AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2008
(Unaudited)
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
Nuclear Solutions, Inc. ("the "Company") was organized February 27, 1997 under the laws of the State of Nevada, as Stock Watch Man, Inc. On September 12, 2001, the Company amended its articles of incorporation to change its name to Nuclear Solutions, Inc.
On September 2, 2005 the Company formed a wholly owned subsidiary, Fuel Frontiers Inc., formally, Future Fuels, Inc., which has had minimal operations through March 31, 2008.
On July 31, 2006 the company formed a wholly owned subsidiary, Liquidyne Fuels, which has had no activity through March 31, 2008.
The unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany transactions and balances have been eliminated in the consolidated financial statement.
Business:
Nuclear Solutions, Inc. is engaged in the research, development, and commercialization of innovative product technologies, which are generally early-stage, theoretical or commercially unproven. We operate a highly technical business and our primary mission is to develop advanced product technologies to address emerging market opportunities in the fields of homeland security, nanotechnology, and nuclear remediation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with Regulation S-X promulgated by the Securities and Exchange Commission and do not include all of the information and footnotes required by generally accepted accounting principles in the United States for complete financial statements. In the opinion of management, these interim financial statements include all adjustments, which include only normal recurring adjustments, necessary in order to make the financial statements not misleading. The results of operations for such interim periods are not necessarily indicative of results of operations for a full year. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto of the Company and management's discussion and analysis of financial condition and results of operations included in the Company's Annual Report for the year ended December 31, 2007 as filed with the Securities and Exchange Commission on Form 10-K.
Business Concentration
For the three months ended March 31, 2007 we earned all of our revenue from one customer.
NOTE 2 - ACCOUNTING POLICIES AND PROCEDURES
Revenue Recognition
Revenues are recognized in the period that services are provided. For revenue from product sales, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB104"), which superceded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. Payments received in advance are deferred.
SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company's consolidated financial position and results of operations was not significant.
Licensing fee income generally is being recognized ratably over the term of the license. The Company's management has determined that the collectibility and length of time to collect the remaining contracted price due from its licensee can not be reasonably assured. Accordingly, revenues will be recognized as collected.
Use of Estimates
The preparation of 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 and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates.
Loss Per Share
Basic and diluted loss per common share for all periods presented is computed based on the weighted average number of common shares outstanding during the year as defined by SFAS No. 128, "Earnings Per Share". The assumed exercise of common stock equivalents was not utilized since the effect would be anti-dilutive. At March 31, 2008 and 2007, the Company had 1,047,645 and 10,611,495 potentially dilutive securities, respectively.
Stock Based Compensation
The Company uses the fair value method for equity instruments granted to non-employees and uses the Black Scholes model for measuring the fair value. The stock based fair value compensation is determined as of the date of the grant or the date at which the performance of the services is completed (measurement date) and is recognized over the periods in which the related services are rendered.
New Accounting Pronouncements
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” which changes the disclosure requirements for derivative instruments and hedging activities. SFAS No. 161 requires enhanced disclosures about (a) how and why an entity uses derivative instruments, (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” and its related interpretations, and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance, and cash flows. This statement’s disclosure requirements are effective for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the future impacts and disclosures of this standard.
In May 2008, the FASB issued FAS No. 162 “The Hierarchy of Generally Accepted Accounting Principles” (“FAS 162”). FAS 162 identifies the sources of accounting generally accepted accounting principles in the United States. FAS 162 is effective sixty days following the SEC’s approval of PCAOB amendments to AU Section 411, “The Meaning of ‘Present fairly in conformity with generally accepted accounting principles’“. The Company is currently evaluating the potential impact, if any, of the adoption of FAS 162 on its consolidated financial statements.
NOTE 3 - GOING CONCERN
The accompanying unaudited condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in the accompanying unaudited condensed consolidated financial statements, the Company has a net loss of $1,257,579 for the three months ended March 31, 2008, and a working capital deficiency of $5,219,089 and a stockholders' deficiency of $5,154,868 at March 31, 2008. These factors raise substantial doubt about its ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company's ability to raise additional funds and implement its business plan. The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
The Company is actively pursuing additional equity financing through discussions with investment bankers and private investors. There can be no assurance the Company will be successful in its effort to secure additional equity financing.
