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 September 30, 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. 246,882,243 shares as of November 10, 2006
Transitional Small Business Disclosure Format (check one): Yes o No ý
Form 10-QSB
For the Quarterly Period Ended September 30, 2006
Table of Contents
Item 1. Financial Statements
CONSOLIDATED BALANCE SHEETS | |||||||
As of September 30, 2006 (Unaudited) and December 31, 2005 | |||||||
ASSETS | |||||||
(Unaudited) | |||||||
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
CURRENT ASSETS | |||||||
Cash & Cash Equivalents | $ | 6,224 | $ | 12,340 | |||
Accounts Receivable | 15,833 | 14,015 | |||||
Inventory | 14,218 | 24,289 | |||||
Employee Advances | 4,217 | – | |||||
Prepaid Expenses | 28,616 | 14,078 | |||||
TOTAL CURRENT ASSETS | $ | 69,108 | $ | 64,722 | |||
Property and Equipment-Net | 6,600 | 8,121 | |||||
Deposits | 4,520 | 4,520 | |||||
TOTAL ASSETS | $ | 80,228 | $ | 77,363 | |||
The accompanying notes are an integral part of these financial statements
3
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
CONSOLIDATED BALANCE SHEETS | |||||||
As of September 30, 2006 (Unaudited) and December 31, 2005 | |||||||
(Continued) | |||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||
(Unaudited) | |||||||
September 30, | December 31, | ||||||
2006 | 2005 | ||||||
CURRENT LIABILITIES | |||||||
Notes Payable | $ | 50,000 | $ | 100,000 | |||
Notes Payable to Related Parties - Current Portion | 329,375 | 310,000 | |||||
Accounts Payable | 116,783 | 63,546 | |||||
Accrued Salaries | 343,758 | 470,500 | |||||
Accrued Interest | 4,242 | 7,631 | |||||
Accrued Taxes | 168,416 | 115,821 | |||||
TOTAL CURRENT LIABILITIES | $ | 1,012,574 | $ | 1,067,498 | |||
Commitments | – | – | |||||
STOCKHOLDERS’ EQUITY (DEFICIT) | |||||||
Preferred Stock - $0.0001 par value; 50,000,000 shares authorized; none issued or outstanding | – | – | |||||
Common Stock - $0.001 par value; 400,000,000 shares authorized; 171,232,979 and 27,879,563 shares issued and outstanding, September 30, 2006 and December 31, 2005, respectively | 171,233 | 27,880 | |||||
Additional Paid-In Capital | 18,456,431 | 15,189,716 | |||||
Accumulated Deficit | (19,560,010 | ) | (16,207,731 | ) | |||
TOTAL STOCKHOLDERS’ EQUITY (DEFICIT) | (932,346 | ) | (990,135 | ) | |||
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | $ | 80,228 | $ | 77,363 | |||
The accompanying notes are an integral part of these financial statements
4
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS | |||||||||||||
(Unaudited) | (Unaudited) | ||||||||||||
Nine Months Ended September 30, | Three Months Ended September 30, | ||||||||||||
2006 | 2005 | 2006 | 2005 | ||||||||||
REVENUE | |||||||||||||
Product Revenue | $ | 65,868 | $ | 88,330 | $ | 17,868 | $ | 17,550 | |||||
COST OF SALES | |||||||||||||
Cost of Product Revenues | 43,620 | 35,680 | 7,688 | 4,225 | |||||||||
GROSS PROFIT (LOSS) | 22,248 | 52,650 | 10,180 | 13,325 | |||||||||
General & Administrative Expenses | |||||||||||||
Salaries and wages | 739,095 | 655,657 | 245,372 | 230,674 | |||||||||
Salaries and option bonuses | |||||||||||||
–officers and directors | 1,417,500 | – | 252,000 | – | |||||||||
–consultants | 203,550 | – | – | – | |||||||||
–employees | 75,150 | – | – | – | |||||||||
Sales and marketing expense | 362,676 | 270,385 | 120,773 | 81,932 | |||||||||
Legal and professional fees | 213,383 | 169,256 | 74,618 | 39,417 | |||||||||
FDA expense | 102,556 | 82,350 | 16,860 | 55,700 | |||||||||
Rent expense | 40,680 | 45,616 | 13,560 | 9,040 | |||||||||
Miscellaneous expense | 155,617 | 208,980 | 47,764 | 43,414 | |||||||||
3,310,207 | 1,432,244 | 770,947 | 460,177 | ||||||||||
LOSS FROM OPERATIONS | (3,287,959 | ) | (1,379,594 | ) | (760,767 | ) | (446,852 | ) | |||||
OTHER INCOME (EXPENSE) | |||||||||||||
Interest Expense | (64,320 | ) | (53,867 | ) | (22,936 | ) | (17,402 | ) | |||||
(64,320 | ) | (53,867 | ) | (22,936 | ) | (17,402 | ) | ||||||
NET LOSS | $ | (3,352,279 | ) | $ | (1,433,461 | ) | $ | (783,703 | ) | $ | (464,254 | ) | |
BASIC AND DILUTED LOSS PER SHARE | $ | (0.04 | ) | $ | (0.07 | ) | $ | (0.01 | ) | $ | (0.02 | ) | |
