Washington, D.C. 20549
EMTA HOLDINGS, INC.
(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.
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.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
EMTA Holdings, Inc. and Subsidiaries
EMTA Holdings, Inc. and Subsidiaries
See accompanying notes to these financial statements.
EMTA Holdings, Inc. and Subsidiaries
See accompanying notes to these consolidated financial statements.
EMTA Holdings, Inc. and Subsidiaries
Nature of the Business - We are a specialty energy conservation chemical company that produces and supplies technologies to the global transportation, industrial and consumer markets. These technologies include gasoline, oil and diesel additives for engines and other transportation-related fluids and industrial lubricants.
Presentation of Interim Statements - The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and with the instructions to Form 10-Q for small business filers. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements and should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Form 10-K for the years ended March 31, 2008 and 2007. In the opinion of management, all adjustments, consisting of normal recurring accruals, considered necessary for a fair presentation have been included in the accompanying unaudited consolidated financial statements. The results of operations for the periods presented are not necessarily indicative of results that may be expected for any other interim period or for the full fiscal year.
Going Concern Uncertainty
The Company's continued existence is dependent upon its ability to generate sufficient cash flows from operations to support its daily operations as well as provide sufficient resources to retire existing liabilities and obligations on a timely basis.
The Company anticipates that future sales of equity and debt securities to fully implement it’s business objectives and to raise working capital to support and preserve the integrity of the corporate entity will be necessary. There is no assurance that the Company will be able to obtain additional funding through the sales of additional equity or debt securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
If no additional capital is received to successfully implement the Company’s business plan, the Company will be forced to rely on existing cash in the bank and upon additional funds which may or may not be loaned by management and/or significant stockholders to preserve the integrity of the corporate entity at this time. In the event, the Company is unable to acquire sufficient capital, the Company’s ongoing operations would be negatively impacted.
It is the intent of management and significant stockholders to provide sufficient working capital necessary to support and preserve the integrity of the corporate entity. However, no formal commitments or arrangements to advance or loan funds to the Company or repay any such advances or loans exist. There is no legal obligation for either management or significant stockholders to provide additional future funding.
While the Company is of the opinion that good faith estimates of the Company’s ability to secure additional capital in the future to reach our goals have been made, there is no guarantee that the Company will receive sufficient funding to sustain operations or implement its objectives.
Note 2 - Significant Accounting Policies
Consolidation - The consolidated financial statements include the accounts of EMTA Holdings, Inc. and its consolidated subsidiaries and wholly-owned limited liability company. All significant intercompany transactions and profits have been eliminated.
Use of Estimates - The preparation of financial statements in conformity with United States generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. The more significant estimates relate to revenue recognition, contractual allowances and uncollectible accounts, intangible assets, accrued liabilities, derivative liabilities, income taxes, litigation and contingencies. Estimates are based on historical experience and on various other assumptions that the Company believes to be reasonable under the circumstances, the results of which form the basis for judgments about results and the carrying values of assets and liabilities. Actual results and values may differ significantly from these estimates.
Cash Equivalents - The Company invests its excess cash in short-term investments with various banks and financial institutions. Short-term investments are cash equivalents, as they are part of the cash management activities of the Company and are comprised of investments having maturities of three months or less when purchased.
Allowance for Doubtful Accounts - The Company provides an allowance for doubtful accounts when management estimates collectibility to be uncertain. Accounts receivable are continually reviewed to determine which, if any, accounts are doubtful of collection. In making the determination of the appropriate allowance amount, the Company considers current economic and industry conditions, relationships with each significant customer, overall customer credit-worthiness and historical experience. The allowance for doubtful accounts was $34,149 at June 30, 2008 and March 31, 2008.
Inventories - Inventories are stated at the lower of cost or market value. Cost of inventories is determined by the first-in, first-out (FIFO) method. Obsolete or abandoned inventories are charged to operations in the period that it is determined that the items are not longer viable sales products.
Property, Plant and Equipment - Property, plant and equipment are carried at cost. Repair and maintenance costs are charged against operations while renewals and betterments are capitalized as additions to the related assets. The Company depreciates it assets on a straight line basis. Estimated useful lives range for the equipment ranges from 3 to 10 years and the buildings are being depreciated over 31 years.
Intangible Assets - Intangible assets consist of patents, trademarks, intellectual property and government approval. For financial statement purposes, identifiable intangible assets with a defined life are being amortized using the straight-line method over the estimated useful lives of the assets. Costs incurred in connection with patent, trademark applications and approvals from governmental agencies such as the Environmental Protection Agency, including legal fees, patent and trademark fees and specific testing costs, are capitalized and amortized over an estimated economic life of the asset, generally seven years, commencing upon the grant or approval date. Costs subsequent to grant date are expensed as incurred.
Impairment of Long-Lived Assets - In accordance with the Statement of Financial Accounting Standards No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets, including, but not limited to, property and equipment, patents and other assets, for impairment annually or whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. If the sum of the expected future cash flows of an asset is less than its carrying value, an impairment measurement is required. Impairment charges are recorded to the extent that an asset’s carrying value exceeds fair value. Accordingly, actual results could vary significantly from such estimates. There were no impairment charges during the periods presented.
Fair Value Disclosures - The carrying values of cash, accounts receivable, deposits, prepaid expenses, accounts payable and accrued expenses generally approximate the respective fair values of these instruments due to their current nature.
The fair values of debt instruments for disclosure purposes only are estimated based upon the present value of the estimated cash flows at interest rates applicable to similar instruments.
The Company generally does not use derivative financial instruments to hedge exposures to cash flow or market risks. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to the Company’s common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within the control of the Company. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to fair value at the close of each reporting period.
Revenue Recognition - Revenues are recognized at the time of shipment of products to customers, or at the time of transfer of title, if later, and when collection is reasonably assured. All amounts in a sales transaction billed to a customer related to shipping and handling are reported as revenues.
Provisions for sales discounts and rebates to customers are recorded, based upon the terms of sales contracts, in the same period the related sales are recorded, as a deduction to the sale. Sales discounts and rebates are offered to certain customers to promote customer loyalty and encourage greater product sales.
Research, Testing and Development - Research, testing and development costs are expensed as incurred. Research and development expenses, including testing, were $0 for the three months ended June 30, 2008, and $52,481 for the three months ended June 30, 2007. Costs to acquire in-process research and development (IPR&D) projects that have no alternative future use and that have not yet reached technological feasibility at the date of acquisition are expensed upon acquisition.
Income Taxes - We provide for income taxes in accordance with SFAS No. 109, “Accounting for Income Taxes.” SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the financial statement carrying amounts and the tax bases of the assets and liabilities. The recording of a net deferred tax asset assumes the realization of such asset in the future; otherwise a valuation allowance must be recorded to reduce this asset to its net realizable value. The Company considers future pretax income and, if necessary, ongoing prudent and feasible tax planning strategies in assessing the need for such a valuation allowance. In the event that the Company determines that it may not be able to realize all or part of the net deferred tax asset in the future, a valuation allowance for the deferred tax asset is charged against income in the period such determination is made. The Company has recorded full valuation allowances as of June 30, 2008 and 2007.
