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 June 30, 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 July 31,
2008 was 219,083,497.
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION 2
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 2
Consolidated Balance Sheets (unaudited) 2
Consolidated Statements of Operations (unaudited) 3
Consolidated Statement of Shareholders Equity/(Deficit)
for the Six Months Ended June 30, 2008 4
Consolidated Statements of Cash Flows (unaudited) 5
Notes to the Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 13
ITEM 4T. CONTROLS AND PROCEDURES 13
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 1A. RISK FACTORS 14
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS 14
SIGNATURES 14
-1-
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEETS
(Unaudited)
June 30, 2008 December 31, 2007
--------------------- ----------------------
ASSETS
CURRENT ASSETS
Cash $ 19,480 $ 3,258
Other receivable - 300,000
Inventory 71,428 39,103
Prepaid expenses 2,329 5,164
--------------------- ----------------------
TOTAL CURRENT ASSETS 93,237 347,525
--------------------- ----------------------
PROPERTY & EQUIPMENT, at cost
Machinery & equipment 13,080 13,080
Computer equipment 50,351 50,351
Furniture & fixture 4,670 4,670
--------------------- ----------------------
68,101 68,101
Less accumulated depreciation (53,881) (49,186)
--------------------- ----------------------
NET PROPERTY AND EQUIPMENT 14,220 18,915
--------------------- ----------------------
OTHER ASSETS
Purchase option, Regents 5,000 5,000
License fees, net of amortization of $29,124 aand 7,615, respectively 45,118 66,627
Goodwill, WDTI - 1,715,000
Patents 656 -
Security Deposit 2,975 2,975
--------------------- ----------------------
TOTAL OTHER ASSETS 53,749 1,789,602
--------------------- ----------------------
TOTAL ASSETS $ 161,206 $ 2,156,042
===================== ======================
LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 45,290 $ 42,507
Accrued expenses 333,991 244,662
Unearned revenues 40,000 30,000
Note payable, investor 65,000 65,000
Notes payable, shareholder 398,342 384,342
--------------------- ----------------------
TOTAL CURRENT LIABILITIES 882,623 766,511
--------------------- ----------------------
LONG TERM LIABILITIES
Unearned revenues 18,817 48,817
Notes payable, shareholder 436,000 436,000
--------------------- ----------------------
TOTAL LONG TERM LIABILITIES 454,817 484,817
--------------------- ----------------------
TOTAL LIABILITIES 1,337,440 1,251,328
--------------------- ----------------------
SHAREHOLDERS' EQUITY/(DEFICIT)
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 5,225,256 5,212,163
Deficit accumulated during the development stage (6,620,206) (4,526,099)
--------------------- ----------------------
TOTAL SHAREHOLDERS' EQUITY/(DEFICIT) (1,176,234) 904,714
--------------------- ----------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY/(DEFICIT) $ 161,206 $ 2,156,042
===================== ======================
The accompanying notes are an integral part of these consolidated financial statements.
-2-
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended Six Months Ended From Inception
-------------------------- --------------------------- January 30,2002
through
6/30/2008 6/30/2007 6/30/2008 6/30/2007 June 30, 2008
------------- ------------ ------------- ------------- -----------------
REVENUE $ 10,000 $ (2,238) $ 20,000 $ 21,730 $ 1,044,579
COST OF SERVICES - (1,991) 21 30,930 453,095
------------- ------------ ------------- ------------- -----------------
GROSS PROFIT (DEFICIT) 10,000 (247) 19,979 (9,200) 591,484
OPERATING EXPENSES
Selling and marketing expenses 47,811 64,571 90,812 163,997 1,243,314
General and administrative expenses 88,470 88,050 178,785 175,623 2,421,982
Research and development 41,325 102,962 66,566 168,234 1,385,759
Depreciation and amortization expense 13,107 2,971 26,204 5,942 94,490
------------- ------------ ------------- ------------- -----------------
TOTAL OPERATING EXPENSES 190,713 258,554 362,367 513,796 5,145,545
------------- ------------ ------------- ------------- -----------------
LOSS FROM OPERATIONS (180,713) (258,801) (342,388) (522,996) (4,554,061)
OTHER INCOME/(EXPENSE) BEFORE PROVISION FOR INCOME TAXES
Interest Income 3 3 6 6 10,244
Discounts earned - 2 - 2 2
Interest Expense (13,830) (12,680) (27,402) (23,281) (215,653)
Stock compensation expense (4,262) (4,261) (8,523) (8,476) (65,470)
Impairment loss (1,715,000) - (1,715,000) - (1,715,000)
Loss on Investment - - - - (74,468)
Gain/(Loss) on Sale of Asset - - - - (963)
