UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarterly Period Ended March 31, 2008
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition period from _______________ to ______________
Commission File Number: 000-49805
MACHINETALKER, INC.
----------------------
(Name of registrant in its charter)
DELAWARE 01-05922991
-------- -----------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
513 DE LA VINA STREET, SANTA BARBARA, CALIFORNIA 93101
--------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Issuer's telephone Number: (805) 957-1680
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 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[__]
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [___] Accelerated filer [___]
Non-accelerated filer [___] Smaller reporting company [_X_]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes[__] No[_X_]
Indicate the number of shares outstanding of each of the issuer's
classes of common stock as of the latest practicable date.
The number of shares of registrant's common stock outstanding, as of
March 31, 2008 was 218,716,831.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION 3
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 3
Consolidated Balance Sheets at March 31, 2008
(unaudited) 3
Consolidated Statements of Operations for the
Three Months Ended March 31, 2008
and March 31, 2007 (unaudited) 4
Consolidated Statements of Shareholders
Equity for the Year Ended December 31, 2007
through the Three Months Ended March 31, 2008
(unaudited) 5
Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 2008
and March 31, 2007 (unaudited) 6
Notes to the Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 14
ITEM 4T. CONTROLS AND PROCEDURES 14
PART II - OTHER INFORMATION 14
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 1A. RISK FACTORS 14
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 15
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 15
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 15
ITEM 5. OTHER INFORMATION 15
ITEM 6. EXHIBITS 15
SIGNATURES 15
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
MARCH 31, 2008
(Unaudited)
March 31, 2008 December 31, 2007
--------------- -------------------
ASSETS
CURRENT ASSETS
Cash $ 48,893 $ 3,258
Other receivable - 300,000
Inventory 39,620 39,103
Prepaid expenses 51,291 5,164
--------------- -------------------
TOTAL CURRENT ASSETS 139,804 347,525
--------------- -------------------
PROPERTY & EQUIPMENT, at cost
Machinery & equipment 13,080 13,080
Computer equipment 50,351 50,351
Furniture & fixture 4,671 4,670
--------------- -------------------
68,102 68,101
Less accumulated depreciation (51,533) (49,186)
--------------- -------------------
NET PROPERTY AND EQUIPMENT 16,569 18,915
--------------- -------------------
OTHER ASSETS
Purchase option, Regents 5,000 5,000
License fees, net of amortization 55,876 66,627
Goodwill, WDTI 1,715,000 1,715,000
Patents 656 -
Security Deposit 2,975 2,975
--------------- -------------------
TOTAL OTHER ASSETS 1,779,507 1,789,602
--------------- -------------------
TOTAL ASSETS $ 1,935,880 $ 2,156,042
=============== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,939 $ 42,507
Accrued expenses 291,475 244,662
Unearned revenues 40,000 30,000
Note payable, investor 65,000 65,000
Notes payable, shareholder (note 7) 339,342 384,342
--------------- -------------------
TOTAL CURRENT LIABILITIES 737,756 766,511
--------------- -------------------
LONG TERM LIABILITIES
Unearned revenues 28,817 48,817
Notes payable, shareholder (note 7) 436,000 436,000
--------------- -------------------
TOTAL LONG TERM LIABILITIES 464,817 484,817
--------------- -------------------
TOTAL LIABILITIES 1,202,573 1,251,328
--------------- -------------------
SHAREHOLDERS' EQUITY
Common stock, $.001 par value;
500,000,000 authorized shares;
218,716,831 and 218,650,602 shares
issued and outstanding, respectively 218,716 218,650
Additional paid in capital 5,220,994 5,212,163
Deficit accumulated during the development stage (4,706,403) (4,526,099)
--------------- -------------------
TOTAL SHAREHOLDERS' EQUITY 733,307 904,714
--------------- -------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 1,935,880 $ 2,156,042
=============== ===================
The accompanying notes are an integral part of these consolidated financial statements
3
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
From Inception
Three Months Ended January 30,2002
--------------------------- through
3/31/2008 3/31/2007 March 31, 2008
------------- ------------- ------------------
REVENUE $ 10,000 $ 23,968 $ 1,034,579
COST OF SERVICES 21 32,921 432,095
------------- ------------- ------------------
GROSS PROFIT (DEFICIT) 9,979 (8,953) 602,484
OPERATING EXPENSES
General and administrative expenses 137,575 191,215 3,611,221
Research and development 25,241 65,272 1,344,434