Stock-Based Compensation
We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 — Accounting for Stock-Based Compensation, which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Shares of common issued in connection with acquisitions are also recorded at their estimated fair values. The fair value of equity securities is determined by management based upon recent private stock sales to third parties.
In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”). The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award. The provisions of the revised statement are effective for financial statements issued for the first interim or annual reporting period beginning after June 15, 2005, with early adoption encouraged.
Concentrations of Credit Risks —Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and accounts receivable. Although the amount of credit exposure to any one institution may exceed federally insured amounts, the Company limits its cash investments to high-quality financial institutions in order to minimize its credit risk. The Company extends credit based on an evaluation of the customer's financial condition, generally without requiring collateral. Exposure to losses on receivables is dependent on each customer's financial condition. At June 30, 2008 the Company had a receivable from one foreign customer in the amount of $1,317,809. The balance of the accounts receivable are primarily from retailers and distributors located in the United States
New Accounting Standards — Several accounting pronouncements became effective in fiscal year 2008 or are expected to become effective in fiscal year 2009.
GAAP Hierarchy
In May 2008, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 162, "The Hierarchy of Generally Accepted Accounting Principles." SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles (the GAAP hierarchy). SFAS No. 162 will become effective 60 days following the SEC's approval of the Public Company Accounting Oversight Board amendments to AU Section 411, "The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles." EMTA does not expect the adoption of SFAS No. 162 to have a material effect on its results of operations and financial position.
In May 2008, the FASB issued Financial Statement Position (FSP) Accounting Principles Board (APB) 14-1 "Accounting for Convertible Debt Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash Settlement)." FSP APB 14-1 requires the issuer of certain convertible debt instruments that may be settled in cash (or other assets) on conversion to separately account for the liability (debt) and equity (conversion option) components of the instrument in a manner that reflects the issuer's non-convertible debt borrowing rate. FSP APB 14-1 is effective for fiscal years beginning after December 15, 2008 on a retroactive basis and will be adopted by EMTA in the first quarter of fiscal 2010. EMTA is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its results of operations and financial position.
Noncontrolling Interests
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements—an amendment of Accounting Research Bulletin No. 51." SFAS No. 160 establishes accounting and reporting standards for ownership interests in subsidiaries held by parties other than the parent, the amount of consolidated net income attributable to the parent and to the noncontrolling interest, changes in a parent's ownership interest, and the valuation of retained noncontrolling equity investments when a subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure requirements that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 is effective for fiscal years beginning after December 15, 2008 and will be adopted by the Company in the first quarter of fiscal 2010. We do not expect the adoption of SFAS No. 160 to have a material effect on its results of operations and financial position.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities—Including an Amendment of FASB Statement No. 115," which permits an entity to measure many financial assets and financial liabilities at fair value that are not currently required to be measured at fair value. Entities that elect the fair value option will report unrealized gains and losses in earnings at each subsequent reporting date. The fair value option may be elected on an instrument-by-instrument basis, with few exceptions. SFAS No. 159 amends previous guidance to extend the use of the fair value option to available-for-sale and held-to-maturity securities. The statement also establishes presentation and disclosure requirements to help financial statement users understand the effect of the election. This statement is effective for fiscal years beginning after November 15, 2007. EMTA does not expect the adoption of SFAS No. 159 to have a material effect on its results of operations and financial position.
Fair Value Measurements
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements." SFAS No. 157 defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. This statement applies under other accounting pronouncements that require or permit fair value measurement where the FASB has previously determined that under those pronouncements fair value is the appropriate measurement. This statement does not require any new fair value measurements but may require companies to change current practice. This statement is effective for fiscal years beginning after November 15, 2007. EMTA does not expect the adoption of SFAS No. 157 to have a material effect on its results of operations and financial position.
Defined Benefit Pension and Other Postretirement Plans
In September 2006, the FASB issued SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans." SFAS No. 158 requires employers to fully recognize the obligations associated with single-employer defined benefit pension, retiree healthcare, and other postretirement plans in their financial statements. The effect of adopting SFAS No. 158 on EMTA's financial statements at March 31, 2007 and 2008 has no effect on the Company.
In September 2006, the Emerging Issues Task Force (EITF) reached consensus on EITF Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements." The scope of EITF No. 06-4 is limited to the recognition of a liability and related compensation costs for endorsement split-dollar life insurance arrangements that provide a benefit to an employee that extends to postretirement periods. EITF No. 06-4 is effective for fiscal years beginning after December 15, 2007. We adopted EITF No. 06-4 early, in fiscal 2008, and its adoption did not have an impact on EMTA’s results of operations or financial position.
In June 2006, the FASB issued FASB Interpretation (FIN) No. 48, "Accounting for Uncertainty in Income Taxes," which supplements SFAS No. 109, "Accounting for Income Taxes,' and is effective for fiscal years beginning after December 15, 2006. FIN 48 clarifies the accounting for uncertainties in income taxes recognized in accordance with SFAS 109 by prescribing guidance for the recognition, de-recognition, and measurement in financial statements of income tax positions taken in previously filed tax returns or tax positions expected to be taken in tax returns, including a decision whether to file or not to file in a particular jurisdiction. FIN 48 requires that any liability created for unrecognized tax benefits be disclosed. The application of FIN 48 may also affect the tax bases of assets and liabilities and therefore may change or create deferred tax liabilities or assets.
On March 31, 2007, we adopted the provisions of FIN 48. There was no material impact to EMTA of adopting FIN 48.
Life Insurance Policies
In March 2006, the FASB issued FSP No. FTB 85-4-1, "Accounting for Life Settlement Contracts by Third Party Investors." FSP FTB 85-4-1 provides for a contract-by-contract irrevocable election to account for life settlement contracts on either a fair value basis, with changes in fair value recognized in the condensed consolidated statements of operations, or through use of the investment method. Under the investment method, the initial investment and continuing costs are capitalized; however, no income is recognized until the death of the insured party. The guidance of FSP FTB 85-4-1 will be effective for fiscal years beginning after June 15, 2006. EMTA adopted FSP FTB 85-4-1 as of the beginning of fiscal 2008, and its adoption did not have an impact on EMTA’s results of operations or financial position.
In September 2006, the EITF reached a conclusion on EITF Issue No. 06-5, "Accounting for Purchases of Life Insurance—Determining the Amount That Could Be Realized in Accordance with FASB Technical Bulletin No. 85-4, "Accounting for Purchases of Life Insurance." The scope of EITF No. 06-5 consists of three separate issues relating to accounting for life insurance policies purchased by entities protecting against the loss of "key persons." The three issues are clarifications of previously issued guidance on FASB Technical Bulletin No. 85-4. EMTA adopted EITF No. 06-5 as of the beginning of fiscal 2008, and its adoption did not have a material impact on EMTA’s results of operations or financial position.
