UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended December 31, 2006
Commission File Number: 001-31347
S3 INVESTMENT COMPANY, INC.
(Exact name of registrant specified in its charter)
California 33-0906297 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 43180 Business Park Drive #202, Temecula, CA 92590 (Address of principal executive offices) (951) 587-3618 (Registrant’s telephone number, including area code) N/A (former name, former address and former fiscal year if changed since last report) |
Indicate by check mark 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. [ X ] Yes [ ] No
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). [ ] Yes [ X ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
The Registrant had 16,000,000 shares of its common stock, $0.001 par value per share, 12,000,000 shares of its Series B Preferred Stock, $0.001 par value per share and 1,000,000 shares of its Series C Preferred Stock, $0.001 par value per share outstanding as of February 13, 2007.
Transitional Small Business Disclosure Format (Check one): [ X ] Yes [ ] No
PART I – FINANCIAL INFORMATION
Item 1. Financial Statements.
S3 Investment Company, Inc. | |||
Balance Sheet | |||
ASSETS | |||
|
|
| December 31, |
2006 | |||
Current Assets |
|
| |
| Cash | $ | 60,970 |
| Prepaid expense |
| 1,810 |
| Accounts receivable |
| 1,221,458 |
| Advances |
| 3,951 |
| Investments |
| 450,509 |
| Contracts receivable, net of allowance |
| - |
Total Current Assets |
| 1,738,698 | |
Property - office equipment net of depreciation |
| 12,172 | |
Other Assets |
|
| |
| Goodwill |
| 1,167,432 |
Total Other Assets |
| 1,167,432 | |
| Total Assets | $ | 2,918,302 |
LIABILITIES AND STOCKHOLDERS' EQUITY | |||
Current Liabilities |
|
| |
| Accounts payable | $ | 897,061 |
| Accrued interest |
| 2,500 |
| Line of credit |
| 26,000 |
| Derivative liability |
| 73,175 |
| Contingent liabilities |
| 345,383 |
| Notes payable |
| 143,450 |
Total Current Liabilities |
| 1,487,569 | |
| Total Liabilities |
| 1,487,569 |
|
|
|
|
Minority Interest |
| 662,480 | |
|
|
|
|
Stockholders' Equity |
|
| |
| Preferred Stock, Authorized 100,000,000 Shares, $0.001 Par Value, 13,000,000 |
| 13,000 |
| Common Stock, Authorized 9,900,000,000 Shares, $0.001 Par Value, 2,400,000,000 Shares Issued and Outstanding (Note 6) |
| 2,400,000 |
| Additional Paid in Capital |
| 5,041,419 |
| Retained deficit |
| (6,686,166) |
Total Stockholders' Equity |
| 768,253 | |
| Total Liabilities and Stockholders' Equity | $ | 2,918,302 |
The accompanying notes are an integral part of these consolidated financial statements.
S3 Investment Company, Inc. | ||||||||||
Statements of Operations | ||||||||||
(unaudited) | ||||||||||
|
|
|
| For the Six |
| For the Three | ||||
|
|
|
| 2006 |
| 2005 |
| 2006 |
| 2005 |
Revenues | $ | 1,589,685 | $ | 1,103,828 |
| 619,761 | $ | 932,835 | ||
Total Revenues |
| 1,589,685 |
| 1,103,828 |
| 619,761 |
| 932,835 | ||
Cost of Materials |
| 1,103,931 |
| 224,055 |
| 484,779 |
| 123,523 | ||
Gross Profit |
| 485,754 |
| 879,773 |
| 134,982 |
| 809,312 | ||
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses |
|
|
|
|
|
|
|
| ||
Administrative fees |
| 90,000 |
| 61,064 |
| 45,000 |
| 31,064 | ||
Consulting |
| 1,830 |
| - |
| - |
| - | ||
Depreciation expense |
| 4,775 |
| 158 |
| 4,696 |
| 79 | ||
Derivative expense |
| 73,175 |
| - |
| 73,175 |
| - | ||
Financing costs |
| 110,000 |
|
|
| 110,000 |
| - | ||
Interest expense |
| 58 |
| 19 |
| 19 |
