UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
x ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2008
o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ______ to ______
Commission File Number 000-32847
TITAN GLOBAL HOLDINGS, INC.
(Name of small business issuer in its charter)
| 87-0433444 |
(State or other jurisdiction of incorporation or organization | I.R.S. Employer Identification Number |
1700 Jay Ell Drive, Suite 200
Richardson, Texas 75081
(Address of Principal Executive Offices, Including Zip Code)
Issuer’s telephone number: (972) 470-9100
Securities registered pursuant to Section 12(b) of the Exchange Act: None
Securities registered pursuant to Section 12(g) of the Exchange Act: Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o Nox
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o No x
Indicate by check mark if the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the proceeding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “larger accelerated filer”, “accelerated filer”, and “small reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o Accelerated filer o Non-accelerated filer o Small reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold on the Pink OTC Market (“Pink Sheets”) as of the last business day of the registrant’s recently completed fiscal quarter. $17,632,115
As of December 1, 2008, the number of outstanding shares of the issuer’s Common Stock, par value $0.001 per share, were 53,430,652.
TITAN GLOBAL HOLDINGS, INC.
ANNUAL REPORT ON FORM 10-K
For the Fiscal Year August 31, 2008
TABLE OF CONTENTS |
| |
| | | | | Page |
PART I | | | | |
| Item 1. | | Business | | 3 |
| Item 1A. | | Risk Factors | | 12 |
| Item 1B. | | Unresolved Staff Comments | | 17 |
| Item 2. | | Properties | | 18 |
| Item 3. | | Legal Proceedings | | 18 |
| Item 4. | | Submission of Matters to a Vote of Security Holders | | 22 |
| | | | | |
PART II | | | | |
| Item 5. | | Market for Common Equity and Related Stockholder Matters and Purchases of Equity Securities | | 22 |
| Item 7. | | Management's Discussion and Analysis of Financial Conditions and Results of Operations | | 23 |
| Item 8. | | Financial Statements and Supplementary Data | | 36 |
| Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | 84 |
| Item 9A. | | Controls and Procedures | | 84 |
| Item 9B. | | Other Information | | 85 |
| | | | | |
PART III | | | | |
| Item 10. | | Directors, Executive Officers, Promoters, Control Persons and Corporate Governance; Compliance with Section 16(a) of the Exchance Act | | 85 |
| Item 11. | | Executive Compensation | | 87 |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 90 |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | 91 |
| Item 14. | | Principal Accountant Fees and Services | | 92 |
| | | | | |
PART IV | | | | |
| Item 15. | | Exhibits | | 92 |
| SIGNATURES | | 98 |
ITEM 1. BUSINESS
GENERAL
Titan Global Holdings (the “Company”, “We”, “Us”, “Our” or “Titan”) is a holding company owning subsidiaries engaged in a number of diverse business activities. The most material of these are in the energy and telecommunications industries. We own and are in the process of discontinuing operations in the electronics manufacturing, apparel and consumer products industries. The Company is domiciled in the state of Utah and its corporate headquarters are in Richardson, Texas.
Our operating subsidiaries are managed in a much decentralized fashion. Our corporate headquarters provides very limited support to our operating subsidiaries and there is minimal involvement by the corporate headquarters in running the day-to-day business activities of our operating units. Our corporate headquarters participates and is ultimately responsible for arranging financing, allocating capital, sourcing senior leadership and influencing the strategic direction of each operating unit.
We are opportunistic buyers of companies that offer a value proposition either through initiating operating efficiencies by our experienced management team and or synergies with our existing operation. In either case, our management team is experienced in financing acquired operations with innovative lenders with what we perceive as minimal dilution to our existing shareholders. The Company is committed to serving our shareholders and customers through our endeavors in a variety of businesses. The Company pursues opportunities in a variety of industries as part of a diversification strategy coupled with opportunistic acquisitions. Once acquired, our management assesses specific industry appropriate strategies to build revenue, enhance margins and contain general and administrative expenses.
The Company has two active wholly-owned subsidiaries operating in two divisions - Titan Global Energy Group and the Communications Division. Titan Global Energy division includes Appalachian Oil Company, Inc. (“Appco”). Appco is primarily engaged in the distribution of petroleum fuels and in the operation of retail convenience stores. The Communications division consists of Planet Direct Inc., an innovative distributor of prepaid international long distance calling cards. We are in the process of winding down and or liquidating several other subsidiaries including Oblio Telecom, Inc. (“Oblio”) which was previously a distributor of prepaid international long distance calling cards that ran on a network operated by another subsidiary that we are discontinuing, StartTalk Inc. (“StartTalk”), Titan Wireless Communications, Inc. (“Titan Wireless”), whose primary assets were liquidated in January 2008, Titan Global Brands that includes USA Detergents, Inc. (“USAD”), which was a manufacturer and distributor of value-branded home care products and Titan Apparel Inc, (“Titan Apparel’) which designed and distributed footwear, the Titan Electronics and Homeland Security division including Titan PCB East, Inc. (“Titan East”), whose primary assets were sold in a transaction that closed on August 1, 2008, Titan Electronics Inc. (formerly PCB West, Inc.) whose primary assets were sold in a transaction that closed effective July 18, 2008, and Titan Nexus Inc., which is in the process of being liquidated.
HISTORY OF THE COMPANY
The Company was organized under the laws of the State of Utah on March 1, 1985, with the primary purpose of seeking potential business enterprises which in the opinion of the Company's management would prove profitable. The Company was largely inactive through 2001.
The Company began its electronics and homeland security division in 2001 through SVPC Partners LLC, a Delaware limited liability company that commenced its operations in July 2001 ("SVPC") through the acquisition of all of the assets of SVPC Circuit Systems, Inc., certain assets of Circuit Systems Inc. and certain system integration division assets out of bankruptcy from creditors of Paragon Electronic Systems, Inc. In addition, effective August 30, 2002, through the Company's wholly-owned subsidiary Titan EMS Acquisition Corp., a Delaware corporation ("Acquisition Co"), the Company acquired all of the capital stock of Titan PCB West through an exchange of its Common Stock pursuant to an Agreement and Plan of Merger (the "Merger"). In connection with the Merger, its fiscal year end was also changed from June 30 to August 31. In the Merger, Acquisition Co merged with and into Titan PCB West through the exchange of 6,880,490 shares of its Common Stock for all of Titan PCB West's outstanding shares of common stock.
On February 27, 2003, through the Company's subsidiary, Titan PCB East, the Company acquired substantially all of the assets of Eastern Manufacturing Corporation, an Amesbury, Massachusetts-based manufacturer of rigid-flex printed circuits using a patented manufacturing process (the "HVR Flex Ô Process"), in a foreclosure sale from Eastern Manufacturing Corporation's secured lender Eastern Bank.
On July 28, 2005, Farwell Equity Partners, LLC (“Farwell”) and its newly formed acquisition subsidiary, Oblio Telecom, Inc. entered into an Asset Purchase Agreement with Oblio Telecom L.L.P for the purchase of substantially all of the assets of Seller including a subsidiary Pinless Inc. This transaction closed on August 12, 2005, upon Oblio obtaining financing for the acquisition. Also, effective on August 12, 2005 and following the aforementioned closing, Farwell contributed its 1,000 shares of the common stock of Oblio to Titan, which represents all of the authorized and outstanding common stock of Oblio. Upon our receipt of the Oblio common stock, Oblio became our wholly-owned subsidiary.
On April 17, 2006, the Company established StartTalk, Inc. to own and operate switching equipment.
On September 28, 2006, the Company established Titan Wireless to better capitalize on organic and strategic growth opportunities in the prepaid wireless sector. Our Board of Directors approved a plan to transfer all wireless assets, including the Bravo Cellular and the Picante Movil brands to Titan Wireless.
On May 11, 2007, the Company through its subsidiary Titan Wireless acquired certain assets of Ready Mobile, LLC. Ready Mobile is in the business of creating, marketing, and distributing prepaid telephone products for the wireless markets.
On July 23, 2007, the Company formed a new division, the Titan Global Energy Group (“Titan Global Energy”). Titan Global Energy’s focus is on acquiring and managing complementary energy sector assets, which falls in line with the Company’s strategy to aid growth through strategic acquisitions.
On September 17, 2007, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of Appalachian Oil Company, Inc. (“Appco”), a corporation formed under the laws of Tennessee, from the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict. Appco is headquartered in Blountville, Tennessee and is primarily engaged in the distribution of petroleum fuels in eastern Tennessee, southwestern Virginia, eastern Kentucky, western North Carolina and southern West Virginia and in the operation of retail convenience stores in some of those regions. Appco is a part of the Titan Global Energy division.
On August 7, 2007, the Company formed a new division, Titan Global Brands (“Titan Brands”). Titan Brands focused on integrating, protecting and expanding brand management capabilities and leveraging and optimizing growth from the Company's distribution channels.
On September 4, 2007, the Company formed Titan Card Services, Inc. ("Card Services") in an effort to enter the international prepaid money transfer business.
On October 16, 2007, the Company exercised its option to acquire 80% of the issued and outstanding capital of USA Detergents, Inc. (“USAD”) in exchange for one dollar ($1.00) pursuant to the Stock Purchase Agreement dated July 30, 2007 by and among the Company, USAD and USAD Metro Holdings, LLC, as amended. USAD is headquartered in North Brunswick, New Jersey and is a manufacturer and distributor of value-branded home care products that leverages brand extensions and licensing agreements with consumer product conglomerates.
On November 5, 2007, the Company formed Titan Electronics Group (“Titan EG”). Titan Nexus, along with the Company’s legacy subsidiaries, Titan East and Titan Electronics, Inc. (formerly Titan West) comprise Titan EG.
On December 14, 2007, Titan Apparel, Inc. (“Titan Apparel”), a wholly owned subsidiary of Titan Global Holdings, Inc., acquired substantially all of the assets of Global Brand Marketing, Inc (“Global”). Global, located in Santa Barbara, CA, owns the brands Dry-shod, No Mass, Mehandi and Funflopps. Global operated under the banner Global Feet and sells its footwear products in 130 countries worldwide.
During January 2008, the Company created Titan Communications, Inc. (“Titan Communications”) and began operations in the Company’s Pinless Inc. subsidiary as Planet Direct Inc. Through these subsidiaries, the communications division will further its strategic endeavors in the prepaid international long distance marketplace and begin exploring new relationships outside our historical distribution and supply channels.
On January 25, 2008, the Company sold substantially all of the assets of Titan Wireless to a management led buyout group, Boomerang Wireless through an asset purchase agreement.
On April 25, 2008, PCB West, Inc. changed its name to Titan Electronics, Inc.
Effective June 12, 2008, the Company’s USAD subsidiary’s assets were seized by the Bankruptcy Court as a result of an involuntary Chapter 7 bankruptcy petition filed by several of USAD’s creditors. As such, the operations of USAD have been deconsolidated from the operating results of the Company.
Effective July 18, 2008, the Company entered into an asset purchase agreement with Sunrise Electronics, Inc. to sell substantially all of the assets of Titan Electronics, Inc’s printed circuit board manufacturing facility located in Fremont, California which were previously included in our electronics and homeland security division. The operations of Titan Electronics, Inc. have been classified as discontinued operations.
In August 2008, Titan Apparel subsidiary ceased operations and we began liquidating the remaining assets including inventory, accounts receivable and fixed assets. The operations of Titan Apparel have been classified as discontinued operations as of and for the period ending August 31, 2008.
In August 2008, the Company evaluated its communications division and determined to classify the operations of Oblio Telecom, Start Talk and Titan Wireless as discontinued.
In August 2008, the Company evaluated the operations of our Titan Nexus subsidiary, which has been historically included in our electronics and homeland security division and determined to cease operations. We began liquidating the remaining assets including fixed assets, inventory and accounts receivable. As such, the operations of Titan Nexus have been included as discontinued operations as of and for the period ending August 31, 2008.
Effective August 1, 2008, the Company entered into an asset purchase agreement with a management led buyout team to sell substantially all of the assets of our printed circuit board manufacturing facility located in Amesbury, Massachusetts held by Titan Electronics, Inc. f/k/a Titan PCB East, Inc which was previously part of our electronics and homeland security division. The operations of Titan Electronics have been classified as discontinued operations.
Effective October 1, 2008, the Company completed the acquisition of all of the issued and outstanding shares of common and preferred stock of Crescent Fuels, Inc. (“Crescent”), a corporation formed under the laws of Kansas, from Phillip Near, Johnson Enterprises of Kansas, LLC, Jeff McReynolds, the Karen N. Reeder Trust, Harrison F. Johnson, Jr. and the Martha M. Johnson Trust. Crescent is headquartered in Independence, Kansas and is primarily engaged in the distribution of petroleum fuels in the mid-continent region of the United States and in the operation of retail convenience stores. Crescent is a part of the Titan Global Energy division.
MARKET SEGMENTS
The Company currently operates in two market segments – (i) energy through our Titan Global Energy group and (ii) telecommunications through our Titan Communications group. For financial information relating to our business segments, please see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8. Financial Statements and Supplementary Data”.
TITAN GLOBAL ENERGY GROUP
Operations
Our operations include retail convenience stores and wholesale petroleum distribution in the Southeastern United States. We operate 58 convenience store locations in Tennessee, Kentucky and Virginia where we offer merchandise, foodservice, motor fuel and other services consistent with the convenience store industry. In addition, we sell liquid motor fuels to an additional 170 locations through either wholesale distribution contracts or consignment arrangements primarily to convenience stores located in Tennessee, Kentucky, Virginia and North Carolina. For the fiscal period ending August 31, 2008, we distributed 377 million gallons of branded and unbranded motor fuel from refiners and terminal operators for our retail convenience store locations, wholesale distribution contracts and consigned locations. Our business experiences substantial seasonality due to customer activity behaviors during different seasons; in general, sales and operating income are highest in our third and fourth fiscal quarters which occur in the spring and summer months. Our lowest activity months are during the winter months.
We offer Marathon, BP, Citgo and Exxon branded motor fuel and unbranded motor fuel. We purchase our gasoline from these major oil companies, terminal operators and independent refiners. We purchase our branded gasoline and diesel fuel from major oil companies under supply agreements at the stated rack price, market price quoted at each terminal as adjusted per the terms of the applicable contracts. Our inventories of gasoline generally turn in approximately seven or less days.
The following table provides a history of our retail petroleum sales in thousands (000s) for the last two years:
| Fiscal year ended | | August 31, 2008 | | August 31, 2007 | |
| Petroleum sales | | $ | 137,786 | | $ | 108,964 | |
| Petroleum gallons sold | | | 47,437 | | | 52,102 | |
| Average gallons sold per store | | | 818 | | | 947 | |
| Average retail price per gallon | | $ | 2.90 | | $ | 2.09 | |
| Average gross profit per gallon | | $ | 0.16 | | $ | 0.18 | |
Our gasoline supply agreements typically contain provisions relating to, among other things, minimum volumes, payment terms, use of the supplier’s brand names, compliance with the supplier’s requirements, acceptance of the supplier’s credit cards, insurance coverage and compliance with legal and environmental requirements. As is typical in the industry, gasoline suppliers generally can terminate the supply contracts if we do not comply with any reasonable and important requirement of the relationship, including if we were to fail to make payments when due, if the supplier withdraws from marketing activities in the area in which we operate, or if we are involved in fraud, criminal misconduct, bankruptcy or insolvency.
With the volatile crude oil market, we attempt to pass along wholesale gasoline cost changes to our customers through retail price changes; however, we are not always able to do so. The timing of any related increase or decrease in retail prices is affected by competitive conditions. As a result, we tend to experience lower gasoline margins in periods of rising wholesale costs and higher margins in periods of decreasing wholesale costs. We are unable to ensure that significant volatility in gasoline wholesale prices will not negatively affect gasoline gross margins or demand for gasoline within our markets. In fiscal 2008, we started blending ethanol with gasoline fuel products that we distribute through many of our unbranded locations to increase our gross margin. Blending ethanol with petroleum based fuel products increases our margin because ethanol is not subject to the same local, state and federal fuel taxes as petroleum derived gasoline products and also provides valuable tax credits to the Company. In addition, we opened the first E85 ethanol pumps in eastern Tennessee to serve the ever increasing number of flex fuel vehicles in our marketplace.
For the stores that we operate, we carry a broad selection of food, beverages, snacks, grocery and non-food merchandise. We stock minimal merchandise units on average with each store offering a customized merchandise mix based on local customer demand and preferences. Our stores also offer candy, packaged foods, magazines and newspapers, health and beauty aids and a variety of other non-food items. We purchase the vast majority of our merchandise from a single wholesale grocer, L.P. Shanks Company (“Shanks”). We have a distribution agreement with Shanks pursuant to which Shanks is the primary distributor of our traditional grocery products to our stores. We purchase the products at Shank’s cost plus an agreed upon percentage, reduced by any promotional allowances from Shanks. We purchase the balance of our merchandise from a variety of other distributors. We do not have written contracts with a number of these vendors. All merchandise is delivered to our stores by Shanks or other vendors. We maintain very limited additional product inventories other than what is in our stores.
The following table provides a history of our merchandise sales in thousands (000s) for the last two years:
| Fiscal year ended | | August 31, 2008 | | August 31, 2007 | |
| Merchandise sales | | $ | 57,856 | | $ | 56,305 | |
| Average merchandise sales per store | | $ | 998 | | $ | 1,024 | |
| Merchandise sales same store growth | | | -2.54 | % | | 4.71 | % |
| Merchandise gross profit | | $ | 12,201 | | $ | 10,784 | |
Store Locations. As of August 31, 2008, we operated 58 convenience stores located primarily in rural markets in the Southeastern United States. All of our store locations sell motor fuel.
The following table highlights the regional distribution of our stores as of August 31, 2008:
| | Number of Stores |
| Tennessee | 25 |
| Kentucky | 12 |
| Virginia | 21 |
| Total | 58 |
The following table provides a history of our store openings, conversions, acquisitions and closings for the last two years:
| Fiscal Year | | 2008 | | 2007 |
| Number of locations, beginning of period | | 55 | | 56 |
| Acquired locations | | 3 | | 1 |
| Closed, relocated or divested locations | | 0 | | 2 |
| Number of stores, end of period | | 58 | | 55 |
Technology and Automation. The vast majority of our retail convenience stores use computerized management information systems, including point-of-sale scanning, that are designed to improve operating efficiencies, streamline back office functions, provide corporate management with timely access to financial and marketing data, reduce store level and corporate administrative expense and control merchandise shortage, or shrinkage. Our information systems platform is highly scalable, which allows new stores to be quickly integrated into our system-wide reporting.
Our management information systems obtain detailed store level sales and volume data on a daily basis and generate gross margin, payroll and store contribution data on a weekly basis. We utilize price scanning and electronic point-of-sale, or EPOS, technology in the vast majority of our retail convenience stores that is consolidated on a single platform, FACTOR, supported by on-site computers that are networked to our central server and back office. We manage our motor fuel inventory through FACTOR, which enables us to monitor and coordinate fuel inventory management with our motor fuel vendors. This product has allowed us to better control inventory levels. All store level, back office and accounting functions, including our merchandise price book, scanning, motor fuel management, scheduling, payroll and trend reports, are supported by FACTOR software, a fully integrated management information and financial accounting system. This system provides us with significant flexibility to continually review and adjust our pricing, merchandising strategies and price book, automates the traditional store paperwork process and improves the speed and accuracy of category management and inventory control. Data collected by the FACTOR system is consolidated for financial reporting, data analysis and category management purposes.
We believe our business model of operating both retail convenience stores and wholesale motor fuel distribution provides us with significant advantages over our competitors. Unlike many of our competitors who operate convenience stores only, we are able to take advantage of combined motor fuel purchasing volumes to obtain attractive pricing and terms while reducing the variability in motor fuel margins. We are a distributor of various brands of motor fuel, as well as unbranded motor fuel, which differentiates us from other wholesale distributors in our markets as well.
Distribution Network. As of August 31, 2008, we distributed motor fuel through approximately 170 dealer locations under long-term contracts. We also supply unbranded fuel to numerous other customers on a periodic basis by the load.
The following table provides a history of our petroleum distribution sales in thousands (000s) for the last two years:
| Fiscal year ended | | August 31, 2008 | | August 31, 2007 | |
| Petroleum sales | | $ | 239,152 | | $ | 248,593 | |
| Petroleum gallons sold | | | 86,672 | | | 128,018 | |
| Average wholesale price per gallon | | $ | 2.76 | | $ | 1.94 | |
| Average gross profit per gallon | | $ | 0.10 | | $ | 0.06 | |
Dealer Arrangements. We distribute motor fuel to dealers either under supply agreements or consignment arrangements. Under our supply agreements, we agree to supply a particular branded motor fuel or unbranded motor fuel to a location or group of locations and arrange for all transportation. We receive a per gallon fee equal to the rack cost plus transportation costs, taxes and a fixed margin. The initial term of most supply agreements is 10 years. These supply agreements require, among other things, dealers to maintain standards established by the applicable brand. Under consignment arrangements, we provide and control motor fuel inventory and price at the site and receive the actual retail selling price for each gallon sold less a commission paid to the dealer. Consignment margins per gallon are similar to our retail motor fuel margins, less the commissions paid to the dealers. Our wholesale segment maintains minimal inventories, consisting of consigned fuel inventory at dealer locations. We may provide credit terms to our wholesale customers, which are generally seven days. We generally require commercial letters of credit to secure credit terms offered to wholesale customers.
Selection and Recruitment of New Dealers. We constantly evaluate potential independent site operators based on their creditworthiness and the quality of their site and operation as determined by size and location of the site, monthly volumes of motor fuel sold, monthly merchandise sales, overall financial performance and previous operating experience. In addition to adding to our network through acquiring or recruiting existing independently operating sites from other distributors, we identify new sites to be operated by existing independent operators in our network or new operators we recruit to operate the site. We also occasionally pursue opportunities to convert our retail stores to dealer locations.
Industry Background
The source of the convenience store industry information in this section can be found at http://www.hoovers.com/convenience-stores-and-gas-stations/--ID__15--/free-ind-fr-profile-basic.xhtml
Management believes the convenience store industry remains a strong sector of the economy despite volatility with motor fuel prices, increased cigarette taxes and smoking regulations and variable credit card fees. Overall, 145,000 convenient stores generated $569.4 billion in total industry sales during 2006, up 14.9% from $495.5 billion in 2005.
Total industry in-store sales were $163.6 billion, up 8.3% from $151.1 billion in 2005. Motor fuel sales increased 17.9% to $405.8 billion in 2006 from $344.2 billion in 2005 and accounted for 83.1% of the increase in total industry sales. Total motor fuel sales have more than doubled, up 123.8% since 2002.
Total store count rose 3.2% to 145,119 while stores selling motor fuel rose 2.6% to 114,974. Total stores in the industry have risen 9.6% over the last four years and indicate that the underlying fundamentals of the industry remain strong.
Total industry sales over the last four years increased by 96% while pretax profits rose by 82%. While this is an impressive performance, it does point out the pressure on industry profits. The convenience store industry has performed well, particularly when compared to total retail sales. Total retail sales increased 5.0% in 2006 versus 7.0% in 2005, but increased by 24.9% since 2003.
Industry profitability dipped in 2006; pretax profits fell to $4.767 billion, down 19.1% from the all-time record of $5.895 billion in 2005. Contributing to the falling profits in 2006 were low motor fuel margins and rising credit card fees. Average profits for the last four years have been $4.923 billion versus $3.855 billion for the prior four years according to industry research conducted by Hoovers, Inc., a D&B Company.
The Titan Global Energy Group is primarily convenience stores with gas stations. The convenience store (c-store) industry includes about 60,000 companies with combined annual sales of $200 billion. Major companies include 7-Eleven, The Pantry, and the retail divisions of large oil companies like Exxon Mobil and BP. About 70 companies operate 100 or more stores. The industry is highly fragmented: the 50 largest companies hold less than 40 percent of the market. The average store has annual sales of about $2 million. An average store may sell close to a million gallons of gasoline per year; the average gross profit per gallon is about 13 cents. Chains not owned by oil companies generally buy gasoline from major oil companies or independent refiners under multiyear supply contracts, with delivery from local terminal at the “rack rate” (local market price). Contracts usually specify minimum annual purchases and may contain incentives for taking a high volume. The gas sold at stores may be branded or unbranded. Single-store operators often pay higher wholesale prices for gas. Typically, the gasoline inventory at each store turns over every seven days.
Given the limited space in a store, deciding what merchandise to sell is a key function of management. Merchandising often concentrates on goods with high volume (beverages) or high margins (drugs), or goods with low margins but that draw customers into the store (such as lottery tickets, toilet paper, and milk). Chains monitor their merchandise mix very carefully using highly sophisticated sales tracking computer software that can identify, for example products that are often bought together, or product that sells best at lunchtime, etc. Local managers often have some latitude in adjusting the merchandise mix to suit local needs and tastes. Merchandise is typically bought from several wholesalers, often under long-term supply contracts. 7-Eleven uses a single national distributor for all its grocery products, while beverages and snacks are bought from other wholesalers. A large chain may operate its own distribution system, with regional warehouses that package shipments from several wholesalers into daily deliveries to individual stores.
Competition
The retail convenience store industry is highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our stores. We compete with other convenience store chains, independently owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores and dollar stores. Over the past ten years, several non-traditional retailers, such as supermarkets and club stores, have impacted the convenience store industry, particularly in the geographic areas in which we operate, by entering the motor fuel retail business. These nontraditional motor fuel retailers have captured a significant share of the retail motor fuel market, and we expect their market share will continue to grow. In addition, some large retailers and supermarkets are adjusting their store layouts and product prices in an attempt to appeal to convenience store customers. Major competitive factors for our retail segment include, among others, location, ease of access, product and service selection, motor fuel brands, pricing, customer service, store appearance, cleanliness and safety.
In our wholesale business, we compete with major oil companies that distribute their own products, as well as other independent motor fuel distributors. We may encounter more significant competition if major oil companies increase their own motor fuel distribution operations or if our wholesale customers choose to purchase their motor fuel supplies directly from the major oil companies. Major competitive factors include, among others, customer service, price, range of services offered and quality of service.
Trade Names, Service Marks and Trademarks
We have registered, acquired the registration of, applied for the registration of and claim ownership of a variety of trade names, service marks and trademarks for use in our business, including “Appco.” We are not aware of any facts which would negatively affect our continuing use of any of the above trade names, service marks or trademarks.
Government Regulation and Environmental Matters
Many aspects of our operations are subject to regulation under federal, state and local laws. A violation or change in the enforcement or terms of these laws could have a material adverse effect on our business, financial condition and results of operations. We describe below the most significant of the regulations that impact all aspects of our operations.
Environmental Laws and Regulations. We are subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of hazardous materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of regulated materials, the exposure of persons to regulated materials, remediation of contaminated soil and groundwater and the health and safety of our employees.
Certain environmental laws, including the Comprehensive Environmental Response, Compensation and Liability Act (CERCLA), impose strict, and under certain circumstances, joint and several, liability on the owner and operator as well as former owners and operators of properties for the costs of investigation, removal or remediation of contamination and also impose liability for any related damages to natural resources without regard to fault. In addition, under CERCLA and similar state laws, as persons who arrange for the transportation, treatment or disposal of hazardous substances, we also may be subject to similar liability at sites where such hazardous substances come to be located. We may also be subject to third-party claims alleging property damage and/or personal injury in connection with releases of or exposure to hazardous substances at, from or in the vicinity of our current or former properties or off-site waste disposal sites.
We are required to make financial expenditures to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. Pursuant to the Resource Conservation and Recovery Act of 1976, as amended, the Environmental Protection Agency, or EPA, has established a comprehensive regulatory program for the detection, prevention, investigation and cleanup of leaking underground storage tanks. Compliance with existing and future environmental laws regulating underground storage tank systems of the kind we use may require significant capital expenditures in the future. These expenditures may include upgrades, modifications, and the replacement of underground storage tanks and related piping to comply with current and future regulatory requirements designed to ensure the detection, prevention, investigation and remediation of leaks and spills. State or local agencies are often delegated the responsibility for implementing the federal program or developing and implementing equivalent state or local regulations. We have a comprehensive program in place for performing routine tank testing and other compliance activities which are intended to promptly detect and investigate any potential releases. In addition, the Federal Clean Air Act and similar state laws impose requirements on emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. These laws may require the installation of vapor recovery systems to control emissions of volatile organic compounds to the air during the motor fueling process. We believe we are in compliance in all material respects with applicable environmental requirements, including those applicable to our underground storage tanks.
We are in the process of investigating and remediating contamination at a number of our sites as a result of recent or historic releases of petroleum products. At many sites, we are entitled to reimbursement from third parties for certain of these costs under third-party contractual indemnities, state trust funds and insurances policies, in each case, subject to specified deductibles, per incident, annual and aggregate caps and specific eligibility requirements. To the extent third parties (including insurers) fail to pay for remediation as we anticipate, and/or insurance is unavailable, and/or the state trust funds cease to exist or become insolvent, we will be obligated to pay these additional costs.
We are required to comply with federal and state financial responsibility requirements to demonstrate that we have the ability to pay for cleanups or to compensate third parties for damages incurred as a result of a release of regulated materials from our underground storage tank systems. We seek to comply with these requirements by maintaining insurance which we purchase from private insurers and in certain circumstances, rely on applicable state trust funds, which are funded by underground storage tank registration fees and taxes on wholesale purchase of motor fuels.
Sale of Alcoholic Beverages and Tobacco Products. In certain areas where our stores are located, state or local laws limit the hours of operation for the sale of alcoholic beverages, or prohibit the sale of alcoholic beverages, and restrict the sale of alcoholic beverages and cigarettes to persons older than a certain age. State and local regulatory agencies have the authority to approve, revoke, suspend or deny applications for and renewals of permits and licenses relating to the sale of alcoholic beverages, as well as to issue fines to stores for the improper sale of alcoholic beverages and cigarettes. Failure to comply with these laws may result in the loss of necessary licenses and the imposition of fines and penalties on us. Such a loss or imposition could have a material adverse effect on our business, liquidity and results of operations. In many states, retailers of alcoholic beverages have been held responsible for damages caused by intoxicated individuals who purchased alcoholic beverages from them.
While the potential exposure for damage claims as a seller of alcoholic beverages and cigarettes is substantial, we have adopted procedures intended to minimize such exposure. In addition, we maintain general liability insurance that may mitigate the effect of any liability.
Safety. We are subject to comprehensive federal, state and local safety laws and regulations. These regulations address issues ranging from facility design, equipment specific requirements, training, hazardous materials, record retention, self-inspection, equipment maintenance and other worker safety issues, including workplace violence. These regulatory requirements are fulfilled through health, environmental and safety programs.
Store Operations. Our stores are subject to regulation by federal agencies and to licensing and regulations by state and local health, sanitation, safety, fire and other departments relating to the development and operation of convenience stores, including regulations relating to zoning and building requirements and the preparation and sale of food. Difficulties in obtaining or failures to obtain the required licenses or approvals could delay or prevent the development of a new store in a particular area.
Our operations are also subject to federal and state laws governing such matters as wage rates, overtime, working conditions and citizenship requirements. At the federal level, there are proposals under consideration from time to time to increase minimum wage rates and to introduce a system of mandated health insurance, both of which could affect our results of operations.
Employees
Titan Global Energy Division has 571 employees, of which 451 are full-time employees. Approximately 67% of the employees work in retail stores, approximately 17% in the wholesale distribution and 16% in corporate or field offices. The retail stores typically employ an average of 6 to 14 individuals, who are supervised by a single store manager, and 34 assistant store managers. Our retail field management staff consists of 10 area managers, each of whom is responsible for 5 to 8 stores.
Our Energy Division business is seasonal and as a result the number of employees fluctuates from a high in the spring and summer to a low in the fall and winter. The Energy Division is headquartered in Blountville, Tennessee and employs territory managers, commercial sales representatives and support staff. None of the employees are subject to collective bargaining agreements.
TITAN COMMUNICATIONS
Operations
Titan Communications division provides its customers efficient, cost-effective international prepaid telecommunications calling cards. We provide our end-user customers through our distribution network international prepaid calling cards that offer efficient calling options to foreign countries. We generally design our cards on a region/country specific basis to offer our customers enhanced value to their preferred call destinations. Our cards are generally sold in $2, $3 and $5 denominations. The prepaid international calling cards we are currently distributing are sourced from one provider. This provider is the leading telecommunications company in the primary calling destination for the vast majority of our end users; Mexico. We purchase the cards for a fixed price; mark the cards up, taking into consideration our fixed overhead and profit margin, and sell through our distribution network.
Industry Background
The Company’s Communications division currently operates in the prepaid telecommunications market. Specifically, the Company’s primary product offerings are prepaid international long distance cards and services. Prepaid, also known as pay-as-you-go and pay-in-advance, is service that is paid for prior to usage. Many consumers prefer prepaid because it offers improved budget controls, access and flexibility while not requiring deposits or constraining contracts. This method of payment has been widely used in foreign markets and is gaining acceptance in the United States.
Competition
We compete with large distributors of prepaid calling cards, providers of prepaid calling cards and numerous small and regional distributors. Many of these competitors own and operate their own network whereby they control the inbound termination, outbound termination and ultimately the delivery minutes to a particular destination. The calling card industry is notable for its relative lack of regulation compared to the rest of the telecommunications industry and for its ease of market entry. As calling rates continue to decline and competition increases, we will increasingly rely on our ability to secure distribution contracts with carriers that deliver high call quality, good customer service and competitive delivery minutes to desirable destinations.
Government Regulation and Environmental Matters
Universal Service Fund
In 1997, the FCC issued an order, referred to as the Universal Service Order that requires all telecommunications carriers providing interstate telecommunications services to periodically contribute to universal service support programs administered by the FCC (the “Universal Service Funds”). These periodic contributions are currently assessed based on a percentage of each contributor’s interstate and international end user telecommunications revenues reported to the FCC. We, and most of our competitors, pass through these Universal Service Fund contributions in the price of our interstate services, either as a separate surcharge or as part of the base rate. In turn, we remit amounts owed to the Universal Services Fund on a quarterly basis. We indirectly pay contributions applicable to our wire-line services through our underlying suppliers.
Pursuant to FCC Regulation 54.706(c), from November 1, 1999 to April 1, 2003, a provider of interstate and international retail communications services is not required to contribute to the USF based on its international telecommunications end-user revenues if its interstate telecommunications end-user revenues constitute less than eight (8%) percent of its combined interstate and international end-user revenues. Effective April 1, 2003, the FCC raised the Limited International Revenue Exemption (LIRE) threshold to twelve (12%) percent. As our prepaid international calling card division’s end-user revenues are greater than eighty-eight (88%) percent international end-user revenues, we are exempt from USF contributions for the vast majority of revenue generated by our calling card division. Any changes to this exemption by the FCC would impact the future profitability of our communications division.
In addition to the FCC universal service support mechanisms, state regulatory agencies also operate parallel universal service support systems. As a result, we are subject to state, as well as federal, universal service support contribution requirements, which vary from state to state.
Employees
Titan’s communications division has 11 full-time employees. Of these 1 is involved in management, 1 in shipping and inventory, 7 in administrative/accounting, and 2 in sales.
TITAN GLOBAL HOLDINGS CORPORATE DIVISION
Employees
Titan’s corporate division has 10 full time direct employees. All are in executive or administrative/accounting capacities.
CORPORATE INFORMATION
The Company's corporate office is located at 1700 Jay Ell Drive, Suite 200, Richardson, Texas 75081. The Company's telephone number is (972) 470-9100. Our website address is www.titanglobalholdings.com . We make available on our website, free of charge, our Annual reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K and any amendments to such reports, as soon as reasonably practicable after we electronically file such material with, or furnish them to, the Securities and Exchange Commission (“SEC”).
ITEM 1A. RISK FACTORS
Statements in this report concerning the future revenues, expenses, profitability, financial resources, product mix, market demand, product development and other statements in this report concerning the future results of operations, financial condition and business of Titan Global Holdings, Inc. are “forward-looking” statements as defined in the Securities Act of 1933 and Securities Exchange Act of 1934. Investors are cautioned that the Company’s actual results in the future may differ materially from those projected in the forward-looking statements due to risks and uncertainties that exist in the Company’s operations and business environment, including:
Unless otherwise indicated, all numbers (except per share amounts) presented under this Item 1A are stated in thousands.
RISKS RELATING TO THE COMPANY’S BUSINESS:
We have experienced net losses, and we may not be profitable in the future.
We experienced net losses of $52,007 and $23,748 for the years ended August 31, 2008 and 2007, respectively, and we may not generate profits in the future on a consistent basis, or at all. As of August 31, 2008, we had a net working capital deficit from continuing operations of $17,880 and a shareholders’ deficit of $73,566. If we fail to achieve consistent profitability, that failure could have a negative effect on our financial condition.
We may need additional capital in the future and it may not be available on acceptable terms, or at all.
Looking ahead at long-term needs, we may need to raise additional funds for a number of purposes; to sustain and expand sales and marketing activities, to effectively support the operations and to otherwise implement our overall business strategy. If such funds are not available when required or on an acceptable terms, our business and financial results could suffer. The inability to obtain additional capital will restrict our ability to grow and may reduce our ability to continue to conduct business operations. Any additional equity financing may involve substantial dilution to the existing shareholders.
If we are unable to retain the services of key personnel or if we are unable to successfully recruit qualified managerial and sales personnel having experience in the business, we may not be able to continue operations.
Our future success will depend to a significant degree upon the continued contributions of our key management, marketing, technical, financial, accounting and operational personnel. The loss of the services of one or more key employees could have a material adverse effect on our results of operations. We also believe that our future success will depend in large part upon our ability to attract and retain additional highly skilled managerial and technical resources. There can be no assurance that we will be successful in attracting and retaining such personnel. In addition, recent and potential future facility shutdowns and workforce reductions may have a negative impact on employee recruiting and retention.
Our financial results may fluctuate from period to period as a result of several factors which could adversely affect our stock price.
Our operating results may fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control and because many of our operating costs are fixed, even small revenue shortfalls would materially decrease our gross margins. If future operating results are below the expectations of investors or market analysts, our stock price may decrease. Factors that might impact financial results include:
| | · | the amount and timing of capital expenditures and other costs relating to the implementation of our business plan, including acquisitions of, and investments in, competing or complementary companies or technologies; |
| | · | fluctuations and seasonality in the demand for our products; |
| | · | uncertainty and variability in demand by customers; |
| | · | the introduction of new products or services by our competitors; |
| | · | general economic conditions and economic conditions specific to the fuel distribution and telecommunications industries. |
Our principal stockholders, officers and directors own a controlling interest in our voting stock and investors have a limited voice in our management.
Our principal stockholders, officers and directors, in the aggregate, beneficially own approximately 63.11% of our outstanding common stock. Three of the Company’s stockholders, Irrevocable Children’s Trust, Crivello Group, LLC, and Farwell Equity Partners, LLC, hold approximately 61.49% of our outstanding common stock. David Marks, the Company’s Chairman, is one of two trustees of Irrevocable Children’s Trust and is the Managing Member of Farwell Equity Partners, LLC. Mr. Marks has sole voting and dispositive authority with respect to the shares of stock held by Irrevocable Children's Trust and Farwell Equity Partners, LLC. As a result, these stockholders acting together, have the ability to control substantially all matters submitted to the Company's stockholders for approval, including:
| | · | election of its board of directors; |
| | · | removal of any of its directors; |
| | · | amendment of its certificate of incorporation or bylaws; |
| | · | adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us; and |
| | · | significant corporate transactions |
As a result of their ownership and positions, our principal stockholders, directors and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our principal stockholders, directors and executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Their stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of the Company, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over its stock price.