Note 3 - Inventories
Inventory consists of finished goods and raw material as follows:
| | | June 30, 2008 (Unaudited) | | | March 31, 2008 | |
| | | | | | | | | |
| Finished goods | | $ | 300,967 | | | $ | 340,087 | |
| Raw material | | | 291,765 | | | | 76,706 | |
| | | $ | 592,732 | | | $ | 416,793 | |
At June 30, 2008 and March 31, 2008 equipment and computers consisted of the following:
| | | June 30, 2008 (Unaudited) | | | March 31, 2008 | |
| | | | | | | | | |
| Property and plant | | $ | 1,442,401 | | | $ | 1,442,401 | |
| Equipment and computers | | | 524,852 | | | | 518,504 | |
| Less accumulated depreciation | | | (204,224 | ) | | | (173,938 | ) |
| Net equipment and Computers | | $ | 1,763,029 | | | $ | 1,786,967 | |
During the three months ended June 30, 2008 and 2007 depreciation expense was $30,286 and $26,574, respectively.
Note 5 - Intangible Assets
Intangible assets consist of technology of production and license rights under the Environmental Protection Agency to market one of the products acquired in the acquisition of White Sands, L.L.C. on March 31, 2006. The Company intends to market the related products as soon as production and marketing strategies can be completed. The Company will amortize this investment over its estimated useful life of seven years on a straight line basis. For the three months ended June 30, 2008 and 2007 amortization was $31,681.
Note 6 - Accrued Liabilities
Accrued liabilities consist of the following as of June 30, 2008 and March 31, 2008:
| | | June 30, 2008 (Unaudited) | | | March 31, 2008 | |
| | | | | | | |
| Accrued marketing and advertising | | $ | 140,000 | | | | 300,000 | |
| Accrued reimbursement to product testing partner | | | 978,151 | | | | 978,151 | |
| Accrued interest | | | 272,065 | | | | 288,046 | |
| Other | | | 91,831 | | | | 91,219 | |
| | | $ | 1,482,047 | | | $ | 1,657,416 | |
As part of our testing of products and new applications the Company agreed to reimburse one of our testing partners for the costs incurred in such testing.
Note 7 - Notes and Contracts Payable
As of June 30, 2008 notes and contracts payable consist of the following:
| Bank Loans, payable in installments | | $ | 280,205 | |
| Mortgage Loan Payable, monthly payments of principal and interest at 3 month LIBOR plus 4.7%. | | | 789,577 | |
| Payments due seller of Dyson | | | 254,240 | |
| Loan from Dyson | | | 75,000 | |
| Notes payable | | | 1,040,354 | |
| Loans from individuals, due within one year | | | 265,000 | |
| | | | 2,704,376 | |
| Less amounts due within one year | | | 1,774,930 | |
| Amounts due after one year | | $ | 929,446 | |
Bank Loans consist of two loans that became due in the second quarter of fiscal 2009; these loans are secured by receivables, inventory and equipment in Durant, Oklahoma. The Company is working to replace these loans. The Mortgage Loan Payable has matured as a result of the change in control of the operations in Durant. The Company continues to make principal and interest payments while the Company obtains a replacement loan on the property. Interest is reset quarterly at Libor + 4.7%.
The amounts due sellers bear interest at a rate of 8.0% and are due in October, 2008.
Notes payable include amounts due after one year consists of the loan from Shelter Island Opportunity Fund with interest at 12.25% per annum and secured by the plant and equipment in Durant, Oklahoma. Maturities for the remainder of the loan are as follows:
| 2009 | | $ | 81,724 | |
| 2010 | | $ | 304,049 | |
| 2011 | | $ | 625,397 | |
The balance of the notes payable consists of commercial loans of a vehicles and equipment in the normal course of business.
The Loans from individuals includes three loans all of which are due within one year and bear interest from 9% to 12%.
Note 8 - Convertible Debt
The Company entered into a Convertible Loan Agreement which also entitled the lenders to warrants and to convert the loans, at their option, to common stock of the Company. The face value of the Convertible Notes, 6%, interest quarterly, mature as follows:
| Maturity | | Amount | | | Exercised | | | Balance | |
| | | | | | | | | | |
| April 28, 2009 | | $ | 315,514 | | | $ | – | | | $ | 315,514 | |
| August 17, 2009 | | | 659,610 | | | | – | | | | 659,610 | |
| October 28, 2009 | | | 298,591 | | | | – | | | | 298,591 | |
| November 10, 2009 | | | 1,120,279 | | | | – | | | | 1,120,279 | |
| Total | | $ | 2,373,994 | | | $ | – | | | $ | 2,393,994 | |
The lenders were issued warrants to purchase 7,000,000 shares of common stock at an exercise price of $2.50 per share. The Company also issued warrants to a broker in the transaction for the exercise of 70,000 shares of common stock at an exercise price of $2.50. These warrants expire if not exercised at various dates in 2013 through November 10, 2013. At June 30, 2008, all of the 7,000,000 warrants have been issued entitling the lender to one share for each warrant at an exercise price of $2.50 per share.
The agreements include registration rights and certain other terms and conditions related to share settlement of the embedded conversion features and the warrants. In this instance, EITF 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock”, requires allocation of the proceeds between the various instruments and the derivative elements carried at fair values.
As a result of the Company not having filed the registration statement within 30 days of the execution of the loan agreement, the parties agreed that the Company would issue warrants to purchase an additional 5,000,000 shares of the Company’s common stock at $2.50 per share. The warrants expire if not exercised on August 10, 2013. These warrants were issued to cure the default that occurred on June 28, 2006 and was executed on August 10, 2006. The Company recorded the fair value of these warrants as loan default costs as of June 28, 2006.
Note 9 - - Income Taxes
Provision/benefit for income taxes for the periods ended June 30, 2008 and 2007 consisted of the follows:
| | | For the three months ended June 30, | |
| | | 2008 | | | 2007 | |
| | | | | | | |
| Federal income taxes/(benefit) | | $ | 91,956 | | | $ | (319,277 | ) |
| State income taxes | | | 20,257 | | | | (61,171 | ) |
| Total | | | 112,213 | | | | (380,448) | |
| Valuation allowance | | | (112,213 | ) | | | 380,448 | |
| Net tax provision/benefit | | $ | – | | | $ | – | |
Through March 31, 2008, we recorded a valuation allowance of $4,610,750 against deferred income tax assets primarily associated with tax loss carry forwards. Our significant operating losses experienced in prior years establishes a presumption that realization of these income tax benefits does not meet a “more likely than not” standard. For the quarter ended June 30, 2008 we recognized $112,213 of the valuation allowance to offset the provision for income taxes for this period.
We have net operating loss carry forwards of approximately $11,670,000. Our net operating loss carry forwards will expire between 2025 and 2028.
