UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(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, 2009
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the transition period from __________ to ___________
Commission File Number 333-87696
EXOUSIA ADVANCED MATERIALS, INC.
Texas | 90-0347581 |
(State or Other Jurisdiction of | |
incorporation or Organization) | (I.R.S. Employer Identification No.) |
16537 Shady Lane
Channelview, Texas 77530
(Address of Principal Executive Offices)
(281) 452-5040
(Issuer's Telephone Number, Including Area Code)
Indicate by check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes (X) No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer | Accelerated filer |
Non-accelerated filer (Do not check if a smaller reporting company) | Smaller reporting company (X) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes No (X)
SEC 1296 (02-08) | Potential persons who are to respond to the collection of information contained in this form are not required to respond unless the form displays a currently valid OMB control number. |
Number of shares outstanding as of the close of business on November 20, 2009:
TITLE OF CLASS | NUMBER OF SHARES OUTSTANDING |
Common Stock, $0.001 par value. | 57,343,270 |
EXOUSIA ADVANCED MATERIALS, INC. AND CONSOLIDATED SUBSIDIARIES
REPORT ON FORM 10-Q
For the Quarterly Period Ended September 30, 2009
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION | ||
Item 1. | Unaudited Consolidated Financial Statements | 3 |
Item 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations | 12 |
Item 3. | Quantitative and Qualitative Analysis of Market Risks | 13 |
Item 4. | Controls and Procedures | 13 |
PART II - OTHER INFORMATION | ||
Item 1. | Legal Proceedings | 15 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 15 |
Item 3. | Default Upon Senior Securities | 15 |
Item 4. | Submission of Matters to a Vote of Security Holders | 16 |
Item 5. | Other Information | 16 |
Item 6. | Exhibits | 16 |
SIGNATURES | 17 |
PART I – FINANCIAL STATEMENTS
EXOUSIA ADVANCED MATERIALS, INC. AND SUBSIDIARIES
BALANCE SHEETS
As of September 30, 2009 and December 31, 2008
September 30, 2009 | December 31, 2008 | |||||||
ASSETS | (unaudited) | |||||||
Cash and cash equivalents | $ | 7,330 | $ | 139,967 | ||||
Accounts receivable trade, net | 53,928 | 79,863 | ||||||
Inventory | 753,187 | 657,700 | ||||||
Prepaid expenses | 26,560 | 121,833 | ||||||
TOTAL CURRENT ASSETS | 841,005 | 999,363 | ||||||
NON-CURRENT ASSETS Fixed assets, net of accumulated depreciation of $55,537 and $23,567 as of September 30, 2009 and December 31, 2008, respectively | 202,425 | 224,113 | ||||||
Patent, net of amortization of $301,158 and $176,531 as of September 30, 2009 and December 31, 2008, respectively | 1,448,842 | 1,579,830 | ||||||
Other assets | 168,619 | 14,417 | ||||||
TOTAL NON-CURRENT ASSETS | 1,819,886 | 1,818,360 | ||||||
TOTAL ASSETS | $ | 2,660,891 | $ | 2,817,723 |
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | ||||||||
CURRENT LIABILITIES | ||||||||
Accounts payable and accrued liabilities Debenture principal and interest payable | $ | 1,089,027 54,850 | $ | 733,884 53,337 | ||||
Reserve for legal costs | 207,829 | 232,829 | ||||||
Notes payable | 2,013,675 | 109,855 | ||||||
TOTAL CURRENT LIABILITIES | 3,365,381 | 1,129,905 | ||||||
SHAREHOLDERS' EQUITY (DEFICIT) | ||||||||
Common stock $0.001 par value, 100 million shares authorized; 57,343,270 and 50,917,866 shares issued and outstanding at September 30, 2009 and December 31, 2008, respectively | 57,343 | 50,917 | ||||||
Additional paid-in capital | 16,425,577 | 14,312,710 | ||||||
Accumulated deficit | (17,187,410 | ) | (12,675,809 | ) | ||||
Total shareholders' equity (deficit) | (704,490 | ) | 1,687,818 | |||||
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT) | $ | 2,660,891 | $ | 2,817,723 |
The accompanying notes are an integral part of these financial statements.