Risks Relating to the Company’s Global Energy Division:
The convenience store industry is highly competitive and impacted by new entrants and our failure to effectively compete could result in lower sales and lower margins.
The convenience store industry in the geographic areas in which we operate is highly competitive and marked by ease of entry and constant change in the number and type of retailers offering products and services of the type we sell in our stores. We compete with other convenience store chains, independently owned convenience stores, motor fuel stations, supermarkets, drugstores, discount stores, dollar stores, club stores and mass merchants. In recent years, several non-traditional retailers, such as supermarkets, club stores and mass merchants, have impacted the convenience store industry, particularly in the geographic areas in which we operate, by entering the motor fuel retail business. These non-traditional motor fuel retailers have captured a significant share of the motor fuels market, and we expect their market share will continue to grow. In some of our markets, our competitors have been in existence longer and have greater financial, marketing and other resources than we do. As a result, our competitors may be able to respond better to changes in the economy and new opportunities within the industry. To remain competitive, we must constantly analyze consumer preferences and competitors’ offerings and prices to ensure that we offer a selection of convenience products and services at competitive prices to meet consumer demand. We must also maintain and upgrade our customer service levels, facilities and locations to remain competitive and attract customer traffic to our stores. We may not be able to compete successfully against current and future competitors, and competitive pressures faced by us could have a material adverse effect on our business and results of operations and our ability to service our outstanding indebtedness.
Historical prices for motor fuel have been volatile and significant changes in such prices in the future may adversely affect our profitability.
Crude oil and domestic wholesale petroleum markets are volatile. General political conditions, acts of war or terrorism and instability in oil producing regions, particularly in the Middle East, Russia and South America, could significantly impact crude oil supplies and wholesale petroleum costs. Significant increases and volatility in wholesale petroleum costs could result in significant increases in the retail price of petroleum products and in lower motor fuel gross margin per gallon. Increases in the retail price of petroleum products could impact consumer demand for motor fuel and convenience merchandise. This volatility makes it extremely difficult to predict the impact future wholesale cost fluctuations will have on our operating results and financial condition. In addition, a sudden shortage in the availability of motor fuel could adversely affect our business because our retail stores typically have a three to four day supply of motor fuel and our motor fuel supply contracts do not guarantee an uninterrupted, unlimited supply of motor fuel. A significant change in any of these factors could materially impact our motor fuel gallon volumes, motor fuel gross profit and overall customer traffic, which in turn could have a material adverse effect on our business and results of operations and our ability to service our indebtedness.
Wholesale cost increases and excise tax increases on cigarettes could adversely impact our revenues and profitability.
Significant increases in wholesale cigarette costs and tax increases on cigarettes may have an adverse effect on unit demand for cigarettes. Cigarettes are subject to substantial and increasing excise taxes on both a state and federal level. Increased excise taxes may result in declines in overall sales volume as well as reduced gross profit percent. Currently, major cigarette manufacturers offer rebates to retailers. We include these rebates as a component of our gross margin from sales of cigarettes. In the event these rebates are no longer offered, or decreased, our wholesale cigarette costs will increase accordingly. In general, we attempt to pass price increases on to our customers. However, due to competitive pressures in our markets, we may not be able to do so. These factors could materially impact our retail price of cigarettes, cigarette unit volume and revenues, merchandise gross profit and overall customer traffic, which could in turn have a material adverse effect on our business and results of operations and our ability to service our indebtedness.
Future legislation and campaigns to discourage smoking may have a material adverse effect on our revenues and gross profit.
Future legislation and national, state and local campaigns to discourage smoking could have a substantial impact on our business, as consumers adjust their behaviors in response to such legislation and campaigns. Reduced demand for cigarettes could have a material adverse effect on sales of, and margins for, the cigarettes we sell.
The wholesale motor fuel distribution industry is characterized by intense competition and fragmentation and our failure to effectively compete could result in lower margins.
The market for distribution of wholesale motor fuel is highly competitive and fragmented, which results in narrow margins. We have numerous competitors, some of which may have significantly greater resources and name recognition than us. We rely on our ability to provide value-added reliable services and to control our operating costs in order to maintain our margins and competitive position. If we were to fail to maintain the quality of our services, customers could choose alternative distribution sources and our margins could decrease. Furthermore, there can be no assurance that major oil companies will not decide to distribute their own products in direct competition with us or that large customers will not attempt to buy directly from the major oil companies. The occurrence of any of these events could have a material adverse effect on our business and results of operations and our ability to service our indebtedness.
Our motor fuel operations are subject to inherent risk, and insurance, if available, may not adequately cover any such exposure. The occurrence of a significant event that is not fully insured could have a material adverse effect on our business.
We operate retail outlets that sell refined petroleum products and distribute motor fuel to our wholesale customers. The presence of flammable and combustible products at our facilities provides the potential for fires and explosions that could destroy both property and human life. These products, almost all of which are liquids, also have the potential to cause environmental damage if improperly handled or released. Insurance is not available against all operational risks, especially environmental risks, and there is no assurance that insurance will be available in the future. In addition, as a result of factors affecting insurance providers, insurance premiums with respect to renewed insurance policies may increase significantly compared to what we currently pay. The occurrence of a significant event that is not fully insured could have a material adverse effect on our business and results of operations and our ability to service our indebtedness.
Decreases in consumer spending, travel and tourism in the areas we serve could adversely impact our business.
In the convenience store industry, customer traffic is generally driven by consumer preferences and spending trends, growth rates for automobile and commercial truck traffic and trends in travel, tourism and weather. Changes in economic conditions could adversely impact consumer spending patterns and travel and tourism in our markets, which could have a material adverse effect on our business and results of operations and our ability to service our indebtedness.
The industries in which we operate are subject to seasonal trends, which may cause our operating costs to fluctuate, affecting our cash flow.
We experience more demand for our merchandise, food and motor fuel during the late spring and summer months than during the fall and winter. Travel, recreation and construction are typically higher in these months in the geographic areas in which we operate, increasing the demand for the products that we sell and distribute. Therefore, our revenues are typically higher in the third and fourth quarters of our fiscal year. As a result, our results from operations may vary widely from period to period, affecting our cash flow.
Compliance with and liability under state and federal environmental regulations, including those that require investigation and remediation activities, may require significant expenditures or result in liabilities that could have a material adverse effect on our business.
Our business is subject to various federal, state and local environmental laws and regulations, including those relating to underground storage tanks, the release or discharge of hazardous materials into the air, water and soil, the generation, storage, handling, use, transportation and disposal of hazardous materials, the exposure of persons to hazardous materials, and the health and safety of our employees. A violation of, liability under or compliance with these laws or regulations or any future environmental laws or regulations, could have a material adverse effect on our business and results of operations and our ability to service our outstanding indebtedness..
Certain environmental laws, including CERCLA, impose strict, and under certain circumstances, joint and several, liability on the owner and operator as well as former owners and operators of properties for the costs of investigation, removal or remediation of contamination and also impose liability for any related damages to natural resources without regard to fault. In addition, under CERCLA and similar state laws, as persons who arrange for the transportation, treatment or disposal of hazardous substances, we also may be subject to similar liability at sites where such hazardous substances come to be located. We may also be subject to third party claims alleging property damage and/or personal injury in connection with releases of or exposure to hazardous substances at, from or in the vicinity of our current or former properties or off-site waste disposal sites. The costs associated with the investigation and remediation of contamination, as well as any associated third party claims, could be substantial, and could have a material adverse effect on our business and results of operations and our ability to service our outstanding indebtedness. In addition, the presence or failure to remediate identified or unidentified contamination at our properties could potentially materially adversely affect our ability to sell or rent such property or to borrow money using such property as collateral.
We are required to make financial expenditures to comply with regulations governing underground storage tanks adopted by federal, state and local regulatory agencies. Compliance with existing and future environmental laws regulating underground storage tank systems of the kind we use may require significant capital expenditures in the future. These expenditures may include upgrades, modifications, and the replacement of underground storage tanks and related piping to comply with current and future regulatory requirements designed to ensure the detection, prevention, investigation and remediation of leaks and spills.
In addition, the Federal Clean Air Act and similar state laws impose requirements on emissions to the air from motor fueling activities in certain areas of the country, including those that do not meet state or national ambient air quality standards. These laws may require the installation of vapor recovery systems to control emissions of volatile organic compounds to the air during the motor fueling process. While we believe we are in material compliance with all applicable regulatory requirements with respect to underground storage tank systems of the kind we use, the regulatory requirements may become more stringent or apply to an increased number of underground storage tanks in the future, which would require additional, potentially material, expenditures.
Failure to comply with the other state and federal regulations we are subject to may result in penalties or costs that could have a material adverse effect on our business.
Our business is subject to various other state and federal regulations including, but not limited to, employment laws and regulations, minimum wage requirements, overtime requirements, working condition requirements, citizenship requirements and other laws and regulations. Any appreciable increase in the statutory minimum wage rate, income or overtime pay, adoption of mandated health benefits, or changes to immigration laws and citizenship requirements would likely result in an increase in our labor costs and such cost increase, or the penalties for failing to comply with such statutory minimums or regulations, could have a material adverse effect on our business and results of operations and our ability to service our outstanding indebtedness.
Terrorist attacks and threatened or actual war may adversely affect our business.
Our business is affected by general economic conditions and fluctuations in consumer confidence and spending, which can decline as a result of numerous factors outside of our control. Terrorist attacks or threats, whether within the United States or abroad, rumors or threats of war, actual conflicts involving the United States or its allies, or military or trade disruptions impacting our suppliers or our customers may adversely impact our operations. As a result, there could be delays or losses in the delivery of supplies to us, decreased sales of our products and extension of time for payment of accounts receivable from our customers. Specifically, strategic targets such as energy related assets (which could include refineries that produce the motor fuel we purchase or ports in which crude oil is delivered) may be at greater risk of future terrorist attacks than other targets in the United States. These occurrences could have an adverse impact on energy prices, including prices for our products, and an adverse impact on the margins from our operations. In addition, disruption or significant increases in energy prices could result in government imposed price controls. Any or a combination of these occurrences could have a material adverse effect on our business and results of operations and our ability to service our outstanding indebtedness.
RISKS RELATING TO THE COMPANY’S COMMUNICATIONS BUSINESS:
Our telecommunications business is affected by government regulations in the United States, which may delay or hinder our ability to provide services and products.
The following summary of regulatory developments and legislation does not purport to describe all present and proposed federal, state and local regulations and legislation affecting the telecommunications industry. Other existing federal and state regulations are currently the subject of judicial proceedings, legislative hearings and administrative proposals which could change, in varying degrees, the manner in which this industry operates. Neither the outcome of these proceedings, nor their impact upon the telecommunications industry can be predicted at this time.
The telecommunications industry is highly regulated in the United States at the federal, state and local levels. Various international authorities may also seek to regulate the services provided or to be provided by our communications subsidiaries. Federal laws and the regulations of the Federal Communications Commission (FCC) generally apply to interstate telecommunications, while state public utility commissions, public service commissions or other state regulatory authorities generally exercise jurisdiction over telecommunications that originate and terminate within the same state.
The FCC and state regulatory authorities may address regulatory non-compliance with a variety of enforcement mechanisms, including monetary forfeitures, refund orders, injunctive relief, license conditions, and/or license revocation. The regulation of the telecommunications industry is changing rapidly and the regulatory environment varies substantially from state to state. Moreover, as deregulation at the federal level occurs, some states are reassessing the level and scope of regulation that may be applicable to telecommunications companies. There can be no assurance that future regulatory, judicial or legislative activities will not have a material adverse effect on our business, financial condition and results of operations.
The sale of long distance telephone service through prepaid phone cards may be subject to “escheat” laws in various states. These laws generally provide that payments or deposits received in advance or in anticipation of the provision of utility services, including telephone service, that remain unclaimed for a specific period of time after the termination of such services are deemed “abandoned property” and must be submitted to the state. In the event such laws are deemed applicable, our communications subsidiaries may be required to deliver such amounts to certain states in accordance with these laws, which could have a material adverse effect on its business, financial condition or results of operations.
Pursuant to the Telecommunications Act of 1996, the FCC was granted the authority to implement certain policy objectives, including the establishment of the Universal Service Fund. The purpose of the Universal Service Fund is to subsidize the provision of local telecommunications services to low-income consumers, schools, libraries, health care providers and rural and insular areas that are costly to serve. Pursuant to a FCC order, Universal Service Fund contributions are generally equal to approximately four percent of a carrier’s interstate and international gross revenues, and approximately one percent of its intra-state “end user” gross revenues, effective January 1, 1998. The FCC will adjust the amount of these contributions each calendar quarter, and they may increase significantly in future periods. Our underlying carriers may pass their respective costs through to us.
The taxation of prepaid telephone card sales and use is evolving and is not specifically addressed by the laws of many states. Some states and localities charge a tax on the point-of-sale purchase of prepaid telephone cards while others charge a tax on usage of prepaid telephone cards. Although we do not have funds reserved specifically for this purpose, we believe that we have adequate working capital for any taxes it may ultimately be required to pay but, there can be no assurance that this will be the case. In addition, certain authorities may enact legislation which specifically provides for taxation of prepaid telephone cards or other services provided by us or may interpret current laws in a manner resulting in additional tax liabilities.
RISKS RELATING TO THE COMPANY’S COMMON STOCK:
The Company’s common stock is subject to the "Penny Stock" rules of the SEC and the trading market in its securities is limited, which makes transactions in its stock cumbersome and may reduce the value of an investment in its 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.
Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of the Company's common stock and cause a decline in the market value of its stock.
If an event of default occurs under the security agreement, stock pledge agreement, Greystone Business Credit II, LLC could take possession of all the Company’s and its subsidiaries’ assets.
In connection with the security agreement entered into in December 29, 2006, the Company granted a security interest in all of its assets to Greystone Business Credit II, LLC (“Greystone”) as security for the financing facility. Such security included a pledge of all trademarks and the stock of all subsidiaries. In addition the Company granted to Greystone a security interest on all of the Company’s and its subsidiaries' goods, inventory, contractual rights and general intangibles, receivables, documents, instruments, chattel paper, and intellectual property. The security agreement and stock pledge agreement provide that upon the occurrence of an event of default under any agreement with Greystone, Greystone shall have the right to take possession of the collateral, to operate the Company’s business using the collateral, and have the right to assign, sell, lease or otherwise dispose of and deliver all or any part of the collateral, at public or private sale or otherwise to satisfy the Company’s obligations under these agreements. Any attempt by Greystone to foreclose on the Company’s assets could likewise cause the Company to curtail its current operations.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The Company’s leased facilities as of August 31, 2008 are as follows:
| LOCATION | | SQUARE FEET | | PRIMARY USE | | LEASE TERMS |
| | | | | | | |
| Richardson, TX | 17,934 sq ft | Corporate Office | Lease expires April 30, 2012; lease payments of $11 per month |
| | | | | | | |
| Blountville, TN | | 10,000 sq ft | | Corporate Office | | Lease expires July 31, 2021; lease payments of $14 per month |
| | | | | | | |
| Milwaukee, WI | | 7,296 sq ft | | Warehouse | | Lease expires September 30, 2009; lease payments of $3 per month |
| | | | | | | |
| Santa Barbara, CA | | 3.200 sq ft | | Retail Space | | Lease expires January 31, 2009; lease payments of $13 per month |
The Company believes its Richardson, Texas facilities will be adequate for its current operating needs and continued near term growth.
Appco operates 58 leased convenience stores in East Tennessee, Kentucky and southwest Virginia. The convenience store leases expire at various dates between 2009 and 2027 with monthly rents from $1 to $20.
ITEM 3. LEGAL PROCEEDINGS
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
Unless otherwise indicated, all numbers (except per share amounts) presented under this Item 3 are stated in thousands.
ACE TECH CIRCUIT CO., LTD.
In or about September 2008, the Company was notified of a collections lawsuit filed by Ace Tech Circuit Co., Ltd. ("Ace Tech"). The lawsuit alleges the Company is the dba of its subsidiary Titan PCB West and Titan Electronics. A motion to quash service of summons and complaint as to the Company has been filed. Ace Tech is seeking approximately $459 for alleged failure to pay for delivered product. The Company has accrued $422 of the amounts alleged to be due in its accounts payable as of August 31, 2008 and is disputing the difference of $37.
ADVANCED SURFACE FINISHING
In July 2008, the Company's subsidiary Titan PCB West n/k/a Titan Electronics, Inc. (“Titan Electronics”) was notified of a collections lawsuit and a writ of attachment granted to Advanced Surface Finishing ("AFS"). AFS is seeking approximately $143 from Titan Electronics for alleged failure to pay for delivered product. The Company has accrued $58 of the amounts alleged to be due in its accounts payable as of August 31, 2008 and is disputing the difference of $85.
ALLSTATE PRINTING & PACKAGING, INC
On March 25, 2008, the Company’s subsidiary, Oblio, was notified, via a process server, that it was being sued by Allstate Printing & Packaging, Inc. (“Allstate”). Allstate is seeking $86 for alleged unpaid invoices for services rendered in Passaic County: Superior Court, NJ. This action is currently pending. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
AMERTEL COMMUNICATIONS, INC
On April 2, 2008, the Company’s subsidiaries, Oblio and Titan Wireless, were notified, via a process server, that it was being sued by Amertel Communications, Inc. (“Amertel”). Amertel is seeking $275 for alleged unpaid refunds for products purchased in the US District Court, MD. This action is currently pending. The Company disputes the amounts alleged to be due, and Management is unable to estimate the ultimate liability, if any, related to this claim at August 31, 2008.
ASIA TELECOM CORPORATION
On March 7, 2008, Oblio filed a lawsuit in Dallas County, Texas, against Asia Telecom Corporation (“Asia Telecom”) seeking to recover $753 for unpaid product. Asia Telecom filed a special appearance claiming that it does not have sufficient contacts with the State of Texas to warrant being sued in a Texas Court. On July 25, 2008, the district court denied Asia Telecom’s special appearance. We are now proceeding with pre-trial discovery against Asia Telecom.
AT&T CORP.
On December 5, 2006, the Company’s subsidiary, Oblio Telecom, Inc. (“Oblio”), filed a Demand for Arbitration with the American Arbitration Association against AT&T Corp. (“AT&T”). Oblio sought a refund of amounts paid to AT&T for the period from 1999 to October 2006 for USF charges paid to AT&T pursuant the Purchase Order Agreement, which sets forth the parties’ business relationship. The fees paid to AT&T for AT&T’s Enhanced Prepaid Card Service (“Prepaid Card Service”) included USF and other Federal Communications Commission (the “FCC”) charges. AT&T retained this revenue instead of making the required contributions to the USF and other FCC programs based on AT&T’s argument that its Prepaid Card Service was exempt under the law.
On October 12, 2007, Oblio entered into a Settlement Agreement (the “Settlement Agreement”) with AT&T, effective as of October 11, 2007. Pursuant to the Settlement Agreement, AT&T agreed to waive and discharge its right to receive $7,200 and Oblio issued a promissory note for the payment of the balance of $600 in interest to AT&T in full settlement of the Partial Final Award issued in the arbitration proceeding on the counter claims brought by AT&T against Oblio and in full settlement of the Oblio’s Universal Service Fund claim against AT&T, which has been paid in full. As Oblio had already recorded its liability in its accounts payable, the $6,600 net reduction in accounts payable reduced cost of sales during the three months ended November 30, 2007.
CLIFTON PREPAID COMMUNICATIONS CORP.
On August 21, 2007, Oblio filed suit against Clifton Prepaid Communications Corp., Clifton Pre-Paid Corp, and Aref Aref (collectively “Clifton”) for non-payment of invoices related to services rendered in the District Court, 199th Judicial District, Collin County, Texas. Oblio seeks $2,199 in payment plus pre-judgment interest, post judgment interest at the maximum lawful rate from July 30, 2007 until judgment at the rate of six percent per annum, and reasonable and necessary attorney fees and costs. Oblio also obtained Writs of Garnishment against Clifton’s funds on deposit with Bank of America, N.A. and J.P. Morgan Chase Bank. As a result of the Writs of Garnishment, Oblio trapped approximately $140 in Clifton’s bank accounts. Clifton has unsuccessfully attempted to dissolve the Writ of Garnishment. On September 22, 2008, the district court entered a final judgment against Clifton Prepaid Communications Corp. and Clifton Pre-Paid Corp. in the amount of approximately $2,500. The final judgment did not include Aref Aref because two weeks prior to trial, Aref Aref filed for personal bankruptcy in an effort to thwart Oblio’s collection efforts. On or about October 1, 2008, the district court entered judgment in the bankruptcy action directing Bank of America, N.A. and J.P. Morgan Chase Bank to release the garnished funds to Oblio. As of August 31, 2008, the Company has fully reserved and allowed for the $2,199 in accounts receivable from Clifton less the amounts captured in the Writ of Garnishment.
CRESCENT FUND, INC.
On July 6, 2007, the Company filed a lawsuit against Crescent Fund, Inc. in Dallas County, Texas, seeking a declaratory judgment declaring that the Company had no remaining liability to Crescent Fund, Inc. under a Consulting Agreement entered into by and between the Company and Crescent Fund, Inc. in October 2003. On July 7, 2008, the trial court entered judgment in favor of the Company declaring that the Company had no remaining liability to Crescent Fund, Inc.
FASTPRINT CIRCUIT TECHNOLOGIES
In August 2008, the Company was notified of a collections lawsuit filed by Fastprint Circuit Technologies (“Fastprint”). Fastprint is in the process of amending its lawsuit to name the Company's subsidiary Titan Electronics as the defendant. No specific demand has been made although Fastprint seeks damages for alleged failure to pay for delivered product.
F&L, LLP
On November 27, 2007, the Company was notified, via a process server, that it was being sued by F&L, LLP (“F&L”) in the District Court of Dallas County, Texas 160th Judicial District. F&L is seeking the Company to perform on its guarantee of notes payable from Oblio to F&L. Principal amounts due to F&L, LLP as of August 31, 2008 is $3,570. This action is currently pending. The Company has recorded the amounts due as a liability as of August 31, 2008. Oblio has also recorded accrued interest of $511 related to this obligation. On April 29, 2008, Greystone Funding, LLC intervened in the lawsuit seeking to stay the lawsuit as a result of F&L’s prior agreement to subordinate its debt and collection to the rights of Greystone Funding, LLC. A letter agreement staying F&L’s collection efforts has been executed between Titan Global Holdings, F&L, and Greystone Funding LLC. Pursuant to the letter agreement, this lawsuit has been dismissed without prejudice.
GEOTEL INTERNATIONAL, LC
On January 31, 2008, the Company’s subsidiary, Starttalk, was notified, via a process server, that it was being sued by Geotel International, LC (“Geotel”). Geotel is seeking $73 for alleged unpaid invoices for services rendered in Miami-Dade County: Circuit Court, FL. This action is currently pending. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
HAWAII GLOBAL EXCHANGE, INC. AND TRANSPAC TELECOM, INC.
On December 21, 2007, the Company’s subsidiary Oblio, filed a lawsuit against Hawaii Global in 162nd Judicial District Court of Dallas County, Texas. Oblio sought to recover $1,319 for unpaid product. Hawaii Global then removed the lawsuit to the United States District Court for the Northern District of Texas. Hawaii Global then moved to dismiss the Texas lawsuit based upon lack of personal jurisdiction and in the alternative to transfer the Texas lawsuit to the United States District Court of Hawaii. The District Court denied Hawaii Global’s motion to dismiss and or transfer. On January 29, 2008, the Company’s subsidiary, Oblio, was notified, via a process server, that it was being sued by Hawaii Global Exchange, Inc. and Transpac Telecom, Inc. (“Transpac”). Transpac is alleging violation of the Communications Act, breach of oral contract, promissory estoppel, and intentional interference with contractual relations and/or prospective economic advantage in US District Court, HI. Oblio then filed a motion to dismiss the Hawaii lawsuit based upon lack of personal jurisdiction or, in the alternative, to transfer the Hawaii lawsuit to Texas. Although Hawaii Global and Transpac have opposed the motion to dismiss, they have consented to the transfer of the Hawaii lawsuit to the Northern District of Texas. The Hawaii lawsuit has been transferred and consolidated with the Texas Lawsuit. Hawaii Global has joined the Company, Bryan Chance, Kurt Jensen, Frank Crivello, and David Marks as parties to the lawsuit. The Company disputes these allegations and will defend itself, and Management is unable to estimate the ultimate liability, if any, related to this claim at August 31, 2008. As of August 31, 2008, the Company has fully reserved and allowed for the $1,319 in accounts receivable from Hawaii Global.
INTERNATIONAL ELECTRONIC COMPONENTS USA
In or about September 2008, the Company was notified of a collections lawsuit filed by International Electronic Components USA ("IEC") against the Company and its subsidiary Titan PCB West and several individuals. IEC obtained a writ of attachment against subsidiary Titan PCB West. IEC alleges the Company is the alter ego of its subsidiary Titan PCB West and is seeking approximately $235 for alleged failure to pay for delivered product. A motion to quash service of summons and complaint as against the Company will be filed. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
JACO ELECTRONICS, INC.
On September 1, 2006, a subsidiary of the Company, Titan Nexus, Inc. f/k/a Nexus Nano Electronic, Inc. (“Nexus Nano”) filed suit against Jaco Electronics, Inc. (“Jaco”) in the United States District Court for the Southern District of New York, alleging that Jaco had made certain misrepresentations in connection with an Asset Purchase Agreement executed in September 2004. Jaco denied the allegations and asserted counterclaims against Nexus Nano and other related entities. On June 27, 2008, the Company, Jaco, and others entered into a Settlement Agreement that provided for the release of claims between the parties and included a five-year Supply Agreement between Jaco, Titan Nexus, Inc. d/b/a NEO EMS, Inc., and Nexus Custom Electronics, Inc.
LANHAM ACT LAWSUIT
On February 15, 2008, Oblio filed a lawsuit in the United States District Court for the Northern District of Texas against various individuals and entities alleging trademark infringement under the Lanham Act. Many of the defendants have filed motion to dismiss which are currently pending before the Court.
LATIN AMERICAN VOIP, INC
On December 26, 2007, the Company and its subsidiaries, Oblio and Starttalk were notified, via a process server, that it was being sued by Latin American VOIP, Inc (“Latin American VOIP”). Latin American VOIP is seeking $723 for alleged unpaid invoices for services rendered in Palm Beach County: Circuit Court, Florida. This action is currently pending. The Company has accrued $630 of the amounts alleged to be due in its accounts payable as of August 31, 2008 and is disputing the difference of $93.
LEVEL 3 COMMUNICATIONS, LLC
On November 2, 2007, the Company’s subsidiary, Oblio, was notified, via a process server, that it was being sued by Level 3 Communications, LLC (“Level 3”). Level 3 is seeking $2,379 for alleged unpaid invoices for services rendered in Broomfield County: District Court, CO. On May 14, 2008, Oblio entered into an Agreed Judgment in the amount of $2,042. As of August 31, 2008, Oblio has accrued the amount of the Agreed Judgment in accounts payable.
PALPILOT
In August 2008, the Company's subsidiary Titan PCB West f/k/a Titan EMS was notified of a collections lawsuit filed by Palpilot. Palpilot is seeking approximately $99 for alleged failure to pay for delivered product. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
RICO LAWSUIT
On February 15, 2008, Oblio filed a lawsuit in the United States District Court for the Northern District of Texas against various individuals and entities alleging a conspiracy to defraud Oblio under the Racketeering, Influence Corruption Act (“RICO”). Many of the defendants have filed motion to dismiss which are currently pending before the Court.
STX COMMUNICATIONS, INC
On January 16, 2008, STX Communications, LLC d/b/a STX Phone Cards (“STX”) sought a Temporary Restraining Order (“TRO”) in the 14th Judicial District Court of Dallas County, Texas against the Company’s subsidiary Oblio. The TRO immediately restrained Oblio from suspending its network support for any pre-paid phone card supplied by Oblio to STX and from taking any action to impair the network supporting any pre-paid phone card supplied by Oblio to STX. On January 23, 2008, the Company was notified by its attorneys that the TRO became effective and enforceable and that the Company was in violation of its TRO and was subject to sanctions for contempt of court. The TRO has since been dissolved by agreement of the parties.
STX has added the Company, Bryan Chance, Kurt Jensen, and Frank Crivello as defendants. STX claims that Oblio breached a contract to provide network support for prepaid phone cards, and to accept returns of the cards as necessary. STX also alleges that Oblio has been unjustly enriched by STX’s payments for cards, and that Oblio breached the implied warranty of merchantability and the express warranty to provide network support for the cards, and that Oblio’s failure to provide network support breached a duty of care owed to STX. STX also claims that Titan, Chance and Crivello tortiously interfered with the Oblio/STX contract and caused Oblio to purposefully interrupt network support for the cards sold to STX. Finally, STX alleges all defendants tortiously interfered with STX’s business relationships with STX’s distributors and end consumers by playing recorded messages for end consumers to return their cards, and changing rate decks on the cards from the posted rates. STX’s actual damages are not specified, but it seeks not less than $1,200 in exemplary damages, together with interest, and attorney’s fees.
Oblio has filed a counter-claim against STX, alleging STX failed to pay for the cards it purchased. Oblio also claims STX, together with Tawfik and Raimondo, STX’s chief officers, fraudulently induced Oblio to sell pre-paid phone cards for certain foreign markets at a loss, in exchange for STX’s promise to place Oblio products in more lucrative local markets. STX’s failure to place Oblio’s products in the promised markets caused Oblio damages in an amount not less than $10,000.
The case is currently set for trial the week of April 20, 2009.
TOUCH TELL, INC.
On December 21, 2007, Oblio filed suit in Dallas County, Texas, against Touch Tell, Inc. (“Touch Tell”) for $1,300 in unpaid product. Oblio also initially obtained a pre-judgment Writ of Garnishment against Touch Tell’s bank trapping $1,300. Touch Tell filed a counterclaim that claims that after allowing for credits, deactivations, and returns, Oblio owes Touch Tell approximately $268. Touch Tell successfully reduced the amount of the garnishment to $477. At August 31, 2008, Oblio has recorded accounts receivable from TouchTell equal to the garnishment of $477. No amounts have been recorded or accrued related to the counter-claim. The case is currently set for trial on November 24, 2008.
WESTERN PRINT & MAIL, LLC
On January 25, 2008, the Company’s subsidiary Titan Wireless was notified, via a process server, that it and Ready Mobile, LLC were being sued by Western Print & Mail, LLC (“Western”). Western is seeking $71 including late charges from Ready Mobile, LLC. Western is seeking $183 from Titan Wireless, which includes the $71 from Ready Mobile, LLC and $112 including late charges from Titan Wireless, for alleged unpaid invoices for services rendered in Iowa District Court for Linn County. This action is currently pending. The Company has not accrued any amounts related to the charges incurred by Ready Mobile, LLC. As per the asset purchase agreement with Ready Mobile, LLC, this liability was not assumed, and therefore is not a responsibility of the Company. In addition, the Titan Wireless liability was assumed by Boomerang Wireless, Inc. on January 25, 2008 with the sale of certain CMDA assets as discussed in Note 2.
OTHER LEGAL MATTERS
As of August 31, 2008, the Company has fully reserved and allowed (through its allowance for doubtful accounts $15,736 and its allowance for sales returns $3,672) $19,408 in accounts receivable recorded for the communications division matters referenced above, including Clifton.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The Company's shares are traded on the Pink OTC Market under the ticker symbol TTGL.PK. The Company's shares have been traded on the Pink OTC Market since February 2008 and prior to that traded on the OTC Bulletin Board since September 21, 2002. Prior to September 21, 2002, there was no "public market" for shares of its common stock. The following table sets forth, for the periods indicated, the high and low closing sales prices for past two fiscal years. The quotations reflect inter-dealer prices, without retail markups, markdowns, or commissions and do not necessarily represent actual transactions. The quotations were derived from the finance.yahoo.com website.
| | | High | | Low | |
| | | | | | |
2007 | | | | | | | |
| First Quarter ended November 30, 2006 | | | 1.01 | | | 0.50 | |
| Second Quarter ended February 28, 2007 | | | 1.36 | | | 0.92 | |
| Third Quarter ended May 31, 2007 | | | 1.43 | | | 1.02 | |
| Fourth Quarter ended August 31, 2007 | | | 1.78 | | | 0.94 | |
| | | | | | | | |
2008 | | | | | | | |
| First Quarter ended November 30, 2007 | | | 2.20 | | | 1.59 | |
| Second Quarter ended February 28, 2008 | | | 1.75 | | | 0.30 | |
| Third Quarter ended May 31, 2008 | | | 0.60 | | | 0.25 | |
| Fourth Quarter ended August 31, 2008 | | | 0.70 | | | 0.30 | |
Stockholders
On November 28, 2008, the last reported sale price for our Common Stock on the Pink OTC Market was $0.47 per share. As of November 28, 2008, there were approximately 2,664 holders of record of Common Stock.
Dividends
The Company has never declared or paid any cash dividends on the Common Stock. The Company currently intends to retain future earnings, if any, to fund the development and growth of its business and does not anticipate paying any cash dividends on the Common Stock in the foreseeable future. It is the Company’s intention to use any excess cash for debt retirement. Once this debt is extinguished, the Board of Directors of the Company intends to review this policy from time to time, after taking into account various factors such as the Company’s financial condition, results of operation, current and anticipated cash needs and plans for expansion.
The Company's registrar and transfer agent is Continental Stock Transfer and Trust Co., Inc., 17 Battery Place, 8th Floor, New York, NY 10004.
Sales of Unregistered Securities
None.
Repurchases
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |
| 05/09/07 | | 08/31/07 | | | 1,087,307 | | $ | 1.35 | | | 1,037,307 | | | | |
| 09/01/07 | | 11/30/07 | | | 24,850 | | | 1.62 | | | 24,850 | | | | |
| 12/01/07 | | 02/29/08 | | | 212,000 | | | 0.98 | | | 212,000 | | | | |
| 03/01/08 | | 05/31/08 | | | - | | | - | | | - | | | | |
| 06/01/08 | | 08/31/08 | | | - | | | - | | | - | | | | |
Total | | | | | 1,324,157 | | $ | 1.30 | | | 1,274,157 | | | 2,725,843 | |
Equity Compensation Plans
The following table summarizes as of August 31, 2008, the shares of common stock authorized for issuance under our equity compensation plans:
Equity Compensation Plan Information
| Plan Category | | Number of securities to be issued upon exercise of outstanding options, warrants and rights | | Weighted average exercise price of outstanding options, warrants and rights | | Number of securities remaining available for future issuance under equity compensation plans | |
| Equity compensation plans approved by security holders | | | - | | | - | | | - | |
| Equity compensation plans not approved by security holders | | | 1,094,167 | | $ | 0.83 | | | - | |
| Total | | | 1,094,167 | | $ | 0.83 | | | - | |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise indicated, all numbers (except per share amounts) presented under this Item 7 are stated in thousands.
This Management's Discussion and Analysis of Financial Condition and Results of Operations and other portions of this report contain forward-looking information that involve risks and uncertainties. The Company's actual results could differ materially from those anticipated by the forward-looking information. Factors that may cause such differences include, but are not limited to, availability and cost of financial resources, product demand, market acceptance and other factors discussed in this report under the heading “Forward Looking Information/Risk Factors. ” This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with its consolidated financial statements and the related notes included elsewhere in this report. All numbers referenced below are stated in thousands except per share amounts unless otherwise noted.
The Company’s relationships between revenue, cost of revenue, and operating expenses reflected in the financial information included in this Form 10-K do not represent future expected financial relationships. Much of the cost of revenue and operating expenses reflected in its consolidated financial statements are costs based on the integration of the acquired companies and assets that comprise its operations and the dispositions of certain operations. Accordingly, the Company believes that, at the Company's current stage of operations, period-to-period comparisons of results of operations are not meaningful.
The Company's business strategy, by division, is as follows:
Titan Global Energy Group
Titan Global Energy Group was formed in the fourth quarter of fiscal year 2007. Titan Global Energy Group is a division engaged in the acquisition and management of complementary energy sector assets. On September 17, 2007 Titan Global Energy Group completed the acquisition of Appco. Appco, formed in 1923 and based in Blountville, Tennessee, is a regional petroleum company that owns and operates an extensive petroleum product distribution network that is comprised of 170 dealers in the southeastern United States. Appco operates 58 convenience store locations in Tennessee, Kentucky and Virginia. Appco has more than 550 employees and maintains long standing partnerships with strategic terminal operators and major oil companies.
Titan Global Energy Group’s business strategy is to:
| | · | Integrate the operations and distribution network of Appco. |
| | · | Increase the integration of biofuel products through strategic agreements and acquisitions that will enhance core profitability at wholesale and retail distribution and environmental responsibility in the markets we serve. |
| | · | Integrate vertically in the supply chain of purchasing petroleum. |
| | · | Increase inside store margins and volume through alignment with strategic distribution partners, product placement and aggressive liquid fuel pricing. |
Titan Communications Division
The business strategy of the communications division is to re-establish the company in the prepaid international calling card distribution business. We are establishing relationships with international telecommunications providers to distribute prepaid calling cards in the United States. Our focus is on the distribution segment of the business not involving providing inbound or outbound termination or end user customer service. We are focusing our efforts on contracting with foreign carriers in the destination country of our end users. We are developing a new distribution network that ultimately serves independently owned and operated convenience stores through a network of distributors. The vast majority of prepaid international calling cards are distributed through this distribution channel. We are currently operating this segment of our business through Planet Direct Inc.
In the quarter ended February 29, 2008, the Company created Titan Communications to further its strategic endeavors in the prepaid international long distance marketplace, and began exploring new relationships outside Oblio’s traditional distribution and supply channels. Additionally, the Company no longer had strategic relationships with tier one partners for resale of prepaid international calling cards due to disputes over USF charges (see Note 2 to the consolidated financial statements). Simultaneously, the Company experienced a significant decrease in sales and collections of outstanding accounts receivable. Many of the long-standing distributors of Oblio’s products stopped placing orders for new product and stopped sending payments for previously placed orders. While we are vigorously pursuing legal action against many of these customers, the extended collection process has significantly disrupted the operating cash flow cycle of the prepaid international long distance portion of our communication’s division. These issues along with losses experienced in its network operations have resulted in the Company ceasing to do business as Oblio in the prepaid international long distance market. As such, the Company evaluated goodwill and other assets for impairment based on changes in business model. Goodwill and other intangibles of $4,666 were determined to be impaired and were written off during the quarter ended November 30, 2007. As of August 31, 2008, the allowance for sales returns remained at $3,552 and the allowance for uncollectible accounts receivable was increased to $12,114 for Oblio Telecom. In fiscal year 2008, The Company’s management committed to a plan to discontinue the Oblio Telecom and Titan Wireless operations and focus on Planet Direct, Inc.