BASIC AND DILUTED WEIGHTED AVERAGE SHARES OUTSTANDING | 62,399,252 | 19,362,426 | 93,051,833 | 21,628,649 | |||||||||
The accompanying notes are an integral part of these financial statements
5
UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||||||||||
For the Nine Months Ended September 30, 2006 | ||||||||||||||||
Additional | Retained | Stockholders’ | ||||||||||||||
Common Stock | Paid-In | Earnings | Equity | |||||||||||||
Shares | Par Value | Capital | (Deficit) | (Deficit) | ||||||||||||
Balance at December 31, 2005 | 27,879,563 | $ | 27,880 | $ | 15,189,716 | $ | (16,207,731 | ) | $ | (990,135 | ) | |||||
Stock and Options Issued for Services | 39,826,313 | 39,826 | 1,093,386 | – | 1,133,212 | |||||||||||
Stock and Options Issued for Bonuses | 31,050,000 | 31,050 | 1,948,650 | – | 1,979,700 | |||||||||||
Reverse Stock Split - Fractional Shares | 167 | – | – | – | – | |||||||||||
Stock Issued for Debt & Interest | 72,476,936 | 72,477 | 224,679 | – | 297,156 | |||||||||||
Net Loss for the Nine Months Ended September 30, 2006 | – | – | – | (3,352,279 | ) | (3,352,279 | ) | |||||||||
Balance at September 30, 2006 | 171,232,979 | $ | 171,233 | $ | 18,456,431 | $ | (19,560,010 | ) | $ | (932,346 | ) | |||||
The accompanying notes are an integral part of these financial statements
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
For the Nine Months Ended September 30, 2006 and 2005 | |||||||
(Unaudited) | |||||||
Nine Months Ended September 30, | |||||||
2006 | 2005 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: | |||||||
Net Loss | $ | (3,352,279 | ) | $ | (1,433,461 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation | 1,522 | 1,610 | |||||
Stock and options issued for salaries, consulting & interest | 732,000 | 452,204 | |||||
Common stock issued for services | 417,367 | 298,157 | |||||
Stock and options issued for bonuses | 1,979,700 | – | |||||
Changes in Assets and Liabilities: | |||||||
Inventory | 10,071 | (15,252 | ) | ||||
Prepaid expenses | (14,538 | ) | (2,139 | ) | |||
Employee advances | (4,217 | ) | – | ||||
Deferred compensation | – | 20,833 | |||||
Accounts receivable | (1,818 | ) | 23,721 | ||||
Accounts payable | 53,237 | (1,466 | ) | ||||
Accrued salaries | (126,742 | ) | 281,250 | ||||
Accrued interest | (3,389 | ) | 3,429 | ||||
Accrued taxes | 52,595 | 35,969 | |||||
NET CASH USED IN OPERATING ACTIVITIES | (256,491 | ) | (335,145 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Proceeds from borrowings | 311,200 | 322,000 | |||||
Repayment on notes payable, related party | (10,825 | ) | – | ||||
Repayment on notes payable | (50,000 | ) | – | ||||
Proceeds from exercise of stock options | – | 21,200 | |||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 250,375 | 343,200 | |||||
Net change in cash and cash equivalents | (6,116 | ) | 8,055 | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 12,340 | 58 | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 6,224 | $ | 8,113 |
The accompanying notes are an integral part of these financial statements
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
For the Nine Months Ended September 30, 2006 and 2005 | |||||||
(Continued) | |||||||
(Unaudited) | |||||||
Nine Months Ended September 30, | |||||||
2006 | 2005 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Interest Paid | $ | 44,847 | $ | 42,525 | |||
Non-Cash Transactions: | |||||||
Issuance of common stock for salaries | 715,845 | 444,594 | |||||
Issuance of common stock for services | 417,367 | 298,157 | |||||
Issuance of common stock for interest | 16,155 | 7,610 | |||||
Issuance of common stock for debt | 281,000 | 313,000 | |||||
Accrued officers’ salaries and taxes contributed to capital | – | 751,417 | |||||
Issuance of common stock and options for bonuses | 1,979,700 | – |
The accompanying notes are an integral part of these financial statements
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
For the Three Months Ended September 30, 2006 and 2005 | |||||||
(Unaudited) | |||||||
Three Months Ended September 30, | |||||||
2006 | 2005 | ||||||
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS | |||||||
CASH FLOW FROM OPERATING ACTIVITIES: | |||||||
