UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
ý | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended March 31, 2006 | ||
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: 33-33042-NY
CORONADO INDUSTRIES, INC.
(Exact name of small business issuer as specified in its charter)
Nevada | 22-3161629 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
16857 E. Saguaro Blvd., Fountain Hills, Arizona 85268
(Address of principal executive offices)
(480) 837-6810
(Issuer’s telephone number)
Not applicable
(Former name, former address and former fiscal year, if changed since last report.)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject such filing requirements for the past 90 days. Yes ý No o
Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date. 60,210,872 shares as of May 15, 2006
Transitional Small Business Disclosure Format (check one): Yes o No ý
Form 10-QSB
For the Quarterly Period Ended March 31, 2006
Table of Contents
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS | |||||||
ASSETS | |||||||
(Unaudited) | |||||||
March 31, | December 31, | ||||||
2006 | 2005 | ||||||
CURRENT ASSETS: | |||||||
Cash & Cash Equivalents | $ | — | $ | 12,340 | |||
Accounts Receivable | 25,540 | 14,015 | |||||
Inventory | 28,166 | 24,289 | |||||
Prepaid Expenses | 11,052 | 14,078 | |||||
TOTAL CURRENT ASSETS | 64,758 | 64,722 | |||||
Property & Equipment-Net | 7,602 | 8,121 | |||||
Deposits | 4,520 | 4,520 | |||||
TOTAL ASSETS | $ | 76,880 | $ | 77,363 | |||
The Accompanying Notes are an Integral Part of the Financial Statements
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||
(Unaudited) | |||||||
March 31, | December 31, | ||||||
2006 | 2005 | ||||||
CURRENT LIABILITIES: | |||||||
Notes Payable to Related Parties - Current Portion | $ | 444,175 | $ | 310,000 | |||
Notes Payable | 50,000 | 100,000 | |||||
Bank Overdraft | 5,126 | — | |||||
Accounts Payable | 70,881 | 63,546 | |||||
Accrued Salaries | 93,750 | 470,500 | |||||
Accrued Interest | 8,344 | 7,631 | |||||
Accrued Taxes and Expenses | 130,165 | 115,821 | |||||
TOTAL LIABILITIES | 802,441 | 1,067,498 | |||||
Commitments | — | — | |||||
Stockholders’ Equity (Deficit) | |||||||
Preferred Stock - $0.0001 par value; 3,000,000 shares | |||||||
authorized, none issued or outstanding | — | — | |||||
Common Stock - $0.001 par value; 200,000,000 shares authorized, | |||||||
53,993,736 and 27,879,563 shares issued and outstanding, | |||||||
respectively | 53,994 | 27,880 | |||||
Additional Paid In Capital | 17,360,826 | 15,189,716 | |||||
Accumulated Deficit | (18,140,381 | ) | (16,207,731 | ) | |||
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | (725,561 | ) | (990,135 | ) | |||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 76,880 | $ | 77,363 | |||
The Accompanying Notes are an Integral Part of the Financial Statements
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||
(Unaudited) | |||||||
Three Months Ended March 31, | |||||||
2006 | 2005 | ||||||
REVENUE | |||||||
Product Revenue | $ | 25,500 | $ | 49,780 | |||
COST OF SALES | |||||||
Cost of Product Revenues | 11,027 | 22,486 | |||||
GROSS PROFIT (LOSS) | 14,473 | 27,294 | |||||
General & Administrative Expenses | |||||||
Salaries and wages | 227,124 | 232,210 | |||||
Stock & option bonuses | |||||||
- officers & directors | 1,165,500 | — | |||||
- consultants | 203,550 | — | |||||
- employees | 75,150 | — | |||||
Selling and marketing expenses | 84,242 | 79,432 | |||||
Legal and professional fees | 76,027 | 33,508 | |||||
FDA expense | 34,548 | 15,650 | |||||
Rent expense | 13,560 | 15,203 | |||||
Miscellaneous expenses | 49,713 | 92,691 | |||||
1,929,414 | 468,694 | ||||||
LOSS FROM OPERATIONS | (1,914,941 | ) | (441,400 | ) | |||
OTHER INCOME (EXPENSE) | |||||||
Interest Expense | (17,709 | ) | (18,040 | ) | |||
$ | (17,709 | ) | $ | (18,040 | ) | ||
NET LOSS | $ | (1,932,650 | ) | $ | (459,440 | ) | |