Future realization of the net operating losses is dependent on generating sufficient taxable income prior to their expiration. Tax effects are based on a 34% Federal income tax rate. The net operating losses expire as follows:
| Expiration | | Amount | |
| | | | | |
| 2025 | | $ | 1,233,826 | |
| 2026 | | | 5,132,298 | |
| 2027 | | | 3,052,902 | |
| 2028 | | | 2,251,030 | |
| Total net operating loss available | | $ | 11,670,056 | |
Note 10 - Accounting for derivative financial instruments
On April 29, 2006, the Company entered into an agreement whereby it would issued 6% secured convertible notes in the aggregate principal amount of $3,000,000 which are convertible into common shares of the Company at the lender’s option based on a range of 50% to 60% of the then current market price at the time of the conversion election. The Company had the right at any time that the stock is trading below $5.00 per share to call the notes at a prepayment premium ranging from 20% in the first 30 days after issuance to 40% after 60 days of issuance, this call provision has expired. The Company has reserved a sufficient number of its common shares to meet these obligations.
Host instrument:
The proceeds from each financing arrangement were allocated to the various elements of the financing resulting in discounts to the face values of the debt instruments. These discounts were then amortized over the debt terms (in all instances three-years) using the effective interest method.
Proceeds from the financing were allocated to the fair value of the warrants issued using the binomial model. These instruments will be carried as additional paid in capital, and their carrying values will not be adjusted to fair value at the end of each subsequent reporting period.
Free standing instruments, consisting of warrants are valued using the binomial model valuation methodology because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions included in this model as of June 30, 2008 are as follows:
| | | Original | | | Default | |
| | | Warrants | | | Warrants | |
| | | | | | | | | |
| Exercise price | | $ | 2.50 | | | $ | 2.50 | |
| Shares subject to exercise | | | 7,000,000 | | | | 5,000,000 | |
| Weighted Average Term Remaining (years) | | | 5.16 | | | | 5.00 | |
| Volatility | | | 131.8 | % | | | 131.8 | % |
| Risk-free rate | | | 2.36-3.34 | % | | | 2.36-3.34 | % |
| Implied value | | $ | 1,112,185 | | | $ | 774,918 | |
| Recorded value | | $ | – | | | $ | 13,960,334 | |
The value of the original warrants was limited by the net loan amounts after issue costs.
Embedded conversion features:
Each hybrid instrument was analyzed in accordance with the guidance in SFAS 133 for features that possessed the characteristics of derivative instruments. Those instruments whose economic characteristics and risks of the embedded derivative instrument were not “clearly and closely related” to the host instrument were bifurcated and treated as derivatives under the guidance of SFAS 133 and recorded at fair value with adjustments to fair value at the end of each subsequent reporting period. This resulted in the conversion feature being recorded as an embedded derivative at each loan funding date, April 29, 2006, August 17, 2006, October 28, 2006 and November 10, 2006.
Note 11 - - Company Stock
Preferred Stock
At June 30, 2008, the Company had 1,000,000 shares of $0.001 par value authorized and no outstanding or issued shares.
Common Stock
At June 30, 2008, the Company had 250,000,000 shares authorized of $0.001 par value common stock, of which issued and outstanding shares were 64,791,103.
During the first quarter ended June 30, 2008, the Company issued 5,606,000 par value $0.001 common shares of stock for net proceeds of $971,930 after payment of issue costs and fees of $25,070. Also during the period, the Company issued an aggregate of 4,300,000 common shares for services to consultants recognizing an aggregate addition to stockholders’ equity of $953,000 based on the market price of the stock at the date of the agreement. The services will be recognized over the next one to two years and the related expense is being recognized over the service period.
Warrants
No warrants have been exercised.
At June 30, 2008 the status of the outstanding warrants is as follows:
| Issue Date | | Shares Exercisable | | Weighted Average Exercise Price | | Expiration Date |
| | | | | | | | |
| September 27, 2005 | | 450,000 | | $ | 2.50 | | September 26, 2010 |
| April 29, 2006 | | 1,866,667 | | $ | 2.50 | | April 28, 2013 |
| June 28, 2006 | | 5,000,000 | | $ | 2.50 | | August 10, 2013 |
| August 17, 2006 | | 1,633,333 | | $ | 2.50 | | August 17, 2013 |
| October 28, 2006 | | 700,000 | | $ | 2.50 | | October 28, 2013 |
| November 10, 2006 | | 2,800,000 | | $ | 2.50 | | November 10, 2013 |
| May 21, 2007 | | 500,000 | | $ | .75 | | May 20, 2009 |
| July 1, 2007 | | 5,775,000 | | $ | .75 | | June 30, 2012 |
| Cashless April 20 - November 10, 2006 | | 700,000 | | $ | 2.50 | | April 29 - November 10, 2015 |
| Cashless March 26, 2007 | | 1,400,000 | | $ | .75 | | March 26, 2010 |
| Cashless July 1, 2007 | | 519,750 | | $ | .75 | | June 30, 2012 |
The warrants have no intrinsic value at June 30, 2008.
Stock Options
At March 31, 2008, the Company had one stock option plan under which grants were outstanding. The stock options outstanding are for grants issued under the Company’s 2007 Stock Incentive Plan.
The 2007 Stock Incentive Plan
During the fiscal year ended March 31, 2008, the Company adopted a stock option plan, entitled the “2007 Incentive Plan” (the “2007 Plan”), under which the Company may grant options to purchase up to 20,000,000 shares of common stock.
The 2007 Plan is administered by the Board of Directors or a Committee of the Board of Directors which has the authority to determine the persons to whom the options may be granted, the number of shares of common stock to be covered by each option grant, and the terms and provisions of each option grant. Options granted under the 2007 Plan may be incentive stock options or non-qualified options, and may be issued to employees, consultants, advisors and directors of the Company and its subsidiaries. The exercise price of options granted under the 2007 Plan may not be less than the fair market value of the shares of common stock on the date of grant, and may not be granted more than ten years from the date of adoption of the plan or exercised more than ten years from the date of grant.
