(Former Name, Former Address and Former Fiscal year, if Changed Since Last Report)
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
Celsia Technologies, Inc. and Subsidiaries
Consolidated Balance Sheet
(US Dollars)
| | | March 31, 2008 | | December 31, 2007 | |
| | | (unaudited) | | | |
Assets | | | | | |
| Current Assets | | | | | |
| Cash and cash equivalents | | $ | 2,387,729 | | $ | 3,046,624 | |
| Receivable | | | 407,324 | | | 298,799 | |
| Inventory | | | 92,769 | | | 74,465 | |
| Prepaid expenses | | | 63,893 | | | 45,661 | |
| Other | | | 19,075 | | | 31,785 | |
| Total current assets | | | 2,970,790 | | | 3,497,334 | |
| | | | | | | | |
| Guarantee deposits | | | 25,132 | | | 26,157 | |
| Advance payments | | | 145,979 | | | 154,287 | |
| | | | | | | | |
| Furniture and equipment, net (note 1) | | | 671,420 | | | 639,947 | |
| Deferred Charges (note 1) | | | 1,544,034 | | | 1,721,630 | |
| Royalty Advance (note 3) | | | - | | | - | |
| Intangible Assets, net (note 3) | | | 89,934 | | | 85,049 | |
| | | | | | | | |
| Total assets | | $ | 5,447,289 | | $ | 6,124,404 | |
| | | | | | | | |
Liabilities and Stockholders’ Equity (Deficit) | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable | | $ | 531,244 | | $ | 282,055 | |
| Bond Payable (note 4) | | | 303,475 | | | 322,582 | |
| Accrued expenses | | | | | | | |
| Payroll and Related | | | 666,917 | | | 652,917 | |
| Other | | | 464,173 | | | 576,917 | |
| Other | | | 24,667 | | | 26,545 | |
| Total current liabilities | | | 1,990,476 | | | 1,861,016 | |
| | | | | | | | |
| Convertible Debenture, net of $3,668,736 as of March 31, 2008 and $4,092,051 as of December 31, 2007 unamortized discount (note 6) | | | 5,229,047 | | | 4,400,796 | |
| Accrual for Employee Retirement Benefits (note 3) | | | 94,030 | | | 86,683 | |
| | | | | | | | |
| Total liabilities | | | 7,313,553 | | | 6,348,495 | |
| | | | | | | | |
| Stockholders’ Equity (Deficit) (note 6 & 7) | | | | | | | |
| Preferred Stock, Series A; $.001 par value; 30,000,000 shares authorized; 22,032,963 as of March 31, 2008 and 22,320,598 as of December 31, 2007 issued and outstanding | | | 22,033 | | | 22,321 | |
| Preferred Stock, Series B; $.001 par value; 7,000,000 shares authorized; 3,063,402 as of March 31, 2008 and December 31, 2007 issued and outstanding | | | 3,063 | | | 3,063 | |
| Common stock; $.001 par value; 500,000,000 shares authorized; 85,565,713 as of March 31, 2008 and 85,273,680 as of December 31, 2007 issued and outstanding | | | 85,566 | | | 85,273 | |
| Common stock subscribed | | | 6,158 | | | 6,158 | |
| Additional paid-in-capital | | | 40,085,518 | | | 40,032,066 | |
| Other comprehensive loss | | | (96,997 | ) | | (80,478 | ) |
| Accumulated (deficit) | | | (41,971,605 | ) | | (40,292,494 | ) |
| Total stockholders’ equity (deficit) | | | (1,866,264 | ) | | (224,091 | ) |
| | | | | | | | |
| Total liabilities and stockholders’ equity (deficit) | | $ | 5,447,289 | | $ | 6,124,404 | |
See notes to consolidated financial statements
Celsia Technologies, Inc. and Subsidiaries
Consolidated Statements of Operations
(US Dollars)
| | | Three Months Ended March 31, | |
| | | 2008 | | 2007 | |
| | | | | | |
| Revenue | | $ | 305,688 | | $ | 99,323 | |
| | | | | | | | |
| Costs and expenses | | | | | | | |
| Cost of Sales | | | 294,725 | | | 166,538 | |
| Selling and Administrative expenses | | | 740,555 | | | 956,962 | |
| Depreciation | | | 16,969 | | | 43,474 | |
| Amortization of deferred financing cost (note 1) | | | 193,300 | | | 5,053 | |
| Miscellaneous (income) expense | | | 11,712 | | | 663 | |
| Total costs and expenses | | | 1,257,261 | | | 1,172,690 | |
| | | | | | | | |
| Operating (loss) | | | (951,573 | ) | | (1,073,367 | ) |
| | | | | | | | |
| Other income (expenses) | | | | | | | |
| | | | | | | | |
| Financing Expense (note 6) | | | (177,956 | ) | | - | |
| Interest and other income | | | 83,539 | | | (27,300 | ) |
| Interest expense (notes 5 and 6) | | | (633,121 | ) | | (16,056 | ) |
| | | | | | | | |
| Total other income (expenses) | | | (727,538 | ) | | (43,356 | ) |
| | | | | | | | |
| Net (loss) | | $ | (1,679,111 | ) | $ | (1,116,723 | ) |
| | | | | | | | |
| Dividend on Series A Preferred Stock (note 7) | | $ | (97,942 | ) | $ | (400,322 | ) |
| | | | | | | | |
| Net Loss Attributable to Common Shareholders | | $ | (1,777,053 | ) | $ | (1,517,045 | ) |
| | | | | | | | |
| Net Loss per Share: | | | | | | | |
| Basic and Diluted | | $ | (0.02 | ) | $ | (0.04 | ) |
| | | | | | | | |
| Weighted Average Shares Outstanding | | | 85,376,373 | | | 36,382,907 | |
See notes to consolidated financial statements
Celsia Technologies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(US Dollars)
| | | March 31, | |
| | | 2008 | | 2007 | |
| Cash flows from operating activities: | | | | | |
| Net (loss) | | $ | (1,679,111 | ) | $ | (1,116,723 | ) |
| Adjustments to reconcile net (loss) to net cash (used) by operating activities: | | | | | | | |
| Depreciation | | | 16,969 | | | 43,474 | |
| Amortization of Deferred Charges | | | 193,300 | | | 5,053 | |
| Amortization of Debt Discount | | | 423,316 | | | - | |
| Financing Expense | | | 404,936 | | | - | |
| Stock Based Compensation | | | 53,456 | | | 93,441 | |
| Changes to certain other accounts: | | | | | | | |
| Receivable | | | (108,525 | ) | | (53,151 | ) |
| Inventory | | | (18,304 | ) | | 3,632 | |
| Advance payments | | | 8,308 | | | 10,128 | |
| Prepaid expenses | | | (18,232 | ) | | 17,146 | |
| Accounts payable | | | 249,189 | | | 36,422 | |
| Accrued expenses | | | (98,744 | ) | | 79,822 | |
| Accrual for Employee Retirement Benefits | | | 7,347 | | | (30,097 | ) |
| Other | | | (45,383 | ) | | 52,756 | |
| Net cash (used) by operating activities | | | (611,478 | ) | | (858,097 | ) |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Deposits | | | 1,025 | | | 1,542 | |
| Purchase of furniture and equipment | | | (48,442 | ) | | (22,865 | ) |
| Net cash (used) by investing activities | | | (47,417 | ) | | (21,323 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Deferred Finance Charge | | | - | | | (192,026 | ) |
| Long-term borrowings | | | | | | 1,000,000 | |
| Net cash (used) provided by financing activities | | | - | | | 807,974 | |
| | | | | | | | |
| Net (decrease) increase in cash and cash equivalents | | | (658,895 | ) | | (71,446 | ) |
| | | | | | | | |