Basic and diluted net loss per share | $ | (0.05 | ) | $ | (0.02 | ) | |
Basic and diluted weighted average shares outstanding | 35,932,579 | 19,084,151 |
The Accompanying Notes are an Integral Part of the Financial Statements
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
FOR THE THREE MONTHS ENDED MARCH 31, 2006 | ||||||||||||||||
Additional | Retained | Stockholders’ | ||||||||||||||
Common Stock | Paid-In | Earnings | Equity | |||||||||||||
Shares | Par Value | Capital | (Deficit) | (Deficit) | ||||||||||||
Balance at December 31, 2004 (post split) | 18,329,194 | $ | 18,329 | $ | 12,650,440 | $ | (13,949,552 | ) | (1,280,783 | ) | ||||||
Stock Issued for Debt and Interest | 4,325,903 | 4,326 | 515,160 | — | 519,486 | |||||||||||
Stock Issued for Services | 5,159,466 | 5,160 | 1,251,564 | — | 1,256,724 | |||||||||||
Forgiveness of Officers’ Salaries | — | — | 751,417 | — | 751,417 | |||||||||||
Stock Options Exercised | 65,000 | 65 | 21,135 | — | 21,200 | |||||||||||
Net Loss | — | — | — | (2,258,179 | ) | (2,258,179 | ) | |||||||||
Balance at December 31, 2005 | 27,879,563 | 27,880 | 15,189,716 | (16,207,731 | ) | (990,135 | ) | |||||||||
Stock and Options Issued for Services | 5,564,006 | 5,564 | 463,960 | — | 469,524 | |||||||||||
Stock and Options Issued for Bonuses | 20,550,000 | 20,550 | 1,707,150 | — | 1,727,700 | |||||||||||
Reverse Stock Split - Fractional Shares | 167 | — | — | — | — | |||||||||||
Net Loss for the Three Months Ended March 31, 2006 (unaudited) | — | — | — | (1,932,650 | ) | (1,932,650 | ) | |||||||||
Balance at March 31, 2006 | 53,993,736 | $ | 53,994 | $ | 17,360,826 | $ | (18,140,381 | ) | $ | (725,561 | ) | |||||
The Accompanying Notes are an Integral Part of the Financial Statements
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(Unaudited) | |||||||
Three Months Ended March 31, | |||||||
2006 | 2005 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS: | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: | |||||||
Net Income (Loss) | $ | (1,932,650 | ) | $ | (459,440 | ) | |
Adjustments to reconcile net income to net cash provided (used) by operating activities: | |||||||
Depreciation | 519 | 554 | |||||
Common Stock issued for services | 113,127 | 125,031 | |||||
Stock and options issued for salaries, consulting and interest | 356,397 | 112,262 | |||||
Stock and options issued for bonuses | 1,727,700 | — | |||||
Changes in Assets and Liabilities: | |||||||
Prepaid Expenses | 3,026 | 3,321 | |||||
Inventory | (3,877 | ) | 4,512 | ||||
Deferred Compensation | — | 12,500 | |||||
Accounts receivable | (11,525 | ) | 6 | ||||
Accounts payable | 7,335 | (26,030 | ) | ||||
Accrued salaries | (376,750 | ) | 93,750 | ||||
Accrued interest | 713 | 645 | |||||
Accrued taxes and expenses | 14,344 | 7,281 | |||||
NET CASH USED IN OPERATING ACTIVITIES | (101,641 | ) | (125,608 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES | |||||||
Proceeds from borrowings | 143,000 | 110,000 | |||||
Bank overdraft | 5,126 | — | |||||
Proceeds from exercise of stock options | — | 17,200 | |||||
Repayment of notes payable | (58,825 | ) | — | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 89,301 | 127,200 | |||||
Net change in cash and cash equivalents | (12,340 | ) | 1,592 | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 12,340 | 58 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | — | $ | 1,650 | |||
(Continued) |
The Accompanying Notes are an Integral Part of the Financial Statements
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
(Continued) | |||||||
(Unaudited) | |||||||
Three Months Ended March 31, | |||||||
2006 | 2005 | ||||||
SUPPLELMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Interest paid | $ | 12,000 | $ | 12,925 | |||
NON-CASH TRANSACTIONS: | |||||||
Issuance of common stock & options for salaries | 356,397 | 108,096 | |||||
Issuance of common stock for services | 113,127 | 125,031 | |||||
Issuance of common stock for interest | — | 4,166 | |||||