3
EXOUSIA ADVANCED MATERIALS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Nine Months Ended September 30, 2009 and 2008
Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||
REVENUES: | 2009 | 2008 | 2009 | 2008 | ||||||||||||
Sales | $ | 110,232 | $ | 398,234 | $ | 314,486 | $ | 1,081,998 | ||||||||
EXPENSES: | ||||||||||||||||
Cost of Sales | 69,175 | 298,190 | 193,025 | 826,540 | ||||||||||||
General and administrative expenses | 1,064,343 | 1,376,073 | 4,338,459 | 4,181,953 | ||||||||||||
China Relations | - | - | - | 3,325,128 | ||||||||||||
Depreciation and amortization | 54,331 | 53,688 | 162,856 | 156,058 | ||||||||||||
TOTAL OPERATING EXPENSES | 1,187,849 | 1,727,951 | 4,694,340 | 8,489,679 | ||||||||||||
OPERATING LOSS | (1,077,617 | ) | (1,329,717 | ) | (4,379,854 | ) | (7,407,681 | ) | ||||||||
OTHER INCOME (EXPENSE): | ||||||||||||||||
Bad Debt | (5,692 | ) | - | (5,692 | ) | - | ||||||||||
Interest expense | (75,341 | ) | (2,155 | ) | (109,195 | ) | (9,399 | ) | ||||||||
Abandoned acquisition expense | - | - | - | (19,999 | ) | |||||||||||
Interest income | 34 | - | 68 | 3,447 | ||||||||||||
Other expense | (13,406 | ) | (28,213 | ) | (16,927 | ) | (35,025 | ) | ||||||||
Total Other Income & Expenses | (94,405 | ) | (30,368 | ) | (131,746 | ) | (60,976 | ) | ||||||||
Net loss before extraordinary items | (1,172,022 | ) | (1,360,085 | ) | (4,511,600 | ) | (7,468,657 | ) | ||||||||
Extraordinary gain- bargain purchase | - | - | - | 234,583 | ||||||||||||
NET LOSS | $ | (1,172,022 | ) | $ | (1,360,085 | ) | $ | (4,511,600 | ) | $ | (7,234,074 | ) | ||||
Basic and diluted net loss per share | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.08 | ) | $ | (0.17 | ) | ||||
Weighted average number of shares outstanding | 57,197,061 | 46,711,126 | 55,967,236 | 41,433,111 |
The accompanying notes are an integral part of these financial statements.
4
EXOUSIA ADVANCED MATERIALS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY (DEFICIT)
For the Nine Months Ended September 30, 2009
No. of Shares | Capital Stock | Additional Paid In Capital | Accumulated Deficit | Total | ||||||||||||||||
Balance, December 31, 2008 | 50,917,866 | $ | 50,917 | $ | 14,312,710 | $ | (12,675,810 | ) | $ | 1,687,817 | ||||||||||
Shares issued for services | 5,684,833 | 5,685 | 1,640,076 | - | 1,645,761 | |||||||||||||||
Shares issued for cash | 740,571 | 741 | 219,759 | - | 220,500 | |||||||||||||||
Warrants issued for services | - | - | 139,036 | - | 139,036 | |||||||||||||||
Warrants issued for cash | - | - | 14,625 | - | 14,625 | |||||||||||||||
Warrants issued for interest | - | - | 22,254 | - | 22,254 | |||||||||||||||
Stock options for compensation | - | - | 77,117 | - | 77,117 | |||||||||||||||
Net loss | - | - | - | (4,511,600 | ) | (4,511,600 | ) | |||||||||||||
Balance, September 30, 2009 | 57,343,270 | $ | 57,343 | $ | 16,425,577 | $ | (17,187,410 | ) | $ | (704,490) |
The accompanying notes are an integral part of these financial statements.