The following table sets forth the Company’s stock option activity during the quarter ended June 30, 2008:
| | | Shares Underlying Options | | Weighted Average Exercise Price | | Weighted Average Remaining Contractual Life | | Aggregate Intrinsic Value |
| | | | | | | | | | | |
| Outstanding at March 31, 2008 | | 5,415,000 | | $ | .20 | | 3.0 | | $ | – |
| During the quarter ended June 30, 2008: | | | | | | | | | | |
| Granted | | | | | | | – | | | 216,600 |
| Exercised | | – | | | – | | – | | | – |
| Canceled | | – | | | – | | – | | | – |
| | | | | | | | | | | |
| Outstanding at June 30, 2008 | | 5,415,000 | | $ | .20 | | 3.0 | | $ | |
| | | | | | | | | | | |
| Exercisable at June 30, 2008 | | – | | $ | – | | – | | $ | – |
| | | Number of Options | | | Weighted-Average Grant-Date Fair Value | |
| | | | | | | | | |
| Non-vested as of March 31, 2008 | | | 5,415,000 | | | $ | .11 | |
| Option activity during the quarter ended June 30, 2008: | | | | | | | | |
| Granted | | | (0 | ) | | | – | |
| Forfeited | | | (0 | ) | | | – | |
| Vested | | | (0 | ) | | | – | |
| | | | | | | | | |
| Non-vested as of June 30, 2008 | | | 5,415,000 | | | $ | .11 | |
During the year ended March 31, 2008, the Company granted options to purchase an aggregate of 5,415,000 shares of common stock to employees, directors and consultants for services to be provided. These options are exercisable at $0.20 per share, and vest one third on October 1, 2008, April 1, 2009 and October 1, 2009 with an expiration of three years from the date of grant for all options. The Company has valued these at their fair value on the date of grant using the Hull-White enhanced option-pricing model.
Unrecognized stock-based compensation expense related to the unvested options is approximately $525,165 will be recorded over the vesting periods of 18 months. This estimate is based on the number of unvested options currently outstanding and could change based on the number of options granted or forfeited in the future. During the quarter ended June 30, 2008 the Company recognized expense of $85,383. These options have an intrinsic value at June 30, 2008 of $216,600.
The assumptions used in calculating the fair value of stock-based payment awards represent management’s best estimates.
The Company based its expected volatility on the historical volatility of similar companies with consideration given to the expected life of the award. The Company intends to continue to consistently use this method until sufficient market acceptance of its stock has reached a stable level.
The risk-free interest rate used for each grant is equal to the U.S. Treasury yield in effect at the time of grant for instruments with a similar expected life.
The expected term of options granted was determined based on the historical exercise behavior of similar peer groups.
The Company has never declared or paid a cash dividend, and has no current plans to pay a cash dividend in the future.
SFAS 123(R) also requires that the Company recognize compensation expense for only the portions that are expected to vest. Therefore, the Company has estimated expected forfeitures of stock options with the adoption of SFAS 123(R). In developing a forfeiture rate estimate, the Company considered its historical experience. If the actual number of forfeitures differs from those estimated by management, additional adjustments to compensation expense may be required in future periods.
| | | 2008 |
| | | |
| Risk Free Interest Rate | | 1.79 % |
| Expected Life | | 3.0 years |
| Expected Volatility | | 116 % |
| Expected Dividend Yield | | 0 % |
The per share weighted average fair value of stock options granted for the fiscal year ended March 31, 2008 was $0.11.
Note 12 - - Earnings (Loss) Per Share
Basic income (loss) per common share is computed by dividing the results of operations by the weighted average number of shares outstanding during the period. For purposes of the determining the number of shares outstanding the shares received by the acquirer in the reverse acquisition are treated as outstanding for all periods prior to the transaction.
Diluted income (loss) earnings per common share adjusts basic income (loss) per common share for the effects of convertible securities, stock options, warrants and other potentially dilutive financial instruments only in periods in which such effect is dilutive. No instruments were dilutive at June 30, 2008 or 2007.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Forward-Looking Statements
The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are “forward-looking statements” under the Private Securities Litigation Reform Act of 1995 and within Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. All forward-looking statements involve various risks and uncertainties. Forward-looking statements contained in this Report include statements regarding the plans of EMTA Holdings, Inc. (“EMTA,” “we,” “our” or “us”) to develop, test and deliver new products; market risks, opportunities and acceptance; industry growth; anticipated capital expenditures; the impact of option expensing; our ability to finance operations, refinance current maturities of long-term obligations; and our ability to meet our cash requirements while maintaining proper liquidity. These statements involve risks and uncertainties and are based on management’s current expectations and estimates; actual results may differ materially. Those risks and uncertainties that could impact these statements include the risks relating to implementation and success of our advertising and marketing plans and sensitivity to general economic conditions, including the current economic environment, consumer spending patterns; our ability to complete long-term financing, our leverage and debt risks; the effect of competition on EMTA and our clients; management’s allocation of capital and the timing of capital purchases; and internal factors such as the ability to increase efficiencies, control expenses and successfully execute growth strategies. The effect of market risks could be impacted by future borrowing levels and economic factors such as interest rates. The expected impact of option/warrant expensing is based on certain assumptions regarding the number and fair value of options granted, resulting tax benefits and shares outstanding. The actual ultimate impact of option/warrant expensing could vary significantly to the extent actual results vary significantly from current assumptions and market conditions.
Such forward-looking statements encompass our beliefs, expectations, hopes or intentions regarding future events. Words such as “expects,” “believes,” “anticipates,” “should,” and “likely” also identify forward-looking statements. All forward-looking statements included in this Report are made as of the date hereof, based on information available to us as of such date, and we assume no obligation to update any forward-looking statement. It is important to note that such statements may not prove to be accurate and that our actual results and future events could differ materially from those anticipated in such statements. Among the factors that could cause actual results to differ materially from our expectations are those described under “Management’s Discussion and Analysis of Financial Condition and Results of Operations---Risks Related to Existing and Proposed Operations.” All subsequent written and oral forward-looking statements attributable to EMTA or persons acting on our behalf are expressly qualified in their entirety by this section and other factors included elsewhere in this Report. For a more detailed discussion of these and other factors that could cause actual results to differ from those contained in the forward-looking statements, see the company’s annual report on Form 10-K filed with the Securities and Exchange Commission which includes our financial statements for the year ended March 31, 2008.
Overview
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to help the reader understand EMTA Holdings, Inc. (“ EMTA,” “ we, ” “our” or “ us ”), our operations and our business environment. MD&A is provided as a supplement to (and should be read in conjunction with) our Financial Statements and accompanying notes.
The Company
We are an energy conservation chemical company focused on the development and commercialization of automotive and trucking additives to improve mileage, reduce wear and promote ecologically sound environmental practices. One of these products, XenTx™, is being marketed through automotive and retail outlets as an engine treatment that reduces friction and wear on engine parts and improves gas mileage. We have also introduced related products of the XenTx family that improve transmission operations, a spray lubricant.
Our White Sands, L.L.C. subsidiary has an approved diesel fuel additive for the commercial trucking industry. By adding a relatively small amount of Clean Boost to the fuel tank of a large diesel truck, fuel economy is improved and engine wear reduced. This product was reviewed by the Environmental Protection Agency (“EPA”) and we received registration number 201920001 for this product
As an expansion of the White Sands Clean Boost product, we received a limited approval from the Texas Commission on Environment Quality (“TCEQ”) and the EPA in March, 2007 of the Clean Boost LE product, a refined diesel fuel additive that reduces diesel fuel emissions and when added to diesel fuel would bring the fuel into compliance with the mandated Texas emission standard. In June, 2008 the Company received an unconditional approval for the Clean Boost LE product from the TCEQ that qualifies for additive for all diesel fuels. This product is applicable to the refining and distribution processes in other states where similar clean air standards are being developed.