| 19 | ||
Investor relations |
| 17,910 |
| 23,075 |
| 8,640 |
| 11,825 | ||
Payroll expenses |
| 162,767 |
| 229,704 |
| 93,729 |
| 112,248 | ||
Professional fees |
| 156,664 |
| 133,338 |
| 81,500 |
| 66,317 | ||
Travel and entertainment |
| 132,393 |
| 68,495 |
| 63,788 |
|
| ||
General & Administrative expense |
| 95,446 |
| 120,198 |
| 52,225 |
| 32,713 | ||
Total Operating Expenses |
| 845,018 |
| 636,051 |
| 532,772 |
| 254,265 | ||
Net Operating Gain (Loss) |
| (359,264) |
| 243,722 |
| (397,790) |
| 555,047 | ||
Other Income (Expense) |
|
|
|
|
|
|
|
| ||
Gain on forgiveness of debt |
| - |
| 645,777 |
| - |
| - | ||
Realized loss on sale of stock |
| (93,144) |
| - |
| (93,144) |
| - | ||
Unrealized loss on investment |
| (140,347) |
| (14,710) |
| (117,547) |
| (14,710) | ||
Total Other Expense |
| (233,491) |
| 631,067 |
| (210,691) |
| (14,710) | ||
Income (Loss) Before Income Taxes |
| (592,755) |
| 874,789 |
| (608,481) |
| 540,337 | ||
Less Minority Interest |
| (76,631) |
| (291,184) |
| 14,005 |
|
| ||
Income Tax Expense |
| - |
| - |
| - |
| - | ||
Net Gain (Loss) | $ | (669,386) | $ | 583,605 | $ | (594,476) | $ | 540,337 | ||
Net loss per share | $ | (0.00031) | $ | 0.0003 | $ | (0.00032) | $ | 0.0003 | ||
Weighted Average Shares Outstanding |
| 2,177,717,391 |
| 1,673,490,514 |
| 1,851,207,905 |
| 1,673,490,514 | ||
The accompanying notes are an integral part of these consolidated financial statements. |
S3 Investment Company, Inc. | ||||||||||||||
Statements of Stockholders' Equity (Deficit) | ||||||||||||||
|
|
|
|
|
|
|
|
| Additional |
|
|
| Retained |
|
| Preferred Stock |
| Common Stock |
| Paid in |
| Subscription |
| Earnings | Minority | ||||
| Shares |
| Amount |
| Shares |
| Amount |
| Capital |
| Receivable |
| (Deficit) | Interest |
Balance, June 30, 2003 | - |
| $ - |
| 22,709,197 |
| $ 22,709 |
| $ 2,986,639 |
| $ - |
| $ (3,269,195) | $ - |
January 2004 - stock issued for services | - |
| - |
| 300,000 |
| 300 |
| 74,700 |
| - |
| - | - |
January 2004 - stock issued for satisfaction of debt | - |
| - |
| 820,000 |
| 820 |
| 128,780 |
| - |
| - | - |
March 2004 - stock issued for conversion of debentures including finance charge | - |
| - |
| 13,910,490 |
| 13,911 |
| 715,089 |
| - |
| - | - |
April 2004 - stock issued for cash | - |
| - |
| 300,000 |
| 300 |
| 2,700 |
| - |
| - | - |
Net loss for the year ended June 30, 2004 |
|
|
|
|
|
|
|
|
|
|
|
| (1,362,885) | - |
Balance, June 30, 2004 | - |
| - |
| 38,039,687 |
| 38,040 |
| 3,907,908 |
| - |
| (4,632,080) |
|
July, through Dec 04 - stock issued for conversion of debentures | - |
| - |
| 189,200,000 |
| 189,200 |
| 542,699 |
| - |
| - | - |
Beneficial Conversion expense related to convertible debentures | - |
| - |
| - |
| - |
| 277,482 |
| - |
| - | - |
October 2004 - acquisition of Redwood Capital | 12,000,000 |
| 12,000 |
| - |
| - |
| 108,000 |
| - |
| - | - |
October 2004- restricted stock issued for retirement of debt | - |
| - |
| 4,730,000 |
| 4,730 |
| (4,730) |
| - |
| - | - |
December 2004- acquisition of Sino | - |
| - |
| 18,092,745 |
| 18,093 |
| 23,520 |
| - |
| - | - |
Oct, 04 through June 05 - stock issued for cash | - |
| - |
| 1,354,250,000 |
| 1,354,250 |
| 225,984 |
| (339,399) |
| - | - |
Net loss for the year ended June 30, 2005 | - |
| - |
| - |
| - |
| - |
|
|
| (1,806,568) | - |
Balance June 30, 2005 | 12,000,000 |
| 12,000 |
| 1,604,312,432 |
| 1,604,313 |
| 5,080,863 |
| (339,399) |
| (6,438,648) | - |
August, 2005 stock issued for cash | - |
