UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
-----------
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended March 31, 2005
or
[_] Transition Report Pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
Commission file No. 0-29991
LUNA TECHNOLOGIES INTERNATIONAL, INC.
-------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 91-1987288
- --------------------------- -------------------------------
(State of incorporation) (I.R.S. Employer Identification
Number)
61 B Fawcett Road
Coquitlam, British Columbia, Canada V3K 6V2
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(address of principal executive offices) (Zip Code)
(604) 526-5890
--------------
(Registrant's telephone number, including area code)
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 [ ]
As of May 20, 2005 the Company had 10,089,648 shares of common stock issued and
outstanding.
Item 1. Financial Statements
- -----------------------------
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(Unaudited)
CONSOLIDATED BALANCE SHEETS
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
LUNA TECHNOLOGIES INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEETS
March 31, December 31,
2005 2004
======================================================================================================================
(Unaudited)
ASSETS
CURRENT ASSETS
Accounts receivable $ 74,945 $ 81,357
Prepaid expenses and other 8,358 6,027
Inventory 22,736 75,437
- ----------------------------------------------------------------------------------------------------------------------
106,039 162,821
FURNITURE AND EQUIPMENT, net of depreciation of $83,542 (2004 - $81,424) 13,487 15,605
- ----------------------------------------------------------------------------------------------------------------------
$ 119,526 $ 178,426
======================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
CURRENT LIABILITIES
Bank overdraft $ 2,422 $ 184
Accounts payable and accrued liabilities 262,986 265,505
Convertible debenture (Note 4) 46,776 56,797
Due to related parties (Note 3) 18,956 16,160
Current portion of notes payable (Note 3) 102,730 78,168
- ----------------------------------------------------------------------------------------------------------------------
433,870 416,814
NOTES PAYABLE (Note 3) 76,062 101,497
- ----------------------------------------------------------------------------------------------------------------------
509,932 518,311
- ----------------------------------------------------------------------------------------------------------------------
GOING CONCERN CONTINGENCY (Note 1)
STOCKHOLDERS' EQUITY (CAPITAL DEFICIENCY)
Capital stock (Note 5)
Common stock, $0.0001 par value, 30,000,000 shares authorized
10,009,648 (2004 - 9,664,648) shares issued and outstanding 1,001 966
Convertible preferred stock, $0.0001 par value, 5,000,000 shares authorized
NIL issued and outstanding - -
Additional paid-in capital 2,081,353 2,032,988
Warrants 137,000 124,000
Deficit (2,515,480) (2,406,065)
Accumulated other comprehensive loss (94,280) (91,774)
- ----------------------------------------------------------------------------------------------------------------------
(380,406) (339,885)
- ----------------------------------------------------------------------------------------------------------------------
$ 119,526 $ 178,426
======================================================================================================================
The accompanying notes are an integral part of these
interim consolidated financial statements
LUNA TECHNOLOGIES INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31,
2005 2004
================================================================================
SALES $ 174,453 $ 131,240
COST OF SALES 87,198 94,717
- --------------------------------------------------------------------------------
GROSS PROFIT 87,255 36,523
OTHER INCOME - 90,000
- --------------------------------------------------------------------------------
87,255 126,523
- --------------------------------------------------------------------------------
GENERAL AND ADMINISTRATIVE EXPENSES
Consulting 1,518 44,578
Consulting - stock based (Note 5) 6,400 42,500
Depreciation 2,118 2,973
Interest on convertible debenture 1,033 1,841
Management fees 46,453 37,563
Office and general 45,526 35,066
Professional fees 17,671 25,626
Rent 8,532 7,639
Research and development, net of recoveries 9,453 22,548
Wages and benefits 57,966 33,222
- --------------------------------------------------------------------------------
196,670 253,556
- --------------------------------------------------------------------------------
NET LOSS FOR THE PERIOD $ (109,415) $ (127,033)
================================================================================
BASIC NET LOSS PER SHARE $ (0.01) $ (0.02)
================================================================================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING 9,679,092 6,843,506
================================================================================
The accompanying notes are an integral part of these
interim consolidated financial statements
LUNA TECHNOLOGIES INTERNATIONAL, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31,
2005 2004
=========================================================================================
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss for the period $ (109,415) $ (127,033)
Adjustments to reconcile net loss to net cash from
operating activities:
- depreciation 2,118 2,973
- stock-based compensation 6,400 42,500
- accrued interest expense (22) (22)
- accounts receivable 6,412 (51,980)
- inventory 52,701 (4,571)
- prepaid expenses (2,331) (1,010)
- accounts payable and accrued liabilities (2,519) (29,426)
- -----------------------------------------------------------------------------------------
NET CASH USED IN OPERATING ACTIVITIES (46,656) (109,717)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets - (5,546)
- -----------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES - (5,546)
- -----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Bank overdraft 2,238 (11,252)
Issuance of common shares 55,000 102,000
Convertible debenture repayments (9,999) (9,999)
Loan from related parties 2,796 38,243
- -----------------------------------------------------------------------------------------
NET CASH FLOWS FROM FINANCING ACTIVITIES 50,035 118,992
- -----------------------------------------------------------------------------------------
EFFECT OF EXCHANGE RATE CHANGES (3,379) 531
- -----------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH - 4,260
CASH, BEGINNING OF PERIOD - -
- -----------------------------------------------------------------------------------------
CASH, END OF PERIOD $ - $ 4,260
=========================================================================================
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid $ 1,054 $ 1,863
=========================================================================================
Taxes paid $ Nil $ Nil
=========================================================================================
Non-cash activities:
- --------------------
Refer to Notes 3, and 5.