Depreciation and amortization expense 13,097 2,971 81,383
------------- ------------- ------------------
TOTAL OPERATING EXPENSES 175,913 259,458 5,037,038
------------- ------------- ------------------
LOSS FROM OPERATIONS (165,934) (268,411) (4,434,554)
OTHER INCOME/(EXPENSE) BEFORE PROVISION FOR INCOME TAXES
Interest Income 3 3 10,243
Interest Expense (13,573) (10,601) (201,824)
Loss on Investment - - (74,468)
Gain/(Loss) on Sale of Asset - - (963)
------------- ------------- ------------------
TOTAL OTHER INCOME/(EXPENSES) (13,570) (10,598) (267,012)
------------- ------------- ------------------
PROVISION FOR INCOME TAXES (800) (800) (4,837)
------------- ------------- ------------------
NET (LOSS) $ (180,304) $ (279,809) $ (4,706,403)
============= ============= ==================
BASIC AND DILUTED LOSS PER SHARE $ (0.00) $ (0.00)
============= =============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 218,660,063 161,244,113
============= =============
The accompanying notes are an integral part of these consolidated financial statements
4
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 2008
Accumulated
Deficit During
Common stock Additional the
------------------------- Paid-in Development
Shares Amount Capital Stage Total
----------- ------------- -------------- ------------ ------------
Balance at December 31, 2007 218,650,602 $ 218,650 $ 5,212,163 $ (4,526,099) $ 904,714
Issuance of common stock in March 2008
(66,229 shares at $0.07 per share for services) (unaudited) 66,229 66 4,570 - 4,636
Stock compensation cost (unaudited) - - 4,261 - 4,261
Net Loss for the three months ended March 31, 2008 (unaudited) - - - (180,304) (180,304)
----------- ------------- -------------- ------------ ------------
Balance at March 31, 2008 (unaudited) 218,716,831 $ 218,716 $ 5,220,994 $ (4,706,403) $ 733,307
=========== ============= ============== ============ ============
The accompanying notes are an integral part of these consolidated financial statements
5
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
From Inception
Three Months Ended January 30, 2002
--------------------------------- through
3/31/2008 3/31/2007 March 31, 2008
-------------- --------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (180,304) $ (279,809) $ (4,706,403)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization expense 13,097 2,971 86,483
Issuance of common shares and warrants for services 4,636 49,487 539,559
Issuance of common shares in conversion of debt - - 400,000
Write off of investment value - - 74,468
Stock compensation cost 4,261 4,215 61,208
Gain/(loss) on sale of asset - - (1,237)
Disposal of asset - - 4,200
(Increase) Decrease in:
Accounts receivable - (13,968) -
Employee advances - 227 -
Inventory (517) (615) (39,620)
Prepaid expenses (46,127) 3,102 (51,291)
Deposits - - (2,975)
Other assets (656) - (656)
Increase (Decrease) in:
Accounts payable (40,568) (14,876) 1,939
Accrued expenses 46,813 45,626 291,475
Unearned revenue (10,000) (10,000) 68,817
-------------- --------------- -----------------
NET CASH USED IN OPERATING ACTIVITIES (209,365) (213,640) (3,274,033)
-------------- --------------- -----------------
Net CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment - - (73,754)
Sale of asset - - 1,963
Proceeds from subidiary purchase 300,000 - 300,000
Investment in companies - - (7,468)
--------------- --------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES 300,000 - 220,741
--------------- --------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Bank Overdraft - 18,820 -
Loans from officers - 51,342 1,020,342
Payments on loans from officers (45,000) - (45,000)
Proceeds from investor - 20,000 110,000
Payments on notes payable - - (45,000)
Proceeds from issuance of common stock - 75,818 2,054,193
-------------- --------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (45,000) 165,980 3,094,535
-------------- --------------- -----------------
NET INCREASE IN CASH 45,635 (47,660) 41,243
CASH, BEGINNING OF PERIOD 3,258 50,546 7,650
-------------- ---------------- -----------------
CASH, END OF PERIOD $ 48,893 $ 2,886 $ 48,893
============== =============== =================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ - $ - $ 133,948
============== =============== =================
Income taxes $ 800 $ 800 $ 4,837
============== =============== =================
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the three months ended March 31, 2008, the Company expensed
compensation cost of $4,261 related to the vesting of employee stock
options; issued 66,229 shares of common stock for services at a fair value
of $4,636. During the three months ended March 31, 2007, the Company
expensed compensation cost of $4,215 related to the vesting of employee
stock options; issued 600,000 shares of common stock for services at a fair
value of $49,487.