| - |
| 80,000,000 |
| 80,000 |
| - |
|
|
| - | - |
Cash received for stock subscription | - |
| - |
| - |
| - |
| - |
| 339,399 |
| - | - |
S8 stock issued for services | - |
| - |
| 100,000,000 |
| 100,000 |
| 25,000 |
| - |
| - | - |
Restricted stock issued for subscription receivable | - |
| - |
| 115,687,568 |
| 115,687 |
| (75,197) |
| (40,491) |
| - | - |
Restricted stock issued for cash | - |
| - |
| 100,000,000 |
| 100,000 |
| - |
| - |
| - | - |
Preferred Stock issued to officer | 1,000,000 |
| 1,000 |
| - |
| - |
| 9,000 |
| - |
| - | - |
Contribution of accrued interest by shareholders | - |
| - |
| - |
| - |
| 21,753 |
| - |
| - | - |
Net income for the year ended June 30, 2006 | - |
| - |
| - |
| - |
| - |
| - |
| 421,868 | 585,849 |
Balance June 30, 2006 | 13,000,000 |
| 13,000 |
| 2,000,000,000 |
| 2,000,000 |
| 5,061,419 |
| (40,491) |
| (6,016,780) | 585,849 |
S8 stock issued for services (unaudited) | - |
| - |
| 300,000,000 |
| 300,000 |
| (20,000) |
| - |
| - | - |
Restricted stock | - |
| - |
| 100,000,000 |
| 100,000 |
| - |
| - |
| - | - |
Cash received for stock subscription (unaudited) | - |
| - |
| - |
| - |
| - |
| 40,491 |
| - | - |
Net loss for the period ended December 31, 2006 | - |
| - |
| - |
| - |
| - |
| - |
| (669,386) | 76,631 |
Balance December 31, 2006 (unaudited) | 13,000,000 |
| $ 13,000 |
| 2,400,000,000 |
| $ 2,400,000 |
| $ 5,041,419 |
| $ - |
| $ (6,686,166) | $ 662,480 |
The accompanying notes are an integral part of these consolidated financial statements. |
|
S3 Investment Company, Inc. | ||||
Statements of Cash Flows | ||||
|
| For the Six
| ||
|
| 2006 |
| 2005 |
|
|
|
|
|
Cash Flows from Operating Activities: |
|
|
|
|
Net Gain (Loss) | $ | (669,386) | $ | 874,789 |
Adjustments to Reconcile Net Loss to Net Cash Provided by Operations: |
|
|
|
|
Depreciation and amortization |
| 4,775 |
| 157 |
Derivative expense |
| 73,175 |
| - |
Stock issued for services |
| 380,000 |
| - |
Debt forgiveness |
| - |
| (645,777) |
Unrealized loss on investments |
| - |
| - |
Minority interest |
| 76,631 |
| 293,706 |
Changes in Operating Assets and Liabilities: |
|
|
|
|
Increase in deposits |
| - |
| - |
(Increase) decrease in prepaid expenses |
| 39,484 |
| (3,040) |
Increase in receivables |
| (675,617) |
| (154,721) |
Increase in accounts payable and accrued liabilities |
| 477,747 |
| (37,683) |
Net Cash Provided (Used) by Operating Activities |
| (293,191) |
| 327,431 |
Cash Flows from Investing Activities: |
|
|
|
|
Investments |
| 233,491 |
| (477,144) |
Purchase of office equipment |
| (1,240) |
| 795 |
Net Cash Used by Investing Activities |
| 232,251 |
| (476,349) |
Cash Flows from Financing Activities: |
|
|
|
|
Payments made on accrued expenses |
| - |
| (4,000) |
Principal payment on note payable |
| (110,000) |
| - |
Proceeds from sale of common stock for cash |
| 40,491 |
| 419,399 |
Net Cash Provided by Financing Activities |
| (69,509) |
| 415,399 |
Increase (decrease) in Cash |
| (130,449) |
| 266,481 |
Cash and Cash Equivalents at Beginning of Period |
| 191,419 |
| 91,018 |
Cash and Cash Equivalents at End of Period | $ | 60,970 | $ | 357,499 |
Supplemental cash flow information: |
|
|
|
|
Cash Paid For: |
|
|
|
|
Interest | $ | - | $ | - |
Income Taxes | $ | - | $ | - |
Non-Cash Investing and Financing Activities: |
|
|
|
|
Stock issued for Services | $ | 100,000 | $ | - |
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements. |
S3 INVESTMENT COMPANY, INC.