If operations and cash flows continue to improve through these efforts, management believes that the Company can continue to operate. However, no assurance can be given that management's actions will result in profitable operations or the resolution of its liquidity problems.
The Company's existence is dependent upon management's ability to develop profitable operations and resolve its liquidity problems. Management anticipates the Company will attain profitable status and improve its liquidity through the continued developing, marketing and selling of its services and additional equity investment in the Company. The accompanying financial statements do not include any adjustments that might result should the Company be unable to continue as a going concern.
NOTE 4 - CONVERTIBLE DEBT
Notes payable at March 31, 2008 and December 31, 2007:
| | March 31, | | December 31, | |
| | | 2008 (unaudited) | | 2007 | |
| Denise Barbato, bearing interest at 10% per year, convertible into common stock at $0.084 per share. The note is payable on December 31, 2008 | | $ | — | | $ | 34,723 | |
| Denise Barbato, bearing interest at 10% per year, convertible into common stock at $0.084 per share. The notes are payable on December 31, 2008 | | | 44,002 | | | 696,500 | |
| Global Atomic Inc. demand note payable to related party at 10% per year, convertible into common stock at $1.00 per share | | | 4,000 | | | 4,000 | |
| International Fission demand note payable to related party at 10% per year, convertible into common stock at $1.00 per share | | | 15,000 | | | 15,000 | |
| Jackie Brown, demand note payable to related party, non -interest bearing, convertible into common stock at $1.00 per share | | | 20,000 | | | 20,000 | |
| John Powers note, convertible into common stock | | | | | | | |
| At a 50% discount to market; interest rate 12%; maturity June 4, 2008 | | | 12,000 | | | 12,000 | |
| John Powers note, convertible into common stock | | | | | | | |
| At a 50% discount to market; interest rate 14%; maturity March 17, 2009 | | | 8,000 | | | — | |
| Total notes payable | | | 103,002 | | | 782,223 | |
| Less: current portion | | | (103,002 | ) | | (782,223 | ) |
| Balance notes payable (long term portion) | | $ | — | | $ | — | |
During March 2008 the Company received advances from Denise Barbato in the amount of $50,000. The advances are convertible into common stock at the rate of $0.084 per share and are due on December 31, 2008. Since the advances are convertible at a discount to market, the Company has recorded a debt discount related to the beneficial conversion feature in the amount of $50,000, based on the proceeds received. The discount is being amortized over the term of the debt, through December 31, 2008.
During the three months ended March 31, 2008 the Company issued an aggregate of 8,887,000 shares of common stock as payment of $737,221 of principle and $9,287 of accrued interest to Denise Barbato.
On March 17, 2008 the Company received $8,000 pursuant to a promissory note payable to John Powers, a director, bearing interest at 14% per year and maturing on March 17, 2009. The note is convertible into common stock at the rate of 50% of market value. We have recorded a debt discount related to the beneficial conversion feature in the amount of $8,000, based on the proceeds received. The discount is being amortized over the term of the debt, through March 17, 2009.
The embedded conversion option related to the Powers note is accounted for under EITF issue No. 00-19. We have determined that the embedded conversion option is a derivative liability. Accordingly, the embedded conversion option will be marked to market through earnings at the end of each reporting period. The conversion option is valued using the Black-Scholes valuation model. For the three months ended March 31, 2008, the Company reflected a charge of $2,376 representing the change in the value of the embedded conversion option.
For the three months ended March 31, 2008 and 2007, the Company reflected a charge of $2,165 and $40,950, respectively, representing the change in the value of our embedded conversion options during the periods.
For the three months ended March 31, 2008 and 2007, the Company reflected a charge of $244,590 and $19,631, respectively, representing the amortization of debt discount as interest expense during the periods.
On March 16, 2007 the Company issued 25,000 shares of common stock as payment of $10,000 of principle and $1,395 of accrued interest to Long Lane Capital.
NOTE 5 - STOCKHOLDER'S EQUITY
The Company is authorized to issue 100,000,000 shares of common stock with $0.0001 par value per share. As of December 31, 2007 and 2006, the Company has issued and outstanding 73,734,095 and 53,665,644 shares of common stock, respectively.
During the three months ended March 31, 2008 the Company issued an aggregate of 744,683 shares of common stock, valued at $276,419, for consulting services.
During the three months ended March 31, 2008 the Company issued 632,369 shares as payment of expenses accrued at December 31, 2007 in the amount of $312,000.