Net Loss | $ | (783,703 | ) | $ | (464,254 | ) | |
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||
Depreciation | 502 | 528 | |||||
Stock and options issued for salaries, consulting & interest | 110,055 | 179,124 | |||||
Common stock issued for services | 192,865 | 97,763 | |||||
Stock and options issued for bonuses | 252,000 | – | |||||
Changes in Assets and Liabilities: | |||||||
Prepaid expenses | (20,590 | ) | (8,783 | ) | |||
Deposits | – | 4,520 | |||||
Inventory | 1,622 | (2,298 | ) | ||||
Employee advances | (4,217 | ) | – | ||||
Accounts receivable | 6,781 | 3,435 | |||||
Accounts payable | 46,326 | (15,971 | ) | ||||
Accrued salaries | 125,004 | 93,750 | |||||
Accrued interest | (11,224 | ) | (828 | ) | |||
Accrued taxes | 19,125 | 14,344 | |||||
NET CASH USED IN OPERATING ACTIVITIES | (65,454 | ) | (98,670 | ) | |||
CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||
Bank overdraft | – | (6,217 | ) | ||||
Proceeds from borrowings | 61,000 | 110,000 | |||||
Proceeds from exercise of stock options | – | 3,000 | |||||
Repayment on notes payable, related party | (2,000 | ) | – | ||||
NET CASH PROVIDED BY FINANCING ACTIVITIES | 59,000 | 106,783 | |||||
Net change in cash and cash equivalents | (6,454 | ) | 8,133 | ||||
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | 12,678 | – | |||||
CASH AND CASH EQUIVALENTS AT END OF PERIOD | $ | 6,224 | $ | 8,113 | |||
The accompanying notes are an integral part of these financial statements
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES | |||||||
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS | |||||||
For the Three Months Ended September 30, 2006 and 2005 | |||||||
(Continued) | |||||||
(Unaudited) | |||||||
Three Months Ended September 30, | |||||||
2006 | 2005 | ||||||
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION | |||||||
Interest Paid | $ | 15,500 | $ | 17,600 | |||
Non-Cash Transactions: | |||||||
Issuance of common stock for salaries | 93,900 | 177,568 | |||||
Issuance of common stock for services | 192,865 | 97,763 | |||||
Issuance of common stock for interest | 16,155 | 1,556 | |||||
Issuance of common stock for debt | 281,000 | 85,000 | |||||
Issuance of common stock and options for bonuses | 252,000 | – | |||||
The accompanying notes are an integral part of these 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 September 30, 2006 and the results of its operations, changes in stockholders’ deficit, and cash flows for the three months ended September 30, 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 results of operations for the nine months ended September 30, 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 $ (943,466) and a negative net worth of $ (932,346) at September 30, 2006.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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. If a favorable clinical study protocol were granted by the FDA, the Company anticipates it will be approximately 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 as of January 1, 2006.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 nine months ended September 30, 2006 as if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based compensation prior to January 1, 2006.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION (Continued)
Nine Months Ended | ||||
September 30, 2005 | ||||
Net Income / (Loss): | $ | (1,433,461 | ) | |
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 | $ | (233,000 | ) | |
Pro forma net loss | $ | (1,666,461 | ) | |
Loss per share: | ||||
As reported | $ | (0.07 | ) | |
Pro forma | $ | (0.09 | ) |
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the SEC issued SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements,” to address diversity in practice in quantifying financial statement misstatements. SAB No. 108 requires that the Company quantify misstatements based on their impact on each of its financial statements and related disclosures. SAB No. 108 is effective as of the end of the 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB No. 108. The Company does not expect SAB No. 108 will have a material effect on its consolidated financial statements.