| Cash and cash equivalents - beginning of period | | $ | 3,046,624 | | $ | 295,400 | |
| | | | | | | | |
| Cash and cash equivalents - end of period | | $ | 2,387,729 | | $ | 223,954 | |
| | | | | | | | |
| Supplemental cash flow disclosure | | | | | | | |
| Noncash financing activity | | | | | | | |
| | | | | | | | |
| During 2008 and 2007 the Company recorded stock compensation arrangements for certain employees and directors | | $ | 53,456 | | $ | 93,441 | |
| | | | | | | | |
| During 2008 Preferred Shares were converted into Common Shares | | $ | 288 | | $ | - | |
See notes to consolidated financial statements
Celsia Technologies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
March 31, 2008
Note 1 - Summary of significant accounting policies
Organization
Celsia Technologies, Inc. (the "Company" or "Celsia"), a US Corporation incorporated in Nevada, is formerly known as iCurie, Inc. Celsia’s operations consist of research, development, and commercialization of next-generation cooling solutions. The Company was founded in 2000 to address the emerging heat problem that now threatens the development of higher-performing microelectronic products. Celsia is taking this innovative thermal management technology from the laboratory to high volume manufacturing, and operating as both a licensor of the technology and a vertically integrated provider of customized applications.
The Company’s corporate headquarters is located in Miami, USA with subsidiaries in London, United Kingdom, Seoul, South Korea, and Taipei, Taiwan. During 2007, the Company relocated its Design and Manufacturing operations from Seoul, Korea to Taipei, Taiwan. Our operations in Seoul, Korea remain as a sales and administrative office for the region. Our patented NanoSpreader™ is a completely new alternative to conventional cooling devices. By utilizing a nano scale environment, the laws of physics are manipulated enabling our cooling technology to be thinner, lighter and deliver significantly higher thermal conductivity (heat transfer capacity) versus conventional options such as Heat Pipes. And, we can supply our plate-shaped heat spreaders in virtually any shape that a design engineer requires. As a result, customers are able to achieve improved product performance without trading off size, weight or cost considerations.
Celsia Technologies, Inc.’s subsidiaries consist of (i) Celsia Technologies UK Limited ("UK Subsidiary"), a United Kingdom Company formerly known as iCurie Lab Holdings Limited, (ii) Celsia Technologies Korea, Inc. ("Korea Subsidiary"), a Korean Company formerly known as iCurie Lab, Inc, and (iii) Celsia Technologies Taiwan, Inc. ("Taiwan Subsidiary"). In consolidation, all significant intercompany balances and transactions have been eliminated.
Financial reporting
The Company prepares its financial statements in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the financial statements. Although these statements are based on management’s best knowledge of current events and actions that the Company may undertake in the future, actual results could differ from those estimates.
Significant estimates required to be made by management include the valuation of equity securities issued, registration rights, intangible assets, and accouting for convertible debentures.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company and its Subsidiaries have recently commenced limited revenue producing operations and have sustained accumulated losses approximately $42.0 and $40.3 million as of March 31, 2008 and December 31, 2007, respectively. The Company and its Subsidiaries have funded operations through equity and debt financing since inception. All these factors raise substantial doubt over the Company’s ability to continue as a going concern.
Cash and Cash Equivalents
Cash and cash equivalents include all cash balances and highly liquid investments, including time deposits, which are readily convertible into known amounts of cash and have an original maturity dates of three months or less. The Company and its Subsidiary’s cash and cash equivalents are maintained in banks and financial institutions in the United States, United Kingdom, South Korea, and Taiwan, and they have not experienced any losses on their cash balances.
Inventory
Inventory consists of finished goods ready to be sold to customers. Inventories are carried at the lower of cost or market value.
Investment
The UK Subsidiary owns 527,000 shares of an entity formerly affiliated through common management. These shares have been fully reserved and carry a book value of $0 as of March 31, 2008 and December 31, 2007.
Revenue recognition
The Company’s policy is to record revenue as earned when the following attributes are met.
| - | Persuasive evidence of a sale arrangement exists. |
| - | Delivery has occurred to the customers. |
| - | The sales price to the customer is fixed or determinable. |
| - | Collection is reasonably assured. |
The Company recognized revenues of $305,688 and $99,323 for the three months ended March 31, 2008 and 2007, respectively, from customer orders for test samples and commercial deliveries.
Deferred costs
In connection with obtaining debt financing as described in Note 6, the Company incurred legal and other related fees. Deferred financing costs incurred in connection with long-term financing amounted to $2,131,150 and are being amortized on a straight-line basis over the stated term of the loan. Amortization expense for the three months ended March 31, 2008 and March 31, 2007 amounted to $193,300 and $5,053, respectively.
Furniture and equipment
Furniture and equipment are summarized as follows:
| | | March 31, 2008 | | December 31, 2007 | |
| Vehicles | | $ | 52,471 | | $ | 73,331 | |
| Machinery | | | 632,306 | | | 596,505 | |
| Furniture and fixtures | | | 415,434 | | | 429,148 | |
| | | | 1,100,211 | | | 1,098,984 | |
| Accumulated depreciation | | | (428,791 | ) | | (459,037 | ) |
| | | $ | 671,420 | | $ | 639,947 | |
Furniture and equipment are stated at cost. Major renewals and betterments, which prolong the useful life or enhance the value of assets, are capitalized. Depreciation is computed using the straight-line method over the estimated life of five years for machinery and equipment, furniture and fixtures, and vehicles. Depreciation expense for the three months ended March 31, 2008 and 2007 amounted to $16,969 and $43,474, respectively.