5
EXOUSIA ADVANCED MATERIALS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended September 30, 2009 and 2008
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||||
Net loss | $ | (4,511,600 | ) | $ | (7,234,074 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Extraordinary items | - | (234,583 | ) | |||||
Capital stock issued for services | 1,645,761 | 5,040,690 | ||||||
Warrants issued for services | 139,036 | |||||||
Warrants issued for interest | 22,254 | - | ||||||
Stock based compensation | 77,117 | �� | ||||||
Depreciation and amortization | 162,856 | 156,058 | ||||||
Abandoned acquisition expense | - | 19,999 | ||||||
Change in operating assets and liabilities: | ||||||||
---Investment | - | 5,176 | ||||||
---Accounts receivable | 25,935 | (181,500 | ) | |||||
---Inventory | (95,487 | ) | (557,095 | ) | ||||
---Prepaid expenses | 130,661 | (34,953 | ) | |||||
---Other assets | (154,202 | ) | - | |||||
---Interest payable to related parties | 75,046 | 927 | ||||||
---Accounts payable and accrued liabilities | 327,168 | 242,431 | ||||||
Net cash used in operating activities | (2,155,455 | ) | (2,776,924 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Cash used for asset purchase | (10,181 | ) | (164,592 | ) | ||||
Net cash used in investing activities | (10,181 | ) | (164,592 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Payments of insurance payable | (76,972 | ) | (92,896 | ) | ||||
Payments on debt | (500,154 | ) | (86,681 | ) | ||||
Stock payable | - | 1,250,000 | ||||||
Proceeds from sale of warrants | 14,625 | - | ||||||
Proceeds from sale of stock | 220,500 | 2,113,250 | ||||||
Proceeds from Notes payable | 2,375,000 | 30,000 | ||||||
Net cash provided by financing activities | 2,032,999 | 3,213,673 | ||||||
NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | (132,637 | ) | 272,157 | |||||
Cash and cash equivalents, beginning of period | 139,967 | 267,212 | ||||||
Cash and cash equivalents, end of period | $ | 7,330 | $ | 539,369 |
6
NON CASH TRANSACTIONS | ||||||||
Financed Insurance Premium | $ | 35,388 | $ | - | ||||
SUPPLEMENTAL INFORMATION | ||||||||
Interest Paid | $ | - | $ | - | ||||
Taxes Paid | $ | - | $ | - |
The accompanying notes are an integral part of these financial statements.
7
EXOUSIA ADVANCED MATERIALS, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 – Basis of Presentation and Accounting Policies
Presentation of Interim Information
The accompanying consolidated financial statements of Exousia Advanced Materials, Inc. and Consolidated Subsidiaries (“Exousia” or the “Company”) have been prepared by the Company without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in conformity with generally accepted accounting principles have been omitted or condensed pursuant to such rules and regulations. These statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Form 10-K for the year ended December 31, 2008. In management’s opinion, these interim consolidated financial statements reflect all adjustments (consisting of normal and recurring adjustments) necessary for a fair presentation of the consolidated financial position and results of operations for each of the periods presented. The accompanying unaudited interim financial statements as of and for the nine months ended September 30, 2009 are not necessarily indicative of the results which can be expected for the entire year.
Principles of Consolidation
The accounts of our wholly-owned subsidiary, Aegeon, are included in the consolidation of these financial statements from the date of acquisition. All significant intercompany accounts and transactions have been eliminated in consolidation.
Recently Adopted Accounting Pronouncements
Effective June 30, 2009, the Company adopted a new accounting standard issued by the FASB related to the disclosure requirements of the fair value of the financial instruments. This standard expands the disclosure requirements of fair value (including the methods and significant assumptions used to estimate fair value) of certain financial instruments to interim period financial statements that were previously only required to be disclosed in financial statements for annual periods. In accordance with this standard, the disclosure requirements have been applied on a prospective basis and did not have a material impact on the Company’s financial statements.
In June 2009, the Financial Accounting Standards Board ("FASB") established the FASB Accounting Standards Codification (the "Codification") as the source of authoritative accounting principles recognized by the FASB to be applied by non-governmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission ("SEC") under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. The introduction of the Codification does not change GAAP and other than the manner in which new accounting guidance is referenced, the adoption of these changes had no impact on the our consolidated financial statements.
Recently Issued Accounting Standards
In August 2009, the FASB issued an amendment to the accounting standards related to the measurement of liabilities that are recognized or disclosed at fair value on a recurring basis. This standard clarifies how a company should measure the fair value of liabilities and that restrictions preventing the transfer of a liability should not be considered as a factor in the measurement of liabilities within the scope of this standard. This standard is effective for the Company on October 1, 2009. The Company does not expect the impact of its adoption to be material to its financial statements.
In October 2009, the FASB issued an amendment to the accounting standards related to the accounting for revenue in arrangements with multiple deliverables including how the arrangement consideration is allocated among delivered and undelivered items of the arrangement. Among the amendments, this standard eliminated the use of the residual method for allocating arrangement considerations and requires an entity to allocate the overall consideration to each deliverable based on an estimated selling price of each individual deliverable in the arrangement in the absence of having vendor-specific objective evidence or other third party evidence of fair value of the undelivered items. This standard also provides further guidance on how to determine a separate unit of accounting in a multiple-deliverable revenue arrangement and expands the disclosure requirements about the judgments made in applying the estimated selling price method and how those judgments affect the timing or amount of revenue recognition. This standard, for which the Company is currently assessing the impact, will become effective for the Company on January 1, 2011.