In September 2006, the FASB issued SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106 and 132(R).” The statement requires an employer to recognize the over funded or under funded status of a defined benefit postretirement plan as an asset or liability in its statement of financial position and to recognize changes in that funded status in the year in which the changes occur through comprehensive income of a business entity or changes in unrestricted assets of a not-for-profit organization. SFAS No. 158 is effective for the beginning of an entity’s fiscal year that begins after December 15, 2006. The Company does not expect SFAS No. 158 will have a material effect on its consolidated financial statements.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” The statement standardizes the definition of fair value, establishes a framework for measuring in generally accepted accounting principles and sets forth the disclosures about fair value measurements. SFAS No. 157 is effective for the beginning of an entity’s fiscal year that begins after November 15, 2007. The Company does not expect SFAS No. 157 will have a material effect on its consolidated financial statements.
In July 2006, the FASB issued FASB Staff Position (FSP) FIN No. 13-2 “Accounting for a Change or Projected Change in the Timing of Cash Flows Relating to Income Taxes Generated by a Leveraged Lease Transaction,” that will become effective for fiscal years beginning after December 15, 2006. FSP FIN No. 13-2 addresses how a change in the timing of cash flows relating to income taxes generated by leveraged lease transaction affects the accounting by a lessor for that lease. The adoption of this FSP is not expected to have a material effect on the Company’s consolidated financial statements.
In June 2006, the FASB issued FASB Interpretation No. 48, “An Interpretation of FASB Statement No. 109,” which clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with FASB Statement No. 109, “Accounting for Income Taxes.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN No. 48 reflects the benefit recognition approach, where a tax benefit is recognized when it is “more likely than not” to be sustained based on the technical merits of the position. This Interpretation is effective for fiscal years beginning after December 15, 2006. The Company is evaluating the impact of FIN No. 48 on its consolidated financial statements.
In April 2006, the FASB issued FASB Staff Position (FSP) FIN No. 46(R)-6, “Determining the Variability to Be Considered in Applying FASB Interpretation No. 46(R),” that will become effective beginning the third quarter of 2006. FSP FIN No. 46(R)-6 clarifies that the variability to be considered in applying FASB Interpretation 46(R) shall be based on an analysis of the design of the variable interest entity. The adoption of this FSP did not have a material effect on the Company’s consolidated financial statements.
In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets,” which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This new Statement amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,” with respect to the accounting for separately recognized servicing assets and servicing liabilities. SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity’s fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Company does not expect SFAS No. 156 will have a material effect on its consolidated financial statements.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES (Continued)
RECENT ACCOUNTING PRONOUNCEMENTS (Continued)
The FASB has revised its guidance on SFAS No. 133 Implementation Issues as of March 2006. Several Implementation Issues were revised to reflect the issuance of SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments-an Amendment of FASB Statements No. 133 and 140,” in February 2006. SFAS No. 155 allows any hybrid financial instrument that contains an embedded derivative that otherwise would require bifurcation under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” to be carried at fair value in its entirety, with changes in fair value recognized in earnings. In addition, SFAS No. 155 requires that beneficial interests in securitized financial assets be analyzed to determine whether they are freestanding derivatives or contain an embedded derivative. SFAS No. 155 also eliminates a prior restriction on the types of passive derivatives that a qualifying special purpose entity is permitted to hold. SFAS No. 155 is applicable to new or modified financial instruments in fiscal years beginning after September 15, 2006, though the provisions related to fair value accounting for hybrid financial instruments can also be applied to existing instruments. The Company does not expect SFAS No. 155 will have a material effect on its consolidated financial statements.
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 September 30, 2006 and 2005 of 13,325,835 and 16,318,849, respectively, have been excluded from the calculation of basic net loss per common share as their effect is anti-dilutive (decreases the loss per share).
NOTE 3 - EQUITY
During August 2006, 72,476,936 shares of common stock were issued for the conversion of an aggregate of $297,156 of debt and interest.