Net Loss per Share
Basic Loss per share is computed by dividing net loss attributable to common shareholders for the period by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of shares plus the dilutive effect of convertible debt and preferred shares and outstanding options and warrants. Approximately 22 million and 3 million shares to be issued upon conversion of Series A and Series B, respectively, Preferred Shares were excluded from the calculation of diluted earnings per share for the period ended March 31, 2008 and 2007, respectively, because they were anti-dilutive. Approximately 136 million shares to be issued upon conversion of the convertible debentures were excluded from the calculation of diluted earnings per share as of March 31, 2008 because they were anti-dilutive.
Long-lived assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the aggregate undiscounted future cash flows is less than the carrying value of the asset, an impairment loss is recognized, based on the fair value of the asset.
Business risks
The Company is subject to the risks associated with start-up and high growth companies such as the risks of raising adequate capital, producing profitable operations, and operating in various countries throughout the world.
Research and development costs
Research and development costs are expensed as incurred and amounted to $35,024 and $87,566 for the three months ended March 31, 2008 and 2007, respectively.
Foreign currency translation
The reporting and functional currency of the Company and its UK Subsidiary is the U.S. Dollar, while the functional currency of the Korea and Taiwan subsidiaries are the Korean Won and the New Taiwanese Dollar, respectively.
The assets and liabilities of the Korea and Taiwan Subsidiaries have been translated into U.S. Dollars at the prevailing period-end rate of exchange, while the related income and expense items were translated at the average rate of exchange during the period. The resulting translation adjustments are accumulated in a separate component of stockholders’ equity (deficit).
The Company follows Financial Accounting Standards No. 130 (SFAS 130) "Reporting Comprehensive Income." SFAS 130 requires a Company to report comprehensive income (loss) and its components in a full set of financial statements. Comprehensive income (loss) includes the change in equity during a period from transactions and other events and circumstances from non-owner sources, such as unrealized gains (losses) on foreign currency translation adjustments. Changes in unrealized foreign currency translation gains (losses) for the three months ended March 31, 2008 and 2007 amounted to ($16,519) and $37,258, respectively. Accordingly, comprehensive loss for the three months ended March 31, 2008 and 2007 amounted to $1,695,630 and $1,079,465, respectively.
Fair value of financial instruments
The Company’s cash, receivables, accounts payable, short-term debt, bonds payable, and the face amount of its convertible debentures represent financial instruments whose carrying amounts reasonably approximate their fair value.
Recent accounting pronouncements
In July 2006, the Financial Accounting Standards Board (FASB) issued FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes—an interpretation of FASB Statement No. 109" ("FIN 48"), which provides clarification related to the process associated with accounting for uncertain tax positions recognized in consolidated financial statements. FIN 48 prescribes a more-likely-than-not threshold for financial statement recognition and measurement of a tax position taken, or expected to be taken, in a tax return. FIN 48 also provides guidance related to, among other things, classification, accounting for interest and penalties associated with tax positions, and disclosure requirements. FIN 48 is effective for fiscal years beginning after December 15, 2006. The adoption of this statement did not have a material effect on the Company’s financial position or results of operations.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”), which provides guidance for measuring the fair value of assets and liabilities, as well as requires expanded disclosures about fair value measurements. SFAS 157 indicates that fair value should be determined based on the assumptions marketplace participants would use in pricing the asset or liability, and provides additional guidelines to consider in determining the market-based measurement . SFAS No. 157 is effective for fiscal years beginning after November 15, 2007. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits all entities to choose to measure eligible items at fair value at specified election dates. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. The adoption of this standard did not have a material effect on the Company’s results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”), which replaces SFAS 141. SFAF 141(R) requires assets and liabilities acquired in a business combination, contingent consideration, and certain acquired contingencies to be measured at their fair values as of the date of acquisition. SFAS 141(R) also requires that acquisition-related costs and restructuring costs be recognized separately from the business combination. SFAS 141(R) is effective for fiscal years beginning after December 15, 2008 and will be effective for business combinations entered into after January 1, 2009.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements, an Amendment ARB No. 51” (“SFAS 160”). SFAS 160 clarifies the accounting for noncontrolling interests and establishes accounting and reporting standards for the noncontrolling interest in a subsidiary, including classification as a component of equity. SFAS 160 is effective for fiscal years beginning after December 15, 2008. The Company does not currently have any minority interests.
Note 2 - Income Taxes
The Company recognizes deferred tax assets and liabilities created by temporary differences between the financial statement and tax basis of assets and liabilities. Deferred tax assets and liabilities are computed on such temporary differences, including available net operating loss carry forwards and tax credits, by applying enacted statutory tax rates applicable to the years when such differences are expected to reverse. A valuation allowance is provided on deferred tax assets to the extent that it is more likely than not that such deferred tax assets will not be realized.
The Company currently operates in the United States, while its Subsidiaries operate in the United Kingdom South Korea, and Taiwan. Operating loss carryforwards in the United States approximated $6,800,000 at December 31, 2007, and can be carried forward for 20 years, expiring in the years 2025-2027. Operating loss carryforwards in the United Kingdom approximated $5,000,000 at December 31, 2007, and can be carried forward indefinitely, provided the Company (i) doesn’t cease operations and (ii) doesn’t change its business nature, while operating loss carryforwards in South Korea approximated $6,300,000 at December 31, 2007, and expire in the years 2008-2012. At December 31, 2007, the Company has a deferred tax asset of approximately $5,600,000 and has recorded a full valuation allowance against the deferred tax asset resulting from these tax loss carry-forwards.
Note 3 - Commitments and Contingencies
Operating Leases
The Company has a lease in Seoul, Korea for its Sales and Administrative office which expires in October 2009. The Company has a lease in Taipei, Taiwan for its Design and Manufacturing Center which expires in September 2009. As of December 31, 2007, the minimum future rental commitments under all non-cancelable operating leases with terms greater than one year, are as follows:
| Year Ending December 31, | | | |
| 2008 | | $ | 100,599 | |
| 2009 | | $ | 77,953 | |
| | | $ | 178,552 | |
Employment contracts
The Company has entered into employment agreements with some of its officers / employees for terms ranging between one and two years. Under the terms of the contracts these officers / employees are entitled to minimum compensation of approximately $274,000 in 2008. Other employees contracts have expired and are employed at will with no minimum compensation.
On August 15, 2007, the Company entered into an agreement with Core Strategies, LLC (“Core Strategies”) which provides services of several Core Strategies partners including Joseph Formichelli as Chief Executive Officer of the Company on a full-time basis, and a marketing and sales executives on a part-time basis. The agreement is effective from August 15, 2007 through August 14, 2009. The Company pays Core Strategies $20,000 per month and has issued 8,000,000 warrants to purchase the Company’s common stock.
Accrual for Employment Retirement Benefits
The Company has recorded a liability of $94,030 and $86,683 as of March 31, 2008 and December 31, 2007, respectively, for employment retirement benefits. The Company believes that this liability will not be paid within the current year, and it has therefore been recorded as a long term liability.
