UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): December 31, 2009
CARIBBEAN VILLA CATERING CORPORATION
(Exact name of registrant as specified in its charter)
Nevada | 333-151840 | 45-0557179 |
(State or Other Jurisdiction of Incorporation) | (Commission File Number) | (I.R.S. Employer Identification Number) |
22, Sevemaya Street
Togliatti, Samara Region
Russia
(Address of principal executive offices) (zip code)
7 8482 319999
(Registrant's telephone number, including area code)
Copies to:
Andrea Cataneo, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway
New York, New York 10006
Phone: (212) 930-9700
Fax: (212) 930-9725
38 Playa Laguna
Sosua, Dominican Republic
(Former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
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Item 1.01 Entry into a Material Definitive Agreement
On December 31, 2009, Caribbean Villa Catering Corporation , a Nevada corporation (“Caribbean ” or the “Company”), entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Caribbean Villa Acquisition Corp. , a Nevada corporation and wholly-owned subsidiary of the Company (the “Subsidiary”) and CJSC Globotek., a Russian corporation (“Globotek”).
Pursuant to the Merger Agreement, on December 31, 2009 (the “Closing Date”), the Subsidiary merged with and into Globotek resulting in Globotek becoming a wholly-owned subsidiary of the Company (the “Merger”). Pursuant to the Merger Agreement, the Company issued approximately 40,000,000 shares of its common stock (the “Acquisition Shares”) to the shareholders of Globotek, representing approximately 61.73% of the issued and outstanding common stock following the closing of the Merger. Pursuant to the Merger Agreement, the outstanding shares of common stock of Globotek were cancelled.
In connection with the Merger, in addition to the foregoing:
(i) Effective on the Closing Date, Robert Seeley, Virgilio Santana Ripoll and Stuart Wayne Jones resigned from all officer and director positions held with the Company and the following executive officers and directors of Globotek were appointed as executive officers and directors of the Company:
Name | Title |
Dmitry Viktorovich Lukin | Director and Chief Executive Officer |
Alexandr Nikolaevich Lapkin | Director and Chief Science Officer |
Sergey Alexandrovich Lapkin | Director and Chief Technology Officer - Chief Designer |
Axandr Viktorovich Lukin | Director and Chief Production Officer |
Sergey Viktorovich Lukin | Director and Chief Financial Officer |
Vladislav Feliksovich Tenenbaum | Director (Chairman of the Board) and President |
Alexandr Vladimirivich Auxtin | Director |
Elena Alexandrova Lapkina | Director |
(ii) The Company intends to change its name to Globotek Holdings, Inc. or a similar derivation, as soon as practicable.
Item 2.01 Completion of Acquisition or Disposition of Assets
Information in response to this Item 2.01 is keyed to the Item numbers of Form 10.
Item 1. Description of Business
Effective on the Closing Date, pursuant to the Merger Agreement, Globotek became a wholly-owned subsidiary of the Company. The acquisition of Globotek is treated as a reverse acquisition, and the business of Globotek became the business of the Company. At the time of the reverse acquisition, Caribbean was not engaged in any active business.
References to “Globotek”, “we”, “us”, “our” and similar words refer to the Company and its wholly-owned subsidiary, Globotek, unless the context otherwise requires, and prior to the effectiveness of the reverse acquisition, these terms refer to Globotek. References to “Caribbean” refer to the Company and its business prior to the reverse acquisition.
Summary
Globotek was incorporated as a closed joint-stock company on November 23, 2005 in accordance with the Civil Code of the Russian Federation and Federal Law of the Russian Federation The manner of the incorporation of the company, contents of its constituent documents, formation of the charter capital, placement and State registration of shares, structure and competence of the governing bodies in general conform to the requirements of the effective legislation.
Globotek and its affiliates represent a group of enterprises specializing in development and introduction of protecting energy and innovative technologies of processing of hydrocarbonic raw material, including passing oil gas, and the manufacture and realization of industrial block-modular mobile complexes on processing Associated Petroleum Gas (“APG”) The production process developed by Globotek can be used in operations in the Russian Federation as well as other parts of the world.
Globotek has designed and engineered a unique modular processing plant for the treatment of APG or Natural Casing Head Gas.
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APG continues to be one of the areas which to date has escaped complete treatment resulting in surplus gas being ‘flared’ – not only a waste of resources and income through loss of hydro carbon reserves but a practice which has an impact on the environment, public health and the economy. In Russia the utilisation of APG has always been treated as an expenditure of the producer the cost of which had to be borne by the producer. Until now the absence of a means of handling APG economically has forced companies to flare the APG. Traditionally APG handling involves the use of main gas pipes from the field via a booster station to the Gas producing Plant. In some cases it is necessary to construct additional pipe lines which is a slow and expensive business and of course when a field is finished these pipe lines are redundant. To construct a plant of this type can easily take thirty months – three times longer than the manufacture and installation of a Globotek structure.
Globotek has developed a solution for all oil producers. By installing modular mobile complexes at the production site where the APG is produced, producers can utilise the APG thereby increasing their profitability as well as reducing the impact on the environment. The process used is the separation of the gas mixture by the use of low temperature condensation resulting in production of Gasoline (Gas Stable Grade) Natural Combustible Gas and Propane/Butane in an automobile grade fuel. A secondary product from the process is Methanol. In April 2008 the modular complex of Globotek APG processing was approved by The Russian Federal Service for Ecological Technical and Atomic Supervsion.
In summary the Globotek system has several advantages:
a) | Deployment at the source of the APG |
b) | Easy redeployment when the field is worked out |
c) | Stand alone self sufficiency |
d) | Low relative costs |
e) | Savings on environmental fees |
f) | Low construction costs |
g) | Short time frame from application to construction (8 – 10 Months) |
BUSINESS STRUCTURE AND STRATEGY
Globotek is currently acting as a developer and producer of a unique system for the processing of APG. To date the sale of Globotek’s technology has been exclusively in Russia. The Russian Government has imposed new regulations on oil and gas companies which come in to force in January 2012. These regulations state that 95% of APG must be processed otherwise producing companies will lose their licenses. By passing this legislation a natural market has evolved for JSC Globotek and its product – estimates for new total investment in APG processing vary between USD 25 to USD 27 billion and currently Globotek enjoys a market with little competition.
Globotek intends to become a fully vertically integrated company with a production line from processing APG to the sale of the end products ranging from LPG to electricity. The business and its products are of great interest not only to oil and gas companies as well as refineries worldwide but also electricity generating and distributing companies and therefore the Management see great potential for expanding and growing Globotek by way of merger or acquisitions.
Globotek also buys and sell industrial equipment to some of it client base. They are distributors for some national electric companies, taking the order and processing the order and arranging shipments for the transaction. Globotek receives payment after the product is received from the third party. Globotek has resale agreement with these vendors.
Globotek’s executive offices are located at 22, Sevemaya Street, Togliatti, Samara region, Russia and its telephone number at such address is 7 8482 319999.
Item 1A. RISK FACTORS
There are numerous and varied risks, known and unknown, that may prevent us from achieving our goals. If any of these risks actually occur, our business, financial condition or results of operation may be materially adversely affected. In such case, the trading price of our common stock could decline and investors could lose all or part of their investment.
Risks Related to our Business
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Our independent registered auditors have expressed doubt about our ability to continue as a going concern.
Because we have not generated significant revenue since our inception, our auditors included in their report for the year ended December 31, 2008, an emphasis of matter paragraph in its independent auditors’ report dated December 31, 2009 stating that there is significant doubt about the Company’s ability to continue as a going concern. Our ability to continue as a going concern is subject to our ability to generate a profit and/or obtain necessary funding from outside sources, including by the sale of our securities, or obtaining loans from financial institutions, where possible. Our continued net operating losses and our auditors’ doubts increase the difficulty of our meeting such goals and our efforts to continue as a going concern may not prove successful.
Our business is difficult to evaluate because we have limited operating history and an uncertain future.
We have a limited operating history upon which you can evaluate our present business and future prospects. We face risks and uncertainties relating to our ability to implement our business plan successfully. Our operations are subject to all of the risks inherent in the establishment of a new business enterprise generally. The likelihood of our success must be considered in light of the problems, expenses, difficulties, complications and delays frequently encountered in connection with the formation of a new business, the commencement of operations and the competitive environment in which we operate. If we are unsuccessful in addressing these risks and uncertainties, our business, results of operations, financial condition and prospects will be materially harmed.
We will need significant additional capital, which we may be unable to obtain.
As of September 30, 2009, we had no cash available. We also expect to experience negative cash flow for the forseeable future as we fund our operating losses and capital expenditures. Accordingly we need significant additional capital to fund our operations. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. If we are unable to raise substantial capital, investors will lose their entire investment.
If our strategy is unsuccessful, we will not be profitable and our stockholders could lose their investment.
We do not believe there are track records for companies pursuing our strategy, and there is no guarantee that our strategy will be successful or profitable. If our strategy is unsuccessful, we will fail to meet our objectives and not realize the revenues or profits from the business we pursue, which would cause the value of the Company to decrease, thereby potentially causing in all likelihood, our stockholders to lose their investment.
We may be unable to successfully execute any of our identified business opportunities or other business opportunities that we determine to pursue.
We currently have a limited corporate infrastructure. In order to pursue business opportunities, we will need to continue to build our infrastructure and operational capabilities. Our ability to do any of these successfully could be affected by any one or more of the following factors:
· | our ability to raise substantial additional capital to fund the implementation of our business plan; |
· | our ability to execute our business strategy; |
· | the ability of our products and services to achieve acceptance in new markets; |
· | our ability to manage the expansion of our operations and any acquisitions we may make, which could result in increased costs, high employee turnover or damage to customer relationships; |
· | our ability to attract and retain qualified personnel; |
· | our ability to manage our third party relationships effectively; and |
· | our ability to accurately predict and respond to the rapid technological changes in our industry and the evolving demands of the markets we serve. |
Our failure to adequately address any one or more of the above factors could have a significant impact on our ability to implement our business plan and our ability to pursue other opportunities that arise.
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If we are unable to manage our intended growth, our prospects for future profitability will be adversely affected.
We intend to aggressively expand our marketing and sales program. Rapid expansion may strain our managerial, financial and other resources. If we are unable to manage our growth, our business, operating results and financial condition could be adversely affected. Our systems, procedures, controls and management resources also may not be adequate to support our future operations. We will need to continually improve our operational, financial and other internal systems to manage our growth effectively, and any failure to do so may lead to inefficiencies and redundancies, and result in reduced growth prospects and profitability.
We may become liable for damages for violations of environmental laws and regulations.
We are subject to various environmental laws and regulations enacted in the jurisdictions in which we operate which govern the manufacture, importation, handling and disposal of certain materials used in our operations. We are in the process of establishing procedures to address compliance with current environmental laws and regulations and we monitor our practices concerning the handling of environmentally hazardous materials. However, there can be no assurance that our procedures will prevent environmental damage occurring from spills of materials handled by the Company or that such damage has not already occurred. On occasion, substantial liabilities to third parties may be incurred. We may have the benefit of insurance maintained by the Company; however, the Company may become liable for damages against which it cannot adequately insure or against which it may elect not to insure because of high costs or other reasons.
We face competition and may not be able to successfully compete.
The Company currently does not have direct competitors in the capacity range we target. However, there can be no assurance that the Company will not have direct competition in the future that such competitors will not substantially increase the resources devoted to the development and marketing of products and services that compete with those of the Company or that new or existing competitors will not enter the market in which the Company is active.
We rely on key personnel and, if we are unable to retain or motivate key personnel or hire qualified personnel, we may not be able to grow effectively
Our success depends in large part upon the abilities and continued service of our executive officers and other key employees, particularly Dmitry Lukin, our Chief Executive Officer and Vladisav Tenenbaum, our President. There can be no assurance that we will be able to retain the services of such officers and employees. Our failure to retain the services of our key personnel could have a material adverse effect on the Company. In order to support our projected growth, we will be required to effectively recruit, hire, train and retain additional qualified management personnel. Our inability to attract and retain the necessary personnel could have a material adverse effect on the Company. We have no “key man” insurance on any of our key employees.
Risks Related to our Industry and Doing Business in Russia
Cyclical declines in oil and natural gas prices may result in reduced use of the Company’s services, affecting the Company’s business, financial condition and results of operation and the Company’s ability to meet the Company’s capital expenditure obligations and financial commitments .