During the nine months ended September 30, 2006, the Company approved the following stock option plans:
On July 20, 2006, the Board of Directors approved the 2006 Coronado Industries, Inc. Employee & Consultant Stock Option Plan. The Plan authorizes the Company to grant stock options to key employees of the Company. Under the aforementioned Plan, 1,500,000 shares of common stock were reserved for issuance.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - EQUITY (Continued)
A summary of the activity of the plan is as follows:
Weighted | Weighted | ||||||||||||
Average | Average Remaining | Aggregate | |||||||||||
Number of | Exercise | Contractual Life | Intrinsic | ||||||||||
Options | Price | (In Years) | Value | ||||||||||
Outstanding July 20, 2006 | – | $ | – | – | $ | – | |||||||
Granted | 1,500,000 | 0.024 | 9.8 | – | |||||||||
Exercised | – | ||||||||||||
Cancelled/Forfeited | – | ||||||||||||
Outstanding September 30, 2006 | 1,500,000 | $ | 0.024 | 9.8 | |||||||||
Exercisable September 30, 2006 | 1,500,000 | $ | 0.024 | 9.8 | $ | – |
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 the plan is as follows:
Weighted | Weighted | ||||||||||||
Average | Average Remaining | Aggregate | |||||||||||
Number of | Exercise | Contractual Life | Intrinsic | ||||||||||
Options | Price | (In Years) | Value | ||||||||||
Outstanding March 24, 2006 | – | $ | – | – | $ | – | |||||||
Granted | 60,000,000 | 0.053 | 9.5 | – | |||||||||
Exercised | – | ||||||||||||
Cancelled/Forfeited | (60,000,000 | ) | 0.053 | 9.5 | |||||||||
Outstanding September 30, 2006 | – | $ | – | – | |||||||||
Exercisable September 30, 2006 | – | $ | – | – | $ | – |
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - EQUITY (Continued)
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 the plan is as follows:
Weighted | Weighted | ||||||||||||
Average | Average Remaining | Aggregate | |||||||||||
Number of | Exercise | Contractual Life | Intrinsic | ||||||||||
Options | Price | (In Years) | Value | ||||||||||
Outstanding March 24, 2006 | – | $ | – | – | $ | – | |||||||
Granted | 9,600,000 | 0.053 | 9.5 | – | |||||||||
Exercised | – | ||||||||||||
Cancelled/Forfeited | – | ||||||||||||
Outstanding September 30, 2006 | 9,600,000 | $ | 0.053 | 9.5 | |||||||||
Exercisable September 30, 2006 | 9,600,000 | $ | 0.053 | 9.5 | $ | – |
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 four and one-half percent (4.5%) to five percent (5%), volatility of 133% to 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 September 30, 2006 approximated $0.02. No stock-based compensation was recorded in relation to the 1,500,000 options granted as the value was deminimus. 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 June 30, 2006, the Company entered into an agreement for a New York Company to act as a consultant in the field of mergers and acquisitions for the period of one year. Shares in the amount of 450,000 were issued upon signing and 150,000 shares were to be paid monthly for nine months. No additional shares have been issued through September 30, 2006.
CORONADO INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5 - RELATED PARTY TRANSACTIONS
During the nine months ended September 30, 2006, the Company entered into the following transactions with related parties:
· | During January 2006, the Company issued an aggregate of 20,833,334 shares of restricted common stock to three officers in conversion of accrued salaries outstanding in the aggregate amount of $187,500. |
· | During January 2006, the Company issued an aggregate of 31,500,000 shares of restricted common stock to three officers, employees and consultants as a bonus for services rendered in 2005. |
· | During March 2006,the Company issued an aggregate of 17,400,000 shares of restricted common stock to three officers, consultants, and employees. |
· | During July 2006, the Board of Directors approved the issuance of 3,500,000 restricted common stock shares as a stock bonus for three officers for obtaining the approval to sell the corporation’s products in Canada. |
· | During August 2006, the Company issued an aggregate of 72,476,936 shares of restricted common stock to three officers and three consultants in conversion of outstanding notes payable and accrued interest. |
· | During August 2006, the Board of Directors resolved to issue 58,943,414 shares of restricted common stock to two officers for accrued salary outstanding in the amount of $241,668. The shares will be issued after the Company has increased its authorized common stock shares. |
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 the 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.