Royalty Agreement
On May 18, 2005, the UK Subsidiary entered into a Royalty Agreement with CHL Investment Partnership ("CHL") and Hansen Gray & Company, Inc. ("Hansen Gray"). The terms of the agreement call for a payment of 1.14% and 0.86% of revenue to CHL and Hansen Gray, respectively, once the UK Subsidiary’s revenue exceeds $25 million. The agreement is terminated once the aggregate payment to CHL and Hansen Gray totals $50 million. During 2005, the Company paid a Royalty Advance to Hansen Gray totaling $500,000.
On July 18, 2007, the Company and AMF Capital, Inc. (formerly known as Hansen Gray & Company, Inc) (“AMF”) entered into a Settlement Agreement and Release pursuant to which the Company and AMF resolved certain claims of AMF against the Company. Pursuant to the Settlement Agreement, the Company paid a Royalty Advance of $100,000 in cash to AMF and issued to AMF a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $0.88 per share, and AMF released the Company from any and all claims except for certain specified contractual rights as set forth in the Settlement Agreement. The Company has recorded a full valuation allowance resulting from these prepaid royalties.
CHL is an organization in which Dr. Jeong Hyun Lee (a former Director of the Company) holds an interest in. Hansen Gray is an entity in which Alan Miller (a former Director of the Company) holds an interest in.
Intangible Assets
In April 2007, Celsia acquired certain assets and liabilities together with two sales executives and a thermal management customer base from CheongNam International Co. Ltd. ("CNIT"), a Korean entity, for approximately $70,000. The Company has recorded assets of approximately $88,000, liabilities of approximately $82,000 and intangible asset (which is the value assigned to the acquired customer list) of approximately $64,000. The Company is amortizing this customer list over 36 months.
The Company has also recorded an intangible asset for costs incurred with filing approved patents and trademarks of approximately $34,000.
Registration Rights
The Company entered into a registration rights agreement with the Preferred Series B share holders dated December 16, 2005. Under the terms of the Registration Rights Agreement, the Company was required to use its best efforts to file a Registration Statement covering the underlying Common Stock within six months after the Company’s Registration Statement on Form SB-2 (SEC File No. 333-128856) was declared effective. The Company was required to maintain the effectiveness of the Initial Registration Statement through the first anniversary of the Closing Date and was to use its best efforts to maintain the effectiveness of the Initial Registration Statement through the second anniversary of the Closing Date. This agreement was amended on May 25, 2007 to reflect the subordination of rights under this agreement to the registration rights agreement entered into by the Company on May 25, 2007 as described below.
The Company entered into a registration rights agreement with the Convertible Debenture Holders dated May 25, 2007 (see Note 6). Under the terms of the Registration Rights Agreement, the Company is required to file a Registration Statement (the "Initial Registration Statement") covering the Common Stock (i) into which the Debentures are convertible and (ii) for which the Warrants and Placement Agent Warrants are exercisable (collectively, the “Registrable Securities”) within 30 days of a demand by Debenture Holders or within six (6) months after the Closing Date. If the Initial Registration Statement is not filed on or prior to its Filing Date, or in certain other circumstances, the Company shall pay to each Debenture Holder an amount in cash equal to 1.0% of the aggregate purchase price paid by such Debenture Holder pursuant to the Purchase Agreement for any unregistered securities then held by such Debenture Holder. The Company has fulfilled its requirements by filing the Registration Statement on Form SB-2 (SEC File No. 333-147564) which was declared effective on December 11, 2007.
Litigation
On October 19, 2007, the Company’s former President, CEO, and Board of Director, filed a lawsuit in the Miami-Dade County Circuit Court claiming failure to pay bonses, severance, and other benefits in connection with his previously reported termination by the Company. The Company has filed a motion to Compel Arbitration and Stay Proceedings as provided by the employment contract with the Company. On April 16, 2008, the court granted the Company’s motion and ordered (i) that the Plaintiff commence arbitration in accordance with the terms of the employment agreement within six (6) months of the date of the order and (ii) all proceedings are stayed until the conclusion of the arbitration proceedings. Pursuant to the court order, if arbitration is not timely commenced the action will be dismissed. The Company believes the employee’s claims are without merit and intends to defend the action vigorously. The settlement of this action is not expected to have a material impact on the Company’s financial position.
Note 4 - Bond payable
The bond payable (Won 300 million) at March 31, 2008 and December 31, 2007, was issued to a third party in December 2002 and matures in December 2007. The bond carries no interest and has been discounted using a 7% interest rate. The bond payable is summarized as follows:
| | | March 31, 2008 | | December 31, 2007 | |
| Face Amount | | $ | 303,475 | | $ | 322,582 | |
| Less: Discount | | | (93,926 | ) | | (93,926 | ) |
| Plus: Amortization of discount | | | 93,926 | | | 93,926 | |
| | | | | | | | |
| Carrying value | | $ | 303,475 | | $ | 322,582 | |
Note 5 - Notes Payable
On February 20, 2007 and April 20, 2007, the Company issued Secured Convertible Promissory Notes (the “Notes”) in an aggregate principal amount of $1,000,000 and $150,000, respectively, to certain purchasers (the “Noteholders”) pursuant to the terms of Securities Purchase Agreements dated as of February 20, 2007 by and between the Company and the Noteholders. The Notes carry an annual interest rate of 10%, with all principal and accrued interest being due and payable on June 20, 2007; provided, however, that upon the terms and subject to the conditions of the Notes, all outstanding principal and interest on the Notes will automatically convert into securities of the Company issued pursuant to a Company financing meeting certain conditions (a “Qualified Financing”), if such Qualified Financing is effectuated on or prior to June 20, 2007. All principal and accrued interest on the Notes shall become payable prior to June 20, 2007 upon certain events of default relating to, among things, the bankruptcy or dissolution of the Company, the sale of substantially all of the Company’s assets and certain breaches by the Company of the terms and conditions of the Notes and related agreements. The obligations evidenced by the Notes were secured by a pledge of substantially all of the Company’s assets, including the capital stock of Celsia Technologies UK Limited and Celsia Technologies Korea, Inc. In connection with the issuance of the Notes, the Company’s former Chief Executive Officer and former Chief Financial Officer had agreed to transfer approximately 735,000 shares of Company common stock held by such executives to the Noteholders in the event that a Qualified Financing does not occur on or prior to June 20, 2007.
On May 25, 2007, the Company issued Convertible Debentures which met the conditions of a Qualified Financing. The Notes, totaling principal of $1,150,000, interest of $27,847, and a 10% premium on principal totaling $115,000, were automatically converted into the Convertible Notes (see Note 6). Upon completion of the transaction, the 735,000 shares of Company common stock pledged by the Company’s former Chief Executive Officer and former Chief Financial Officer were returned to them.