Issuance of common stock for debt | — | 133,000 | |||||
Accrued officers’ salaries and taxes contributed to capital | — | 751,417 | |||||
Issuance of common stock & options for bonuses | 1,727,700 | — |
The Accompanying Notes are an Integral Part of the Financial Statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
In the opinion of management, the accompanying consolidated financial statements reflect all adjustments (consisting of normal recurring accruals) necessary to present fairly the Company’s financial position as of March 31, 2006 and the results of its operations, changes in stockholders’ deficit, and cash flows for the three months ended March 301 2006. Although management believes that the disclosures in these consolidated financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities Exchange Commission.
The result of operations for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006. The accompanying consolidated financial statements should be read in conjunction with the more detailed consolidated financial statements, and the related footnotes thereto, filed with the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2005.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the financial position, results of operations, cash flows and changes in stockholders’ deficit of Coronado Industries, Inc., and its wholly-owned subsidiaries. All material intercompany transactions, accounts and balances have been eliminated.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of 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 financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
GOING CONCERN
The Company’s financial statements are presented on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has not made an operating profit since its reorganization in 1996. Further, the Company has a working capital deficit of $(737,683) and a negative net worth of $(725,561) at March 31, 2006.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
GOING CONCERN (Continued)
The Company is currently attempting to negotiate with the FDA the protocol for a clinical study in the United States. The Company is hopeful that a new preliminary patient study will permit a favorable clinical study protocol to be granted by the FDA approximately within the next year.
If a favorable clinical study protocol were granted by the FDA, the Company anticipates it will be about two years after the clinical study commences before the Company’s products could be sold in the U.S. The estimated cost of the clinical study is several million dollars. The Company is hopeful a major medical equipment distributor will pay the majority of the clinical study expenses as consideration for receiving the U.S. or worldwide marketing rights to the products. If the Company is unable to obtain third party funding of the clinical study, the Company will seek equity or debt financing for the clinical study. There is no assurance that the Company will be able to adequately fund any clinical study permitted by the FDA. Until the Company receives its FDA approval, the Company will be dependent on loans from its management and improved international sales.
The financial statements do not include any adjustments to reflect the possible future effects of the recoverability and classification of assets or the amounts and classifications of liabilities that may result from the uncertainty of the Company’s ability to continue as a going concern.
STOCK BASED COMPENSATION
Prior to January 1, 2006, the Company had applied APB Opinion No. 25 and related interpretations in accounting for its stock-based plans as was permitted under SFAS No. 123, “Accounting for Stock-Based Compensation.” Under SFAS No. 123, companies could, but were not required to, elect to recognize compensation expense for all stock-based awards using a fair value methodology. The Company had adopted the disclosure-only provisions, as permitted by SFAS No. 123.
