SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended – September 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from to
TRANS MAX TECHNOLOGIES, INC.
(Exact name of registrant as it appears in its charter)
000-31631
Commission File Number)
NEVADA | 42-1599830 |
7473 West Lake Mead Boulevard
Las Vegas, Nevada 89128
(Address of Principal Executive Office)
(702) 382-3377
Registrant's telephone number, including area code
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (b) of the Act: Class A Common Stock $0.001 Par Value
Indicate by check mark whether the registrant (1) has filed all reports to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or 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
At the end of the quarter ending September 30, 2004 there were 59,445,024 issued and outstanding shares of the registrant’s common stock.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TRANS MAX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED FINANCIALS
FOR PERIOD ENDING SEPTEMBER 30, 2004 (UNAUDITED)
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TRANS MAX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004 (UNAUDITED)
ASSETS | |
Current Assets: | |
Cash and cash equivalents | $ 1,378 |
Accounts receivable | 599 |
Total Current Assets | 1,977 |
Receivable from affiliates | 314,339 |
Property and equipment, net | 1,511,162 |
TOTAL ASSETS | $ 1,827,478 |
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | |
LIABILITIES | |
Current Liabilities | |
Accounts payable and accrued expenses | $ 1,602,257 |
Note payable to stockholders | 768,697 |
Total Current Liabilities | 2,370,954 |
Total Liabilities | 2,370,954 |
STOCKHOLDERS' EQUITY (DEFICIT) | |
Common stock, $.001 Par Value; 500,000,000 shares authorized 59,445,024 shares |
|
Additional paid-in capital | 7,432,895 |
Accumulated deficits | (8,035,816) |
Total Stockholders' Equity (Deficit) | (543,476) |
TOTAL LIABILITY AND STOCKHOLDERS' EQUITY (DEFICIT) | $ 1,827,478 |
The accompanying notes are an integral part of the condensed consolidated financial statements.
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TRANS MAX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE AND THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
NINE MONTHS ENDED | THREE MONTHS ENDED | ||||||
SEPTEMBER 30, | SEPTEMBER 30, | ||||||
2004 | 2003 | 2004 | 2003 | ||||
OPERATING REVENUES | |||||||
Sales | $ 112,288 | $ 205,370 | $ - | $ 47,280 | |||
COST OF SALES | 61,423 | 94,680 | - | 36,771 | |||
GROSS PROFIT (LOSS) | 50,865 | 110,690 | - | 10,509 | |||
OPERATING EXPENSES | |||||||
Research and development | 57,612 | - - | - - | - - | |||
General and administrative expenses | 1,255,181 | 221,359 | 140,790 | 132,594 | |||
Depreciation and amortization | 2,894 | 2,574 | 2,221 | 1,074 | |||
Total Operating Expenses | 1,315,687 | 223,933 | 143.011 | 133,668 | |||
NET INCOME (LOSS) BEFORE OTHER (EXPENSES) | (1,264,822) | (113,243) | (143,011) | (123,159) | |||
OTHER (EXPENSES) | |||||||
Impairment | (6,089,420) | - - | (5,267,000) | - - | |||
Interest expense | (19,226) | (5,904) | (286) | (2,345) | |||
Total Other Expenses | (6,108,646) | (5,904)) | (5,267,286) | (2,345) | |||
NET INCOME (LOSS) PER COMMON SHARE OUTSTANDING | |
|
|
| |||
WEIGHTED AVERAGE NUMBER OF COMMON SHARE OUTSTANDING | 8,450,111 | 6,339,271 | 23,138,210 | 14,241,438 | |||
NET INCOME (LOSS) PER COMMON SHARE | $ (0.8726) | $ (0,0188) | $ (0.2338) | $ (0.0088) | |||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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TRANS MAX TECHNOLOGIES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 | 2003 | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | |||||||
Net income (loss) | $(7,373,468) | $ (119,147) | |||||
Adjustments to reconcile net income (loss) to net cash provided by | |||||||
Depreciation | 2,894 | 2,574 | |||||
Imputed interest expense | 16,179 | - - | |||||
Common stock issued for services | 113,851 | 6,666 | |||||
Impairment | 6,089,024 | - - | |||||
Changes in assets and liabilities | |||||||
Decrease in accounts receivable | 23,385 | 2,313 | |||||
(Increase) decrease in inventory | 40,940 | (4,934) | |||||
Decrease in other current assets | 23,881 | - | |||||
(Increase) decrease in other assets | 163,250 | (129,840) | |||||
Increase in accounts payable | 1,551,444 | 13,234 | |||||
Total adjustments | 8,027,848 | (229,134) | |||||
Net cash provided by (used in) operating activities | 654,380 | 6,584 | |||||
CASH FLOWS FROM INVESTING ACTIVITIES | |||||||
Purchase of property and equipment | (1,900,707) | (16,168) | |||||
(Increase) in receivable from affiliates, net | (284,445) | - - | |||||
Net cash (used in) investing activities | (2,185,152) | (16,168) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from notes payable to stockholders | 655,297 | - - | |||||
Line of credit, net | - | 24 | |||||
Cash contributed by stockholders | 867,594 | 277,500 | |||||
Net cash provided by financing activities | 1,522,891 | 277,254 | |||||
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | (7,881) | 32,222 | |||||