Note 6 - Convertible Debentures
On May 25, 2007, the Company issued 8% Secured Convertible Debentures due May 25, 2010 (the “Debentures”) in the aggregate principal amount of $8,142,847 to certain individuals and entities, together with warrants exercisable for a total of 70,752,778 shares of the Company’s common stock at a price of $0.144, for an aggregate of $6,850,000 in cash and the surrender of previously outstanding promissory notes of the Company totaling $1,292,847 (see Note 5). The Company used the Black Scholes option-pricing model to value the warrants issued to the Debenture Holders and applied it to the principal amount to determine the convertible debt discount. The Company will amortize the discount over the life of the Debenture (36 months).
On August 17, 2007, the Company issued an additional 8% Secured Convertible Debenture due May 25, 2010 in the principal amount of $350,000, together with a warrant to purchase 2,800,000 shares of the Company’s common stock at a price of $0.144, for $350,000 in cash, on the same terms as the Company’s debentures and warrants issued on May 25, 2007.
On January 1, 2008, the Company elected to acrete to, and increase, the outstanding principal amount due under the Debenture by $404,936 pursuant to the terms of the Debenture.
The convertible debentures payable is summarized as follows:
| | | March 31, 2008 | | December 31, 2007 | |
| Face Amount | | $ | 8,897,783 | | $ | 8,492,847 | |
| Less: Discount | | | (5,062,256 | ) | | (5,062,256 | ) |
| Plus: Amortization of discount | | | 1,393,520 | | | 970,205 | |
| | | | | | | | |
| Carrying value | | $ | 5,229,047 | | $ | 4,400,796 | |
The sale of Debentures and Warrants (the “Debenture Offering”) was effected pursuant to a Securities Purchase Agreement dated as of May 25, 2007 between the Company and the Debenture Holders (the “Purchase Agreement”). In connection with the Debenture Offering, the Company entered into a Security Agreement and Registration Rights Agreement, each dated as of May 25, 2007, with the Debenture Holders (see Note 3).
In connection with the Debenture Offerings, the placement agents (i) received a cash fee of approximately $618,000 and (ii) are entitled to receive warrants to purchase 5,120,000 shares of the Company’s common stock at a price of $0.144. The Company has recorded payments to the placement agents as a deferred cost (see Note 1).
As part of the debt financing, each holder of Series A & B Preferred Stock who certified their status as an accredited investor was issued 2.19 shares of Common Stock for each share of Preferred Stock held. The Company has recorded a financing expense of $6,060,564 representing the fair value of the 50,504,696 shares of Common Stock issued as an inducement to the Series A & B Preferred Shareholders to consent to the convertible debenture. As of December 31, 2007, 46,517,737 shares of Common Stock have been issued and the remaining 3,986,959 shares have been recorded as Common Stock subscribed. As part of the same consent, the Series A & B Preferred Shareholders agreed to modify the terms of the preferred stock to eliminate their seniority to the Debenture holders in regards to the sale or liquidation of the Company, forfeit any unpaid and undeclared dividends through May 24, 2007, lower the dividend rate on the Series A Preferred Stock to two percent per annum (2%) going forward, and eliminate certain additional rights of the preferred stock. In addition, the Series A & B Preferred Shareholders waived any future anti-dilution rights.
Upon issuing the Debentures, the Company triggered certain anti-dilution provisions in the Company’s warrants which lowered the conversion price and increased the number of shares the warrant is convertible for. The Company used the Black-Scholes option-pricing model to determine the fair market value of the adjusted warrants and recorded a deemed dividend of $652,318 (see note 7).
The Debenture Holders shall be entitled to receive interest on the aggregate unconverted and then outstanding principal amount of their Debentures at the rate of 8% per annum, payable quarterly, in cash or Common Stock at the discretion of the Company, and subject to certain limitations and restrictions. The Debentures are secured by substantially all of the Company’s assets. The Debenture Holders have the right to convert the Debentures at any time into shares of Common Stock at an initial conversion price of $0.125. The exercise price of the Warrants and Placement Agent Warrants are $.144 per share. The initial conversion price of the Debentures and the exercise price of the Warrants and Placement Agent Warrants are subject to adjustment upon certain events.
The Company triggered adjustments to the conversion price of the Debenture and the exercise price of the Warrants as a result of the Company’s financial results for the period ending September 30, 2007, which became effective November 15, 2007. The Debenture Holders now have the right to convert the Debentures at any time into shares of Common Stock at a conversion price of $0.0625. The number of Warrants issued to the Debenture Holders and the Placement Agents increased to 147,105,556 and 10,240,000, respectively, and the exercise price was reduced to $0.072 per share.
The Company used the Black Scholes option-pricing model to value the adjusted warrants issued to the Debenture Holders and applied it to the principal amount to determine the convertible debt discount which totaled $5,062,256. The Company will amortize the discount over the life of the Debenture (36 months). During the three months ended March 31, 2008, the Company amortized $423,316 of the debt discount into interest expense. As a result of the adjustment to the conversion price, the Company has recognized a beneficial conversion feature and recorded a Financing Expense totaling $3,430,591 during the year ended December 31, 2007.
On March 26, 2008, the Company obtained consent from more than 70% of the Debenture Holders to modify the terms of the Debentures to provide that, in lieu of making the interest payments due thereunder in cash or in shares of common stock of the Company on the interest payment due dates, the interest payments shall accrue and be paid in full in cash on May 25, 2010, the Debenture maturity date. As an incentive to provide the consent, the Company shall distribute to the Debenture Holders a one time distribution equal to the value of 2% of the outstanding principal amount due under the Debentures as of March 31, 2008 totaling approximately $178,000, which will be paid in cash on the maturity date. Each Debenture Holder shall have the right, in its sole discretion, to convert any accrued but unpaid interest on the principal amount due under the Debentures into shares of common stock of the Company at the applicable Interest Conversion Rate at any time prior to the maturity date.
Note 7 - Stockholders’ equity
Capital stock
At March 31, 2008 and December 31, 2007, the Company had an authorized number of shares of 500,000,000 Common Shares and 100,000,000 of Preferred Shares, 30,000,000 of which has been designated as Preferred Series A Shares and 7,000,000 of which has been designated Preferred Series B Shares. As of March 31, 2008, the total issued and outstanding shares were 85,565,713 Common Shares, 22,032,963 Preferred Series A Shares, and 3,063,402 Preferred Series B Shares. As of December 31, 2007, the total issued and outstanding shares were 85,273,680 Common Shares, 22,320,598 Preferred Series A Shares, and 3,063,402 Preferred Series B Shares.
During the years ended December 31, 2007, 740,907 shares of Preferred Series A were converted to Common Shares, respectively, at a rate of 1:1. During the three months ended March 31, 2008, 287,635 shares of Preferred Series A were converted to Common Shares, respectively, at a rate of 1:1.