The accompanying notes are an integral part of these consolidated financial statements
6
MACHINETALKER, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2008
1. BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management,
all normal recurring adjustments considered necessary for a fair
presentation have been included. Operating results for the three months
ended March 31, 2008 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2008. For further information
refer to the consolidated financial statements and footnotes thereto
included in the Company's Form 10K-SB for the year ended December 31, 2007.
GOING CONCERN
The accompanying condensed consolidated financial statements have been
prepared on a going concern basis of accounting, which contemplates
continuity of operations, realization of assets and liabilities and
commitments in the normal course of business. The accompanying financial
statements do not reflect any adjustments that might result if the Company
is unable to continue as a going concern. The Company does not generate
significant revenue, and has negative cash flows from operations, which
raise substantial doubt about the Company's ability to continue as a going
concern. The ability of the Company to continue as a going concern and
appropriateness of using the going concern basis is dependent upon, among
other things, an additional cash infusion. The Company has obtained funds
from its shareholders since its inception through March 31, 2008. It is
Management's plan to generate additional working capital from investors,
and then continue to pursue its business plan and purposes..
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of MachineTalker, Inc. is
presented to assist in understanding the Company's consolidated financial
statements. The consolidated financial statements and notes are
representations of the Company's management, which is responsible for their
integrity and objectivity. These accounting policies conform to accounting
principles generally accepted in the United States of America and have been
consistently applied in the preparation of the financial statements.
DEVELOPMENT STAGE ACTIVITIES AND OPERATIONS
The Company has been in its initial stages of formation and for the three
months ended March 31, 2008, had insignificant revenues. FASB #7 defines a
development stage activity as one in which all efforts are devoted
substantially to establishing a new business and even if planned principal
operations have commenced, revenues are insignificant.
REVENUE RECOGNITION
The Company recognizes revenue when services are performed, and at the time
of shipment of products, provided that evidence of an arrangement exists,
title and risk of loss have passed to the customer, fees are fixed or
determinable, and collection of the related receivable is reasonably
assured. The Company also granted an exclusive license limited to a
specific application for the use of the technology required to operate the
Company's product. The revenue related to this transaction is recognized
over the contract period, and the related deferred revenue amounted to
$68,817 at March 31, 2008. To date the Company has had minimal revenue and
is still in the development stage.
7
MACHINETALKER, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2008
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
STOCK-BASED COMPENSATION
On January 1, 2006, the Company adopted Financial Accounting Standards No.
123 (revised 2004), "Share-Based Payment" (FAS) No. 123R, that addresses
the accounting for share-based payment transactions in which an enterprise
receives employee services in exchange for either equity instruments of the
enterprise or liabilities that are based on the fair value of the
enterprise's equity instruments or that may be settled by the issuance of
such equity instruments. The statement eliminates the ability to account
for share-based compensation transactions, as we formerly did, using the
intrinsic value method as prescribed by Accounting Principles Board, or
APB, Opinion No. 25, "Accounting for Stock Issued to Employees," and
generally requires that such transactions be accounted for using a
fair-value-based method and recognized as expenses in our statement of
income. The adoption of (FAS) No. 123R by the Company had no material
impact on the statement of income.
The Company adopted FAS 123R using the modified prospective method which
requires the application of the accounting standard as of January 1, 2006.
Our financial statements as of and for the three months ended March 31,
2008 reflect the impact of adopting FAS 123R. In accordance with the
modified prospective method, the financial statements for prior periods
have not been restated to reflect, and do not include, the impact of FAS
123R.
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 three months ended March
31, 2008, included compensation expense for the stock-based payment awards
granted prior to, but not yet vested, as of March 31, 2008 based on the
grant date fair value estimated in accordance with the pro forma provisions
of FAS 148, and compensation expense for the stock-based payment awards
granted subsequent to March 31, 2008, based on the grant date fair value
estimated in accordance with FAS 123R. As stock-based compensation expense
recognized in the statement of income for the three months ended March 31,
2008 is based on awards ultimately expected to vest, it has been reduced
for estimated forfeitures, FAS 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. In the pro forma
information required under FAS 148 for the periods prior to the year ended
December 31, 2007, we accounted for forfeitures as they occurred. The
stock-based compensation expense recognized in the consolidated statement
of operations during the three months ended March 31, 2008 is $4,261.