The oil and natural gas exploration and drilling business is highly cyclical. Generally, as oil and natural gas prices decrease, exploration and drilling activity declines as marginally profitable projects become uneconomic and are either delayed or eliminated. Declines in the number of operating drilling rigs result in reduced use of and prices for the Company’s services. Accordingly, when oil and natural gas prices are relatively low, the Company’s revenues and income will suffer. Oil and natural gas prices depend on many factors beyond the Company’s control, including the following:
· | worldwide economic conditions; |
· | changes in global supply and demand for oil and natural gas; |
· | political conditions, including embargoes, affective oil and gas production; |
· | global petroleum inventories; and |
· | advances in exploration and production techniques. |
Depending on the market prices of oil and natural gas, companies exploring for oil and natural gas may cancel or curtail their drilling programs, thereby reducing demand for drilling. The Company’s contracts are generally long-term, and oil and natural gas companies tend to respond quickly to upward or downward changes in prices. Any reduction in the demand for drilling services may materially erode both pricing and utilization rates for the Company’s services and adversely affect the Company’s financial results. As a result, the Company may suffer losses, be unable to make necessary capital expenditures and be unable to meet the Company’s financial obligations.
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Currency fluctuations may adversely affect the Company’s operating results.
Globotek generates revenues and incurs expenses and liabilities in Roubles, the currency of the Russian Federation. However, they will report their financial results in the United States in U.S. Dollars. As a result, the Company’s financial results will be subject to the effects of exchange rate fluctuations between these currencies. From time to time, the government of Russia may take action to stimulate the Russian economy that will have the effect of reducing the value of Rouble. In addition, international currency markets may cause significant adjustments to occur in the value of the Rouble. Any such events that result in a devaluation of the Rouble versus the U.S. Dollar will have an adverse effect on the Company’s reported results. The Company has not entered into agreements or purchased instruments to hedge the Company’s exchange rate risks.
The Company’s business and growth will suffer if the Company is unable to hire and retain key personnel that are in high demand.
The Company’s future success depends on the Company’s ability to attract and retain highly skilled geologists, engineers, and technicians. Qualified individuals are in high demand in Toglatti, and there are insufficient experienced personnel to fill the demand. Therefore the Company may not be able to successfully attract or retain the personnel the Company needs to succeed.
Government regulation may hinder the Company’s ability to function efficiently
The Federation of Russia is supportive of its oil and gas exploration industry. Nevertheless, the government of Russia is highly bureaucratic, and the day-to-day operations of the Company’s business require frequent interaction with representatives of the Russian government institutions. The effort to obtain the registrations, licenses and permits necessary to carry out the Company’s business plans can be daunting.
Significant delays can result from the need to obtain governmental approval of the Company’s activities. These delays can have an adverse effect on the profitability of the Company’s operations. In addition, future legislation, particularly legislation aimed at protecting the environment of Russia and legislation aimed at protecting the workers of Russia may increase the cost of the Company’s operations, which would adversely affect the Company’s profitability.
The Company may have difficulty establishing adequate management and financial controls in Russia.
The Federation of Russia has not begun to adopt the management and financial reporting concepts and practices with which investors in the United States are familiar. The Company may have difficulty in hiring and retaining employees in Russia who have the experience necessary to implement the kind of management and financial controls that are expected of a United States public company. If the Company cannot establish such controls, the Company may experience difficulty in collecting financial data and preparing financial statements, books of account and corporate records and instituting business practices that meet U.S. standards.
Capital outflow policies in Russia may hamper the Company’s ability to pay dividends to shareholders in the United States.
The Federation of Russia has adopted currency and capital transfer regulations. These regulations require that Globotek comply with complex regulations for the movement of capital. The current regulations require notification to the Russian Government of all significant currency transactions, impose registration and licensing requirements on entities involved in currency exchange, and limit the ability of entities operating in Russia to expatriate funds. Moreover, Russia changes its currency regulations frequently. The Company may be unable to obtain all of the required conversion approvals for the Company’s operations, and Russian regulatory authorities may impose greater restrictions on the convertibility of the Rouble in the future. Because all of the Company’s current revenues are in Roubles, any inability to obtain the requisite approvals or any future restrictions on currency exchanges will limit the Company’s ability to fund business activities outside Russia. Moreover, although the Company do not expect that the company will pay dividends in the foreseeable future, the Company’s ability to pay dividends to the Company’s shareholders in the future could be hampered by Russian currency regulations.
The operations of Globotek will require significant expenditures of capital that may not be recovered.
The Company requires significant expenditures of capital in order to locate and obtain APG producing properties. In conducting exploration, exploitation and development activities from a particular well, the presence of unanticipated pressure or irregularities in formations, miscalculations or accidents may cause the Company’s exploration, exploitation, development and production activities to be unsuccessful, potentially resulting in abandoning the well. This could result in a total loss of the Company’s investment. In addition, the cost and loss revenues, completing and operating APG plants is difficult to predict.
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Oil and gas price fluctuations in the market may adversely affect the results of the Company’s operations.
The results of the Company’s APG exploration and production activities will be highly dependent upon the worldwide prices received for the Company’s APG production. Substantially all of the Company’s sales of APG will be made in the spot market, or pursuant to contracts based on spot market prices, and not pursuant to long-term, fixed-price contracts. Accordingly, the prices received for the Company’s APG production will be dependent upon numerous factors beyond the Company’s control. These factors include the level of consumer product demand, governmental regulations and taxes, the price and availability of alternative fuels, the level of foreign imports of oil and natural gas and the overall economic environment. Significant declines in world wide prices for oil could have a material adverse effect on the Company’s financial condition, results of operations and quantities of reserves recoverable on an economic basis.
Reserve Estimates Depend On Many Assumptions That May Turn Out To Be Inaccurate.
Any material inaccuracies in the Company’s reserve estimates or underlying assumptions could materially affect the quantities and present values of the Company’s reserves. The process of estimating oil reserves is complex. It requires interpretations of available technical data and various assumptions, including assumptions relating to economic factors. Any significant inaccuracies in these interpretations or assumptions could materially affect the estimated quantities and present value of reserves shown in this Report. In order to prepare these estimates, the Company must project production rates and timing of development expenditures. The Company must also analyze available geological, geophysical, production and engineering data, and the extent, quality and reliability of this data can vary. The process also requires economic assumptions relating to matters such as oil and natural gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. Therefore, estimates of oil and APG reserves are inherently imprecise.
Actual future production, APG and natural gas prices, revenues, taxes, development expenditures, operating expenses and quantities of recoverable APG and natural gas reserves most likely will vary from the Company’s estimates. A significant variance could materially affect the estimated quantities and pre-tax present value of reserves shown in this report. In addition, the Company may adjust estimates of proved reserves to reflect production history, results of exploration and development, prevailing oil and natural gas prices and other factors, many of which are beyond the Company’s control.
Risks Related to our Organization and Common Stock
As a result of the Merger, Globotek became a subsidiary of ours and since we are subject to the reporting requirements of federal securities laws, this can be expensive and may divert resources from other projects, thus impairing its ability grow.
As a result of the Merger, Globotek became a subsidiary of ours and, accordingly, is subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other federal securities laws, including compliance with the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”). The costs of preparing and filing annual and quarterly reports, proxy statements and other information with the SEC (including reporting of the Merger) and furnishing audited reports to stockholders will cause our expenses to be higher than they would have been if Globotek had remained privately held and did not consummate the Merger. In addition, we will incur substantial expenses in connection with the preparation of the registration statement and related documents required under the terms of the Private Placement that require us to register the shares of common stock included in the units and the Warrant Shares.
It may be time consuming, difficult and costly for us to develop and implement the internal controls and reporting procedures required by the Sarbanes-Oxley Act. We will need to hire additional financial reporting, internal controls and other finance personnel in order to develop and implement appropriate internal controls and reporting procedures. If we are unable to comply with the internal controls requirements of the Sarbanes-Oxley Act, then we may not be able to obtain the independent accountant certifications required by such act, which may preclude us from keeping our filings with the SEC current and interfere with the ability of investors to trade our securities and for our shares to continue to be quoted on the OTC Bulletin Board or to list on any national securities exchange.
If we fail to establish and maintain an effective system of internal control, we may not be able to report our financial results accurately or to prevent fraud. Any inability to report and file our financial results accurately and timely could harm our reputation and adversely impact the trading price of our common stock.
Effective internal control is necessary for us to provide reliable financial reports and prevent fraud. If we cannot provide reliable financial reports or prevent fraud, we may not be able to manage our business as effectively as we would if an effective control environment existed, and our business and reputation with investors may be harmed. As a result, our small size and any current internal control deficiencies may adversely affect our financial condition, results of operation and access to capital. We have not performed an in-depth analysis to determine if historical un-discovered failures of internal controls exist, and may in the future discover areas of our internal control that need improvement.
Public company compliance may make it more difficult to attract and retain officers and directors.
The Sarbanes-Oxley Act and rules implemented by the SEC have required changes in corporate governance practices of public companies. As a public company, we expect these rules and regulations to increase our compliance costs in 2009 and beyond and to make certain activities more time consuming and costly. As a public company, we also expect that these rules and regulations may make it more difficult and expensive for us to obtain director and officer liability insurance and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. As a result, it may be more difficult for us to attract and retain qualified persons to serve on our board of directors or as executive officers, and to maintain insurance at reasonable rates, or at all.
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Because we became public by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
There may be risks associated with us becoming public through a “reverse merger.” Securities analysts of major brokerage firms may not provide coverage of us since there is no incentive to brokerage firms to recommend the purchase of our common stock. No assurance can be given that brokerage firms will, in the future, want to conduct any offerings on behalf of our post-Merger company.
There is a limited trading market for the Common Stock.
To date there has been a very limited trading market for the Common Stock, and we cannot give an assurance that an active trading market will develop. The lack of an active, or any, trading market will impair a stockholder’s ability to sell his shares at the time he wishes to sell them or at a price that he considers reasonable. An inactive market will also impair our ability to raise capital by selling shares of capital stock and will impair our ability to acquire other companies or assets by using common stock as consideration.
The market price of our Common Stock is likely to be highly volatile and subject to wide fluctuations.
Dramatic fluctuations in the price of our Common Stock may make it difficult to sell our Common Stock. The market price of our Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
· | dilution caused by our issuance of additional shares of common stock and other forms of equity securities, in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies; |
· | variations in our quarterly operating results; |
· | announcements that our revenue or income are below or that costs or losses are greater than analysts’ expectations; |
· | the general economic conditions; |
· | sales of large blocks of our common stock; |
· | announcements by us or our competitors of significant contracts, acquisitions, strategic partnerships, joint ventures or capital commitments; and |
· | fluctuations in stock market prices and volumes; |
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our Common Stock and/or our results of operations and financial condition.
The ownership of our Common Stock is highly concentrated in our officers.
Based on the 64,800,000 shares of Common Stock outstanding as of December 31, 2009, our directors and executive officers beneficially own 61.73% of our outstanding Common Stock. As a result, our directors and executive officers have the ability to exercise control over our business by, among other items, their voting power with respect to the election of directors and all other matters requiring action by stockholders. Such concentration of share ownership may have the effect of discouraging, delaying or preventing, among other items, a change in control of the Company.
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The Common Stock will be subject to the “penny stock” rules of the SEC, which may make it more difficult for stockholders to sell the Common Stock.
The Securities and Exchange Commission has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
· | that a broker or dealer approve a person's account for transactions in penny stocks; and |
· | the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased. |
In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
· | obtain financial information and investment experience objectives of the person; and |
· | make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks. |
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the Commission relating to the penny stock market, which, in highlight form:
· | sets forth the basis on which the broker or dealer made the suitability determination; and |
· | that the broker or dealer received a signed, written agreement from the investor prior to the transaction. |
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
The regulations applicable to penny stocks may severely affect the market liquidity for the Common Stock and could limit an investor’s ability to sell the Common Stock in the secondary market.
As an issuer of “penny stock,” the protection provided by the federal securities laws relating to forward looking statements does not apply to the Company.
Although federal securities laws provide a safe harbor for forward-looking statements made by a public company that files reports under the federal securities laws, this safe harbor is not available to issuers of penny stocks. As a result, the Company will not have the benefit of this safe harbor protection in the event of any legal action based upon a claim that the material provided by the Company contained a material misstatement of fact or was misleading in any material respect because of the Company’s failure to include any statements necessary to make the statements not misleading. Such an action could hurt our financial condition.
The Company has not paid dividends in the past and does not expect to pay dividends for the foreseeable future. Any return on investment may be limited to the value of the Common Stock.
No cash dividends have been paid on the Common Stock. We expect that any income received from operations will be devoted to our future operations and growth. The Company does not expect to pay cash dividends in the near future. Payment of dividends would depend upon our profitability at the time, cash available for those dividends, and other factors as the Company’s board of directors may consider relevant. If the Company does not pay dividends, the Common Stock may be less valuable because a return on an investor’s investment will only occur if the Company’s stock price appreciates.