------------- ------------ ------------- ------------- -----------------
TOTAL OTHER INCOME/(EXPENSES) (1,733,089) (16,936) (1,750,919) (31,749) (2,061,308)
------------- ------------ ------------- ------------- -----------------
PROVISION FOR INCOME TAXES - - (800) (800) (4,837)
------------- ------------ ------------- ------------- -----------------
NET (LOSS) $ (1,913,802) $ (275,737) $ (2,094,107) $ (555,545) $ (6,620,206)
============= ============ ============= ============= =================
BASIC AND DILUTED LOSS PER SHARE $ (0.01) $ (0.00) $ (0.01) $ (0.00)
============= ============ ============= =============
WEIGHTED-AVERAGE COMMON SHARES OUTSTANDING
BASIC AND DILUTED 218,716,831 162,558,420 218,686,264 162,081,650
============= ============ ============= =============
The accompanying notes are an integral part of these consolidated financial statements.
-3-
MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY/(DEFICIT)
FOR THE SIX MONTHS ENDED JUNE 30, 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) - - 8,523 - 8,523
Net Loss for the six months ended June 30, 2008 (unaudited) - - - (2,094,107) (2,094,107)
----------- ------------- -------------- ------------ ------------
Balance at June 30, 2008 (unaudited) 218,716,831 $ 218,716 $ 5,225,256 (6,620,206) ($1,176,234)
=========== ============= ============== ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
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MACHINETALKER, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended From Inception
--------------------------------- January 30, 2002
through
6/30/2008 6/30/2007 June 30, 2008
---------------- ---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (2,094,107) $ (555,545) $ (6,620,206)
Adjustment to reconcile net loss to net cash
used in operating activities
Depreciation and amortization expense 26,204 5,942 94,490
Issuance of common shares and warrants for services 4,636 53,313 539,559
Issuance of common shares in conversion of debt - - 400,000
Write off of investment value - - 74,468
Stock compensation cost 8,523 8,476 65,470
Gain/(loss) on sale of asset - - (1,237)
Impairment loss 1,715,000 - 1,715,000
Disposal of asset - - 4,200
(Increase) Decrease in:
Inventory (32,325) (7,794) (71,428)
Employee advance - 227 -
Prepaid expenses 2,835 4,136 (2,329)
Deposits - - (2,975)
Other assets (656) - (656)
Increase (Decrease) in:
Accounts payable 2,783 (7,160) 45,290
Accrued expenses 89,329 86,998 333,991
Unearned revenue (20,000) (20,000) 58,817
---------------- ---------------- ------------------
NET CASH USED IN OPERATING ACTIVITIES (297,778) (431,407) (3,367,546)
---------------- ---------------- ------------------
NET CASH FLOWS USED IN INVESTING ACTIVITIES:
Purchase of property and equipment - - (68,654)
Sale of asset - - 1,963
Investment in companies - (2,468) (7,468)
----------------- ---------------- ------------------
NET CASH USED IN INVESTING ACTIVITIES - (2,468) (74,159)
----------------- ---------------- ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Loans from officers 59,000 251,342 1,079,342
Payments on loans from officers (45,000) - (45,000)
Proceeds from subsidiary 300,000 - 300,000
Proceeds from investor - - 110,000
Payments on notes payable - - (45,000)
Proceeds from issuance of common stock - 158,068 2,054,193
----------------- ---------------- ------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 314,000 409,410 3,453,535
----------------- ---------------- ------------------
NET INCREASE IN CASH 16,222 (24,465) 11,830
CASH, BEGINNING OF PERIOD 3,258 50,546 7,650
----------------- ---------------- ------------------
CASH, END OF PERIOD $ 19,480 $ 26,081 $ 19,480
================= ================ ==================
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid $ - $ - $ 133,948
================ ================ ==================
Income taxes $ 800 $ 800 $ 4,837
================= ================ ==================
SUPPLEMENTAL SCHEDULE OF NON-CASH TRANSACTIONS
During the six months ended June 30, 2008, the Company
expensed compensation cost of $8,523 related to the vesting
of employee stock options; issued 66,229 shares of common
stock for services at a fair value of $4,636; Loss on
impairment of goodwill in the amount of $1,715,000. During
the six months ended June 30, 2007, the Company expensed
compensation cost of $8,476 related to the vesting of
employee stock options; issued 38,260 shares of common stock
and granted 600,000 common stock purchase warrants for
services for a fair value of $53,313; issued 2,857,143
shares of common stock in conversion of $200,000 of related
party loans payable.