CRITICAL ACCOUNTING POLICIES
The SEC has issued Financial Reporting Release No. 60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies" ("FRR 60"); suggesting companies provide additional disclosure and commentary on their most critical accounting policies. In FRR 60, the SEC defined the most critical accounting policies as the ones that are most important to the portrayal of a company's financial condition and operating results, and require management to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, the Company's most critical accounting policies include: revenue recognition, which affects sales, inventory valuation, which affects its cost of sales and gross margin; and allowance for doubtful accounts and stock-based compensation, which affects general and administrative expenses. The methods, estimates and judgments the Company uses in applying these most critical accounting policies have a significant impact on the results the Company reports in its consolidated financial statements.
Revenue recognition
The Company recognizes revenues when the following criteria are met: (1) the Company has persuasive evidence of an arrangement, such as contracts, purchase orders or written requests; (2) the Company has completed delivery and no significant obligations remain; (3) its price to its customer is fixed or determinable and (4) collection is probable.
In our energy division, we recognize sales of petroleum and other items when the title passes to the customer. We recognize the gross amounts earned from sales to wholesale customers as revenues. Shipping and handling costs charged to customers are included in our sales. At August 31, 2008 we had $0 allowance for returns and an allowance for doubtful accounts of $109. Actual returns may differ materially from our estimates, and revisions to the allowances may be required from time to time. Sales in our energy division are subject to volatility based on trading prices of petroleum and the competitive forces in our markets.
In the communications division, we recognize sales upon the activation of our prepaid calling cards by our customers. We provide our customers with a limited right of return. We record net sales as gross sales less an allowance for returns. At August 31, 2008, we had a $7 allowance for sales returns. Actual returns may differ materially from our estimates and revisions to the allowance may be required from time to time.
Cost of sales
In our energy division, cost of sales consists of costs of acquiring petroleum and related products in our stores. Additionally, we include transportation costs of petroleum, shipping costs and handling costs in the cost of sales. Our cost of sales can fluctuate based on the changing market pricing of petroleum products on a daily basis. We occasionally mitigate our risk of market fluctuations in petroleum pricing by purchasing fuel on the spot market at the refineries, through strategic relationships with terminal operators and prevailing rates on the open market.
In the communications division, cost of sales consists of printing, shipping and the cost of the cards from the service provider. We accrue for the cost of the cards from the service provider as the cards are activated by our customers. Our payment terms with the service provider vary based on the first use of the card by the end user of the telecommunication services.
Allowance for doubtful accounts
We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. Our allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts, the aging of accounts receivable, our history of bad debts, and the general condition of the industry. If a major customer's credit worthiness deteriorates, or our customers' actual defaults exceed our historical experience, our estimates could change and adversely impact our reported results. If a customers’ account is deemed to be uncollectible by management, the account is charged off against the allowance. The allowance is then re-assessed and adjusted accordingly.
Inventory valuation
In our energy division, liquid fuel and all other inventories are valued at the lower of cost, using the FIFO method, or market.
In our communications division, our policy is to value activated prepaid international card at the lower of cost or market on a card-by-card basis on a FIFO basis.
Long-lived Assets
We review long-lived assets for impairment whenever events or changes in circumstances indicate that the related carrying amounts may not be recoverable. Determining whether impairment has occurred typically requires various estimates and assumptions, including determining which cash flows are directly related to the potentially impaired asset, the useful life over which cash flows will occur, their amount, and the asset’s residual value, if any. In turn, measurement of an impairment loss requires a determination of fair value, which is based on the best information available. We use internal discounted cash flow estimates, quoted market prices when available and independent appraisals as appropriate to determine fair value. We derive the required cash flow estimates from our historical experience and our internal business plans and apply an appropriate discount rate.
Goodwill and Intangible Assets
We test goodwill for impairment annually and whenever events or circumstances make it more likely than not that impairment may have occurred, such as a significant adverse change in the business climate or a decision to sell or dispose of a reporting unit. Determining whether an impairment has occurred requires estimating the fair value of the respective reporting unit, which we estimate using a discounted cash flow method. When available and as appropriate, we use comparative market multiples to corroborate discounted cash flow results. In applying this methodology, we rely on a number of factors, including actual operating results, future business plans, economic projections and market data.
If this analysis indicates goodwill is impaired, measuring the impairment requires a fair value estimate of each identified tangible and intangible asset. In this case we supplement the cash flow approach discussed above with independent appraisals, as appropriate.
Stock-based compensation
We account for stock-based compensation according to SFAS 123(R) (revised 2004), “Share Based Payment” by using the modified-prospective method. Under SFAS 123(R), stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the consolidated statement of operations during the year ended August 31, 2008 includes compensation expense for stock-based payment awards granted prior to, but not yet vested, as of August 31, 2008, based on the grant date fair value estimated in accordance with SFAS 123(R).
As stock-based compensation expense recognized in the consolidated statement of operations for the year ended August 31, 2008 is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. SFAS 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
Derivative Liabilities
The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including embedded conversion and other features that are required to be bifurcated and accounted for separately as derivative financial instruments. Generally, where the ability to physical or net-share settle an embedded conversion option is not deemed to be within the control of the Company, the embedded conversion option is required to be bifurcated and accounted for as a derivative liability.
In connection with the sale of convertible debt and equity instruments, we may also issue freestanding options or warrants. Additionally, we may issue options or warrants to non-employees in connection with consulting or other services they provide. Although the terms of the options and warrants may not provide for net-cash settlement, in certain circumstances, physical or net-share settlement is deemed to not be within our control and, accordingly, we are required to account for these freestanding options and warrants as derivative liabilities, rather than as equity. Certain instruments, including convertible debt and equity instruments and freestanding options and warrants, may be subject to registration rights agreements, which impose penalties for failure to register the underlying common stock. The existence of these potential cash penalties may require that the embedded conversion option and the freestanding options or warrants be accounted for as derivative instrument liabilities.
Derivative liabilities are initially measured at their fair value and then re-valued at each reporting date, with changes in the fair value reported as charges or credits to the statement of operations. For derivative liabilities related to freestanding warrants and embedded conversion features, we use the Black-Scholes option pricing model to determine the fair value. For derivative liabilities related to registration rights agreements and cash payment premiums, we used a discounted present value of expected future cash flows to determine the fair value.
To the extent that the initial fair values of the bifurcated and/or freestanding derivative liabilities exceed the total proceeds received, an immediate charge to the statement of loss is recognized, in order to initially record the derivative liabilities at fair value. The discount from the face value of the convertible debt resulting from allocating part or all of the proceeds to the derivative liabilities, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to the statements of loss, using the effective interest method. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on the classification of the host instrument.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Deferred tax assets, including tax loss and credit carry-forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Realization of the deferred tax asset is dependent upon generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company adopted Interpretation No. 48, “Accounting for Uncertainty in Income Taxes—an Interpretation of FASB Statement No. 109” (“FIN 48”) effective September 1, 2007. The adoption of this pronouncement did not have a material impact on the Company’s result of operations or financial condition.
Results of Operations – Year Ended August 31, 2008 Compared to the Year Ended August 31, 2007
Sales
Energy
Sales increased to $417,879 in the year ended August 31, 2008 from $0 in the year ended August 31, 2007. The increase is due to the September 17, 2007 Titan Global Energy Group acquisition of Appco.
Communications
Sales increased to $451 in the year ended August 31, 2008 from $0 in the year ended August 31, 2007. During January 2008, the Company created Titan Communications and began operations in the Company’s Pinless Inc. subsidiary as Planet Direct Inc. Through these subsidiaries, the communications division will further its strategic endeavors in the prepaid international long distance marketplace and began exploring new relationships outside our historical distribution and supply channels.
Cost of Sales
Energy
Cost of sales increased $393,417 in the year ended August 31, 2008 from $0 in the year ended August 31, 2007. Cost of sales as a percentage of sales was 94%. Gross profit was $24,462 in the year ended August 31, 2008 compared to $0 in the year ended August 31, 2007. The increase in cost of sales and gross profit is due to the September 17, 2007 Titan Global Energy Group acquisition of Appco.
Communications
Cost of sales increased $413 in the year ended August 31, 2008 from to $0 in the year ended August 31, 2007. Gross profit increased $38 in the year ended August 31, 2008 from. $0 in the year ended August 31, 2007. During January 2008, the Company created Titan Communications and began operations in the Company’s Pinless Inc. subsidiary as Planet Direct Inc. Through these subsidiaries, the communications division will further its strategic endeavors in the prepaid international long distance marketplace and began exploring new relationships outside our historical distribution and supply channels.
Sales and Marketing
Energy
Sales and marketing expenses increased by $123 in the year ended August 31, 2008 from $1 in the year ended August 31, 2007. The increase in sales and marketing expense is due to the September 17, 2007 Titan Global Energy Group acquisition of Appco.
Communications
During January 2008, the Company created Titan Communications and began operations in the Company’s Pinless Inc. subsidiary as Planet Direct Inc. Through these subsidiaries, the communications division will further its strategic endeavors in the prepaid international long distance marketplace and began exploring new relationships outside our historical distribution and supply channels.
General and Administrative Expenses
Energy
General and administrative expenses increased $24,297 in the year ended August 31, 2008 from $0 in the year ended August 31, 2007. As a percentage of sales, general and administrative expense was 5.8% in the year ended August 31, 2008. The increase in general and administrative expense is due to the September 17, 2007 Titan Global Energy Group acquisition of Appco.
Communications
General and administrative expenses increased $1,162 the year ended August 31, 2008 from $0 in the year ended August 31, 2007. As a percentage of sales, general and administrative expense was 258% in the year ended August 31, 2008. The Company incurred startup expenses related to the January 2008 creation and startup of Titan Communications and the Pinless Inc. subsidiary dba Planet Direct Inc. Through these subsidiaries, the communications division will further its strategic endeavors in the prepaid international long distance marketplace and began exploring new relationships outside our historical distribution and supply channels.
Corporate
General and administrative expenses decreased to $2,684 in the year ended August 31, 2008 from $4,839 in the year ended August 31, 2007, a decrease of $2,155. The decrease in corporate general and administrative expenses from the prior year is due primarily to a decrease in salaries and wages of $1,000 and a decrease of $1,420 in investor relations expenses. Corporate general and administrative expenses are comprised primarily of salaries and wages, investor relation expenses, professional fees, consulting expenses, travel and insurance expenses.
Amortization Expense
Energy
Amortization expenses increased $316 in the year ended August 31, 2008 from $0 in the year ended August 31, 2007. As a percentage of sales, amortization expense was less than 1%. Amortization expense is related to the intangible asset amortization from the Appco transaction.
Other Income (Expense)
Energy
Interest expense increased $2,204 in the year ended August 31, 2008 from $0 in the year ended August 31, 2007. As a percentage of sales, interest expense was 0.5 % in the year ended August 31, 2008. Interest expense is related to Appco borrowings on its line of credit.
Derivative liabilities are initially measured at their fair value and then re-valued at each reporting date, with changes in the fair value reported as charges or credits to the statements of loss. The Energy segment recognized non-cash income from the change in fair value of its derivative liabilities of $703 during the year ended August 31, 2008 compared to $0 in the year ended August 31, 2007.
Communications
Interest expense increased $10 in the year ended August 31, 2008 compared to $0 in the year ended August 31, 2007. As a percentage of sales, interest expense was 2.0% in the year ended August 31, 2008. During January 2008, the Company created Titan Communications and began operations in the Company’s Pinless Inc. subsidiary as Planet Direct Inc.
Corporate
Interest expense increased $1,299 in the year ended August 31, 2008 from $15 in the year ended August 31, 2007. Interest expense is primarily related to the non-cash expense of derivative liabilities.
Discontinued operations
During the year ended August 31, 2008, the Company’s management committed to a plan to dispose of certain assets and liabilities of its Telecommunications Division, Electronic Homeland Security Division and its Titan Global Brands division. A summary of the results of operations are below:
| | | Twelve Months Ended | | | | | |
| | | 8/31/2008 | | 8/31/2007 | | $ Change | | % Change | |
| | | | | % of sales | | | | % of sales | | | | | |
| Sales - Communications division | | $ | 34,840 | | | 50 | | $ | 87,711 | | | 79 | | | (52,871 | ) | | -60 | % |
| Sales - Electronics and homeland security division | | | 26,386 | | | 38 | | | 23,634 | | | 21 | | | 2,752 | | | 12 | % |
| Sales - Global brands division | | | 8,768 | | | 12 | | | - | | | - | | | 8,768 | | | 0 | % |
| Total sales | | | 69,994 | | | 100 | | | 111,345 | | | 100 | | | (41,351 | ) | | -37 | % |
| | | | | | | | | | | | | | | | | | | | |
| Cost of sales - Communications division | | | 24,353 | | | 35 | | | 80,507 | | | 72 | | | (56,154 | ) | | -70 | % |
| Cost of sales - EHS division | | | 26,123 | | | 37 | | | 22,397 | | | 20 | | | 3,726 | | | 17 | % |
| Cost of sales - Global brands division | | | 10,689 | | | 15 | | | - | | | - | | | 10,689 | | | 0 | % |
| Total cost of sales | | | 61,165 | | | 87 | | | 102,904 | | | 92 | | | (41,739 | ) | | -41 | % |
| Gross profit | | | 8,829 | | | 13 | | | 8,441 | | | 8 | | | 388 | | | 5 | % |
| | | | | | | | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | | | | | | | |
| Sales and marketing | | | 3,127 | | | 4 | | | 2,079 | | | 2 | | | 1,048 | | | 50 | % |
| General and administrative | | | 14,095 | | | 20 | | | 7,565 | | | 7 | | | 6,530 | | | 86 | % |
| Bad debt expense | | | 10,538 | | | 15 | | | 2,689 | | | 2 | | | 7,849 | | | 292 | % |
| Amortization of intangibles | | | 2,811 | | | 4 | | | 5,377 | | | 5 | | | (2,566 | ) | | -48 | % |
| Total operating expenses | | | 30,571 | | | 44 | | | 17,710 | | | 16 | | | 12,861 | | | 73 | % |
| | | | | | | | | | | | | | | | | | | | |
| Operating loss | | | (21,742 | ) | | (31 | ) | | (9,269 | ) | | (8 | ) | | (12,473 | ) | | 135 | % |
| | | | | | | | | | | | | | | | | | | | |
| Other income (expense) | | | | | | | | | | | | | | | | | | | |
| Other income | | | 24 | | | (1 | ) | | - | | | - | | | 24 | | | - | |
| Interest expense, net | | | (5,751 | ) | | (8 | ) | | (4,144 | ) | | (4 | ) | | (1,607 | ) | | 39 | % |
| Gain on disposal of assets | | | 2,184 | | | 3 | | | - | | | - | | | 2,184 | | | - | |
| Loss on impairment | | | (33,062 | ) | | (47 | ) | | - | | | - | | | (33,062 | ) | | - | |
| Gain on extinguishment of debt | | | - | | | - | | | 7,966 | | | 7 | | | (7,966 | ) | | -100 | % |
| Gain (loss) on value of derivative instruments | | | 12,951 | | | 19 | | | (13,446 | ) | | (12 | ) | | 26,397 | | | -196 | % |
| Net loss from discontinued operations | | $ | (45,396 | ) | | (65) | % | $ | (18,893 | ) | | (17) | % | | (26,503 | ) | | 140 | % |
LIQUIDITY AND CAPITAL RESOURCES
Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, cash generated from operations, and cash available from borrowings under our revolving credit facilities. We may also generate liquidity from offerings of debt and/or equity in the capital markets. As of August 31, 2008, we had a total of $2,379 in unrestricted cash and cash equivalents. As of August 31, 2008, we also had restricted cash and cash equivalents and short-term investments of $620 that included funds set aside or pledged to secure lines of credit with key suppliers. We believe that our existing cash and investments, liquidity under our revolving credit facility and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements through at least the next twelve months.
We currently intend to seek opportunities to acquire strategic assets that will enhance our holdings in our energy division. More specifically, the acquisition of Crescent Fuels, Inc. effective October 1, 2008, increases the Company’s aggregate lines of credit with fuel suppliers and unencumbered asset base. Increased lines of credit with fuel suppliers decrease our reliance on financing our working capital needs through our asset based revolving credit facilities. Increasing unencumbered assets creates more borrowing capacity under our revolving credit facilities. The combination of these two factors increases the company’s liquidity and financing options and lowers our borrowing costs. We anticipate financing any purchases of assets, and any related working capital and/or initial operating cost needs, with cash from operations, our existing cash, cash equivalents and short-term investments, borrowings under our revolving credit facility, and proceeds from offerings of debt and/or equity securities. The amounts we may seek to raise through any such offerings may be substantial.
Operating Activities - Cash used by operating activities was $5,283 ($2,018 from continuing operations and $3,265 from discontinued operations) during the year ended August 31, 2008 compared to cash provided by operating activities of $9,284 ($4,618 used by continuing operations and $13,902 provided by discontinued operations) during the year ended August 31, 2007. The decrease in cash provided by operations is due primarily to the operating losses in the discontinued operations.
Investing Activities - Cash used in investing activities was $27,080 ($27,472 used by continuing operations and $392 provided by discontinued operations) during the year ended August 31, 2008 compared to cash used in investing activities of $583 ($74 used by continuing operations and $509 used by discontinued operations) during the year ended August 31, 2007. The increase in cash used in investing activities is due primarily to $30,000 paid to the sellers of Appco.
Financing Activities - Cash provided by financing activities during the year ended August 31, 2008 was $34,400 ($32,434 provided by continuing operations and $1,966 provided by discontinued operations) compared to cash used by financing activities of $8,912 ($1,426 used by continuing operations and $7,486 used by discontinued operations) during the year ended August 31, 2007. The increase in cash provided from financing activities in the year ended August 31, 2008 is due to the proceeds to a sales leaseback transaction of $15,000, proceeds from common stock issuance of $5,000 and increased net debt borrowings.
BORROWING ARRANGEMENTS
The loans to the Company are principally with (i) Greystone Business Credit II LLC, (“Greystone”) and are utilized primarily for the communications division and the energy division and are secured by its assets, and (ii) with F&L LLP, (“F&L”), which was utilized in connection with the Oblio acquisition in August 2005. From time to time, short term loans have been obtained from related parties to fund working capital or other needs. The various borrowing arrangements are described below and in detail in Note 9 Debt, Derivative Liabilities and Warrants in the financial statements.
Greystone Business Credit II, LLC
On December 29, 2006, the Company, together with all of its subsidiaries, entered into a credit facility with Greystone. The new credit facility with Greystone initially included a revolving line of credit (“Revolver”) in the maximum amount of $15,000 and also includes senior term loans of up to $7,950.
The revolver expires in December 2009, subject to earlier termination under certain circumstances. The revolving credit facility bears interest at a rate of 1.5%, plus the prime interest rate. Interest payments on the revolver are due monthly with principal paid at maturity. Revolver loans will be advanced based upon 85% of eligible accounts receivable and up to a maximum of 85% of eligible inventory, subject to certain limitations. The Company is required to have a minimum unused availability under the line of between $200 and $1,000. At year-end 2007, the Company was required to have a minimum unused availability of $340. The Company was obligated to use any refunds on commercial taxes including Universal Service Fees (“USF”) to repay the term loans. As of August 31, 2008, the Company has no excess availability based on collateral under the line.
The senior term loans bear interest at a rate of 6%, plus the prime interest rate, provided that such rate is reduced by .5% for each reduction of principal by $1,000. The senior term loans are to be paid off in 48 equal installments of $135 per month which will result in repayment of the principal.
The Company granted a security interest in all of its assets to Greystone as security for the financing facility. Such security included a pledge of all trademarks and the stock of all subsidiaries.
The Company paid a commitment fee of $369 and will pay an annual commitment fee of ½% of the facility, payable on each anniversary. A loan servicing fee of .3% is payable each month based on the amount outstanding under the revolving facility. There is also a $20 per month administrative fee. In the event of a termination of the facility, an early termination fee will be payable. Such fee equals 1% of the maximum revolving facility and the term loans if the termination occurs during the first year. As additional consideration for the facility, the Company issued to Greystone: (i) 500,000 shares of common stock valued at $505 and was recorded as a debt discount, and (ii) a warrant to purchase 500,000 shares of common stock at a price of $1.00 per share, exercisable for a period of five years which was recorded as a derivative liability. The Company is obligated to register the shares of common stock and the common stock underlying the warrant.
On February 14, 2007, the Company entered into Amendment #1 with Greystone. Through the amendment, Greystone increased the Company’s Revolver line of credit from $15,000 to $18,000 and provides for senior term loans of up to $7,608.
On June 1, 2007, the Company entered into Amendment #2 with Greystone. Through the amendment, the Company received approval from Greystone to transfer 100% of the issued and outstanding shares of common stock related to StartTalk from Oblio to the Company.
On June 11, 2007, the Company received the proceeds from tax refunds owed related to Federal Excise Tax (“FET”). The Company used $3,232 of the proceeds to repay Term Loan B in full.
On July 25, 2007, the Company entered into Amendment #3 with Greystone. Through the amendment, Greystone agreed to reestablish Term Loan B and advance the Company up to $1,500.
On August 23, 2007, the Company entered into Amendment #4 with Greystone. Through the amendment, Greystone agreed to increase Term Loan B by $500 up to a maximum of $2,000. The monthly principal payment for Term Loan A is $18 and the new monthly principal payment for reestablished Term Loan B is $83. The amended senior Term Loan B is to be paid off in 24 equal installments, which will result in repayment of the principal. The terms for Loan A were not changed.
On September 17, 2007, the Company entered into Amendment #5 with Greystone. Through the amendment, Greystone consented to the debt issuance in favor of YA Global Investments, L.P. of $6,000 and agreed to a Term Loan C advance of $5,000. This three-year note carries an annual interest rate of 1.5% in excess of the prime interest rate and is fully collateralized with $5,000 of cash held in a restricted account. The entire balance of Term Loan C is due and payable on the maturity date of the loan.
On October 17, 2007, the Company entered into Amendment #6 with Greystone. Through the amendment, Greystone consented to the formation of Titan Card Services, Inc.
On October 17, 2007, the Company entered into Amendment #7 with Greystone. Through the amendment, Greystone reduced the amount of the minimum unused availability to $0 and agreed to increase the minimum unused availability by $16 each month up to a maximum amount of $750. In addition, the repayment schedule was modified for Term Loan B to $43 per month.
On November 30, 2007 the Company entered into Amendment #8 with Greystone. The amendment decreased the interest rate on Term Loan C from 1.5% above the prime rate to 0.75% per annum. The interest rate on Term Loan C was lowered to 0.75% because the loan was 100% collateralized by cash held in a non-interest bearing escrow at Greystone which approximates the market rate of interest for loans with this type of collateral.
On March 3, 2008, effective December 2007, the Company entered into Amendment #9 with Greystone. Through the amendment, Greystone consented to the formation of Titan Communications, Inc.
On March 3, 2008, effective February 11, 2008, the Company entered into Amendment #10 with Greystone. The amendment created Term Loan D, as an advance to Titan Nexus and increased the revolver amount to $20,000; $7,000 to the Electronics and Homeland Security segment and $13,000 to the Communications segment. Term Loan D shall be repaid in monthly installments beginning March 1, 2008 with the balance due on the maturity date of February 1, 2011. The amendment also modified the interest rates as follows: all revolving loans have an interest rate of 1.5% per annum in excess of the prime rate except the revolving loans owed by Titan Nexus in excess of $1,000 which have an interest rate of 4.5% per annum in excess of the prime rate and the interest rates shall not be lower than 6.0% per annum, the interest rate on Term Loan A shall be 6.0% per annum in excess of the prime rate and shall be reduced by one-half of one percent for every $1,000 reduction in the term loan but not lower than 5.0% per annum in excess of the prime rate, the interest rate for Term Loan B is 5.0% per annum in excess of the prime rate, the interest rate for Term Loan C is 0.75% per annum and the interest rate for Term Loan D is 6.0% per annum in excess of the prime rate.
On February 29, 2008, the Company entered into Amendment #11 with Greystone. The amendment expands the definition of eligible borrowers under the loan and security agreement for the communications division to include newly formed entities.
On March 5, 2008, Term Loan C’s outstanding balance of $5,000 was paid in full. Term Loan D has an outstanding balance of $1,002 and an interest rate of 11% as of August 31, 2008.
On May 30, 2008, the Company entered into Amendment #12 with Greystone. In the amendment Greystone consented to the Company’s entry into an unsecured subordinated indebtedness with Mike Kadlec, at the time, the CEO of Titan Electronics Inc. who resigned as of July 18, 2008. In addition, the amendment specified the terms and conditions of term loan E for $300 with $25 per month amortization payments beginning July 1, 2008. Term loan E carries interest at prime plus 6%.
On June 9, 2008, the Company entered into Amendment #13 with Greystone. The amendment set the term loan D limit at $1,050 and established a 44 month amortization term for term loan D.
On October 13, 2008, the Company entered into Amendment #14 with Greystone. The amendment created a borrowing account sub-limit for the loans related to the Company’s Planet Direct subsidiary to $3,000, acknowledged the formation of our Global Wholesale International Inc subsidiary and defined what qualifies as an eligible account for borrowing base calculation purposes for Planet Direct.
As of August 31, 2008, Term Loans A and B are recorded at $2,171 and the revolver has a balance of $12,393 with an excess available credit of $0 based on actual borrowing capacity. Interest rates on the revolver were 5.25% on $12,323 and 6.5% on $1,076. Loans A and B and the revolver are included in the Electronic and Homeland Security and Communications Divisions discontinued operations.
Debt Covenant Restrictions Related to Communications and Electronics and Homeland Security Debts
| Maximum Cumulative Net Loss: | | $1,000 on a cumulative basis for the period from September 1, 2006 through the end of the Term |
| | | |
| Maximum Leverage Ratio: | | Not applicable |
| | | |
| Limitation on Purchase Money Security Interests: | | $1,000 |
| | | |
| Limitation on Equipment Leases: | | $1,000 |
| | | |
| Additional Financial Covenants: | | None |
The Company has met all covenant terms except the maximum cumulative net loss. The Company has received a written waiver from Greystone related to this covenant through August 31, 2009. No penalties have been assessed related to this violation.
Discontinued Operations of Global Brands Division
On October 16, 2007 the Company assumed a note as a result of the USAD acquisition. The note was held by Greystone and had an issue date of December 27, 2006 in the amount of a $10,000 line of credit which will mature on January 1, 2010. The line of credit includes $500 for equipment advances. Advances on the revolver are based on a formula related to certain levels of eligible accounts receivable and inventory (as defined in the agreement). The agreement has a term of three years with automatic three-year extensions unless either party gives notice to the other of its intention to terminate the agreement.
Advances under the equipment advance facility are repayable in 84 monthly installments of principal and interest commencing February 1, 2007; however, such indebtedness, if any, will become due and payable on the earlier of (a) repayment of all revolver advances and the termination of any commitment by Greystone to make revolver advances under the agreement, and (b) the agreement maturity date. All advances bear interest at the prime rate plus 1% per annum.
The Company also assumed four term notes designated A, B, C & D which have an interest rate of 7.75%. As of August 31, 2008 the revolver has an outstanding balance of $6,103 and the term notes have a balance of $3,879. The monthly principal payment for Term Loan A, B, C & D is $72. As collateral for advances under the credit facility, the Company has granted Greystone a security interest in all of its assets.
On December 14, 2007, the Company through its subsidiary Titan Apparel, Inc. (“TAPP”) entered into a Loan and Security Agreement in connection with a Secured Party Bill of Transfer of the collateral of Global Brand Marketing Inc. (“GBMI”) with Greystone. The credit facility includes a revolving line of credit in the maximum amount of $14,000. The credit facility also includes a term loan of up to $2,000. Loans will be advanced on the revolver based on a formula related to certain levels of eligible accounts receivable and inventory as defined in the agreement. The agreement has a maturity date of December 29, 2009. The revolving credit facility bears interest at 3% per annum in excess of the prime rate for a period of six months from the date of the loan and security agreement and 5% thereafter and the term loan bears interest at a rate of 5% per annum in excess of the prime rate for a period of six months from the date of the loan and security agreement and 7% thereafter. The agreement contains a provision for a net sales participation fee calculated as 5% of net sales to be applied to the outstanding balance of the term loan until the term loan is paid in full and thereafter paid as a fee. The agreement contains a provision for a sharing fee calculated as 25% of the net profits for the first four full fiscal quarters occurring after the loan agreement payable when the financial statements of the eligible fiscal quarter are delivered. As collateral for advances under the credit facility, TAPP has granted Greystone a security interest in all of its assets including all trademarks and patents. The Company guaranteed the obligations of TAPP up to $250. At August 31, 2008 the revolver had an outstanding balance of $3,227 and the term note had a balance of $3,835 and an excess available credit of $0 based on actual borrowing capacity. The interest rates on the revolving credit facility and term loans were 10% and 15.5% respectively, at August 31, 2008.
YA Global Investments, L.P. (“YA Global”)
On September 17, 2007, the Company executed a secured convertible debenture in the principal amount of $6,000, all of which was advanced immediately. The Company pledged all of its assets and rights to secure this debenture subordinate to Greystone. Interest on the debenture accrues at 10% per annum. The debenture is convertible at the option of the holder into shares of common stock of Titan at a price of $2.25 per share. The debenture matures on September 17, 2010. Beginning on May 1, 2008 and continuing on the first business day of each successive month, the Company will make payments by converting such installment payment into shares of common stock provided certain equity conditions are met. The conversion price is equal to the lower of (i) $2.25 per share, or (ii) 90% of the lowest daily volume weighted average price of the common stock during the 15 consecutive trading days immediately preceding the conversion date. The Company may also at its option choose to redeem a portion or all of the installment payment by paying such amounts in cash plus a redemption premium of 10%. The Company may defer the payment of any installment payment to the maturity date if the volume weighted average price of the common stock equals 110% of the applicable conversion price for the consecutive 5 trading days prior to the notice due date for the applicable installment payment. Each installment amount shall be equal to all accrued and unpaid interest, plus the lesser of (a) the product of (i) $200 multiplied by a fraction of which the numerator is the original principal amount and the denominator of which is the aggregate purchase price paid under the Purchase Agreement and (b) the principal amount of the Debenture on the installment payment date.
The Company has the right to redeem a portion or all amounts outstanding under the Debenture prior to the maturity date at a premium of 10% provided that (i) the Volume Weighted Average Price (VWAP) of Titan’s Common Stock is less than the conversion price of $2.25; (ii) no event of default has occurred and (iii) the underlying Registration Statement is effective.
The Company also issued YA Global warrants to purchase 525,000 shares of common stock at a price of $2.47 per share and 525,000 shares of common stock at a price of $2.81 per share, exercisable for a period of five years. Titan is obligated to register the common stock underlying the warrant within 90 days of the closing. The Company has not yet registered the common stock underlying the warrants. The Company has received a waiver from YA Global related to this deficiency. No penalties have been assessed related to this violation.
The note was issued with a beneficial conversion feature. At issuance, the note was recorded at $1,831 with an associated discount of $4,169. The discount will be amortized over the 36 month term of the note. At August 31, 2008, the note had a recorded balance of $2,342 with an associated unrecognized discount of $3,658. No payments have been made and the Company has not been notified of any defaults.
Modification Agreement with Greystone Business Credit II, LLC
In the fourth quarter of fiscal 2008, the Company entered into a modification agreement with Greystone. The agreement set forth (1) general terms and conditions of the structure a future working relationship concerning any assets that may become available from the Chapter 7 bankruptcy proceeding of USAD (2) a 36 month amortization schedule of the over advance attributable to the discontinued operations of Oblio Telecom (3) terms and conditions of the related party loan from the Crivello Group to our subsidiary, Titan Nexus (4) an outline of the working structure for the Planet Direct sub-limit portion of the Titan Loan Agreement (5) consent to transfer the ownership of certain parcels of real estate owned by Appco in partial satisfaction of indebtedness owed by the Company to the Crivello Group (6) modifications to the Appco monthly amortization schedule should the Company continue to be unable to obtain certain leasehold mortgages in favor of Greystone (7) terms and conditions of future merger transactions with our Titan Apparel subsidiary (8) conditions subject to additional loan facilities being made available to Titan Apparel and (9) an interest surcharge of 3.5% on any over advance with our Titan Apparel subsidiary.
Concurrent with the modification agreement with Greystone, our Chairman, David Marks and Frank Crivello executed a joint and severable limited recourse guaranty of $5,000 for the debts of the Company owed to Greystone. In addition, Farwell Equity Partners II, LLC a related party to David Marks and Frank Crivello executed a limited recourse guaranty for the debts of the Company owed to Greystone that is secured by 6,000,000 common shares of Marine Growth Ventures, Inc. common stock shares. The Farwell Equity Partners II pledge is limited to the pledged shares. The pledged Marine Growth Ventures, Inc. common shares are traded on the OTC Bulletin Board and were trading at $0.15 per share on November 7, 2008.
Seller-financed Notes and Redeemable Preferred Stock in Discontinued Operations
Seller-financed debt was provided in connection with the acquisition of Oblio on August 12, 2005, and the Company issued to the Seller, F&L, LLP (“F&L”) formerly known as Oblio Telecom, LLP, an 18-month promissory note in the principal amount of $2,500. The note matured on February 12, 2007 and carried an interest rate of 1% per annum. The note was recorded upon issuance at its fair value of $2,245, and the associated discount of $255 is being amortized over the 18 month term of the note. The effective interest rate on the note is approximately 7.50%.
Additional seller financing was provided upon the closing of the Oblio acquisition in the amount of $2,323 in a contractual short term obligation that was not interest-bearing. On December 14, 2005, a promissory note was executed acknowledging this amount due to the Seller. The Note bears interest of 4%, and had a maturity date of February 28, 2006 which was extended to March 31, 2009.
On December 29, 2006, F&L agreed to amend the terms of the Series A Preferred Stock originally issued to them as part of the Oblio acquisition. The provisions related to potential additional value of the preferred shares as a result of attainment of certain financial goals were eliminated and the stated value of the preferred stock was reduced from $9,000 to $4,500. The preferred stock agreement was modified as follows:
| | · | The old Series A Preferred Stock consisted of four tranches. The first tranche included a fixed 3,000 shares with a stated value of $1 per share. The three remaining tranches included 2,000 shares each with a stated value of $1 per share, subject to reduction in the event Oblio failed to meet certain EBITDA targets. Based on these EBITDA targets, the initial value of the Series A Preferred Stock could be reduced by a maximum of $6,000, but in no case could the final value ever be more than $9,000. |
| | · | The amended Series A Preferred Stock includes the first tranche only and is a fixed 3,000 shares with a stated value of $1.5 per share. |
On the same date, pursuant to the amendment, F&L agreed to extend the maturity date of the notes to March 31, 2009, and increase the interest rate to 5% per annum. Oblio will make monthly payments of $179, commencing January 31, 2007. In connection with the amendment, the Company agreed to issue 250,000 shares of common stock valued at $253 to F&L. In addition, the Company agreed to guaranty the payment to be made by Oblio. See additional discussion in Note 9 Debt and Derivative Liabilities in the financial statements.
Deferred Purchase Consideration in Discontinued Operations
On May 11, 2007, the Company acquired certain assets of Ready Mobile, LLC. Pursuant to the terms of the Asset Purchase Agreement, the Company agreed to pay consideration equal to 55% of earnings before interest, taxes, depreciation and amortization (EBITDA) for the first 36 months subsequent to the closing, payable monthly in arrears. As of August 31, 2007, the Company had accrued $3,401 for deferred purchase consideration which was management’s estimate of the total amount to be paid for the asset purchase.
As discussed further in Note 3, the Company determined to cease the distribution of CDMA prepaid wireless handsets and the related airtime through its subsidiary Titan Wireless RM, Inc, due to the increasing capital requirements associated with the business model at Titan Wireless, the Company’s wireless operating subsidiary. As such, the Company impaired the goodwill and intangible assets related to Ready Mobile asset purchase as of November 30, 2007. This impairment was offset by a reduction of the Deferred Purchase Consideration to $267 as of November 30, 2007. Furthermore, as the remaining assets associated with the wireless operations were sold on January 25, 2008, (see additional discussion in Note 2), the accrual for deferred purchase consideration was reduced to $0 as of January 25, 2008.
Derivative Liabilities
The fair value of the individual long-term embedded and free standing derivatives at August 31, 2008 is as follows:
Issue Date | | Expiration Date | | Instrument | | Exercise Price per Share | | 2008 | |
| 9/17/07 | | | 9/17/12 | | | Long-term fair value of conversion feature of convertible debenture | | | | | $ | 2,889 | |
Long-term embedded derivatives | | 2,889 | |
| | | | | | | | | | | | | | |
| 9/17/07 | | | 9/17/12 | | | 500,000 Warrants | | $ | 2.00 | | | 100 | |
| 9/17/07 | | | 9/17/12 | | | 525,000 Warrants | | $ | 2.47 | | | 99 | |
| 9/17/07 | | | 9/17/12 | | | 525,000 Warrants | | $ | 2.81 | | | 93 | |
Total long-term free-standing derivatives | | 292 | |
| | | | |
Total embedded and free-standing derivative liabilities | $ | 3,181 | |
Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock, the Company has identified certain embedded and freestanding derivative instruments. Generally, where the ability to physical or net-share settle an embedded conversion option or free standing financial instrument is not deemed to be within the control of the Company, the embedded conversion option is required to be bifurcated and both the freestanding instruments and bifurcated conversion feature are accounted for as derivative liabilities.
At each reporting date, the Company estimates the fair values of all derivatives and changes in the fair value are charged to operations. For embedded and free standing derivatives valued using the Black-Scholes option pricing model the following assumptions were used: (1) contractual term of 3 to 7 years; (2) volatility of 140%, (3) risk free interest rate between 2.85% and 4.17% and (4) dividend rate of 0%.
OFF BALANCE SHEET ARRANGEMENTS
GUARANTEE OF TITAN PCB EAST, INC. F/K/A TITAN EAST, INC.
In connection with the asset purchase agreement we entered with Time Sensitive Circuits whereby we sold substantially all of the assets of our Titan Electronics, Inc. (“Titan Electronics”) printed circuit board manufacturing facility located in Amesbury, Massachusetts in exchange for the Time Sensitive Circuits’ assumption of Titan Electronics obligations to Greystone and certain trade accounts payable, our lender, Greystone, consented to the asset purchase agreement pending Time Sensitive Circuits closing a loan and security agreement with Greystone or refinancing the loan with a third party lender. Until such time as Time Sensitive Circuits closes and or refinances all outstanding obligations with Greystone associated with our Titan Electronics subsidiary, we remain obligated to Greystone for the outstanding indebtedness should Time Sensitive Circuits be unable to satisfy the outstanding obligations to Greystone. The obligations to Greystone are secured by cash, inventory, accounts receivable and fixed assets among other valuable assets. The outstanding obligation to Greystone as of August 31, 2008 by Time Sensitive Circuits was approximately $1,100. We have not recorded any liabilities associated with the aforementioned guaranty as of August 31, 2008
SEASONALITY
Our energy experiences substantial seasonality due to customer activity behaviors during different seasons; in general, sales and operating income are highest in our third and fourth fiscal quarters which occur in the spring and summer months. Our lowest activity months are during the winter months.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Information | | | |
| | | Page | |
| | | | |
| Reports of Independent Registered Public Accounting Firms | | 37 | |
| | | | |
| Consolidated Balance Sheets | | 39 | |
| | | | |
| Consolidated Statements of Operations | | 40 | |
| | | | |
| Consolidated Statements of Stockholder's Deficit | | 41 | |
| | | | |
| Consolidated Statements of Cash Flows | | 42 | |
| | | | |
| Notes to Consolidated Financial Statements | | 44 | |
| | | | |
| Schedule of Valuation and Qualifying Accounts | | 83 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Titan Global Holdings, Inc.