8
In October 2009, the FASB issued an amendment to the accounting standards related to certain revenue arrangements that include software elements. This standard clarifies the existing accounting guidance such that tangible products that contain both software and non-software components that function together to deliver the product’s essential functionality, shall be excluded from the scope of the software revenue recognition accounting standards. Accordingly, sales of these products may fall within the scope of other revenue recognition standards or may now be within the scope of this standard and may require an allocation of the arrangement consideration for each element of the arrangement. This standard, for which the Company is currently assessing the impact, will become effective for the Company on January 1, 2011.
Note 2 - Notes Payable
On February 19, 2009, the Company acquired two short term loans in the amount of $610,000 for use of operations. These loans were to be paid back on or before June 15, 2009 bearing interest of 7.5% per annum. In addition, as consideration for the loan, the Company issued 383,333 shares valued at the closing share price of $0.30 for a total value of $115,000. For the period ended September 30, 2009, the Company recorded the $115,000 in expense and accrued interest expense of $25,786, which is included in the note payable balance of $2,013,675. As of September 30, 2009 the company had not made the payments required under this note and is currently negotiating an extension of the loan.
In May 2009, the Company acquired a short term loan in the amount of $450,000 for use of operations. This loan bears interest at 1.5% per month and is due on demand. The Company recorded accrued interest expense of $17,292, which is included in the note payable balance of $2,013,675. At September 30, 2009, the Company made payments in the amount of 164,250.
On May 27, 2009, the Company acquired a bridge loan in the amount of $275,000 for use in operations. This loan bears interest at 12% per annum and is due on August 27, 2009. The Company recorded accrued interest expense of $3,074, the principal and accrued interest was paid in full this quarter.
On July 28, 2009, the Company acquired a loan in the amount of $1,000,000 for use in operations. This loan bears interest at 12% per annum with a two year maturity date. The Company recorded accrued interest expense of $26,885.
On August 28, 2009 the company acquired a short term loan in the amount of $35,000 from related party Launchpad Capital. The interest rate is 0% and imputed interest is considered immaterial.
On September 3, 2009 the company acquired a short term loan in the amount of $5,000 from related party Elorian Landers. The interest rate is 0% and imputed interest is considered immaterial.
Note 3- Reserve for Legal Costs
On or about July 21, 2008, a suit was filed by Baker & Daniels, LLP against the Company in St. Joseph circuit Court, in the State of Indiana, bearing Cause No. 71C01-0807-CC-01617, for unpaid legal fees in the amount of $7,051, with late fees accruing at $63 monthly. The Company disputes the claim, and intends to vigorously defend the claim. At September 30, 2009 the Company accrued $7,051 in legal costs.
On or about November 6, 2008, a Judgment was entered in Cause No. 20D02-0709-PL-79 in the Elkhart Superior Court No. 2, Elkhart, Indiana, in favor of Group Impact, LLC, Tektrellis, Inc., Marc Lacounte and Mary Wetzel, Plaintiffs, against J. Wayne Rodrigue, Exousia Advanced Materials, Inc., Re-Engineered Composite Systems, LLC and Engineered Particle Systems, LLC, Defendants, jointly and severally, in the amount of One Hundred Thousand Dollars ($100,000), plus prejudgment interest at the rate of 12% A.P.R. from May 1, 2007 through April 1, 2008 totaling Eleven Thousand Dollars ($11,000), plus post judgment interest accruing on the outstanding judgment amount at the statutory rate of Eight Percent (8%) from the date of summary judgment of April 1, 2008. In addition, Judgment was entered against the Defendants, jointly and severally, in the amount of Seven Thousand Three Hundred Thirty-Eight Dollars ($7,338) in attorney’s fees and costs, plus post judgment interest accruing on the outstanding judgment amount at the statutory rate of Eight Percent (8%) from the date of award of attorneys fees and costs of May 21, 2008. On or about November 12, 2008, Plaintiffs filed a Notice of Filing Foreign Judgment in the 240th Judicial District Court of Fort Bend County, Texas bearing Cause Number 08-DCV-167838.
9
On or about February 6, 2009, Defendants J. Wayne Rodrigue and Exousia Advanced Materials, Inc. filed a Motion to Vacate Judgment alleging certain defects in the Judgment and the attempt to file the Judgment as a Foreign Judgment. The Company is continuing to investigate the matter, including investigating the possibility of an out-of-court settlement of the claim. At September 30, 2009, the Company accrued $125,778 in legal costs.
In January, 2007, the Company entered into an Asset Purchase and Sale Agreement under which the Company would acquire certain assets of The Little Trailer company, Inc., and Indiana Corporation. The Company has received notice from The Little Trailer Company, Inc. that it claims to be owed a ‘break-up fee’ of approximately One Hundred Thousand Dollars ($100,000) in connection with the alleged failure of Exousia to close the transaction. The Company disputes the claim of The Little Trailer Company, Inc., and intends to vigorously defend the claim and any lawsuit that may be initiated with respect thereto. At September 30, 2009, the Company accrued $100,000 in legal costs.