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment (Revised 2004).” SFAS No. 123R establishes standards for the accounting for transactions in which an entity (i) exchanges its equity instruments for goods or services, or (ii) incurs liabilities in exchange for goods or services that are based on the fair value of the entity’s equity instruments or that may be settled by the issuance of the equity instruments. SFAS No. 123R eliminates the ability to account for stock-based compensation using APB 25 and requires that such transactions be recognized as compensation cost in the income statement based on their fair values on the date of the grant. SFAS No. 123R is effective for the Company in the first interim period beginning after December 15, 2005.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK BASED COMPENSATION (Continued)
Effective January 1, 2006, the Company adopted the fair value recognition provisions of SFAS 123R “Share-Based Payment” (“SFAS 123R”) using the modified prospective approach. SFAS No. 123R applies to new awards and to awards modified, repurchased, or cancelled after December 15, 2005. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered (generally referring to non-vested awards) that are outstanding as of December 15, 2005 must be recognized as the remaining requisite service is rendered during the period of and/or the periods after the adoption of SFAS No. 123R. The attribution of compensation cost for those earlier awards will be based on the same method and on the same grant-date fair values previously determined for the pro forma disclosures required for companies that did not adopt the fair value accounting method for stock-based employee compensation. For purposes of estimating the grant date fair value of stock options, the Company uses the Black-Scholes options pricing model.
Assumptions used to determine compensation expense are determined as follows:
· | Expected term is determined using a weighted average of the contractual term of the award; |
· | Expected volatility of award grants is measured using the weighted average of historical daily changes in the market price of the Company’s common stock over the expected term of the award; |
· | Risk-free interest rate is equivalent to the implied yield on zero-coupon U.S. Treasury bonds with a remaining maturity equal to the expected term of the awards; and |
· | Forfeitures are based on the history of cancellations of awards granted and management’s analysis of potential forfeitures. |
Under the modified prospective method, results for prior periods have not been restated to reflect the effects of implementing SFAS No. 123(R). The following pro-forma information, as required by SFAS No. 148, “Accounting for Stock-Based Compensation - Transaction and Disclosure, an amendment of FASB Statement No. 123,” is presented for comparative purposes and illustrates the effect on net loss and net loss per common share for the three months ended March 31, 2005 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation prior to January 1, 2006.
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK BASED COMPENSATION (Continued)
Three Months Ended | ||||
March 31, 2005 | ||||
Net Income / (Loss): | $ | (459,440 | ) | |
As Reported | ||||
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects | $ | — | ||
Deduct: Total stock based employee compensation expense determined under fair value based method for all awards, net of related tax effects | $ | — | ||
Proforma net loss | $ | (459,440 | ) | |
Loss per share: | ||||
As reported | $ | (0.02 | ) | |
Proforma | $ | (0.02 | ) |
There were no stock options granted during the three months ended March 31, 2005.
RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the FASB issued Statement of Financial Accounting Standards No. 154, (“SFAS 154”), “Accounting Changes and Error Corrections,” a replacement of APB Opinion No. 20, “Accounting Changes” and FASB Statement No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 applies to all voluntary changes in accounting principle and changes the requirements for accounting for and reporting a change in accounting principle. SFAS 154 requires the retrospective application to prior periods’ financial statements of the direct effect of a voluntary change in accounting principle unless it is impracticable. APB No. 20 required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. FASB stated that SFAS 154 improves financial reporting because its requirements enhance the consistency of financial information between periods. Unless early adoption is elected, SFAS 154 is effective for fiscal years beginning after December 15, 2005. Early adoption is permitted for fiscal years beginning after June 1, 2005. SFAS 154 does not change the transition provisions of any existing accounting pronouncements, including those that are in a transition phase as of the effective date of this statement. The adoption of SFAS 154 did not have a material affect on the Company’s financial position or results of operations.
NOTE 2 - EARNINGS PER SHARE
LOSS PER SHARE
Basic loss per share includes no dilution and is computed by dividing loss to common stockholders by the weighted average number of common shares outstanding for the period. Assumed exercise of the outstanding stock options at March 31, 2006 and 2005 of 71,765,835 and 15,958,850 (post-split), respectively, have been excluded from the calculation of basic net loss per common share as their effect is anti-dilative (decreases the loss per share). In addition, as the Company has a net loss available to common stockholders for the years ended December 31, 2005 and 2004 the diluted EPS calculation has been excluded from the financial statements.