The accompanying notes are an integral part of these
interim consolidated financial statements
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
================================================================================
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
- --------------------------------------------------------------------------------
The Company was incorporated on March 25, 1999 in the state of Delaware. The
Company commenced operations April 30, 1999 and by agreement effective as of
that date, acquired proprietary technology and patent rights from Luna
Technology Inc. ("LTBC"), a private British Columbia company with certain
directors and shareholders in common with the Company. In addition, by agreement
effective November 15, 1999, the Company acquired proprietary technology and the
trademark rights to "LUNA" and "LUNAPLAST" from Douglas Sinclair, an officer and
employee of LTBC, which relate to the acquired Photoluminescent technology. This
technology is used for the development and production of photoluminescent
signage, wayfinding systems and other novelty products with applications in
marine, commuter rail, subway, building and toy markets.
The consolidated financial statements have been prepared on the basis of a going
concern which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. At March 31, 2005 the Company has
a working capital deficiency of $327,831 and has incurred losses since inception
raising substantial doubt as to the Company's ability to continue as a going
concern. The ability of the Company and its subsidiary to continue as a going
concern is dependent on raising additional capital and on generating future
profitable operations. In addition, during the three months ended March 31,
2005, 71% of the Company's total sales was derived from two customers, one
customer of which also provided financing to the Company in connection with the
Convertible Debenture as described in Note 4 accounted for 52% of sales.
The Company anticipates meeting its working capital requirement for the next
year through the sale of shares of common stock or through loans and advances
from related parties as may be required.
Unaudited Interim Financial Statements
- --------------------------------------
The accompanying unaudited interim consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB of Regulation
S-B. They may include all information and footnotes required by generally
accepted accounting principles for complete financial statements. However,
except as disclosed herein, there has been no material changes in the
information disclosed in the notes to the financial statements for the year
ended December 31, 2004 included in the Company's Annual Report on Form 10-KSB
filed with the Securities and Exchange Commission. The unaudited interim
consolidated financial statements should be read in conjunction with those
financial statements included in the Form 10-KSB. In the opinion of Management,
all adjustments considered necessary for a fair presentation, consisting solely
of normal recurring adjustments, have been made. Operating results for the three
months ended March 31, 2005 are not necessarily indicative of the results that
may be expected for the year ending December 31, 2005.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
Principles of Consolidation
- ---------------------------
The financial statements include the accounts of the Company and its
wholly-owned subsidiary Luna Technologies (Canada) Ltd. ("LTC"), a company
incorporated June 9, 1999 in the province of British Columbia. LTC was
incorporated to conduct business activities in Canada. All significant
intercompany balances and transactions are eliminated on consolidation.
Use of Estimates and Assumptions
- --------------------------------
Preparation of the Company's financial statements in conformity with United
States generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates. The areas
requiring significant estimates and assumptions are determining the useful lives
of furniture and equipment and the fair value of stock-based compensation.
Inventory
- ---------
Inventory is carried at the lower of cost and net realizable value.
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Furniture and Equipment
- -----------------------
Furniture and equipment are recorded at cost. Depreciation is computed by the
straight-line method on estimated useful lives of two to five years.