Share Exchange Agreement and Series A Offering
Effective as of July 11, 2005, the Company issued 20,995,239 shares of Series A Preferred Stock, together with warrants exercisable for a total of 6,441,895 shares of the Company’s common stock at prices ranging from $0.88 - $1.32, to various parties in exchange for approximately $12.48 million in cash (at a cash price of $0.88 per share of Series A Preferred Stock) and the transfer of $4.6 million of previously issued promissory notes issued by various parties. (These transactions are collectively referred as the “Series A Offering").
In connection with the Series A Offering, the Company entered into a Registration Rights Agreement dated as of July 11, 2005 with the Company’s shareholders, Series A Shareholders, and certain additional parties. Under the terms of the Registration Rights Agreement, if a registration statement is not filed within 60 days of July 11, 2005 or declared effective within 120 days of July 11, 2005 (each a "Non-registration Event"), then for each 30 day period during the pendancy of such a Non-Registration Event, the company is required to pay to the selling shareholders liquidated damages in an amount equal to one percent (1%) of the aggregated price such selling shareholders paid for the Company’s series A Preferred stock (deemed to be $0.88 per share), which the company may pay in cash or additional shares of series A Preferred Stock (valued at $0.88 per share), at the company’s option. The registration statement was filed on October 6, 2005 and was declared effective in April 2006. On August 10, 2006, the Company issued 970,550 Series A Preferred Shares valued at $902,611 to Preferred Series A Share Holders in settlement of the Non-Registration Events. This agreement was amended on May 25, 2007 to reflect the subordination of rights under this agreement to the registration rights agreement entered into by the Company on May 25, 2007 (see Note 3).
Terms of Series A Preferred
Subject and subordinate to the liquidation rights of the Company’s Secured Convertible Promissory Noteholders, the holders of the Series A Preferred shall be entitled to receive in preference to the holders of the Series B and Common Stock a per share amount equal to $0.88 plus any accrued, unpaid dividends, in the event of any sale or dissolution of the Company. The holders of the Series A Preferred have the right to convert the Series A Preferred at any time into shares of Common Stock at an initial conversion rate of 1:1, as defined. At the option of the Company, if certain criteria as defined in the agreement are met, the Series A Preferred can be converted into Common Stock.
Prior to May 25, 2007, the holders of Series A Preferred Stock were entitled to receive cumulative, compounding dividends at a rate of eight percent (8%) per annum as, when and if declared by the Board of Directors of the Company. The dividends may be paid in cash or shares of Series A Preferred Stock (valued at original issue price) at the sole discretion of the Company. Holders of Series A Preferred Stock also receive on an as-converted basis any distributions paid on the common stock. No dividends may be paid on common stock unless all unpaid cumulative dividends on the Series A Preferred Stock are paid. On August 10, 2006, the Company issued approximately 1,700,000 shares of Series A Preferred Stock as dividends to all holders of record on July 11, 2006, valued at approximately $1,500,000. As of May 25, 2007, the Series A Preferred Stock consented to waive any unpaid and undeclared dividends which resulted in the elimination of approximately $1,172,000 in accumulated, unpaid and undeclared dividends (see Note 6). In addition, the Series A Preferred Shareholders consented to lower the compounding dividend rate to two percent (2%) per annum. As of March 31, 2007, accumulated, undeclared dividends on the Series A Preferred Shares totaled approximately $339,400.
Terms of Series B Preferred
Subject and subordinate to the liquidation rights of the Company’s Secured Convertible Promissory Noteholders and Series A Preferred Stock, the holders of the Series B Preferred shall be entitled to receive in preference to the holders of the Common Stock a per share amount equal to $1.00, in the event of any sale or dissolution of the Company. The holders of the Series B Preferred have the right to convert the Series B Preferred at any time into shares of Common Stock at an initial conversion rate of 1:1, as defined. At the option of the Company, if certain criteria as defined in the agreement are met, the Series B Preferred can be converted into Common Stock. Holders of the Series B Preferred Stock receive on an as-converted basis any distributions paid on the Common Stock.
Stock Compensation
Through March 31, 2008 and 2007, the Company has granted approximately 4.6 and 6.6 million, respectively, of its common stock to employees and others, of which approximately 4.4 and 4.3 million, respectively, common shares have vested. These shares issuances were valued between $0.07-0.50 based upon management’s estimate of the fair value of the common stock on the date of issuance. These stocks grants have certain vesting provisions through May 2009. For the three months ended March 31, 2008 and 2007, approximately 0 and 78,000 shares, respectively, vested and a charge to compensation expense of $4,750 and $51,838, respectively, was recorded. The remaining unvested shares valued at approximately $23,750 are being amortized over their respective vesting periods.
Employee Stock Options
On January 1, 2006, the Company adopted the fair value recognition provisions of Statement of Financial Accounting Standards (SFAS) No. 123R, “Share-Based Payment,” using the modified prospective method. For the three months ended March 31, 2008 and 2007, the Company recognized stock-based compensation of $51,882 and $41,603, respectively. The Company considers voluntary termination behavior as well as trends of actual option forfeitures when estimating its forfeiture rate. Given the limited history of outstanding options, the Company has estimated a 0% forfeiture rate and has only recorded actual forfeitures as incurred.
Stock options issued under the Company’s Long-term Incentive Plans are granted with an exercise price equal or greater than the market price of the Company’s stock at the date of grant and expire ten years from the date of grant. These options generally vest over a two- or three-year period. During the three months ended March 31, 2008 and 2007, the Company issued 0 options to purchase common stock.
The fair value of each option granted is estimated on the date of grant using the Black-Scholes option-pricing method. Given its limited trading history, the Company used volatility from companies in the same industry. The Company estimated the expected option life and the expected forfeiture rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for the estimated life of the option. The Company has not made any dividend payments on common stock nor does it have plans to pay dividends in the foreseeable future. The following assumptions were used to estimate the fair value of options granted during the year ended December 31, 2007 and 2006 using the Black-Scholes option-pricing model:
| | | 2007 | |
| Risk free interest rate | | | 7.33-8.25 | % |
| Expected Term (years) | | | 5 | |
| Expected volatility | | | 100.00 | % |
| Dividend Yield | | | 0.00 | % |
Information about all employee options outstanding is as follows:
| For the three months ended March 31, | | 2008 | | 2007 | |
| | | Shares | | Weighted Average Exercise Price | | Shares | | Weighted Average Exercise Price | |
| | | | | | | | | | |
| Options Outstanding at beginning of period | | | 16,117,500 | | $ | 0.15 | | | 3,176,015 | | $ | 0.79 | |
| Granted | | | 0 | | $ | - | | | 0 | | $ | - | |
| Cancelled | | | 0 | | $ | - | | | (104,000 | ) | $ | 0.88 | |
| Options Outstanding at end of period | | | 16,117,500 | | $ | 0.15 | | | 3,072,015 | | $ | 0.79 | |
Warrants to Purchase Common Stock
During 2005, the Company issued various warrants to various parties in connection with the Series A and B Offerings. On May 25, 2007, upon issuing the Debentures, the Company triggered certain anti-dilution provisions in these warrant agreements which lowered the conversion price and increased the number of shares the warrant is convertible for. The Company used the Black-Scholes option-pricing model to determine the fair market value of the adjusted warrants and recorded a deemed dividend of $652,318. The tables below show the effect of the repriced warrants and increase in the number of shares.