Our research staff and consultants continue to improve existing products and evaluate new products for environmental benefit and economic viability. Also, we continue to evaluate potential acquisitions whose products would complement our current products and environmentally responsible corporate philosophy.
Our goal is to develop and market automotive and industrial products that benefit the user, improve air quality and improve engine life and efficiency.
Accounting Treatment
On March 31, 2006 EMTA Holdings, Inc. (formerly Omni Alliance Group, Inc.) acquired EMTA Corp. (“Corp.”), Inc. in consideration for the issuance to EMTA Corporation’s shareholders of 30,828,989 shares of EMTA Holdings, Inc. common stock. The acquisition of Corp. was accounted for as a reverse merger in which Corp. was the accounting acquirer and EMTA Holdings, Inc. was the legal acquirer. As a result, the financial statements of Corp. became our financial statements. Prior to this transaction, EMTA Holdings, Inc. had been a non-reporting public shell in search of an acquirer or business to acquire. Prior to this acquisition, EMTA Corporation was a privately held company.
Effective January 1, 2007 the Company acquired Dyson Properties, Inc., a manufacturer, blender and seller of oil based products in Durant, Oklahoma. This acquisition gives the Company the ability to manufacture and package and distribute its products as well as those of Dyson in lieu of using third party blenders, packagers and distributors.
Business Segments
For financial reporting purposes, our business has only one segment and we develop, manufacture and sell petroleum energy conservative products to owners of private and commercial vehicles. These products are designed to extend engine life, promote fuel efficiency and reduce emissions.
The XenTx Engine Treatment is added to the crankcase, adheres to the metal parts and reduces friction, wear and extends oil life. Also since year end we have expanded our penetration of the retail and automotive parts business by adding numerous national, regional and local outlets resulting in the sale of additional products.
Since March 31, 2005 we introduced several new products that we are in the process of bringing to market. All of these products are in the same industry segment. These products include XenTx transmission treatment, XenTx fuel treatment, XenTx lubricating aerosol spray and the diesel fuel additive, Clean Boost with an EPA license number 201920001. In June, 2008 we received unconditional approval for the Clean Boost LE (low emissions) product for diesel engines that reduces emissions when combined with standard diesel fuel and were issued an EPA Certification #201920002CB-LE.
Quarterly Results May Fluctuate
We anticipate that our quarterly results of operations will fluctuate for several reasons, including:
| | · | the timing and extent of our research and development activities to introduce new products; |
| | · | the timing and application of advertising and marketing campaigns to establish name and product recognition and demand; |
| | · | the timing and outcome of our applications and testing to acquire regulatory approval for our products where necessary; |
| | · | the timing and extent of our adding new employees and building infrastructure; |
| | · | the timing of any license fees, or royalty payments that we may be required to pay in the future; and |
| | · | seasonal influences on the sale of certain automotive products sold primarily during the non-winter season. |
In addition, raw materials and manufacturing costs may fluctuate based on raw material availability, manufacturing volume, shipping methods and the packaging processes.
Critical Accounting Policies and Estimates
Our management’s discussion and analysis of the financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported net sales and expenses during the reporting periods.
The accounting policies discussed below are considered by our management to be critical to an understanding of our financial statements because their application depends on management’s judgment, with financial reporting results relying on estimates and assumptions about the effect of matters that are inherently uncertain. On an ongoing basis, we evaluate our estimates and assumptions. We base our estimates on personal and historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. For all of these policies, management cautions that future events rarely develop exactly as forecast and that best estimates routinely require adjustment. Accordingly, actual results may differ from our estimates under different assumptions or conditions and could materially impact our financial condition or results of operations.
While our significant accounting policies are more fully described in Note 2 to our consolidated financial statements, we believe that the following accounting policies are the most critical to aid the reader to fully understand and evaluate our reported financial results.
Revenue Recognition
Revenues are recognized at the time of shipment of products to customers, or at the time of transfer of title, if later, and when collection is reasonably assured. All amounts in a sales transaction billed to a customer related to shipping and handling are reported as revenues.
Provisions for sales discounts and rebates to customers are recorded, based upon the terms of sales contracts, in the same period the related sales are recorded, as a deduction to the sale. Sales discounts and rebates are offered to certain customers to promote customer loyalty and encourage greater product sales.
Inventories
Inventories are stated at the lower of cost or market value. Cost of inventories is determined by the first-in, first-out (FIFO) method. Obsolete or abandoned inventories are charged to operations in the period that it is determined that the items are not longer viable sales products. The cost of products produced in the development and experimental stages are expensed as incurred until it is determined that the product is both salable and a viable commercial product.
Property, Plant and Equipment
Property, plant and equipment are carried at cost. Repair and maintenance costs are charged against operations while renewals and betterments are capitalized as additions to the related assets. The Company depreciates it assets on a straight line basis. Estimated useful lives range for the equipment ranges from 3 to 10 years and the buildings are being depreciated over 31 years.
Valuation of Intangible Assets
Our intangible assets include trademarks, product rights, technology rights, and governmental license, all of which are accounted for based on Financial Accounting Standard Statement No. 142 Goodwill and Other Intangible Assets (“FAS 142”). As described below, intangible assets that have indefinite useful lives are not amortized but are tested at least annually for impairment or more frequently if events or changes in circumstances indicate that the asset might be impaired. Intangible assets with limited useful lives are amortized using the straight-line method over their estimated period of benefit.
We will undertake an annual impairment analysis of all intangible assets. Trademarks, product rights and technology rights developed by us are carried a no value on the books of the Company. On March 31, 2006 the Company acquired White Sands, L.L.C. and its completed registration process from the Environmental Protection Agency (“EPA”) for its Clean Boost diesel fuel additive, as required for sale of products to the trucking and related industries. This was the major asset acquired in the transaction and will be amortized on a straight line basis over its estimated useful life of seven years. This license will be evaluated annual for impairment. Impairment exists if the carrying amount is less than its estimated fair value, resulting in a write-down equal to the difference between the carrying amount and the estimated fair value.
We have made no impairment adjustments to recorded intangible assets. No intangible assets with an assigned value existed prior to March 31, 2006. The value recorded for intangible assets represent fair value calculated by accepted valuation methods. Such valuations require critical estimates and assumptions derived from and which include, but are not limited to: (i) estimated cash flows, (ii) discount rates, (iii) patent expiration information, (iv) terms of license and registration agreements, and (v) expected timelines and costs to complete any in-process research and development projects to commercialize our products.
Impairment of Long-Lived Assets
In accordance with the Statement of Financial Accounting Standards No. 144 (“FAS 144”), “Accounting for the Impairment or Disposal of Long-Lived Assets,” the Company reviews long-lived assets, including, but not limited to, property and equipment, patents and other assets, for impairment annually or whenever events or changes in circumstances indicate the carrying amounts of assets may not be recoverable. The carrying value of long-lived assets is assessed for impairment by evaluating operating performance and future undiscounted cash flows of the underlying assets. If the sum of the expected future cash flows of an asset is less than its carrying value, an impairment measurement is required. Impairment charges are recorded to the extent that an asset’s carrying value exceeds fair value. Accordingly, actual results could vary significantly from such estimates. There were no impairment charges during the periods presented.