Notes to the Consolidated Financial Statements
December 31, 2006 and 2005
NOTE 1 - NATURE OF ORGANIZATION
This summary of significant accounting policies of S3 Investment Company, Inc. is presented to assist in understanding the Company's financial statements. The financial statements and notes are representations of the Company's management who are responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.
On April 12, 2004, the Company filed an election with the U.S. Securities and Exchange Commission to become a business development company pursuant to Section 54 of the Investment Company Act of 1940. On August 26, 2005, the Board of Directors unanimously approved the proposal to withdraw the Company’s election to be treated as a business development company (“BDC”) as soon as practicable so that it could begin conducting business as an operating company rather than as a business development company subject to the Investment Company Act. On April 5, 2006, the holders of a majority of the outstanding shares of the Company’s common stock approved the proposal to withdraw the Company’s election to be treated as a BDC, and on April 6, 2006, a Notification of Withdrawal was filed with the Securities and Exchange Commission.
The election to withdraw the Company’s election as a BDC under the Investment Company Act has resulted in a significant change in the Company’s required method of accounting. Investment company financial statement presentation and accounting utilizes the “fair value method of accounting” for recording ownership in portfolio or subsidiary companies. This treatment requires that BDCs value their investments at market value as opposed to historical cost. With the Company’s withdrawal from the Investment Company Act, the required financial statement presentation and accounting for securities held will be either the equity method or consolidation of accounting depending on the classification of the investment and the Company’s ownership percentage.
As an operating company, the Company must consolidate its financial statements with subsidiaries, thus eliminating the fair value reporting required by BDC’s. As a result, in accordance with FAS 154, the accompanying financial statements have been presented on an operating and consolidated basis for all periods presented on a retrospective basis. The effect to the statement of operations for the prior period based on the consolidated comparison are as follows:
The statement of operations for the six month ended December 31, 2005 has been adjusted to include the subsidiaries Sino UJE and Redwood Capital, which were included only as portfolio companies carried at their fair market value in the December 31, 2005 quarterly report previously filed. As a result of consolidating these entities, gross profit increased $843,532, operating expenses increased by $478,706, and the other expense decreased by $645,177, which primarily was the result of a gain on forgiveness of debt. Combined, these changes resulted in a loss of $135,814 becoming a gain of $583,605.
NOTE 2 – GOING CONCERN
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The Company’s current assets exceed current liabilities by approximately $251,128, but the Company has had recurring operating losses for the past several years resulting in an accumulated deficit of $6,686,166 at December 31, 2006. The Company has discontinued the operations of one of its subsidiaries so as to eliminate continued losses from that source. Generated revenues from sales and profits of its two other subsidiary companies will supplement and eventually replace money raised through financing. These factors combined, raise substantial doubt about the Company’s ability to continue as a going concern. Management has taken various steps to revise its operating and financial requirements, which it believes will be sufficient to provide the Company with the ability to continue its operations for the n ext twelve months.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying consolidated balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 3 – COMMITMENTS AND CONTINGENCIES
Litigation
The Company continues to carry an accrued liability of $345,383 for legal contingencies that were incurred by Securesoft Systems, Inc. Securesoft has discontinued operations and filed for bankruptcy protection under Chapter 7 of the Universal Commercial Code, but there are pending liabilities that may be incurred. This amount was reviewed and deemed proper in regard to the legal cases pending against the Company.
The pending liabilities and cases involving S3 Investment Company, Inc. and/or Securesoft Systems, Inc are listed below:
Securesoft was named as a defendant in a case entitled I-Sol, Inc. V. Securesoft Systems, Inc. The matter was submitted to binding arbitration before a JAMS Judge of the Orange County Superior Court on August 15, 2003. Judgment was awarded to the plaintiff in the amount of $77,000.00. Securesoft is seeking relief under bankruptcy protection, and does not anticipate incurring any liability on this matter.
S3 Investment Company, Inc., S3I Holdings, Inc. and Securesoft were named defendants in a case entitled Villella V. Yamamoto, Berlainder, et al. Villella filed the complaint on April 13, 2005. Notice of service was not properly given to S3I until August of 2005. S3I filed a cross-complaint for damages against Villella on September 20, 2005. The Company agreed to a settlement in the amount of $183,000, which is being paid over 24 months.