Three Months Ending September 30, 2006
Operations
Registrant continued delivery of its PNT products to its European distributors in the third quarter of 2006. Total sales were $17,868, with a cost of goods sold of $7,688. Registrant’s gross margin on its products sold was approximately 57%, 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 September 30, 2006, Registrant experienced a net loss of $783,703, which was comprised primarily of its general and administrative expenses incurred at the corporate level of $770,947 and net interest expense of $22,936. 92.1% of Registrant’s third quarter 2006 corporate expenses consisted of salaries and wages of $245,372 (31.8%), stock option and bonus compensation of $252,000 (32.7%), professional expenses of $91,478 (11.9%) and selling and media promotion of $120,773 (15.7%). In comparison, during third quarter 2005 88.6% of Registrant’s corporate expense of $460,177 consisted of salaries and wages of $230,674 (50.1%), professional expenses of $95,177 (20.7%) and selling and media promotion of $81,932 (17.8%). The increase in salaries and wages during the 2006 quarter resulted from salary increases for non-management personnel. The increase in promotional expenses in 2006 resulted from increased foreign marketing and foreign public relations in 2006. The decrease in professional expenses in 2006 over 2005 was insubstantial. Over 70% of the corporate expenses in 2006 were paid with Registrant’s common stock in order to preserve Registrant’s cash resources. Registrant expects its management salaries to be stable in the last quarter 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, European contracts executed, increased sales, worldwide or U.S. distribution agreements executed, or medical journal publication. Registrant expects its professional and promotional expenses throughout the remainder of 2006 to be high as its European and other foreign marketing activities continue and new FDA approval efforts commence.
Liquidity and Capital Resources
Because of Registrant’s current inventory levels, Registrant requires only minimal capital to sustain its manufacturing of the patented equipment. 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 third quarter of 2006. During the third quarter of 2006 Registrant was required to borrow a total of $65,000 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 and in 2007; 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 July 1, 2006 through September 30, 2006, G. Richard Smith loaned the Registrant $30,000; Gary R. Smith had loaned Registrant $20,000; and Dr. John T. LiVecchi had loaned Registrant $5,000. On August 24, 2006 G. Richard Smith was repaid $99,000 of principal and $5,389 of interest by the issuance of 25,460,822 restricted common stock shares; Gary R. Smith was repaid $87,000 of principal and $3,999 of interest by the issuance of 22,194,783 restricted common stock shares; and John LiVecchi was repaid $87,000 of principal and $6,613 of interest by the issuance of 22,832,527 restricted common stock shares. At September 30, 2006 G. Richard Smith was owed a total of $21,775; Gary R. Smith was owed a total of $2,600; and Dr. John T. LiVecchi was owed a total of $5,000. These loan accrues interest at 15% per annum.
In 2003, G. Richard Smith loaned the Company $300,000 to repay a third party long-term loan. That loan bears interest at the rate of 16% per annum, is secured by the Registrant’s assets and the interest thereon in paid monthly.
21
Nine Months Ending September 30, 2006
Operations
Registrant continued delivery of its PNT products to its European distributors in the first three quarters of 2006. Total sales were $65,868, with a cost of goods sold of $43,620. Registrant’s gross margin on its products sold was approximately 34%, 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 nine months ending September 30, 2006, Registrant experienced a net loss of $3,352,279 which was comprised primarily of its general and administrative expenses incurred at the corporate level of $3,310,207 and net interest expense of $64,320. 94.0% of Registrant’s 2006 nine-month corporate expenses consisted of salaries and wages of $739,095 (22.3%), stock option and bonus compensation of $1,696,200 (51.2%), professional expenses of $315,939 (9.5%) and selling and media promotion of $362,676 (11.0%). In comparison, during the first nine months of 2005 82.2% of Registrant’s corporate expense of $1,432,244 consisted of salaries and wages of $655,657 (45.8%), professional expenses of $251,606 (17.6%) and selling and media promotion of $270,385 (18.9%). The increase in salaries and wages in 2006 over 2005 resulted from increased salaries for non-management personnel. The increase in professional expenses in 2006 over 2005 occurred as a result of increased FDA expenses earlier in 2006. The increase in selling and media promotion in 2006 over 2005 resulted from increased European and other foreign marketing activities in 2006.
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 September 30, 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 September 30, 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 September 30, 2006.
All equity securities issued by Registrant during the quarter ended September 30, 2006 were previously registered or reported on Form 8-K on July 27, 2006 and September 8, 2006.
On October 11, 2006, the holders of a majority of Registrant’s outstanding common stock approved the increase in Registrant’s authorized common stock shares to 400,000,000 and authorized preferred stock to 50,000,000. An information statement explaining this stock recapitalization was sent to shareholders in September 2006.
Not applicable.
Exhibit Number | Description | |
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: November 20, 2006 | By: | /s/ G. Richard Smith |
G. Richard Smith Chairman (Chief Executive Officer) |
| | |
Date: November 20, 2006 | By: | /s/ Gary R. Smith |
Gary R. Smith Treasurer (Chief Accounting Officer) |
25