LOSS PER SHARE CALCULATIONS
The Company adopted Statement of Financial Standards ("SFAS") No. 128 for
the calculation of "Loss per Share". SFAS No. 128 dictates the calculation
of basic earnings per share and diluted earnings per share. Basic earnings
per share is computed by dividing income available to common shareholders
by the weighted-average number of common shares available. Diluted earnings
per share is computed similar to basic earnings per share except that the
denominator is increased to include the number of additional common shares
that would have been outstanding if the potential common shares had been
issued and if the additional common shares were dilutive. The Company's
diluted loss per share is the same as the basic loss per share for the
three months ended March 31, 2008 as the inclusion of any potential shares
would have had an anti-dilutive effect due to the Company generating a
loss. The weighted average number of shares used for the calculation of the
loss per share considers the stock split as if it had occurred on January
1, 2003.
RECLASSIFICATION
Certain items included in the three months ended March 31, 2007
consolidated financial statements have been reclassified to conform to the
current year presentation.
8
MACHINETALKER, INC. AND SUBSIDIARY
(A Development Stage Company)
Notes to Consolidated Financial Statements
March 31, 2008
3. CAPITAL STOCK AND WARRANTS
During the three months ended March 31, 2008, the Company issued 66,229
shares of common stock for a fair value of $4,636 for services. During the
three months ended March 31, 2007, the Company through a private placement
issued 1,028,571 shares of common stock for cash of $72,000 at a price of
$0.07; through the exercise of warrants issued 31,818 shares of common
stock for cash of $3,818 at a price of $0.12 per share.
WARRANTS
During the three months ended March 31, 2007, the Company issued 600,000
warrants for services with a fair value of $49,487 determined using the
Black Scholes pricing model; 31,818 of these warrants were exercised at a
price of $0.12. At March 31, 2008, the Company had a total of 4,332,000
warrants to purchase 4,332,000 shares of common stock outstanding.
4. INCOME TAXES
The Company files income tax returns in the U.S. Federal jurisdiction, and
the state of California. With few exceptions, the Company is no longer
subject to U.S. federal, state and local, or non-U.S. income tax
examinations by tax authorities for years before 2004.
The Company adopted the provisions of FASB Interpretation No. 48,
Accounting for Uncertainty in Income Taxes, on January 1, 2007. Deferred
income taxes have been provided by temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes
and the amounts used for tax purposes. To the extent allowed by GAAP, we
provide valuation allowances against the deferred tax assets for amounts
when the realization is uncertain.
Included in the balance at March 31, 2008, are no tax positions for which
the ultimate deductibility is highly certain but for which there is
uncertainty about the timing of such deductibility.
The Company's policy is to recognize interest accrued related to
unrecognized tax benefits in interest expense and penalties in operating
expenses.
5. SUBSEQENT EVENTS
On or about May 9, 2008, the Company commenced a private placement of up to
twenty million (20,000,000) shares of its common stock (the "Shares") at a
price of five cents ($0.05) per Share. The private placement is being made
in reliance upon an exemption from registration under Rule 506 of
Regulation D promulgated under Section 4(2) of the Securities Act of 1933,
as amended.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
CAUTIONARY STATEMENTS
This Form 10-Q contains financial projections and other
"forward-looking statements," as that term is used in federal securities laws,
about MachineTalker, Inc.'s ("we," "us," or the "Company") financial condition,
results of operations and business. These statements include, among others:
statements concerning the potential for revenues and expenses and other matters
that are not historical facts. These statements may be made expressly in this
Form 10-Q. You can find many of these statements by looking for words such as
"believes," "expects," "anticipates," "estimates," or similar expressions used
in this Form 10-Q. These forward-looking statements are subject to numerous
assumptions, risks and uncertainties that may cause the Company's actual results
to be materially different from any future results expressed or implied by the
Company in those statements. The most important facts that could prevent the
Company from achieving its stated goals include, but are not limited to, the
following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company to earn revenues or profits;
(d) inadequate capital and barriers to raising the additional capital
or to obtaining the financing needed to implement its business
plans;
(e) inadequate capital to continue business;
(f) changes in demand for the Company's products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside
parties; and
(i) insufficient revenues to cover operating costs.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. The Company cautions you not to place undue reliance
on the statements, which speak only as of the date of this Form 10-Q. The
cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that the Company or persons acting on its behalf may issue.