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Item 2. Financial Information
FORWARD-LOOKING STATEMENTS
Statements in this current report on Form 8-K may be “forward-looking statements.” Forward-looking statements include, but are not limited to, statements that express our intentions, beliefs, expectations, strategies, predictions or any other statements relating to our future activities or other future events or conditions. These statements are based on current expectations, estimates and projections about our business based, in part, on assumptions made by management. These statements are not guarantees of future performance and involve risks, uncertainties and assumptions that are difficult to predict. Therefore, actual outcomes and results may, and are likely to, differ materially from what is expressed or forecasted in the forward-looking statements due to numerous factors, including those described above and those risks discussed from time to time in this prospectus, including the risks described under “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this current report and in other documents which we file with the Securities and Exchange Commission. In addition, such statements could be affected by risks and uncertainties related to our ability to raise any financing which we may require for our operations, competition, government regulations and requirements, pricing and development difficulties, our ability to make acquisitions and successfully integrate those acquisitions with our business, as well as general industry and market conditions and growth rates, and general economic conditions. Any forward-looking statements speak only as of the date on which they are made, and we do not undertake any obligation to update any forward-looking statement to reflect events or circumstances after the date of this current report.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. In addition, from time to time, we or our representatives may make forward-looking statements orally or in writing. We base these forward-looking statements on our expectations and projections about future events, which we derive from the information currently available to us. Such forward-looking statements relate to future events or our future performance. You can identify forward-looking statements because they are not historical in nature. In particular, those statements that use terminology such as “may,” “should,” “expects,” “anticipates,” “contemplates,” “estimates,” “believes,” “intends,” “plans,” “projected,” “predicts,” “potential” or “continue” or the negative of these or similar terms are forward-looking statements. In evaluating these forward-looking statements, you should consider various factors, including those described in this report. These and other factors may cause our actual results to differ materially from any forward-looking statements.
The following is a listing of important risks, uncertainties and contingencies that could cause our actual results, performances or achievements to be materially different from the forward-looking statements included in this report.
· | Our ability to finance our operations on acceptable terms; |
· | Our ability to retain members of our management team and our employees; |
· | The success of our research and development activities, the development of viable commercial products, and the speed with which product launches and sales contracts may be achieved; |
· | Our ability to develop and expand our sales, marketing and distribution capabilities; |
· | Our ability to adapt to or upgrade our technologies and products as the markets in which we compete evolve; |
· | Our ability to offer pricing for products which is acceptable to customers; and |
· | Competition that exists presently or may arise in the future. |
Except to the extent required by applicable laws or rules, we undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.
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Globotek was incorporated as a closed joint-stock company on November 23, 2005 in accordance with the Civil Code of the Russian Federation and Federal Law of the Russian Federation The manner of the incorporation of the Company, contents of its constituent documents, formation of the charter capital, placement and State registration of shares, structure and competence of the governing bodies in general conform to the requirements of the effective legislation.
Globotek and its affiliates represent a group of enterprises specializing in development and introduction of protecting energy and innovative technologies of processing of hydrocarbonic raw material. The Company’s principal activity is the development of the newest technologies for the processing of hydrocarbonic raw material, including passing oil gas, manufacture and realization industrial block-modular mobile complexes on processing oil passing gas (OPG). The production process developed by the Company can be used in operations in the Russian Federation as well as other parts of the world.
Globotek and its affiliates represent a group of entities specializing in the development of technology designed to process hydrocarbonic raw material. Globotek has designed and engineered a unique modular processing plant for the treatment of Associated Petroleum Gas (“APG”) or Natural Casing Head Gas.
Globotek plans to become a fully vertically integrated company with a production line from processing APG to the sale of the end products ranging from LPG to electricity. The business and its products are of great interest not only to oil and gas companies as well as refineries worldwide but also electricity generating and distributing companies and therefore the Management see great potential for expanding and growing the Company by way of merger or acquisitions.
Results of Operations
The Company’s revenue for the nine month ended September 30, 2009 were $1,325,593 as compared to $6,729,796 for the nine months ended September 30, 2008. The decreases in revenues were due to the temporary shutdown of the Globotek NV subsidiary. This facility is located in Siberia and an additional investment is needed to secure utilities to be continual in presence. The company is in the process of moving equipment from this region to a place in the Samaria Region which is more stable and profitable for its shareholders.
The Company’s income from operating activities for the nine months of 2009 were $269,275 as compared to a $4,459,453 gain for the first nine months of 2008, these losses was due to the decrease in revenues in proportion to expenses in the comparative period. The year 2009 had no LPG income for the period, whereas in 2008 it was being produced.
Distribution expense for the nine month ended September 30, 2009 were non existent compared to 2008 due to the LPG facility being temporarily shut down. Administrative expenses were lower in 2009 due to the less staff and cost in relation to a slowdown in production. Other operation expense was also lower in 2009 due to staffing at the requirements and maintence of the facilities that would be need if there were in full operations.
VAT expenses for the nine month period ended September 30, 2009 was $202,209 as compared to $1,026,579 for the same period in 2008. This decrease was primarily due to the decrease in LPG gas production done by Globotek NV. However this will continue to be fluctuated by the revenues of the company which is directly related to gross Revenue.
Other Income for the nine month period ended September 30, 2009 was $16,072 as compared to $59,092 for the same period in 2008. This decrease was no penalties from late payments or contractors in 2009. Finance Income for 2009 increase from 2008 was due to penalties paid in 2009. Finance expense for the nine month period ended September 30, 2009 was $154,036 as compared to $75,953 for the nine month ended September 30, 2008 were due to increase borrowing from D Lukin and Rusvest-Finance.
Income Tax Cap for the nine month period ended September 30, 2009 was $194 as compared to $670,896 for the same period in 2008 due to change in deferred taxes.
The Company’s net loss for the nine months ended September 30, 2009 was $593,130 as compared to a gain of $1,896,131 for nine months ended September 30, 2008 was lower revenues coupled with no operation from subsidiary Globotek NV resulted in the change.
Off-Balance Sheet Arrangements
We do not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.
Liquidity and Capital Resources
Historically, we have financed our operations and capital expenditures primarily with cash on-hand and the proceeds from sales of our common stock. The primary source of the Company’s capital resources has been from lines of credit with. The Company’s aggregate debt service obligations at September 30, 2009 are shown in the following table:
Cash Flow
The Company’s cash flow for the nine months ended September 30, 2009 and 2008 is summarized.
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The cash flow of Globotek at this time is not adequate to satisfy its working capital requirements and its debt service. Globotek will be able to utilize Loans from Affiliates for a entry portion of its development plan. However the capital spending required by Globotek to remain competitive and operate efficiently coupled with the funds needed by Globotek to continue existence will likely result in an increase in the Company’s debt.
In the past few months, concerns about the capitalization of a number of major banks has led to a significant worldwide reduction in the availability of credit. One result of this situation has been a sharp reduction in the price of oil on the world market. If the current global financial crisis were to continue for an extended period, it could have a significant unfavorable impact on the Company. Specifically, if the clients of Globotek are unable to raise capital, that could result in a reduction in our client’s drilling programs and their need for Globotek’s services. At the same time, the reduction in world oil prices, if it persists, is likely to lead to a reduction in drilling activity, which could also reduce demand for Globotek’s services. We are unable to determine at this time what the effect of the current banking crisis will be on our operations.
The Company will continue its efforts to obtain the funds needed to meet the future capital requirements of Globotek will continue to evaluate ways to maximize the value of its assets, including possibly retiring or refinancing its existing debt. Although discussions have taken place, no commitment has been received at this time.
Off-Balance Sheet Arrangement
The Company and its subsidiaries do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on their financial condition or results of operations.
Item 3. Properties
Globotek’s executive offices are located at 22, Sevemaya Street, Togliatti, Samara region, Russia and its telephone number at such address is 7 8482 319999.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information, as of December 31, 2009 with respect to the beneficial ownership of the outstanding Common Stock by (i) any holder of more than five (5%) percent; (ii) each of the Company’s executive officers and directors; and (iii) the Company’s directors and executive officers as a group. Except as otherwise indicated, each of the stockholders listed below has sole voting and investment power over the shares beneficially owned.
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Name of Beneficial Owner (1) | Common Stock Beneficially Owned | Percentage of Common Stock (2) | ||||||
Directors and Officers: | ||||||||
Dmitry Viktorovich Lukin | 5,600,000 | 8.64% | ||||||
Alexander Nikolaevich Lapkin | 5,600,000 | 8.64% | ||||||
Sergey Alexandrovich Lapkin | 5,600,000 | 8.64% | ||||||
Alexander Viktorovich Lukin | 5,600,000 | 8.64% | ||||||
Alexander Vladimirovich Akustin | 800,000 | 1.23% | ||||||
Vladislav Feliksovich Tenenbaum | 5,600,000 | 8.64% | ||||||
Sergey Viktorovich Lukin | 5,600,000 | 8.64% | ||||||
Elena Alexandrovna Lapkina | 5,600,000 | 8.64% | ||||||
All officers and directors as a group (8 persons) | 40,000,000 | 61.73 % | ||||||
Beneficial owners of more than 5%: | ||||||||
Stuart Wayne Jones 38 Playa Laguna Sosus, Dominican Republic | 7,200,000 | 11.11% | ||||||
Virgilio Santana Ripoll 38 Playa Laguna Sosua, Dominican Republic | 3,600,000 | 5.56% | ||||||
Robert Seeley 38 Playa Laguna Sosua, Dominican Republic | 7,200,000 | 11.11% |
(1) | Except as otherwise indicated, the address of each beneficial owner is 22, Sevemaya Street, Togliatti, Samara region, Russia. |
(2) | Applicable percentage ownership is based on 64,800,000 shares of Common Stock outstanding as of December 31, 2009 together with securities exercisable or convertible into shares of Common Stock within 60 days of December 31, 2009 for each stockholder. Beneficial ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. |
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Item 5. Directors and Executive Officers
Below are the names and certain information regarding the Company’s executive officers and directors following the acquisition of Globotek.
Name | Age | Position |
Vladisav Feliksovich Tenenbaum | 45 | President and Chairman |
Dmitry Viktorovich Lukin | 37 | Chief Executive Officer and Director |
Alexandr Nikolaevich Lapkin | 54 | Chief Science Officer and Director |
Sergey Alexandrovich Lapkin | 30 | Chief Technology Officer and Director |
Alexander Viktorovich Lukin | 35 | Chief Production Officer and Director |
Sergey Viktorovich Lukin | 33 | Chief Financial Officer and Director |
Alexandr Vladimirivich Axutin | 35 | Director |
Elena Alexandrovna Lapkina | 28 | Director |
Directors serve until the next annual meeting of stockholders or until their successors are elected and qualified. Officers serve at the discretion of the board of directors.
Vladisav Feliksovich Tenenbaum – President and Chairman
Vladisav Tenenbaum has served Director for Foreign Affairs, Director for Strategic Planning and Chairman of the Board for Globotek since 2006. He has also served as Chairman of the Board of Directors for International Affairs for JSC Neftechim and as a Director for Sindikat Oil.
Dmitry Viktorovich Lukin – Chief Executive Officer and Director
Dmitry Lukin has served as Chief Executive Officer of Globotek since 2005. Prior to joining Globotek, he served as a Director of Samit LLC from 2001 through 2007. He also served as a Director of CJSC Biotech from 1998 through 2001.
Alexandr Nikolaevich Lapkin – Chief Science Officer and Director
Alexandr Lapkin has served as Principal Engineer of Globotek since 2005. Prior to joining Globotek, he served as a Senior Expert at OJSC Kuybyshevazot from 1978 through 1985 and as a Director and Principal Engineer at OJSC Tolvattiazot.
Sergey Alexandrovich Lapkin – Chief Technology Officer and Director
Sergey Lapkin has served as Technical Director – Principal Engineer of Globotek since 2006. Prior to joining Globotek, he served as Principal Engineer of CJSC SPA Ecologicheskiyesistemy from 2003 through 2005. He also previously served as Principal Engineer of SPA Bara from 2002 through 2003.
Alexander Viktorovich Lukin – Chief Production Officer and Director
Alexander Lukin has served as Financial Director of Globotek since 2005. Prior to joining Globotek, he served as Deputy Director of Samit LLC from 2001 through 2007. He also served as a Director of CJSC Biotech from 1998 through 2001 and as the head of the commercial department of CJSC Polad from 1997 through 2000.
Sergey Viktorovich Lukin - Chief Financial Officer and Director
Sergey Vikrovich served as the Financial Director of Globotek since 2005. Prior to joining Globotek, he served as Director of Samit LLC from 2001 through 2007. He also served as a Director of CJSC Biotech from 1998 through 2001 and as the head of the marketing and sales department of CJSC Polad from 1997 through 2000.
Alexandr Vladimirivich Axutin - Director
Alexandr Axutin has served as Director of Corporate Management and Relations Director of Globotek since July 2009. Prior to joining Globotek, he served as President of Resource Management at an autoparts production company from December 2006 through June 2009. He also previously served as a General Director of an autoparts production company from June 2004 through December 2006.