S3I Holdings, Inc. and Securesoft were named defendants in a case entitled Radford v. Yamamoto, Berlandier, S3I, Securesoft and Grant. Radford filed complaint on February 10, 2004 alleging nonpayment of back wages. Defendants answered the complaint on July 9, 2004. Stipulated mediation before an arbitrator was to have been completed on November 17, 2004. However, Radford filed a motion to have the case moved to state court for adjudication. On June 7, 2005 the Company filed a motion with the Court of Apeal of the State of California Fourth Appellate District, Division One, to compel mediation before an arbitrator. On June 15, 2006, the Company agreed to settle the suit for $42,000, which is being paid over 24 months.
Securesoft was named a defendant in a case entitled Bortorn Petrini & Copely, LLP V. Sercuresoft Systems, Inc. Borton filed the complaint on August 1, 2005 in order to collect legal fees that they claim were generated in defending Securesoft in the arbitration matter known as I-Sol V. Securesoft Systems, Inc. Securesoft is seeking relief under bankruptcy protection, and does not anticipate incurring any additional liability on this matter.
NOTE 4 – NOTES PAYABLE
During the quarter ended December 31, 2006, the Company agreed to repay $100,000 as part of the consideration for the cancellation of 4,000,000,000 warrants. The Company executed a promissory note for the $100,000 that is due in four equal monthly payments of $25,000 starting on February 1, 2007 and ending on May 1, 2007. If any monthly payment is not paid within ten days of its due date, interest shall accrue on the balance due, from the date of the note, at the rate of 9% per annum.
NOTE 5 – MINORITY INTEREST
The Company previously acquired a 51% ownership interest in Sino UJE, a Hong Kong corporation. The accompanying consolidated financial statements have been prepared with adjustments necessary to reflect the minority interest held by third parties. As a result, $662,480, representing 49% of the profit of Sino UJE, LTD, has been deducted from the operating profit of Sino and recorded on the balance sheet as minority interest.
NOTE 6 – COMMON STOCK
During the quarter ending December 31, 2006, the Company had the following common stock transactions:
·
The Company agreed to the cancellation of 4,000,000,000 warrants that were issued on June 2, 2006. As consideration to the holder of the warrants, the Company agreed to repay $100,000 that the warrant holder had advanced to the Company under the warrant contract and issue 100,000,000 shares of restricted common stock. The Company executed a promissory note for the $100,000 that is due in four equal monthly payments of $25,000 starting on February 1, 2007 and ending on May 1, 2007. In addition, the warrant holder retained the 100,000,000 shares of common stock previously issued as collateral against the monies advanced. As a result of this transaction the Company recorded, $210,000 as a financing expense for the value of the shares issued and reclassified the $100,000 previously received as a promissory note payable.
·
The Company issued 200,000,000 shares of common stock registered under Form S-8 to Javelin Advisory Group, Inc. in consideration for services previously rendered. The Company retains Javelin to provide corporate secretary, bookkeeping, financial reporting and other administrative functions for which it would otherwise have to hire additional staff. In connection with the issuance of the shares, the Company recorded Administrative Expenses of $90,000.
·
In October 2006, the Company issued warrants to purchase 105,000,000 shares of common stock to Merriman, Curhan and Ford as part of a consulting compensation agreement. The warrants are exercisable at $0.0008, which was the closing bid price of the Company’s stock on the date the warrants were granted. The warrants expire October 1, 2011. In connection with the issuance of the warrants, the Company recorded derivative liability and expense of $73,175, which reflects the present value of the warrants based on historic volatility of the Company’s stock price as required by EITF 00-19.
NOTE 7 – SEGMENT AND RELATED INFORMATION
Our consolidated subsidiaries are organized geographically into reporting segments operating in China with headquarters in the United States.
As of and for the quarter ended December 31, 2006:
|
| Revenue |
| Operating Profit/(Loss) |
| Depreciation & Amortization |
| Accounts Receivable |
| Goodwill |
| Net Property & Equipment |
| Total Assets |
| Net Assets |
United States | $ | - | $ | (379,786) | $ | 158 | $ | - | $ | 1,167,432 | $ | 983 | $ | 1,164,321 | $ | (600,352) |
China |
| 1,589,685 |
| 20,523 |
| 3,024 |
| 1,221,458 |
| - |
| 11,189 |
| 1,754,246 |
| 863,653 |
Total | $ | 1,589,685 | $ | (359,263) | $ | 3,182 | $ | 1,221,458 | $ | 1,167,432 | $ | 12,172 | $ | 2,918,567 | $ | 263,301 |
NOTE 8 – SUBSEQUENT EVENTS
Subsequent to the quarter ended December 31, 2006, the Company’s Board of Directors approved a recapitalization of the Company’s common stock under which every one-hundred-fifty shares of the Company’s common stock were reverse split into one share of common stock. Prior to the reverse split, the Company had 9,900,000,000 shares of common stock authorized with 2,400,000,000 shares issued and outstanding. Immediately subsequent to the reverse split, the Company had 66,000,000 shares authorized with 16,000,000 shares issued and outstanding.