Revenue Recognition
- -------------------
The Company recognizes revenue when products have been shipped and collection is
reasonably assured. The Company also generates other income from one-time fees
charged in connection with territorial Supply Agreements. As the Company has no
future obligations in connection with these agreements, these fees are
recognized as other income upon execution of the agreements and when collection
is reasonably assured.
Research and Development Costs
- ------------------------------
Ongoing new product and technology research and development costs are expensed
as incurred net of contributions made by third parties toward research projects.
Foreign Currency Translation
- ----------------------------
The financial statements are presented in United States dollars. In accordance
with Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign
Currency Translation", foreign denominated monetary assets and liabilities are
translated to their United States dollar equivalents using foreign exchange
rates which prevailed at the balance sheet date. Revenue and expenses are
translated at average rates of exchange during the year. Related translation
adjustments are reported as a separate component of stockholders' equity,
whereas gains or losses resulting from foreign currency transactions are
included in results of operations.
Fair Value of Financial Instruments
- -----------------------------------
In accordance with the requirements of SFAS No. 107, management has determined
the estimated fair value of financial instruments using available market
information and appropriate valuation methodologies. The fair value of financial
instruments classified as current assets or liabilities including bank overdraft
and notes and accounts payable approximate carrying value due to the short-term
maturity of the instruments. Management has also determined that the fair value
of the note payable approximates its carrying value as at March 31, 2005 and
December 31, 2004.
Risk Management
- ---------------
Currency risk: The majority of the Company's sales and cost of sales are made in
U.S. currency while a significant amount of its general and administrative
expenses are made in Canadian currency. The Company does not currently hedge its
foreign currency exposure and accordingly is at risk for foreign currency
exchange fluctuations.
Credit risk: Management does not believe the Company is exposed to significant
credit risk and accordingly does not manage credit risk directly.
Net Loss per Common Share
- -------------------------
Basic loss per share includes no dilution and is computed by dividing income
available to common stockholders by the weighted average number of common shares
outstanding for the period. Dilutive earnings per share reflects the potential
dilution of securities that could share in the earnings of the Company. Share
purchase warrants and stock options were not included in the calculation of
weighted average number of shares outstanding because the effect would be
anti-dilutive.
Stock-Based Compensation
- ------------------------
In December 2002, the Financial Accounting Standards Board ("FASB") issued
Financial Accounting Standard No. 148, "Accounting for Stock-Based Compensation
- - Transition and Disclosure" ("SFAS No. 148"), an amendment of Financial
Accounting Standard No. 123 "Accounting for Stock-Based Compensation" ("SFAS No.
123"). The purpose of SFAS No. 148 is to: (1) provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation, (2) amend the disclosure
provisions to require prominent disclosure about the effects on reported net
income of an entity's accounting policy decisions with respect to stock-based
employee compensation, and (3) to require disclosure of those effects in interim
financial information. The disclosure provisions of SFAS No. 148 were effective
for the Company commencing for the year ended December 31, 2002 and the required
disclosures have been made below.
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
================================================================================
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (cont'd)
- --------------------------------------------------------------------------------
Stock-Based Compensation cont'd
- -------------------------------
The Company has elected to continue to account for stock-based employee
compensation arrangements in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees",
("APB No. 25") and comply with the disclosure provisions of SFAS No. 123 as
amended by SFAS No. 148 as described above. In addition, in accordance with SFAS
No. 123 the Company applies the fair value method using the Black-Scholes
option-pricing model in accounting for options granted to consultants. Under APB
No. 25, compensation expense is recognized based on the difference, if any, on
the date of grant between the estimated fair value of the Company's stock and
the amount an employee must pay to acquire the stock. Compensation expense is
recognized immediately for past services and pro-rata for future services over
the option-vesting period.