Note 4 - Equity Transactions
As of September 30, 2009, the Company had common shares issued and outstanding of 57,343,270 which 23,107,483 or 40% are owned directly or indirectly by officers and directors of the Company.
The following common stock transaction occurred during the nine month period ended September 30, 2009:
· | 740,571 shares issued for cash totaling $220,500 to accredited investors as part of a private placement with attached warrants of 740,571 with an exercise price range of $0.35 to $0.50 and a term of 30 months. The relative fair value of the common stock is $73,709 and the relative fair value of the warrants is $70,849. |
· | 5,684,833 shares issued for services valued at $1,645,060 based upon the closing price of the Company’s common stock on the date of issue. |
On April 7, 2009, the Company sold warrants to purchase 600,000 shares of common stock at an exercise price of $0.35 for a total value of $6,000. The warrants have a 30 month exercise period commencing on date of issuance.
On April 23, 2009, the Company sold warrants to purchase 562,500 shares of common stock at an exercise price of $0.48 for a total value of $5,625. The warrants have a 30 month exercise period commencing on date of issuance.
On May 15, 2009, the Company sold warrants to purchase 300,000 shares of common stock at an exercise price of $0.60 for a total value of $3,000. The warrants have a 30 month exercise period commencing on date of issuance.
On June 22, 2009, the Company issued the vested portion of the employee stock options. The total value of the options is $308,470 with $77,117 vesting as of June 22, 2009.
On July 7, 2009, the Company issued warrants in lieu of interest for certain notes payable. The total value of the warrants issued was $22,254.
Note 5 – Going Concern
The Company is subject to the risks associated with companies that lack working capital, operating resources and contracts, cash and ready access to the credit and equity markets. Without additional funding, the Company may be unable to continue as a going concern. The Company expects to obtain additional debt and equity financing from various sources in order to finance its operations and to grow through merger and acquisition opportunities. However, the Company is currently dependent upon external debt and cash flows have historically been insufficient for the Company’s cash needs. New debt or equity capital may contain provisions that could suppress future stock prices further, or cause significant dilution to current shareholders and increase the cost of doing business. In the event the Company is unable to obtain additional debt and equity financing, the Company may not be able to continue its operations.
10
Note 6 – Business Combination
On March 5, 2008 the Company acquired the assets of Aegeon, LLC (“Aegeon”) for a purchase price of $193,000 which was paid in cash at the close of this transaction. Aegeon primarily has focused on the manufacturing and distribution of industrial grade coatings. Certain notes and other liabilities due from Aegeon were not part of this transaction. This purchase has been accounted for as a business purchase pursuant to an evaluation by management of EITF 98-3. The transaction was evaluated and the Company believes that the historical cost of the assets acquired approximated fair market value given the current nature of the assets acquired. The fair value of the net assets acquired was $427,583 resulting in a bargain purchase of $234,583. Pursuant to business combination accounting and specifically FASB statement 141 in a bargain purchase any shortfall of consideration is first netted against the long term assets acquired. Given that the fair value of any long term assets acquired was zero the in accordance with purchase accounting the next step would be to consider any contingent consideration. Since there was no contingent consideration in this transaction pursuant to purchase accounting the excess purchase price of $234,583 is treated as an extraordinary gain.
A breakdown of the purchase price is as follows:
Cash | $ | 37,787 | ||
Accounts Receivable | 140,066 | |||
Inventory | 435,651 | |||
Prepaid Expenses | 18,220 | |||
LESS: Liabilities assumed | (204,141 | ) | ||
Net Assets Acquired | 427,583 | |||
Less: Excess purchase price | (234,583 | ) | ||
Total Consideration | $ | 193,000 |
The following unaudited pro-forma assumes the transactions occurred as of the beginning of the periods presented as if it would have been reported during the nine month period below:
Unaudited Pro Forma
Nine month period ended
September 30, 2008
Sales | $ | 1,407,374 | ||
Cost of Sales | 1,139,534 | |||
Gross Margin | 267,840 | |||
Operating | ||||
Net Assets Acquired | 7,710,608 | |||
Other Expenses | 32,789 | |||
Net Loss | $ | (7,475,557 | ) |
Note 7– Segment Reporting
The Company manufactures and sells industrial coating applied to a variety of applications including Petrochemical Plants, Refineries and Oil and Gas Equipment. The Company has two operating segments, Domestic Industrial Coatings (marketed under the Aegeon Brand) and China Industrial Coatings (marketed under the power Shield Brand). Each segment operates independently, manufacturing and selling in their respective markets.