CASH AND CASH EQUIVALENTS - BEGINNING OF PERIOD | 9,259 | - - | |||||
CASH AND CASH EQUIVALENTS - END OF PERIOD | $ 1,378 | $ 32,222 | |||||
SUPPLEMENTAL CASH FLOW INFORMATION | |||||||
Cash paid during the year for interest | $ 19,226 | $ 4,904 | |||||
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION | |||||||
Common stock issued for services | $ 113,851 | $ 6,666 | |||||
Common stock issued for intangible assets and goodwill | $ 5,267,000 | $ - | |||||
Notes payable converted to equity | $ 271,519 | $ - | |||||
The accompanying notes are an integral part of the condensed consolidated financial statements.
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TRANS MAX TECHNOLOGIES, INC.
SELECTED NOTES TO UNAUDITED CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
1. INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim condensed consolidated financial statements have been prepared without audit pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to such rules and regulations. These unaudited financial statements should be read in conjunction with the audited financial statements and notes thereto of the Company included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003. In the opinion of Management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of financial position, results of operations and cash flows for the interim periods presented have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the respective full year.
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company faces many operating and industry challenges. The Company intends to do business in a highly competitive industry. Future operating losses for the Company are anticipated and the proposed plan of operations, even if successful, may not result in cash flow sufficient to finance the continued expansion of its business. These factors raise substantial doubt about the Company's ability to continue as a going concern. Realization of assets is dependent upon continued operations of the Company, which in turn is dependent upon management's plans to meet its financing requirements, as discussed below, and the success of its future operations. The condensed consolidated financial statements do not include any adjustments that might result from this uncertainty.
2. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Perma-Tune Electronics, Inc. ("Perma-Tune") was incorporated in 1993 in the state of Texas. The Company designs and manufactures high performance electronic ignition systems for distribution throughout the United States, Canada and Europe. On July 21, 2003 Perma-Tune acquired 100% of the issued and outstanding stock of Trans Max Technologies, Inc. ("Trans Max"), a Nevada corporation, in exchange for 15,177,300 shares of Perma-Tune's common stock (pre 2 for 1, 6 for 1 and 1 for 200 stock splits), 910,638 post split. As a result of this acquisition, the control of Perma-Tune shifted to the former shareholders of Trans Max and this transaction was treated as a recapitalization. As a part of this recapitalization, Perma-Tune Electronics, Inc. changed its name to Trans Max Technologies, Inc. (the "Company").
MANAGEMENT ESTIMATES
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time product is shipped. The Company provides for the estimated cost of product warranties upon shipment. The Company has a no return policy and has had no returns in the last two years. Shipping and handling costs are included in cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development activities are expensed as incurred, including costs relating to patents or rights, which may result from such expenditures.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which subject the Company to concentration of credit risk include cash and cash equivalents and account receivables. The Company maintains its cash and cash equivalents with major financial institutions selected based upon management's assessment of the banks' financial stability. Balances periodically exceed the $100,000 federal depository insurance limit. The Company has not experienced any losses on deposits. Accounts receivable generally arise from sales of services to customers operating in the United States. Collateral is generally not required for credit granted. As of September 30, 2004, approximately 35% of the Company's trade receivables were due from one customer. The Company provides allowances for potential credit losses when necessary.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of three to seven years for office furniture and equipment. Leasehold improvements are depreciated over the shorter of the useful life of the improvement or the life of the related lease. Additions or improvements that increase the value or extend the life of an asset are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. Disposals are removed from the accounts at cost less accumulated depreciation and any gain or loss from disposition is reflected in operations currently.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.