Richardson, Texas
We have audited the accompanying consolidated balance sheet of Titan Global Holdings, Inc. and subsidiaries as of August 31, 2008, and the related consolidated statements of operations, stockholders' deficit, and cash flows for the fiscal year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Titan Global Holdings, Inc. and subsidiaries as of August 31, 2008, and the results of their operations and their cash flows for the fiscal year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.
/s/ Skoda Minotti
Mayfield Village, Ohio
December 1, 2008
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Titan Global Holdings, Inc.
Richardson, Texas
We have audited the accompanying consolidated balance sheet of Titan Global Holdings, Inc. as of August 31, 2007, and the related consolidated statement of operations, stockholders' deficit, and cash flows for the year ended August 31, 2007. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Titan Global Holdings, Inc. as of August 31, 2007, and the consolidated results of their operations and their cash flows for the year ended August 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 2 to the consolidated financial statements, effective September 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123(R), Share Based Payment.
/s/ KBA GROUP LLP
Dallas, Texas
November 29, 2007
Titan Global Holdings, Inc.
Consolidated Balance Sheets
(In thousands, except common stock share data)
| | | August 31, | | August 31, | |
| | | 2008 | | 2007 | |
ASSETS | | | | | | | |
| Current assets: | | | | | | | |
| Cash and cash equivalents | | $ | 2,379 | | $ | 4 | |
| Restricted cash and short-term investments | | | 620 | | | - | |
| Accounts receivable, (less allowance for doubtful accounts of $109 and $0, respectively) | | | 6,966 | | | - | |
| Inventory | | | 10,910 | | | - | |
| Prepaid expenses and other current assets | | | 1,062 | | | 1,392 | |
| Assets of discontinued operations, current | | | 5,583 | | | 18,327 | |
| Total current assets | | | 27,520 | | | 19,723 | |
| | | | | | | | |
| Equipment and improvements, net | | | 10,512 | | | 74 | |
| Definite-lived intangible assets, net | | | 584 | | | - | |
| Goodwill and indefinite-lived intangible assets | | | 9,277 | | | - | |
| Capitalized loan fees, net | | | 561 | | | - | |
| Other assets | | | 9 | | | - | |
| Assets of discontinued operations, non-current | | | 1,529 | | | 26,619 | |
| Total assets | | $ | 49,992 | | $ | 46,416 | |
| | | | | | | | |
LIABILITIES AND STOCKHOLDERS' DEFICIT | | | | | | | |
| | | | | | | | |
| Current liabilities: | | | | | | | |
| Accounts payable | | $ | 18,016 | | $ | 256 | |
| Accrued liabilities | | | 4,990 | | | 541 | |
| Related party - notes payable | | | 2,791 | | | - | |
| Short-term notes payable | | | 8 | | | - | |
| Current portion of long-term debt | | | 1,020 | | | - | |
| Loss in excess of investment in subsidiary | | | 12,992 | | | - | |
| Liabilities of discontinued operations, current | | | 25,679 | | | 38,676 | |
| Total current liabilities | | | 65,496 | | | 39,473 | |
| | | | | | | | |
| Lines of credit | | | 12,393 | | | - | |
| Long-term debt, net of discount of $4,090 and $0, respectively | | | 4,865 | | | - | |
| Long-term derivative liabilities | | | 3,181 | | | - | |
| Other long-term liabilities | | | 1,901 | | | - | |
| Liabilities of discontinued operations, non-current | | | 35,722 | | | 37,091 | |
| Total liabilities | | | 123,558 | | | 76,564 | |
| Stockholders' deficit: | | | | | | | |
| Common stock-$0.001 par value; 950,000,000 shares authorized; 54,754,809 and 50,244,378 shares issued; 53,430,652 and 49,157,071 outstanding, respectively | | | 55 | | | 50 | |
| Additional paid-in capital | | | 30,800 | | | 21,968 | |
| Accumulated deficit | | | (102,707 | ) | | (50,700 | ) |
| Treasury stock, at cost, 1,324,157 and 1,087,307 shares, respectively | | | (1,714 | ) | | (1,466 | ) |
| Total stockholders' deficit | | | (73,566 | ) | | (30,148 | ) |
| Total liabilities and stockholders' deficit | | $ | 49,992 | | $ | 46,416 | |
The accompanying notes form an integral part of the consolidated financial statements.
Titan Global Holdings, Inc.
Consolidated Statements of Operations
(In thousands, except share and per share amounts)
| | For the Years Ended August 31, | |
| | | 8/31/2008 | | 8/31/2007 | |
| | | | | | |
| Sales - Energy division | | $ | 417,879 | | $ | - | |
| Sales - Communications division | | | 451 | | | - | |
| Total sales | | | 418,330 | | | - | |
| | | | | | | | |
| Cost of sales - Energy division | | | 393,417 | | | - | |
| Cost of sales - Communications division | | | 413 | | | - | |
| Total cost of sales | | | 393,830 | | | - | |
| | | | | | | | |
| Gross margin | | | 24,500 | | | - | |
| | | | | | | | |
| Operating expenses: | | | | | | | |
| Sales and marketing | | | 124 | | | 1 | |
| General and administrative expenses | | | 28,143 | | | 4,839 | |
| Bad debt expense | | | 167 | | | - | |
| Amortization of intangibles | | | 316 | | | - | |
| | | | | | | | |
| Loss from continuing operations | | | (4,250 | ) | | (4,840 | ) |
| | | | | | | | |
| Other income (expenses): | | | | | | | |
| Other expense | | | (397 | ) | | - | |
| Interest expense | | | (3,528 | ) | | (15 | ) |
| Loss on disposal of assets | | | (227 | ) | | - | |
| Gain on value of derivative instruments | | | 1,791 | | | - | |
| | | | | | | | |
| Loss from continuing operations before income taxes | | | (6,611 | ) | | (4,855 | ) |
| Provision for income taxes | | | - | | | - | |
| | | | | | | | |
| Loss from continuing operations | | | (6,611 | ) | | (4,855 | ) |
| Loss from discontinued operations | | | (45,396 | ) | | (18,893 | ) |
| | | | | | | | |
| Net loss | | | (52,007 | ) | | (23,748 | ) |
| | | | | | | | |
| Accrual of preferred stock dividend | | | (135 | ) | | (135 | ) |
| Net loss applicable to common stockholders | | $ | (52,142 | ) | $ | (23,883 | ) |
| | | | | | | | |
| Net loss applicable to common stockholders per share: | | | | | | | |
| Basic and diluted | | | | | | | |
| Continuing operations | | $ | (0.13 | ) | $ | (0.10 | ) |
| Discontinued operations | | | (0.86 | ) | | (0.39 | ) |
| Net loss | | $ | (0.99 | ) | $ | (0.49 | ) |
| | | | | | | | |
| | | | | | | | |
| Number of weighted-average common shares outstanding: | | | | | | | |
| Basic | | | 52,736,849 | | | 49,104,711 | |
| Diluted | | | 52,736,849 | | | 49,104,711 | |
The accompanying notes form an integral part of the consolidated financial statements.
Titan Global Holdings, Inc.
Consolidated Statements of Stockholders' Deficit
For the years ended August 31,
(In thousands, except share amounts)
| | | Common Stock | | Additional | | | | | | Total | |
| | | | | at Par | | Paid-in | | Accumulated | | Treasury | | Stockholders’ | |
| | | Shares | | Value | | Capital | | Deficit | | Stock | | Deficit | |
Balance, August 31, 2006 | | | 49,114,052 | | $ | 49 | | $ | 18,621 | | $ | (26,952 | ) | $ | - | | $ | (8,282 | ) |
| Issuance of common stock with debt agreements | | | 765,000 | | | 1 | | | 772 | | | - | | | - | | | 773 | |
| Issuance of common stock to CEO as compensation | | | 500,000 | | | - | | | 305 | | | - | | | - | | | 305 | |
| Repurchase and cancellation of Laurus Shares (see Note 9) | | | (1,250,000 | ) | | (1 | ) | | (1,262 | ) | | - | | | - | | | (1,263 | ) |
| Stock-based compensation | | | - | | | - | | | 797 | | | - | | | - | | | 797 | |
| Stock options exercised | | | 50,000 | | | - | | | 40 | | | - | | | - | | | 40 | |
| Repurchase of treasury shares | | | - | | | - | | | - | | | - | | | (1,466 | ) | | (1,466 | ) |
| Conversion of debt to common stock | | | 1,065,326 | | | 1 | | | 2,003 | | | - | | | - | | | 2,004 | |
| Common stock warrants issued for services | | | - | | | - | | | 827 | | | - | | | - | | | 827 | |
| Preferred stock dividends accrued | | | - | | | - | | | (135 | ) | | - | | | - | | | (135 | ) |
| Net loss | | | - | | | - | | | - | | | (23,748 | ) | | - | | | (23,748 | ) |
Balance, August 31, 2007 | | | 50,244,378 | | | 50 | | | 21,968 | | | (50,700 | ) | | (1,466 | ) | | (30,148 | ) |
| Issuance of common stock with debt agreements | | | 2,000,000 | | | 2 | | | 3,998 | | | - | | | - | | | 4,000 | |
| Issuance of common stock as part of equity raise | | | 2,500,000 | | | 3 | | | 4,997 | | | - | | | - | | | 5,000 | |
| Exercise of 20,000 warrants | | | 10,431 | | | - | | | - | | | - | | | - | | | - | |
| Stock-based compensation | | | - | | | - | | | (28 | ) | | - | | | - | | | (28 | ) |
| Repurchase of treasury shares | | | - | | | - | | | - | | | - | | | (248 | ) | | (248 | ) |
| Preferred stock dividends accrued | | | - | | | - | | | (135 | ) | | - | | | - | | | (135 | ) |
| Net loss | | | - | | | - | | | - | | | (52,007 | ) | | - | | | (52,007 | ) |
Balance, August 31, 2008 | | | 54,754,809 | | $ | 55 | | $ | 30,800 | | $ | (102,707 | ) | $ | (1,714 | ) | $ | (73,566 | ) |
The accompanying notes form an integral part of the consolidated financial statements.
Titan Global Holdings, Inc.
Consolidated Statements of Cash Flows
(In thousands)
| | | For the Years Ended August 31, | |
| | | 8/31/2008 | | 8/31/2007 | |
| Cash flows from operating activities: | | | | | | | |
| Net loss from continuing operations | | $ | (6,611 | ) | $ | (4,855 | ) |
| Adjustments to reconcile net loss to net cash (used in) generated by operating activities: | | | | | | | |
| Depreciation | | | 2,474 | | | - | |
| Bad debt | | | 109 | | | - | |
| Loss on disposal of assets | | | 227 | | | - | |
| Non-cash compensation | | | (28 | ) | | - | |
| Non-cash asset retirement obligation accretion expense | | | 78 | | | - | |
| Non-cash interest expense | | | 1,456 | | | - | |
| Amortization of debt discounts and bank fees | | | 214 | | | - | |
| Amortization of intangibles | | | 316 | | | - | |
| Gain on fair value of derivative liabilities | | | (1,791 | ) | | - | |
| Warrants issued for services | | | - | | | 827 | |
| Changes in operating assets and liabilities, net of effects of acquisitions: | | | | | | | |
| Accounts receivable | | | (1,530 | ) | | - | |
| Inventory | | | (3,022 | ) | | - | |
| Prepaid expenses and other current assets | | | 1,095 | | | (1,388 | ) |
| Other assets | | | 13 | | | - | |
| Accounts payable and accrued liabilities | | | 5,029 | | | 798 | |
| Other liabilities | | | (47 | ) | | - | |
| Total adjustments | | | 4,593 | | | 237 | |
| Net cash used in operating activities of continuing operations | | | (2,018 | ) | | (4,618 | ) |
| Net cash (used in ) generated by operating activities of discontinued operations | | | (3,265 | ) | | 13,902 | |
| Net cash (used in) generated by operating activities | | | (5,283 | ) | | 9,284 | |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Equipment and improvements expenditures | | | (479 | ) | | (74 | ) |
| Cash provided (used) by restricted investment to collateralize obligation | | | (620 | ) | | - | |
| Cash paid to sellers of Appco | | | (30,000 | ) | | - | |
| Cash provided by acquisitions | | | 3,627 | | | - | |
| Net cash used in investing activities of continuing operations | | | (27,472 | ) | | (74 | ) |
| Net cash provided by (used in) investing activities of discontinued operations | | | 392 | | | (509 | ) |
| Net cash used in investing activities | | | (27,080 | ) | | (583 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Proceeds from issuance of common stock | | | 5,000 | | | - | |
| Proceeds from sale leaseback transaction | | | 15,000 | | | - | |
| Proceeds from related party notes | | | 2,791 | | | - | |
| Proceeds from issuance of long-term debt | | | 8,598 | | | - | |
| Proceeds from lines of credit, net of repayments | | | 13,897 | | | - | |
| Payments on long-term debt | | | (11,829 | ) | | - | |
| Common stock options exercised | | | - | | | 40 | |
| Capitalized loan fees | | | (775 | ) | | - | |
| Purchase of treasury stock | | | (248 | ) | | (1,466 | ) |
| Net cash provided by (used in) financing activities of continuing operations | | | 32,434 | | | (1,426 | ) |
| Net cash provided by (used in) financing activities of discontinued operations | | | 1,966 | | | (7,486 | ) |
| Net cash provided by (used in) financing activities | | | 34,400 | | | (8,912 | ) |
Titan Global Holdings, Inc.
Consolidated Statements of Cash Flows Continued
(In thousands)
| | | For the Years Ended August 31, | |
| | | 8/31/2008 | | 8/31/2007 | |
| | | | | | | | |
| Net increase (decrease) in cash and cash equivalents | | $ | 2,037 | | $ | (211 | ) |
| Cash and cash equivalents at beginning of period including cash of discontinued operations | | | 1,190 | | | 1,401 | |
| | | | | | | | |
| Cash and cash equivalents at end of period including cash of discontinued operations | | $ | 3,227 | | $ | 1,190 | |
| | | | | | | | |
| Cash and cash equivalents at end of period of discontinued operations | | $ | 848 | | $ | 1,186 | |
| | | | | | | | |
| Cash and cash equivalents at end of period of continuing operations | | $ | 2,379 | | $ | 4 | |
| | | | | | | | |
Supplemental disclosures of cash flow information: | | | | | | | |
| Interest Paid | | $ | 1,994 | | $ | - | |
| Income Tax Paid | | $ | - | | $ | - | |
| | | | | | | | |
| Non-cash activities: | | | | | | | |
| Issuance of redeemable preferred stock for acquisition of note receivable | | $ | 7,245 | | $ | - | |
| Net assets acquired through asset purchase agreement | | $ | - | | $ | 3,401 | |
| Equipment purchased through short-term note payable | | $ | - | | $ | 114 | |
| Issuance of common stock for acquisition of note receivable | | $ | 4,000 | | $ | - | |
| Issuance of common stock with debt agreements | | $ | - | | $ | 773 | |
| Issuance of common stock to Chief Executive Officer | | $ | - | | $ | 305 | |
| Issuance of common stock in connection upon conversion of debt | | $ | - | | $ | 2,004 | |
| Property transferred in sale leaseback transaction | | $ | 15,000 | | $ | - | |
The accompanying notes form an integral part of the consolidated financial statements.
TITAN GLOBAL HOLDINGS, INC.
(All amounts in thousands, except share and per share amounts)
1. Nature of Business
Organization:
The Company was formed on March 1, 1985 as a Utah corporation. In August, 2002, the Company acquired Titan Electronics, Inc. f//k/a Titan PCB West, Inc. in a merger transaction with a subsidiary of the Company. Prior to this merger, the Company had no active business operations. On November 4, 2005, the name of the corporation was changed from Ventures-National Incorporated to its present name.
Nature of Operations:
The Company currently operates in two market segments - (i) energy through our Titan Global Energy group and (ii) Titan Communications through our Titan Communications group.
Energy Segment
The Company, through its Appalachian Oil Company (“Appco”) subsidiary is a petroleum distributor in the Southeastern United States. The operations include retail convenience stores and wholesale petroleum distribution. As of August 31, 2008, the retail division operated 58 convenience store locations in Tennessee, Kentucky, and Virginia, offering merchandise, food service, motor fuel and other services and the wholesale petroleum distribution division provided liquid motor fuel products for approximately 170 accounts located in Tennessee, Kentucky, Virginia and North Carolina. We believe Appco’s retail/wholesale business model, scale, and merchandise offerings, combined with selected acquisition opportunities, position Appco for ongoing growth in sales and higher margins. Appco is expanding the offerings of biofuels products such as E10 (90% petroleum, 10% ethanol), E85 (15% petroleum and 85% ethanol) and biodiesel to create a pre-eminent integrated distribution model leveraging renewable energy sources.
Communications Segment
The Company, through its Planet Direct (f/k/a Pinless, Inc.) subsidiary, provides prepaid international phone cards, and prior to February 2008, its Oblio Telecom (“Oblio”), Titan Wireless and StartTalk subsidiaries, provided prepaid international phone cards and prepaid wireless services. The communications division creates and distributes prepaid offerings that provide first and second generation Americans efficient means to complete international calls. These prepaid communications products are sold directly to wholesale distributors.
In December 2007, the Company’s communications division experienced a significant decrease in sales and collections of outstanding accounts receivable. Many of the long-standing distributors of Oblio’s products stopped placing orders for new product and stopped sending payments for previously placed orders. While management is vigorously pursuing legal action against many of these customers, the extended collection process has significantly disrupted the operating cash flow cycle of the prepaid international long distance portion of the Company’s communication’s division. These issues along with losses experienced in its network operations have resulted in the Company ceasing to do business as Oblio in the prepaid international long distance market. As such the Company evaluated the division’s goodwill and other intangible assets for impairment based on changes in the business model. Based on the determination of management, the Company impaired all of the goodwill and certain intangible assets of Oblio as of November 30, 2007.
Simultaneously, the Company determined to cease the distribution of code division multiple access “CDMA” prepaid wireless handsets and the related airtime through its subsidiary Titan Wireless RM, Inc., due to the increasing capital requirements associated with the business model at Titan Wireless, the Company’s wireless operating subsidiary. As such, the Company evaluated goodwill and other assets for impairment based on changes in its business model. Accordingly, the Company incurred an impairment charge of $14,572 related to the write-off of all the goodwill and intangible assets of Oblio and Titan Wireless during the three months ended November 30, 2007. On January 25, 2008, substantially all of the operating assets of the wireless related activities of the communications division were sold in an Asset Purchase Agreement to Boomerang Wireless, Inc. The purchase price was $1,000 (net of $737 release of liability) consisting of a $1,000 promissory note, a release of liability for asserted salary and bonus claims of $737 and the assumption of certain liabilities.
The business strategy of the communications division is to re-establish the Company in the prepaid international calling card distribution business. We are establishing relationships with international telecommunications providers to distribute prepaid calling cards in the United States. Our focus is on the distribution segment of the business not involving providing inbound or outbound termination or end user customer service. We are focusing our efforts on contracting with foreign carriers in the destination country of our end users. We are developing a new distribution network that ultimately serves independently owned and operated convenience stores through a network of distributors. The vast majority of prepaid international calling cards are distributed through this distribution channel. We are currently operating this segment of our business through Planet Direct Inc.
Liquidity:
Our principal sources of liquidity are our existing cash, cash equivalents and short-term investments, cash generated from operations, and cash available from borrowings under our revolving credit facilities. We may also generate liquidity from offerings of debt and/or equity in the capital markets. As of August 31, 2008, we had a total of $2,379 in unrestricted cash and cash equivalents. As of August 31, 2008, we also had restricted cash and cash equivalents and short-term investments of $620 that included funds set aside or pledged to secure lines of credit with key suppliers. We believe that our existing cash and investments, liquidity under our revolving credit facility and anticipated cash flows from operations will be sufficient to meet our operating and capital requirements through at least the next twelve months.
We currently intend to seek opportunities to acquire strategic assets that will enhance our holdings in our energy division. More specifically, the acquisition of Crescent Fuels, Inc. effective October 1, 2008, increases the Company’s aggregate lines of credit with fuel suppliers and unencumbered asset base. Increased lines of credit with fuel suppliers decrease our reliance on financing our working capital needs through our asset based revolving credit facilities. Increasing unencumbered assets creates more borrowing capacity under our revolving credit facilities. The combination of these two factors increases the Company’s liquidity and financing options and lowers our borrowing costs. We anticipate financing any purchases of assets, and any related working capital and/or initial operating cost needs, with cash from operations, our existing cash, cash equivalents and short-term investments, borrowings under our revolving credit facility, and proceeds from offerings of debt and/or equity securities. The amounts we may seek to raise through any such offerings may be substantial.
2. Summary of Significant Accounting Policies
Consolidation Policy
The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All material inter-company transactions have been eliminated.
Use of Estimates
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Such estimates relate primarily to the estimated lives of equipment and improvements, valuation reserves for accounts receivable, calculation of deferred revenue, allocation of purchase price, inventory, impairment of intangible assets, deferred tax accounts, fair value of equity instruments issued and sales returns.
Revenue Recognition
The Company recognizes revenues when the following criteria are met: (1) the Company has persuasive evidence of an arrangement, such as contracts, purchase orders or written requests; (2) the Company has completed delivery and no significant obligations remain; (3) its price to its customer is fixed or determinable and (4) collection is probable.
The Company recognizes sales of petroleum and other items when the title passes to the customer. We recognize the amounts earned from sales to wholesale customers as revenues, net of sales or excise tax. Shipping and handling costs charged to customers are included in our sales.
In the communications division, we recognize sales upon the activation of our prepaid calling cards by our customers. We provide our customers with a limited right of return. We record net sales as gross sales less an allowance for returns. At August 31, 2008, we had a $0 allowance for sales returns. Actual returns may differ materially from our estimates and revisions to the allowance may be required from time to time.
Cash and Cash Equivalents
The Company considers highly liquid investments with a maturity of three months or less to be cash equivalents and consist primarily of interest-bearing bank accounts.
Accounts Receivable
The Company’s accounts receivable are due from a variety of customers. Credit is extended based on an evaluation of a customer’s financial condition. Accounts receivable are generally due between 7 to 30 days and are stated at amounts due from customers, net of an allowance for doubtful accounts. Accounts outstanding longer than the contractual payment terms are considered past due. The Company performs ongoing credit evaluation of its customers and generally does not require collateral. The Company maintains reserves for potential credit losses and such losses have been within management’s expectations. The Company determines its allowance by considering a number of factors, including the length of time accounts are past due, the Company’s previous loss history, the customer’s current ability to pay its obligations to the Company, and the condition of the general economy and industry as a whole. The Company writes off accounts receivable when they become uncollectible. At August 31, 2008, the Company provided an allowance for doubtful accounts totaling $109.
Asset Retirement Obligation
In 2001, the FASB issued SFAS 143, “Accounting for Asset Retirement Obligations.” SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This statement requires companies to record the present value of obligations associated with the retirement of tangible long-lived assets in the period in which it is incurred. The liability is capitalized as part of the related long-lived asset’s carrying amount. Over time, accretion of the liability is recognized as an operating expense, and the capitalized cost is amortized over the expected useful life of the related asset. The Company’s asset retirement obligations (“ARO”) relate primarily to the future shutdown of fuel storage tanks.
The Company has adopted the provisions of SFAS 143 to record the ARO that could be incurred upon the future closure of facilities. Accretion of the ARO on properties from which production has commenced has been calculated using the estimated life of the facility. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rate. At August 31, 2008, the Company has recorded a liability of $1,401 related to ARO.
Concentration of Credit Risk
The Company generally extends credit to its customers and performs ongoing credit evaluations of its customers. Typically, the Company does not require collateral. The Company routinely reviews the collectibility of its accounts receivable and considers the following factors when determining collectibility of specific customer accounts: customer credit-worthiness, past transaction history with the customer, current economic industry trends, and changes in customer’s financial condition. If the financial condition of a customer were to deteriorate, adversely affecting its ability to make payments, an allowance would be required. In the Titan Energy group two customers comprise approximately 18% of 2008 total sales. In the Company’s communications group there are no individual customers that comprise a significant amount of total sales.
Universal Service Fund Fees Recoverable
Under FCC regulations, certain providers of telecommunication services are required to submit Universal Service Fund Fees (USF). In fiscal year 2006, the Company determined that a majority of the telecommunication services it had previously provided were exempt from USF based on the limited international revenue exemption rule (LIRE). Under the LIRE, a telecommunications carrier whose revenue from international services exceeds its revenue from United States long distance services by a ratio of 88% to 12% is exempt from liability for USF charges on the international revenue amount. The Company has reached an agreement with one of its wholesale suppliers that telecommunication services previously reported by the wholesale supplier will be reported by Oblio and therefore subject to the aforementioned exemption. A corresponding receivable has been established by the Company for the recovery of USF pursuant to that agreement. As of August 31, 2007, the Company received $2,618 in invoice credits to reduce the receivable due from the wholesale supplier. At November 30, 2007, Oblio determined that no further USF credits were recoverable and wrote off the remaining $1,402 of USF recoverable to cost of sales. The loss is included in the discontinued operations results for the year ended August 31, 2008.
Federal Excise Tax Recoverable
In May 2006, the United States Treasury Department formally conceded the legal dispute over federal excise taxes on long distance telephone service. Accordingly, the Internal Revenue Service (“IRS”) will process principal and interest refunds for all Federal Excise Taxes (FET) paid for long distance services during the previous three years. During fiscal year 2006, the Company established a receivable for FET amounts that had historically been included in the cost of sales as reported in historical financial statements. In fiscal year 2007, the Company filed the appropriate request for the FET refund with the IRS and received $3,865 in refunds from the IRS on June 6, 2007. At August 31, 2008, the Company has no receivable recorded related to FET recoverable.
Inventories
In our energy division, liquid fuel and all other inventories are valued at the lower of cost, using the FIFO method, or market.
In our communications division, our policy is to value activated prepaid international cards at the lower of cost or market.
Equipment and Improvements
Equipment and improvements are carried at cost less depreciation and amortization which is provided using the straight-line method.
The estimated service lives of equipment and improvements are as follows:
| Automobiles | | 3- 10 years |
| Computer equipment | | 3 years |
| Leasehold improvements | | Lesser of useful life or remaining life of lease |
| Office equipment | | 3-10 years |
| Software | | 3 years |
| Production equipment | | 5-10 years |
Depreciable assets acquired through an asset or stock purchase agreement are depreciated over their remaining useful life from the date of the asset or stock purchase agreement based on the respective assets purchase date and or the date the asset was initially placed in service.
Intangible Assets
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets,” the Company reviews intangibles for impairment annually or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the Company's business enterprise below its carrying value. The impairment test requires management to estimate the fair value of the Company's overall business enterprise down to the reporting unit level. The Company performs its annual impairment test in its fiscal fourth quarter. No impairment charges were recorded in the fiscal year ended August 31, 2007. In the year ended August 31, 2008, management committed to a plan to dispose of certain assets and liabilities of its Communications, Electronic Homeland Security and Global Brands divisions and consequently recognized an impairment loss of $33,062 related to intangible assets in these divisions.
Subsequent to November 30, 2007, the Company’s communications division experienced a significant decrease in sales and collections of outstanding accounts receivable. Many of the long-standing distributors of Oblio’s products stopped placing orders for new product and stopped sending payments for previously placed orders. While the Company is vigorously pursuing legal action against many of these customers, the extended collection process significantly disrupted the operating cash flow cycle of the prepaid international long distance portion of the Company’s communication division. These issues along with losses experienced in its network operations have resulted in the Company ceasing to do business as Oblio in the prepaid international long distance market. As such, the Company evaluated the division’s goodwill and other intangible assets for impairment based on changes in the business model. Based on the determination of management, the Company fully impaired the goodwill and all of the intangible assets of Oblio in the amount of $14,572 with the exception of the trade names as of November 30, 2007. In the fourth quarter of fiscal year ended August 31, 2008, management impaired the remaining trade names intangible balance of $3,351 associated with Oblio and committed to a plan to dispose of certain assets and liabilities of Oblio.
Simultaneously, the Company determined to cease the distribution of CDMA prepaid wireless handsets and the related airtime through its subsidiary, Titan Wireless RM, Inc., due to the increasing capital requirements associated with the business model at Titan Wireless, the Company’s wireless operating subsidiary. As such, the Company evaluated goodwill and other assets for impairment based on changes in its business model. Accordingly, the Company incurred an impairment charge for $14,572 of goodwill and intangible assets related to the Oblio and Titan Wireless as of November 30, 2007 and committed to plan to discontinue operations as of August 31, 2008.
In connection with the formation of our global brands division and related acquisition of USA Detergents on October 16, 2007, goodwill in the amount of $6,569 was established as of the acquisition date as part of the purchase price allocation. During the due diligence phase of the acquisition of USAD and prior to acquisition, the Company made certain assumptions regarding the working capital necessary to revitalize the core business of USAD. During the execution phase of the post-acquisition reorganization plan, the Company was unable to successfully negotiate work-out payment plans with key suppliers. The Company reevaluated the working capital requirements of this subsidiary and determined it was not feasible to fund the operations of USAD. As such, management determined to cease operations in its current structure. Accordingly, the Company incurred an impairment charge for $6,569 of goodwill related to the USA Detergents acquisition as of November 30, 2007. As of June 9, 2008, USAD was de-consolidated. See additional information in Note 19.
In August 2008, the Company ceased operations of its Titan Nexus subsidiary and began an orderly liquidation of the Titan Nexus assets including inventory and equipment in addition to collecting outstanding accounts receivable. The operations of Titan Nexus which were previously included in our electronics and homeland security division have been classified as discontinued operations as of and for the period ending August 31, 2008. As such, we incurred an impairment charge for all of the goodwill recorded at our Titan Nexus subsidiary totaling $8,571 as of August 31, 2008.
Impairment of Long-Lived Assets
Pursuant to SFAS No. 144, "Accounting for the Impairment or Disposal of Long-lived Assets," the Company continually monitors events and changes in circumstances that could indicate carrying amounts of long-lived assets may not be recoverable. An impairment loss is recognized when expected cash flows are less than the asset's carrying value. Accordingly, when indicators of impairment are present, the Company evaluates the carrying value of such assets in relation to the operating performance and future undiscounted cash flows of the underlying assets. The Company’s policy is to record an impairment loss when it is determined that the carrying amount of the asset may not be recoverable. The Company performs its annual impairment test in its fiscal fourth quarter. No impairment charges were recorded in the fiscal year ended August 31, 2007. The Company recognized a long-lived asset impairment loss of $17,922 in the fiscal year ended August 31, 2008 related to its Communications division. In the year ended August 31, 2008, management committed to plan to dispose of certain assets and liabilities of this division.
Advertising
The Company expenses advertising costs when incurred. Advertising expense totaled $124 and $1 for the years ended August 31, 2008, and 2007, respectively. Advertising expense in discontinued operations totaled $138 and $116 for the years ended August 31, 2008, and 2007, respectively.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities, and their respective tax basis. Deferred tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax expense represents the change during the period in the deferred tax assets and deferred tax liabilities. The components of the deferred tax assets and liabilities are individually classified as current and non-current based on their characteristics. Realization of the deferred tax asset is dependent upon generating sufficient taxable income in future years. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company adopted FIN 48 effective September 1, 2007. The adoption of this pronouncement did not have a material impact on the Company’s result of operations or financial condition.
Loss in excess of investment in USAD
Under Accounting Research Bulletin No. 51 (“ARB No. 51”), consolidation of a majority-owned subsidiary is precluded where control does not rest with the majority owners. Under these rules, legal reorganization or bankruptcy represents conditions which can preclude consolidation or equity method accounting as control rests with the Bankruptcy Court, rather than the majority owner. Accordingly, we deconsolidated USAD as of June 12, 2008, eliminating all future operations from the financial results of operations. Therefore, in accordance with ARB No. 51, we follow the cost method of accounting to record the interest in USAD, our wholly owned subsidiary which declared bankruptcy on June 12, 2008. Under cost method accounting, income will only be recognized to the extent of cash received in the future or when the Company is discharged from the bankruptcy, at which time, any loss in excess of the investment in subsidiary can be recognized into income as discussed below. As a result of the deconsolidation, The Company had a negative basis in its investment in USAD because the subsidiary generated significant losses in excess of its asset balances. This negative investment, “Loss in excess of investment in subsidiary” is reflected as a single amount on the audited consolidated statement of financial condition as a $12,992 liability as of August 31, 2008. This balance was comprised of a negative investment in USAD. Since USAD results are no longer consolidated and management believes that it is not probable that it will be obligated to fund future operating losses at USAD, any adjustments reflected in USAD financial statements subsequent to June 12, 2008 are not expected to affect the results of operations of the Company. The reversal of our liability into income will occur when either USAD bankruptcy is discharged and the amount of the Company’s remaining investment in USAD is determined or we reach a final settlement in the Bankruptcy Court related to any claims against the Company. The Company will continue to evaluate our cost method investment in USAD quarterly to review the reasonableness of the liability balance.
Stock Based Compensation
Effective September 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123(R) (revised 2004), “Share Based Payment” using the modified-prospective method. Under SFAS 123(R), stock-based compensation expense recognized during the period is based on the value of the portion of stock-based payment awards that is ultimately expected to vest. Stock-based compensation expense recognized in the consolidated statement of operations during the year ended August 31, 2007 includes compensation expense for stock-based payment awards granted prior to, but not yet vested, as of August 31, 2006 based on the grant date fair value estimated in accordance with the pro forma provision of SFAS 148 and compensation expense for the stock-based payment awards granted subsequent to August 31, 2006, based on the grant date fair value estimated in accordance with SFAS 123(R).
The Black-Scholes option valuation model was developed for estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because option valuation models require the use of subjective assumptions, changes in these assumptions can materially affect the fair value of the options. The Company's options do not have the characteristics of traded options; therefore, the option valuation models do not necessarily provide a reliable measure of the fair value of its options.
Fair Value of Financial Instruments
The carrying amount of the Company's cash and cash equivalents, accounts receivable, long-term debt, redeemable preferred stock, lines of credit and accounts payable, approximates their estimated fair values due to the market rates and short-term maturities of those financial instruments.
Derivative Liabilities
The Company reviews the terms of convertible debt and equity instruments issued to determine whether there are embedded derivative instruments, including embedded conversion and other features that are required to be bifurcated and accounted for separately as derivative financial instruments.
Generally, where the ability to physical or net-share settle an embedded conversion option is not deemed to be within the control of the Company, the embedded conversion option is required to be bifurcated and accounted for as a derivative liability.
In connection with the sale of convertible debt and equity instruments, the Company may also issue freestanding options or warrants. Additionally, the Company may issue options or warrants to non-employees in connection with consulting or other services they provide. Although the terms of the options and warrants may not provide for net-cash settlement, in certain circumstances, physical or net-share settlement is deemed to not be within company control and, accordingly, the Company is required to account for these freestanding options and warrants as derivative liabilities, rather than as equity.
Certain instruments, including convertible debt and equity instruments and freestanding options and warrants, may be subject to registration rights agreements, which impose penalties for failure to register the underlying common stock. The existence of these potential cash penalties may require that the embedded conversion option and the freestanding options or warrants be accounted for as derivative instrument liabilities.
Derivative liabilities are initially measured at their fair value and then re-valued at each reporting date, with changes in the fair value reported as charges or credits to the statement of operations. For derivative liabilities related to freestanding warrants and embedded conversion features, the Company uses the Black-Scholes option pricing model to determine the fair value. For derivative liabilities related to registration rights agreements and cash payment premiums, the Company uses a discounted present value of expected future cash flows to determine the fair value.
To the extent that the initial fair values of the bifurcated and/or freestanding derivative liabilities exceed the total proceeds received, an immediate charge to the statements of operations is recognized, in order to initially record the derivative liabilities at fair value. The discount from the face value of the convertible debt resulting from allocating part or all of the proceeds to the derivative instruments, together with the stated interest on the instrument, is amortized over the life of the instrument through periodic charges to the statement of loss, using the effective interest method. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Derivative liabilities are classified in the balance sheet as current or non-current based on the classification of the host instrument.
The Company does not use derivative instruments to hedge exposures to cash flow, market, or foreign currency risks.
Segment Reporting
Based on a number of factors, including differences in products and services, regulatory environment, customers and the Company's integration and management strategies, the Company determined that it operated in two distinct business segments (see a detailed schedule in Note 20 Segment Reporting).
Recent Accounting Pronouncements
In September 2006, the FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“FAS 157”) which is effective for fiscal year ends beginning after November 15, 2007. This Statement defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosure related to the use of fair value measures in financial statements. The Company is in the process of evaluating the impact on its financial position, cash flows, and results of operations.
In February 2007, the FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Liabilities Including an Amendment of FASB No. 115” (“FAS 159”). This Statement permits entities to choose to measure eligible financial instruments and other items at fair value and is effective for fiscal years beginning on or after November 15, 2007. The Company is in the process of evaluating the impact on its financial position, cash flows, and results of operations.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements — an amendment of ARB No. 51”, (“SFAS 160”). SFAS 160 requires that a noncontrolling interest in a subsidiary be reported as equity and the amount of consolidated net income specifically attributable to the noncontrolling interest be identified in the consolidated financial statements. It also calls for consistency in the manner of reporting changes in the parent’s ownership interest and requires fair value measurement of any noncontrolling equity investment retained in a deconsolidation. SFAS 160 is effective for fiscal years beginning on or after December 15, 2008. We have not yet evaluated the impact that the adoption of SFAS 160 will have on our consolidated financial statements.
In December 2007, the FASB issued SFAS 141(R), ("Business Combinations") of which the objective is to improve the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects. The new standard requires the acquiring entity in a business combination to recognize all (and only) the assets acquired and liabilities assumed in the transaction; establishes the acquisition-date fair value as the measurement objective for all assets acquired and liabilities assumed (including contingent payments); requires expensing of all costs incurred in the transaction; and requires the acquirer to disclose to investors and other users all of the information they need to evaluate and understand the nature and financial effect of the business combination. This Statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. An entity may not apply it before that date. The Company is currently evaluating SFAS 141(R), and has not yet determined its potential impact on its future results of operations or financial position.
In April 2008, the FASB issued Staff Position 142-3, “Determination of the Useful Life of Intangible Assets” (“FSP 142-3”). This standard 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 142. FSP 142-3 is effective for financial statements issued for fiscal years beginning after December 15, 2008 and interim periods within those fiscal years. Early adoption is prohibited. The Company is currently evaluating FSP 142-3, and has not yet determined its potential impact on its future results of operations or financial position.
3. Acquisitions and Divestitures
Acquisition of Appalachian Oil Company
The Company formed Titan Global Energy Group to acquire and manage complementary energy sector assets. On September 17, 2007, the Company completed the acquisition of all of the issued and outstanding shares of capital stock of Appalachian Oil Company, Inc. (“Appco”), a corporation formed under the laws of Tennessee, from the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict. The Company’s results of operations include Appco’s results from the purchase date. The purchase price paid for the shares under the Appco stock purchase agreement, as amended, was $30,000 in cash, of which $1,000 will be escrowed for 18 months following the closing of the acquisition in order to secure the Company’s potential claims against the Appco sellers for any breach of their representations, warranties and covenants under the stock purchase agreement. In addition, the Company incurred $1,947 in closing costs related to the acquisition.