Net sales of each segment include end-user revenue from the sale of industrial coatings manufactured by the company. The costs included in each of the reportable segments’ operating results include the direct costs of the products sold to end-users and operating expenses managed by each reportable segment. Certain operating expenses managed by the Company’s selling and corporate functions, including all stock-based compensation expense, are not included in the reportable segment’s operating profit. As a result, reportable segment operating profit or loss is not representative of the operating profit or loss of the products in these reportable segments. Additionally, certain assets are managed by the Company’s corporate functions including corporate cash.
The following table presents net sales and operating profit or loss by reportable segments:
(Unaudited) | Domestic | China | Other | Total | ||||||||||||
Three Months ended September 30, 2009 | ||||||||||||||||
Net Sales | $ | 89,321 | $ | 20,912 | --- | $ | 110,232 | |||||||||
Operating Profit (Loss) | $ | (1,090,435 | ) | $ | (79,049 | ) | $ | (2,542 | ) | $ | (1,172,026 | ) | ||||
Nine Months ended September 30, 2009 | ||||||||||||||||
Net Sales | $ | 264,892 | $ | 49,594 | --- | $ | 314,486 | |||||||||
Operating Profit (Loss) | $ | (4,279,960 | ) | $ | (201,024 | ) | $ | (30,616 | ) | $ | (4,511,600 | ) |
The following table represents the Company’s total assets by reportable segment:
Domestic | $ | 2,225,308 | ||
China | 434,593 | |||
Other | 990 | |||
Total Assets | $ | 2,660,891 |
The above table does not include December 31, 2008 comparative data as there were no China operations during fiscal year 2008.
Note 7– Inventory
Inventory
The Company has industrial coatings inventory in Channelview, Texas and in China. The Company has Vistamer inventory in El Campo, Texas. The inventories are valued using the average cost method and recorded at the lower of cost or market. The balances are $376,080 in Channelview, Texas and $331.060 in China and $46,047 in El Campo, Texas. All inventories carried by the Company are sellable materials. The Company evaluates inventory quarterly and any obsolete or unsellable materials are written off at that time.
Note 8– Subsequent Events
On November 20, 2009, the Company acquired a short term loan in the amount of $100,000 for use in operations. This loan bears interest rate is 1% per month and is due and payable on or before December 5, 2009.
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Item 2 – Management’s Discussion and Analysis or Plan of Operation
Liquidity and Capital Resources
As of September 30, 2009, total assets were $2,660,891 consisting primarily of patents with a carrying value of $1,448,842. Current liabilities totaled $3,365,381, which consist of $494,871 of accounts payable, $801,985 of accrued expenses and $2,068,525 or notes payable. As of December 31, 2008, total assets were $2,817,723 and $1,129,905 in current liabilities. Our revenues for the nine months ended September 30, 2009 and 2008 were $314,486 and $1,081,998, respectively. The Company sustained losses of $4,511,600 and $7,468,657 for the nine months ended September 30, 2009 and 2008, respectively. The decrease is primarily due to the expenses related to China relations in 2008 of $3,325,128. Cash used in operating activities was $2,155,455 and $2,776,924 for the nine months ended September 30, 2009 and 2008, respectively.
Our financial statements are prepared using principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, we do not have significant cash or other material liquid assets, nor do we have an established source of revenue sufficient to cover our operating costs and to allow us to continue as a going concern. We may, in the future, experience significant fluctuations in our results of operations. If we are required to obtain additional debt and equity financing or our illiquidity could suppress the value and price of our shares if and when trading in those shares develops. However, our future offerings of securities may not be undertaken, and if undertaken, may not be successful or the proceeds derived from these offerings may be less than anticipated and/or may be insufficient to fund operations and meet the needs of our business plan. Our current working capital is not sufficient to cover expected cash requirements for 2009 or to bring us to a positive cash flow position. It is possible that we will never become profitable and will not be able to continue as a going concern.
The 3rd Quarter 2009 represented the weakest financial performance in terms of Sales and Operating Income since the Company began filing as a Commercial enterprise following its Developmental Stage filings. The primary factor contributing to this weak performance has been the Company’s inability over the last year to raise Working Capital to fund the initial inventories and receivables associated with the contracts the Company has in China as well as the opportunities it has developed in the U.S.