The following table illustrates the pro forma effect on net income (loss) and
net income (loss) per share as if the Company had accounted for its stock-based
employee compensation using the fair value provisions of SFAS No. 123 using the
assumptions as described in Note 5:
Three months ended March 31,
2005 2004
-------------- --------------
Net loss for the period As reported $ (109,415) $ (127,033)
SFAS 123 compensation expense Pro-forma (15,800) -
-------------- --------------
Net loss for the year Pro-forma $ (125,215) $ (127,033)
============== ==============
Pro-forma basic net loss per share Pro-forma $ (0.01) $ (0.02)
============== ==============
The Company accounts for equity instruments issued in exchange for the receipt
of goods or services from other than employees in accordance with SFAS No. 123
and the conclusions reached by the Emerging Issues Task Force ("EITF") in Issue
No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring or in Conjunction with Selling Goods or Services" ("EITF
96-18"). Costs are measured at the estimated fair market value of the
consideration received or the estimated fair value of the equity instruments
issued, whichever is more reliably measurable. The value of equity instruments
issued for consideration other than employee services is determined on the
earlier of a performance commitment or completion of performance by the provider
of goods or services as defined by EITF 96-18.
The Company has also adopted the provisions of the Financial Accounting
Standards Board Interpretation No.44, "Accounting for Certain Transactions
Involving Stock Compensation - An Interpretation of APB Opinion No. 25" ("FIN
44"), which provides guidance as to certain applications of APB No. 25.
Income Taxes
- ------------
The Company follows the liability method of accounting for income taxes. Under
this method, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
balances. Deferred tax assets and liabilities are measured using enacted or
substantially enacted tax rates expected to apply to the taxable income in the
years in which those differences are expected to be recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the date of enactment or
substantive enactment.
Recent Accounting Pronouncements
- --------------------------------
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment, which
establishes standards for the accounting for transactions in which an entity
exchanges its equity instruments for goods or services. A key provision of this
statement is the requirement of a public entity to measure the cost of employee
services received in exchange for an award of equity instruments (including
stock options) based on the grant date fair value of the award. That cost will
be recognized over the period during which an employee is required to provide
service in exchange for the award (i.e., the requisite service period or vesting
period). This standard becomes effective for the Company for its first annual or
interim period ended on or after December 15, 2005. The Company will adopt SFAS
123R no later than the beginning of the Company's fourth quarter ending December
31, 2005. Management is currently evaluating the potential impact that the
adoption of SFAS 123R will have on the Company's financial position and results
of operations.
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
================================================================================
NOTE 3 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
The Company pays the Chief Executive Officer ("CEO"), President, and Chief
Financial Officer ("CFO"), CDN$7,500, CDN$7,500 and CDN$4,000 per month
respectively. These obligations are on a month by month basis. Effective April
11, 2005, the Company's CFO resigned.
During the period the Company had transactions with directors and officers, as
follows: expenses paid on behalf of and advances made to the Company - $3,510
(2004 - $65,000); management fees incurred by the Company - $46,453 (2004 -
$37,563); and payments and reimbursements made by the Company - $47,167(2004 -
$64,320) leaving $18,956 owing as at March 31, 2005 (December 31, 2004 -
$16,160).
During 2003 LTC and the Company executed a guarantee of certain unpaid
management fees owing to the then CEO of LTC) totaling $123,750 (CAN$165,000.
Effective August 31, 2004, the CEO of LTC resigned and entered into an agreement
with the Company for the payment of these guaranteed amounts an additional fees
owing. Effective August 3, 2004, the Company had guaranteed, by a non-interest
bearing promissory note, outstanding management fees due to the former CEO of
LTC totaling CAN$187,000 payable as follows: CDN$20,000 upon acceptance, CDN$
20,000 on January 15, 2005, CDN$25,000 on June 15, 2005, CDN$30,000 on January
15, 2006, CDN$40,000 on June 15, 2006 and CDN$52,000 on January 15, 2007. In
addition, the Company agreed to a severance payment of CDN$43,200 to be paid in
twelve equal monthly instalments of CDN$3,600. To March 31, 2005 CDN$52,400 has
been paid in connection with the above agreements leaving CDN$177,800
(US$146,990) owing of which $138,062 has been reclassified to notes payable and
$8,928 has been reclassified to accounts payable The Company did not pay the CDN
$20,000 instalment due January 15, 2005.
The Company and LTC have non-interest-bearing promissory notes totalling $40,730
to LTBC originally due on or before June 30, 2001. The due dates on these notes
have been extended to January 1, 2006.
Unless otherwise noted, all amounts due to related parties are unsecured,
non-interest bearing and with no specific terms of repayment.
NOTE 4 - CONVERTIBLE DEBENTURE
- --------------------------------------------------------------------------------
Effective December 21, 2002 the Company issued a $120,000 Secured Convertible
Debenture (the "Debenture"). The Debenture is secured by a first floating charge
on all of the property, assets and undertakings of the Company and bears
interest at a rate of 8% per annum. The Company is required to make fixed
monthly principal payments of $3,333 for a period of 30 months commencing June
21, 2003 and a final principal payment of $20,010 due December 21, 2005.