On September 11, 2006, the Company issued warrants to purchase 1,500,000 of Celsia common stock to a third party as part of a distribution agreement. As part of the same agreement, the Company received warrants to purchase 500,000 shares of the distributors common stock. The warrants vest 25% in December 2006, 25% in December 2007, and 50% contingent upon acheivement of volume thresholds. The agreement was executed with the intention that the value of each warrant to be materially similar in value. Management has estimated the fair market value of both issuances using the Black-Scholes Option pricing model and has valued the warrant issuance to them at approximately $220,000. The Company has recorded an expense totaling approximately $139,000 related to this issuance as of December 31, 2007. No value was assigned to the warrants received by the Company.
On May 25, 2007, the Company issued warrants to purchase 70,752,778 shares of Celsia common stock to the Debenture Holders (see Note 6). The Company valued the warrants to determine the discount on the debenture. In addition, the Company become obligated to issue warrants to purchase 5,120,000 shares of Celsia common stock to the Placement Agents and recorded $355,328 as deferred charges.
On July 18, 2007, the Company issued AMF Capital, Inc. a warrant to purchase 1,000,000 shares of common stock of the Company at an exercise price of $0.88 per share as part of a settlement (see Note 3). The Company recorded an expense of $32,700 for the issuances.
On August 17, 2007, the Company issued warrants to purchase 2,800,000 of Celsia common stock to the Debenture Holders (see Note 6). The Company valued the warrants to determine the discount on the debenture.
The Company triggered adjustments to the exercise price of the Debenture Warrants as a result of the Company’s financial results for the period ending September 30, 2007, which became effective on November 15, 2007. The number of Warrants issued to the Debenture Holders and the Placement Agents increased to 147,105,556 and 10,240,000, respectively, and the exercise price was reduced to $0.072 per share. The Company recorded a deferred charge of $521,216 for the additional warrants issued to the placement agent.
During the year ended December 31, 2007, the Company issued warrants to purchase 1,300,000 shares of common stock to a consultant and recorded $59,410 as a consulting expense. During the year ended December 31, 2007, the Company issued 1,440,000 shares of common stock and warrants to purchase 720,000 in satisfaction of a $90,000 outstanding liability.
A summary of the issued and outstanding warrants are as follows:
Old Exercise Price | | Old # of Warrants Outstanding | | Anti-Dilution Exercise Price | | Anti-Dilution # of Warrants Outstanding | | # of Warrants Exercisable | | Expiration Date | |
| | | | | | | | | | | | |
| $ | 0.072 | | | 720,000 | | | n/a | | | n/a | | | 720,000 | | | December 2012 | |
| $ | 0.11 | | | 1,300,000 | | | n/a | | | n/a | | | 1,300,000 | | | December 2012 | |
| $ | 0.144 | | | 78,672,778 | | $ | 0.072 | | | 157,345,556 | | | 157,345,556 | | | May 2012 | |
| $ | 0.32 | | | 1,500,000 | | | n/a | | | n/a | | | 750,000 | | | September 2011 | |
| $ | 0.88 | | | 1,000,000 | | | n/a | | | n/a | | | 1,000,000 | | | July 2012 | |
| $ | 0.88 | | | 681,018 | | $ | 0.144 | | | 681,018 | | | 681,018 | | | July 2009 | |
| $ | 0.88 | | | 1,186,820 | | $ | 0.36 | | | 2,862,308 | | | 2,862,308 | | | July 2010 | |
| $ | 1.09 | | | 1,097,142 | | $ | 0.36 | | | 2,646,027 | | | 2,646,027 | | | July 2010 | |
| $ | 1.10 | | | 2,759,357 | | $ | 0.45 | | | 6,789,387 | | | 6,789,387 | | | July 2010 | |
| $ | 1.32 | | | 2,759,357 | | $ | 0.53 | | | 6,882,126 | | | 6,882,126 | | | July 2010 | |
| $ | 1.50 | | | 772,190 | | $ | 0.60 | | | 1,941,836 | | | 1,941,836 | | | December 2010 | |
| $ | 3.00 | | | 765,850 | | $ | 1.16 | | | 1,986,069 | | | 1,986,069 | | | December 2010 | |
Warrants to Purchase Preferred Stock
During 2005, the Company issued various warrants to placement agents in connection with the Series A and B Offerings. A summary of these warrants are as follows:
Old Exercise Price | | Old # of Warrants Outstanding | | New Exercise Price | | New # of Warrants Outstanding | | # of Warrants Exercisable | | Expiration Date | |
| $ | 0.88 | | | 1,364,528 | | $ | 0.144 | | | 1,364,528 | | | 1,364,528 | | | July 2010 | |
| $ | 1.50 | | | 210,000 | | $ | 0.144 | | | 210,000 | | | 210,000 | | | December 2010 | |
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-Q.
Celsia’s business strategy is to become a leader in developing and commercializing next-generation cooling solutions which are focused on the computer, flat panel display, LED-lighting, and communications industries. We develop, manufacture, market, sell and/or license our patented thermal management products and technology. We believe that our products absorb, transport and dissipate heat more efficiently than current heat-pipe/heat-sink cooling solutions. Our unique cooling device uses patented combinations of liquid and vapor layers to manage liquid and vapor at very high speeds through micro-channels within the assemblies.
We develop and commercialize technology and have succeeded in achieving several design wins at key OEMs. We engage with key OEM’s who are finding our technology an attractive solution to their thermal management problems. We believe that we provide better performance than competing technologies at a competitive price. This allows the OEM’s to either offer higher performance or to run their systems cooler. We expect design wins in all of our key target markets, LED’s, Graphics Chips, high end CPUs, communications equipment and memory applications.
We expect our product development, and project management activities to continue to be driven by commercial opportunities and undertaken as a result of potential customers requesting test units. The test orders that we receive from potential customers are fulfilled either by (1) modification of already commercialized products or (2) new solutions designed together with the potential customer. The majority of our R&D resources are dedicated to customer projects and for the design of products with commercial opportunities.
In December 2007, we relocated our engineering and pilot line facilities from Korea to Taiwan. Our Korean staff and facilities were downsized to a sales and administrative support function only. The net result is a more responsive unit in Taiwan at lower costs. Any capital expenditures over the next twelve months will be focused on complementing this new Taiwan pilot plant with specific volume related equipment and on specific research and development related test equipment. All investments will be driven by commercialization opportunities, customer driven projects, and/or commercial volumes.