The accompanying notes are an integral part of these consolidated financial statements.
-5-
MACHINETALKER, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
JUNE 30, 2008
1. BASIS OF PRESENTATION
The accompanying unaudited 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
six months ended June 30, 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 10-KSB for the year
ended December 31, 2007.
GOING CONCERN
The accompanying 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 consolidated 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 June 30, 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
consolidated financial statements.
DEVELOPMENT STAGE ACTIVITIES AND OPERATIONS
The Company has been in its initial stages of formation and for the six
months ended June 30, 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 $58,817 at June 30, 2008. To date the
Company has had minimal revenue and is still in the development stage.
-6-
MACHINETALKER, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
JUNE 30, 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 six months ended
June 30, 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 condensed consolidated statement of operations during
the six months ended June 30, 2008, included compensation expense for
the stock-based payment awards granted prior to, but not yet vested, as
of June 30, 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 June
30, 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 six months ended June 30, 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 six months ended June 30, 2008 is
$8,523.
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 six months ended June 30,
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 six months ended June 30, 2007 condensed
consolidated financial statements have been reclassified to conform to
the current year presentation.
-7-
MACHINETALKER, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-UNAUDITED
JUNE 30, 2008
3. CAPITAL STOCK AND WARRANTS
During the six months ended June 30, 2008, the Company issued 66,229
shares of common stock for a fair value of $4,636 for services. During
the six months ended June 30, 2007, the Company through a private
placement issued 1,828,571 shares of common stock for cash of $128,000
at a price of $0.07; 31,818 shares of common stock were issued for cash
of $3,818, for warrants exercised at a price of $0.12 per share;
2,857,143 shares of common stock issued for the conversion of a note
payable at a price of $0.07 per share; 250,000 shares of common stock
issued for the exercise of employee stock options for a price of $0.025
per share; 400,000 shares of common stock issued for cash at a price of
$0.05 per share; 38,260 shares of common stock issued for services at a
fair value of $0.10 per share.
WARRANTS
During the six months ended June 30, 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 June 30, 2008, the Company had a total of
5,108,515 warrants to purchase 5,108,515 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 June 30, 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. IMPAIRMENT OF GOODWILL
During the six months ended June 30, 2008, the Company performed a
review of its goodwill. Certain events came to the Company's attention
that indicated that goodwill may have been impaired. The Company
evaluated those events, which included the expiration of the Company's
repurchase options for the shares issued in connection with the
acquisitions that resulted in the goodwill balance. Also, because of
the Company's failure to meet the projected cash flows associated with
the acquisitions, the Company determined that goodwill was impaired. As
a result of this evaluation, the Company recorded an impairment of
$1,715,000.
6. SUBSEQUENT EVENTS
On or about July 15, 2008, the Company issued 366,666 shares of common
stock for services at a fair value of $18,333.
-8-
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
In May 2008, the Company successfully interconnected its Talker(R)
product line to its new "GuardDog" product which uses Ultra-Wide Band ("UWB")
technology to detect any movement or motion in its vicinity. The combination of
Talkers(R) and GuardDog employs UWB radar-like signals to detect movement within
an area, either in the open space or inside of a closed chamber like that of a
shipping container. In addition, this new product can detect changes other than
movement, such as a break or hole being made in the side of a container. This
product is aimed at a unique method of protection for goods in transit or in
storage, and has been proposed as part of a package to several potential
customers.
Another recently released product, the CBM6, has been proposed for use
in monitoring the vibration in high speed rotating spindles and slower speed
rotating fans and motors in oil refineries for wireless data acquisition in
support of Condition-Based Maintenance ("CBM"). This product has been packaged
within explosion-proof housings for use in oil refineries and in less costly
polycarbonate enclosures for other harsh environments. The CBM6 has been
-9-
designed to gather data from high speed sources and sensors and process that
data at a remote site prior to sending it by wireless means to a central
computer facility.