Appco is headquartered in Blountville, Tennessee and is primarily engaged in the distribution of petroleum fuels in eastern Tennessee, southwestern Virginia, eastern Kentucky, western North Carolina and southern West Virginia and in the operation of retail convenience stores in some of those regions. Appco is a part of the Titan Global Energy division.
The acquisition was accounted for as a purchase. The purchase price allocated to the acquired assets and assumed liabilities were determined using management estimates based on a model developed by a professional valuation group. The Company has allocated the purchase price as follows:
| Cash | | $ | 5,719 | |
| Investment securities | | | 2,597 | |
| Accounts receivable | | | 5,545 | |
| Inventory | | | 7,888 | |
| Real estate and fixed assets | | | 27,434 | |
| Definte lived intangible assets | | | 900 | |
| Goodwill | | | 7,177 | |
| Indefinite-lived intangible assets | | | 2,100 | |
| Other assets | | | 681 | |
| Accounts payable | | | (16,969 | ) |
| Notes payable | | | (9,177 | ) |
| Other liabilities | | | (1,948 | ) |
| Purchase price | | $ | 31,947 | |
The sources of funding for the purchase price were as follows:
| Sources of funds for closing: | | | | |
| Cash | | $ | 2,092 | |
| Investment securities | | | 2,481 | |
| Greystone revolving debt facility | | | 14,909 | |
| Yorkville Advisors proceeds from sale of real estate | | | 15,000 | |
| Greystone term loan | | | 5,000 | |
| Accounts payable | | | 750 | |
| Retirement of notes payable | | | (8,285 | ) |
| Purchase price | | $ | 31,947 | |
Proforma Operating Results
Unaudited proforma operating results for the Company, assuming the acquisition of Appco occurred as of September 1, 2006, the beginning of fiscal year 2007, is presented below.
| | | 2007 | |
| Net sales | | $ | 530,285 | |
| Net earnings (loss) applicable to common stockholders | | | (29,456 | ) |
| Net earnings (loss) applicable to common stockholders per share: | | | | |
| Basic earnings (loss) per common share | | $ | (0.59 | ) |
| Diluted earnings (loss) per common share | | $ | (0.65 | ) |
Sale and Leaseback of Real Estate
Immediately following the closing of the acquisition of Appco on September 17, 2007, Appco and its wholly-owned subsidiary Appco-KY, Inc. (“Appco-KY”) entered into a purchase and sale agreement with YA Landholdings, LLC and YA Landholdings 7, LLC pursuant to which Appco and Appco-KY sold certain property located in Kentucky, Tennessee and Virginia for $15,000 in cash. The proceeds were utilized to fund a portion of the acquisition cost of Appco. Certain properties were then leased back to Appco by YA Landholdings, LLC for a term of 20 years pursuant to the terms of a Land and Building Lease Agreement. The Land and Building Lease Agreement also contains four (4) five (5) year options to extend the term of the lease to a maximum of 40 years. The annual lease payments during each of the first five years of the term of the lease are $1,650 and the leases qualify for treatment as operating leases. There was no gain or loss recorded associated with this transaction.
Acquisition of USA Detergents
The Company formed Titan Global Brands Division to integrate, protect and expand brand management capabilities and to identify and purchase other consumer product brands that can leverage and optimize growth from the Company's distribution channels. On October 16, 2007, the Company exercised its option to acquire 80% of the issued and outstanding capital of USA Detergents, Inc. (“USAD”) in exchange for one dollar pursuant to the Stock Purchase Agreement dated July 30, 2007 by and among the Company, USAD and USAD Metro Holdings, LLC, as amended. The Company’s discontinued operations include USAD’s results from the date the Company exercised its option through June 9, 2008. See additional discussion in Note 19.
USAD is headquartered in North Brunswick, New Jersey and is a manufacturer and distributor of value-branded home care products that leverages brand extensions and licensing agreements with consumer product conglomerates.
The acquisition was accounted for as a purchase. The purchase price allocated to the acquired assets and assumed liabilities were determined using management estimates based on a model developed by a professional valuation group. The Company has allocated the purchase price as follows:
| Cash | | $ | 6 | |
| Accounts receivable | | | 4,367 | |
| Inventory | | | 4,650 | |
| Property, plant and equipment | | | 2,145 | |
| Definte lived intangible assets | | | 2,560 | |
| Goodwill | | | 6,569 | |
| Other assets | | | 1,317 | |
| Accounts payable | | | (10,161 | ) |
| Notes payable | | | (1,300 | ) |
| Revolving credit facility | | | (10,153 | ) |
| Purchase price | | $ | - | |
Effective June 9, 2008, the Company’s USAD subsidiary’s asset were seized by the Bankruptcy Court as a result of an involuntary Chapter 7 bankruptcy petition filed by several of USAD’s creditors. As such, the operations of USAD have been deconsolidated from the operating results of the Company as of June 9, 2008.
Acquisition of Secured Convertible Debt of Nexus Nano Electronics and Subsequent Surrender of Assets
On November 2, 2007, Titan Nexus, Inc. (“Titan Nexus”), a subsidiary of Titan Electronics and an indirect subsidiary of the Company, entered into a limited recourse assignment (the “Assignment”) with YA Global Investments, L.P. (“YA Global”). Pursuant to the Assignment, Titan Nexus was assigned all rights, title and interest to YA Global’s secured convertible debt position in Nexus Nano Electronics, Inc. (“Nexus Nano”), in the aggregate amount of $11,245, including principal and interest. The obligations are secured by all of Nexus Nano’s assets.
In consideration for the Assignment (i) the Company issued YA Global 2,000,000 shares of common stock, valued at $2.00 per share, the price of the stock at the time of the closing, and (ii) Titan Electronics, a direct subsidiary of the Company, issued YA Global 103,503 shares of Titan Electronics series A convertible preferred stock valued at $7,245.
On November 5, 2007, the Company formed Titan Electronics Group (“Titan EG”). Titan Nexus, along with the Company’s legacy subsidiaries, Titan East and Titan Electronics comprise Titan EG all of which are included as discontinued operations.
On November 30, 2007, Titan Nexus completed the final step in the acquisition of the assets of Nexus Nano, a manufacturer of custom circuit boards for aerospace, defense and other industries. The surrender of assets was completed by agreement between Nexus Nano as debtor and Titan as creditor. The purchase price allocated to the surrendered assets and assumed liabilities was based on fair value as of the surrender date as determined by management. The fair value of the surrendered assets is presented below:
| Cash | | $ | 3 | |
| Accounts receivable | | | 338 | |
| Inventory | | | 1,173 | |
| Fixed assets | | | 1,533 | |
| Goodwill | | | 8,571 | |
| Other assets | | | 27 | |
| Accounts payable | | | (10 | ) |
| Short term debt | | | (180 | ) |
| Long term debt | | | (210 | ) |
| Value of common and preferred stock issued | | $ | 11,245 | |
In August 2008, the Company ceased operations of its Titan Nexus subsidiary and began an orderly liquidation of the Titan Nexus assets including inventory and equipment in addition to collecting outstanding accounts receivable. The operations of Titan Nexus which were previously included in our electronics and homeland security division have been classified as discontinued operations as of and for the period ending August 31, 2008. As such, we incurred an impairment charge for all of the goodwill recorded at our Titan Nexus subsidiary totaling $8,571 as of August 31, 2008.
Acquisition of Assets in Global Brands Segment via a Secured Party Transfer of Global Brand Marketing, Inc. Collateral from Greystone
On December 14, 2007, the Company formed Titan Apparel, Inc. (“TAPP”) and acquired the collateral of Global Brand Marketing Inc. (“GBMI”), a California Corporation, through a Secured Party Bill of Transfer with Greystone. The purchase price of the collateral was $7,961 and was financed through a Loan and Security Agreement with Greystone. The Company’s results of operations for the year ended August 31, 2008 include TAPP’s results from the date of formation to the end of the reporting period and are included in discontinued operations.
TAPP is headquartered in Carpinteria, California and is an owner of several footwear brands and the Global Feet retail store chain and an authorized footwear marketer. TAPP designs, develops and markets stylish footwear for men, women and children. The primary reason for the acquisition was to facilitate the development of the Company’s Global Brands segment with an opportunistic acquisition of undervalued assets accompanied by a successful seasoned management team. The acquisition was accounted for as a purchase. The purchase price allocation of the acquired assets was determined by management. There were no definite or indefinite lived intangible assets established as part of the purchase price allocation. Management allocated the purchase price to the most liquid assets first at their respective fair values as of the date of the acquisition and then to the non-current assets (fixed assets) at their respective fair values as of the date of acquisition in succession until the carrying value of the acquired assets equaled the purchase price. The Company has allocated the purchase price as follows:
| Cash | | $ | 153 | |
| Accounts receivable | | | 3,459 | |
| Inventory | | | 3,437 | |
| Fixed assets | | | 912 | |
| Purchase price | | $ | 7,961 | |
In August 2008, the Company discontinued the operations of its Titan Apparel subsidiary and began the orderly liquidation of the inventory and fixed assets in addition to collecting the outstanding accounts receivable. The operations of Titan Apparel were previously included in our Global Brands division and have been classified as discontinued as of and for the period ending August 31, 2008.
Divestiture of CDMA Wireless Assets
On January 25, 2008, the Company’s subsidiary, Titan Wireless RM, Inc., completed a sale of certain assets for $1,000 and the assumption of certain liabilities to Boomerang Wireless, Inc. The Company received a Promissory Note from Boomerang for $1,000 bearing interest at the prime interest rate plus four percent and the note is fully reserved as of the date of acquisition. A reserve was established for the note based on the poor credit worthiness of Boomerang and its lack of stable financing. The Promissory Note is to be paid to the Company in four annual installments with interest in arrears beginning on December 31, 2008. The Company has obtained UCC-1 security interests in the accounts receivable, inventory, equipment and other assets of Boomerang as collateral to the Promissory Note. Boomerang also assumed certain liabilities of Titan Wireless RM, Inc. as additional consideration to the Company. The Company retained its accounts receivable and retained its legacy wireless brand names Bravo Cellular and Picante Movil. The Company recorded a gain on disposal of assets of $2,030 as a result of the transaction as liabilities assumed by the buyer were greater than the carrying value of assets divested. In August 2008, the Company evaluated its communications division and determined to classify the operations of Oblio Telecom, StartTalk and Titan Wireless as discontinued.
Titan East Inc. f/k/a Titan PCB East Asset Purchase Agreement
On May 20, 2008, the Company entered into an Asset Purchase Agreement with Denis McCarthy dba Time Sensitive Circuits, a management led buy-out team (“TSC”), to sell substantially all of the assets of the Company’s Titan PCB East subsidiary. The agreement calls for the assumption by TSC of Titan PCB East’s debt with Greystone and certain other liabilities. Effective August 1, 2008, the Company entered into an asset purchase agreement with a management led buyout team for substantially all of the assets of our printed circuit board manufacturing facility located in Amesbury, Massachusetts held by Titan East, Inc f/k/a Titan PCB East, Inc. and which was part of our electronics and homeland security division. The operations of Titan East, Inc. f/k/a Titan PCB East have been classified as discontinued operations.
In addition, our lender, Greystone, consented to the asset purchase agreement pending TSC’s closing a loan and security agreement with Greystone or refinancing the loan with a third party lender. Until such time as TSC closes and or refinances all outstanding obligations with Greystone associated with our Titan East Inc. f/k/a Titan PCB East subsidiary, we remain obligated to Greystone for the outstanding indebtedness should TSC be unable to satisfy the outstanding obligations to Greystone. The obligations to Greystone are secured by cash, inventory, accounts receivable and fixed assets among other valuable assets. The outstanding obligation to Greystone as of August 31, 2008 by TSC was approximately $1,100. We have not recorded any liabilities associated with the aforementioned guaranty as of August 31, 2008.
Acquisition of Assets from Ready Mobile, LLC
On May 11, 2007, the Company through its subsidiary Titan Wireless acquired certain assets of Ready Mobile, LLC. Ready Mobile is in the business of creating, marketing, and distributing prepaid telephone products for the wireless markets. Titan Wireless acquired these assets to expand its wireless footprint into the convenient store market. Pursuant to the terms of the Asset Purchase Agreement, the Company agreed to pay consideration equal to 55% of earnings before interest, depreciation, taxes, and amortization (EBITDA) for the first 36 months subsequent to the closing, payable monthly in arrears. The EBITDA calculation is based on revenue from the acquired distribution channels offset by a formula based expense structure. As of August 31, 2007, the Company estimated the total consideration to be paid of $3,401 which was recorded as debt.
The following table summarizes the assets acquired and liabilities assumed as of the closing date:
| Current assets | | $ | 446 | |
| Tangible assets acquired | | | 253 | |
| Intangible assets acquired | | | | |
| Existing Subscribers | | | 384 | |
| Contracts for retail locations | | | 551 | |
| Trade names | | | 1,224 | |
| Goodwill | | | 989 | |
| Total assets acquired | | | 3,847 | |
| Liabilities assumed | | | (446 | ) |
| Net assets acquired | | $ | 3,401 | |
The acquisition was accounted for using the purchase method of accounting. Existing subscribers’ intangible assets will be amortized over their estimated useful life of five years. Contracts for retail locations intangible assets will be amortized over their estimated useful life of fifteen years. Trade names intangible assets are considered an indefinite lived intangible asset and will therefore not be amortized but tested annually for impairment. The purchase price allocated to the intangible assets was determined using management estimates based on a model developed by a professional valuation group. Goodwill represents the excess of merger consideration over the fair value of assets acquired. The goodwill acquired may not be amortized for federal income tax purposes.
The assets of Ready Mobile were acquired in the third quarter of fiscal year 2007. The pro-forma information is shown below as if the asset purchase occurred on September 1, 2005 (unaudited):
| | | 08/31/2007 | |
| Revenues | | $ | 116,327 | |
| | | | | |
| Net loss applicable to common shareholders | | $ | (27,920 | ) |
| | | | | |
| Net loss applicable to common shareholders per share: | | | | |
| basic and diluted: | | $ | (0.57 | ) |
The Company determined to cease the distribution of CDMA prepaid wireless handsets and the related airtime through its subsidiary Titan Wireless RM, Inc, due to the increasing capital requirements associated with the business model at Titan Wireless, the Company’s wireless operating subsidiary. As such, the Company impaired $3,148 of the goodwill and intangible assets related to Ready Mobile asset purchase as of November 30, 2007. This impairment was offset by a reduction of the Deferred Purchase Consideration to $267 as of November 30, 2007. Furthermore, as the remaining assets associated with the wireless operations were sold on January 25, 2008, (see additional discussion in Note 2), the accrual for deferred purchase consideration was reduced to $0 as of January 25, 2008. The Ready Mobile transactions are included in the Telecommunications discontinued operations.
Titan Electronics, Inc. Asset Purchase Agreement
Effective July 18, 2008, the Company entered into an asset purchase agreement with Sunrise Electronics, Inc. to sell substantially all of the assets of Titan Electronics, Inc.’s printed circuit board manufacturing facility located in Fremont, California and which were previously included in our electronics and homeland security division. The operations of Titan Electronics, Inc. have been classified as discontinued operations.
4. Loss per Common Share
The Company computes loss per share in accordance with Statement of Financial Accounting Standards No. 128 “Earnings per Share” (“SFAS 128”) and SEC Staff Accounting Bulletin No. 98 (“SAB 98”). Under the provisions of SFAS 128 and SAB 98, basic net income or loss per share is computed by dividing the net loss available to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed by dividing the net loss available to common shareholders for the period by the total number of common and common equivalent shares outstanding during the period. During the period when they would be anti-dilutive, common stock equivalents (which during the year ended August 31, 2008 consisted of employee options/warrants to purchase 1,094,167 common shares, warrants to purchase 14,396,667 common shares, and preferred stock convertible into 3,252,238 common shares and during the year ended August 31, 2007 consisted of employee options/warrants to purchase 1,582,500 common shares, warrants to purchase 10,700,000 common shares, and preferred stock convertible into 3,162,000 common shares) are not considered in the computations as they are anti-dilutive.
5. Inventories
Inventories in continuing operations as of August 31, 2008 consist primarily of finished goods. There were no inventories in continuing operations at August 31, 2007.
6. Equipment and Improvements
A summary of equipment and improvements as of August 31:
| | | 2008 | | 2007 | |
| Automobiles | | $ | 25 | | $ | - | |
| Computer equipment | | | 79 | | | - | |
| Leasehold improvements | | | 4,194 | | | - | |
| Office equipment | | | 207 | | | - | |
| Production equipment | | | 8,578 | | | - | |
| Software | | | 230 | | | 74 | |
| Other | | | 4 | | | - | |
| Total | | | 13,317 | | | 74 | |
| Less accumulated depreciation | | | (2,805 | ) | | - | |
| Equipment and improvements, net | | $ | 10,512 | | $ | 74 | |
Depreciation expense in continuing operations for equipment, and improvements was $2,474 and $0 for the years ended August 31, 2008 and 2007, respectively. Depreciation expense in discontinued operations for equipment, and improvements was $1,335 and $838 for the years ended August 31, 2008 and 2007, respectively.
7. Definite Lived Amortizable Assets
A summary as of August 31, 2008 is as follows:
| | | | | Estimted useful | |
| | | 2008 | | Life ( Years) | |
| Supply agreement | | $ | 500 | | | 2 | |
| Non-compete | | | 400 | | | 5 | |
| Total | | | 900 | | | | |
| Less accumulated amortization | | | (316 | ) | | | |
| Intangibles, net | | $ | 584 | | | | |
At August 31, 2007 there were no definite lived amortizable assets in continuing operations.
Amortization expense in continuing operations for intangible assets amounted to $316 and $0 for the years ended August 31, 2008 and 2007, respectively.
Amortization expense in discontinued operations for intangible assets amounted to $2,646 and $5,377 for the years ended August 31, 2008 and 2007, respectively.
Future annual amortization expense of intangible assets is expected to be as follows:
Amortization Expense | |
FY 2009 | | FY 2010 | | FY 2011 | | FY 2012 | | FY 2013 | | Thereafter | | Total | |
| $ 330 | | $ | 90 | | $ | 80 | | $ | 80 | | $ | 4 | | $ | - | | $ | 584 | |
8. Accrued Liabilities
A summary as of August 31, 2008 and 2007 is as follows:
| | | 2008 | | 2007 | |
| Compensation and benefits | | | 331 | | | 412 | |
| Interest | | | 666 | | | - | |
| Miscellaneous vendor payables and other | | | 801 | | | 129 | |
| Payroll taxes | | | 95 | | | - | |
| Wholesaler | | | 2,134 | | | - | |
| Federal, state and local taxes | | | 963 | | | - | |
| | | $ | 4,990 | | $ | 541 | |
9. Debt, Derivative Liabilities and Warrants
Debt and derivative liabilities are comprised of the following at August 31, 2008:
| | | 2008 | |
| Greystone term loans A&B, net of discount of $432 | | $ | 2,523 | |
| YA Global Convertible Debentures, net of discount of $3,658 | | | 2,342 | |
| Greystone revolving notes | | | 12,393 | |
| Long-term derivative liabilities | | | 3,181 | |
Total Long-Term Debt and Long-Term Derivative Liabilities | | | 20,439 | |
| Greystone term loans A&B | | | 1,020 | |
| Short-term notes payable | | | 8 | |
Total Debt and Derivative Liabilities | | $ | 21,467 | |
Long-term debt consists of:
| Issue | | Expiration | | | | | |
| Date | | Date | | Instrument | | 2008 | |
| 09/17/2007 | | 09/17/2012 | | $20,000 Secured Revolving Note | | 11,680 | |
| 09/17/2007 | | 09/17/2012 | | $5,200 Term Notes | | 3,975 | |
| 09/17/2007 | | 09/17/2010 | | $6,000 Convertible Debentures | | 6,000 | |
| 12/14/2007 | | 12/29/2009 | | $14,000 Secured Revolving Note | | 713 | |
| Total debt | | | 22,368 | |
| Less discount from warrants and derivatives | | | (4,090 | ) |
| Total carrying value of debt | | | 18,278 | |
| Less current portion of long-term debt | | | (1,020 | ) |
| Total long-term debt | | $ | 17,258 | |
There were no debt or derivative liabilities at August 31, 2007 in continuing operations.
Titan Global Energy Division
On September 17, 2007, the Company acquired Appco. As part of the acquisition, the Company entered into a credit facility including a revolving line of credit in the maximum amount of $20,000 less the outstanding balance under Term Notes A, B and C under the Loan and Security Agreement dated as of December 29, 2006. The credit facility also includes term loans of up to $5,200. An aggregate of approximately $14,909 was advanced under the loan and credit facility related to the initial Appco acquisition. Advances will be based upon (i) 90% of eligible accounts receivable, and (ii) the sum of up to 45% of eligible convenience store inventory plus up to 75% of eligible fuel inventory. The borrower is required to have a minimum outstanding balance of $10,000. The revolving credit facility and the term loans bear interest at a rate of 1.5%, plus the prime interest rate. A loan servicing fee of .25% is payable each month based on the average daily outstanding balance outstanding under the revolving facility and the term loans. In the event of a termination of the facility, an early termination fee will be payable. Such fee equals 1% of the maximum revolving facility and the term loans if the termination occurs during the first year, which is reduced to 0.50% if termination occurs in the second year and 0.25% if terminated thereafter. The borrower will also be assessed credit accommodation fees of 2% of the face amount of the letter of credit for up to 60 days and 1% of the face amount of such letter of credit for each 30 day period thereafter. The loan and line of credit is due September 17, 2012.
The Company issued Greystone a warrant to purchase 500,000 shares of common stock at a price of $2.00 per share, exercisable for a period of five years. Titan is obligated to register the common stock underlying the warrant within six months of the closing or by March 17, 2008. As of December 1, 2008, the common stock underlying the warrant has not yet been registered. No penalties have been assessed by Greystone related to this obligation.
At August 31, 2008 the revolver had an outstanding balance of $11,680 and the term notes had a carrying value of $3,543 (net of discount of $432) and an excess availability and an excess available credit of $0 based on actual borrowing capacity. The interest rate on the revolver and term loans was 6.5% at August 31, 2008.
Discontinued Operations of Communications and Electronics and Homeland Security Division
On December 29, 2006, the Company, together with all of its subsidiaries, entered into a credit facility with Greystone. The new credit facility with Greystone initially included a revolving line of credit (“Revolver”) in the maximum amount of $15,000 and also includes senior term loans of up to $7,950.
The revolver expires in December 2009, subject to earlier termination under certain circumstances. The revolving credit facility bears interest at a rate of 1.5%, plus the prime interest rate. Interest payments on the revolver are due monthly with principal paid at maturity. Revolver loans will be advanced based upon 85% of eligible accounts receivable and up to a maximum of 85% of eligible inventory, subject to certain limitations. The Company is obligated to use any refunds on commercial taxes including Universal Service Fees (“USF”) to repay the term loans.
The senior term loans bear interest at a rate of 6%, plus the prime interest rate, provided that such rate is reduced by .5% for each reduction of principal by $1,000. The senior term loans were initially to be paid off in 48 equal installments of $135 per month which will result in repayment of the principal. At August 31, 2008, the Term Loan A had an interest rate of 11% and Term Loan B had an interest rate of 10%.
The Company granted a security interest in all of its assets to Greystone as security for the financing facility. Such security included a pledge of all trademarks and the stock of all subsidiaries.
The Company paid a commitment fee of $369 and will pay an annual commitment fee of 0.5% of the facility, payable on each anniversary. A loan servicing fee of .3% is payable each month based on the amount outstanding under the revolving facility. There is also a $20 per month administrative fee. In the event of a termination of the facility, an early termination fee will be payable. Such fee equals 1% of the maximum revolving facility and the term loans if the termination occurs during the first year. As additional consideration for the facility, the Company issued to Greystone: (i) 500,000 shares of common stock valued at $505 which was recorded as a debt discount, and (ii) a warrant to purchase 500,000 shares of common stock at a price of $1.00 per share, exercisable for a period of five years which was recorded as a derivative liability. The Company is obligated to register the shares of common stock and the common stock underlying the warrant.
On February 14, 2007, the Company entered into Amendment #1 with Greystone. Through the amendment, Greystone increased the Company’s Revolver line of credit from $15,000 to $18,000 and provides for senior term loans of up to $7,608. The Company is required to have a minimum unused availability under the line in increasing amounts between $200 and $1,000.
On June 1, 2007, the Company entered into Amendment #2 with Greystone. Through the amendment, the Company received approval from Greystone to transfer 100% of the issued and outstanding shares of common stock related to StartTalk from Oblio to Titan Global Holdings.
On June 11, 2007, the Company received the proceeds from tax refunds owed related to Federal Excise Tax (“FET”). The Company used $3,232 of the proceeds to repay Term Loan B in full.
On July 25, 2007, the Company entered into Amendment #3 with Greystone. Through the amendment, Greystone agreed to re-establish Term Loan B and advance the Company up to $1,500.
On August 23, 2007, the Company entered into Amendment #4 with Greystone. Through the amendment, Greystone agreed to increase Term Loan B by $500 up to a maximum of $2,000. The monthly principal payment for Term Loan A is $18 and the new monthly principal payment for reestablished Term Loan B is $83. The amended senior Term Loan B is to be paid off in 24 equal installments, which will result in repayment of the principal. The terms for Loan A were not changed.
On September 17, 2007, the Company entered into Amendment #5 with Greystone. Through the amendment, Greystone consented to the debt issuance in favor of YA Global Investments, L.P. of $6,000 and agreed to a Term Loan C advance of $5,000. This three-year note carries an annual interest rate of 1.5% in excess of the prime interest rate and is fully collateralized with $5,000 of cash held in a restricted account. The entire balance of Term Loan C is due and payable on the maturity date of the loan.
On October 17, 2007, the Company entered into Amendment #6 with Greystone. Through the amendment, Greystone consented to the formation of Titan Card Services, Inc.
On October 16, 2007, the Company entered into Amendment #7 with Greystone. Through the amendment, Greystone reduced the amount of the minimum unused availability to $0 and agreed to increase the minimum unused availability by $16 each month up to a maximum amount of $750. In addition, the repayment schedule was modified for Term Loan B to $43 per month.
On November 30, 2007 the Company entered into Amendment #8 with Greystone. The amendment decreased the interest rate on Term Loan C from 1.5% above the prime rate to 0.75% per annum. The interest rate on Term Loan C was lowered to 0.75% because the loan was 100% collateralized by cash held in a non-interest bearing escrow at Greystone which approximates the market rate of interest for loans with this type of collateral.
On March 3, 2008, effective December 2007, the Company entered into Amendment #9 with Greystone. Through the amendment, Greystone consented to the formation of Titan Communications, Inc.
On March 3, 2008, effective February 11, 2008, the Company entered into Amendment #10 with Greystone. The amendment created Term Loan D, as an advance to Titan Nexus and increased the revolver amount to $20,000; $7,000 to the Electronics and Homeland Security segment and $13,000 to the Communications segment. Term Loan D shall be repaid in monthly installments beginning March 1, 2008 with the balance due on the maturity date of February 1, 2011. The amendment also modified the interest rates as follows: all revolving loans have an interest rate of 1.5% per annum in excess of the prime rate except the revolving loans owed by Titan Nexus in excess of $1,000 which have an interest rate of 4.5% per annum in excess of the prime rate and the interest rates shall not be lower than 6.0% per annum, the interest rate on Term Loan A shall be 6.0% per annum in excess of the prime rate and shall be reduced by one-half of one percent for every $1,000 reduction in the term loan but not lower than 5.0% per annum in excess of the prime rate, the interest rate for Term Loan B is 5.0% per annum in excess of the prime rate, the interest rate for Term Loan C is 0.75% per annum and the interest rate for Term Loan D is 6.0% per annum in excess of the prime rate.
On February 29, 2008, the Company entered into Amendment #11 with Greystone. The amendment expands the definition of eligible borrows under the loan and security agreement for the communications division to include newly formed entities.
On May 30, 2008, the Company entered into Amendment #12 with Greystone. In the amendment Greystone consented to the Company entry into an unsecured subordinated indebtedness with Mike Kadlec, at the time, the CEO of Titan Electronics Inc. who resigned as of July 18, 2008. In addition, the amendment specified the terms and conditions of term loan E for $300 with $25 per month amortization payments beginning July 1, 2008. Term loan E carries interest at prime plus 6%.
On June 9, 2008, the Company entered into Amendment #13 with Greystone. The amendment set the term loan D limit at $1,050 and established a 44 month amortization term for term loan D.
On October 13, 2008, the Company entered into Amendment #14 with Greystone. The amendment created a borrowing account sub-limit for the loans related to the Company’s Planet Direct subsidiary to $3,000, acknowledged the formation of our Global Wholesale International Inc subsidiary and defined what qualifies as an eligible account for borrowing base calculation purposes for Planet Direct.
As of August 31, 2008, Term Loans A and B are recorded at $2,629 and the revolver has a balance of $15,247 with an excess available credit of $0 based on actual borrowing capacity. Interest rates on the revolver were 3.5% on $11,830 and 6.5% on $3,417.
On March 5, 2008, Term Loan C’s outstanding balance of $5,000 was paid in full. Term Loan D has an outstanding balance of $778 and an interest rate of 11% as of August 31, 2008.
Debt Covenant Restrictions Related to Communications and Electronics and Homeland Security Debts
| Maximum Cumulative Net Loss: | $1,000 on a cumulative basis for the period from September 1, 2006 through the end of the Term |
| | |
| Maximum Leverage Ratio: | Not applicable |
| | |
| Limitation on Purchase Money Security Interests: | $1,000 |
| | |
| Limitation on Equipment Leases: | $1,000 |
| | |
| Additional Financial Covenants: | None |
The Company has met all covenant terms except the maximum cumulative net loss. The Company has received a written waiver from Greystone related to this covenant through August 31, 2009. No penalties have been assessed related to this violation.
Modification Agreement with Greystone Business Credit
In the fourth quarter of fiscal 2008, the Company entered into a modification agreement with Greystone. The agreement set forth (1) general terms and conditions of the structure a future working relationship concerning any assets that may become available from the Chapter 11 bankruptcy proceeding of USAD (2) a 36 month amortization schedule of the over advance attributable to the discontinued operations of Oblio Telecom (3) terms and conditions of the related party loan from the Crivello Group to our subsidiary, Titan Nexus (4) an outline of the working structure for the Planet Direct sub-limit portion of the Titan Loan Agreement (5) consent to transfer the ownership of certain parcels of real estate owned by Appco in partial satisfaction of indebtedness owed by the Company to the Crivello Group (6) modifications to the Appco monthly amortization schedule should the Company continue to be unable to obtain certain leasehold mortgages in favor of Greystone (7) terms and conditions of future merger transactions with our Titan Apparel subsidiary (8) conditions subject to additional loan facilities being made available to Titan Apparel and (9) an interest surcharge of 3.5% on any over advance with our Titan Apparel subsidiary.
Concurrent with the modification agreement with Greystone, our Chairman, David Marks and Frank Crivello executed a joint and severable limited recourse guaranty of $5,000 for the debts of the Company owed to Greystone. In addition, Farwell Equity Partners II, LLC a related party to David Marks and Frank Crivello executed a limited recourse guaranty for the debts of the Company owed to Greystone that is secured by 6,000,000 common shares of Marine Growth Ventures, Inc. common stock shares. The Farwell Equity Partners II pledge is limited to the pledged shares. The pledged Marine Growth Ventures, Inc. common shares are traded on the OTC bulletin board and were trading at $0.34 per share on November 28, 2008.
Seller-Financed Notes and Preferred Stock in Communications Division Discontinued Operations
Seller-financed debt was provided in connection with the acquisition of Oblio on August 12, 2005, and the Company issued to the Seller, F&L, LLP (“F&L”) formerly known as Oblio Telecom, LLP, an 18-month promissory note in the principal amount of $2,500. The note matured on February 12, 2007 and carried an interest rate of 1% per annum. The note was recorded upon issuance at its fair value of $2,245, and the associated discount of $255 was amortized over the 18-month term of the note. The effective interest rate on the note was approximately 7.50%.
Additional seller financing was provided upon the closing of the Oblio acquisition in the amount of $2,323 in a contractual short term obligation that was not interest-bearing. On December 14, 2005, a promissory note was executed acknowledging this amount due to the Seller. The Note bears interest of 4%, and had an initial maturity date of May 31, 2006 which was extended to March 31, 2009.
On December 29, 2006, F&L agreed to amend the terms of Oblio Series A Preferred Stock originally issued to them as part of the Oblio acquisition. The provisions related to potential additional value of the preferred shares as a result of attainment of certain financial goals were eliminated and the stated value of the preferred stock was reduced from $9,000 to $4,500. The preferred stock agreement was modified as follows:
| | · | The amended Series A Preferred Stock includes the first tranche only and is a fixed 3,000 shares with a stated value of $1.50 per share. |
| | · | Holders of the Series A Preferred are entitled to preferential cash dividends out of the Company’s funds at an annual rate of 3% of the then current stated value, payable quarterly. |
| | · | All shares must be redeemed by March 31, 2009. |
| | · | The Series A Preferred is convertible into a number of shares of Common Stock equal to the then stated value (plus accrued and unpaid dividends) divided by $1.50 (the “Conversion Price”). The Conversion Price is subject to adjustments as a result of, among other things, stock splits and reclassifications and contains initial anti-dilution provisions including adjustments to the Conversion Price in the event of the Company issuing Common Stock at prices below the initial Conversion Price. |
| | · | The Series A Preferred is non-voting, subordinate to all Greystone debt and has a preference in liquidation of $12,345 as of May 31, 2008. |
On the same date, pursuant to the amendment, F&L agreed to extend the maturity date of the notes to March 31, 2009, and increase the interest rate to 5% per annum. Oblio will make monthly payments of $179, commencing January 31, 2007. In connection with the amendment, the Company issued 250,000 shares of common stock valued at $253 to F&L LLP. In addition, the Company agreed to guaranty the payment to be made by Oblio. No payments have been made since July 2007 and the Company is currently being sued by F&L, as discussed in Note 19.
In accordance with SEC Accounting Series Release No. 268, Presentation in Financial Statements of "Redeemable Preferred Stock", the Company has classified this preferred stock as well as the accrued dividends as a long-term liability. Additionally, due to the potential variability of the Conversion Price as discussed above, the Company is required to record the embedded conversion feature of the Series A Preferred stock as a liability at fair value and to re-measure that value each reporting period with changes being charged to operations.
As of August 31, 2008, the Company has recorded $3,570 as debt related to the note and $4,878 related to the preferred stock (which includes $378 in accrued dividends). No dividend payments have been made as of November 28, 2008. The Series A Preferred Stock in included in the discontinued operations long-term liabilities at August 31, 2008 and 2007.
YA Global
On September 17, 2007, the Company executed a secured convertible debenture in the principal amount of $6,000, all of which was advanced immediately. The Company pledged all of its assets and rights to secure this debenture subordinate to Greystone. Interest on the debenture accrues at 10% per annum. The debenture is convertible at the option of the holder into shares of common stock of Titan at a price of $2.25 per share. The debenture matures on September 17, 2010. Beginning on May 1, 2008 and continuing on the first business day of each successive month, the Company will make payments by converting such installment payment into shares of common stock provided certain equity conditions are met. The conversion price is equal to the lower of (i) $2.25 per share, or (ii) 90% of the lowest daily volume weighted average price of the common stock during the 15 consecutive trading days immediately preceding the conversion date. The Company may also at its option choose to redeem a portion or all of the installment payment by paying such amounts in cash plus a redemption premium of 10%. The Company may defer the payment of any installment payment to the maturity date if the volume weighted average price of the common stock equals 110% of the applicable conversion price for the consecutive 5 trading days prior to the notice due date for the applicable installment payment. Each installment amount shall be equal to all accrued and unpaid interest, plus the lesser of (a) the product of (i) $200 multiplied by a fraction of which the numerator is the original principal amount and the denominator of which is the aggregate purchase price paid under the Purchase Agreement and (b) the principal amount of the Debenture on the installment payment date.
The Company has the right to redeem a portion or all amounts outstanding under the Debenture prior to the maturity date at a premium of 10% provided that (i) the Volume Weighted Average Price (VWAP) of Titan’s Common Stock is less than the conversion price of $2.25; (ii) no event of default has occurred and (iii) the underlying Registration Statement is effective.
The Company also issued YA Global warrants to purchase 525,000 shares of common stock at a price of $2.47 per share and 525,000 shares of common stock at a price of $2.81 per share, exercisable for a period of five years. Titan is obligated to register the common stock underlying the warrant within 90 days of the closing. The Company has not yet registered the common stock underlying the warrants. The Company has received a waiver from YA Global related to this deficiency. No penalties have been assessed related to this violation.
The note was issued with a beneficial conversion feature. At issuance, the note was recorded at $1,831 with an associated discount of $4,169. The discount will be amortized over the 36 month term of the note. At August 31, 2008, the note had a recorded balance of $2,342 with an associated discount of $3,658. No payments have been made and the Company has not been notified of any defaults.
Deferred Purchase Consideration in Communications Division Discontinued Operations
On May 11, 2007, the Company acquired certain assets of Ready Mobile, LLC. Pursuant to the terms of the Asset Purchase Agreement, the Company agreed to pay consideration equal to 55% of earnings before interest, taxes, depreciation and amortization (EBITDA) for the first 36 months subsequent to the closing, payable monthly in arrears. As of August 31, 2007, the Company had accrued $3,401 for deferred purchase consideration which was management’s estimate of the total amount to be paid for the asset purchase.
As discussed further in Note 19, the Company determined to cease the distribution of CDMA prepaid wireless handsets and the related airtime through its subsidiary Titan Wireless RM, Inc., due to the increasing capital requirements associated with the business model at Titan Wireless, the Company’s wireless operating subsidiary. As such, the Company impaired $3,148 in the goodwill and intangible assets related to Ready Mobile asset purchase as of November 30, 2007. This impairment was offset by a reduction of the Deferred Purchase Consideration to $267 as of November 30, 2007. Furthermore, as the remaining assets associated with the wireless operations were sold on January 25, 2008 (see additional discussion in Note 2) the accrual for deferred purchase consideration was reduced to $0 as of January 25, 2008.
Trilogy Capital Partners
On September 20, 2006, the Company entered into a letter of engagement with Trilogy Capital Partners, Inc. (“Trilogy”). The term of the engagement is for twelve months beginning on September 20, 2006 and terminable thereafter by either party upon 30 days prior written notice. Trilogy will provide marketing, financial public relations and investor relations services to the Company. The Company will pay Trilogy $13 per month and the Company issued warrants to purchase an aggregate of 2,450,000 shares of common stock of the Company, 1,225,000 of which are exercisable at a price of $1.00 per share and 1,225,000 of which are exercisable at a price of $1.50 per share. The warrants issued to Trilogy are exercisable upon issuance, expire on September 17, 2009, and are required to be registered with the Securities and Exchange Commission as part of the agreement.
Cornell Capital Partners L.P.