China Industrial Coatings
Total Sales in China during the 3rd Quarter 2009 were $20,912. Sales did not achieve the level anticipated nor the level that should occur when that segment is fully funded. During the quarter, the Company expanded its customer relations base in several ways. First it performed training for NIG’s sales personnel, an activity that will continue into the 4th quarter when all sales personnel will be fully trained in Exousia’s product line. This is expected to generate significant sales levels in the 4th quarter and well into 2010. The Company has also provided samples and technical services to several key customers which is expected to lead to sales in the 4th Quarter 2009. Management believes that the key to establishing and maintaining our baseline sales is to insure technical support infrastructure. Maintaining and improving on our Human Resource pool in the area of technical support will continue in the 4th quarter. The Chinese economy is stable and the economic packages that the government has initiated are continuing to stabilize the economy in China. With the Contracts already in place and with the funding of this business segment, the Company is extremely excited about China’s future operations.
Domestic Industrial Coatings
Continuing the strategy put in place in the second quarter 2009 Sales efforts in the United States during the 3rd Quarter focused on contractors with relationships with larger end users such as large refineries and chemical plants. Sales in the third quarter were $89,321 but the backlog exceeds $80,000 and a significant improvement in the fourth quarter is expected.
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RPA/Plastics Division
Exousia’s Tuff core panel sales initiatives proceeded ahead at a slow pace as well. The end user “pull through” approach that being employed requires more time but is expected to be far more successful in the long run. The Company demonstrates a platform of life cycle savings and fuel savings to the end-user customer base to establish a base demand for its product. Management continues to be bullish on Tuffcore and its strategy in spite of the continuing slow economic conditions in the US.
In response to the economic conditions it faces management has initiated several cost-saving plans and re-positioning plans to take advantage of its facilities and unique product lines. It believes that its China Operations are positioned to move forward with existing management and growth in the Technical areas. The focus in the 4th Quarter will be to achieve break-even in its Domestic U.S. Industrial Coatings to position that segment for significant growth in 2010. Finally, the Company will stay the course with its Plastics Division strategy to acceptance by end-users and significant sales in 2010. The company will continue to explore all options for adjusting our sales efforts to a changing US and International market.
The Company’s two business segments, Industrial Coatings and RPA/Plastics had stunted growth in the second quarter due primarily to funding limitations. As a result the focus was primarily on establishing an operational foundation that will allow it to move quickly when the anticipated funding options materialize.
In summary, Exousia has not been exempt from the world-wide economic slowdown which has delayed implementation of the Company’s business plan. Exousia’s customer base has shown continued support and commitment for the remainder of 2009 and into 2010 and while no one can be certain of timing and external conditions Exousia is positioned to benefit from the stimulus plans and other measures for economic growth both in the U.S. and in other parts of the world
Item 3 – Quantitative and Qualitative Analysis of Market Risks
There are no material changes in the market risks faced by us from those reported in our Annual Report on Form 10-K for the year ended December 31, 2008.
Item 4 – Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2009, the Company's management carried out an evaluation, under the supervision of the Company's Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of the Company's system of disclosure controls and procedures pursuant to the Securities and Exchange Act, Rule 13a-15(e) and 15d-15(e) under the Exchange Act). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were not effective, as of the date of their evaluation, for the purposes of recording, processing, summarizing and timely reporting material information required to be disclosed in reports filed by the Company under the Securities Exchange Act of 1934.
As of September 30, 2009, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness. |
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1. | As of September 30, 2009, effective controls over the control environment were not maintained. Specifically, a formally adopted a written code of business conduct and ethics that governs to the Company’s employees, officers and directors was not in place. Additionally, management has not developed and effectively communicated to its employees its accounting policies and procedures. This has resulted in inconsistent practices. Further, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness. | |
2. | As of September 30, 2009, effective controls over financial statement disclosure were not maintained. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness. |
3. | As of September 30, 2009, effective controls over equity transactions were not maintained. Specifically, controls were not designed and in place to ensure that equity transactions were properly reflected. Accordingly, management has determined that this control deficiency constitutes a material weakness. |
Changes in Internal Control over Financial Reporting
No change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2009, that materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
On or about December 10, 2007 a lawsuit was filed by CorrBan Technologies, Inc and Thin Film Technology, Inc. against Exousia Advanced Materials, Inc, Shield Industries, Inc, Global Development Enterprise, Inc, Vickers Industrial Coatings, Inc and other individuals. In the Lawsuit Plaintiffs allege misappropriation of proprietary information, breach of fiduciary duty and fraud. The allegations stem from the certain individuals previous association with CorrBan Technologies and CorrBan’s belief that these individuals used technology obtained from CorrBan. The defendants have agreed to a temporary restriction regarding the use of the disputed technology. Exousia does not believe this temporary agreement will affect their day to day business operations. A settlement was reached during the nine month period ending September 30, 2008 and the Company paid $25,000 on July 28, 2008 to CorrBan Technologies.