Interest is calculated on the outstanding principal balance and is payable
monthly commencing June 21, 2003. During 2005 the Company made principal and
interest payments totalling $11,053 and as at March 31, 2005 a further $102 of
interest has been accrued. This Debenture was issued to the Company's major
customer as described in Note 1.
The total unpaid balance of principal and interest may be converted at any time
into restricted shares of the Company's common stock at a price of $0.90 per
share during 2004 and $1.20 per share during 2005.
NOTE 5 - CAPITAL STOCK
- --------------------------------------------------------------------------------
During 2005 the Company issued 325,000 units at a price of $0.20 per unit for
proceeds of $65,000 of which $10,000 was received subsequent to March 31, 2005.
Each unit consists of one common share and one share purchase warrant entitling
the holder to purchase one additional common share of the Company at a price of
$0.35 per share to March 31, 2006 and a price of $0.55 per share to March 31,
2007. The estimated fair value of the warrants of $13,000 has been recorded as a
separate component of stockholders' equity.
During 2005 the Company awarded 20,000 shares of common stock under the Stock
Bonus Plan with a fair value of $6,400. At March 31, 2005 182,188 shares remain
available for awards under the Stock Bonus Plan.
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
================================================================================
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
During 2004 the Company issued 100,000 units at a price of $0.65 per unit for
proceeds of $65,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until February 28, 2006. The estimated
fair value of the warrants of $13,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 35,000 units at a price of $1.00 per unit for
proceeds of $35,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $1.00 per share until March 31, 2006. The estimated
fair value of the warrants of $7,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 1,250,000 units at a price of $0.20 per unit for
proceeds of $250,000. Each unit consists of one common share and one share
purchase warrant entitling the holder to purchase one additional common share of
the Company at a price of $0.30 per share until September 3, 2005. The estimated
fair value of the warrants of $50,000 has been recorded as a separate component
of stockholders' equity.
During 2004 the Company issued 12,000 shares of common stock under the Company's
Stock Bonus Plan at $0.50 per share in settlement of $6,000 of accounts payable
and awarded a further 585,812 shares under the Stock Bonus Plan with a fair
value of $124,868.
During 2004 the Company issued 954,000 shares of common stock on exercise of
various stock options for total consideration of $105,810 of which $7,000 was
received in cash, $79,250 by offset of accounts payable and $19,560 by offset of
amounts due to a director of the Company.
Stock option plans
- ------------------
As approved by the directors effective January 26, 2004, the Company has adopted
plans allowing for the granting of stock options and awarding of shares of
common stock as follows:
Incentive Stock Option Plan
---------------------------
The Company adopted an Incentive Stock Option Plan authorizing the issuance
of options to purchase up to 750,000 shares of common stock of the Company.
Options granted under this plan will have a price and term to be determined
at the time of grant, but shall not be granted at less than the then fair
market value of the Company's common stock and can not be exercised until
one year following the date of grant. This plan is available to officers,
directors and key employees of the Company.
Non-Qualified Stock Option Plan
-------------------------------
The Company adopted a Non-Qualified Stock Option Plan authorizing the
issuance of options to purchase up to 1,350,000 shares of common of the
Company. Options granted under this plan will have a price and term to be
determined at the time of grant, but shall not be granted at less than the
then par value of the Company's common stock and can be exercised at any
time following the date of grant. This plan is available to officers,
directors, employees, consultants and advisors of the Company.
Stock Bonus Plan
----------------
The Company adopted a Stock Bonus Plan authorizing the awarding of up to
1,000,000 shares of common stock of the Company solely at the discretion of
the board of directors. This plan is available to officers, directors,
employees, consultants and advisors of the Company.
Effective February 10, 2004 the Company filed a Form S-8 Registration Statement
for 3,000,000 shares authorized under the Incentive Stock Option Plan, the
Non-Qualified Stock Option Plan and the Stock Bonus Plan.
During 2004 the Company granted 460,000 stock options to consultants at prices
ranging from $0.10 per share to $0.23 per share. The fair value of these options
was recorded as consulting fees of $71,600. The fair value of these stock
options was estimated using the Black-Scholes option pricing model assuming
expected lives ranging from one year to five years, risk-free interest rates
ranging from 2% to 3% and expected volatilities ranging from 77% to 103%.
LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
================================================================================
NOTE 5 - CAPITAL STOCK (cont'd)
- --------------------------------------------------------------------------------
During the third quarter of 2004 the Company granted a total of 659,200 stock
options to the Company's new president at exercise prices ranging from $0.35 per
share to $0.75 per share, exercisable for a term of three years. The fair value
of these stock options was estimated using the Black-Scholes option pricing
model assuming an expected life of three years, a risk-free interest rate of 3%
and an expected volatility of 102% resulting in a pro forma expense of $142,200
to be disclosed in Note 2 upon vesting of the options. Of these options, 59,200
vested immediately and the remaining 600,000 vest at a rate of 16,667 per month
for a period of three years. To March 31, 2005, $46,650 (December 31, 2004 -
$30,850) of the pro forma expense has been disclosed and the remaining $95,550
will be disclosed upon vesting of the options.
During the 2004 the Company granted a total of 505,000 stock options to an
employee and a director of the Company at exercise prices ranging from $0.04 per
share to $0.30 per share, exercisable for terms ranging from one year to ten
years. As the exercise price of certain of these options was less than the
market price of the Company's common stock as at the date of grant, the Company
has recorded an intrinsic value stock based compensation expense of $78,600. In
addition the Company has disclosed a pro-forma expense of $16,500 relating to
the additional fair value of these options as estimated using the Black-Scholes
option pricing model assuming an expected life of ten years, a risk-free
interest rate of 3% and an expected volatility of 103%.
As at March 31, 2005, 305,000 shares have been granted and no stock options were
outstanding under the Incentive Stock Option Plan and 770,200 stock options were
outstanding under the Non-Qualified Stock Option Plan. The Company's stock
option activity is as follows:
Number of Weighted Average Weighted Average
options Exercise Price Remaining Life
-------------- ---------------- ----------------
Balance, December 31, 2003 185,000 $ 0.32 2.98 years
Granted during the year 1,624,200 0.23
Expired during the year (85,000) 0.25
Exercised during the year (954,000) 0.11
-------------- ---------------- ----------------
Balance, December 31, 2004 770,200 0.39 2.81 years
Granted during the period - -
Expired during the period - -
Exercised during the period - -
-------------- ---------------- ----------------
Balance, March 31, 2005 770,200 $ 0.39 2.56 years
============== ================ ================
Share Purchase Warrants
- -----------------------
The Company's share purchase warrant activity is as follows:
Number of Weighted Average Weighted Average
warrants Exercise Price Remaining Life
-------------- ---------------- ----------------
Balance, December 31, 2003 839,255 $ 0.94 1.21 years
Issued during the year 1,385,000 0.37
Expired during the year (439,255) 0.89
Exercised during the year - -
-------------- ---------------- ----------------
Balance, December 31, 2004 1,785,000 0.51 0.77 years
Issued during the period 325,000 0.35
Expired during the period - -
Exercised during the period - -
-------------- ---------------- ----------------
Balance, March 31, 2005 2,110,000 $ 0.49 0.75 years
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LUNA TECHNOLOGIES INTERNATIONAL, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005 (Unaudited)
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NOTE 6 - SUBSEQUENT EVENTS
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Subsequent to March 31, 2005, the Company issued 60,000 common shares under the
Stock Bonus Plan and issued 20,000 commons shares for the exercise of stock
options under the Non-Qualified Stock Option Plan for proceeds of $3,600. The
Company has received subscription proceeds of $40,000 toward the purchase of
200,000 units at a price of $0.20 per unit. Each unit consists of one common
share and one share purchase warrant entitling the holder to purchase one
additional common share of the Company at a price of $0.35 per share for the
first year and a price of $0.55 per share for the second year.
Item 2. Management's Discussion and Analysis
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Results of Operations
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Sales during the three months ended March 31, 2005 sales increased 33% over the
same period ended March 31, 2004 due to efforts by the Company to increase
awareness of the Company's products in the marketplace. The Company's gross
margin increased from 28% to 50% over the same period described mainly due to
increased productivity and costs savings from in house printing facilities which
were previously subcontracted out.