Elena Alexandrovna Lapkina
Elena Lapkina has served as the head of the project department of Globotek since January 2006. Prior to joining Globotek, she served as a design engineer at CJSC SPA Ecologicheskive.
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Item 6. Executive Compensation
No executive officer of the Company received compensation in excess of $100,000 per year for each of the last three fiscal years.
Employment Agreements
We currently have no formal employment or consulting agreements with our executive officers.
Director Compensation
No director of the Company received any compensation for services as director for the year ended December 31, 2008.
Item 7. Certain Relationships and Related Transactions, and Director Independence
Certain Relationships and Related Transactions
N/A
Director Independence
None of our directors is independent as that term is defined under the Nasdaq Marketplace Rules.
Item 8. Legal Proceedings
Golobtek is a party to the following proceedings in the Russian Federation:
No. A9595/2009 initiated based on the action brought by State Establishment – Administration of the Pension Fund of the Russian Federation in cities of Syzran and Oktiabrsk, Syzran and Shigonskiy provinces of the Samara region against CJSC “Globotek” to recover from it mandatory payments and sanctions;
No. 24592/2009 initiated based on the action brought by Lapkin Alexander Nikolaevich against CJSC “Globotek” and CJSC “VAZINTERSERVICE” to recognize surety agreement № 2956 dated 28 November 2006 to be invalid;
No. A55-15744/2009 initiated based on the action brought by the Ministry of Industry, Energy, and Technologies of the Samara region against CJSC “Globotek”:
No. A55-23415/2009 initiated based on the writ brought by creditor CJSC “VAZINTERSERVICE” to initiate bankruptcy proceedings against CJSC “Globotek”.
Item 9. Market Price of and Dividends on Common Equity and Related Stockholder Matters
The Common Stock is eligible for quotation on the Over-the-Counter Bulletin Board under the symbol “CBBV.OB”. As of the date of the filing of this report, there has been limited trading in the Common Stock.
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For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions. All pershare amounts below have been adjusted to reflect the 20:1 forward split effected be the Company on June 16, 2009.
Year Ended December 31, 2010
High | Low | |||||||
First Quarter ended March 31, 2010 (through 1/6/10) | $ | 0.53 | $ | 0.45 |
Year Ended December 31, 2009
High | Low | |||||||
Second Quarter ended June 30, 2009 | $ | 0.175 | $ | 0.05 | ||||
Third Quarter ended September 30, 2009 | $ | 0.375 | $ | 0.20 | ||||
Fourth Quarter ended December 31, 2009 | $ | 0.53 | $ | 0.26 |
Dividends
The Company has never declared or paid any cash dividends on its Common Stock. The Company currently intends to retain future earnings, if any, to finance the expansion of its business. As a result, the Company does not anticipate paying any cash dividends in the foreseeable future.
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Securities Authorized for Issuance Under Equity Compensation Plans
The Company has not adopted any equity compensation plan as of December 31, 2009.
Item 10. Recent Sales of Unregistered Securities
None.
Item 11 Description of Securities
The Company’s authorized capital stock consists of 125,000,000 shares of Common Stock at a par value of $0.001 per share. As of December 31, 2009, there were 64,800,000 shares of common shares of the Company’s Common Stock issued and outstanding.
The holders of our common stock (i) have equal ratable rights to dividends from funds legally available therefore, when, as and if declared by our Board of Directors; (ii) are entitled to share in all of our assets available for distribution to holders of common stock upon liquidation, dissolution or winding up of our affairs; (iii) do not have preemptive, subscription or conversion rights and there are no redemption or sinking fund provisions or rights; and (iv) are entitled to one non-cumulative vote per share
on all matters on which stockholders may vote.
NON-CUMULATIVE VOTING
Holders of shares of our common stock do not have cumulative voting rights,
which means that the holders of more than 50% of the outstanding shares, voting for the election of directors, can elect all of the directors to be elected, if they so choose, and, in such event, the holders of the remaining shares will not be able to elect any of our directors.
Item 12. Indemnification of Directors and Officers
Caribbean ’s By-Laws allow for the indemnification of the officers and directors in regard to their carrying out the duties of their offices. The board of directors will make determination regarding the indemnification of the director, officer or employee as is proper under the circumstances if he/she has met the applicable standard of conduct set forth in the Nevada General Corporation Law.
As to indemnification for liabilities arising under the Securities Act of 1933for directors, officers or persons controlling Caribbean Villa Catering, Inc., we have been informed that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and unenforceable.
Item 13. Financial Statements and Supplementary Data
.
The financial statements of CJSC Globotek begin on Page F-1 to this Form 8-K.
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Item 14. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 5.01 Changes in Control of Registrant.
See Item 2.01.
Item 5.02 Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers.
See Item 1.01.
Item 5.06 Change in Shell Company Status.
See Item 1.01.
Item 9.01 Financial Statements and Exhibits.
(a) Financial statements of CJSC Globotek. See Page F-1.
(b) Pro forma financial information. See Exhibit 99.2.
(c) Shell Company Transactions. See (a) and (b) of this Item 9.01.
(d) Exhibits
Exhibit Number | Description | |
99.1 | Agreement and Plan of Merger, dated December 22, 2009, among Caribbean Villa Catering, Inc. CJSC Globotek and Caribbean Villa Acquisition Corp(1). | |
99.2 | Proforma financial information* |
(1) | Incorporated by reference to the Current Report on Form 8-K filed with the SEC on December 31, 2009 |
* | To be filed by amendment |
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SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
CARIBBEAN VILLA CATERING CORPORATION | |||
Dated: January 7, 2010 | By: | /s/ Dmitry Viktrovich Lukin | |
Name: Dmitry Viktrovich Lukin Title: Chief Executive Officer | |||
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JSC GLOBOTEK
COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 2008 AND 2007
WITH AUDIT REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
F-1
JSC GLOBOTEK
Index to Combined Financial Statements
Page | ||
Report of Independent Registered Public Accounting Firm | F-3 | |
Combined Balance Sheets As Of December 31, 2008 and 2007 | F-4 | |
Combined Statement Of Operations For The Years Ended December 31, 2008 and 2007 | F-5 | |
Combined Statement Of Deficiency In Stockholders’ Equity For The Two Years Ended December 31, 2008 | F-6 | |
Combined Statement Of Cash Flows For The Year Ended December 31, 2008 and 2007 | F-7 | |
Notes To Combined Financial Statements | F-8 ~F-20 |
F-2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors
JSC Globotek
Tolyatti, Russia
We have audited the accompanying combined balance sheets of JSC Globotek and affiliates (the “Company”) as of December 31, 2008 and 2007 and the related combined statements of operations, deficiency in stockholders’ equity, and cash flows for each of the two years in the period ended December 31, 2008. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these combined financial statements based upon our audits.
We have conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free of material misstatements. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the combined financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall combined financial statement presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2008 and 2007, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2008, in conformity with accounting principles generally accepted in the United States of America.
The accompanying combined financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in note 14 to the combined financial statements, at December 31, 2008, the Company had a working capital deficiency of $2,410,613 and deficiency in stockholders’ equity of $632,925. This raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in note 14. The combined financial statements do not include any adjustments that might result from the outcome of this uncertainty.
By: | /s/ RBSM LLP | ||
0;
New York, New York
December 31, 2009
F-3
JSC GLOBOTEK
COMBINED BALANCE SHEETS
December 31, 2008 and 2007
2008 | 2007 | |||||||
Assets | ||||||||
Current Assets: | ||||||||
Cash and cash equivalents | $ | 2,015 | $ | 9,273 | ||||
Trade receivable, net of allowance for doubtful accounts $107,170 and $0 as of December 31, 2008 and 2007, respectively | 49,765 | 599 | ||||||
Inventories | 660,397 | 25,490 | ||||||
Advances to suppliers | 193,024 | 1,194,380 | ||||||
VAT recoverable | 488,321 | 88,037 | ||||||
Other current assets | 360,690 | 575,416 | ||||||
Total Current Assets | 1,754,213 | 1,893,196 | ||||||
Property and Equipment, net of accumulated depreciation of $396,153 and $6,337, respectively | 3,800,360 | 186,906 | ||||||
Other Assets: | ||||||||
Intangible Assets | 142,669 | 163 | ||||||
Deferred income tax assets | - | 670,798 | ||||||
Total Other Assets | 142,669 | 670,961 | ||||||
Total Assets | $ | 5,697,242 | $ | 2,751,063 | ||||
(Deficiency in) Stockholders' equity and Liabilities | ||||||||
Current Liabilities: | ||||||||
Advances received from customers | $ | 506,486 | $ | 1,554,157 | ||||
Trade payable | 1,540,117 | 2,056,928 | ||||||
Notes payable – current – related parties | 1,075,127 | 1,658,419 | ||||||
Capital lease payable – current | 910,177 | 64,550 | ||||||
Other current liabilities | 132,920 | 47,751 | ||||||
Total Current Liabilities | 4,164,826 | 5,381,804 | ||||||
Long-term Liabilities: | ||||||||
Notes payable – long term – related parties | 1,069,366 | - | ||||||
Capital lease payable – long term | 1,095,975 | 122,323 | ||||||
Total Long-term Liabilities | 2,165,341 | 122,323 | ||||||
(Deficiency in) Stockholders' Equity: | ||||||||
Common Stock, no par value; 100 shares authorized; 100 shares issued and outstanding at December 31, 2008 and 2007 | 100 | 100 | ||||||
Additional paid-in capital | 1,059 | 632 | ||||||
Accumulated deficit | (1,285,587 | ) | (2,609,827 | ) | ||||
Accumulated other comprehensive income / loss | 651,503 | (143,968 | ) | |||||
Total (Deficiency in) Stockholders' Equity | (632,925 | ) | (2,753,065 | ) | ||||
Total (Deficiency in) Stockholders’ Equity and Liabilities | $ | 5,697,242 | $ | 2,751,063 |
The accompanying notes are an integral part of these combined financial statements
F-4
JSC GLOBOTEK
COMBINED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31, 2008 AND 2007
2008 | 2007 | |||||||
Revenues: | ||||||||
Sale of productive output | $ | 4,360,076 | $ | 306,764 | ||||
Sale of goods | 2,340,345 | 3,006,893 | ||||||
Other revenue | 74,098 | 41,574 | ||||||
Total Revenue | 6,774,519 | 3,355,232 | ||||||
Cost of Sales | 2,448,949 | 5,749,073 | ||||||
Gross Profit (Loss) | 4,325,570 | (2,393,841 | ) | |||||
Operating Expenses: | ||||||||
Depreciation and amortization | 399,098 | 7,059 | ||||||
Value added taxes (VAT) | 1,041,993 | 511,728 | ||||||
Selling, general and administrative | 828,025 | 236,303 | ||||||
Total Operating Expenses | 2,269,116 | 755,090 | ||||||
Income (Loss) from Operations | 2,056,454 | (3,148,931 | ) | |||||
Other Income (Expenses): | ||||||||
Interest expense, net | (130,410 | ) | (35,617 | ) | ||||
Miscellaneous income | 70,797 | 3,282 | ||||||
Total Other Income (Expenses) | (59,613 | ) | (32,335 | ) | ||||
Income (Loss) before Taxes | 1,996,841 | (3,181,267 | ) | |||||
Income tax expenses (benefit) | 672,601 | (660,774 | ) | |||||
Net Income (Loss) | $ | 1,324,240 | $ | (2,520,493 | ) |
The accompanying notes are an integral part of these combined financial statements
F-5
JSC GLOBOTEK
COMBINED STATEMENT OF (DEFICIENCY IN) STOCKHOLDERS' EQUITY
FOR THE TWO YEARS ENDED DECEMBER 31, 2008
Common Stock | ||||||||||||||||||||||||
Common Shares | Amount | Additional Paid-in Capital | Accumulated Deficit | Accumulated Other Comprehensive Income / (Loss) | Total (Deficiency in) Shareholders' Equity | |||||||||||||||||||
Balance at December 31, 2006 | 100 | $ | 100 | $ | 632 | $ | (89,336 | ) | $ | (56 | ) | $ | (88,660 | ) | ||||||||||
Cumulative translation adjustment | - | - | - | - | (143,912 | ) | (143,912 | ) | ||||||||||||||||
Net loss | - | - | - | (2,520,493 | ) | - | (2,520,493 | ) | ||||||||||||||||
Balance at December 31, 2007 | 100 | $ | 100 | $ | 632 | $ | (2,609,827 | ) | $ | (143,968 | ) | $ | (2,753,064 | ) | ||||||||||
Cumulative translation adjustment | - | - | 427 | - | 795,471 | 795,898 | ||||||||||||||||||
Net income | - | - | - | 1,324,240 | - | 1,324,240 | ||||||||||||||||||
Balance as at 31 December 2008 | 1,00 | $ | 100 | $ | 1,059 | $ | (1,285,587 | ) | $ | 651,503 | $ | (632,925 | ) |
The accompanying notes are an integral part of these combined financial statements
F-6
JSC GLOBOTEK
COMBINED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2008 AND 2007
2008 | 2007 | |||||||
Cash Flows from Operating Activities: | ||||||||
Net income (loss) from operations | $ | 1,324,240 | $ | (2,520,493 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | - | |||||||
Depreciation and amortization | 399,098 | 6,337 | ||||||
Bad debts | 126,682 | - | ||||||
(Increase) / decrease in: | ||||||||
Trade receivables | (175,848 | ) | (599 | ) | ||||
Inventories | (634,907 | ) | (11,255 | ) | ||||
Advances to suppliers | 1,001,356 | (903,698 | ) | |||||
VAT recoverable | (400,284 | ) | (79,247 | ) | ||||
Deferred tax assets | 670,798 | (662,425 | ) | |||||
Other current assets | 145,833 | (484,010 | ) | |||||
Increase / (decrease) in: | ||||||||
Advances received from customers | (1,047,671 | ) | 1,554,157 | |||||
Trade payables | (516,811 | ) | 2,053,056 | |||||
Other current liabilities | 85,169 | 39,363 | ||||||
Net Cash Provided by (Used in) Operating Activities | 977,655 | (1,008,814 | ) | |||||
Cash Flows from Investing Activities: | ||||||||
Repayments of notes receivable | 68,893 | 316,160 | ||||||
Payments for purchase of property, plant and equipments and intangible assets | (3,462,548 | ) | (192,771 | ) | ||||
Net Cash (Used in) Provided by Investing Activities | (3,393,655 | ) | 123,389 | |||||
Cash Flows from Financing Activities: | ||||||||
Net proceeds from capital leases | 1,516,066 | 193,000 | ||||||
Proceeds from note payable – related parties | 759,116 | 846,012 | ||||||
Net Cash Provided by Financing Activities | 2,275,182 | 1,039,012 | ||||||
Exchange differences | 133,560 | (150,039 | ) | |||||
Net Decrease in Cash and Cash Equivalents | (7,258 | ) | 3,549 | |||||
Cash and Cash Equivalents at the beginning of the Year | 9,273 | 5,725 | ||||||
Cash and Cash Equivalents at The End of the Year | $ | 2,015 | $ | 9,273 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the year for interest | $ | (130,410 | ) | $ | (33,717 | ) | ||
Cash paid during the year for taxes | $ | (7,246 | ) | $ | - | |||
The accompanying notes are an integral part of these combined financial statements
F-7
JSC GLOBOTEK
NOTES TO COMBINED FINANCIAL STATEMENTS
DECMBER 31, 2008 AND 2007
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of the accompanying financial statements follows:
Business and basis of Presentation
The Company was incorporated in the year 2005 as closed joint stock company in accordance with the civil code of the Russian Federation Inc.