On October 10, 2006, the Company consummated a Securities Purchase Agreement (the "Purchase Agreement") with Cornell Capital Partners L.P. ("Cornell") providing for the sale by the Company to Cornell of its 8% secured convertible debentures in the aggregate principal amount of $1,200 (the "Debentures") of which $850 was advanced immediately. The second installment of $150 was advanced on December 26, 2006. The last installment of $200 was never advanced. The Debentures mature on the second anniversary of the date of issuance (the "Maturity Date").
Cornell may convert at any time amounts outstanding under the Debentures into shares of Common Stock of the Company (the "Common Stock") at a conversion price per share equal to $1.00. The Company had the right to redeem a portion or all amounts outstanding under the Debentures prior to the Maturity Date at a 10% redemption premium provided that (i) the Volume Weighted Average Price “VWAP” of the Company’s Common Stock was less than the conversion price of $1.00; (ii) no event of default has occurred and (iii) the Registration Statement was effective.
Beginning on February 6, 2007 and continuing on the first trading day of each calendar month for the twelve months thereafter, the Company was to make mandatory redemptions consisting of outstanding principal divided by twelve, accrued and unpaid interest and a redemption premium of 10% per month, until the Debentures were paid in full. The Company had the option to make the mandatory redemption payments in cash or by issuing to Cornell such number of shares of its common stock which shall be equal to the mandatory redemption amount divided by 90% of the lowest VWAP during the 15 trading days prior to the date of the redemption payment. The Company would have been permitted to pay the mandatory redemption by issuing shares of its common stock provided (i) the closing bid price of the Company’s Common Stock was greater than the redemption conversion price as of the trading day immediately prior to the date the redemption payment was due; (ii) no event of default had occurred and (iii) the Registration Statement was effective.
Under the Purchase Agreement, the Company issued to Cornell (A) five-year warrants to purchase 250,000 and 250,000 shares of Common Stock at $1.00 and $1.10, respectively (collectively, the "Warrants"); and (B) 15,000 shares of its common stock (the “Shares”). The Company recorded a derivative liability for the 500,000 warrants associated with this transaction. The Company has recorded a derivative liability and associated expense, as appropriate, for the warrants associated with the Debenture.
In connection with the Purchase Agreement, the Company entered into a registration rights agreement with Cornell (the "Registration Rights Agreement") providing for the filing of a registration statement (the "Registration Statement") with the Securities and Exchange Commission registering the Common Stock issuable upon conversion of the Debentures, exercise of the Warrants, and the 15,000 Shares. The Company was obligated to use its best efforts to cause the Registration Statement to be declared effective no later than February 8, 2007 and to insure that the registration statement remains in effect until all of the shares of common stock issuable upon conversion of the Debentures and exercise of the Warrants have been sold. In the event of a default of its obligations under the Registration Rights Agreement, including its agreement to file the Registration Statement with the Securities and Exchange Commission no later than December 11, 2006, or if the Registration Statement is not declared effective by February 8, 2007, it was required to pay to Cornell, as liquidated damages, for each thirty day period that the registration statement has not been filed or declared effective, as the case may be, either a cash amount or shares of our common stock equal to 2% of the liquidated value of the Debentures.
Cornell has waived all penalties associated with the delay in effectiveness of the registration rights agreement. An SB-2 was filed with the SEC to register the securities covered by these agreements on March 8, 2007. On June 28, 2007, the Company filed a Form SB-2/A amending its previous Form SB-2 registration statement filing. The Company received a signed agreement from Cornell Capital Partners, LLP waiving, on a one time basis, its right to receive liquidated damages that have accrued to date as a result of the Company’s failure to have the Initial Registration Statement declared effective by the scheduled effective date, and agreed to extend the scheduled effective date to August 26, 2007.
On August 14, 2007, Cornell converted the outstanding amounts under the debentures to a $1,000 face value, $65 of accumulated interest, $1,024 of derivative liabilities on these instruments, and an $86 reduction related to the unamortized capitalized loan fees into 1,065,326 shares of common stock. The Company recorded the value of the freestanding derivative liability related to the previously issued 500,000 warrants of $100 and $747 as of August 31, 2008 and August 31, 2007, respectively.
Laurus Master Fund, LTD. In Electronics Group Discontinued Operations
All amounts owed related to the Laurus Master Fund, Ltd. (“Laurus”) financing which totaled $6,676 were paid on December 29, 2006. On November 20, 2003, the Company entered into loan agreements with Laurus, including principally a Security Agreement, a Securities Purchase Agreement ("SPA"), and a Registration Rights Agreement. Pursuant to the Security Agreement, the Company issued to Laurus (i) a Secured Revolving Note (the "Revolving Note") in the maximum principal amount of $2,500 and (ii) a Secured Convertible Minimum Borrowing Note (the "Minimum Borrowing Note") in the original principal amount of $1,500. As prescribed by the terms of the Security Agreement, the Company could borrow from Laurus such amount as shall equal 85% of the Company's eligible accounts receivable on the PCB West and PCB East subsidiaries, up to a maximum of $4,000. Additional Minimum Borrowing Notes could be issued from time to time upon request by the Company, provided the Company had availability under the Revolving Note using the prescribed formula or, at the discretion of Laurus, Laurus could advance additional loans in excess of the formula amount. The Revolving Note and the Minimum Borrowing Note would have matured on August 12, 2008. Pursuant to the SPA, the Company also issued and sold to Laurus a convertible term note (the "2003 Term Note") in the principal amount of $2,100. The first payment of the monthly principal amount of $64 on the 2003 Term Note commenced on February 1, 2004 and the maturity date was November 20, 2006.
On September 12, 2006, the Company and Laurus entered into a letter agreement pursuant to which Laurus agreed for a period of two years, commencing on September 12, 2006, that without prior written consent of the Company, Laurus will not sell any shares of common stock of the Company during a twenty two (22) day trading period by a number that exceeds twenty percent (20%) of the aggregate dollar trading volume of the common stock for the twenty two (22) day trading period immediately preceding and including the date of such proposed sales by Laurus. Such restriction, however, is not applicable to transfers in a private transaction, including as a bona fide gift or gifts, provided that the transferee thereof agrees to be bound in writing by the restrictions contained in the letter agreement. On September 12, 2006, the Company paid $.50 for an Option/Purchase to repurchase 1,250,000 shares for $.50 by December 31, 2006. The exercise of this option was subject to the repayment, on or before December 31, 2006, of all outstanding amounts owed by the Company to Laurus pursuant to the secured revolving note dated November 20, 2003, minimum borrowing note dated November 20, 2003, convertible term note dated March 30, 2004, and convertible term note dated November 20, 2003. On December 29, 2006 the Company exercised the option for the shares. The Company immediately cancelled these shares. The gain of $1,263 from the repurchase of these shares at a discount was accounted for as part of the debt extinguishment costs. This gain was calculated using the share trading price on December 29, 2006. The derivative liabilities on these instruments were removed as of the extinguishment date, which resulted in a gain of $1,480 that is included in gain on debt extinguishment for the year ended August 31, 2007.
Maturities of Long-Term Debt
A summary of the maturities of long-term debts at August 31, 2008 is shown in the table below:
| Fiscal Year | | YA Global | | Greystone Revolvers | | Greystone Term Debt | | Total Long- Term Debt | |
| 2009 | | $ | - | | $ | - | | $ | 1,020 | | $ | 1,020 | |
| 2010 | | | - | | | 713 | | | 1,020 | | | 1,733 | |
| 2011 | | | 6,000 | | | - | | | 1,020 | | | 7,020 | |
| 2012 | | | - | | | - | | | 915 | | | 915 | |
| 2013 | | | - | | | 11,680 | | | - | | | 11,680 | |
| | | $ | 6,000 | | $ | 12,393 | | $ | 3,975 | | $ | 22,368 | |
There was no long-term debt in continuing operations at August 31, 2007.
Derivatives
Pursuant to SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended, and EITF Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, A Company’s Own Stock, the Company has identified certain embedded and free-standing derivative instruments. Generally, where the ability to physical or net-share settle an embedded conversion option or free standing financial instrument is not deemed to be within the control of the Company, the embedded conversion option is required to be bifurcated and both the free-standing instruments and bifurcated conversion feature are accounted for as derivative liabilities.
At each reporting date, the Company estimates the fair values of all derivatives and changes in the fair value are charged to operations. For embedded and free-standing derivatives valued using the Black-Scholes option pricing model the following assumptions were used: (1) contractual term of 3 to 7 years; (2) volatility of 140%, (3) risk free interest rates between 2.85% and 4.17% and (4) dividend rate of 0%.
A summary of the embedded and freestanding derivative liabilities at August 31, 2008 is shown in the table below:
Issue Date | | Expiration Date | | Instrument | | Exercise Price per Share | | 2008 | |
| 9/17/07 | | | 9/17/12 | | | Long-term fair value of conversion feature of convertible debenture | | | | | $ | 2,889 | |
Long-term embedded derivatives | | 2,889 | |
| | | | | | | | | | | | | | |
| 9/17/07 | | | 9/17/12 | | | 500,000 Warrants | | $ | 2.00 | | | 100 | |
| 9/17/07 | | | 9/17/12 | | | 525,000 Warrants | | $ | 2.47 | | | 99 | |
| 9/17/07 | | | 9/17/12 | | | 525,000 Warrants | | $ | 2.81 | | | 93 | |
Total long-term free-standing derivatives | | 292 | |
| | | | | | | | | | | | | | |
Total embedded and free-standing derivative liabilities | | | $ | 3,181 | |
There were no embedded and freestanding derivative liabilities in continuing operations at August 31, 2007
10. Gain or Loss on Extinguishment of Debts in Discontinued Operations
On December 29, 2006, the Company entered into a credit facility with Greystone as discussed in Note 9. The new credit facility with Greystone initially included a revolving line of credit in the maximum amount of $15,000 and also included term loans of up to $7,950 of which $6,484 was borrowed on the closing date. On February 14, 2007, the revolving line of credit increased to $18,000 and also provides for term loans of up to $7,608 in connection with Amendment #1. Certain of the proceeds of the new financing were used to repay the existing credit facilities of the Company with Laurus and CapitalSource. The Company also exercised an option previously granted by Laurus pursuant to which the Company canceled 1,250,000 shares of its outstanding common stock from Laurus in exchange for $1 upon repayment of all sums owed to Laurus. The repayment of the Laurus debt resulted in a $1,263 gain during the second quarter from the exercise of the option to purchase 1,250,000 shares and the cancellation of the shares and a $1,480 gain during second quarter from the removal of the derivative liabilities on these instruments. The gain related to the repurchase of the common shares was based on the fair value of the shares on the date of repurchase. The gain was recorded on February 28, 2007 and is included in the fiscal year 2007 results of discontinued operations. The repayment of the CapitalSource debt did not result in a gain or loss.
As discussed in Note 9, an amendment to the loan agreements on December 29, 2006 between the Company and F&L resulted, in part, in the stated value of the preferred stock being reduced from $9,000 to $4,500. F&L agreed to extend the maturity date of the Notes to March 31, 2009, and increase the interest rate to 5% per annum. The Company also issued 250,000 shares as a part of this transaction. In accordance with EITF Issue No. 96-19, Debtor's Accounting for a Modification or Exchange of Debt Instruments, the Company concluded that the terms of the restructured debt were substantially different (greater than 10%) than the original debt terms and has treated the transaction as a debt extinguishment. The debt extinguishment was calculated by comparing the carrying value of the original debt instrument to the carrying value of the modified debt instrument. A resulting gain of $5,223 was recorded, which includes a reduction in the stated value of $4,500, a reduction in the accrued dividends of $176, and a reduction in the related derivative liability of $622. The gain was reduced by the write off of the remaining unamortized discount on the initial sellers’ loan of $75. The gain was recorded on February 28, 2007 in discontinued operations.
The Company has recorded a total gain of $7,966 for the year ended August 31, 2007 in discontinued operations.
11. Treasury Stock
On May 9, 2007, the Company commenced a Board approved 4,000,000 share open market buyback plan. Through this plan, the Company will buy back its own shares at attractive share prices. There is no expiration date or established dollar amount on the plan. The intent is to repurchase the shares timely at reasonable prices. This announced plan is the only repurchase plan currently underway at the Company.
| Period | | Total Number of Shares Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | | Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs | |
| 05/09/07 | | | 05/31/07 | | | 90,500 | | $ | 1.21 | | | 90,500 | | | 3,909,500 | |
| 06/01/07 | | | 06/30/07 | | | 291,907 | | | 1.12 | | | 241,907 | | | 3,667,593 | |
| 07/01/07 | | | 07/31/07 | | | 32,900 | | | 1.19 | | | 32,900 | | | 3,634,693 | |
| 08/01/07 | | | 08/31/07 | | | 672,000 | | | 1.48 | | | 672,000 | | | 2,962,693 | |
| 09/01/07 | | | 11/30/07 | | | 24,850 | | | 1.62 | | | 24,850 | | | 2,937,843 | |
| 12/01/07 | | | 02/29/08 | | | 212,000 | | | 0.98 | | | 212,000 | | | 2,725,843 | |
Total | | 1,324,157 | | $ | 1.30 | | | 1,274,157 | | | | |
12. Litigation
All amounts excluding share and per share amounts referenced below are stated in thousands unless otherwise noted.
From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business. The Company is currently not aware of any such legal proceedings or claims that the Company believes will have, individually or in the aggregate, a material adverse affect on its business, financial condition or operating results.
ACE TECH CIRCUIT CO., LTD.
In or about September 2008, the Company was notified of a collections lawsuit filed by Ace Tech Circuit Co., Ltd. ("Ace Tech"). The lawsuit alleges the Company is the dba of its subsidiary Titan PCB West and Titan Electronics. A motion to quash service of summons and complaint as to the Company has been filed. Ace Tech is seeking approximately $459 for alleged failure to pay for delivered product. The Company has accrued $422 of the amounts alleged to be due in its accounts payable as of August 31, 2008 and is disputing the difference of $37.
ADVANCED SURFACE FINISHING
In July 2008, the Company's subsidiary Titan PCB West n/k/a Titan Electronics Inc. (“Titan Electronics”) was notified of a collections lawsuit and a writ of attachment granted to Advanced Surface Finishing ("AFS"). AFS is seeking approximately $143 from Titan PCB West for alleged failure to pay for delivered product. The Company has accrued $58 of the amounts alleged to be due in its accounts payable as of August 31, 2008 and is disputing the difference of $85.
ALLSTATE PRINTING & PACKAGING, INC
On March 25, 2008, the Company’s subsidiary, Oblio, was notified, via a process server, that it was being sued by Allstate Printing & Packaging, Inc. (“Allstate”). Allstate is seeking $86 for alleged unpaid invoices for services rendered in Passaic County: Superior Court, NJ. This action is currently pending. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
AMERTEL COMMUNICATIONS, INC
On April 2, 2008, the Company’s subsidiaries, Oblio and Titan Wireless, were notified, via a process server, that it was being sued by Amertel Communications, Inc. (“Amertel”). Amertel is seeking $275 for alleged unpaid refunds for products purchased in the US District Court, MD. This action is currently pending. The Company disputes the amounts alleged to be due, and Management is unable to estimate the ultimate liability, if any, related to this claim at August 31, 2008.
ASIA TELECOM CORPORATION
On March 7, 2008, Oblio filed a lawsuit in Dallas County, Texas, against Asia Telecom Corporation (“Asia Telecom”) seeking to recover $753 for unpaid product. Asia Telecom filed a special appearance claiming that it does not have sufficient contacts with the State of Texas to warrant being sued in a Texas Court. On July 25, 2008, the district court denied Asia Telecom’s special appearance. We are now proceeding with pre-trial discovery against Asia Telecom.
AT&T CORP.
On December 5, 2006, the Company’s subsidiary, Oblio Telecom, Inc. (“Oblio”), filed a Demand for Arbitration with the American Arbitration Association against AT&T Corp. (“AT&T”). Oblio sought a refund of amounts paid to AT&T for the period from 1999 to October 2006 for USF charges paid to AT&T pursuant the Purchase Order Agreement, which sets forth the parties’ business relationship. The fees paid to AT&T for AT&T’s Enhanced Prepaid Card Service (“Prepaid Card Service”) included USF and other Federal Communications Commission (the “FCC”) charges. AT&T retained this revenue instead of making the required contributions to the USF and other FCC programs based on AT&T’s argument that its Prepaid Card Service was exempt under the law.
On October 12, 2007, Oblio entered into a Settlement Agreement (the “Settlement Agreement”) with AT&T, effective as of October 11, 2007. Pursuant to the Settlement Agreement, AT&T agreed to waive and discharge its right to receive $7,200 and Oblio issued a promissory note for the payment of the balance of $600 in interest to AT&T in full settlement of the Partial Final Award issued in the arbitration proceeding on the counter claims brought by AT&T against Oblio and in full settlement of the Oblio’s Universal Service Fund claim against AT&T. As Oblio had already recorded its liability in its accounts payable, the $6,600 net reduction in accounts payable reduced cost of sales during the three months ended November 30, 2007.
Oblio has remitted $500 to AT&T in compliance with the Settlement Agreement as of May 31, 2008. Additionally, the Company has recorded $100 as a liability to AT&T as of August 31, 2008 for the remainder of the amounts due AT&T per the Settlement Agreement.
CLIFTON PREPAID COMMUNICATIONS CORP.
On August 21, 2007, Oblio filed suit against Clifton Prepaid Communications Corp., Clifton Pre-Paid Corp, and Aref Aref (collectively “Clifton”) for non-payment of invoices related to services rendered in the District Court, 199th Judicial District, Collin County, Texas. Oblio seeks $2,199 in payment plus pre-judgment interest, post judgment interest at the maximum lawful rate from July 30, 2007 until judgment at the rate of six percent per annum, and reasonable and necessary attorney fees and costs. Oblio also obtained Writs of Garnishment against Clifton’s funds on deposit with Bank of America, N.A. and J.P. Morgan Chase Bank. As a result of the Writs of Garnishment, Oblio trapped approximately $140 in Clifton’s bank accounts. Clifton has unsuccessfully attempted to dissolve the Writ of Garnishment. On September 22, 2008, the district court entered a final judgment against Clifton Prepaid Communications Corp. and Clifton Pre-Paid Corp. in the amount of approximately $2,500. The final judgment did not include Aref Aref because two weeks prior to trial, Aref Aref filed for personal bankruptcy in an effort to thwart Oblio’s collection efforts. On or about October 1, 2008, the district court entered judgment in the bankruptcy action directing Bank of America, N.A. and J.P. Morgan Chase Bank to release the garnished funds to Oblio.
As of August 31, 2008, the Company has fully reserved and allowed for the $2,199 in accounts receivable from Clifton less the amounts captured in the Writ of Garnishment.
CRESCENT FUND, INC.
On July 6, 2007, the Company filed a lawsuit against Crescent Fund, Inc. in Dallas County, Texas, seeking a declaratory judgment declaring that the Company had no remaining liability to Crescent Fund, Inc. under a Consulting Agreement entered into by and between the Company and Crescent Fund, Inc. in October 2003. On July 7, 2008, the trial court entered judgment in favor of the Company declaring that the Company had no remaining liability to Crescent Fund, Inc.
FASTPRINT CIRCUIT TECHNOLOGIES
In August 2008, the Company was notified of a collections lawsuit filed by Fastprint Circuit Technologies (“Fastprint”). Fastprint is in the process of amending its lawsuit to name the Company's subsidiary Titan Electronics as the defendant. No specific demand has been made although Fastprint seeks damages for alleged failure to pay for delivered product.
F&L, LLP
On November 27, 2007, the Company was notified, via a process server, that it was being sued by F&L, LLP (“F&L”) in the District Court of Dallas County, Texas 160th Judicial District. F&L is seeking the Company to perform on its guarantee of notes payable from Oblio to F&L. Principal amounts due to F&L, LLP as of May 31, 2008 is $3,570. This action is currently pending. The Company has recorded the amounts due as a liability as of May 31, 2008. Oblio has also recorded accrued interest of $410 related to this obligation. On April 29, 2008, Greystone Funding, LLC intervened in the lawsuit seeking to stay the lawsuit as a result of F&L’s prior agreement to subordinate its debt and collection to the rights of Greystone Funding, LLC. A letter agreement staying F&L’s collection efforts has been executed between Titan Global Holdings, F&L, and Greystone Funding LLC. Pursuant to the letter agreement, this lawsuit has been dismissed without prejudice.
GEOTEL INTERNATIONAL, LC
On January 31, 2008, the Company’s subsidiary, Starttalk, was notified, via a process server, that it was being sued by Geotel International, LC (“Geotel”). Geotel is seeking $73 for alleged unpaid invoices for services rendered in Miami-Dade County: Circuit Court, FL. This action is currently pending. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
HAWAII GLOBAL EXCHANGE, INC. AND TRANSPAC TELECOM, INC.
On December 21, 2007, the Company’s subsidiary Oblio, filed a lawsuit against Hawaii Global in 162nd Judicial District Court of Dallas County, Texas. Oblio sought to recover $1,319 for unpaid product. Hawaii Global then removed the lawsuit to the United States District Court for the Northern District of Texas. Hawaii Global then moved to dismiss the Texas lawsuit based upon lack of personal jurisdiction and in the alternative to transfer the Texas lawsuit to the United States District Court of Hawaii. The District Court denied Hawaii Global’s motion to dismiss and or transfer. On January 29, 2008, the Company’s subsidiary, Oblio, was notified, via a process server, that it was being sued by Hawaii Global Exchange, Inc. and Transpac Telecom, Inc. (“Transpac”). Transpac is alleging violation of the Communications Act, breach of oral contract, promissory estoppel, and intentional interference with contractual relations and/or prospective economic advantage in US District Court, HI. Oblio then filed a motion to dismiss the Hawaii lawsuit based upon lack of personal jurisdiction or, in the alternative, to transfer the Hawaii lawsuit to Texas. Although Hawaii Global and Transpac have opposed the motion to dismiss, they have consented to the transfer of the Hawaii lawsuit to the Northern District of Texas. The Hawaii lawsuit has been transferred and consolidated with the Texas Lawsuit. Hawaii Global has joined the Company, Bryan Chance, Kurt Jensen, Frank Crivello, and David Marks as parties to the lawsuit. The Company disputes these allegations and will defend itself, and Management is unable to estimate the ultimate liability, if any, related to this claim at August 31, 2008. As of August 31, 2008, the Company has fully reserved and allowed for the $1,319 in accounts receivable from Hawaii Global.
INTERNATIONAL ELECTRONIC COMPONENTS USA
In or about September 2008, the Company was notified of a collections lawsuit filed by International Electronic Components USA ("IEC") against the Company and its subsidiary Titan Electronics and several individuals. IEC obtained a writ of attachment against subsidiary Titan PCB West. IEC alleges the Company is the alter ego of its subsidiary Titan Electronics and is seeking approximately $235 for alleged failure to pay for delivered product. A motion to quash service of summons and complaint as against the Company will be filed. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
JACO ELECTRONICS, INC.
On September 1, 2006, a subsidiary of the Company, Titan Nexus, Inc. f/k/a Nexus Nano Electronic, Inc. (“Nexus Nano”) filed suit against Jaco Electronics, Inc. (“Jaco”) in the United States District Court for the Southern District of New York, alleging that Jaco had made certain misrepresentations in connection with an Asset Purchase Agreement executed in September 2004. Jaco denied the allegations and asserted counterclaims against Nexus Nano and other related entities. On June 27, 2008, the Company, Jaco, and others entered into a Settlement Agreement that provided for the release of claims between the parties and included a five-year Supply Agreement between Jaco, Titan Nexus, Inc. d/b/a NEO EMS, Inc., and Nexus Custom Electronics, Inc.
LANHAM ACT LAWSUIT
On February 15, 2008, Oblio filed a lawsuit in the United States District Court for the Northern District of Texas against various individuals and entities alleging trademark infringement under the Lanham Act. Many of the defendants have filed motion to dismiss which are currently pending before the Court.
LATIN AMERICAN VOIP, INC
On December 26, 2007, the Company and its subsidiaries, Oblio and Starttalk were notified, via a process server, that it was being sued by Latin American VOIP, Inc (“Latin American VOIP”). Latin American VOIP is seeking $723 for alleged unpaid invoices for services rendered in Palm Beach County: Circuit Court, Florida. This action is currently pending. The Company has accrued $630 of the amounts alleged to be due in its accounts payable as of August 31, 2008 and is disputing the difference of $93.
LEVEL 3 COMMUNICATIONS, LLC
On November 2, 2007, the Company’s subsidiary, Oblio, was notified, via a process server, that it was being sued by Level 3 Communications, LLC (“Level 3”). Level 3 is seeking $2,379 for alleged unpaid invoices for services rendered in Broomfield County: District Court, CO. On May 14, 2008, Oblio entered into an Agreed Judgment in the amount of $2,042. As of August 31, 2008, Oblio has accrued the amount of the Agreed Judgment in accounts payable.
PALPILOT
In August 2008, the Company's subsidiary Titan PCB West fka Titan EMS was notified of a collections lawsuit filed by Palpilot. Palpilot is seeking approximately $99 for alleged failure to pay for delivered product. The Company has accrued the amounts alleged to be due in its accounts payable at August 31, 2008.
RICO LAWSUIT
On February 15, 2008, Oblio filed a lawsuit in the United States District Court for the Northern District of Texas against various individuals and entities alleging a conspiracy to defraud Oblio under the Racketeering, Influence Corruption Act (“RICO”). Many of the defendants have filed motion to dismiss which are currently pending before the Court.
STX COMMUNICATIONS, INC
On January 16, 2008, STX Communications, LLC d/b/a STX Phone Cards (“STX”) sought a Temporary Restraining Order (“TRO”) in the 14th Judicial District Court of Dallas County, Texas against the Company’s subsidiary Oblio. The TRO immediately restrained Oblio from suspending its network support for any pre-paid phone card supplied by Oblio to STX and from taking any action to impair the network supporting any pre-paid phone card supplied by Oblio to STX. On January 23, 2008, the Company was notified by its attorneys that the TRO became effective and enforceable and that the Company was in violation of its TRO and was subject to sanctions for contempt of court. The TRO has since been dissolved by agreement of the parties.
STX has added the Company, Bryan Chance, Kurt Jensen, and Frank Crivello as defendants. STX claims that Oblio breached a contract to provide network support for prepaid phone cards, and to accept returns of the cards as necessary. STX also alleges that Oblio has been unjustly enriched by STX’s payments for cards, and that Oblio breached the implied warranty of merchantability and the express warranty to provide network support for the cards, and that Oblio’s failure to provide network support breached a duty of care owed to STX. STX also claims that Titan, Chance and Crivello tortiously interfered with the Oblio/STX contract and caused Oblio to purposefully interrupt network support for the cards sold to STX. Finally, STX alleges all defendants tortiously interfered with STX’s business relationships with STX’s distributors and end consumers by playing recorded messages for end consumers to return their cards, and changing rate decks on the cards from the posted rates. STX’s actual damages are not specified, but it seeks not less than $1,200 in exemplary damages, together with interest, and attorney’s fees.
Oblio has filed a counter-claim against STX, alleging STX failed to pay for the cards it purchased. Oblio also claims STX, together with Tawfik and Raimondo, STX’s chief officers, fraudulently induced Oblio to sell pre-paid phone cards for certain foreign markets at a loss, in exchange for STX’s promise to place Oblio products in more lucrative local markets. We claim STX’s failure to place Oblio’s products in the promised markets caused Oblio damages in an amount not less than $10,000.
The case is currently set for trial the week of April 20, 2009.
TOUCH TELL, INC.
On December 21, 2007, Oblio filed suit in Dallas County, Texas, against Touch Tell, Inc. (“Touch Tell”) for $1,300 in unpaid product. Oblio also initially obtained a pre-judgment Writ of Garnishment against Touch Tell’s bank trapping $1,300. Touch Tell filed a counterclaim that claims that after allowing for credits, deactivations, and returns, Oblio owes Touch Tell approximately $268. Touch Tell successfully reduced the amount of the garnishment to $477. At August 31, 2008, Oblio has recorded accounts receivable from TouchTell equal to the garnishment of $477. No amounts have been recorded or accrued related to the counter-claim. The case is currently set for trial on November 24, 2008.
WESTERN PRINT & MAIL, LLC
On January 25, 2008, the Company’s subsidiary Titan Wireless was notified, via a process server, that it and Ready Mobile, LLC were being sued by Western Print & Mail, LLC (“Western”). Western is seeking $71 including late charges from Ready Mobile, LLC. Western is seeking $183 from Titan Wireless, which includes the $71 from Ready Mobile, LLC and $112 including late charges from Titan Wireless, for alleged unpaid invoices for services rendered in Iowa District Court for Linn County. This action is currently pending. The Company has not accrued any amounts related to the charges incurred by Ready Mobile, LLC. As per the asset purchase agreement with Ready Mobile, LLC, this liability was not assumed, and therefore is not a responsibility of the Company. In addition, the Titan Wireless liability was assumed by Boomerang Wireless, Inc. on January 25, 2008 with the sale of certain CMDA assets as discussed in Note 2.
OTHER LEGAL MATTERS
As of August 31, 2008, the Company has fully reserved and allowed (through its allowance for doubtful accounts $15,736 and its allowance for sales returns $3,672) $19,408 in accounts receivable recorded for the communications division matters referenced above including Clifton.
13. Income Taxes
Realization of deferred tax assets is dependent on future earnings, if any, the timing and amount of which is uncertain. Accordingly a valuation allowance, in an amount equal to the net deferred tax asset as of August 31, 2008 and 2007 has been established to reflect these uncertainties.
A reconciliation of the provision (benefit) for income taxes with amounts determined by applying the statutory U.S. federal income tax rate to income before income taxes is as follows:
| | | 2008 | | 2007 | |
| Computed tax benefit at federal statutory rate of 34% | | $ | (17,889 | ) | $ | (8,074 | ) |
| Permanent differences | | | (2,509 | ) | | 2,510 | |
| Change in valuation allowance | | | 20,398 | | | 5,564 | |
| | | $ | - | | $ | - | |
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities at August 31, 2008 and 2007 are as follows:
| | | 8/31/2008 | | 8/31/2007 | |
Deferred tax assets | | | | | | | |
Current: | | | | | | | |
| Allowance for doubtful accounts | | $ | 5,053 | | $ | 999 | |
| Inventory reserve | | | 283 | | | 50 | |
| Accrued liabilities | | | 555 | | | 275 | |
| Stock based compensation | | | 375 | | | 375 | |
| Sales return & allowances | | | 1,208 | | | 302 | |
| USF and FET recoverable | | | - | | | (479 | ) |
| Other | | | 218 | | | - | |
Total current | | | 7,692 | | | 1,522 | |
Long-term: | | | | | | | |
| Intangible amortization | | | 11,151 | | | 2,126 | |
| Depreciation | | | (2,443 | ) | | (68 | ) |
| Net operating loss carryforward | | | 8,120 | | | 7,042 | |
| Total long-term | | | 16,828 | | | 9,100 | |
| Net deferred assets before valuation allowance | | | 24,520 | | | 10,622 | |
| Valuation allowance | | | (24,520 | ) | | (10,622 | ) |
| | | $ | - | | $ | - | |
At August 31, 2008, the Company has available unused net operating loss carry forwards of approximately $23,885 ($21,972 related to Titan Global Holdings, Inc.and $1,913 related to Appco) for federal purposes that may be applied against future taxable income. Approximately $1,913 of the net operating loss carry forwards is subject to significant limitations on their utilization due to ownership changes as a result of the company’s acquisition. If unused, the net operating loss carry forwards will begin to expire in 2022. During the year ended August 31, 2008, the valuation allowance increased $20,398.
14. Employee Stock Options and Employee Warrants
As of August 31, 2007, the Company approved the 2002 Stock Option Plan and Directors Stock Plan. In addition to this plan, the Board of Directors has authorized the issuance of warrants to executive officers as additional compensation. The Company calculated the fair value of each option award on the date of grant using the Black-Scholes option pricing model. The weighted average fair value of the options/warrants granted in the year ended August 31, 2007 were $1.16 as of the date of grant. The Company did not grant any options/warrants in 2008. The following assumptions were used for the years ended August 31, 2008 and 2007:
| | | 2008 | | 2007 | |
| Dividend yield | | | 0.00 | % | | 0.00 | % |
| Expected volatility | | | 115 | % | | 115.00 - 144.43 | % |
| Risk free interest rate | | | NA | | | 4.62 - 4.77 | % |
| Expected life (years) | | | NA | | | 1.50 - 10.00 | |
Employee stock option activity is summarized as follows:
| | 8/31/2008 | | | | 8/31/2007 | |
| | | | | | | | |
Outstanding, September 1, 2007 | | | 1,582,500 | | | Outstanding, September 1, 2006 | | | 1,045,000 | |
Granted | | | - | | | Granted | | | 682,500 | |
Exercised | | | - | | | Exercised | | | (50,000 | ) |
Forfeited | | | (488,333 | ) | | Forfeited | | | (95,000 | ) |
Outstanding, August 31, 2008 | | | 1,094,167 | | | Outstanding, August 31, 2007 | | | 1,582,500 | |
| | | | | | | | | | | |
Non-vested, September 1, 2007 | | | 250,000 | | | Non-vested, September 1, 2006 | | | 50,000 | |
Grants | | | - | | | Grants | | | 682,500 | |
Vested | | | (125,000 | ) | | Vested | | | (482,500 | ) |
Forfeitures | | | (108,333 | ) | | Forfeitures | | | - | |
Non-vested, August 31, 2008 | | | 16,667 | | | Non-vested, August 31, 2007 | | | 250,000 | |
| | | | | | | | | | | |
| Weighted-average exercise price per share: | | | | | | Weighted-average exercise price per share: | | | | |
| Outstanding, September 1, 2007 | | $ | 0.69 | | | Outstanding, September 1, 2006 | | $ | 0.67 | |
| Granted | | $ | - | | | Granted | | $ | 1.16 | |
Forfeited | | $ | (0.97 | ) | | Forfeited | | $ | (0.77 | ) |
Outstanding, August 31, 2008 | | $ | 0.83 | | | Outstanding, August 31, 2007 | | $ | 0.69 | |
Exercisable | | $ | 0.82 | | | Exercisable | | $ | 0.83 | |
Non Vested, September 1, 2007 | | $ | 1.11 | | | Non Vested, September 1, 2006 | | $ | 0.33 | |
Non Vested, August 31, 2008 | | $ | 1.18 | | | Non Vested, August 31, 2007 | | $ | 1.11 | |
| | | | | | | | | | |
| Weighted-average grant date fair value: | | | | | | Weighted-average grant date fair value: | | | | |
Non Vested, September 1, 2007 | | $ | 0.86 | | | Non Vested, September 1, 2006 | | $ | 0.28 | |
Grants | | $ | - | | | Grants | | $ | 1.05 | |
Vested | | $ | 0.73 | | | Vested | | $ | 1.07 | |
Forfeited | | $ | 0.57 | | | Forfeited | | $ | - | |
Non Vested, August 31, 2008 | | $ | 1.10 | | | Non Vested, August 31, 2007 | | $ | 0.86 | |
| | | | | | | | | | | |
Weighted-average remaining term of outstanding options | | | 2.73 years | | | Weighted-average remaining term of outstanding options | | | 3.12 years | |
Weighted-average remaining term of exercisable options | | | 2.70 years | | | Weighted-average remaining term of exercisable options | | | 3.17 years | |
As of August 31, 2008, there was $30 of total unrecognized compensation cost related to non vested share-based compensation arrangements granted. That cost is expected to be recognized over a weighted-average period of .7 years.
15. Retirement Plan
The Company has its 401(k) plan for the benefit of employees. The Communications Division and corporate employee 401(k) plan includes dollar for dollar matching up to 3% of employee contributions and half dollar matching for the next 2% of employee contributions. The employer matching amounts are immediately vested. This plan allows for the employee to contribute up to the IRS maximum allowable contribution per year. Employer contributions for the year ended August 31, 2008 and 2007 were $66 and $41 respectively.
The Energy Division 401(k) plan includes quarter dollar matching up to 6% of employee contributions. The employer contributions amounts vest over a six year period, with 0% the first year, 20% each year over the next five years. Employer contributions are made annually and the employee must be an eligible employee on December 31st to receive the employer matching for the previous year. This plan allows for the employee to contribute up to the IRS maximum allowable contribution per year. Employer contributions for the year ended August 31, 2008 were $35.
The Company plans to merge the two plans in 2009.
16. Commitments and Contingencies
OPERATING LEASES
The Company leases its facilities. The following is a schedule by years of future minimum rental payments required under operating leases that have non-cancellable or original lease terms in excess of one year as of August 31, 2008:
| | | Year ended | |
| | | August 31, | |
| 2009 | | $ | 3,263 | |
| 2010 | | | 3,036 | |
| 2011 | | | 2,771 | |
| 2012 | | | 2,641 | |
| 2013 | | | 2,554 | |
| Thereafter | | | 29,047 | |
| | | $ | 43,312 | |
The Company through its Appco subsidiary operates 58 leased convenience stores in East Tennessee, Kentucky and southwest Virginia. The convenience store leases expire at various dates between 2009 and 2027 with monthly rents from $1 to $20. Real estate taxes, insurance, and maintenance expenses are obligations of the Company. Rent expense for continuing operations totaled $2,693 and $0 for the years ended August 31, 2008 and 2007, respectively. Rent expense for discontinued operations totaled $2,138 and $953 for the years ended August 31, 2008 and 2007, respectively.
CONTINGENCIES
In January 2007, prior to the Company’s purchase of Appco, Appco entered into a settlement agreement with one of its cigarette vendors totaling $2,500. The settlement was in response to an investigation by the Federal Bureau of Alcohol, Tobacco and Firearms related to a buy-down marketing program and certain contractual limitations with a cigarette vendor. Appco satisfies this obligation through the application of marketing funds that would have been otherwise received from the vendor through a marketing program. As of August 31, 2008, $665 of the original settlement obligation remains unpaid, all of which is a current liability.
On July 27, 2007, the Company entered into a Finder’s Fee Agreement (the “Agreement”) with Crivello Group, LLC (“Crivello”). Crivello is a significant shareholder of the Company and is controlled by a majority shareholder of the Company. Pursuant to the terms of the Agreement, as consideration for Crivello presenting the Company with the opportunity to purchase Appalachian Oil Company, Inc. (“Appco”), the Company has agreed to pay a cash fee of $750 and issue 10,000,000 ten year warrants to Crivello. Such consideration shall be paid to Crivello only if Titan closes on the acquisition of Appco. The Warrants shall be exercisable at a price of $1.30 and may also be exercised on a cashless basis. The Appco acquisition closed on September 17, 2007. As a result of the completion, the Company issued the warrants to Crivello and recorded a payable for the cash fee. The Company accounted for these transactions in the first quarter of fiscal year 2008. The warrants were subsequently cancelled and as of August 31, 2008 the Company had nothing recorded related to these contingencies.
On August 9, 2007, the Company executed a definitive option agreement to purchase 80% of the outstanding stock of USA Detergents, Inc., ("USAD"), a manufacturer and distributor of quality essential home products such as laundry care, household cleaners and personal care items. In addition, the Company guaranteed bridge financing of up to $1,500 for USAD’s continuing operations. During the sixty day option period, Titan has the right to exercise its option to purchase 80% of the outstanding stock in exchange for providing the referenced bridge financing. On October 17, 2007, the Company exercised its option to purchase 80% of the outstanding stock. As a result, the Company assumed the liability related to the bridge financing and no longer provides a separate guaranty.