INCOME TAXES
The Company uses the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and income tax carrying amounts of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. A valuation allowance, if necessary, is provided against deferred tax assets, based upon management's assessment as to their realization.
The difference between the 34% federal statutory income tax rate and amounts shown in the accompanying interim financial statements is primarily attributable to an increase in the valuation allowance applied against the tax benefit from utilization of net operating loss carry forwards.
STOCK-BASED COMPENSATION
Financial Accounting Standard No. 123, "Accounting for Stock-Based Compensation" ("SFAS No. 123") established financial accounting and reporting standards for stock-based employee compensation plans. It defined a fair value based method of accounting for an employee stock option or similar equity instrument and encouraged all entities to adopt that method of accounting for all of their employee stock compensation plans and include the cost in the income statement as compensation expense. However, it also allows an entity to continue to measure compensation cost for those plans using the intrinsic value based method of accounting prescribed by Accounting Principles Board ("APB") Opinion No. 25,"Accounting for Stock Issued to Employees". The Company accounts for compensation cost for stock option plans in accordance with APB Opinion No. 25.
IMPAIRMENT OF LONG-LIVED ASSETS
In the event facts and circumstances indicate the carrying value of a long-lived asset, including associated intangibles, may be impaired, an evaluation of recoverability is performed by comparing the estimated future undiscounted cash flows associated with the asset to the asset's carrying amount to determine if a write-down to market value or discounted cash flow is required. Based upon management's evaluation, an impairment write-down of some of the Company's assets was deemed necessary in the amount of $6,089,420.
GOODWILL AND INTANGIBLE ASSETS
In July 2004, the Company acquired Bogner Industries for 31,200,000 shares of common stock. Upon purchase, the Company determined that the acquisition of this company’s assets were completely impaired, and such wrote off the entire acquisition amount of $4,992,000, the fair value of the stock at the time of acquisition.
The Company issued 55,000,000 shares of common stock for various intellectual property, which was valued at $275,000. The Company has determined that this amount should be impaired at September 30, 2004.
The Company accounts for its impairment in accordance with FASB 142, “Goodwill and Other Intangible Assets.”
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company includes fair value information in the notes to financial statements when the fair value of its financial instruments is different from the book value. When the book value approximates fair value, no additional disclosure is made.
LOSS PER SHARE
Basic and diluted loss per share is computed on the basis of the weighted average number of shares of common stock outstanding during each period. Common equivalent shares from common stock options and warrants are excluded from the computation, as their effect would dilute the loss per share for all periods presented.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," which addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. In addition, SFAS No. 146 establishes that fair value is the objective for initial measurement of the liability. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002, but early adoption is permitted. The adoption of SFAS No. 146 did not have an impact on the Company's financial position or results of operations.
In December 2002, the FASB issued SFAS No.148, "Accounting for Stock Based Compensation", which amends SFAS No.123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value method of accounting for stock based employee compensation. It also amends the disclosure provisions of SFAS No. 123 to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock based employee compensation. Finally, SFAS No. 148 amends APB Opinion No.28, "Interim Financial Reporting", to require disclosure of those effects in interim financial statements. SFAS No. 148 is effective for fiscal years ended after December 15, 2002, but early adoption is permitted. The Company adopted SFAS No.148 on January 1, 2003. The adoption of SFAS No. 148 did not have a significant impact on its financial reporting.
In January 2003, the FASB issued FASB Interpretation (FIN) No. 46 "Consolidation of Variable Interest Entities." FIN No. 46 requires a company to consolidate a variable interest entity ("VIE") if the company has variable interests that give it a majority of the expected losses or a majority of the expected residual returns of the entity. Prior to FIN No. 46, VIE's were commonly referred to as SPE's. FIN No. 46 is effective immediately for VIE's created after January 31, 2003. This interpretation did not have a material effect on the Company's financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, Amendment to Statement No. 133 on Derivative Instruments and Hedging Activities. This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133. The changes in SFAS No. 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. Those changes will result in more consistent reporting of contracts as either derivatives or hybrid instruments. SFAS No.149 is effective for contracts entered into or modified after June 30, 2003, except in certain instances detailed in the statement, and hedging relationships designated after June 30, 2003. Except as otherwise stated in SFAS No. 149, all provisions should be applied prospectively. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150, which is effective at the beginning of the first interim period beginning after June 15, 2003, must be implemented by reporting the cumulative effect of a change in accounting principle for financial instruments created before the issuance date of the statement and still existing at the beginning of the interim period of adoption. The statement requires that a financial instrument which falls within the scope of the statement to be classified and measured as a liability. The following financial instruments are required to be classified as liabilities: (1) shares that are mandatorily redeemable, (2) an obligation to repurchase the issuer's equity shares or one indexed to such an obligation and that requires or may require settlement by transferring assets and (3) the embodiment of an unconditional obligation that the issuer may or may not settle by issuing a variable number of equity shares if, at inception, the monetary value of the obligation is based on certain measurements defined in the statement. The adoption of this statement did not have a material effect on the Company's financial condition or results of operations.