Item 2. Management’s Discussion and Analysis or Plan of Operation.
General
S3 Investment Company, Inc. (“the Company” or “SIVC”) was incorporated under the laws of California under the name of Retail Windows, Inc. on April 19, 2000 to engage in any lawful activity as shall be appropriate under laws of the State of California. On June 30, 2001 the Company amended its Articles of Incorporation to change its name to Axtion Foods, Inc. Prior to April 2003, Axtion Foods, Inc. was engaged in the development, manufacturing and distribution of health bars and health drinks. The business plan was not fully implemented and on April 16, 2003 Axtion Foods, Inc. changed its name to S3I Holdings, Inc. and pursuant to the Share Exchange Agreement (Agreement) closed the definitive agreement to acquire all of the issued and outstanding capital stock of Securesoft Systems, Inc., a Delaware corporation, making Securesoft Systems, Inc (Securesoft) a wholly-owned subsidiary of the Company, and exchanging al l of Securesoft’s capital stock for shares of Company’s authorized but un-issued shares of common stock as provided in Agreement.
Further in connection with the Share Exchange Agreement, the controlling shareholders of the Company surrendered their stock in exchange for transfer of all right, title and interest to the sports nutrition products developed by the company since its inception. In accordance with the agreement, it was the intention of the parties that the company would acquire all of the issued and outstanding capital stock of Securesoft in exchange solely for the number of shares of the Company’s authorized but un-issued common stock and that the exchange qualify as a tax-free reorganization under section 368(a)(1)(B) of the Internal Revenue Code of 1986, as amended, and related sections there under; and the exchange qualify as a transaction in securities exempt from registration or qualification under the Securities Act of 1933 and under the applicable securities laws of each state or jurisdiction where the shareholders reside.
Securesoft Systems, Inc.’s operations were discontinued during the fiscal year ended June 30, 2005.
The Company presently has two subsidiaries: Redwood Capital, Inc. and Sino UJE, LTD.
Redwood Capital, Inc., a privately-held investment advisory group, was acquired during November, 2004. S3 Investment acquired 100% of Redwood Capital, Inc. to participate in the fast growing investment banking market in China. Redwood Capital specializes in Investment Banking for privately-held Chinese companies and has offices in China and the United States.
The Company acquired 51% of the common stock of Sino UJE, LTD, a Hong Kong corporation during November, 2004. Sino has an extensive distribution network in China. It distributes medical and industrial supplies for a group of Original Equipment Manufacturers (OEM’s) in Europe and the US that are exclusively represented in China by Sino. Sino was acquired from YaSheng for 5% of the outstanding stock of the company, a ratio that must be maintained until July of 2008.
Plan of Operation
On April 12, 2004 the Company’s filed an election with the U.S. Securities Exchange Commission to become a business development company (“BDC”) pursuant to Section 54 of the Investment Company Act of 1940. On August 26, 2005, the Board of Directors unanimously approved a proposal to withdraw the Company’s election to be treated as a business development company as soon as practicable so that the Company could begin conducting business as an operating company rather than as a business development company subject to the Investment Company Act. On April 5, 2006, a Special Meeting of the S3 Investment Company shareholders was held to consider and vote upon a proposal to authorize the Company’s Board of Directors to withdraw the Company’s election to be treated as a BDC and the proposal was approved. On April 6, 2006 a Notification of Withdrawal was filed with the Securities Exchange Commission so that the Company could begin conducting business as an operating company rather than a BDC subject to the Investment Company Act.
During the fiscal year ended June 30, 2006, Redwood Capital completed a reverse merger transaction with Dalian Fushi Enterprise Group, Co., Ltd. Redwood Capital has received fees and stock for the services that were performed in arranging this transaction. Redwood Capital has a number of other clients in the pipeline and through its present and future deal flow will be able to repay the $661,744 that has been advanced to them by the Company as well as contribute a significant dividend to the Company.