The Company does not undertake any obligation to review or confirm
analysts' expectations or estimates or to release publicly any revisions to any
forward-looking statements to reflect events or circumstances after the date of
this Form 10-Q or to reflect the occurrence of unanticipated events.
The following discussion should be read in conjunction with our
condensed financial statements and notes to those statements. In addition to
historical information, the following discussion and other parts of this
quarterly report contain forward-looking information that involves risks and
uncertainties.
OVERVIEW
The acquisition by the Company in June 2007 of 100% of Wideband
Detection Technologies, Inc. ("WDT") provided the Company with a new product
which the Company calls the "GuardDog." GuardDog employs Ultra-Wide Band ("UWB")
radar-like signals to detect movement within the area, either in the open space
or inside of a closed chamber like that of a shipping container. In addition, it
can detect changes other than movement, such as a break or hole being made in
the side of a container. The Company has taken delivery of the first units and
they have been connected to MachineTalkers in order to create a composite
system. This new combined product is aimed at a unique method of protection for
goods in transit or in storage, and is now in the testing phase, to be
introduced in the next six months for demonstration to potential customers.
The second product, now in demonstration, is the CBM6 which supports
wireless process control applications. It has been packaged within
explosion-proof housings for use in oil refineries and harsh environments. The
CBM6 has been designed to gather data from high speed sources and sensors and
10
process that data at a remote site prior to sending it by wireless means to a
central computer facility. The Company anticipates that the CBM6 will be used
for Condition-Based Maintenance ("CBM") operation gathering data from vibration
sensors. The Company is currently bidding this new product into several
applications.
We currently have six full time employees that are technical
contributors to product development with our Chief Scientist providing a
marketing presence by presenting seminars at trade shows and by being a
contributing member of wireless standards committees. This work helps to address
the wireless process control aspects of our product line. We have also minimized
the use of administration personnel in favor of technical staff concerned with
the application of our products to security and industrial customers. We also
continue to rely upon OEMs and Systems Integrators that are not employees as
marketing representatives.
APPLICATION OF CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which 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 judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosures of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including those
related to impairment of property, plant and equipment, intangible assets,
deferred tax assets and fair value computation using the Black Scholes option
pricing model. We base our estimates on historical experience and on various
other assumptions, such as the trading value of our common stock and estimated
future undiscounted cash flows, that we believe to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying value of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions; however, we believe that our estimates, including
those for the above-described items, are reasonable.
USE OF ESTIMATES
In accordance with accounting principles generally accepted in the
United States, management utilizes estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements as well as the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates. These estimates and assumptions
relate to recording net revenue, collectibility of accounts receivable, useful
lives and impairment of tangible and intangible assets, accruals, income taxes,
inventory realization, stock-based compensation expense and other factors.
Management believes it has exercised reasonable judgment in deriving these
estimates. Consequently, a change in conditions could affect these estimates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Our cash, cash equivalents, investments, accounts receivable and
accounts payable are stated at cost which approximates fair value due to the
short-term nature of these instruments.
In December 2004, the FASB issued Statement of Financial Accounting
Standards No. 123R, Share-based Payment. SFAS 123R revises SFAS 123 and
supersedes APB 25. SFAS 123R will be effective for the year ending December 31,
2006, and applies to transactions in which an entity exchanges its equity
instruments for goods or services and also applies to liabilities an entity may
incur for goods or services that are to follow a fair value of those equity
instruments. Under SFAS 123R, we will be required to follow a fair value
approach using an option-pricing model, such as the Black Scholes option
valuation model, at the date of a stock option grant. The deferred compensation
calculated under the fair value method would then be amortized over the
respective vesting period of the stock option. The adoption of SFAS 123R will
not have a material impact on our results of operations.