Purchased In-Process Research and Development
We account for purchased in-process research and development, or IPR&D, in accordance with pronouncements as follows:
| | · | FASB Statement of Financial Accounting Standards No. 2, Accounting for Research and Development; and |
| | · | FASB Interpretation No. 4, Applicability of FASB Statement No. 2 to Business Combinations Accounted for by the Purchase Method. |
Generally, purchased in-process research and development is distinguished from developed technology based upon whether the IPR&D projects are measurable, have substance, and are incomplete. IPR&D represents the portion of a purchase price of an acquisition related to research and development activities that have not demonstrated technological feasibility and do not have alternative future uses. IPR&D projects that have not been granted EPA approval or that are determined to be otherwise commercially viable are classified as being incomplete, and as such the associated costs are expensed as incurred.
Valuation of Derivative Instruments
We generally do not use derivative financial instruments to hedge exposures to cash-flow risks that may affect the fair values of our financial instruments. However, certain other financial instruments, such as warrants and embedded conversion features that are indexed to our common stock, are classified as liabilities when either (a) the holder possesses rights to net-cash settlement or (b) physical or net-share settlement is not within our control. In such instances, net-cash settlement is assumed for financial accounting and reporting, even when the terms of the underlying contracts do not provide for net-cash settlement. Such financial instruments are initially recorded at fair value and subsequently adjusted to gain value at the close of each reporting period. We have issued warrants in conjunction with the private placement of some of our common stock. These warrants have an exercise price of $2.50 per share and were issued when estimated market value was approximately $1.00 per share.
Stock-Based Compensation
We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123 — Accounting for Stock-Based Compensation, which provides for the use of the fair value based method to determine compensation for all arrangements where shares of stock or equity instruments are issued for compensation. Shares of common issued in connection with acquisitions are also recorded at their estimated fair values. The fair value of equity securities is determined by management based upon recent private stock sales to third parties.
In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”). The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is recognized over the period during which the employee is required to provide service in exchange for the award. The provisions of the revised statement are effective for financial statements issued for the first interim or annual reporting period beginning after June 15, 2005, with early adoption encouraged.
We recorded stock-based compensation for the three months ended June 30, 2008 of $85,383. The options vest at a rate of 1,805,000 shares on October 1, 2008, April 1, 2009 and October 1, 2009 and are exercisable for a period of three years from the grant date.
Income Taxes
We incurred net operating losses for the years ended March 31, 2005 through 2008, and had net income of the three months ended June 30, 2008 and consequently did not, or will not be required to, pay federal or foreign income taxes, but we did pay nominal state taxes in states where we have operations. We have a federal net operating loss carryover of approximately $11,670,000 as of June 30, 2008, which expires through March 31, 2028. The Company does not believe it is subject to the various Section 382 limitations.
Under Section 382 and 383 of the Internal Revenue Code, if an ownership change occurs with respect to a “loss corporation” as defined, there are annual limitations on the amount of the net operating loss and other deductions, which are available to us. Due to the reverse acquisition transactions and purchases in which we have engaged in recent years, we do not believe that the use of these net operating losses will be significantly limited.
However, the utilization of our net operating loss carryforwards may be limited in the future if we experience a change in ownership of more than 50% within any twelve month period subsequent to the last change in ownership. Accordingly, our net operating loss carryforward available to offset future federal taxable income arising before such ownership changes may be further limited.
Our ability to realize our deferred tax assets depends on our future taxable income as well as the limitations on usage discussed above. For financial reporting purposes, a deferred tax asset must be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized prior to its expiration. Because we believe the realization of our deferred tax assets is uncertain, we have recorded a valuation allowance to fully offset them.
Sales and Marketing
Our objective is to market, sell and distribute our products in the most efficient, cost effective manner possible with our distribution channel strategy providing the widest range of customer coverage possible. We believe sales to automotive retailers through independent sales representatives affords us the best overall chance to gain and hold customers and allows us to control and maximize the product value chain benefits for us and the end-user.
We sell our products through retailers, auto parts suppliers, internet sales at its our web sites: www.xentx.com, www.synergynracing.com and direct sales through sales representatives to commercial customers. We sell our retail and commercial product through our sales force of three and through independent sales representatives. Each sales representative tends to service one to a few retail outlets with which they have long term, strong relationships. Our compensation arrangement with these representatives is commission only.
Our products are currently sold in approximately 4,000 retail outlets in the United States and Canada. During the three months ended June 30, 2008 no retailers accounted for more than 10% of our sales volume.
Results of Operations
Three Months Ended June 30, 2008 Compared to the Three Months Ended June 30, 2007
Net Sales. Our net sales for the three months ended June 30, 2008 were $1,836,421, an increase of $1,169,697, or 175%, from the three months ended June 30, 2007. The increase from the prior year was as a result of the Company’s strong foreign sales, marketing strategy changes to seek industrial/commercial sales that would produce the greatest volumes and changes in product branding strategy. In addition, the Company’s new emphasis on the commercial/industrial market, particularly with long haul trucking fleets, is just now beginning to be successful.
Cost of Sales. Our cost of sales for the three months ended June 30, 2008 was $726,776, or 40% of net sales, compared to $293,176, or 44% of net sales, during the three months ended June 30, 2007. The increase in the cost of sales was primarily due to both increases in raw material and manufacturing costs. However, the gross profit increased by 4% as a result of the mix of products sold with a lower per unit finished cost.
Selling, General and Administrative Expenses. Our selling, general and administrative expenses were $681,703 for the three months ended June 30, 2008, a decrease of $47,168, from the June 30, 2007 results. The decrease was due primarily to the reduction in sales and promotional costs, a reduction in the estimated cost to settle litigation of $160,000 that was previously accrued, and offset by the increases for stock issued for consulting services of $122,833 and stock option costs of $85,383.
Depreciation and Amortization. Depreciation and amortization increased to $61,966 from $58,183 for the same period a year earlier. Depreciation and amortization includes the depreciation on property, plant and equipment and the amortization on the intangible asset at the rate of $31,681 per quarter on a straight line basis.
Interest and Other Expense
Interest Expense. During the three months ended June 30, 2008, the interest expense was $198,834 compared to $266,822 for the same period a year earlier. The decrease is due primarily to the lower cost of cashless warrant conversion adjustment in 2008 of $37,815 as opposed to $145,070 in the earlier period.