The Company has adopted the provisions of SFAS 143 to record the ARO that could be incurred upon the future closure of facilities. Accretion of the ARO on properties from which production has commenced has been calculated using the estimated life of the facility. The amounts recognized upon adoption are based upon numerous estimates and assumptions, including future retirement costs, future inflation rates and the credit-adjusted risk-free interest rate. An estimate for asset retirement obligation has been accrued in the amount of $1,401 as of August 31, 2008.
17. Related Parties
The Company's policy is to enter into transactions with related parties on terms that, on the whole, are more favorable, or no less favorable, than those available from unaffiliated third parties. Based on the Company's experience in the business sectors in which the Company operates and the terms of its transactions with unaffiliated third parties, the Company believes that all of the transactions described below met this policy standard at the time they occurred.
On September 28, 2007, the Company entered into a 6.5% promissory note with Frank Crivello, managing partner of the Crivello Group (a stockholder). The maturity date of the note was March 28, 2008. As of August 31, 2008, the outstanding balance of the note payable was $883. Payment on the note has not been made and the revised maturity date has not been determined as of December 1, 2008.
On February 29, 2008, the Company entered into a 10% promissory note with The Irrevocable Children’s Trust I and II (a stockholder). The note has a six-month term with all interest and principal due at maturity. As of August 31, 2008, the outstanding balance of the promissory note payable was $1,068 and a revised maturity date has not been determined as of December 1, 2008.
As of August 31, 2008, the Company owes $90 in other short term related party payables for advances or business expenses.
Effective March 4, 2008, Titan Electronics entered into a $55 promissory note with Stephen Kennedy. The note bears interest at an annual rate of 10% and matures on September 4, 2008. Interest is payable monthly and the principal amount is due at maturity. As of August 31, 2008, the outstanding balance of the promissory note payable was $55 and is included in the discontinued operations current liabilities balance. Stephen Kennedy is currently a Director of the Company. As of December 1, 2008, the note balance is outstanding and is included in discontinued operations.
During the year ended August 31, 2007, the Company entered into a Finder’s Fee Agreement with Crivello related to the Appco purchase. Upon the closing of the acquisition, the Company agreed to pay a cash fee of $750,000 and issue 10,000,000 ten year warrants to Crivello. The Appco acquisition closed on September 17, 2007. As a result of the completion, the Company issued the warrants to Crivello and recorded a payable for the cash fee. The Company accounted for these transactions in the first quarter of fiscal year 2008. The warrants were subsequently cancelled.
At August 31, 2007, the Company had $108 in Accounts Receivable from Sky Net Distributors, LLC (“Sky Net”). Sky Net is partially owned by an employee of Oblio. Oblio results of operations are included in discontinued operations.
18. Revenue Concentration
Communications
The Company’s communications division sells its products through a network of wholesale distributors. There are no individual customers that comprise a significant amount of total sales.
Energy
Our operations include retail convenience stores and wholesale petroleum distribution in the Southeastern United States. We operate 58 convenience store locations in Tennessee, Kentucky and Virginia where we offer merchandise, foodservice, motor fuel and other services consistent with the convenience store industry. In addition, we sell liquid motor fuels to an additional 170 locations through either wholesale distribution contracts or consignment arrangements primarily to convenience stores located in Tennessee, Kentucky, Virginia and North Carolina. There were two customers that comprise approximately 18% of 2008 total sales.
19. Deconsolidated Subsidiary and Bankruptcy Filing in Global Brands Segment and Discontinued Operations
USAD
Facts and Circumstances
During the second quarter of fiscal 2008, the Company ceased its manufacturing operations for filling and packaging USAD liquid products. The Company has segregated the operating results of USAD from the results of continuing operations and classified them as discontinued operations. As USAD was acquired on October 17, 2007, during the current fiscal period, prior period operating results were not restated. On February 12, 2008, several suppliers of USAD filed an involuntary Chapter 7 bankruptcy petition with the United States Bankruptcy Court in the District of Delaware. During the third fiscal quarter of 2008, the Company converted the Chapter 7 bankruptcy filing to a Chapter 11 bankruptcy filing and pursued other alternatives for the assets of USAD. Effective June 12, 2008, the Company’s USAD subsidiary’s asset were seized by the Bankruptcy Court as a result of an involuntary Chapter 7 bankruptcy petition filed by several of USAD’s creditors. As such, the operations of USAD have been deconsolidated from the operating results of the Company.
The following table summarizes the assets, liabilities and net equity of USAD as of June 9, 2008, the date it was deconsolidated from the financial statements, as well as the calculation of the loss in excess of investment in subsidiary which was recorded on the Company’s consolidated statement of financial condition at August 31, 2008:
| | | June 9, | |
| | | 2008 | |
| | | | |
| Cash and cash equivalents | | $ | 189 | |
| Accounts receivable, trade (less allowance for doubtful accounts of $1,814) | | | 1,220 | |
| Inventory, net | | | 3,113 | |
| Prepaid expenses and other current assets | | | 158 | |
| Equipment and improvements, net | | | 1,929 | |
| Definite-lived intangible assets, net | | | 2,367 | |
| Other assets | | | 93 | |
Assets deconsolidated | | | 9,069 | |
| | | | | |
| Accounts payable and accrued liabilities | | | 10,269 | |
| Notes payable | | | 11,232 | |
| Other liabilities | | | 560 | |
Liabilities deconsolidated | | | 22,061 | |
| | | | | |
Net equity/negative investment | | $ | (12,992 | ) |
The loss in excess of investment in subsidiary is comprised of the net equity in USAD.
The following condensed consolidated financial statements of USAD have been prepared in conformity with Statement of Position 90-7 “Financial Reporting by Entities in Reorganization Under the Bankruptcy Code” (“SOP 90-7”), which requires that the liabilities subject to compromise by the Bankruptcy Court are reported separately from the liabilities not subject to compromise, and that all transactions directly associated with the liquidation plan be reported separately as well. Liabilities subject to compromise include pre-petition unsecured claims that may be settled at amounts that differ from those recorded in USAD’s condensed consolidated statements of financial condition.
| | | August 31, | |
| | | 2008 | |
Assets | | | | |
| Accounts receivable | | $ | 566 | |
| Inventory | | | 1,443 | |
| Equipment and improvements | | | 894 | |
| Definite-lived intangible assets | | | 1,097 | |
Total assets | | $ | 4,000 | |
| | | | | |
Liabilities and Stockholder's Equity | | | | |
| Notes payable | | $ | 9,982 | |
| Liabilities subject to compromise (1) | | | 12,079 | |
| Stockholder's deficit | | | (18,061 | ) |
Total liabilities and stockholder's equity | | $ | 4,000 | |
Liabilities subject to compromise in USAD’s condensed consolidated statements of financial condition as of August 31, 2008 refer to both secured and unsecured obligations that will be accounted for under the liquidation plan, including claims incurred prior to the Petition Date. They represent the debtors’ current estimate of the amount of known or potential pre-petition claims that are subject to
final settlement in the Chapter 7 case. Such claims remain subject to future adjustments.
(1) Liabilities subject to compromise at August 31, 2008 were as follows:
| Accounts payable and accrued liabilities | | $ | 10,269 | |
| Notes payable | | | 1,250 | |
| Other liabilities | | | 560 | |
| Total liabilities subject to compromise | | $ | 12,079 | |
Titan Electronics Group Discontinued Operations
In August 2008, the Company evaluated the operations of the Titan Electronics Group, which has been historically included in the Company’s electronics and homeland security division and determined to cease operations. The Electronics Group includes Nexus, Titan East Inc. f/k/a Titan PCB East, Inc and Titan Electronics, Inc. The Company began liquidating the remaining assets including fixed assets, inventory and accounts receivable. As such, the operations of Titan Electronics Group have been included as discontinued operations as of and for the period ending August 31, 2008.
The results of operations for the years ended August 31, 2008 and 2007 of the discontinued Electronics Group subsidiaries are as follows:
| | | FY 2008 | | FY 2007 | |
| | | | | | |
| Sales | | $ | 26,386 | | $ | 23,634 | |
| | | | | | | | |
| Cost of sales | | | 26,123 | | | 22,396 | |
| | | | | | | | |
| Gross profit | | | 263 | | | 1,238 | |
| | | | | | | | |
| Operating expenses | | | | | | | |
| Sales and marketing | | | 1,890 | | | 1,882 | |
| General and administrative | | | 2,917 | | | 1,713 | |
| Depreciation expense | | | 5 | | | - | |
| Bad debt expense | | | 281 | | | 58 | |
| Loss from operations | | | (4,830 | ) | | (2,415 | ) |
| | | | | | | | |
| Other income (expense) | | | | | | | |
| Interest expense | | | (1,013 | ) | | (2,103 | ) |
| Gain (loss) on value of derivative instruments | | | 10,005 | | | (8,724 | ) |
| Loss on impairment | | | (8,571 | ) | | - | |
| Gain (loss) on disposal of assets | | | 327 | | | (22 | ) |
| Gain on extinguishment of debt | | | - | | | 2,742 | |
| Miscellaneous | | | 5 | | | - | |
| Loss before provision for income taxes | | | (4,077 | ) | | (10,522 | ) |
| | | | | | | | |
| Provision for income taxes | | | - | | | - | |
| Accrual of prefered stock dividend | | | - | | | - | |
| | | | | | | | |
| Net loss | | $ | (4,077 | ) | $ | (10,522 | ) |
Depreciation expense included in Cost of sales was $882 and $676 for the years ended August 31, 2008 and 2007, respectively.
The principal balance sheet items of the assets held for sale as of August 31, 2008 and 2007 are stated below:
| | | 08/31/08 | | 08/31/07 | |
| Current Assets | | | | | | | |
| Cash and cash equivalents | | $ | 87 | | $ | 96 | |
| Accounts receivable, trade (less allowance | | | | | | | |
| for doubtful accounts and sales returns), $31 and $322, respectively | | | 2,301 | | | 4,021 | |
| Inventory, net | | | 521 | | | 1,266 | |
| Prepaid expenses and other assets | | | 34 | | | 32 | |
| Total current assets | | $ | 2,943 | | $ | 5,415 | |
| | | | | | | | |
| Non-current assets | | | | | | | |
| Equipment and improvements, net | | $ | 1,294 | | $ | 1,544 | |
| Other assets | | | - | | | 162 | |
| Total non-current assets | | $ | 1,294 | | $ | 1,706 | |
| | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable, trade | | $ | 4,260 | | $ | 2,306 | |
| Accrued liabilities | | | 458 | | | 1,247 | |
| Notes payable to related party | | | 55 | | | - | |
| Current portion of long-term debt, net | | | 839 | | | 219 | |
| Short-term notes | | | 438 | | | 72 | |
| Total current liabilities | | $ | 6,050 | | $ | 3,844 | |
| | | | | | | | |
| Non-current liabilities | | | | | | | |
| Lines of credit, net | | $ | 1,076 | | $ | 3,593 | |
| Long-term debt | | | 945 | | | 381 | |
| Long-term derivative liabilities | | | 2,085 | | | 12,089 | |
| Convertible preferred stock | | | 7,245 | | | - | |
| Other long-term liability | | | - | | | 117 | |
| Total non-current liabilities | | $ | 11,351 | | $ | 16,180 | |
Long-term debt as of August 31, 2008 consisted of the following:
| Issue | | Expiration | | | | Outstanding at | |
| Date | | Date | | Instrument | | 8/31/2008 | |
| 12/29/2006 | | | 12/01/2010 | | $ 20,000 Line of credit | | $ | 1,076 | |
| 12/29/2006 | | | 07/01/2009 | | $ 7,608 Term Notes A & B | | | 511 | |
| 02/11/2008 | | | 02/01/2011 | | $ 830 Term Notes | | | 1,003 | |
| 11/30/2007 | | | 08/31/2010 | | Other | | | 270 | |
| | | | | | | | | | 2,860 | |
| Less current portion of long-term debt | | (839 | ) |
| Total long-term debt | | $ | 2,021 | |
Long-term debt repayments are due as follows:
| Fiscal Year | | Other | | Greystone Revolvers | | Greystone Term Debt | | Total Long- Term Debt | |
| | 2009 | | $ | 120 | | $ | - | | $ | 676 | | $ | 796 | |
| | 2010 | | | 120 | | | 1,076 | | | 250 | | | 1,446 | |
| | 2011 | | | 30 | | | - | | | 588 | | | 618 | |
| | 2012 | | | - | | | - | | | - | | | - | |
| | 2013 | | | - | | | - | | | - | | | - | |
| | 2014 | | | | | | - | | | - | | | - | |
| | | | $ | 270 | | $ | 1,076 | | $ | 1,514 | | $ | 2,860 | |
Communications Division Discontinued Operations
In August 2008, the Company evaluated its communications division and determined to classify the operations of Oblio Telecom, Starttalk and Titan Wireless as discontinued.
The results of operations for the years ended August 31, 2008 and 2007 of the discontinued Communications subsidiaries are as follows:
| | | FY 2008 | | FY 2007 | |
| | | | | | |
| Sales | | $ | 34,840 | | $ | 87,711 | |
| | | | | | | | |
| Cost of sales | | | 24,353 | | | 80,508 | |
| | | | | | | | |
| Gross profit | | | 10,487 | | | 7,203 | |
| | | | | | | | |
| Operating expenses | | | | | | | |
| Sales and marketing | | | 100 | | | 197 | |
| General and administrative | | | 2,421 | | | 5,695 | |
| Bad debt expense | | | 9,418 | | | 2,631 | |
| Depreciation and amortization | | | 328 | | | 157 | |
| Amortization of intangibles | | | 2,618 | | | 5,377 | |
| Loss from operations | | | (4,398 | ) | | (6,854 | ) |
| | | | | | | | |
| Other income (expense) | | | | | | | |
| Interest income (expense) | | | (4 | ) | | 52 | |
| Interest expense | | | (3,352 | ) | | (2,071 | ) |
| Gain (loss) on value of derivative instruments | | | 2,946 | | | (4,722 | ) |
| Gain on extinguishment of debt | | | - | | | 5,224 | |
| Gain on disposal of assets | | | 1,815 | | | - | |
| Loss on impairment | | | (17,922 | ) | | - | |
| Loss before provision for income taxes | | | (20,915 | ) | | (8,371 | ) |
| | | | | | | | |
| Provision for income taxes | | | - | | | - | |
| Accrual of preferred stock dividend | | | (135 | ) | | (135 | ) |
| | | | | | | | |
| Net loss available to common stockholders | | $ | (21,050 | ) | $ | (8,506 | ) |
The principal balance sheet items of the assets held for sale as of August 31, 2008 and 2007 are stated below:
| | | 08/31/08 | | 08/31/07 | |
| Current assets | | | | | | | |
| Cash and cash equivalents | | $ | - | | $ | 1,090 | |
| Restricted cash | | | - | | | 750 | |
| Accounts receivable, trade (less allowance | | | | | | | |
| for doubtful accounts and sales returns of $15,975 and $3,506) | | | 715 | | | 8,678 | |
| Inventory, net | | | - | | | 397 | |
| Universal Service Fund Recoverable | | | - | | | 1,406 | |
| Prepaid expenses and other current assets | | | 79 | | | 591 | |
| Total current assets | | $ | 794 | | $ | 12,912 | |
| | | | | | | | |
| Equipment and improvements, net | | $ | - | | $ | 708 | |
| Definite-lived intangible assets, net | | | - | | | 16,989 | |
| Goodwill and indefinite-lived intangibles | | | - | | | 6,661 | |
| Capitalized loan fees, net | | | 235 | | | 412 | |
| Other assets | | | - | | | 143 | |
| Total non-current assets | | $ | 235 | | $ | 24,913 | |
| | | | | | | | |
| Current liabilities | | | | | | | |
| Accounts payable - trade | | $ | 12,257 | | $ | 18,488 | |
| Accrued liabilities | | | 536 | | | 13,130 | |
| Seller financed note | | | 3,570 | | | - | |
| Current portion of long-term debt | | | 1,660 | | | 3,213 | |
| Total current liabilities | | $ | 18,023 | | $ | 34,831 | |
| | | | | | | | |
| Non-current liabilities | | | | | | | |
| Lines of credit | | $ | 12,323 | | $ | 8,085 | |
| Long-term debt | | | - | | | 3,730 | |
| Long-term seller financed note | | | - | | | 1,301 | |
| Redeemable convertible preferred stock | | | 4,878 | | | 4,743 | |
| Derivative Liability | | | 108 | | | 3,053 | |
| Total non-current liabilities | | $ | 17,309 | | $ | 20,912 | |
Long-term debt as of August 31, 2008 consisted of the following:
| Issue | | Expiration | | | | Outstanding at | |
| Date | | Date | | Instrument | | 8/31/2008 | |
| | | | | | | | |
| 08/12/2005 | | | 03/31/2009 | | $ 4,823 Seller-Financed Debt | | $ | 3,570 | |
| 12/29/2006 | | | 12/01/2010 | | $ 20,000 Line of credit | | | 12,323 | |
| 12/29/2006 | | | 07/01/2009 | | $ 7,608 Term Notes A & B | | | 1,660 | |
| Total debt | | | | | | | | | 17,553 | |
| Less current portion of long-term debt and seller financed note | | (5,230 | ) |
| Total long-term debt | | $ | 12,323 | |
Long-term debt repayments are due as follows:
| Fiscal Year | | F&L Note | | Greystone Revolvers | | Greystone Term Debt | | Total Long- Term Debt | |
| | 2009 | | $ | 3,570 | | $ | - | | $ | 1,660 | | $ | 5,230 | |
| | 2010 | | | - | | | 12,323 | | | - | | | 12,323 | |
| | 2011 | | | - | | | - | | | - | | | - | |
| | 2012 | | | - | | | - | | | - | | | - | |
| | 2013 | | | - | | | - | | | - | | | - | |
| | 2014 | | | | | | - | | | - | | | - | |
| | | | $ | 3,570 | | $ | 12,323 | | $ | 1,660 | | $ | 17,553 | |
Global Brands Discontinued Operations
In August 2008, the Company’s Titan Apparel subsidiary ceased operations and we began liquidating the remaining assets including inventory, accounts receivable and fixed assets. The operations of Titan Apparel have been classified as discontinued operations as of and for the period ending August 31, 2008.
The results of operations of the discontinued Titan Apparel subsidiaries are as follows and include the results of operations of USAD. USAD’s results of operations are from October 17, 2007, the date of acquisition, through June 9, 2008, the effective date of deconsolidation due to its Chapter 7 bankruptcy filing. On December 14, 2007, Titan Apparel acquired substantially all of the assets of Global. Titan Apparel had no operations prior to December 14, 2007.
| | | FY 2008 | |
| | | | |
| Sales | | $ | 8,768 | |
| | | | | |
| Cost of sales | | | 10,689 | |
| | | | | |
| Gross margin | | | (1,921 | ) |
| | | | | |
| Operating expenses | | | | |
| Sales and marketing | | | 1,137 | |
| General and administrative | | | 8,183 | |
| Bad debt expense | | | 839 | |
| Depreciation expense | | | 241 | |
| Amortization of intangibles | | | 193 | |
| Loss from operations | | | (12,514 | ) |
| | | | | |
| Other income (expense) | | | | |
| Interest income | | | 51 | |
| Interest expense | | | (1,433 | ) |
| Gain on disposal of assets | | | 42 | |
| Loss on impairment | | | (6,569 | ) |
| Miscellaneous | | | 19 | |
| Loss before provision for income taxes | | | (20,404 | ) |
| | | | | |
| Provision for income taxes | | | - | |
| Accrual of preferred stock dividend | | | - | |
| | | | | |
| Loss available to common stockholders | | $ | (20,404 | ) |
The principal balance sheet items of the assets held for sale as of August 31, 2008 are stated below:
| | | 8/31/08 | |
| Current Assets | | | | |
| Cash and cash equivalents | | $ | 2 | |
| Accounts receivable, trade (less allowance for doubtful accounts of $446) | | | 564 | |
| Inventory, net | | | 1,255 | |
| Prepaid expenses and other assets | | | 25 | |
| Total current assets | | $ | 1,846 | |
| | | | | |
| Current liabilities | | | | |
| Accounts payable, trade | | $ | 930 | |
| Accrued liabilities | | | 676 | |
| Total current liabilities | | $ | 1,606 | |
| | | | | |
| Non-current liabilities | | | | |
| Lines of credit | | $ | 3,227 | |
| Long-term debt | | | 3,835 | |
| Total non-current liabilities | | $ | 7,062 | |
Long-term debt as of August 31, 2008 consisted of the following:
| Issue | | Expiration | | | | Outstanding at | |
| Date | | Date | | Instrument | | 8/31/2008 | |
| 12/14/2007 | | | 12/29/2009 | | $ 14,000 Secured Revolving Note | | $ | 3,227 | |
| 12/14/2007 | | | 12/29/2009 | | $ 2,000 Term Notes | | | 3,835 | |
| Total debt | | | | | | | | | 7,062 | |
| Less current portion of long-term debt | | | | | | - | |
| Total long-term debt | | | | | $ | 7,062 | |
Long-term debt repayments are due as follows:
| Fiscal Year | | Greystone Revolvers | | Greystone Term Debt | | Total Long- Term Debt | |
| | 2009 | | $ | - | | $ | - | | $ | - | |
| | 2010 | | | 3,227 | | | 3,835 | | | 7,062 | |
| | 2011 | | | - | | | - | | | - | |
| | 2012 | | | - | | | - | | | - | |
| | 2013 | | | - | | | - | | | - | |
| | 2014 | | | - | | | - | | | - | |
| | | | $ | 3,227 | | $ | 3,835 | | $ | 7,062 | |
20. Segment Reporting
The Company reports its business segments based on industry classifications.
The Company, through its Appco subsidiary, distributes petroleum fuels and operates retail convenience stores. The Company considers this its energy business segment (“Energy”).
The Company, through its subsidiaries Titan Communications and Pinless, dba Planet Direct, is engaged in the creation, marketing, and distribution of prepaid telephone calling cards and other related activities. The Company considers this its communications business segment (“Comm”).
The Company began accounting for its corporate expenses separately from the operating segments effective September 1, 2006.
| | | E & HS | | Comm | | Energy | | Brands | | Corp. | | Total | |
| Sales: | | | | | | | | | | | | | | | | | | | |
| 2008 | | $ | - | | $ | 451 | | $ | 417,879 | | $ | - | | $ | - | | $ | 418,330 | |
| 2007 | | | - | | | - | | | - | | | - | | | - | | | - | |
| Interest expense,net: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | 10 | | | 2,204 | | | - | | | 1,314 | | | 3,528 | |
| 2007 | | | - | | | - | | | - | | | - | | | 15 | | | 15 | |
| Net loss from continuing operations: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | (1,134 | ) | | (2,387 | ) | | - | | | (3,090 | ) | | (6,611 | ) |
| 2007 | | | - | | | - | | | - | | | - | | | (4,855 | ) | | (4,855 | ) |
| Net loss from discontinued operations: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | (4,076 | ) | | (20,916 | ) | | - | | | (20,404 | ) | | - | | | (45,396 | ) |
| 2007 | | | (10,522 | ) | | (8,371 | ) | | - | | | - | | | - | | | (18,893 | ) |
| Depreciation and amortization expense: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | 4 | | | 2,420 | | | - | | | 50 | | | 2,474 | |
| 2007 | | | - | | | - | | | - | | | - | | | - | | | - | |
| Identifiable assets-continuing operations, net: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | 1,955 | | | 38,706 | | | - | | | 707 | | | 41,368 | |
| 2007 | | | - | | | - | | | - | | | - | | | 1,470 | | | 1,470 | |
| Identifiable assets-discontinued operations, net: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | 4,237 | | | 1,029 | | | - | | | 1,846 | | | - | | | 7,112 | |
| 2007 | | | 7,121 | | | 37,825 | | | - | | | - | | | - | | | 44,946 | |
| Accounts receivable, net: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | 361 | | | 5,093 | | | - | | | - | | | 5,454 | |
| 2007 | | | - | | | - | | | - | | | - | | | - | | | - | |
| Inventory, net: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | 935 | | | 9,975 | | | - | | | - | | | 10,910 | |
| 2007 | | | - | | | - | | | - | | | - | | | - | | | - | |
| Equipment and improvements, net: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | 122 | | | 10,250 | | | - | | | 140 | | | 10,512 | |
| 2007 | | | - | | | - | | | - | | | - | | | 74 | | | 74 | |
| Goodwill and indefinite lived intangible assets: | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | - | | | 9,277 | | | - | | | - | | | 9,277 | |
| 2007 | | | - | | | - | | | - | | | - | | | - | | | - | |
| Definite lived intangible assets, net | | | | | | | | | | | | | | | | | | | |
| 2008 | | | - | | | - | | | 584 | | | - | | | - | | | 584 | |
| 2007 | | | - | | | - | | | - | | | - | | | - | | | - | |
21. Subsequent Events
On October 24, 2008, the Company entered into two stock purchase agreements, one with Phillip Near and one with Johnson Enterprises of Kansas, LLC, Jeff McReynolds, Karen E. Reeder Trust, Harrison F. Johnson, Jr., and Martha M. Johnson Trust, to purchase all of the outstanding common and preferred stock of Crescent Fuels, Inc., a corporation formed under the laws of Kansas (“Crescent Fuels”). The purchase price for the common and preferred stock of Crescent Fuels under the stock purchase agreements included shares of the Crescent Fuels common stock, warrants, cash, forgiveness of debt and other consideration. The acquisition is effective October 1, 2008. The purchase price for the common stock shall be an aggregate of $980 consisting of (i) $1.00 in cash per share ($5 in the aggregate), plus 325,000 shares of the common stock of the Company, which the Company values at $975 ($3.00 per share). Crescent Fuels shall be released and discharged from liability with respect to a note receivable (“the Note”) in the amount of $1,357, which Note was previously issued and from time to time amended, restated and reissued in connection with Crescent Fuels’ acquisition of the shares. On November 7, 2008, the Company and its newly acquired subsidiary, Crescent Fuels, entered into a forbearance and modification agreement with Crescent Fuel’s senior secured lender whereby $19,000 of Crescent Fuel’s outstanding debt will be forgiven.
On November 3, 2008 and effective July 18, 2008, the Company entered into an asset purchase agreement with Sunrise Electronics, Inc. to sell substantially all of the assets of Titan Electronics, Inc.’s printed circuit board manufacturing facility located in Fremont, California and which were previously included in our electronics and homeland security division. The operations of Titan Electronics, Inc. have been classified as discontinued operations.
Schedule II
Valuation and Qualifying Accounts
| | | | | Additions | | | | | |
| | | Balance at beginning of year | | Acquisitions | | Charged to expense | | Deductions | | Balance at end of year | |
| | | | | | | | | | | | |
| Year ended August 31,2008: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | 2,940 | | | 90 | | | 10,986 | | | (1,007 | ) | | 13,009 | |
| Allowance for sales retuns | | | 888 | | | - | | | 4,133 | | | (1,469 | ) | | 3,552 | |
| Valuation allowance for deferred tax assets | | | 10,622 | | | (6,500 | ) | | 20,568 | | | (170 | ) | | 24,520 | |
| | | $ | 14,450 | | $ | 6,410 | | $ | 35,687 | | $ | (2,646 | ) | $ | 41,081 | |
| | | | | Additions | | | | | |
| | | Balance at beginning of year | | Acquisitions | | Charged to expense | | Deductions | | Balance at end of year | |
| | | | | | | | | | | | |
| Year ended August 31,2007: | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | | | 282 | | | - | | | 2,689 | | | (31 | ) | | 2,940 | |
| Allowance for sales retuns | | | 120 | | | - | | | 875 | | | (107 | ) | | 888 | |
| Valuation allowance for deferred tax assets | | | 5,058 | | | - | | | 5,564 | | | - | | | 10,622 | |
| | | $ | 5,460 | | $ | - | | $ | 9,128 | | $ | (138 | ) | $ | 14,450 | |
NOTE: The allowance for doubtful accounts and sales returns at August 31, 2007 relate to discontinued operations. At August 31, 2008, $12,900 and $3,552 in the allowance for doubtful accounts and allowance for sales returns relate to discontinued operations, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements with accountants on accounting and financial disclosure during fiscal year 2008.
On August 7, 2008, the Company dismissed KBA Group LLP ("KBA") as its independent auditors and engaged Skoda, Minotti & Co. ("Skoda Minotti") as its independent auditors to audit its financial statements for its year ending August 31, 2008. This decision was approved by the Board of Directors of the Company. Prior to such engagement, the Company did not consult with Skoda Minotti regarding the application of accounting principles to a specific, completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company's financial statements. Skoda Minotti audited the financial statements of Appalachian Oil Company, Inc., a wholly-owned subsidiary of the Company, for the years ended September 30, 2006 and 2005 and the year ended August 31, 2007.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures: Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rule 13a-15(f) and 15d-15(f) under the Securities Exchange Act, as of the end of the period covered by this Annual Report, that ensure that information relating to the Company which is required to be disclosed in this Annual Report is recorded, processed, summarized and reported, within required time periods and in accordance with United States generally accepted accounting rules. Due to inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that compliance with the policies or procedures may deteriorate.
Based on this evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not adequate and effective to ensure that material information relating to the Company and its consolidated subsidiaries would be accumulated and communicated to them by others within those entities, particularly during the period in which this Annual Report was being prepared, to allow timely decisions regarding required disclosure. The matters identified are with regard to insufficient documentation of our board of directors meetings, insufficient maintenance of stock option and warrant grant documents, inadequate documentation of processes and procedures surrounding our system of internal controls, inadequate maintenance of executed copies of corporate documents from debt agreements and lack of proper segregation of duties in the cash disbursements processing cycle. A material weakness is a significant deficiency, or combination of significant deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Significant deficiencies are control issues that could have a significant adverse effect on the ability to record, process, summarize and report financial data in the financial statements.
Changes in internal controls: The Company continued strengthening its system of internal controls during fiscal 2008. During the later half of our fiscal 2008, we consolidated the accounting function for our discontinued operations in our corporate headquarters in Richardson, Texas. We have continued our efforts to streamline our quarter and month end close process, implemented more rigorous month end financial statement review processes, upgraded our general ledger accounting software package and upgraded our information technology hardware to include more sophisticated security measures. We standardized our requirements for our quarter end financial reporting packages that are submitted to our corporate headquarters by the decentralized accounting functions in our energy division. There have been no other changes in the Company’s internal control over financial reporting during the year ended August 31, 2008 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined in Exchange Act Rule 13a - 15(f). Our internal control system was designed to provide reasonable assurance to our management and the Board of Directors regarding the preparation and fair presentation of published financial statements. All internal control systems, no matter how well designed have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2007. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control - Integrated Framework - Guidance for Smaller Public Companies (the COSO criteria). Based on our assessment we believe that as of August 31, 2008, our internal control over financial reporting is not effective based on those criteria. In particular, the matters identified contributing to the ineffective controls over financial reporting are insufficient documentation of our board of directors meetings, insufficient maintenance of stock option and warrant grant documents, inadequate documentation of processes and procedures surrounding our system of internal controls, inadequate maintenance of executed copies of corporate documents from debt agreements and lack of proper segregation of duties in the cash disbursements processing cycle.
Attestation Report of our Registered Public Accounting Firm
This annual report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Our management's report was not subject to attestation by our independent registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, PROMOTORS, CONTROL PERSONS AND CORPORATE GOVERNANCE; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Directors and Executive Officers
Set forth below are the directors and executive officers of the Company and their ages as of August 31, 2008 and positions held with the Company, as follows
| Name | | Age | | Position |
| David M. Marks | | 41 | | Chairman of the Board |
| Bryan Chance | | 38 | | President, Chief Executive Officer and Director |
| R. Scott Hensell | | 42 | | Chief Financial Officer |
| Kurt Jensen | | 44 | | President and Chief Executive Officer, Communications Division and Director |
| Stephen Saul Kennedy | | 41 | | Director |
DAVID M. MARKS. Mr. Marks was the Company's Chairman of the Board of Directors from September 15, 2002 to May 13, 2003 and was reappointed Chairman in May 2005. From May 2003 until May 2005, Mr. Marks remained as one of its Directors. Mr. Marks has served as Trustee of Irrevocable Children's Trust and Irrevocable Children's Trust No. 2 since 1994. Irrevocable Children's Trust and Irrevocable Children's Trust No. 2 currently have an ownership or investment interest in commercial properties, private residences, natural resources, telecommunications, and technology companies, and other business and investment ventures. Mr. Marks has the responsibility in overseeing all investments by Irrevocable Children's Trust and Irrevocable Children's Trust No. 2 with responsibilities beginning at acquisition and continuing through ownership. Mr. Marks generally acts in the capacity of officer or director for all of the operating companies that are vehicles for investments by the Trusts and is involved in strategic planning, and major decision-making. Mr. Marks holds a BS in Economics from the University of Wisconsin.
BRYAN CHANCE. On January 24, 2006, Mr. Chance was appointed to serve as Chief Financial Officer of Titan Global Holdings, Inc. On August 18, 2006, Mr. Chance was appointed to serve as President and Chief Executive Officer of the Company. Mr. Chance replaced Curtis Okumura, who remained President and Chief Executive Officer of the Company’s subsidiaries, Titan Electronics, Inc. and Titan East Inc. f/k/a Titan PCB East, Inc., and a member of the Company’s Board of Directors. On May 23, 2008, Mr. Okumura resigned as President and Director of both Titan East, Inc. (f/k/a Titan PCB East, Inc.) and Titan Electronics (f/k/a Titan PCB West, Inc.). Mr. Okumura also resigned from the Board of Directors of Titan Global Holdings, Inc. Prior to joining the Company, Mr. Chance was the Chairman and Chief Executive Officer of Sigma Global Corporation and its predecessor company Sigma RX since its inception in 2002. Prior to founding Sigma RX, Mr. Chance served from 2000 to 2002 as Chief Financial Officer for Aslung Pharmaceutical, a privately held generic pharmaceutical manufacturing company specializing in inhalation medications for the respiratory marketplace. Mr. Chance has also held financial and mergers and acquisition leadership positions in companies such as Caresouth, Nursefinders, Home Health Corporation of America, the Baylor Healthcare System, Columbia/HCA and Price Waterhouse, LLP. Mr. Chance received his Bachelor’s degree from the University of Tennessee in 1992.
R. SCOTT HENSELL. On October 9, 2006, Mr. Hensell was appointed to serve as Chief Financial Officer of Titan Global Holdings, Inc. Mr. Hensell replaced Bryan Chance after his promotion to President and Chief Executive Officer of the Company. Mr. Hensell has over eighteen years of experience in financial leadership positions and public accounting. Prior to joining Titan, Mr. Hensell managed the financial and accounting functions for thirteen operating companies and the complex implementation of Sarbanes Oxley requirements. Mr. Hensell previously served as Chief Operating Officer and other key positions for various operating companies in the insurance, real estate, oil and gas, hospitality and agriculture industries. He is a Certified Public Accountant licensed to practice in the state of Texas and holds a BS degree in Accounting from Texas A&M University.
KURT JENSEN. Mr. Jensen currently serves as the President and Chief Executive Officer of the Company’s communications subsidiaries, Plant Direct Inc. and Global Wholesale International. From December 2007 through June 4, 2008, Mr. Jensen served as the Senior Vice President of Mergers and Acquisition. On April 10, 2006, Mr. Jensen was appointed to serve as Chief Executive Officer of Oblio Telecom, Inc. As an early entrepreneur of the Internet boom, Mr. Jensen started and operated an Internet Service Provider, selling to and growing the successor through organic and acquisition into the second largest ISP in the upper Midwest. Prior to joining Oblio Telecom Mr. Jensen acted as an independent consultant to Crivello Group, LLC and played a critical role in the acquisition of Oblio Telecom by Titan Global Holdings. Mr. Jensen holds a Bachelor of Arts degree from the University of Northern Iowa.
STEPHEN SAUL KENNEDY. Mr. Kennedy was appointed a Director in May 2005. Mr. Kennedy was an employee of the Company's predecessor companies SVPC and Circuit Systems Inc. since 1988 until his resignation as an employee on July 18, 2008. He continues to serve as a Director of the Company. Mr. Kennedy was a top Sales Manager and Sales Executive for SVPC and subsequently Circuit Systems Inc. Since 1988 Mr. Kennedy has worked as both as an Inside and Outside Sales Executive as well as overall sales management for SVPC. He has been instrumental in SVPC's sales growth from 1988 to 1999. Mr. Kennedy holds a B.S. in Economics from Santa Clara University and was a Commissioned Officer in the United States Army.
Code of Ethics
As of August 31, 2008, the Company has not adopted an approved Code of Ethics. The Company has specific Code of Ethic language in the Employee Handbook that management and employees are required to read and abide by. However, no formal document has been approved.
Audit, Nominating and Compensation Committees
The Company does not have an audit, nominating or compensation committee at this time. All audit concerns are addressed by the Chairman of the Board of Directors.