"Globotek" closed joint stock company (the "Company") and its affiliates (together – the “Group”) represent group of the enterprises specializing in development and introduction of protecting energy and innovative technologies of processing of hydro carbonic raw material.
The Group’s principal activity is the development of the newest technologies of processing of hydro carbonic raw material, including passing oil gas, manufacture and realization industrial block-modular mobile complexes on processing oil passing gas (OPG). The production process developed by the Company can be used in operations in the Russian Federation as well as other parts of the world.
Group’s main operations are in the Samara region (Tolyatti) involving the Industrial modular mobile complex on processing OPG which is established on the Mohtikovsky deposit (Nizhnevartovsk area, Hunts-Mansijsky independent district-Jugra). Currently, the Company is in the process of transporting this mobile complex at another location as per a new contract/arrangement. (Note 14)
The Company also buys and sell industrial equipment to some of it client base. The Company acts as distributors for some national electric companies, taking the order and processing the order and arranging shipments for the transaction. The company receives payment after the product is received from the third party. The company does have a resale agreement with these vendors.
Globotek NV
Globotek NV is founded in the year 2007 in Nizhnevartovsk region and it is an affiliate, although the Group Company does not owns the voting interest in this subsidiary but carries out a complete control of this organization including controlling their work activity. The principal activity of this company is complex operation on processing OPG. The Group benefits by having acquired experienced company in niche area, which assures a deep bench of talent with a successful multi-year track record in this industry.
Globotek Samara
This Company founded in the year 2008 in Samara region and it is an affiliate of Group Company. The Group’s main operations are in the Samara region (Tolyatti), the Industrial modular mobile complex on processing OPG is established on the Mohtikovsky deposit (Nizhnevartovsk area, Hunts-Mansijsky independent district-Jugra).
The combined financial statements include the financial statements of Globotek JSC, Globotek NV and Globotek Samara, which are related through common ownership and management. All significant intercompany balances and transactions have been eliminated in combination.
F-8
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Revenue Recognition
For revenue from product sales and services, the Company recognizes revenue in accordance with Staff Accounting Bulletin No. 104, Revenue Recognition ("SAB104"), which superseded Staff Accounting Bulletin No. 101, Revenue Recognition in Financial Statements ("SAB101"). SAB 101 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed and determinable; and (4) collectibility is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectibility of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded. The Company defers any revenue for which the product has not been delivered or is subject to refund until such time that the Company and the customer jointly determine that the product has been delivered or no refund will be required. SAB 104 incorporates Emerging Issues Task Force 00-21 ("EITF 00-21"), Multiple-Deliverable Revenue Arrangements. EITF 00-21 addresses accounting for arrangements that may involve the delivery or performance of multiple products, services and/or rights to use assets. The effect of implementing EITF 00-21 on the Company's financial position and results of operations was not significant.
All types of revenue received in advance are recognized as deferred income in the balance sheet. All other income and expense items are generally recorded on an accruals basis by reference to completion of the specific transaction assessed on the basis of the actual service provided as a proportion of the total services to be provided.
Services are provided subject to customer acceptance provisions. Customer acceptance provisions and the related accounting take the following form: It is based on customer-specified objective criteria. The Company does not recognize revenue until it can demonstrate that the customer-specified objective criteria have been satisfied. The Company recognizes revenue upon receipt of the act of acceptance for services provided signed and stamped by the customer.
The Company uses the sales method of accounting for APG revenues. Under this method, revenues are recognized based on actual volumes of APG and sold to purchasers. The volumes sold may differ from the volumes to which the Company is entitled based on its interests in the properties. These differences create imbalances that are recognized as a liability only when the estimated remaining reserves will not be sufficient to enable the under produced owner to recoup its entitled share through production. There are no significant balancing arrangements or obligations related to the Company’s operations.
Use of Estimates
The preparation of financial statements in accordance with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and revenue and expenses during the periods reported. Estimates are used when accounting for certain items such as allowances for doubtful accounts; depreciation and amortization lives; asset retirement obligations; legal and tax contingencies; inventory values; goodwill. Estimates are based on historical experience, where applicable and other assumptions that management believes are reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. The cost of self-constructed assets includes the cost of materials, direct labor and an appropriate portion of production overheads directly related to construction of assets. Property, plant and equipment also include assets under construction and plant and equipment awaiting installation. Capitalized costs include cost of transporting plant to the site for use. At the time of relocation, the Company reevaluates capitalized transportation and site specific structural costs and writes off related book value. Where an item of property, plant and equipment comprises major components having different useful lives, they are accounted for as separate items of property, plant and equipment. Depreciation is charged on a straight-line basis over the estimated remaining useful lives of the individual assets. Plant and equipment under capital leases and subsequent capitalized expenses are depreciated on a straight-line basis over the estimated remaining useful life of the individual assets. Depreciation commences from the time an asset is put into operation. Depreciation is not charged on assets to be disposed of and land. The range of the estimated useful lives is as follows:
Furniture and Equipment 2-5 years
Plant 8 years
Vehicles 3-5 years
Maintenance and repairs to vehicles, machinery and equipment is expensed as incurred. There is no reevaluation of useful life as most of the assets are short term in nature and the repairs or maintenance are in the normal course of the operating life of the asset.
F-9
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Inventories
Inventories as of December 31, 2008 and 2007 relate to industrial equipment resale and raw material for APG conversion. Inventories are carried at cost or market, whichever is less. Cost is calculated based on cost relating to specific identification of batch of equipment for resale.
Value Added Tax
The tax authorities permit the settlement of value added tax (“VAT”) on a net basis. The net value added tax related to sales and purchases which has not been settled at the balance sheet date is recognized in the balance sheet and disclosed separately as a liability, or as an asset to the extent that management expect to recover these amounts. Related cash flows are recorded as part of operating activities in the cash flow statement According to the Russian law the VAT is The VAT rate constitutes 18 percent of gross cost.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising expense was $0 and $0 for the years ended December 31, 2008 and 2007, respectively.
Reclassification
Certain reclassifications have been made in prior year’s financial statements to conform to classifications used in the current year.
Intangible Assets and Goodwill
Under SFAS No. 142, Goodwill and Other Intangible Assets, ("SFAS No. 142") intangible assets with indefinite useful lives are subject to impairment test at least annually and on an interim basis when an event occurs or circumstances change between annual tests that would more-likely-than-not result in impairment. The Group performs the required annual intangible assets impairment test at the end of each calendar year. Intangible assets that have limited useful lives are amortized on a straight-line basis over the shorter of their useful or legal lives. In accordance with SFAS No. 142, the Company tests its intangible assets for impairment on an annual basis and when there is reason to suspect that their values have been diminished or impaired. Any write-downs will be included in results from operations.
Impairment of long lived assets
The Company has adopted Statement of Financial Accounting Standards No. 144 (SFAS 144). The Statement requires that long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. SF AS No. 144 also requires assets to be disposed of is reported at the lower of the carrying amount or the fair value less costs to sell.
Concentrations of Credit Risk
Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash, cash equivalents and trade receivables. The Company places its cash and temporary cash investments with credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit. The allowance for doubtful accounts was $107,170 and $0 at December 31, 2008 and December 31, 2007, respectively.
Trade receivables are presented in the balance sheet net of the allowance for doubtful accounts and are written off when they are determined to be uncollectible. The allowance for doubtful accounts is estimated based on the Company’s historical losses, the existing economic conditions in the industry, and the financial stability of its customers.
F-10
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Research and Development
The Company accounts for research and development costs in accordance with the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 2 ("SFAS 2"), "Accounting for Research and Development Costs.” Under SFAS 2, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. Total expenditures on research and product development for 2008 and 2007 were $0 and $0, respectively.
Deferred Financing Costs
The company amortizes deferred financing costs under the straight-line method over the terms of the related indebtedness, which approximates the effective interest method and is included in interest expense in the accompanying combined statements of operations. Deferred financing expense was $0 and $0 for the years ended December 31, 2008 and 2007, respectively.
Income taxes
The Company follows Statement of Financial Accounting Standard No.109, Accounting for Income Taxes (SFAS No.109) for recording the provision for income taxes. Deferred tax assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled. Deferred income tax expenses or benefits are based on the changes in the asset or liability during each period. If available evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future changes in such valuation allowance are included in the provision for deferred income taxes in the period of change. Deferred income taxes may arise from temporary differences resulting from income and expense items reported for financial accounting and tax purposes in different periods. Deferred taxes are classified as current or non-current, depending on the classification of assets and liabilities to which they relate. Deferred taxes arising from temporary differences that are not related to an asset or liability are classified as current or non-current depending on the periods in which the temporary differences are expected to reverse.
Comprehensive Income (Loss)
The Company adopted Statement of Financial Accounting Standards No. 130; “Reporting Comprehensive Income” (SFAS) No. 130 establishes standards for the reporting and displaying of comprehensive income and its components. Comprehensive income is defined as the change in equity of a business during a period from transactions and other events and circumstances from non-owners sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. SFAS No. 130 requires other comprehensive income (loss) to include foreign currency translation adjustments and unrealized gains and losses on available for sale securities.
Segment Information
The Company adopted Statement of Financial Accounting Standards No. 131, Disclosures about Segments of an Enterprise and Related Information ("SFAS 131"). SFAS establishes standards for reporting information regarding operating segments in annual combined financial statements and requires selected information for those segments to be presented in interim financial reports issued to stockholders. SFAS 131 also establishes standards for related disclosures about products and services and geographic areas. Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision making group, in making decisions how to allocate resources and assess performance. The information disclosed herein, materially represents all of the financial information related to the Company's principal operating segments.
F-11
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Liquidity
As shown in the accompanying combined financial statements, the Company generated profit of $1,324,240 for the year ended December 31, 2008. The Company's current liabilities exceeded its current assets by $2,410,613 as of December 31, 2008.
