7.25%. As of March 31, 2008, $835,005 was outstanding under the Factoring Agreement.
During fiscal 2003, we were notified by both the New Jersey Department of Labor and the California Employment Development Department (the “EDD”) that, if certain payroll delinquencies were not cured, judgment would be entered against us. As of March 31, 2008, there was still an aggregate of $3.1 million in delinquent payroll taxes outstanding, including interest and penalties, which are included in “Payroll taxes payable” in the March 31, 2008 balance sheet. Judgment has not been entered against us in California; however, the EDD has issued notices of levy to two parties that have payment obligations to us which, in one case, directs the party to remit amounts owed to us to the EDD, and, in the other case, directs the party to hold funds owed to us and provide certain information to the EDD pending further instruction. While judgment has been entered against us in New Jersey, no actions have been taken to enforce same. On January 7, 2005, we entered into a payment plan agreement with the EDD, which requires us to pay $12,500 per week to the EDD. The $12,500 weekly payment is subject to increase for a three month period following any quarter in which our reported income exceeds $200,000, based upon a percentage related to the amount of increase above $200,000. We paid $12,500 per week to the EDD until July 2007 when we satisfied the outstanding employment tax liability (exclusive of interest and penalties) in full. In August 2007, we unilaterally reduced our payments with respect to accrued interest and penalties to $1,000 per week.
In July 2003, we entered into an agreement with the holder of our Series A Preferred Stock pursuant to which we agreed to redeem the aggregate 1,458,933 shares of Series A Preferred Stock then outstanding. The agreement, as amended in March 2004, provided that our obligation to redeem the Series A Preferred Stock was contingent upon the sale of not less than $1,000,000 units in our “best efforts” public offering of units. This condition was satisfied in July 2004. As a result, we paid $500,000 and issued 1,750,000 shares of common stock to the Series A holder and redeemed all of the Series A Preferred Stock following the initial closing of the offering. We were obliged to pay the Series A holder an additional $250,000 by January 31, 2005, or at our option, issue to the Series A holder shares of common stock having an aggregate market value of $250,000, based upon the average closing bid prices of the common stock for the 30 days preceding January 31, 2005. We failed to make the $250,000 payment in cash or stock. Accordingly, we are required to pay $300,000 in cash, plus accrued interest at the rate of 18% per year from the date of default until the date the default is cured, to the former holder of the Series A Preferred Stock. The former holder of the Series A Preferred Stock has instituted litigation against us related to this matter and the Asset Sales. We are currently in discussions with the former holder of the Series A Preferred Stock to try to resolve all issues.
In January 2006 we entered into an agreement with the holder of all of the outstanding shares of our Series I Preferred Stock pursuant to which we issued to the holder, effective as of December 28, 2005, a secured convertible promissory note
in the aggregate principal amount of $2,356,750 (the “Convertible Note”) in exchange for all of such shares of Series I Preferred Stock. See Note 13 to the Condensed Consolidated Financial Statements.
As of March 31, 2008, there were no off-balance sheet arrangements, unconsolidated subsidiaries, commitments or guarantees of other parties, except as disclosed in the notes to financial statements. Stockholders’ (deficiency) at that date was $(8,111,522).
We engaged in various transactions with related parties during the six months ended March 31, 2008 including the following:
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• | During the six months, the brother of our CEO and a significant shareholder loaned us $76,195 and $225,000, respectively. We repaid $15,000 to the significant shareholder during the six months. |
• | In addition, at March 31, 2008, we owed: $41,000 under a demand note bearing interest at 10% per annum to a corporation owned by the son of Joseph J. Raymond, our Chairman, President and CEO; $3,123 to a trust formed for the benefit of a family member of a former member of our Board of Directors under a promissory note bearing interest at 12% per annum which became due in full in August 2005; $41,598 to a former member of our Board of Directors under a promissory note bearing interest at 12% per annum which became due in full in May 2006. |
• | The nephew of our Chairman, President and CEO is affiliated with Pinnacle Investment Partners, LP, (“Pinnacle”), which is the holder of the Convertible Note issued in exchange for our Series I Preferred Stock. As of March 31, 2008, $616,850 was outstanding on the Convertible Note. |
Contractual Obligations
Our aggregate contractual obligations as of March 31, 2008 are as follows:
Payments Due by Fiscal Period (in Thousands) | ||||||||||||||||||||
2010 - | 2012 - | |||||||||||||||||||
Total | 2009 | 2011 | 2013 | Thereafter | ||||||||||||||||
Contractual Obligations: | ||||||||||||||||||||
Long-term debt obligations | $ | 2,661 | $ | 1,493 | $ | 350 | $ | 818 | $ | - | ||||||||||
Operating lease obligations | 537 | 234 | 270 | 33 | - | |||||||||||||||
Series A redemption payable | 300 | 300 | - | - | - | |||||||||||||||
Workers’ compensation insurance liability (a) | 224 | 72 | 144 | 8 | - | |||||||||||||||
TOTAL | $ | 3,722 | $ | 2,099 | $ | 764 | $ | 859 | $ | - |
(a) | In December 2006, we entered into an agreement with the California Compensation Insurance Fund (“the Fund”) whereby the Fund agreed to reduce our then liability of $2,023,000 to $300,000 provided that we make certain monthly payments aggregating $300,000 over 56 months. At March 31, 2008, $1,947,000 is included in accounts payable and accrued expenses on the attached condensed consolidated balance sheet. The difference of $1,723,000 has not been recognized in earnings at this time since it is contingent upon our paying the $300,000 in accordance with the terms of the agreement. |
Impact of Inflation
We believe that since our inception, inflation has not had a significant impact on our results of operations.