Meetings
There were no documented Board of Directors meetings in the fiscal year ended Augus31, 2008. However, several actions were approved by our Board of Directors by unanimous written consent.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth certain information regarding the Company’s Chief Executive Officer and each of the other four highest paid executive officers during the years ended August 31, 2008, 2007 and 2006. The information in this table is in dollars
| Name and Principal Position | | Fiscal Year | | Salary ($) | | Bonus ($) | | Stock Awards ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Change in Pension Value and Non- Qualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
| Bryan Chance - President & CEO, | | | 2008 | | $ | 238,553 | | $ | - | | $ | - | | $ | - | | | - | | $ | - | | $ | 10,022 | | $ | 248,575 | |
| Titan Global Holdings, Inc. (1) | | | 2007 | | | 205,000 | | | 55,000 | | | 305,000 | | | 304,482 | | | - | | | - | | | 16,880 | | | 886,362 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| R. Scott Hensell - CFO, CAO, | | | 2008 | | | 173,104 | | | - | | | - | | | - | | | - | | | - | | | 12,384 | | | 185,488 | |
| Titan Global Holdings, Inc. (2) | | | 2007 | | | 111,881 | | | 10,000 | | | - | | | 55,754 | | | - | | | - | | | - | | | 177,635 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kurt Jensen - President & CEO, | | | 2008 | | | 200,263 | | | - | | | - | | | - | | | - | | | - | | | 8,490 | | | 208,753 | |
| Titan Communications Division (3) | | | 2007 | | | 182,044 | | | 55,000 | | | - | | | - | | | - | | | - | | | 9,000 | | | 246,044 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Marty Anderson, President | | | 2008 | | | 153,686 | | | 40,000 | | | - | | | - | | | - | | | - | | | 10,695 | | | 204,381 | |
| Appalachain Oil Compnay (4) | | | 2007 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Killick Datta, President | | | 2008 | | | 227,693 | | | - | | | - | | | - | | | - | | | - | | | - | | | 227,693 | |
Titan Apparel dba Global Feet (5) | | | 2007 | | | - | | | - | | | - | | | - | | | - | | | - | | | - | | | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Curtis Okumura - President & CEO | | | 2008 | | | 92,943 | | | - | | | - | | | - | | | - | | | - | | | - | | | 92,943 | |
| Titan Electronics and Homeland | | | 2007 | | | 150,000 | | | 67,500 | | | - | | | - | | | - | | | - | | | 27,204 | | | 244,704 | |
| Security Division (6) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Stephen S. Kennedy - VP Sales, | | | 2008 | | | 92,966 | | | - | | | - | | | - | | | - | | | - | | | 6,182 | | | 99,148 | |
| Titan Electronics and Homeland | | | 2007 | | | 165,000 | | | 25,000 | | | - | | | - | | | - | | | - | | | 19,696 | | | 209,696 | |
| Security Division (7) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (1) | Mr. Chance was appointed to serve as Chief Financial Officer of the Company effective January 24, 2006. Mr. Chance had an annual salary of $192,000 and was granted warrants to purchase 100,000 shares of common stock. On August 18, 2006, Mr. Chance was appointed to serve as President and Chief Executive Officer of the Company. Mr. Chance has an annual salary of $205,000. Mr. Chance also began receiving a director stipend of $1,000 in December 2006 and received a $500 car allowance until June 2006. At the time of his appointment to CEO, the Company issued Mr. Chance 500,000 unregistered shares valued at $305,000. Mr. Chance received an annual bonus of $55,000 in December 2006. On August 2, 2007, Mr. Chance received warrants to purchase 200,000 shares of common stock. Effective September 17, 2007, Mr. Chance’s annual salary was increased to $240,000. |
| (2) | Mr. Hensell was appointed to serve as Chief Financial Officer of the Company effective October 9, 2006. Mr. Hensell has an annual salary of $125,000. Mr. Hensell also received warrants to purchase 100,000 shares of common stock. In December 2006, Mr. Hensell received an annual bonus of $10,000. Effective September 17, 2007, Mr. Hensell’s annual salary was increased to $175,000. Beginning November 1, 2007, Mr. Hensell was granted a $500 monthly car allowance. |
| (3) | Mr. Jensen was appointed Chief Executive Officer of Oblio Telecom, Inc on April 10, 2006. Mr. Jensen had an annual salary of $175,000. Mr. Jensen also began receiving a director stipend of $1,000 per month in December 2006. In May 2007, Mr. Jensen was appointed Chief Executive Officer and President of the Titan Communications division. Mr. Jensen also currently serves as the President and Chief Executive Officer of the Company’s communications subsidiaries, Planet Direct Inc. and Global Wholesale International. Effective May 31, 2007, Mr. Jensen’s annual salary was increased to $200,000. In December 2006, Mr. Jensen received an annual bonus of $55,000. |
| (4) | Mr. Anderson was appointed Chief Executive Officer of Appalachian Oil Company concurrent with the acquisition on September 17, 2007. Mr. Anderson had an annual starting salary of $137,500 which was increased to $162,500 on March 1, 2008. In addition, he received a bonus of $40,000 on November 15, 2007. |
| (5) | Killick Datta was appointed as the President of Titan Apparel Inc. concurrent with the asset purchase agreement on December 13, 2007. Mr. Datta had an annual salary of $400,000 and resigned on August 18, 2008 when the operations of Titan Apparel were discontinued. |
| (6) | Mr. Okumura was appointed Chief Executive Officer effective December 16, 2004. Mr. Okumura had an annual salary of $150,000. On August 18, 2006, Bryan Chance was appointed to serve as President and Chief Executive Officer. Mr. Okumura remained as President and Chief Executive Officer of the Company’s subsidiaries, Titan Electronics, Inc. f/k/a Titan PCB West Inc. and Titan East, Inc. f/k/a as Titan PCB East, Inc., and a member of the Company’s Board of Directors. Mr. Okumura has an annual salary of $150,000. Mr. Okumura received a $1,000 director stipend each month during FY 2007. In December 2006, Mr. Okumura received an annual bonus of $50,000. On June 21, 2007, Mr. Okumura exercised $50,000 stock options. The Company immediately repurchased the shares for $15,036. On July 6, 2007, Mr. Okumura received an additional bonus of $17,500. On May 23, 2008, Mr. Okumura resigned as President and Director of both Titan East, Inc. (f/k/a Titan PCB East, Inc.) and Titan Electronics (f/k/a Titan PCB West, Inc.). Mr. Okumura also resigned from the Board of Directors of Titan Global Holdings, Inc. |
| (7) | Mr. Kennedy was appointed Vice-President-Sales effective August 30, 2002. Effective August 1, 2004, Mr. Kennedy's salary was adjusted to $165,000 per annum. Mr. Kennedy received a $1,000 director stipend each month during FY 2007. He also received a $650 car allowance each month during FY 2008 while he was an employee and FY 2007. In July 2008, Mr. Kennedy was terminated as Vice-President of Sales upon the discontinuation of operations of Titan Electronics. |
Outstanding Equity Awards at Fiscal Year-End Table
| Option Awards | | Stock Awards | |
| Name | | Number of Securities Underlying Unexercised Options (#) Exercisable | | Number of Securities Underlying Unexercised Options (#) Unexercisable | | Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) | | Option Exercise Price ($) | | Option Expiration Date | | Number of Shares or Units of Stock that have not vested (#) | | Market Value of Shares or Units of Stock That Have Not Vested ($) | | Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) | | Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) | |
| Bryan Chance (1) | | | 100,000 | | | - | | | - | | $ | 0.33 | | | 02/17/2009 | | | - | | $ | - | | | - | | $ | - | |
| Scott Hensell (2) | | | 100,000 | | | - | | | - | | | 0.83 | | | 10/09/2009 | | | - | | | - | | | - | | | - | |
| Bryan Chance (1) | | | 200,000 | | | - | | | - | | | 1.30 | | | 08/02/2017 | | | - | | | - | | | - | | | - | |
| Stephen S. Kennedy (3) | | | 360,000 | | | - | | | - | | | 0.79 | | | 07/31/2009 | | | - | | | - | | | - | | | - | |
(1) On February 17, 2006, the Company granted Bryan Chance warrants to purchase 100,000 shares of common stock at a per share exercise price of $.33. The warrants vested in accordance with the following schedule: 1/2 of the total shares vested immediately and ½ of the total shares vested on February 17, 2007. On August 2, 2007, the Company granted Bryan Chance warrants to purchase 200,000 shares of common stock at a per share exercise price of $1.30. The warrants vested immediately and expire on August 2, 2017.
(2) On October 9, 2006, the Company granted Scott Hensell warrants to purchase 100,000 shares of common stock at a per share exercise price of $.83. The warrants vested in accordance with the following schedule: 1/2 of the total shares vested immediately and ½ of the total shares vested on October 9, 2007.
(3) On July 31, 2002 , the Company granted Stephen S. Kennedy options to purchase 360,000 shares of common stock at a per share exercise price of $.79. The options vested immediately and expired on July 31, 2007. The Company extended the expiration date of these options to July 31, 2009 but they expired 90 days after his termination date as an employee or October 18, 2009.
Employment Agreements
Bryan Chance
Pursuant to the terms of an Agreement dated as of February 17, 2006 between Mr. Chance and the Company. Mr. Chance will serve as Chief Financial Officer of Titan for an initial term of two years, subject to automatic renewals for successive one-year terms unless terminated by either party. The Agreement provides for warrants to purchase 100,000 shares of common stock at $.33 per share and an annual compensation of $192,000. On August 18, 2006, Mr. Chance was appointed to serve as President and Chief Executive Officer of the Company and the Company and Mr. Chance entered into a new agreement. The new Agreement provides for the issue of 500,000 shares of common stock (valued at $305,000) and an annual compensation of $205,000. Effective September 17, 2007, Mr. Chance’s annual salary was increased to $240,000.
R. Scott Hensell
Pursuant to the terms of an Agreement dated as of October 9, 2006 between Mr. Hensell and the Company. Mr. Hensell will serve as Chief Financial Officer of Titan for an initial term of two years, subject to automatic renewals for successive one-year terms unless terminated by either party. The Agreement provides for warrants to purchase 100,000 shares of common stock at $.83 per share and an annual compensation of $125,000. Effective September 17, 2007, Mr. Hensell’s annual salary was increased to $175,000. Beginning November 1, 2007, Mr. Hensell was granted a $500 monthly car allowance.
Kurt Jensen
Pursuant to the terms of an Agreement dated as of April 10, 2006 between Mr. Jensen and Oblio, Mr. Jensen will serve as Chief Executive Officer of Oblio for an initial term of two years, subject to automatic renewals for successive one-year terms unless terminated by either party. The Agreement provides for an annual compensation of $175,000. Effective May 31, 2007, Mr. Jensen’s salary was increased to $200,000 per annum.
Stephen S. Kennedy
Pursuant to the terms of an Agreement, dated as of August 12, 2002, between Stephen S. Kennedy and Titan PCB West, assumed by us pursuant to the Merger, Mr. Kennedy receives a salary equal to $140,000 per annum and received immediately exercisable options to purchase 360,000 shares of our common stock, at an exercise price of $1.50 per share, expiring on July 31, 2007. These options were re-priced on May 3, 2004 to $0.79 per share. The agreement provides for a 5-year term subject to earlier termination by either party. In the event that Mr. Kennedy's employment is terminated without cause, Mr. Kennedy is entitled to receive severance pay and continued employee benefits for a period of six (6) months after such termination. For the period March 1, 2003 until December 1, 2003, the Company and Mr. Kennedy agreed orally to reduce his salary to an annual rate of $125,000. Effective August 1, 2004, Mr. Kennedy's salary was increased to $165,000 per annum. Mr. Kennedy’s employment agreement with the Company expired on August 12, 2007 and he was terminated as an employee on July 18, 2008.
Potential Payments upon Termination of Employment or Change in Control
As of August 31, 2008, the Company has no agreements or arrangements with any executive officer that provides for payments upon termination of employment or a change of control.
Director Compensation
| Name | | Fees Earned or Paid in Cash ($) | | Stock Awards ($) | | Option Awards ($) | | Non-Equity Incentive Plan Compensation ($) | | Change in Pension Value and Nonqualified Deferred Compensation Earnings ($) | | All Other Compensation ($) | | Total ($) | |
| David Marks | | $ | 12,000 | | $ | - | | $ | - | | $ | - | | $ | - | | $ | - | | $ | 12,000 | |
| Bryan Chance | | | 12,000 | | | - | | | - | | | - | | | - | | | - | | | 12,000 | |
| Kurt Jensen | | | 12,000 | | | - | | | - | | | - | | | - | | | - | | | 12,000 | |
| Curtis Okumura | | | 11,000 | | | - | | | - | | | - | | | - | | | - | | | 11,000 | |
| Stephen S. Kennedy | | | 12,000 | | | - | | | - | | | - | | | - | | | - | | | 12,000 | |
Effective May 2006, the Company’s directors began receiving $1,000 stipend per month as compensation. This stipend was paid to all directors during the year ended August 31, 2008.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth information as of December 1, 2008 with respect to the beneficial ownership of the outstanding shares of the Company's common stock by (i) each person known by the Company to beneficially own five percent (5%) or more of the outstanding shares; (ii) the Company's officers and directors; and (iii) the Company's officers and directors as a group.
As used in the table below, the term "beneficial ownership" means the sole or shared power to vote or direct the voting, or to dispose or direct the disposition, of any security. A person is deemed as of any date to have beneficial ownership of any security that such person has a right to acquire within 60 days after such date. Except as otherwise indicated, the stockholders listed below have sole voting and investment powers with respect to the shares indicated.
Name and Address of Beneficial Owner | | Title of Class | | No. of Shares Beneficially Owned (1) | | Percentage of Class Beneficially Owned | |
| David M. Marks | | Common | | | 32,597,349 | (2) | | 59.78 | % |
| 1818 North Farwell Ave. | | | | | | | | | |
| Milwaukee, WI 53202 | | | | | | | | | |
| | | | | | | | | | |
| Bryan Chance | | Common | | | 800,500 | (3) | | 1.47 | % |
| c/o Titan Global Holdings, Inc. | | | | | | | | | |
| 1700 Jay Ell Drive, Suite 200 | | | | | | | | | |
| Richardson, Texas 75081 | | | | | | | | | |
| | | | | | | | | | |
| R. Scott Hensell | | Common | | | 100,000 | (4) | | * | |
| c/o Titan Global Holdings, Inc. | | | | | | | | | |
| 1700 Jay Ell Drive, Suite 200 | | | | | | | | | |
| Richardson, Texas 75081 | | | | | | | | | |
| | | | | | | | | | |
| Kurt Jensen | | Common | | | 502,500 | (5) | | * | |
| c/o Titan Global Holdings, Inc. | | | | | | | | | |
| 1700 Jay Ell Drive, Suite 200 | | | | | | | | | |
| Richardson, Texas 75081 | | | | | | | | | |
| | | | | | | | | | |
| Stephen S. Kennedy | | Common | | | 410,000 | (6) | | * | |
| c/o Titan Global Holdings, Inc. | | | | | | | | | |
| 44358 Old Warm Springs Blvd. | | | | | | | | | |
| Fremont, CA 94538 | | | | | | | | | |
| | | | | | | | | | |
| All Officers and Directors as a Group (6 persons) | | Common | | | 34,410,349 | (7) | | 63.11 | % |
| | | | | | | | | | |
| Irrevocable Children's Trust | | Common | | | 10,969,522 | (2) | | 20.12 | % |
| 1818 North Farwell Avenue | | | | | | | | | |
| Milwaukee, WI 53202 | | | | | | | | | |
| | | | | | | | | | |
| Farwell Equity Partners, LLP | | Common | | | 19,586,747 | (2) | | 35.92 | % |
| 1818 North Farwell Avenue | | | | | | | | | |
| Milwaukee, WI 53202 | | | | | | | | | |
| | | | | | | | | | |
| Crivello Group, LLC | | Common | | | 2,972,754 | (8) | | 5.45 | % |
| 405-A Atlantis Road | | | | | | | | | |
| Port Canaveral, FL 32920 | | | | | | | | | |
| | (1) | Applicable percentage of ownership is based on 53,430,652 shares of common stock outstanding as of December 1, 2008, together with securities exercisable or convertible into shares of common stock within 60 days of December 1, 2008 for each stockholder, as applicable. Beneficial ownership is determined in accordance with the rules of the Commission and generally includes voting or investment power with respect to securities. Shares of common stock subject to securities exercisable or convertible into shares of common stock that are currently exercisable or exercisable within 60 days of December 1, 2008 are deemed to be beneficially owned by the person holding such options for the purpose of computing the percentage of ownership of such person, but are not treated as outstanding for the purpose of computing the percentage ownership of any other person. |
| | (2) | Includes (i) 19,586,747 shares registered in the name of Farwell Equity Partners, LLC, of which Mr. Marks is the managing member (ii) 10,969,522 shares held by Irrevocable Children's Trust ("ICT"), (iii) 72,232 shares held by Irrevocable Children's Trust No.2 ("ICT2"); (iv) 123,823 shares held by Phoenix Business Trust ("Phoenix Trust"); (v) 347,579 shares held by Phoenix Investors LLC ("Phoenix Investors"); (vi) 6,667 shares held by Forest Home Partners I, LLC ("Forest Home"); (vii) 1,190,779 shares held by Ohio Investors of Wisconsin ("Ohio Investors"); (viii) 100,000 shares held by Mr. Marks; and (ix) 200,000 shares of common stock issuable to Mr. Marks upon exercise of currently exercisable options. Mr. Marks is a trustee with sole dispositive power over the shares of Common Stock held by ICT, ICT2 and Ohio Investors. |
| | (3) | Includes 500,000 shares held by Mr. Chance and 300,000 shares issuable upon the exercise of currently exercisable options. |
| | (4) | Includes 100,000 shares issuable upon the exercise of currently exercisable options. |
| | (5) | Includes 502,500 shares held by Mr. Jensen. |
| | (6) | Includes 360,000 shares issuable upon the exercise of currently exercisable options and 50,000 shares held by Mr. Kennedy. |
| | (7) | Includes (i) 19,586,747 shares registered in the name of Farwell Equity Partners, LLC, of which Mr. Marks is the managing member (ii) 10,969,522 shares held by Irrevocable Children's Trust ("ICT"), (iii) 72,232 shares held by Irrevocable Children's Trust No.2 ("ICT2"); (iv) 123,823 shares held by Phoenix Business Trust ("Phoenix Trust"); (v) 347,579 shares held by Phoenix Investors LLC ("Phoenix Investors"); (vi) 6,667 shares held by Forest Home Partners I, LLC ("Forest Home"); (vii) 1,190,779 shares held by Ohio Investors of Wisconsin ("Ohio Investors"); (viii) 1,115,000 shares issuable upon the exercise of currently exercisable options by various directors and officers, including 200,000 exercisable shares to Mr. Marks; 300,000 exercisable shares to Mr. Chance; 100,000 exercisable shares to Mr. Hensell; 155,000 exercisable shares to Mr. Okumura; and 360,000 exercisable shares to Mr. Kennedy (ix) 100,000 shares of common stock owned by Mr. Marks (x) 500,000 shares of common stock owned by Mr. Chance; and (xi) 500,000 shares of common stock owned by Mr. Jensen. |
| | (8) | Includes 2,972,754 shares held by Mr. Crivello, managing member of Crivello Group, LLC. |
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The Company's policy is to enter into transactions with related parties on terms that, on the whole, are more favorable, or no less favorable, than those available from unaffiliated third parties. Based on the Company's experience in the business sectors in which the Company operates and the terms of its transactions with unaffiliated third parties, the Company believes that all of the transactions described below met this policy standard at the time they occurred.
On September 28, 2007, the Company entered into a 6.5% promissory note with Frank Crivello, managing partner of the Crivello Group (a stockholder). The maturity date of the note was March 28, 2008. As of August 31, 2008, the outstanding balance of the note payable was $883. Payment on the note has not been made and the revised maturity date has not been determined as of December 1, 2008.
On February 29, 2008, the Company entered into a 10% promissory note with The Irrevocable Children’s Trust I and II (a stockholder). The note has a six-month term with all interest and principal due at maturity. As of August 31, 2008, the outstanding balance of the promissory note payable was $1,068 and a revised maturity date has not been determined as of December 1, 2008.
As of August 31, 2008, the Company owes $90 in other short term related party payables for advances or business expenses.
Effective March 4, 2008, Titan Electronics entered into a $55 promissory note with Stephen Kennedy. The note bears interest at an annual rate of 10% and matures on September 4, 2008. Interest is payable monthly and the principal amount is due at maturity. As of August 31, 2008, the outstanding balance of the promissory note payable was $55 and is included in the discontinued operations current liabilities balance. Stephen Kennedy is currently a Director of the Company. As of December 1, 2008, the note balance is outstanding and included in discontinued operations.
During the year ended August 31, 2007, the Company entered into a Finder’s Fee Agreement with Crivello related to the Appco purchase. Upon the closing of the acquisition, the Company agreed to pay a cash fee of $750,000 and issue 10,000,000 ten year warrants to Crivello. The Appco acquisition closed on September 17, 2007. As a result of the completion, the Company issued the warrants to Crivello and recorded a payable for the cash fee. The Company accounted for these transactions in the first quarter of fiscal year 2008. The warrants were subsequently cancelled.
At August 31, 2007, the Company had $108 in Accounts Receivable from Sky Net Distributors, LLC (“Sky Net”). Sky Net is partially owned by an employee of Oblio. Oblio’s results of operations are included in discontinued operations.
During the years ended August 31, 2008 and 2007, the Company had no independent directors.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following is a summary of the fees billed to us by Skoda Minotti and KBA Group LLP for professional services rendered for the fiscal years ended August 31, 2008 and 2007 and the Company's former independent auditors Wolf & Company, P.C.:
| | | KBA Group LLP | | Wolf & Company, P.C | | Skoda Minotti | |
| Fee Category | | Fiscal 2008 Fees | | Fiscal 2007 Fees | | Fiscal 2008 Fees | | Fiscal 2007 Fees | | Fiscal 2008 Fees | |
| Audit - Fees (1) | | $ | 367,650 | | $ | 250,277 | | $ | - | | $ | 48,147 | | $ | - | |
| Audit-Related Fees (2) | | | - | | | 17,525 | | | - | | | 8,500 | | | - | |
| Tax Fees (3) | | | 40,200 | | | 47,181 | | | | | | | | | - | |
| All Other Fees (4) | | | 26,100 | | | 47,181 | | | - | | | - | | | - | |
| Total Fees | | $ | 433,950 | | $ | 362,164 | | $ | - | | $ | 56,647 | | $ | - | |
| | (1) | Audit fees consist of aggregate fees billed for professional services rendered for the audit of the Company's annual financial statements and review of the interim financial statements included in quarterly reports or services that are normally provided by the independent auditor in connection with statutory and regulatory filings or engagements for the fiscal years ended August 31, 2008 and 2007. |
| | (2) | Audit related fees consist of aggregate fees billed for assurance and related services that are reasonably related to the performance of the audit or review of the Company's financial statements and are not reported under “Audit Fees.” These fees include review of registration statements and participation at meetings of the board of directors and audit committees. |
| | (3) | Tax fees consist of aggregate fees billed for professional services for tax compliance, tax advice, and tax planning. |
| | (4) | All other fees consist of aggregate fees billed for products and services provided by the independent auditor, other than those disclosed above. These fees and services related to certain accounting research and assistance with a regulatory matter. |
The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.
On August 7, 2008, the Company dismissed KBA Group LLP ("KBA") as its independent auditors and engaged Skoda, Minotti & Co. ("Skoda Minotti") as its independent auditors to audit its financial statements for its year ending August 31, 2008. This decision was approved by the Board of Directors of the Company. Prior to such engagement, the Company did not consult with Skoda Minotti regarding the application of accounting principles to a specific, completed or contemplated transaction, or the type of audit opinion that might be rendered on the Company's financial statements. Skoda Minotti audited the financial statements of Appalachian Oil Company, Inc., a wholly-owned subsidiary of the Company, for the years ended September 30, 2006 and 2005 and the year ended August 31, 2007.
During the fiscal years ended August 31, 2007 and 2006, and the subsequent interim period through the date of KBA's dismissal on August 7, 2008, there have been no disagreements on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedure, which disagreements, if not resolved to the satisfaction of KBA, would have caused it to make reference to the subject matter of the disagreements in connection with its reports. In addition, there were no such events as described under Item 304(a)(1)(IV)(B) of Regulation S-B during the fiscal years ended August 31, 2007 and 2006.
KBA audited the Company's financial statements for the years ended August 31, 2007 and 2006. KBA's report for these periods did not contain an adverse opinion or a disclaimer of opinion, nor was it modified as to uncertainty, audit scope, or accounting principles.
ITEM 15. EXHIBITS
Copies of all exhibits to this Form 10-K (including exhibits incorporated by reference) are available without charge upon the request of any stockholder addressed to Bryan Chance, Chief Executive Officer, Titan Global Holdings, Inc., 1700 Jay Ell Drive, Suite 200, Richardson, Texas 75081.
| Exhibit Number | | Description |
| | | |
| 3.1 | | Certificate of Incorporation of Titan Global Holdings, Inc. (Formerly Ventures-National Incorporated), as amended. (Previously filed and incorporated herein by reference to the Company's Annual Report on Form 10-KSB, dated September 29, 2000. (Filing number: 002-98)) |
| 3.2 | | By-Laws of Titan Global Holdings, Inc. (Formerly Ventures-National Incorporated), as amended. (Previously filed and incorporated herein by reference to the Company's Annual Report on Form 10-KSB, dated September 29, 2000. (Filing number: 002-98)) |
| 10.01 | | 2002 Stock Option Plan. (Previously filed and incorporated herein by reference to the SB-2 pre-effective amendment number 1 filed March 20, 2003. (Filing number: 333-102697)) |
| 10.02 | | 2002 Stock Option Plan for Non-Employee Directors as amended (Previously filed and incorporated herein by reference to the SB-2 pre-effective amendment number 1 filed March 20, 2003. (Filing number: 333-102697)) |
| 10.03 | | Option/Purchase Agreement by and between Laurus Master Fund, Ltd and Titan Global Holdings, Inc. dated September 12, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 12, 2006 and filed on September 18, 2006) |
| 10.04 | | Letter Agreement by and between Laurus Master Fund, Ltd and Titan Global Holdings, Inc. dated September 12, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 12, 2006 and filed on September 18, 2006) |
| 10.05 | | Warrants to purchase Common Stock issued to Trilogy Capital Partners, Inc. dated September 20, 2006.) (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 20, 2006 and filed on September 26, 2006) |
| 10.06 | | Letter of engagement between Trilogy Capital Partners, Inc. and Titan Global Holdings, Inc. dated September 20, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 20, 2006 and filed on September 26, 2006) |
| 10.07 | | Warrant to purchase common stock at $1.00 to Cornell Capital Partners, LP dated October 10, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 10, 2006 and filed on October 16, 2006) |
| 10.08 | | Warrant to purchase common stock at $1.10 to Cornell Capital Partners, LP dated October 10, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 10, 2006 and filed on October 16, 2006) |
| 10.09 | | Securities Purchase Agreement dated October 10, 2006 between Titan Global Holdings, Inc. and Cornell Capital Partners, LP (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 10, 2006 and filed on October 16, 2006) |
| 10.10 | | Form of Convertible Debenture between Titan Global Holdings, Inc. and Cornell Capital Partners, LP (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 10, 2006 and filed on October 16, 2006) |
| 10.11 | | Investor Registration Rights Agreement dated October 10, 2006 between Titan Global Holdings, Inc. and Cornell Capital Partners, LP (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 10, 2006 and filed on October 16, 2006) |
| 10.12 | | Irrevocable Transfer Agent Instructions dated October 10, 2006 from Titan Global Holdings, Inc. to Continental Stock Transfer and Trust Co. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 10, 2006 and filed on October 16, 2006) |
| 10.13 | | Amendment No. 5 to the Credit and Security Agreement between Oblio Telecom, Inc., Pinless, Inc., Farwell Equity Partners, LLC and CapitalSource Finance LLC dated November 14, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated November 14, 2006 and filed on November 20, 2006) |
| 10.14 | | Loan and Security Agreement between Greystone Business Credit II LLC, Titan Global Holdings, Inc., Titan PCB West, Inc., Titan PCB East, Inc., Oblio Telecom, Inc., Titan Wireless Communications, Inc., StartTalk, Inc. and Pinless, Inc., dated as of December 29, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 29, 2006 and filed on January 8, 2007) |
| 10.15 | | Pledge Agreement by Titan General Holdings, Inc. in favor of Greystone Business Credit II LLC, dated as of December 29, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 29, 2006 and filed on January 8, 2007) |
| 10.16 | | Pledge Agreement by Oblio Telecom, Inc. in favor of Greystone Business Credit II LLC, dated as of December 29, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 29, 2006 and filed on January 8, 2007) |
| 10.17 | | Trademark Security Agreement by Oblio Telecom, Inc. in favor of Greystone Business Credit II LLC, dated as of December 29, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 29, 2006 and filed on January 8, 2007) |
| 10.18 | | Amendment Agreement between Titan Global Holdings, Inc., Oblio Telecom, Inc. and F&L LLP, dated as of December 29, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 29, 2006 and filed on January 8, 2007) |
| 10.19 | | Guaranty by Titan General Holdings, Inc. in favor of F&L LLP, dated as of December 29, 2006 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 29, 2006 and filed on January 8, 2007) |
| 10.20 | | Settlement and Release Agreement by and between Sprint Communications Company L.P. and Oblio Telecom, Inc. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated March 18, 2007 and filed on March 26, 2007) |
| | Asset Purchase Agreement among Titan Wireless RM, Inc. and Ready Mobile, LLC, DC Cellular Ventures, LLC, Asper Aliason Partnership, Eliason Management Company, Inc. and Jay Eliason dated as of April 8, 2007(Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated May 11, 2007 and filed on May 17, 2007) |
| 10.22 | | Settlement Agreement and Release of Claims by and between Oblio Telecom, Inc. and Sprint Communications Company, L.P., dated May 31, 2007(11) Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated May 31, 2007 and filed on June 1, 2007) |
| 10.23 | | Stock Purchase Agreement dated as of July 17, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 213, 2007) |
| 10.24 | | Stock Purchase Agreement dated as of July 17, 2007 by and among Management Properties, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 17, 2007 and filed on July 23, 2007) |
| 10.25 | | Addendum to Stock Purchase Agreement dated as of July 17, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 17, 2007 and filed on July 23, 2007) |
| 10.26 | | Addendum to Stock Purchase Agreement dated as of July 17, 2007 by and among Management Properties, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 17, 2007 and filed on July 23, 2007) |
| 10.27 | | Finders Fee Agreement between Crivello Group, LLC and Titan Global Holdings, Inc. dated as of July 27. 2007(Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 27, 2007 and filed on August 2, 2007) |
| 10.28 | | Form of Warrant issued to Crivello Group, LLC (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated July 27, 2007 and filed on August 2, 2007) |
| 10.29 | | Stock Purchase Agreement dated as of July 17, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict. (Incorporated by reference to Titan’s Form 8-K filed with the SEC on July 23, 2007) |
| 10.30 | | Addendum to Stock Purchase Agreement dated as of July 17, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict. (Incorporated by reference to Titan’s Form 8-K filed with the SEC on July 23, 2007) |
| 10.31 | | Addendum to Stock Purchase Agreement dated as of August 29, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report filed with the SEC on July 23, 2007) |
| 10.32 | | Addendum to Stock Purchase Agreement dated as of September 14, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.33 | | Addendum to Stock Purchase Agreement dated as of September 17, 2007 by and among Appalachian Oil Company, Inc., the James R. Maclean Revocable Trust, Sara G. Maclean, the Linda R. Maclean Irrevocable Trust and Jeffrey H. Benedict (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.34 | | Loan and Security Agreement dated September 17, 2007 with the Lenders that are parties thereto and Greystone Business Credit II L.L.C (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.35 | | Security Agreement between Appco-KY, Inc. and Greystone Business Credit II, L.L.C (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.36 | | Corporate Guaranty dated as of September 17, 2007 by Appco-KY, Inc (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.37 | | Corporate Guaranty by Appalachian Oil Company, Inc. and Appco-KY, Inc. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.38 | | Corporate Guaranty by Titan Global Holdings, Inc., Titan PCB West, Inc., Titan PCB East, Inc., Oblio Telecom, Inc., Titan Wireless Communications, Inc., Starttalk, Inc., and Pinless, Inc. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.39 | | Trademark Security Agreement dated as of September 17, 2007 between Appalachian Oil Company, Inc. in favor of and Greystone Business Credit II, L.L.C. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.40 | | Stock Pledge Agreement dated as of September 17, 2007 by Appalachian Oil Company, Inc. to and for the benefit of and Greystone Business Credit II, L.L.C. (Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.41 | | Stock Pledge Agreement dated as of September 17, 2007 by Titan Global Holdings, Inc. to and for the benefit of and Greystone Business Credit II, L.L.C (Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.42 | | Purchase and Sale Agreement dated as of September 17, 2007 by and between Appalachian Oil Company, Inc. and Appco-KY, Inc., YA Landholdings, LLC and YA Landholdings 7, LLC. (Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.43 | | Form of Land and Building Lease Agreement between YA Landholdings, LLC and Appalachian Oil Company, Inc.(Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.44 | | Securities Purchase Agreement dated as of September 17, 2007 by and between Titan Global Holdings, Inc. and YA Global Investments, L.P.(Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.45 | | Registration Rights Agreement dated as of September 17, 2007 by and between Titan Global Holdings, Inc. and YA Global Investments, L.P.(Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.46 | | Security Agreement dated as of September 17, 2007 by and between Titan Global Holdings, Inc. and each of its subsidiaries listed on Schedule I thereto and YA Global Investments, L.P. (Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.47 | | Guaranty Agreement dated as of September 17, 2007 by and between Titan Global Holdings, Inc. and each of its subsidiaries listed on Schedule I thereto and YA Global Investments, L.P. (Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated September 17, 2007 and filed on September 21, 2007) |
| 10.48 | | Form of Warrant issued to YA Global Investments, L.P. (Previously filed and incorporated herein by reference to the Company's Current Report on Form 8-K dated July 27, 2007 and filed on August 2, 2007) |
| 10.49 | | Settlement Agreement by and among Oblio Telecom, Inc., Titan Global Holdings, Inc. and AT&T Corp. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 12, 2007 and filed on October 16, 2007) |
| 10.50 | | Promissory Note issued by Oblio Telecom, Inc. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 12, 2007 and filed on October 16, 2007) |
| 10.51 | | Stock Purchase Agreement dated as of July 30, 2007 by and among Titan Global Holdings, Inc., USA Detergents, Inc., USAD Metro Holdings, LLC and Uri Evan (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.52 | | Amendment to Stock Purchase Agreement dated as of October 17, 2007 by and among Titan Global Holdings, Inc., USA Detergents, Inc., USAD Metro Holdings, LLC and Uri Evan (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.53 | | Amendment No. 2 to Loan and Security Agreement dated as of October 16, 2007 by and between USA Detergents, Inc. and GBC Funding, LLC (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.54 | | Amendment No. 1 to Loan dated as of October 16, 2007 by and between Appalachian Oil Company, Inc., Greystone Business Credit II, L.L.C. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.55 | | Waiver, Consent and Amendment No.6 to Loan and Security Agreement dated as of October 16, 2007 by and among, Titan Global Holdings, Inc., Titan PCB West, Inc. Titan TCB East, Inc., Oblio Telecom, Inc., Titan Wireless Communications, Inc., Start Talk, Inc., Pinless, Inc. Titan Card Services, Inc. and GBC Funding, LLC. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.56 | | Amendment No.7 to Loan and Security Agreement dated as of October 16, 2007 by and among, Titan Global Holdings, Inc., Titan PCB West, Inc. Titan TCB East, Inc., Oblio Telecom, Inc., Titan Wireless Communications, Inc., Start Talk, Inc., Pinless, Inc. Titan Card Services, Inc. and GBC Funding, LLC. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.57 | | Corporate Guaranty executed by USA Detergents, Inc. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.58 | | Corporate Guaranty executed by 2007 by Titan Global Holdings, Inc., Titan PCB West, Inc. Titan TCB East, Inc., Oblio Telecom, Inc., Titan Wireless Communications, Inc., Start Talk, Inc., Pinless, Inc. Titan Card Services, Inc. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.59 | | Amendment No. 2 to Stock Pledge Agreement dated October 16, 2007 between Titan Global Holdings, Inc. and GBC Funding, LLC. (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 16, 2007 and filed on October 22, 2007) |
| 10.60 | | Limited Recourse Assignment between Titan Nexus, Inc. and YA Global Investments, L.P., dated as of November 2, 2007.(Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated November 2, 2007 and filed on November 8, 2007) |
| 10.61 | | Securities Purchase Agreement between Titan Global Holdings, Inc. and YA Global Investments, L.P., dated as of November 2, 2007 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated November 2, 2007 and filed on November 8, 2007) |
| 10.62 | | Common stock purchase warrant issued to Bryan M. Chance, dated as of February 17, 2006 (Previously filed and incorporated herein by reference to the Company's Annual Report on Form 10-KSB filed December 15, 2006. (Filing number: 000-32847)) |
| 10.63 | | Employment Agreement dated August 18, 2006, between Oblio Telecom, Inc. and Bryan Chance (Previously filed and incorporated herein by reference to the Company's Annual Report on Form 10-KSB filed December 15, 2006. (Filing number: 000-32847) |
| 10.64 | | Employment Agreement dated October 9, 2006, between Oblio Telecom, Inc. and R. Scott Hensell. (Previously filed and incorporated herein by reference to the Company’s Annual Report on Form 10-K filed on November 29, 2007) |
| 10.65 | | Common stock purchase warrant issued to Bryan Chance dated as of August 2, 2007. (Previously filed and incorporated herein by reference to the Company’s Annual Report on Form 10-K filed on November 29, 2007) |
| 10.66 | | Common stock purchase warrant issued to R. Scott Hensell, dated as of October 9, 2006. (Previously filed and incorporated herein by reference to the Company’s Annual Report on Form 10-K filed on November 29, 2007) |
| 10.67 | | Loan and Security Agreement between Titan Apparel, Inc. and Greystone Business Credit II, LLC (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 14, 2007 and filed on December 20, 2007) |
| 10.68 | | Rescission of Grant of Warrant dated as of December 24, 2007 between Titan Global Holdings, Inc. and the Crivello Group, LLC (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated December 24, 2007 and filed on January 10, 2008) |
| 10.69 | | Titan Modification Agreement dated as of June 12, 2008 among Titan Global Holdings, Inc., Titan Electronics, Inc. Titan East, Inc. Oblio Telecom, Inc., Titan Wireless Communications, Inc., Starttalk, Inc., Planet Direct, Inc. , Titan Card Services, Inc. Titan Nexus, Inc., Appalachian Oil, Company Inc., Titan Apparel, Inc. and American Value Brands, Inc. and GBC Funding, LLC and Greystone Business Credit II, L.L.C. (Filed herewith) |
| 10.70 | | Stock Purchase Agreement, effective as of October 1, 2008 by and among Titan Global Holdings, Inc., Crescent Fuels, Inc. and Phillip Near (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 24, 2008 and filed on October 28, 2008) |
| 10.71 | | Stock Purcahse Agreement, effective as of October 1, 2008 by and among Titan Global Holdings, Inc., Crescent Fuels, Inc. and Johnson Enterprises of Kansas, LLC, Jeff McREynolds, Karen E. Reeder Trust, Harrision F. Johnson, Jr. and Martha M. Johnson Trust (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated October 24, 2008 and filed on October 28, 2008) |
| 10.72 | | Eleventh Forbearance & Modification Agreement by and among M&I Marshall & Isley Bank, Crescent Oil Company, Inc., Crescent Stores Corporation, Titan Global Holdings, Inc. and Phil Near (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated November 7, 2008 and filed on November 13, 2008) |
| 16.1 | | Letter from KBA Group, LLP dated August 12, 2008 (Previously filed and incorporated herein by reference to the Company’s Current Report on Form 8-K dated August 7, 2008 and filed on August 12, 2008) |
| 21.1 | | Subsidiaries of the Company (filed herewith). |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14 and Rule 15d-14(a), promulgated under the Securities and Exchange Act of 1934, as amended. (filed herewith). |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14 and Rule 15d 14(a), promulgated under the Securities and Exchange Act of 1934, as amended. (filed herewith). |
| 32.1 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer). (filed herewith). |
| 32.2 | | Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Chief Financial Officer). (filed herewith). |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized
|
| | |
| By | /s/ Bryan Chance |
| | Bryan Chance |
| | Chief Executive Officer and |
| | President |
| | (Principal Executive Officer) |
| | |
| TITAN GLOBAL HOLDINGS, INC. |
| | |
| By | /s/ Scott Hensell |
| | Scott Hensell |
| | Chief Financial Officer |
| | (Principal Financial and |
| | Accounting Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | | Title | | Date |
| | | | | |
| /s/ Bryan Chance | | Chief Executive Officer and President, Titan | | December 1, 2008 |
| Bryan Chance | | Global Holdings, Inc. and Director | | |
| | | | | |
| /s/ David Marks | | Chairman | | December 1, 2008 |
| David Marks | | | | |
| | | | | |
| /s/ Kurt Jensen | | President, Titan Communications Division and | | December 1, 2008 |
| Kurt Jensen | | Director | | |
| | | | | |
| /s/ Stephen S. Kennedy | | Director | | December 1, 2008 |
| Stephen S. Kennedy | | | | |