REVENUE RECOGNITION
We recognize revenue in accordance with the Securities and Exchange
Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition in
Financial Statements" ("SAB 104"). We recognize revenue upon delivery, provided
that evidence of an arrangement exists, title, and risk of loss have passed to
the customer, fees are fixed or determinable, and collection of the related
11
receivable is reasonably assured. We record revenue net of estimated product
returns, which is based upon our return policy, sales agreements, management
estimates of potential future product returns related to current period revenue,
current economic trends, changes in customer composition and historical
experience. We accrue for warranty costs, sales returns, and other allowances
based on our experience which tells us we have less than $25,000 per year in
warranty returns and allowances. Generally, we extend credit to our customers
and do not require collateral. We perform ongoing credit evaluations of our
customers and historic credit losses have been within our expectations. We do
not ship a product until we have either a purchase agreement or rental agreement
signed by the customer with a payment arrangement. This is a critical policy,
because we want our accounting to show only sales which are "final" with a
payment arrangement. We do not make consignment sales, nor inventory sales
subject to a "buy back" or return arrangement from customers. Accordingly,
original equipment manufacturers do not presently have a right to return unsold
products to the Company.
We also grant exclusive licenses for the use of the technology required
to operate our products. We recognize revenue from software licensing
arrangements under SOP 97-2 "Software Revenue Recognition," as amended by
SOP-98-9, Modification of SOP 97-2, "Software Revenue Recognition with Respect
to Certain Transactions." For those contracts that either do not contain a
services component or that have services which are not essential to the
functionality of any other element of the contract, software license revenue is
recognized over the contract period.
PROVISION FOR SALES RETURNS, ALLOWANCES AND BAD DEBTS
We maintain a provision for sales allowances, returns and bad debts.
Sales returns and allowances result from equipment damaged in delivery or
customer dissatisfaction, as provided by agreement. The provision is provided
for by reducing gross revenue by a portion of the amount invoiced during the
relevant period. The amount of the reduction is estimated based on historical
experience.
RESERVE FOR OBSOLETE/EXCESS INVENTORY
Inventories are stated at the lower of cost or market. We regularly
review our inventories and, when required, will record a provision for excess
and obsolete inventory based on factors that may impact the realizable value of
our inventory including, but not limited to, technological changes, market
demand, regulatory requirements and significant changes in our cost structure.
If ultimate usage varies significantly from expected usage, or other factors
arise that are significantly different than those anticipated by management,
inventory write-downs or increases in reserves may be required.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board issued two
FASB Staff Positions - FSP FAS 109-1, Application of FASB Statement 109
"Accounting for Income Taxes" to the Tax Deduction on Qualified Production
Activities Provided by the American Jobs Creation Act of 2004, and FSP FAS 109-2
Accounting and Disclosure Guidance for the Foreign Earnings Repatriation
Provision within the American Jobs Creation Act of 2004. Neither of these
affected us as it does not participate in the related activities.
In May 2005, the FASB issued FASB Statement No. 154, "Accounting
Changes and Error Corrections." This new standard replaces APB Opinion No. 20,
"Accounting Changes, and FASB Statement No. 3, Reporting Accounting Changes in
Interim Financial Statements," and represents another step in the FASB's goal to
converge its standards with those issued by the IASB. Among other changes,
Statement 154 requires that a voluntary change in accounting principle be
applied retrospectively with all prior period financial statements presented on
the new accounting principle, unless it is impracticable to do so. Statement 154
also provides that (1) a change in method of depreciating or amortizing a
long-lived non-financial asset be accounted for as a change in estimate
(prospectively) that was effected by a change in accounting principle, and (2)
correction of errors in previously issued financial statements should be termed
a "restatement." The new standard is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005.
Early adoption of this standard is permitted for accounting changes and
correction of errors made in fiscal years beginning after June 1, 2005. We have
evaluated the impact of the adoption of Statement 154 and do not believe the
impact will be significant to our overall results of operations or financial
position.
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RESULTS OF OPERATIONS - QUARTER ENDED MARCH 31, 2008 COMPARED TO THE QUARTER
ENDED MARCH 31, 2007
REVENUE
Total revenue decreased by $13,968 or 58.28% to $10,000 for the three
months ended March 31, 2008 compared to the period ended March 31, 2007. This
decrease in revenue was a result of focusing on research and development.
COST OF SALES
Cost of Sales ("COS") decreased by $32,900 or 99.94% to $21 for the
three months ended March 31, 2008 compared to the period ended March 31, 2007.
This decrease in COS was a result of a decrease in sales.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses decreased by $53,640 or
28.05%, to $137,575 for the three months ended March 31, 2008 compared to the
period ended March 31, 2007. This decrease in G&A expenses was the result of a
decrease in professional fees, salaries and marketing services.