3. LIQUIDITY
For the nine months ended September 30, 2004, the Company had a net loss of $(7,373,468) and ($119,147) for the same period in 2003. For the nine months ended September 30, 2004 the Company had $7,881 negative cash flows from operations and positive cash flow of $32,222 of for the same period in 2003. In addition to the revenues provided by the normal operations of the electronic ignition product line, the Company has been dependent on additional capital contributions from shareholders and debt financing to fund its cash requirements.
As of September 30, 2004 the Company's cash reserves totaled $1,379. The Company has temporarily discontinued production and sales efforts as well as further research and development. During the next quarter the Company expects to decide on the future of production and research and development. This decision could significantly impact demand for the Company's products.
To assist with funding its operations, the Company's majority stockholders contributed additional paid-in capital of $867,594 and additional loans of $ 655,297 during the nine months ended September 30, 2004. During 2004 and beyond the Company will require additional capital. Although the current majority stockholders of the Company have made a verbal commitment, with no guarantee, to continue to fund the research and development and sales and marketing efforts of the Company in 2004 if alternate financing cannot be obtained, there can be no assurance that any new capital would be available to the Company or that adequate funds for the Company's operations, whether from the Company's revenues, financial markets, or other arrangements will be available when needed or on terms satisfactory to the Company. The failure of the Company to obtain adequate additional financing may require the Company to delay, curtail or scale back some or all of its research and development programs, sales and marketing efforts, and manufacturing operations.
4. PROPERTY AND EQUIPMENT
Property and equipment, at September 30, 2004, consists of the following:
Machinery and equipment $ 14,735
Water air machine 1,500,000
Less accumulated depreciation ( 3,572)
Property and equipment, net $1,511,162
Depreciation expense was $2,894 and $2,574 for the nine months ended September 30, 2004 and 2003, respectively. Leasehold improvements of $ 822,046 were written off as the building in Ronkonkoma, New York was abandoned. The Company acquired the water air machine for cash of $10,300 and currently owes $1,489,700. There is no formal note agreement on this machine.
5. NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders at September 30, 2004 consisted of the following:
Note payable to a stockholder bearing interest at 10% per year with interest payments due quarterly and the principal due on demand. This note is collateralized by inventory. $ 40,000
Note payable to two stockholders and current employees of the Company bearing interest at 10% per year with all interest and principal due June 28, 2004 with the option to renew the note for 30 day interval periods. The note is not collateralized. $23,400
Note payable to a stockholder and former officer/director of the Company. There is no formal note agreement. The note bears no interest; however, interest is imputed at the prime rate and the outstanding principal balance is due on demand. The note is not collateralized. $ 640,270
Note payable to a majority stockholder of the Company. There is no formal note agreement. The note bears no interest; however, interest is imputed at the prime rate and the outstanding principal balance is due on demand. The note is not collateralized. $ 65,027
Total notes payable to stockholders $768,697
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6. STOCKHOLDERS' EQUITY (DEFICIT)
In connection with the Company's recapitalization (See Note 2), the Company adopted new articles of incorporation that authorized the Company to issue 500,000,000 shares of common stock with a par value of $0.001 per share. Since the Company's common stock did not previously have a stated par value, common stock for all periods presented has been restated to reflect the par value of $0.001 per share.
The Company's articles of incorporation also authorize the issuance of up to 10,000,000 shares of preferred stock with characteristics determined by the Company's board of directors. As of September 30, 2004 the Company has not issued any preferred stock.