On or about July 21, 2008, a suit was filed by Baker & Daniels, LLP against the Company in St. Joseph circuit Court, in the State of Indiana, bearing Cause No. 71C01-0807-CC-01617, for unpaid legal fees in the amount of $7,051, with late fees accruing at $63 monthly. The Company disputes the claim, and intends to vigorously defend the claim. At June 30, 2009, the Company accrued $7,051 in legal costs.
On or about November 6, 2008, a Judgment was entered in Cause No. 20D02-0709-PL-79 in the Elkhart Superior Court No. 2, Elkhart, Indiana, in favor of Group Impact, LLC, Tektrellis, Inc., Marc Lacounte and Mary Wetzel, Plaintiffs, against J. Wayne Rodrigue, Exousia Advanced Materials, Inc., Re-Engineered Composite Systems, LLC and Engineered Particle Systems, LLC, Defendants, jointly and severally, in the amount of One Hundred Thousand Dollars ($100,000), plus prejudgment interest at the rate of 12% A.P.R. from May 1, 2007 through April 1, 2008 totaling Eleven Thousand Dollars ($11,000), plus post judgment interest accruing on the outstanding judgment amount at the statutory rate of Eight Percent (8%) from the date of summary judgment of April 1, 2008. In addition, Judgment was entered against the Defendants, jointly and severally, in the amount of Seven Thousand Three Hundred Thirty-Eight Dollars ($7,338) in attorney’s fees and costs, plus post judgment interest accruing on the outstanding judgment amount at the statutory rate of Eight Percent (8%) from the date of award of attorney’s fees and costs of May 21, 2008. On or about November 12, 2008, Plaintiffs filed a Notice of Filing Foreign Judgment in the 240th Judicial District Court of Fort Bend County, Texas bearing Cause Number 08-DCV-167838.
On or about February 6, 2009, Defendants J. Wayne Rodrigue and Exousia Advanced Materials, Inc. filed a Motion to Vacate Judgment alleging certain defects in the Judgment and the attempt to file the Judgment as a Foreign Judgment. The Company is continuing to investigate the matter, including investigating the possibility of an out-of-court settlement of the claim. At June 30, 2009, the Company accrued $125,778 in legal costs.
In January, 2007, the Company entered into an Asset Purchase and Sale Agreement under which the Company would acquire certain assets of The Little Trailer company, Inc., and Indiana Corporation. The Company has received notice from The Little Trailer Company, Inc. that it claims to be owed a ‘break-up fee’ of approximately One Hundred Thousand Dollars ($100,000) in connection with the alleged failure of Exousia to close the transaction. The Company disputes the claim of The Little Trailer Company, Inc., and intends to vigorously defend the claim and any lawsuit that may be initiated with respect thereto. At June 30, 2009, the Company accrued $100,000 in legal costs.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
None
Item 3 – Defaults Upon Senior Securities
None
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Item 4 – Submission of Matters to a Vote of Security Holders
None
Item 5 – Other Information
None
Item 6 – Exhibitions and Reports on Form 8-K
Exhibit No. | Description of Exhibit |
3.1 | Articles of Incorporation of the Company (filed as Exhibit 3.1 to the Company’s SB-2 Registration Statement declared effective August 6, 2002 is incorporated here by reference) |
3.2 | By-laws of the Company (filed as Exhibit 3.2 to the Company’s SB-2 Registration Statement declared effective August 6, 2002 is incorporated here by reference) |
31.1 | Certification Pursuant to 302 of the Sarbanes-Oxley Act of 2002 |
31.2 | Certification Pursuant to 302 of the Sarbanes-Oxley Act of 2002 |
32.1 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
32.2 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Exousia Advanced Materials, Inc. (Registrant) |
By //s// Wayne Rodrigue, CEO/President/Chairman |
Date: November 20, 2009 |
In accordance with the Securities Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By //s// Robert Roddie, CFO/COO |
Date: November 20, 2009 |
By //s// Wayne Rodrigue, CEO/President/ Chairman |
Date: November 20, 2009 |
By //s// Robert Lane Brindley, Director |
Date: November 20, 2009 |
By //s// Terry Stevens, Director |
Date: November 20, 2009 |
By //s// George Stapleton, Director |
Date: November 20, 2009 |
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