During the three months ended March 31, 2008 the Company issued 8,887,000 shares of common stock as payment of $746,508 of principal and interest due to Denise Barbato.
During the three months ended March 31, 2007 the Company issued an aggregate of 1,419,637 shares of common stock, valued at $906,289, for consulting services.
During the three months ended March 31, 2007 the Company issued 74,718 shares as payment of expenses accrued at December 31, 2006 in the amount of $56,350
During January 2007 the Company issued 2,125,000 shares of common stock as payment of $178,500 of principal and interest due to Denise Barbato.
During March 2007 the Company issued 25,000 shares of common stock as payment of $11,395 of principle and interest due to Long Lane Capital.On August 30, 2006, Long Lane Capital, Inc. exercised its two common stock warrants, aggregating 1,000,000 shares, under the cashless exercise provisions of the warrant agreements dated October 5, 2004 and February 26, 2005 and received 428,155 and 393,203 shares respectively.
NOTE 13 - SUBSEQUENT EVENTS
Subsequent to March 30, 2008, the company issued 916,667 restricted shares to Denise Barbato valued at $77,000 as final payment for the January 8, 2004 debt consolidation agreement. The company also issued an additional 2,083,333 restricted shares to Denise Barbato in exchange for an additional $175,000 in cash.
Subsequent to March 30, 2008, the company issued 1,417,834 shares valued at $425,000 for consulting services.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation
When used in this Form 10-Q and in our future filings with the Securities and Exchange Commission, the words or phrases will likely result, management expects, or we expect, will continue, is anticipated, estimated or similar expressions are intended to identify forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Readers are cautioned not to place undue reliance on any such forward-looking statements, each of which speak only as of the date made. These statements are subject to risks and uncertainties, some of which are described below. Actual results may differ materially from historical earnings and those presently anticipated or projected. We have no obligation to publicly release the result of any revisions that may be made to any forward-looking statements to reflect anticipated events or circumstances occurring after the date of such statements.
Results of Operations
REVENUES: The Company reported revenues of $0 from our existing technology licence agreement, for the three months ended March 31, 2008 as compared with revenues from continuing operations of $100,000 for the three months ended March 31, 2007.
TOTAL COSTS AND EXPENSES: Total costs and expenses from continuing operations decreased from $1,035,610 for the three months ended March 31, 2007 to $1,002,815 for the three months ended March 31, 2008. The principal reason for this decrease was due to a decrease in legal, professional fees and consulting fees. This slight decrease is within expected business activity variances.
OPERATING EXPENSES: Operating expenses from continuing operations decreased from $1,035,610 for the three months ended March 31, 2007 to $1,002,815 for the three months ended March 31, 2008. The principal reason for this decrease was due to a decrease in legal, professional fees and consulting fees, as stated above. Depreciation expense decreased for the first three months of 2008 versus the first three months of 2007, decreasing from $1,668 for the three months ended March 31, 2007 to $1,229 for the three months ended March 31, 2008. This slight decrease reflects no significant increase or decrease in depreciable assets for the respective periods.
INTEREST EXPENSE: Interest expense increased from $40,559 for the three months ended March 31, 2007 to $252,599 for the three months ended March 31, 2008. This increase is due primarily to increased amortization of debt discount.
SALES, GENERAL AND ADMINISTRATIVE:
Sales, General & Administrative Expenses increased by $34,559 during the three months ended March 31, 2008 to a total amount of $75,785 as compared to $41,226 for the three months ended March 31, 2007. The increase was due to increased travel and general business expenses.
NET LOSS: The Company incurred a net loss of ($1,257,579) for the three months ended March 31, 2008, compared with a net loss of ($1,017,119) for the three months ended March 31, 2007, which reflects a year-to-year increase in the amount of loss for the period of $240,460. The principal reason for this increase was due to incurring more operating expenses as a result of increased business development activites.
LIQUIDITY AND CAPITAL RESOURCES:
As of March 31, 2008, we had a working capital deficit of $5,219,089 which compares to a working capital deficit of $ 5,181,372 as of March 31, 2007. As a result of our operating losses for the three month period ended March 31, 2008, we generated a cash flow deficit of $239,847 from operating activities. Cash flows used in investing activities was $0 during the period. Cash flows provided by financing activities were $58,000 on proceeds from short-term notes payable.