Our product test orders have led to several related test product deliveries, as well as commercial orders. Test products are used by potential customers to examine our products’ features and compatibility with customer products. Although such testing procedures can involve numerous steps and significant timelines, in several instances our test products have advanced beyond the test phases and been incorporated into commercial products. The mix between sample order deliveries and commercial deliveries continues to increase in favor of commercial deliveries. Once our products are shipped to our customers, our Company has no additional commitment in order to recognize revenues.
The Company has produced revenues of $305,688 for the three months ended March 31, 2008 compared to $99,323 for the three months ended March 31, 2007. The revenues are a result of customers paying for test samples and commercial deliveries. Cost of sales for the three months ended March 31, 2008 were $294,725 compared to $166,538 for the same period last year. This is attributable to increased production activity originating from an increasing demand for our products.
We are currently operating with strict cost controls in order to manage our commercialization process. A majority of our expenses for the three months ended March 31, 2008 and 2007 were from selling and administrative expenses. The selling and administrative expenses for the three months ended March 31, 2008 were $740,555 compared to $956,962 for the same period last year. The main costs are personnel costs, professional fees, and travel expenses. The decrease in expenses is due to a company wide initiative to reduce expenses and personnel.
Our main source of liquidity and funding for our operations has historically been from monies raised from various financings. During fiscal 2007, we raised an aggregate amount of $8,000,000 in cash through the issuance of the Debentures in May 2007, which was later increased by $350,000 in August 2007. At March 31, 2008, our operational cash outflow was approximately $300,000 per month. Our main use of cash relates to product development driven by customer projects and general and administrative expenses.
On May 25, 2007, the Company obtained additional funds through the issuance of its Debentures in the aggregate amount of $8,142,847, of which $6,850,000 was paid in cash and the remainder through the surrender of previously outstanding promissory notes of the Company. On August 17, 2007, we issued an additional Debenture in the principal amount of $350,000 on the same terms as the Company’s debentures issued on May 25, 2007. Both issuances were accompanied by warrants to purchase the Company’s common stock. The Debentures mature and become are due on May 25, 2010.
In connection with the debenture financing, we incurred legal, due diligence, and placement agent fees of approximately $2,131,000. We have recorded these expenses as deferred charges and these expenses will be amortized over the length of the loan period. We have recorded amortization of deferred financing costs of approximately $193,000 for the three months ended March 31, 2008. Additionally, we recorded an interest expense of approximately $633,000 for the three months ended March 31, 2008. Approximately $423,000 in interest expense results from amortization of a debt discount recorded based upon the fair value of the warrants issued to the debenture holders and has no cash impact on us. The remaining $210,000 pertains to the debenture financing.
On March 26, 2008, the Company obtained consent from more than 70% of the Debenture Holders to modify the terms of the Debentures to provide that, in lieu of making the interest payments due thereunder in cash or in shares of common stock of the Company on the interest payment due dates, the interest payments shall accrue and be paid in full in cash on May 25, 2010, the Debenture maturity date. As an incentive to provide the consent, the Company shall distribute to the Debenture Holders a one time distribution equal to the value of 2% of the outstanding principal amount due under the Debentures as of March 31, 2008 totaling approximately $178,000, which will be paid in cash on the maturity date. Each Debenture Holder shall have the right, in its sole discretion, to convert any accrued but unpaid interest on the principal amount due under the Debentures into shares of common stock of the Company at the applicable Interest Conversion Rate at any time prior to the maturity date.
Based on our current operating plan, we anticipate using our cash mainly to continue commercialization efforts and to expand the distribution network for our technology solutions. The main cash uses will be for sales and marketing, general and administrative, and research and development expenses. Investments will be focused on product development and manufacturing. All investments will be driven by commercialization opportunities. The total cash need for the next twelve months is estimated to be approximately $2.7 million, starting at April 1, 2008. The main portion of the cash need is for sales activities, operating expenses, cost of sales, and a smaller portion is for investments in manufacturing and R&D. We expect to fund these activities through the cash received from the debenture financing and cash generated from operations. We currently believe that our cash balances and anticipated cash flows from operations will be sufficient to meet our normal operating needs through December 2008. We have a $322,582 note payable to a strategic partner that matured in 2007. As of the date of this filing, no payment demand has been received.
The ratio between current assets and current liabilities at March 31, 2008 was approximately 1.49.
Our future liquidity and capital resource requirements will depend on many factors, including, but not limited to the following trends and uncertainties we face:
We prepare our financial statements in conformity with accounting principles generally accepted in the United States of America, which require management to make estimates and assumptions that affect the reported amounts in the financial statements. Although these statements are based on management’s best knowledge of current events and actions that we may undertake in the future, actual results could differ from those estimates. Significant estimates required to be made by management include the valuation of 1equity securities issued, 2) registration rights, 3) intangible assets, and 4) accounting for convertible debentures.
See Note 1 of the Notes to Consolidated Financial Statements included in Item 1 of this Quarterly Report for Recent Accounting Pronouncements.
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
The Company operates in the United States, the United Kingdom, Taiwan, and South Korea, each of which has its own currency. This may cause the Company to experience and be exposed to different market risks such as changes in interest rates and currency deviations.
We are a small reporting company and this Item is not applicable to us.
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.
In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable assurance of achieving the desired control objectives, and we necessarily are required to apply our judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures.
Our management, including our principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2008 and concluded that the disclosure controls and procedures were not effective, because certain deficiencies involving internal controls constituted a material weakness as discussed in our Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and Exchange Commission on February 28, 2008 (the “Annual Report”).
The Company’s material weakness in its internal control over financial reporting that we identified in our Annual Report relates to the monitoring and review of work performed by our Chief Financial Officer in the preparation of audit and financial statements, footnotes and financial data provided to the Company’s registered public accounting firm in connection with the annual audit. All of our financial reporting is carried out by our Chief Financial Officer. This lack of accounting staff results in a lack of segregation of duties necessary for an effective system of internal control. The material weakness identified did not result in the restatement of any previously reported financial statements or any other related financial disclosure, nor does management believe that it had any effect on the accuracy of the Company’s financial statements for the current reporting period.
In order to mitigate this material weakness to the fullest extent possible, all quarterly financial reports are reviewed by the Chief Executive Officer as well as the Audit Committee for reasonableness. All unexpected results are investigated. At any time, if it appears that any control can be implemented to continue to mitigate such weaknesses, such control procedures are immediately implemented. We intend to implement appropriate procedures for monitoring and review of work performed by our Chief Financial Officer.
During the most recently completed fiscal quarter, there has been no change in our internal control over financial reporting that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.
In accordance with the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