Sino UJE, Ltd. has become cash positive and anticipates during the fiscal year ending June 30, 2007 commencing the repayment of the credit line of $344,341 that has been advanced to them by the Company.
Results of Operations
Three months ended December 31, 2006 compared to three months ended December 31, 2005
During the three months ended December 31, 2006, the Company experienced a net loss of $594,476 or approximately ($0.00032) per share compared to a net gain of $540,337 or approximately $0.0003 per share for the same period last year. The Company generated $619,761 of revenue in the three month period ended December 31, 2006 compared to $932,835 of revenue for the same period ended December 31, 2005.
Six months ended December 31, 2006 compared to six months ended December 31, 2005
During the six months ended December 31, 2006, the Company experienced a net loss of $669,386 or approximately ($0.00031) per share compared to a net gain of $583,605 or approximately $0.0003 per share for the same period last year. The Company generated $1,589,685 of revenue in the six month period ended December 31, 2006 compared to $1,103,828 of revenue for the same period ended December 31, 2005.
Liquidity and Capital Resources
The Company’s financial statements present an impairment in terms of liquidity. As of December 31, 2006 the Company had working capital of $251,129. The Company has accumulated $6,686,166 of net operating losses through December 31, 2006, which may be used to reduce taxes in future years through 2026. The use of these losses to reduce future income taxes will depend on the generation of sufficient taxable income prior to the expiration of the net operating loss carry-forwards. The potential tax benefit of the net operating loss carry-forwards have been offset by a valuation allowance of the same amount. Under continuing operations the Company has not yet established revenues to cover its operating costs. Management believes that the Company will soon be able to generate revenues sufficient to cover its operating costs through the operations of its present subsidiaries. In the event the Company is unable to do so, and if suitable financing is un available, there is substantial doubt about the Company’s ability to continue as a going concern.
Our auditors issued a "going concern" opinion in Note 2 of our June 30, 2006 financial statements, indicating we do not have established revenues sufficient to cover our operating costs and to allow us to continue as a going concern. If the operating plans of the two subsidiaries are unsuccessful and we are unable to obtain any suitable financing, our ability to continue as a going concern is doubtful.
Item 3. Control and Procedures.
(a) Evaluation of disclosure controls and procedures.
James Bickel who serves as Company’s chief executive officer, after evaluating the effectiveness of S3 Investments’ disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) as of a date within 90 days of the filing date of this quarterly report (the "Evaluation Date") concluded that as of the Evaluation Date, S3 Investments’ disclosure controls and procedures were adequate and effective to ensure that material information relating to S3 Investment and its unconsolidated investments would be made known to him by others within those entities, particularly during the period in which this quarterly report was being prepared.
(b) Changes in internal controls.
There were no significant changes in S3 Investments’ internal controls or in other factors that could significantly affect Company’s disclosure controls and procedures subsequent to the Evaluation Date, nor any significant deficiencies or material weaknesses in such disclosure controls and procedures requiring corrective actions. As a result, no corrective actions were taken.
ANY FORWARD-LOOKING STATEMENTS INCLUDED IN THIS FORM 10-QSB REFLECT MANAGEMENT'S BEST JUDGMENT BASED ON FACTORS CURRENTLY KNOWN AND INVOLVE RISKS AND UNCERTAINTIES. ACTUAL RESULTS MAY VARY MATERIALLY.
PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
The Company continues to carry an accrued liability of $345,383 for legal contingencies that were incurred by Securesoft Systems, Inc. Securesoft has discontinued operations and filed for bankruptcy protection under Chapter 7 of the Universal Commercial Code, but there are pending liabilities that may be incurred. This amount was reviewed and deemed proper in regard to the legal cases pending against the Company.
The pending liabilities and cases involving S3 Investment Company, Inc. and/or Securesoft Systems, Inc are listed below:
Securesoft was named as a defendant in a case entitled I-Sol, Inc. V. Securesoft Systems, Inc. The matter was submitted to binding arbitration before a JAMS Judge of the Orange County Superior Court on August 15, 2003. Judgment was awarded to the plaintiff in the amount of $77,000.00. Securesoft is seeking relief under bankruptcy protection, and does not anticipate incurring any liability on this matter.
S3 Investment Company, Inc., S3I Holdings, Inc. and Securesoft were named defendants in a case entitled Villella V. Yamamoto, Berlainder, et al. Villella filed the complaint on April 13, 2005. Notice of service was not properly given to S3I until August of 2005. S3I filed a cross-complaint for damages against Villella on September 20, 2005. The Company agreed to a settlement in the amount of $183,000, which is being paid over 24 months.