We currently have four 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 are
negotiating with several Systems Integrators to utilize our products in their
respective fields of business. The Company does not currently have a general
liability plan in place, but plans to purchase a new policy if and when sales of
our products are made.
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
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
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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 JUNE 30, 2008 COMPARED TO THE QUARTER
ENDED JUNE 30, 2007
REVENUE
Total revenue increased by $12,238 or 546.83% to $10,000 for the three
months ended June 30, 2008 compared to the prior period. Total revenue decreased
by $1,730 or 7.96% to $20,000 for the six months ended June 30, 2008 compared to
the prior period. This decrease in revenue was a result of focusing on research
and development.
COST OF SALES
Cost of Sales ("COS") decreased by $1,991 or 100.0% to $0 for the three
months ended June 30, 2008 compared to the prior period. COS decreased by
$30,909 or 99.93% to $21 for the six months ended June 30, 2008 compared to the
prior period. This decrease in COS was a result of a decrease in raw materials
and labor.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative ("G&A") expenses decreased by $6,204 or
3.99%, to $149,388 for the three months ended June 30, 2008 compared to the
prior period. G&A expenses decreased by $49,761 or 14.40%, to $295,801 for the
six months ended June 30, 2008 compared to the prior period. 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 $61,637 or 59.86%,
to $41,325 for the three months ended June 30, 2008 compared to the prior
period. R&D costs decreased by $101,668 or 60.43%, to $66,566 for the six months
ended June 30, 2008 compared to the prior period. This decrease in R&D costs was
the result of purchasing wireless technology through equity financing.
NET LOSS
Net Loss increased by $1,638,065 or 594.07% to $1,913,802 for the three
months ended June 30, 2008, compared to the prior period. Net Loss increased by
$1,538,562 or 276.95% to $2,094,107 for the six months ended June 30, 2008,
compared to the prior period. This increase in Net Loss resulted mainly from
impairment of goodwill, and also from 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 June 30, 2008, we had working deficit of $789,386 as compared to
$418,986 as of December 31, 2007. This increase of $370,400 was due primarily to
use of funds for operational costs.
Cash flow used in operating activities was $297,778 for the six months
ended June 30, 2008, as compared to cash used of $431,407 for the prior period.
This decrease of $133,629 was primarily attributable to a decrease in research
and development, and general and administrative expenses.
Cash used by investing activities was $0 for the six months ended June
30, 2008, as compared to cash used of $2,468 for the prior period. The decrease
of cash used in investing activities was primarily due to no investing in a
subsidiary, or purchase of equipment.
Cash provided from financing activities during the six months ended
June 30, 2008 was $314,000 as compared to cash provided of $409,410 for the
prior period. The decrease of $95,410 was due to less funding received from an
officer.
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PLAN OF OPERATION AND FINANCING NEEDS
We have completed and released for production certain of our products
for the industrial market and for the security marketplace. We intend to
increase our marketing and sales staffing so that the 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, and will be demonstrating the CBM6 package in an
up-coming machine products show along with an organization that services high
speed spindles and also with a supplier of vibration analysis software. We
anticipate that this collaboration on the introduction of joint products along
with customer interest will result in follow-on business for the Company.
Management estimates that we will require additional cash resources during the
remainder of 2008 and into the first quarter of 2009. The Company released its
new business plan in May 2008 and continues to 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 June 30, 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 not effective as of June 30, 2008, due to a material weakness in
our methodology for evaluating potential impairment of goodwill. Our auditors
believe that our methodology for evaluating potential impairment of goodwill
could lead to a material misstatement of net income (loss). We intend to work
with our auditors in 2008 to address this material weakness.
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 June 30, 2008 that materially affected or are
reasonably likely to materially affect the Company's internal control over
financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 1A. RISK FACTORS.
Not Applicable.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
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.
MACHINETALKER, INC.
Dated: August 13, 2008 By: /s/Roland F. Bryan
-------------------------------------------
Roland F. Bryan, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Dated: August 13, 2008 By: /s/Roland F. Bryan
--------------------------------------------
Roland F. Bryan, Chief Financial Officer
(Principal Financial Officer)
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