NOTE 3 - EQUITY
On March 24, 2006 the Board of Directors approved the 2006 Coronado Industries, Inc. Executive Stock Option Plan. The Plan authorizes the Company to grant stock options to key employees of the Company. Under the aforementioned Plan, 60,000,000 shares of common stock were reserved for issuance.
A summary of the activity of plan is as follows:
Number | Average | ||||||
of Options | Exercise Price | ||||||
Outstanding at December 31, 2005 | — | $ | — | ||||
Granted | 60,000,000 | 0.053 | |||||
Exercised | — | — | |||||
Cancelled/Forfeited | — | — | |||||
Outstanding at March 31, 2006 | 60,000,000 | $ | 0.053 |
NOTE 3 - EQUITY (Continued)
Additional information about outstanding options to purchase the Company’s common stock as of March 31, 2006:
Options Outstanding | Options Exercisable | |||||||||
Weighted | ||||||||||
Average | Weighted | Weighted | ||||||||
Remaining | Average | Average | ||||||||
Exercise | Number of | Contractual | Exercise | Number of | Exercise | |||||
Price | Shares | Life (In Years) | Price | Shares | Price | |||||
$ 0.053 | 60,000,000 | 9.98 | $ 0.053 | 60,000,000 | $ 0.053 |
Also, on March 24, 2006 the Board of Directors approved the 2006 Coronado Industries, Inc. Employee Stock Option Plan. The Plan authorizes the Company to grant stock options to key employees of the Company. Under the aforementioned Plan, 9,600,000 shares of common stock were reserved for issuance.
A summary of the activity of plan is as follows:
Number | Average | ||||||
of Options | Exercise Price | ||||||
�� | |||||||
Outstanding at December 31, 2005 | — | $ | — | ||||
Granted | 9,600,000 | 0.053 | |||||
Exercised | — | — | |||||
Cancelled/Forfeited | — | — | |||||
Outstanding at March 31, 2006 | 9,600,000 | $ | 0.053 |
NOTE 3 - EQUITY (Continued)
Additional information about outstanding options to purchase the Company’s common stock as of March 31, 2006:
Options Outstanding | Options Exercisable | |||||||||
Weighted | ||||||||||
Average | Weighted | Weighted | ||||||||
Remaining | Average | Average | ||||||||
Exercise | Number of | Contractual | Exercise | Number of | Exercise | |||||
Price | Shares | Life (In Years) | Price | Shares | Price | |||||
$ 0.053 | 9,600,000 | 9.98 | $ 0.053 | 9,600,000 | $ 0.053 |
The fair value of option grants is estimated as of the date of grant utilizing the Black-Scholes option-pricing model with the following weighted average assumptions for all grants, expected life of options of ten (10) years, risk-free interest rates of five percent (5%), volatility of 146%, forfeitures of 85%, and a zero percent (0%) dividend yield. The weighted average fair value at date of grant for options granted for the quarter ended March 31, 2006 approximated $0.05. Total stock-based compensation recorded in relation to the 69,600,000 options granted was $522,000.
NOTE 4 - COMMITMENTS
During the three month period ended March 31, 2006, the Company entered into a Letter of Understanding and Distribution Agreement with a French company. The Letter of Understanding provides that the Company will share one-half the costs of two clinical trials, up to 40,000 Euros per year, not to exceed 80,000 Euros over the first two years.
NOTE 5 - RELATED PARTY TRANSACTIONS
During the three months ended March 31, 2006, the Company issued common stock and options to three officers and directors as follows:
· | 2,833,334 shares of restricted common stock for the payment of $187,500 of salaries accrued at December 31, 2005. |
· | 2,100,000 shares of restricted common stock for the payment of $189,000 of bonuses accrued at December 31, 2005. |
· | 13,500,000 shares of restricted common stock, valued at $715,500 relating to the signing of two distribution agreements. |
· | 60,000,000 options to purchase common stock at $.053 per share, valued at $450,000. |
Special Note on Forward-Looking Statements
Except for historical information contained herein, this document contains forward-looking statements. Such forward-looking statements involve risks and uncertainties and include, but are not limited to, statements regarding future events and the Company’s plans and expectations. The Company’s actual results may differ materially from such statements. Although the Company believes that the assumptions underlying the forward-looking statements herein are reasonable, any of the assumptions could prove inaccurate and, therefore, there can be no assurance that the results contemplated in such forward-looking statements will be realized. In addition, the business and operations of the Company are subject to substantial risks which increase the uncertainties inherent in the forward-looking statements included in this document. The inclusion of such forward-looking information should not be regarded as a representation by the Company or any other person that the future events, plans or expectations contemplated by the Company will be achieved.