Liquidity and Capital Resources
Since our inception and prior to the last two quarters, we have incurred significant losses and, as of June 30, 2008, we have an accumulated deficit of $26,886,495. We have not yet achieved cumulative profitability, primarily as a result of the valuation adjustment of the warrants issued in conjunction with the cost of curing the loan default in a prior period. We expect that our research and development and selling, general and administrative expenses will increase and, as a result, we will need to generate significant additional product revenues to maintain profitability. The Company has developed new products in the same energy conservation field and acquired both the Clean Boost products for diesel fuel treatment fuel additive and the Clean Boost Low Emissions for refined diesel products to be sold to diesel oil refiners and distributors. In addition, with the acquisition of Dyson Properties, Inc. on January 1, 2007 the Company now owns both its own manufacturing plant and distribution center. Also, the Company acquired the Synergyn brand of lubricants and now has four different product lines. Currently the Company does not have the financial resources to introduce and support these product lines and will need to attract additional funding.
It will be necessary, in order to expand our business, consummate acquisitions and refinance indebtedness, to raise additional capital. No assurance can be given at this time that such funds will be available, or if available will be sufficient in the near term or that future funds will be sufficient to meet growth. In the event of such developments, attaining financing under such conditions may not be possible, or even if such funds are available, the terms on which such capital may be available, may not be commercially feasible or advantageous.
Cash Flows
As of June 30, 2008, we had $25,082 in cash and cash equivalents, compared to $59,544 at March 31, 2008. The decrease was due primarily to investment in the increase in inventory and receivables in support of manufacturing and distribution activities in Durant, OK.
Sources of Liquidity
Since our inception, substantially all of our operations have been financed through the sale of our common stock and notes which were converted to common stock and capital contribution from a majority owner and debt offerings. Through June 30, 2008, we had received net proceeds of $10,423,931 from such sources. We have also used our revenues to date as a source of additional liquidity. As of June 30, 2008, we had cash and cash equivalents of $25,082.
Recent Financing
Short term loans to the Company during the three months ended June 30, 2008 were provided by executives of the Company.
Operating Capital and Capital Expenditure Requirements
We expect to continue to make expenditures, and capital expenditures where necessary, to support the expansion of our production and research and development programs and to expand our commercial operations. We anticipate using the proceeds from the sale of the notes and stock to finance these activities. Specifically, a substantial portion of the proceeds will be used to bolster the advertising and marketing campaigns for the existing and new products we are introducing into the marketplace.
We currently anticipate that our cash and cash equivalents and revenue generated by the sale of our products will be insufficient to fund our growing operations for the next 12 months.
If we are unable to generate a sufficient amount of revenue to finance our operations, research and development plans, we may seek to raise additional funds through public or private equity offerings, debt financings, capital lease transactions, corporate collaborations or other means. We may seek to raise additional capital due to favorable market conditions or strategic considerations even if we have sufficient funds for planned operations. The sale of additional equity or convertible debt securities could result in dilution to our stockholders. To the extent that we raise additional funds through collaborative arrangements, it may be necessary to relinquish some rights to our technologies or grant licenses on terms that are not favorable to us. We do not know whether additional funding will be available on acceptable terms, or at all. If we are not able to secure additional funding when needed, we may have to delay, reduce the scope of or eliminate one or more research and development programs or sales and marketing initiatives.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements as such term is defined in rules promulgated by the SEC.
Item 3. Qantitative and Qualitative Disclosures About Market Risk
Not applicable.
Item 4T. Controls and Procedures
(a) Evaluation of Disclosure Controls and Procedures
The Company carried out, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and the Company’s Chief Financial Officer, an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as amended). Based on their evaluation, the Company’s Chief Executive Officer and its Chief Financial Officer concluded that, as of June 30, 2008, the Company’s disclosure controls and procedures were not effective because of the material weakness identified as of such date discussed below. Notwithstanding, the existence of the material weakness described below, management has concluded that the condensed consolidated financial statements in this Form 10-Q fairly present, in all material respects, the Company’s financial position, results of operations and cash flows for the periods and dates presented.
(b) Report of Management on Internal Control Over Financial Reporting
The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. With the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management conducted an evaluation of the effectiveness of our internal control over financial reporting as of March 31, 2008, based on the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).
A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will occur and not be detected by management before the financial statements are published. In its assessment of the effectiveness in internal control over financial reporting as of June 30, 2008, the Company determined that there were control deficiencies that constituted a material weakness, as described below.
| | · | We have not assessed our control environment or entity-level controls. Due to time and staff constraints, we did not perform an assessment of our control environment or entity-level controls in accordance with COSO standards. |
| | · | We have not tested the operating effectiveness of our controls over financial reporting. During our review process we created and implemented new controls and procedures. However due to time and staff constraints, we did not test our controls over financial reporting in accordance with COSO standards. Since we have not completely tested our controls, we have determined that our controls over financial reporting were ineffective. |
Due to these material weaknesses, management concluded that our internal control over financial reporting was not effective as of June 30, 2008.
This report does not include an attestation report of the company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
(c) Remediation Plan for Material Weakness in Internal Control Over Financial Reporting
The Company is in the process of developing and implementing a remediation plan to address the material weaknesses as described above. The Company has taken the following actions to improve internal control over financial reporting:
| | · | During the remaining period through the year ending March 31, 2009, we intend to devote resources, to properly assess, and remedy if needed, our control environment and entity-level controls. |
| | · | During the remaining period through the year ending March 31, 2009, we will enhance our risk assessment, internal control design and documentation and develop a plan for testing in accordance with COSO standards. |
| | · | The Company requires that all significant or non-routine adjustments be thoroughly researched, analyzed, and documented by qualified personnel, and to provide for complete review of the resulting transaction by the CFO or CEO prior to recording the transactions. |
| | · | Develop and implement focused monitoring controls and other procedures to enhance control. |
(d) Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting that occurred during our last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There were no material pending legal proceedings at June 30, 2008 to which the Company or its subsidiaries is a party other than ordinary routine litigation incidental to their respective businesses.
Resolution of pending litigation: The lawsuit filed January 10, 2006 as Outdoor Life Network, LLC v. EMTA Corp was settled by mediation during the quarter in the amount of $140,000 due Outdoor Life Network. The Company had previously accrued $300,000 in this matter and as a result recognized a reduction in the liability and reduced expense by $160,000. The suit was filed in United States District Court for the District of Arizona as case 2:06-cv-00463 PHX JWS.
Item 1A. Risk Factors
Not applicable.
During the period from April 1, 2008 through June 30, 2008, the Registrant sold and issued an aggregate of 5,606,000 shares of common stock, with par value of $0.001, for an net purchase price of $971,930 (the “Offering”). The Offering was exempt from registration under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated thereunder, in as much as the securities were issued only to accredited investors without any form of general solicitation or general advertising. Out of the total gross proceeds of the Offering, the Registrant paid finders fees of $25,000, and $70 of expenses which represents 2.5% of the $996,930 sold pursuant to the Offering.
Except as otherwise disclosed herein, there were no underwriting discounts or other commissions paid in conjunction with the Offering.
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
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.