Effective March 12, 2004 the Company's board of directors approved a six for one forward split of the Company's stock. As a result, 184,263,395 shares were issued to the stockholders of the Company. Par value of the stock remained at $0.001 per share and, accordingly, $184,263 was transferred from additional paid-in capital to common stock. The effect of this stock split was recorded retroactively in the December 31, 2003 audited financial statements and, accordingly, all references to the number of common shares and per common share amounts have been restated to give retroactive effect to the stock split for all periods presented in these interim financial statements.
On May 12, 2004 the Company issued 100,000 restricted shares to a consulting firm for the introduction of business opportunities. The cost associated with this issuance has been charged to consulting expense in the second quarter.
On May 25, 2004 Eastern Business Associates, Inc., Balboa Group, Inc. and Financial Investors, Inc. each acquired 43,002,350 shares of the Company’s stock or 19.4% of the outstanding shares resulting in a change in control of the Company. All three companies have the same Managing Director. (see related 8K filing)
On July 20, 2004 the Board of Directors adopted a resolution authorizing and approving a 200 to 1 reverse stock split with the effective date of August 9, 2004 and the trading symbol of the Company was changed to TMAX. (see related 8K filings)
On August 24, 2004 the Company entered into an Agreement with Groupo Aquinas SA whereby Groupo Aquinas SA assigned to the Company all the marketing and purchasing rights to water making technologies together with all related intellectual properties, including a Water Air Machine (WAM), which produces large quantities of drinkable water from the air at a low cost, in exchange for 50,000,000 shares of common stock of the Company and $1,500,000. The certificates will bear the appropriate 2-year restrictive legend. This issuance of stock changes the control of the Company to Groupo Aquinas SA, a company with the same Managing Director as the three former control companies. (see related 8K filing)
The Company in the third quarter also issued 7,911,350 shares of common stock for services valued at $43,512.
The Company in the third quarter converted $271,519 in notes payable to 271,519 common shares of stock.
STOCK OPTIONS
The Company periodically issues incentive stock options to key employees, officers and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The issuance of options are approved by the Board of Directors. The exercise price of an option granted is determined by the fair market value of the stock on the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is greater than or equals the fair market value of the underlying stock on the date of grant, no compensation expense has been recognized.
Pro-forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. No options were granted or vested and, accordingly, no option-pricing assumptions or pro-forma disclosures are presented for that year.
The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro-forma disclosures, the estimated fair value of the options is included in expense over the option's vesting period or expected life. As of September 30, 2004, all options to purchase 9,000,000 shares of the Company's common stock were extinguished.
A summary of the Company's stock option activity and related information for the nine months ended September 30, 2004 is as follows:
NUMBER OF
SHARES
UNDER WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
Outstanding - December 31, 2003 1,950,000 $ 0.01667
Granted 7,050,000 $ 0.01667
Exercised - -
Forfeited during 2004 9,000,000 -
Outstanding - September 30, 2004 0
7. RELATED PARTY TRANSACTIONS
The Company has entered into four note payable agreements with certain individual stockholders (See Note 5). Included in accrued expenses at September 30, 2004 is accrued interest payable to these stockholders of $16,179 related to these notes. The Company has a license agreement with its Chief Scientist for its ignition system product line whereby it has acquired all of his rights to patents, trademarks, technical information and trade secrets through November 30, 2021 by payment of a yearly license fee of $1,000.
In November 2003, the Company agreed to provide a $1.5 million line of credit to provide products and services to Aero Marine Engine, Inc., a company owned by the majority stockholders of the Company. Pursuant to the agreement between the Company and Aero Marine Engine, Inc., for every $2 paid to the Company by Aero Marine Engine, Inc., the Company will extend $1 of credit, up to a maximum of $1.5 million dollars. As of September 30, 2004, the Company has not advanced any money under this agreement. Aero Marine does not have sufficient funds to pay the Company in order to receive credit, under this agreement. At September 30, 2004, the Company had a receivable from Aero Marine of $314,339. There is substantial doubt about the ability of Aero Marine to repay the Company. These advances were made in connection with relocating this affiliated company to Ronkonkoma, New York and funding this affiliated company’s payroll.
8. PENDING ARBITRATION
The Company is party to a pending arbitration with two former employees of the Company. The Company denies any wrongdoing and has engaged legal counsel to defend them in this case. The Company has counterclaims with respect to this case, and has not recorded any liability on its books with respect to this case because they believe the case will be dismissed, however, it is too early to determine at this time.
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION.