Critical Accounting Policies
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions about assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, valuation allowances for inventory and accounts receivable, and impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. The SEC suggests that all registrants list their most “critical accounting policies” in Management’s Discussion and Analysis section. A critical accounting policy is one which is both important to portrayal of the Company’s financial condition and results of operations and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of its consolidated financial statements.
These policies include, but are not limited to, the carrying value of the inventory and fixed assets, the life of fixed assets, the expensing of the costs relating to FDA and European licensing activities, and the valuation of common stock and options related to compensation and other services. Complex judgments and estimates underlie these critical accounting policies, such as the estimated life of fixed assets for depreciation purposes, the market valuation of inventory in reporting inventory at the lower of cost or market, dividing consultants’ compensation between expense categories of FDA licensing activities and sales activities, dividing compensation and payments to third parties between cost of goods sold category and general and administrative expense, and the determination of the market value of restricted stock when issued as compensation or as repayment for loans.
Quarter Ending March 31, 2006
Operations.
Registrant continued delivery of its PNT products to its European distributors in the first quarter of 2006. Total sales were $25,500, with a cost of goods sold of $11,027. Registrant’s gross margin on its products sold was approximately 56.8%, but its marketing expenses for these European sales far exceeded the gross sales. Registrant expects its European sales to continue throughout 2006; however, profitability from European sales is not likely in 2006. There can be no assurance that Registrant’s operations will ever be profitable.
For the quarter ending March 31, 2006, Registrant experienced a net loss of $1,932,650, which was comprised primarily of its gross profit from European sales of $14,473, its general and administrative expenses incurred at the corporate level of $1,929,414, and interest expense of $17,709. 96.7% of Registrant’s first quarter 2006 corporate expenses consisted of salaries and consulting wages of $227,124 (11.8%), officer and Director stock bonus and option compensation of $1,165,500 (60.4%), consultant stock bonus and option compensation of $203,550 (10.5%), employee stock bonus and option compensation of $75,150 (3.9%), professional expenses of $110,575 (5.7%), and selling and media promotion expenses of $84,242 (4.4%). In comparison, during first quarter 2005, 76.9% of Registrant’s corporate expense of $468,694 consisted of salaries and wages of $232,210 (49.5%), stock bonus and option compensation of $0 (0.0%), professional expenses of $49,158 (10.5%) and selling and media promotion of $79,432 (16.9%). The stock bonus and option compensation was awarded for the execution of distribution agreements in Europe and China. The increase in professional expenses in 2006 from 2005 occurred as a result of increased legal and FDA-type expenses in 2006. Approximately 89.5% of the corporate expenses in 2006 were paid with Registrant’s common stock in order to preserve Registrant’s cash resources. Since Registrant increased its management salaries by 33% on April 1, 2006, these expenses will increase through the remainder of 2006. Registrant may compensate its management and employees with stock options and stock bonuses in the future when significant events occur, such as FDA protocol approval, distribution contracts executed, increased sales, or medical journal publication. Registrant expects its professional expenses to increase in 2006 as a result of its increased costs for its proposed FDA study later in 2006. Registrant expects its selling and media promotion expenses will increase throughout the remainder of 2006 as a result of its European product distribution, and the commencement of selling efforts in the Pacific Rim and South America.
Liquidity and Capital Resources.