Additional financing will be required in order to meet our current and projected cash flow deficits from operations and development. We are seeking financing in the form of equity capital in order to provide the necessary working capital. There is no guarantee that we will be successful in raising the funds required. We intend to use the proceeds derived from revenues or financing to pay salaries, and general and administrative expenses to maintain the core operations of the company.
If we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations liquidity and financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Cash and Cash Equivalents
We have historically invested our cash and cash equivalents in short-term, fixed rate, highly rated and highly liquid instruments which are reinvested when they mature throughout the year. Although our existing investments are not considered at risk with respect to changes in interest rates or markets for these instruments, our rate of return on short-term investments could be affected at the time of reinvestment as a result of intervening events. As of March 31, 2008, we had cash and cash equivalents aggregated $11,134
The Company does not issue or invest in financial instruments or their derivatives for trading or speculative purposes. The operations of the Company are conducted primarily in the United States, and, are not subject to material foreign currency exchange risk. Although the Company has outstanding debt and related interest expense, market risk of interest rate exposure in the United States is currently not material.
Debt
The interest rate on our outstanding debt obligations are fixed and are not subject to market fluctuations. Some of our convertible debt may have its interest costs increased if the debt is converted into common stock because the conversion price is a function of the market price of our common stock.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) that are designed to be effective in providing reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “ SEC”), and that such information is accumulated and communicated to our management to allow timely decisions regarding required disclosure.
In designing and evaluating disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable, not absolute assurance of achieving the desired objectives. Also, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. 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, have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of simple error or mistake. The design of any system of controls is based, in part, upon certain assumptions about the likelihood of future events and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of management, including our chief executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon that evaluation, management concluded that our disclosure controls and procedures are effective as of March 31, 2008 to cause the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods prescribed by SEC, and that such information is accumulated and communicated to management, including our chief executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of and Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting of the Company. Management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of our internal control over financial reporting as of March 31, 2008 based on the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that, as of March 31, 2008, our internal control over financial reporting were effective in providing reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.
This annual report does not include an attestation report of the company's registered public accounting firm regarding internal control over financial reporting. Management's report was not subject to attestation by the company's registered public accounting firm pursuant to temporary rules of the SEC that permit the company to provide only management's report in this annual report.
Changes in Internal Control over Financial Reporting
There was no change in our internal controls over financial reporting identified in connection with the requisite evaluation that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Limitations.
Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls or internal controls over financial reporting will prevent all errors or all instances of fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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 our company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and any design may not succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
PART II-OTHER INFORMATION
The Company is not a party to any pending material legal proceedings.
Item 1A. Risk Factors
There have been no material changes from risk factors disclosed in our annual report on Form 10-K for the period ending December 31, 2007.
Item 2. Unregistered Sale of Equity Securities and Use of Proceeds.
During this fiscal quarter, we issued the following common stock:
On March 28, 2008, we issued 2,000,000 common shares to Denise Barbato valued at $168,000 as partial payment for the January 8, 2004 debt consolidation agreement.
On April 27, 2008, we issued 916,667 shares to Denise Barbato valued at $77,000 as final payment for the January 8, 2004 debt consolidation agreement. The company also issued an additional 2,083,333 shares to Denise Barbato in exchange for an additional $175,000 in cash.
Item 3. Defaults upon Senior Securities.
None.
No matter was submitted to a vote of the security holders, through the solicitation of proxies or otherwise, during the quarter of the fiscal year covered by this report.
Item 6. Exhibits
(a) Exhibits
| Exhibit No. | | Description |
| | | |
| 31.1 | | Chief Executive Officer-Section 302 Certification pursuant to Sarbanes-Oxley Act. |
| | | |
| 31.2 | | Chief Financial Officer-Section 302 Certification pursuant to Sarbanes-Oxley Act. |
| | | |
| 32.1 | | Chief Executive Officer-Section 906 Certification pursuant to Sarbanes-Oxley Act. |
| | | |
| 32.2 | | Chief Financial Officer-Section 906 Certification pursuant to Sarbanes-Oxley Act. |
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated May 20, 2008
NUCLEAR SOLUTIONS, INC.
| | | | | |
| By: | /s/ Patrick Herda | | By: | /s/ Kenneth Faith |
| |
Patrick Herda | | |
Kenneth Faith |
| | Title: President, CEO | | | Title: CFO |