Forward-looking Statements
This Report on Form 10-QSB contains certain forward-looking statements. These forward-looking statements include statements regarding (i) marketing plans, capital and operations expenditures, and results of operations; (ii) potential financing arrangements; (iii) potential utility and acceptance of the Company's existing and proposed services; and (iv) the need for, and availability of, additional financing.
The forward-looking statements included herein are based on current expectations and involve a number of risks and uncertainties. These forward-looking statements are based on assumptions regarding the business of the Company which involve judgments with respect to, among other things, future economic and competitive conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond the control of the Company. Although the Company believes that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate and, therefore, actual results may differ materially from those set forth in the forward-looking statements. In light of the significant uncertainties inherent in the forward-looking information contained herein, the inclusion of such information should not be regarded as any representation by the Company or any other person that the objectives or plans of the Company will be achieved.
OVERVIEW
Perma-Tune Electronics, Inc. ("Perma-Tune") was incorporated in 1993 in the state of Texas. The Company designs and manufactures high performance electronic ignition systems for distribution throughout the United States, Canada and Europe. On July 21, 2003 Perma-Tune acquired 100% of the issued and outstanding stock of Trans Max Technologies, Inc. ("Trans Max"), a Nevada corporation, in exchange for 15,177,300 shares of Perma-Tune's common stock (pre 2 for 1 and 6 for 1 stock splits). As a result of this acquisition, the control of Perma-Tune shifted to the former shareholders of Trans Max and this transaction was treated as a recapitalization. As a part of this recapitalization, Perma-Tune Electronics, Inc. changed its name to Trans Max Technologies, Inc. (the "Company").
MANAGEMENT ESTIMATES
The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
REVENUE RECOGNITION
The Company recognizes revenue when persuasive evidence of an arrangement exists, delivery has occurred, the sales price is fixed or determinable and collectibility is probable. Generally, these criteria are met at the time product is shipped. The Company provides for the estimated cost of product warranties upon shipment. The Company has a no return policy and has had no returns in the last two years. Shipping and handling costs are included in cost of goods sold.
RESEARCH AND DEVELOPMENT
Research and development activities are expensed as incurred, including costs relating to patents or rights which may result from such expenditures.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which subject the Company to concentrations of credit risk include cash and cash equivalents and accounts receivable. The Company maintains its cash and cash equivalents with major financial institutions selected based upon management's assessment of the banks' financial stability. Balances periodically exceed the $100,000 federal depository insurance limit. The Company has not experienced any losses on deposits. Accounts receivable generally arise from sales of services to customers operating in the United States. Collateral is generally not required for credit granted. As of September 30, 2004, approximately 35% of the Company's trade receivables were due from one customer. The Company provides allowances for potential credit losses when necessary.
PROPERTY AND EQUIPMENT
Property and equipment is stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of three to seven years for office furniture and equipment. Leasehold improvements are depreciated over the shorter of the useful life of the improvement or the life of the related lease. Additions or improvements that increase the value or extend the life of an asset are capitalized. Expenditures for normal maintenance and repairs are expensed as incurred. Disposals are removed from the accounts at cost less accumulated depreciation and any gain or loss from disposition is reflected in operations currently.
INVENTORIES
Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.
LIQUIDITY
For the nine months ended September 30, 2004, the Company had a net loss of $(7,373,468) and ($119,147) for the same period in 2003. For the nine months ended September 30, 2004 the Company had $7,881 negative cash flows from operations and positive cash flow of $32,222 of for the same period in 2003. In addition to the revenues provided by the normal operations of the electronic ignition product line, the Company has been dependent on additional capital contributions from shareholders and debt financing to fund its cash requirements.
As of September 30, 2004 the Company's cash reserves totaled $1,379. The Company has temporarily discontinued production and sales efforts as well as further research and development. During the next quarter the Company expects to decide on the future of production and research and development. This decision could significantly impact demand for the Company's products.
To assist with funding its operations, the Company's majority stockholders contributed additional paid-in capital of $867,594 and additional loans of $ 655,297 during the nine months ended September 30, 2004. During 2004 and beyond the Company will require additional capital. Although the current majority stockholders of the Company have made a verbal commitment, with no guarantee, to continue to fund the research and development and sales and marketing efforts of the Company in 2004 if alternate financing cannot be obtained, there can be no assurance that any new capital would be available to the Company or that adequate funds for the Company's operations, whether from the Company's revenues, financial markets, or other arrangements will be available when needed or on terms satisfactory to the Company. The failure of the Company to obtain adequate additional financing may require the Company to delay, curtail or scale back some or all of its research and development programs, sales and marketing efforts, and manufacturing operations.