Basic and diluted earnings per share
In accordance with SFAS No. 128 – “Earnings Per Share”, the basic and diluted earnings per share is computed by dividing net income available to common stockholders by the weighted average number of common shares outstanding. Diluted net earnings per share is computed similar to basic earnings per share except that the denominator is adjusted for the potential dilution that could occur if stock options, warrants, and other convertible securities were exercised or converted into common stock. The Company does not have any common stock equivalents at December 31, 2008 and 2007.
Cash and Cash Equivalents
For purposes of the statement of cash flows, cash includes demand deposits, saving accounts and money market accounts. The Company considers all highly liquid debt instruments with maturities of three months or less when purchased to be cash equivalents. The Company also purchases bonds from banks and other companies in lieu of cash for payment. These bonds are written by local banks and secured with cash from the originator. These are fully transferable bond that accrue interest.
Fair Value of Financial Instruments
In January 2008, the Company adopted the provisions of SFAS No. 157, “Fair Value Measurements”, (“FAS 157”) which defines fair value for accounting purposes, establishes a framework for measuring fair value and expands disclosure requirements regarding fair value measurements. The Company’s adoption of FAS 157 did not have a material impact on its combined financial statements. Fair value is defined as an exit price, which is the price that would be received upon sale of an asset or paid upon transfer of a liability in an orderly transaction between market participants at the measurement date. The degree of judgment utilized in measuring the fair value of assets and liabilities generally correlates to the level of pricing observability. Financial assets and liabilities with readily available, actively quoted prices or for which fair value can be measured from actively quoted prices in active markets generally have more pricing observability and require less judgment in measuring fair value. Conversely, financial assets and liabilities that are rarely traded or not quoted have less price observability and are generally measured at fair value using valuation models that require more judgment. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency of the asset, liability or market and the nature of the asset or liability. At December 31, 2008 and 2007, the Company did not have any financial assets measured at fair value on a recurring basis.
Stock Based Compensation
The Company has adopted the fair value provisions of SFAS No. 123(R) "Share-Based Payment" which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including employee stock options and employee stock purchases related to a Employee Stock Purchase Plan based on the estimated fair values. There were no employee stock options and employee stock purchases granted to employees and directors through December 31, 2008. There were no unvested options outstanding as of the date of adoption of SFAS No. 123(R).
F-12
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations" ("SFAS No. 141(R)"), which establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in an acquiree, including the recognition and measurement of goodwill acquired in a business combination. SFAS No. 141R is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the adoption of SFAS No. 141R in 2009 will have a material effect on its combined financial position, results of operations or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interest in Consolidated Financial Statements, an amendment of ARB No. 51” (“SFAS No. 160”), which will change the accounting and reporting for minority interests, which will be recharacterized as noncontrolling interests and classified as a component of equity within the combined balance sheets. SFAS No. 160 is effective as of the beginning of the first fiscal year beginning on or after December 15, 2008. Earlier adoption is prohibited. The Company does not expect the adoption of SFAS No. 160 in 2009 to have a material effect on its combined financial position, results of operations or cash flows.
In December 2007, the FASB ratified the consensus in Emerging Issues Task Force (EITF) Issue No. 07-1, “Accounting for Collaborative Arrangements” (EITF 07-1). EITF 07-1 defines collaborative arrangements and requires collaborators to present the result of activities for which they act as the principal on a gross basis and report any payments received from (made to) the other collaborators based on other applicable authoritative accounting literature, and in the absence of other applicable authoritative literature, on a reasonable, rational and consistent accounting policy is to be elected. EITF 07-1 also provides for disclosures regarding the nature and purpose of the arrangement, the entity’s rights and obligations, the accounting policy for the arrangement and the income statement classification and amounts arising from the agreement. EITF 07-1 will be effective for fiscal years beginning after December 15, 2008, which will be the Company’s fiscal year 2009, and will be applied as a change in accounting principle retrospectively for all collaborative arrangements existing as of the effective date. The Company does not expect the adoption of EITF 07-1in 2009 to have a material effect on its combined financial position, results of operations or cash flows.
In June 2008, the FASB ratified the consensus on Emerging Issues Task Force (EITF) Issue 07-5, “Determining whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock.” This issue addresses whether an instrument (or an embedded feature) is indexed to an entity’s own stock, which is the first part of the scope exception in paragraph 11(a) of SFAS No. 133, for purposes of determining whether the instrument should be classified as an equity instrument or accounted for as a derivative instrument. The provisions of EITF Issue No. 07-5 are effective for financial statements issued for fiscal years beginning after December 15, 2008 and will be applied retrospectively through a cumulative effect adjustment to retained earnings for outstanding instruments as of that date. The Company does not expect the adoption of EITF 07-05 to have a material effect on its combined financial position, results of operations or cash flows.
In March 2008, the FASB” issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities - an amendment to FASB Statement No. 133” (“SFAS No. 161”). SFAS No. 161 is intended to improve financial standards for derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. Entities are required to provide enhanced disclosures about: (a) how and why an entity uses derivative instruments; (b) how derivative instruments and related hedged items are accounted for under SFAS No. 133 and its related interpretations; and (c) how derivative instruments and related hedged items affect an entity’s financial position, financial performance and cash flows. It is effective for financial statements issued for fiscal years beginning after November 15, 2008, with early adoption encouraged. The Company does not expect the adoption of SFAS No. 161 to have a material effect on its combined financial position, results of operations or cash flows.
In April 2008, the FASB issued FSP No. FAS 142-3,“Determination of the Useful Life of Intangible Assets”. This FSP amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. The Company is required to adopt FSP 142-3 on January 1, 2009, earlier adoption is prohibited. The guidance in FSP 142-3 for determining the useful life of a recognized intangible asset shall be applied prospectively to intangible assets acquired after adoption, and the disclosure requirements shall be applied prospectively to all intangible assets recognized as of, and subsequent to, adoption. The Company does not expect the adoption of FSP No. FAS 142-3 to have a material effect on its combined financial position, results of operations or cash flows.
F-13
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
In May 2008, the FASB issued SFAS No. 162, "The Hierarchy of Generally Accepted Accounting Principles" ("SFAS No. 162"). 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." The Company does not expect the adoption of SFAS No. 162 to have a material effect on its combined financial position, results of operations or cash flows.
In May 2008, the FASB issued 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"). 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. The Company is currently evaluating the potential impact, if any, of the adoption of FSP APB 14-1 on its combined financial position, results of operations or cash flows.
In May 2008, the FASB issued FASB Statement No. 163, “Accounting for Financial Guarantee Insurance Contracts”, which clarifies how FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises”, applies to financial guarantee insurance contracts issued by insurance enterprises. The standard is effective for financial statements issued for fiscal years beginning after December 15, 2008, including interim periods in that year. The Company does not expect the adoption of SFAS 163 to have a material effect on its combined financial statements.
In June 2008, the FASB issued FSP Emerging Issues Task Force (EITF) No. 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities.” Under the FSP, unvested share-based payment awards that contain rights to receive non-forfeitable dividends (whether paid or unpaid) are participating securities, and should be included in the two-class method of computing EPS. The FSP is effective for fiscal years beginning after December 15, 2008, and interim periods within those years. The Company does not expect the adoption of FSP EITF No. 03-6-1 to have a material effect on its combined financial position, results of operations or cash flows.
In October 2008, the FASB issued FSP SFAS No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active.” This position clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. It also reaffirms the notion of fair value as an exit price as of the measurement date. This position was effective upon issuance, including prior periods for which financial statements have not been issued. The adoption had no impact on the Company’s combined financial statements.
In December 2008, the FASB issued FSP 132(R)-1, Employers’ Disclosures about Postretirement Benefit Plan Assets, which is effective for fiscal years ending after December 15, 2009. FSP 132(R)-1 requires disclosures about fair value measurements of plan assets that would be similar to the disclosures about fair value measurements required by SFAS 157. The Company is assessing the potential effect of the adoption of FSP 132(R)-1 on its combined financial statements.
In December 2008, the FASB issued FSP SFAS 140-4 and FIN 46(R)-8, Disclosures about Transfers of Financial Assets and Interests in Variable Interest Entities. The FSP requires extensive additional disclosure by public entities with continuing involvement in transfers of financial assets to special-purpose entities and with variable interest entities (VIEs), including sponsors that have a variable interest in a VIE. This FSP became effective for the first reporting period ending after December 15, 2008 and did not have any material impact on the Company's combined financial statements.
In January 2009, the FASB issued Financial Statement of Position (“FSP”) Issue No. EITF 99-20-1, “Amendments to the Impairment Guidance of EITF Issue No. 99-20” (“FSP EITF No. 99-20-1”). FSP EITF No. 99-20-1 amends the impairment guidance in EITF Issue No. 99-20, “Recognition of Interest Income and Impairment on Purchased Beneficial Interests and Beneficial Interests that Continue to be Held by a Transferor in Securitized Financial Assets” to achieve more consistent determination of whether an other-than-temporary impairment has occurred. The Company adopted FSP EITF No. 99-20-1 and it did not have a material impact on the combined financial statements.
F-14
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Recent accounting pronouncements (continued)
In April 2009, the FASB issued FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly , provides guidelines for making fair value measurements more consistent with the principles presented in FASB Statement No. 157 (“SFAS 157”), Fair Value Measurements . FSP FAS 157-4 reaffirms what SFAS 157 states is the objective of fair value measurement, to reflect how much an asset would be sold for in an orderly transaction at the date of the financial statements under current market conditions. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. The Company does not expect this pronouncement to have a material impact on its combined results of operations, financial position, or cash flows.
In April 2009, the FASB issued FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial Instruments, enhances consistency in financial reporting by increasing the frequency of fair value disclosures. This relates to fair value disclosures for any financial instruments that are not currently reflected on the combined balance sheet at fair value. FSP FAS 107-1 and APB 28-1 now require that fair value disclosures be made on a quarterly basis, providing qualitative and quantitative information about fair value estimates for all those financial instruments not measured on the balance sheet at fair value. The Company does not expect this pronouncement to have a material impact on its combined results of operations, financial position, or cash flows.
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, provides additional guidance designed to create greater clarity and consistency in accounting for and presenting impairment losses on securities. This FSP is intended to bring greater consistency to the timing of impairment recognition and to provide greater clarity to investors about the credit and noncredit components of impaired debt securities that are not expected to be sold. This FSP also requires increased and timelier disclosures sought by investors regarding expected cash flows, credit losses, and an aging of securities with unrealized losses. The Company does not expect this pronouncement to have a material impact on its combined results of operations, financial position, or cash flows.
FASB ASC 855, Subsequent Events (“ASC 855” and formerly referred to as FAS-165), modified the subsequent event guidance. The three modifications to the subsequent events guidance are: 1) To name the two types of subsequent events either as recognized or non-recognized subsequent events, 2) To modify the definition of subsequent events to refer to events or transactions that occur after the balance sheet date, but before the financial statement are issued or available to be issued and 3) To require entities to disclose the date through which an entity has evaluated subsequent events and the basis for that date, i.e. whether that date represents the date the financial statements were issued or were available to be issued. This guidance is effective for interim or annual financial periods ending after June 15, 2009, and should be applied prospectively.
FASB ASC 105, Generally Accepted Accounting Principles (“ASC 105” and formerly referred to as FAS 168) establishes the FASB Accounting Standards Codification as the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in conformity with GAAP. Rules and interpretive releases of the Securities and Exchange Commission (SEC) under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. ASC 105 is effective for financial statements issued for interim and annual periods ending after September 15, 2009.
Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the AICPA, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future combined financial statements.
2. PROPERTY AND EQUIPMENT
The Company’s property and equipment at December31, 2008 and 2007 consist of the following:
2008 | 2007 | |||||||
Machinery | $ | 3,259,856 | $ | 173,384 | ||||
Motor vehicles | 121,852 | - | ||||||
Furniture | 14,688 | 1,173 | ||||||
Office equipment | 68,984 | 18,685 | ||||||
Construction in progress | 731,132 | - | ||||||
4,196,513 | 193,243 | |||||||
Less accumulated depreciation | (396,153) | (6,337) | ||||||
$ | 3,800,360 | $ | 186,906 |
Depreciation expense charged to operations amounted to $389,816 and $6,337 for the year ended December 31, 2008 and 2007 respectively.
