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 September, 2008 the Company received an unconditional approval for the Clean Boost LE product from the TCEQ that qualifies the 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, 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 September, 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 and Stock Issuances
We account for stock-based awards to employees and non-employees using the accounting provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123R — Share-Based Payments which requires all companies to measure compensation cost for all share-based payments, including stock options, at fair value which the Company adopted in 2006. The fair value of equity securities is determined by management based upon recent public trades of the Company’s stock.
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 September 15, 2005, with early adoption encouraged.
We recorded stock-based compensation for the nine months ended December 31, 2008 of $264,366. The options vest at a rate of 1,655,000 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 a net loss of the nine months ended December 31, 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 $12,757,682 as of December 31, 2008, which expires through March 31, 2029. 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 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 nine months ended December 31, 2008 no retailers accounted for more than 10% of our sales volume.
Results of Operations
Nine Months Ended December 31, 2008 Compared to the Nine Months Ended December 31, 2007
Net Sales . Our net sales for the nine months ended December 31, 2008 were $3,040,728, an increase of $1,486,091, or 96%, from the nine months ended December 31, 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 nine months ended December 31, 2008 was $1,419,514, or 47% of net sales, compared to $687,486, or 44% of net sales, during the nine months ended December 31, 2007. The increase in the cost of sales was primarily due to both increases in raw material and manufacturing costs. The gross profit decreased by 3%, from 56% to 53%, as a result of the mix of products sold and the increase in petroleum based raw materials during the periods.
Research and Development Expenses . Our research and development costs were $0 for the nine months ended December 31, 2008, a decrease of $111,014, over the nine months ended December 31, 2007. All of the expenditures for the nine months ended December 31, 2007 were attributable to the development, testing and permitting of the Clean Boost LE product.
Selling, General and Administrative Expenses . Our selling, general and administrative expenses were $2,631,776 for the nine months ended December 31, 2008, an increase of $255,419, from the December 31, 2007 results. The increase was due primarily to the increased consulting costs, paid in both cash and stock and the amortization of stock option costs.
Depreciation and Amortization . Depreciation and amortization increased to $186,628 from $174,433 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 nine months ended December 31, 2008, the interest expense was $382,347 compared to $762,226 for the same period a year earlier. The interest expense was decreased by $227,128 for the nine months ended December 31, 2008 as a result of the change in cashless warrant liability while the prior nine month period included a charge of $200,286. The balance difference is an increase in the amortization of loan costs as interest expense.
Three Months Ended December 31, 2008 Compared to the Three Months Ended December 31, 2007
Net Sales. Our net sales for the three months ended December 31, 2008 were $674,657, an increase of $364,555, or 118%, from the three months ended December 31, 2007. The increase from the prior year was limited as a result of the Company’s cash flow not allowing the purchase of inventory to fill orders in hand and the focus on attracting industrial/commercial sales that would produce the greatest volumes. 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 December 31, 2008 was $368,255, or 55% of net sales, compared to $25,074 or 8% of net sales, during the three months ended December 31, 2007. The increase in the cost of sales was primarily due to mix of products sold during the periods and the variance in the costs of the raw materials.
Selling, General and Administrative Expenses . Our selling, general and administrative expenses were $699,356 for the three months ended December 31, 2008, an decrease of $293,279, from the December 31, 2007 results. The decrease was due primarily to the decreased consulting costs, paid in both cash and stock, and the amortization of stock option costs.
Depreciation and Amortization . Depreciation and amortization increased to $62,695 from $58,368 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 December 31, 2008, the interest expense was $156,482 compared to interest expense of $536,382 for the same period a year earlier. The fluctuation is due to changes in the valuation of the cashless warrants being reflected as interest change each period and offset by interest expense increases and amortization of debt issuance expenses.
Liquidity and Capital Resources
Since our inception we have incurred significant losses and, as of December 31, 2008, we have an accumulated deficit of $28,633,133. 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 XenTx Lubricants, Inc. (formerly 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 December 31, 2008, we had $69,560 in cash and cash equivalents, compared to $59,544 at March 31, 2008. The increase was due primarily to the increase in accounts payable 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 December 31, 2008, we had received net proceeds of $11,520,861 from such sources. We have also used our revenues to date as a source of additional liquidity. As of December 31, 2008, we had cash and cash equivalents of $69,560.
Recent Financing
Short term loans to the Company during the nine months ended December 31, 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. Our foreign sales collections have hurt our ability to expand sales due to the long order, manufacture, shipping and collection times involving normal trade terms.
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.