RESEARCH AND DEVELOPMENT
Research and Development ("R&D") costs decreased by $40,031 or 61.33%,
to $25,241 for the three months ended March 31, 2008 compared to the period
Ended March 31, 2007. This decrease in R&D costs was the result of purchasing
wireless technology through equity financing.
NET LOSS
Net Loss decreased by $99,505 or 35.56% to $180,304 for the three
months ended March 31, 2008, compared to the period ended March 31, 2007. This
decrease in Net Loss was the result of a decrease in operational costs.
Currently operating costs exceed revenue because sales are not yet significant.
We cannot assure when or if revenue will exceed operating costs.
LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2008, we had working deficit of $597,952 as compared to
$447,481 for the period ended March 31, 2007. This increase of $150,471 was due
primarily to use of funds for operational costs.
Cash flow used in operating activities was $209,365 for the three
months ended March 31, 2008, as compared to cash used of $213,640 for the period
ended March 31, 2007. This decrease of $4,275 was primarily attributable to a
decrease in research and development, and general and administrative expenses.
Cash used by investing activities was $0 for the three months ended
March 31, 2008 and 2007 respectively. The decrease of cash used in investing
activities was primarily due to sufficient equipment for operations.
Cash provided from financing activities during the three months ended
March 31, 2008 was $255,000 as compared to cash provided of $165,980 for the
period ended March 31, 2007. The increase of $89,020 was due to equity financing
to purchase a subsidiary.
PLAN OF OPERATION AND FINANCING NEEDS
We have completed product development for the industrial market and are
nearing completion of a new UWB intrusion detector for the security marketplace.
We anticipate that the security product will be released for production in
approximately six months. We intend to increase our marketing and sales staffing
so that introduction of our completed products to customers will benefit from
concentration on sales. We are currently in discussions with several suppliers
of complementary products, both hardware and software. We anticipate that one or
more of these discussions will result in collaboration on the introduction of
joint products and that the Company will also be able to sell its products by
way of these associations to a "partner's" customers. Management estimates that
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we will require additional cash resources during the remainder of 2008 and into
the first quarter of 2009. The Company plans to release its new business plan
prior to June 2008 and seek investment from qualified investors. If we are
unable to obtain sufficient funds during the next twelve months, we may be
forced to reduce the size of our organization, which could have a material
adverse impact on, or cause us to curtail and/or cease, the development of our
products.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off balance sheet arrangements that are reasonably
likely to have a current or future effect on our financial condition, revenues,
results of operations, liquidity or capital expenditures.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not Applicable.
ITEM 4T. CONTROLS AND PROCEDURES.
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures that are designed to
ensure that information required to be disclosed by the Company is recorded,
processed, summarized, and reported within the time periods specified in the
rules and forms of the Securities and Exchange Commission.
Our management, under the direction of our Chief Executive Officer and
Principal Financial Officer, has evaluated the effectiveness of the design and
operation of our disclosure controls and procedures (as such terms are defined
in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of March 31, 2008.
As part of such evaluation, management considered the matters discussed below
relating to internal control over financial reporting. Based on this evaluation
our management, including the Company's Chief Executive Officer and Principal
Financial Officer, has concluded that the Company's disclosure controls and
procedures were effective as of March 31, 2008.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's Chief Executive Officer and Principal Financial Officer,
is responsible for establishing and maintaining adequate internal control over
financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our
internal control over financial reporting is a process designed to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes of accounting
principles generally accepted in the United States. Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Therefore, even those systems determined to be effective can
provide only reasonable assurance of achieving their control objectives.
CHANGES IN INTERNAL CONTROLS OVER FINANCIAL REPORTING
There were no changes in the Company's internal control over financial
reporting identified in connection with the evaluation of it that occurred
during the quarter ended March 31, 2008 that materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Not Applicable.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
During the three months ended March 31, 2008, the Company issued 66,229
shares of common stock to one consultant for services rendered to the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
EXHIBIT DESCRIPTION
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on its behalf
by the undersigned thereunto duly authorized.
MACHINETALER, INC.
Dated: May 20, 2008 By: /s/Roland F. Bryan
--------------------------------------------
Roland F. Bryan, Chairman of the Board
and Chief Executive Officer (Principal
Executive Officer)
Dated: May 20, 2008 By: /s/Roland F. Bryan
--------------------------------------------
Roland F. Bryan, Chief Financial Officer
(Principal Financial Officer)
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