F-15
3. INVENTORY
Inventory at December 31, 2008 and 2007 consist of the following:
2008 | 2007 | |||||||
Raw materials | $ | 97,165 | $ | 24,613 | ||||
Finished goods and goods for resale | 563,233 | 878 | ||||||
Total | $ | 660,397 | $ | 25,491 |
4. OTHER CURRENT ASSETS
Other current assets consist of the following:
2008 | 2007 | |||||||
Debt assigned - receivable | $ | 38,582 | $ | - | ||||
Claim receivable | 42,298 | - | ||||||
Miscellaneous receivable from suppliers | 259,284 | 236,845 | ||||||
Loans receivable | 14,880 | 90,887 | ||||||
Miscellaneous receivables | 5,646 | 247,684 | ||||||
Total | $ | 360,690 | $ | 575,416 |
5. INTANGIBLE ASSETS
Intangible Assets at December 31, 2008 and 2007 consist of the following:
2008 | 2007 | |||||||
Patents | $ | 150,438 | $ | - | ||||
Trade mark | 1,513 | 163 | ||||||
Accumulated amortization | (9,282 | ) | - | |||||
Total | $ | 142,669 | $ | 163 |
Total amortization expense charged to operations for the year ended December 31, 2008 and 2007 was $9,282 and $0, respectively. Estimated amortization expense as of December 31, 2008 is as follows:
Years Ended December 31, | ||||
2009 | $ | 15,444 | ||
2010 | 15,444 | |||
2011 | 15,444 | |||
2012 | 15,444 | |||
2013 and after | 80,893 | |||
Total | $ | 142,669 |
6. TRADE PAYABLE
Accounts payable and accrued liabilities consisted of the following at December 31, 2008 and 2007:
2008 | 2007 | |||||||
Accounts payable | $ | 1,540,117 | $ | 2,056,928 | ||||
Accrued payroll | 63,388 | 23,181 | ||||||
Accrued taxes payable | 58,180 | 21,746 | ||||||
Other accounts payable | 10,948 | 2,382 | ||||||
Income taxes payable | 405 | 441 | ||||||
Total | $ | 1,673,038 | $ | 2,104,678 |
7 – NOTES PAYABLE-RELATED PARTY
Notes payable-related party consists of the following at December 31, 2008 and 2007:
2008 | 2007 | |||||||
Unsecured loan payable to a company Proekt Rosta due in monthly installments with interest at 21% per year | $ | 804,000 | $ | 203,698 | ||||
Unsecured loan payable to a company Sammit without interest due on demand | 120,000 | 27,703 | ||||||
Unsecured loan payable to a company Rusvest-Finance due in monthly installments with interest at 18 % per year | 199,000 | 264,806 | ||||||
Unsecured loan payable to a shareholder Lukin D without interest due on demand. This loan is subject to collateral of the Company’s guarantee to a the third party under litigation (refer to Note 11) | 974,000 | 1,162,212 | ||||||
Miscellaneous loans | 47,492 | - | ||||||
Total notes payable | 2,144,492 | 1,658,419 | ||||||
Less current portion | (1,075,127 | ) | (1,658,419 | ) | ||||
Notes payable – long-term | $ | 1,069,366 | $ | - |
F-16
8. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. During the year the Company entered into transactions with related parties. The outstanding balances at the year end and the income and expense for the year with related parties are as follows:
Shareholders | Accounts | December 31, 2008 | December 31, 2007 | ||||||
Lukin D. | Borrowings (сurrent liabilities) | $ | 104,000 | $ | 1,162,000 | ||||
Borrowings (non-сurrent liabilities) | 870,000 | - | |||||||
Lukin A. | Trade payable | 4,897 | 16,000 | ||||||
Advance paid | 4,897 | - | |||||||
Other costs for the year | 89,210 | 107,113 | |||||||
Rent and rates for the year | 5,000 | 6,000 | |||||||
Lukin S. | Trade receivable | 2,103 | - | ||||||
Sales of assets | 1 648 | - | |||||||
Lapkin A. | Trade payable | 40,919 | - | ||||||
Intangible Assets (patent) | 46,000 | - | |||||||
Lapkin S. | Trade payable | 40,919 | - | ||||||
Intangible Assets (patent) | 46,000 | - | |||||||
Also, the Company buys and sells goods from related parties- the entities controlled or managed by the stockholders of the Company. The Company purchased goods totaling to $1,941,000 and $412,000 for the year ended December 31, 2008 and 2007, respectively. The Company sold goods totaling to $3,243,000 and $2,480,000 for the year ended December 31, 2008 and 2007, respectively.
The Group received the borrowing according to the loan agreement with Lapkin D. (shareholder of the Group). At December 31, 2008 non-current part of this loan liabilities was $104,000 and short-term liabilities in amount $870,000. This is Interest free loan.
During the year ended December 31, 2008 the Company received, at cost, received the Patents from shareholders Lapkin S. and Lapkin A. assigned according to the contracts.
During the year ended December 31, 2008, the Group acquired equipment and vehicles under capital lease arrangements with the right to buy out leased assets upon completion of the underlying agreements. The amount of capital lease liabilities incurred during the years ended December 31, 2008, was $2,006,152.
Capital lease obligations consist the following as of December 31, 2008 and 2007:
2008 | 2007 | |||||||
Capital lease- related party | $ | 120,121 | 186,873 | |||||
Capital leases - others | 1,886,031 | - | ||||||
Total | 2,006,152 | 186,873 | ||||||
Less: current maturities | (910,177 | ) | (64,550 | ) | ||||
Capital leases payable –long term | $ | 1,095,975 | 122,323 |
F-17
At December 31, 2008 net book value of the machinery, equipment and vehicles held under the capital lease arrangements was:
2008 | 2007 | |||||||
Production machinery | $ | 3,087,302 | $ | 186,873 | ||||
Motor vehicles | 121,020 | - | ||||||
3,208,322 | 186,873 | |||||||
Less: accumulated depreciation | (365,963 | ) | (4,326 | ) | ||||
Net value of property, plant and equipment obtained under capital lease arrangements | $ | 2,842,359 | $ | 182,547 |
Following is a schedule of the Company's future minimum capital lease obligations:
Period Ending December 31, | ||||
2009 | $ | 1,948,861 | ||
2010 | 1,384,664 | |||
2011 | 503,625 | |||
2012 | - | |||
Total minimum payments | $ | 3,837,150 | ||
Less: amount representing interest | (1,830,998 | ) | ||
Present value of net minimum payments | $ | 2,006,152 |
The present value of minimum capital lease obligations amounts to $2,006,152 Interest ranging from 30% -36%.
10. CAPITAL STOCK
As at December 31, 2008, 2007, the Parent Company's share capital consisted of 100 issued common shares, with a par value of 100 Russian rubles each. For each common share held, the stockholder has the right to one vote at the annual stockholders' meeting.
11. COMMITMENTS AND CONTINGENCIES
Operating Lease Commitments
The Company leases office space under non-cancelable operating leases that expire through June 2010 with option to renew contract. The Company also leases warehouse under non-cancelable operating leases from related party expiring through December 2009 with option to renew contract.
For the years ended December 31, 2008 and 2007, rent expense was $21,667 and $7,277, respectively.
Litigation
In proceedings of the Arbitrage Court of Samara Region there is case No. А9595/2009 initiated under the claim of Government institution – General Office of Pension Fund of RF in Syzran City and Oktyabrsk City, Syzran and Shigon District of Samara Region against Globotek ZAO concerning recovery of obligatory payments and penalties. As of December 31, 2008, the Company has accrued $8,000 as liability in the books.
In accordance with information placed on the site of the Arbitrage Court of Samara Region this suit has been satisfied. The amount to be recovered is not indicated.
In proceedings of the Arbitrage Court of Samara Region there is case No А55-15744/2009 initiated under the claim of the Ministry of Industry, Power engineering and Technologies of Samara Region against Globotek ZAO:1) On recovery of money in the aggregate amount of RUB 1,652,5082) On termination of government contract No. 5 dated 28 May 2008. The Company is defending against this case and does not expect to pay on this.
F-18
No. 24592/2009 initiated based on the action brought by Lapkin Alexander Nikolaevich against CJSC “Globotek” and CJSC “VAZINTERSERVICE” to recognize surety agreement № 2956 dated 28 November 2006 to be invalid; No. A55-23415/2009 initiated based on the writ brought by creditor CJSC “VAZINTERSERVICE” to initiate bankruptcy proceedings against CJSC “Globotek”. The Company has guaranteed loan by Vazinterservice to Lapkin Alexander. Lapkin Alexander lent these funds, in turn, to the Company. The loan is shown under note payable- related parties and as of December 31, 2008, outstanding balance was $904,000. The Company does not expect to pay more than this loan balance offset in settlement of this estimated liability. (refer to note 8)
Tax contingencies
Russian tax, currency and customs legislation is subject to varying interpretations and changes, which can occur frequently. Management’s interpretation of such legislation as applied to the transactions and activity of the Group may be challenged by the relevant regional and federal authorities. Recent events within the Russian Federation suggest that the tax authorities may be taking a more assertive position in their interpretation of the legislation and assessments, and it is possible that transactions and activities that have not been challenged in the past may be challenged. As a result, significant additional taxes, penalties and interest may be assessed. Fiscal periods remain open to review by the authorities in respect of taxes for three calendar years preceding the year of review. Under certain circumstances reviews may cover longer periods. As at December 31, 2008, management believes that its interpretation of the relevant legislation is appropriate and the Group’s tax, currency and customs positions will be sustained.
12. INCOME TAXES
The Company has adopted Financial Accounting Standard No. 109 which requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statement or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Temporary differences between taxable income reported for financial reporting purposes and income tax purposes are insignificant.
Income tax expense (benefit) comprises the following:
December 31, 2008 | December 31, 2007 | |||||||
Current income tax expenses | $ | 1,802 | $ | 1,652 | ||||
Deferred income tax expenses (benefit) | 670,799 | (662 425 | ) | |||||
Total income tax expenses (benefit) | $ | 672,601 | $ | (660 774 | ) |
As of December 31, 2007, the Company recorded deferred tax liability of $662,425 mainly relating to net operating loss carryforwards of approximately $2,500,000.
For income tax reporting purposes, as of December 31, 2008, the Company’s estimated aggregate unused net operating losses approximate $1,200,000, which expire in future. The deferred tax asset related to the carryforward is approximately $240,000. The Company has provided a valuation reserve against the full amount of the net operating loss benefit, since in the opinion of management based upon the earnings history and projections of the Company; it is more likely than not that the benefits will not be realized. Due to significant changes in the Company’s ownership, the Company’s future use of its existing net operating losses may be limited.
Components of deferred tax assets as of December 31, 2008 are as follows:
Non Current: | ||||
Net operating loss carryforward | $ | 240,000 | ||
Valuation allowance | (240,000 | ) | ||
Net deferred tax asset | $ | - |
On 26 November 2008, the Russian Federation reduced the standard corporate income tax rate from 24% to 20% with effect from 1 January 2009. The impact of the change in tax rate presented above represents the effect of applying the reduced 20% tax rate to the deferred tax balance at 31 December 2008.
Differences between US GAAP and statutory taxation regulations in Russia give rise to temporary differences between the carrying amount of assets and liabilities for financial reporting purposes and their tax bases. The tax effect of the movements in these temporary differences is detailed below and is recorded at the rate of 20% (2007: 24%).
13 - BUSINESS CONCENTRATION
Revenue from two (2) major customer approximated $2,480,000 or 37% of total revenues for the year ending December 31, 2008. Revenue from one (1) major customer approximated $3,048,467 or 91% of total revenues for the year ending December 31, 2007. Total accounts receivable of $0 of total accounts receivable, was due from these customers as of December 31, 2008. Total accounts receivable of $0, of total accounts receivable, was due from these customers as of December 31, 2007.
Purchases from two (2) major suppliers approximated $3,345,118 of purchases and $3,619,000 or 63%of purchases for the years ended December 31, 2008 and 2007, respectively. Total accounts payable of approximately $38,018 was due to these suppliers as of December 31, 2008, and $0 of total accounts payable was due to these suppliers as of December 31, 2007.
F-19
14. GOING CONCERN MATTERS
The Company’s combined financial statements are prepared using generally accepted accounting principles applicable to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had a working capital deficiency of $2,410,613 and reserves in stockholders’ equity of $632,925 at December 31, 2008, which raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying combined financial statements do not include any adjustments relating to the recoverability and classification of asset carrying amounts or the amount and classification of liabilities that might result from the outcome of this uncertainty.
Continuation as a going concern is dependent upon obtaining additional capital and upon the Company’s attaining profitable operations. The Company will require a substantial amount of additional funds to complete the development of its products, to build a sales and marketing organization, and to fund additional losses which the Company expects to incur over the next few years. The management of the Company intends to seek additional funding through a Private Placement Offering which will be utilized to fund product development and continue operations. The Company recognizes that, if it is unable to raise additional capital, it may find it necessary to substantially reduce or cease operations.
15. SUBSEQUENT EVENTS
a) Management has made decision to transfer a complex carrying over on processing of passing oil gas from Mohtikovsky deposit (Nizhnevartovsk area, Hunts-Mansijsky independent district-Jugra) to Samara (Samara region), for more effective utilisation is accepted. For these purposes the contract of purchases with the lease company is concluded.
b) On November, 26, 2009 the contract on performance of pre-design works on two deposits of passing oil gas is signed. The termination of works is planned in December, 2009. After performance of research works on processing passing oil gas will be finished, signing contracts on delivery of complexes is planned for the sum $3.5 million in December2009 and $10 million in 2010.