Because of Registrant’s current inventory levels, on a short-term basis Registrant requires only minimal capital to sustain its manufacturing of the patented equipment, unless a substantial order is placed. Because of the Registrant’s cash position at year-end and general and administrative expenses totaling approximately $2,000,000 per year, the Registrant suffered from a liquidity shortage during the first quarter of 2006. From January 1, 2006 to March 31, 2006, Registrant borrowed a total of $141,000 from its three Directors. Unless substantial product sales are achieved in the near future, Registrant will continue to experience a liquidity shortage. There can be no assurance that Registrant’s product will be approved for sale in the United States by the FDA or when foreign sales will commence in a substantial number. Registrant will likely be forced to borrow additional funding from its management throughout the remainder of 2006; however, there is no assurance Registrant will be able to obtain any financing in the future.
On a long-term basis, Registrant anticipates, without assurances, that the sale of its product in the U.S. and internationally will provide sufficient liquidity to the Registrant.
From January 1, 2006 through March 31, 2006, G. Richard Smith had loaned the Registrant $69,000; Gary R. Smith had loaned Registrant $35,000; and Dr. John T. LiVecchi had loaned Registrant $37,000. These loans accrued interest at 15% per annum. All of these loans were outstanding on March 31, 2006, and Dr. LiVecchi had an additional $10,000 loan outstanding from 2005.
Our management has responsibility for establishing and maintaining adequate internal control over financial reporting for us. Our management uses a framework for establishing these internal controls. This framework includes review of accounting detailed records on at least a quarterly basis by multiple senior officers of Coronado Industries, Inc., at least one of whom operates outside of the corporate finance and accounting area, and one of whom operates within the area of corporate finance and accounting. This review process includes review of significant accounting records and source documents, such as general journal entry records, accounts payable records, and monthly bank statement reconciliations. Documentary records are kept of this review process.
The Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness, as of March 31, 2006, of the design and operation of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were ineffective to ensure that the information we are required to disclose in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission (“SEC”) rules and forms. More specifically, the Company identified a material weakness due to a lack of sufficient personnel with appropriate knowledge in U.S. GAAP and lack of sufficient analysis and documentation of the application of U.S. GAAP to transactions, including but not limited to equity transactions. Management plans to identify an appropriate service provider to eliminate this material weakness.
There have been no changes in our internal control over financial reporting during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
The controls and procedures for our disclosure as well as our internal controls over financial reporting are processes designed by, or under the supervision of, the chief executive and chief financial officers, and effected by the board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. We believe that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. However, our Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures and its internal controls and procedures are effective at providing that reasonable level of assurance.
Our management believes that upon significant future growth in the number of accounting transactions we process, additional review and enhancement of internal controls will be required. Our management is planning to assign additional staff resources to assist with support for growth in the internal controls area when the increase in transaction velocity dictates this as a prudent step in order to maintain our effective level of internal controls.
Our external auditors, Semple & Cooper, LLP, have not issued an attestation report on management’s assessment of the Company’s internal control over financial reporting, as it is not yet required since the Company has less than $75 million in “public float.”
There are no material legal proceedings pending for the Registrant at March 31, 2006.
All equity securities issued by Registrant during the quarter ended March 31, 2006 were registered under the Act with the SEC or disclosed in a previous filing with the SEC.
Not applicable.
Not applicable.
Exhibit Number | Description | |
4.1(a) | 2006 Executive Stock Option Plan | |
4.1(b) | Form of Stock Option Agreement Under 2006 Executive Stock Option Plan | |
4.2(a) | 2006 Employee Stock Option Plan | |
4.2(b) | Form of Stock Option Agreement Under 2006 Employee Stock Option Plan | |
31.1 | Certificate of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
31.2 | Certificate of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
32.1 | Certificate of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
32.2 | Certificate of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
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 authorized.
CORONADO INDUSTRIES, INC. | ||
| | |
Date: May 19, 2006 | By: | /s/ G. Richard Smith |
G. Richard Smith Chairman (Chief Executive Officer) |
| | |
Date: May 19, 2006 | By: | /s/ Gary R. Smith |
Gary R. Smith Treasurer (Chief Accounting Officer) |
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