PROPERTY AND EQUIPMENT
Property and equipment, at September 30, 2004, consists of the following:
Machinery and equipment $ 14,735
Water air machine 1,500,000
Less accumulated depreciation ( 3,572)
Property and equipment, net $1,511,162
Depreciation expense was $2,894 and $2,574 for the nine months ended September 30, 2004 and 2003, respectively. Leasehold improvements of $ 822,046 were written off as the building in Ronkonkoma, New York was abandoned. The Company acquired the water air machine for cash of $10,300 and currently owes $1,489,700. There is no formal note agreement on this machine.
NOTES PAYABLE TO STOCKHOLDERS
Notes payable to stockholders at September 30, 2004 consisted of the following:
Note payable to a stockholder bearing interest at 10% per year with interest payments due quarterly and the principal due on demand. This note is collateralized by inventory. $ 40,000
Note payable to two stockholders and current employees of the Company bearing interest at 10% per year with all interest and principal due June 28, 2004 with the option to renew the note for 30 day interval periods. The note is not collateralized. $23,400
Note payable to a stockholder and former officer/director of the Company. There is no formal note agreement. The note bears no interest; however, interest is imputed at the prime rate and the outstanding principal balance is due on demand. The note is not collateralized. $ 640,270
STOCKHOLDERS' EQUITY (DEFICIT)
In connection with the Company's recapitalization (See Note 2), the Company adopted new articles of incorporation that authorized the Company to issue 500,000,000 shares of common stock with a par value of $0.001 per share. Since the Company's common stock did not previously have a stated par value, common stock for all periods presented has been restated to reflect the par value of $0.001 per share.
The Company's articles of incorporation also authorize the issuance of up to 10,000,000 shares of preferred stock with characteristics determined by the Company's board of directors. As of September 30, 2004 the Company has not issued any preferred stock.
Effective March 12, 2004 the Company's board of directors approved a six for one forward split of the Company's stock. As a result, 184,263,395 shares were issued to the stockholders of the Company. Par value of the stock remained at $0.001 per share and, accordingly, $184,263 was transferred from additional paid-in capital to common stock. The effect of this stock split was recorded retroactively in the December 31, 2003 audited financial statements and, accordingly, all references to the number of common shares and per common share amounts have been restated to give retroactive effect to the stock split for all periods presented in these interim financial statements.
On May 12, 2004 the Company issued 100,000 restricted shares to a consulting firm for the introduction of business opportunities. The cost associated with this issuance has been charged to consulting expense in the second quarter.
On May 25, 2004 Eastern Business Associates, Inc., Balboa Group, Inc. and Financial Investors, Inc. each acquired 43,002,350 shares of the Company’s stock or 19.4% of the outstanding shares resulting in a change in control of the Company. All three companies have the same Managing Director. (see related 8K filing)
On July 20, 2004 the Board of Directors adopted a resolution authorizing and approving a 200 to 1 reverse stock split with the effective date of August 9, 2004 and the trading symbol of the Company was changed to TMAX. (see related 8K filings)
On August 24, 2004 the Company entered into an Agreement with Groupo Aquinas SA whereby Groupo Aquinas SA assigned to the Company all the marketing and purchasing rights to water making technologies together with all related intellectual properties, including a Water Air Machine (WAM), which produces large quantities of drinkable water from the air at a low cost, in exchange for 50,000,000 shares of common stock of the Company and $1,500,000. The certificates will bear the appropriate 2-year restrictive legend. This issuance of stock changes the control of the Company to Groupo Aquinas SA, a company with the same Managing Director as the three former control companies. (see related 8K filing)
The Company in the third quarter also issued 7,911,350 shares of common stock for services valued at $43,512.
The Company in the third quarter converted $271,519 in notes payable to 271,519 common shares of stock.
STOCK OPTIONS
The Company periodically issues incentive stock options to key employees, officers and directors to provide additional incentives to promote the success of the Company's business and to enhance the ability to attract and retain the services of qualified persons. The issuance of options are approved by the Board of Directors. The exercise price of an option granted is determined by the fair market value of the stock on the date of grant.