F-20
JSC Globotek
Index to Unaudited Condensed Combined Financial Statements
Page | ||
Unaudited Condensed Combined Balance Sheets As Of September 30, 2009 and 2008 | F-22 | |
Unaudited Condensed Combined Statement Of Operations For The Nine months Ended September 30, 2009 and 2008 | F-23 | |
Unaudited Condensed Combined Statement Of Deficiency In Stockholders’ Equity For The Nine Months Ended September 30, 2009 and 2008 | F-24 | |
Unaudited Condensed Combined Statement of Cash Flows For The Nine Months Ended September 30, 2009 and 2008 | F-25 | |
Notes To Unaudited Condensed Combined Financial Statements | F-26 |
F-21
JSC GLOBOTEK
CONDENSED COMBINED BALANCE SHEETS
SEPTEMBER 30, 2009 and 2008
(UNAUDITED)
2009 | 2008 | |||||||
Assets | ||||||||
Current Assets | ||||||||
Cash and cash equivalents | $ | 75 | $ | 4,307 | ||||
Trade receivable, net of allowance for doubtful accounts $0 as of September 30, 2009 and 2008 | 209,098 | 191,351 | ||||||
Inventories | 106,255 | 814,644 | ||||||
Advance paid to suppliers | 112,079 | 910,690 | ||||||
VAT recoverable | 513,095 | 628,847 | ||||||
Other current assets | 191,191 | 324,375 | ||||||
Total Current Assets | 1,131,793 | 2,874,214 | ||||||
Property and Equipment, net of accumulated depreciation of $385,913 and 261,256, respectively | 3,485,241 | 4,092,733 | ||||||
Other Assets: | ||||||||
Intangible Assets | 145,794 | 122,430 | ||||||
Total Assets | $ | 4,762,829 | $ | 7,089,379 | ||||
(Deficiency in) Stockholders' equity and Liabilities | ||||||||
Current Liabilities: | ||||||||
Advances received from customers | $ | 155,436 | $ | 399,189 | ||||
Trade payable | 1,218,179 | 2,563,745 | ||||||
Notes payable – current | 1,062,023 | 1,076,140 | ||||||
Capital lease payable – current | 1,650,266 | 990,134 | ||||||
Other current liabilities | 125,177 | 94,842 | ||||||
Total Current Liabilities | 4,211,079 | 5,124,049 | ||||||
Long-term Liabilities: | ||||||||
Notes payable – long term | 1,045,635 | 1,235,592 | ||||||
Capital lease payable – long term | 564,840 | 1,449,549 | ||||||
Total Long-term Liabilities | 1,610,476 | 2,685,141 | ||||||
(Deficiency in) Stockholders' Equity: | ||||||||
Common Stock, no par value; 100 shares authorized; 100 shares issued and outstanding at September 30, 2009 & 2008 | 100 | 100 | ||||||
Additional paid-in capital | 1,059 | 1,059 | ||||||
Accumulated deficit | (1,878,716 | ) | (713,696 | ) | ||||
Accumulated other comprehensive income / loss | 818,831 | (7,274 | ) | |||||
Total (Deficiency in) Stockholders' Equity | (1,058,726 | ) | (719,811 | ) | ||||
Total (Deficiency in) Stockholders’ Equity and Liabilities | $ | 4,941,335 | $ | 7,089,379 |
The accompanying notes are an integral part of these unaudited condensed combined financial statements
F-22
JSC GLOBOTEK
CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009 | 2008 | |||||||
Revenues | ||||||||
Sale of productive output | $ | 23,064 | $ | 4,280,672 | ||||
Sale of goods | 865,453 | 2,416,097 | ||||||
Other revenue | 437,076 | 33,027 | ||||||
Total Revenue | 1,325,593 | 6,729,796 | ||||||
Cost of Sales | (1,056,318 | ) | (2,270,342 | ) | ||||
Gross profit | 269,275 | 4,459,453 | ||||||
Operating Expenses: | ||||||||
VAT | 202,209 | 1,026,579 | ||||||
Selling, general and administrative | 524,073 | 85,186 | ||||||
Total Operating Expenses | 726,282 | 1,876,765 | ||||||
Income (Loss) from Operations | (457,007 | ) | 2,582,688 | |||||
Other Income (Expenses): | ||||||||
Interest income | 2,035 | 1,200 | ||||||
Interest expense | (154,036 | ) | (75,953 | ) | ||||
Miscellaneous income | 16,072 | 59,092 | ||||||
Total Other Income (Expenses) | (135,929 | ) | (15,661 | ) | ||||
Income (Loss) before Taxes | (592,936 | ) | 2,567,027 | |||||
Income tax (expenses) benefit | (194 | ) | (670,896 | ) | ||||
Net Income (Loss) | $ | (593,130 | ) | $ | 1,896,131 |
The accompanying notes are an integral part of these unaudited condensed combined financial statements
F-23
JSC GLOBOTEK
CONDENSED COMBINED STATEMENT OF (DEFICIENCY IN) STOCKHOLDERS' EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009
(UNAUDITED)
Common Stock | Additional Paid -in | Accumulated | Accumulated Other Comprehensive | Total (Deficiency in)Shareholders' | ||||||||||||||||||||
Common Shares | Amount | Capital | Deficit | Income / (Loss) | Equity | |||||||||||||||||||
Balance as at 31, December 2008 | 100 | $ | 100 | $ | 1,059 | $ | (1,285,587 | ) | $ | 651,503 | $ | (632,925 | ) | |||||||||||
Cumulative translation adjustment | - | - | - | - | 167,328 | 167,328 | ||||||||||||||||||
Net loss | - | - | (593,130 | ) | - | (593,130 | ) | |||||||||||||||||
Balance as at 30, September 2009 | 100 | $ | 100 | $ | 1,059 | $ | (1,878,716 | ) | $ | 818,831 | $ | (1,058,726 | ) |
The accompanying notes are an integral part of these unaudited condensed combined financial statements
F-24
JSC GLOBOTEK
CONDENSED COMBINED STATEMENT OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008
(UNAUDITED)
2009 | 2008 | |||||||
Cash Flows from Operating Activities: | ||||||||
$ | (593,130 | ) | $ | 1,896,131 | ||||
Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: | ||||||||
Depreciation and amortization | 315,119 | 254,919 | ||||||
(Increase) / decrease in: | ||||||||
Trade receivables | (159,333 | ) | (190,752 | ) | ||||
Inventories | 554,142 | (789,154 | ) | |||||
Advances to suppliers | 80,945 | 283,690 | ||||||
VAT recoverable | (24,774 | ) | (540,810 | ) | ||||
Deferred tax assets | - | 670,798 | ||||||
Other current assets | 169,693 | 251,041 | ||||||
Increase / (decrease) in: | ||||||||
Advances received from customers | (351,050 | ) | (1,154,968 | ) | ||||
Trade payables | (321,938 | ) | 506,817 | |||||
Other current liabilities | (7,743 | ) | 202,295 | |||||
Net Cash Provided by (Used in) Operating Activities | (338,069 | ) | 1,390,004 | |||||
Cash Flows from Investing Activities: | ||||||||
Repyments of notes receivable | (13,104 | ) | - | |||||
Payment for purchase of Fixed assets | - | (3,037,543 | ) | |||||
Payment for intangible assets | (3,125 | ) | (122,267 | ) | ||||
Net Cash (Used in) Provided by Investing Activities | (16,229 | ) | (3,159,810 | ) | ||||
Cash Flows from Financing Activities: | ||||||||
Net proceeds from capital leases | 208,954 | 1,800,980 | ||||||
Repayment to note payable – related parties | (23,731 | ) | (582,279 | ) | ||||
Net Cash Provided by Financing Activities | 185,223 | 1,218,701 | ||||||
Exchange differences | 167,135 | 546,139 | ||||||
Net Decrease in Cash and Cash Equivalents | (1,940 | ) | (4,966 | ) | ||||
Cash and Cash Equivalents at the beginning of the Year | 2,015 | 9,273 | ||||||
Cash and Cash Equivalents at The End of the Year | $ | 75 | $ | 4,307 | ||||
Supplemental Disclosures of Cash Flow Information: | ||||||||
Cash paid during the year for interest | $ | - | 130,410 | |||||
Cash paid during the year for taxes | $ | - | 7,246 |
The accompanying notes are an integral part of these unaudited condensed combined financial statements
F-25
JSC GLOBOTEK
NOTES TO COMBINED FINANCIAL STATEMENTS
SEPTEMBER 30, 2009 AND 2008
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited condensed financial statements are prepared on a combined basis. All significant intercompany transactions and balances have been eliminated in combination. The financial statements include JSC Globotek, Globotek NV and Globotek Samara.
The unaudited condensed combined financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Accordingly, the results from operations for the nine months period ended September 30, 2009, are not necessarily indicative of the results that may be expected for the year ended December 31, 2009. These unaudited condensed combined financial statements should be read in conjunction with the December 31, 2008 financial statements and footnotes thereto included elsewhere in this report.
2. PROPERTY AND EQUIPMENT
The Company’s property and equipment at September 30, 2009 and 2008 consist of the following:
2009 | 2008 | |||||||
Machinery | $ | 3,259,856 | $ | 3,241,416 | ||||
Motor vehicles | 121,852 | 121,852 | ||||||
Furniture | 14,688 | 14,688 | ||||||
Office equipment | 68,984 | 65,032 | ||||||
Construction in progress | 801,925 | 911,002 | ||||||
4,267,307 | 4,353,989 | |||||||
Less accumulated depreciation | (782,066) | (261,256) | ||||||
$ | 3,485,241 | $ | 4,092,733 |
Depreciation expense charged to operations amounted to $385,913 and $251,506 for the period ended September 30, 2009 and 2008 respectively.
3. INVENTORY
Inventory at September 30, 2009 and 2008 consist of the following:
2009 | 2008 | |||||||
Raw materials | $ | 59,596 | $ | 81,867 | ||||
Finished goods and goods for resale | 46,660 | 732,778 | ||||||
Total | $ | 106,255 | $ | 814,644 |
F-26
4. TRADE PAYABLE
Accounts payable and accrued liabilities consisted of the following at September 30, 2009 and 2008:
2009 | 2008 | |||||||
Accounts payable | $ | 1,218,179 | $ | 2,563,745 | ||||
Accrued payroll | 29,280 | 33,430 | ||||||
Accrued taxes payable | 73,457 | 45,013 | ||||||
Other accounts payable | 22,441 | 16,398 | ||||||
Total | $ | 1,343,356 | $ | 2,658,586 |
5. RELATED PARTY TRANSACTIONS
Parties are considered to be related if one party has the ability to control the other party, is under common control, or can exercise significant influence over the other party in making financial or operational decisions. In considering each possible related party relationship, attention is directed to the substance of the relationship, not merely the legal form. During the year the Company entered into transactions with related parties. The outstanding balances at the period end and the income and expense for the period with related parties are as follows:
Shareholders | Accounts | 2009 | 2008 | ||||||
Lukin D. | Borrowings (сurrent liabilities) | $ | 1,226 | $ | - | ||||
Borrowings (non-сurrent liabilities) | 843,002 | 1,017,754 | |||||||
Interest expenses | 8,382 | - | |||||||
Lukin A. | Trade payable | 759 | 19,298 | ||||||
Other costs | 51,295 | 69,291 | |||||||
Rent and rates | 3,097 | 4,183 | |||||||
Lukin S. | Trade receivable | ||||||||
Sales of assets | 1,648 | ||||||||
Lapkin A. | Trade payable | 40,204 | 47,921 | ||||||
Intangible Assets (patent) | 42,109 | 47,109 | |||||||
Lapkin S. | Trade payable | 40,204 | 47,921 | ||||||
Intangible Assets (patent) | 42,109 | 47,109 |
Also, the Company buys and sells goods from related parties- the entities controlled or managed by the stockholders of the Company. The Company sold goods totaling to $596,000 and $3,243,000 for the nine months ended September 30, 2009 and 2008, respectively. The Company purchased goods totaling to $0 and $1,941,000 for the nine months ended September 30, 2009 and 2008, respectively.
6. SUBSEQUENT EVENTS
a) Management has made decision to transfer a complex carrying over on processing of passing oil gas from Mohtikovsky deposit (Nizhnevartovsk area, Hunts-Mansijsky independent district-Jugra) to Samara (Samara region), for more effective utilization is accepted. For these purposes the contract of purchases with the lease company is concluded.
b) On November, 26, 2009 the contract on performance of pre-design works on two deposits of passing oil gas is signed. The termination of works is planned in December, 2009. After performance of research works on processing passing oil gas will be finished, signing contracts on delivery of complexes is planned for the sum $3.5 million in December, 2009 and $10 million in 2010.
F-27