During the three months ended March 31, 2005, the Company did not enter into any
new reseller agreement contracts in order to direct our resources to the New
York City Department of Buildings Local Law 26 which is to come into effect in
July 2005. These agreements allow the reseller access to of all Luna's products
at set prices in order to compete competitively at the wholesale level. During
the three months ended March 31, 2004, reseller agreements worth $90,000 were
received from customers in connection with reseller agreements
General and administrative expenses net of stock based compensation for the
three months ended March 31, 2005 decreased by approximately $15,000 due to the
streamlining of overhead. During the three months ended March 31, 2005,
stock-based compensation of $6,400 was expensed representing the fair value of
stock bonus plan shares awarded.
Mr. Brian Fiddler resigned his position as Chief Financial Officer and Director
as of April 4, 2005. Ms Kimberly Landry will now serve in this position and will
also continue her roles as Chairman of the Board of Luna Technologies
International Inc. and its subsidiary Luna Technologies (Canada) Ltd.
Liquidity and Capital Resources
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During the three months ended March 31, 2005 the Company's operations used
$46,656 in cash. The Company satisfied its operational requirements during the
period through the sale of common stock for a total of $55,000 and advances from
related parties of $2,796. The Company increased its bank overdraft by $2,238
and paid $9,999 towards the convertible debenture.
The Company anticipates its capital needs during the twelve month period ended
March 31, 2006 to be $800,000 for general and administrative expenses, including
$100,000 for research and development.
The Company does not have any available credit, bank financing or other external
sources of liquidity. Due to operating losses of the Company since inception,
the Company's operations have not been a source of liquidity. At March 31, 2005,
the Company has a working capital deficiency of $327,831. The ability of the
Company to continue as a going concern is dependent on the Company raising
additional capital and becoming profitable.
The Company does not have any "off-balance sheet arrangements" (as such term
defined in Item 303 of Regulations S-K).
Item 3. Controls and Procedures
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Kimberly Landry, the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures as of a date within 90 days prior to the filing date of this
report (the "Evaluation Date"); and in their opinion the Company's disclosure
controls and procedures ensure that material information relating to the
Company, including the Company's consolidated subsidiaries, is made known to
them by others within those entities, particularly during the period in which
this report is being prepared, so as to allow timely decisions regarding
required disclosure. To the knowledge of Ms. Landry there have been no
significant changes in the Company's internal controls or in other factors that
could significantly affect the Company's internal controls subsequent to the
Evaluation Date. As a result, no corrective actions with regard to significant
deficiencies or material weakness in the Company's internal controls were
required.
PART II
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OTHER INFORMATION
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Item 1. Legal Proceedings.
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None.
Item 2. Changes in Securities.
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During the three months ended March 31, 2005 and up to the date of this
report, the Company issued 80,000 shares of its common stock to a director
and a former director under the Company's stock bonus plan and 20,000
shares of its common stock on exercise of options under the non qualified
stock option plan. The issuance of these shares was registered by means of
a registration statement on Form S-8. The Company also issued a total of
325,000 shares in connection with private placements of units at $0.20 per
unit with each unit consisting of one common share and one common share
purchase warrant entitling the holder to purchase an additional share of
the Company's common stock for a period of two years at $0.35 per share for
the first year and $0.55 per share for the second year.
Item 3. Defaults Upon Senior Securities.
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The Company is currently under default in connection with the non interest
bearing promissory note payable to Douglas Sinclair for outstanding
management fees. Refer to Note 3 on our March 31, 2005 financial statements
for details.
Item 4. Submission of Matters to a Vote of Security Holders.
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None.
Item 5. Other Information.
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None.
Item 6. Exhibits and Reports on Form 8-K
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(a) Exhibits
The following exhibits are filed herewith:
31.1 Certificate of Chief Executive Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended.
31.2 Certificate of Chief Financial Officer pursuant to Rule
13a-14(a)/Rule 15d-14(a) of the Securities Exchange Act of 1934,
as amended
32.1 Certificate of Chief Executive Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certificate of Chief Financial Officer pursuant to 18 U.S.C.
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
(b) Reports on Form 8-K
Report on Form 8K. Item 5.02 Departure of Directors or Principal
Officers; election of Directors; appointment of Principal Officer
dated April 11, 2005.
SIGNATURES
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 20, 2005
LUNA TECHNOLOGIES INTERNATIONAL, INC.
By: /s/ Kimberly Landry
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Kimberly Landry, Chief Executive Officer
/s/ Kimberly Landry
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Kimberly Landry, Chief Financial Officer