Impact of Recent Accounting Pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”. This Statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements. The Statement applies under other accounting pronouncements that require or permit fair value measurements. SFAS No. 157 is effective for fiscal years beginning after November 15, 2007, or the Company’s fiscal year ending September 30, 2009. We are currently assessing the impact the adoption of this pronouncement will have on our financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” and is effective for fiscal years beginning after November 15, 2007. This Statement permits entities to choose to measure many financial instruments and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. We are currently assessing the impact the adoption of this pronouncement will have on our financial statements.
In December 2007, the FASB issued SFAS No. 160 “Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51” and is effective for fiscal years beginning after December 5, 2008. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. We are currently assessing the impact the adoption of this pronouncement will have on our financial statements.
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In December 2007, the FASB issued SFAS No. 141 (Revised) “Business Combinations”. SFAS 141 (Revised) is effective for fiscal years beginning after December 13, 2008. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. We currently assessing the impact the adoption of this pronouncement will have on our financial statements.
Sensitive Accounting Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and notes. Significant estimates include management’s estimate of the carrying value of accounts receivable, the impairment of goodwill and the establishment of valuation reserves offsetting deferred tax assets. Actual results could differ from those estimates. The Company’s critical accounting policies relating to these items are described in the Company’s Annual Report on Form 10-K for the year ended September 30, 2007. As of March 31, 2008, there have been no material changes to any of the critical accounting policies contained therein.
Item 3. | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS |
We are subject to the risk of fluctuating interest rates in the ordinary course of business for borrowings under our Factoring Agreement, which provides for the sale of up to $1,500,000 of accounts receivable to Action Capital. Advances under this agreement bear interest at an annual rate of prime plus 1%, plus a monthly management fee of .6% on the daily average of unpaid balances.
We believe that our business operations are not exposed to market risk relating to foreign currency exchange risk or commodity price risk.
Item 4. | CONTROLS AND PROCEDURES |
Under the supervision and with the participation of management, including our Chief Executive Officer and our Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures. Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the 1934 Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report. There were no changes in our internal controls during the quarter ended March 31, 2008 that have materially affected, or are reasonably likely to have materially affected our internal controls over financial reporting.
Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected.
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Part II | Other Information |
Item 1. | Legal Proceedings |
We are involved, from time to time, in routine litigation arising in the ordinary course of business, including the matters described in our Report on Form 10-K for the fiscal year ended September 30, 2007 (the “2007 10-K”) and Note 16 to the financial statements included with this report. There have been no material changes in the status of such matters since the filing of the 2007 10-K, except that we settled the matter captioned In re APX Holdings, LLC, et al. in which the Trustee in a Chapter 7 bankruptcy proceeding alleged that we had received $860,184 of preference payments by agreeing to pay $23,000 to the Trustee in four monthly installments.
Item 1A. | Risk Factors |
There have been no material changes with respect to the risk factors disclosed in our Report on Form 10-K for the fiscal year ended September 30, 2007.
Item 3. | Defaults Upon Senior Securities |
Dividends on our Series F Preferred Stock accrue at a rate of 7% per annum, payable monthly. As of the date of the filing of this report, $158,948 is in arrears on the Series F Preferred Stock.
Item 4. | Submission of Matters to a Vote of Security Holders |
There were no matters submitted to a vote of our security holders during the three months ended March 31, 2008.
Item 5. | Other Information |
Not applicable.
Item 6 | Exhibits |
Number | Description |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
STRATUS SERVICES GROUP, INC. | |||
Date: May 12, 2008 | By: | /s/ Joseph J. Raymond | |
Name: Joseph J. Raymond | |||
Title: Chairman of the Board of Directors, | |||
President and Chief Executive Officer |
STRATUS SERVICES GROUP, INC. | |||
Date: May 12, 2008 | By: | /s/ Michael A. Maltzman | |
Name: Michael A. Maltzman | |||
Title: Vice President and Chief Financial Officer | |||
Principal Financial and Accounting Officer |
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