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related Interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation", requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options is greater than or equals the fair market value of the underlying stock on the date of grant, no compensation expense has been recognized.
Pro-forma information regarding net income and earnings per share is required by Statement 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option-pricing model. No options were granted or vested and, accordingly, no option-pricing assumptions or pro-forma disclosures are presented for that year.
The Black-Scholes option valuation model was developed for use in estimating fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro-forma disclosures, the estimated fair value of the options is included in expense over the option's vesting period or expected life. As of September 30, 2004, all options to purchase 9,000,000 shares of the Company's common stock were extinguished.
A summary of the Company's stock option activity and related information for the nine months ended September 30, 2004 is as follows:
NUMBER OF
SHARES
UNDER WEIGHTED-AVERAGE
OPTIONS EXERCISE PRICE
Outstanding - December 31, 2003 1,950,000 $ 0.01667
Granted 7,050,000 $ 0.01667
Exercised - -
Forfeited during 2004 9,000,000 -
Outstanding - September 30, 2004 0
Item 3. Controls and Procedures
Within 90 days prior to the date of filing of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the design and operation of the Company's disclosure controls and procedures. Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective for gathering, analyzing and disclosing the information the Company is required to disclose in the reports it files under the Securities Exchange Act of 1934, within the time periods specified in the SEC's rules and forms. There have been no significant changes in the Company's internal controls or in other factors that could significantly affect internal controls subsequent to the date of this evaluation.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
The Company is a party to a lawsuit involving a past due claim. This amount has been included in its accounts payable at September 30, 2004, and the Company plans on making full payment on the outstanding liability.
The Company is party to a pending arbitration with two former employees of the Company. The Company denies any wrongdoing and has engaged legal counsel to defend them in this case. The Company has counterclaims with respect to his case, and has not recorded any liability on its books with respect to this case because they believe the case will be dismissed, however, it is too early to determine at this time.
Item 2. Changes in Securities
None
Item 3. Default Upon Senior Securities
None
Item 4. Submission of matters To a Vote of Security Holders
None
Item 5. Other Events.
The Company has entered into four note payable agreements with certain individual stockholders (See Note 5). Included in accrued expenses at September 30, 2004 is accrued interest payable to these stockholders of $16,179 related to these notes. The Company has a license agreement with its Chief Scientist for its ignition system product line whereby it has acquired all of his rights to patents, trademarks, technical information and trade secrets through November 30, 2021 by payment of a yearly license fee of $1,000.
In November 2003, the Company agreed to provide a $1.5 million line of credit to provide products and services to Aero Marine Engine, Inc., a company owned by the majority stockholders of the Company. Pursuant to the agreement between the Company and Aero Marine Engine, Inc., for every $2 paid to the Company by Aero Marine Engine, Inc., the Company will extend $1 of credit, up to a maximum of $1.5 million dollars. As of September 30, 2004, the Company has not advanced any money under this agreement. Aero Marine does not have sufficient funds to pay the Company in order to receive credit, under this agreement. At September 30, 2004, the Company had a receivable from Aero Marine of $314,339. There is substantial doubt about the ability of Aero Marine to repay the Company. These advances were made in connection with relocating this affiliated company to Ronkonkoma, New York and funding this affiliated company’s payroll.
Item 6. Exhibits and Reports.
(a) EXHIBITS.
EXHIBIT NUMBER | DESCRIPTION | LOCATION |
31.1 | Rule 15d-14(a) | Attached |
32.1 | Rule 1350 | Attached |
REPORTS ON FORM 8-K.
Form 8-K filed on July 21, , Current Report, Item 5 and incorporated herein.
Form 8-K filed on August 4, 2004, Current Report, Item 5 and incorporated herein.
Form 8-K/A filed on August 12, 2004 [Amend] Current Report, Item 5 and incorporated herein.
Form 8-K filed on August 12, 2004 Current Report, Item 2 and incorporated herein.
Form 8-K filed on September 02, 2004 Current Report, Items 1.01 and 9.01 and incorporated herein.
Form 8-K/A filed on September 3, 2004 [Amend] Current Report, Item 8.01 and incorporated herein.
Form 8-K filed on September 16, 2004 Current Report, Item 4.01 and 9.01 and incorporated herein.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned thereunder duly authorized.
TRANS MAX TECHNOLOGIES, INC. | |
Dated: November 17, 2004 | By: /s/ Raymond Brouzes |