S3I Holdings, Inc. and Securesoft were named defendants in a case entitled Radford v. Yamamoto, Berlandier, S3I, Securesoft and Grant. Radford filed complaint on February 10, 2004 alleging nonpayment of back wages. Defendants answered the complaint on July 9, 2004. Stipulated mediation before an arbitrator was to have been completed on November 17, 2004. However, Radford filed a motion to have the case moved to state court for adjudication. On June 7, 2005 the Company filed a motion with the Court of Apeal of the State of California Fourth Appellate District, Division One, to compel mediation before an arbitrator. On June 15, 2006, the Company agreed to settle the suit for $42,000, which is being paid over 24 months.
Securesoft was named a defendant in a case entitled Bortorn Petrini & Copely, LLP V. Sercuresoft Systems, Inc. Borton filed the complaint on August 1, 2005 in order to collect legal fees that they claim were generated in defending Securesoft in the arbitration matter known as I-Sol V. Securesoft Systems, Inc. Securesoft is seeking relief under bankruptcy protection, and does not anticipate incurring any additional liability on this matter.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
During the quarter ending December 31, 2006, the Company had the following common stock transactions:
·
The Company agreed to the cancellation of 4,000,000,000 warrants that were issued on June 2, 2006. As consideration to the holder of the warrants, the Company agreed to repay $100,000 that the warrant holder had advanced to the Company under the warrant contract and issue 100,000,000 shares of restricted common stock. The Company executed a promissory note for the $100,000 that is due in four equal monthly payments of $25,000 starting on February 1, 2007 and ending on May 1, 2007. In addition, the warrant holder retained the 100,000,000 shares of common stock previously issued as collateral against the monies advanced. As a result of this transaction the Company recorded, $210,000 as a financing expense for the value of the shares issued and reclassified the $100,000 previously received as a promissory note payable.
·
The Company issued 200,000,000 shares of common stock registered under Form S-8 to Javelin Advisory Group, Inc. in consideration for services previously rendered. The Company retains Javelin to provide corporate secretary, bookkeeping, financial reporting and other administrative functions for which it would otherwise have to hire additional staff. In connection with the issuance of the shares, the Company recorded Administrative Expenses of $90,000.
·
In October 2006, the Company issued warrants to purchase 105,000,000 shares of common stock to Merriman, Curhan and Ford as part of a consulting compensation agreement. The warrants are exercisable at $0.0008, which was the closing bid price of the Company’s stock on the date the warrants were granted. The warrants expire October 1, 2011. In connection with the issuance of the warrants, the Company recorded derivative liability and expense of $73,175, which reflects the present value of the warrants based on historic volatility of the Company’s stock price as required by EITF 00-19.
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
Item 6. Exhibits.
The exhibits listed below are required by Item 601 of Regulation S-B.
Exhibit No. | Description | Location |
3.1 | Articles of Incorporation | Incorporated by reference to corresponding Exhibit previously filed. |
3.2 | Bylaws | Incorporated by reference to corresponding Exhibit previously filed. |
31.1 | Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
31.2 | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
32.1 | Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
32.2 | Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | Filed herewith |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
S3 INVESTMENT COMPANY, INC.
By:/s/ James Bickel James Bickel Chief Executive Officer |
Dated: February 14, 2007
EXHIBIT 31.1
SECTION 302
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, James Bickel, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of S3 Investment Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, the results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 14, 2007 | By:/s/ James Bickel James Bickel, Chief Executive Officer |
EXHIBIT 31.2
SECTION 302
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Kenneth C. Wiedrich, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of S3 Investment Company, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, the results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) all significant deficiencies in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: February 14, 2007 | By:/s/ Kenneth C. Wiedrich Kenneth C. Wiedrich, Chief Financial Officer |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of S3 Investment Company, Inc (the "Company") on Form 10-QSB for the period ending December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, James Bickel, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operation of the Company.
/s/ James Bickel James Bickel Chief Executive Officer February 14, 2007 |
EXHIBIT 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of S3 Investment Company, Inc. (the "Company") on Form 10-QSB for the period ending December 31, 2006, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Kenneth C. Wiedrich, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge and belief:
(1) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of the operation of the Company.
/s/ Kenneth C. Wiedrich Kenneth C. Wiedrich Chief Financial Officer February 14, 2007 |