U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities Exchange Act
of 1934
For the quarterly period ended March 31, 2005
|_| Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the transition period from _______ to _______.
Commission File No. 814-00631
CELERITY SYSTEMS, INC.
(Exact name of registrant as specified in Its charter)
Delaware 52-2050585
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
146 Maryville Pike, Suite 201, Knoxville, Tennessee 37920
- --------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
(865) 539-5300
(Issuer's Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Exchange Act during
the past 12 months, 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 an accelerated filed
(as defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
There were 4,796,102,805 shares of common Stock outstanding as of May 3, 2005.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
Balance Sheets
Assets (unaudited)
March 31, 2005 December 31, 2004
-------------- -----------------
Cash $ 141,961 $ 1,863
Other current assets 2,664 2,664
------------- -----------------
Total current assets 144,625 4,527
------------- -----------------
Fixed assets, net 35,591 38,391
Investment in Yorkville Advisors Management, LLC, at cost
which approximates fair value 3,000,000 5,240,000
Investment in and advances to Celerity Systems-NV, at fair
value - -
Debt offering costs, net - 40,529
------------- -----------------
Total assets $ 3,180,216 $ 5,323,447
============= =================
Liabilities and Stockholders' Equity
Accounts payable $ 490,782 $ 473,637
Judgments and defaults payable (including $213,400 to a
related party in 2004) 115,000 400,675
Accrued interest ( including $188,366 to a related
party in 2004) 112,521 321,629
Notes payable - related party 10,000 510,000
Other current liabilities 15,541 11,311
------------- -----------------
Total current liabilities 743,844 1,717,252
Convertible debentures - related party, net - 583,517
Convertible debentures, net 1,646,291 1,703,495
------------- -----------------
1,646,291 2,287,012
------------- -----------------
Total liabilities 2,390,135 4,004,264
------------- -----------------
Commitments and contingencies - -
Stockholders' Equity
Common stock, $.001 par value, 5,000,000,000 shares
authorized, 4,796,102,805 shares issued and outstanding 4,796,103 4,796,103
Additional paid-in capital 40,555,128 40,555,128
Treasury stock, at cost - 314,023,599 shares and 226,843,599
shares (789,655) (561,334)
Accumulated deficit (43,771,495) (43,470,714)
------------- -----------------
Total stockholders' equity 790,081 1,319,183
------------- -----------------
Total liabilities and stockholders' equity $ 3,180,216 $ 5,323,447
============= =================
The accompanying notes are an integral part of these
condensed financial statements
1
CELERITY SYSTEMS, INC.
Statement of Operations (unaudited)
Three Months Three Months
Ended March 31, Ended March 31,
2005 2004
------------------ -----------------
Unrealized loss on investments $ -- $ (103,383)
Dividend income -- 345,000
------------------ -----------------
-- 241,617
General and administrative expenses 200,681 196,788
------------------ -----------------
Operating income (loss) (200,681) 44,829
Other income (expense)
Amortization of debt offering costs (40,529) (37,124)
Beneficial conversion feature - convertible debentures (189,279) (175,326)
Interest expense (58,738) (48,207)
Settlement of debt 188,446 --
Other income -- 1,114
------------------ -----------------
Total other income (expense) (100,100) (259,543)
------------------ -----------------
Net loss attributable to common stockholders $ (300,781) $ (214,714)
================== =================
Loss per common share, basic and diluted
Net loss per common share attributable to common
stockholders $ (0.00) $ (0.00)
================== =================
Weighted average shares outstanding - basic and diluted 4,768,446,271 4,701,086,889
================== =================
The accompanying notes are an integral part of these
condensed financial statements
2
CELERITY SYSTEMS, INC.
Statements of Cash Flows (unaudited)
Three Months Three Months
Ended Ended
March 31, 2005 March 31, 2004
-------------- --------------
Cash flows from operating activities:
Net loss $ (300,781) $ (214,714)
Adjustments to reconcile net loss to net
cash used in operating activities:
Settlement of debt (181,901) --
Unrealized loss on investments -- 103,383
Depreciation and amortization 2,800 2,075
Beneficial conversion - convertible notes 189,279 175,326
Amortization of debt offering costs 40,529 37,124
Changes in operating assets and liabilities:
Other assets 1,520
Accounts payable 17,145 28,822
Judgments and defaults payable (103,774) (32,409)
Accrued interest (209,108) 9,403
Other current liabilities 4,230 2,764
-------------- --------------
Net cash provided by (used in) operating activities (541,581) 113,294
Cash flows from investing activities:
Purchase of fixed assets -- (3,176)
Advances to Celerity Systems-NV (103,383)
Proceeds from liquidation of Yorkville Advisors Management, LLC 2,240,000 --
-------------- --------------
Net cash provided by (used in) investing activities 2,240,000 (106,559)
Cash flows from financing activities:
Proceeds from notes payable - related party -- --
Payments on notes payable - related party (1,330,000) (105,000)
Proceeds from convertible debentures --
Principal payments on debt -- (125,000)
Proceeds from issuance of common stock -- 210,000
Acquisition of treasury stock (228,321) --
-------------- --------------
Net cash used in financing activities (1,558,321) (20,000)
Net increase (decrease) in cash 140,098 (13,265)
Cash, beginning of period 1,863 56,156
-------------- --------------
Cash, end of period $ 141,961 $ 42,891
============== ==============
Cash paid for:
Interest $ 245,000 $ 38,806
============== ==============
Taxes $ -- $ 1,450
============== ==============
The accompanying notes are an integral part of these
condensed financial statements
3
CELERITY SYSTEMS, INC.
Statement of Changes in Stockholders' Equity
For the three months ended March 31, 2005
Common Stock Additional Total
---------------------------- Paid-In Treasury Accumulated Stockholders'
Shares Amount Capital Stock Deficit (Deficit) Equity
------------- ---------- ---------- ---------- ----------- -----------------
Balance December 31, 2004 4,796,102,805 $4,796,103 $40,555,128 $(561,334) $ (43,470,714) $ 1,319,183
Acquisition of treasury
stock (unaudited) $(228,321) (228,321)
Net loss (unaudited) (300,781) (300,781)
------------- ---------- ----------- ---------- ------------- -----------------
Balance, March 31, 2005 4,796,102,805 $4,796,103 $40,555,128 $(789,655) $ (43,771,495) $ 790,081
============= ========== =========== ========== ============= =================
The accompanying notes are an integral part of these
condensed financial statements
4
CELERITY SYSTEMS, INC.
Notes to Unaudited Condensed Financial Statements
Overview
The Company is a business development company that has elected to be regulated
pursuant to Section 54 of the Investment Company Act of 1940. We intend to focus
our investments in developing companies, but do not intend to limit our focus on
investment in any particular industry. We intend to seek investments in
companies that offer attractive investment opportunities.
1. Presentation of Unaudited Interim Financial Statements
The accompanying interim condensed financial statements and notes to the
financial statements for the interim periods as of March 31, 2005 and for the
three months ended March 31, 2005 and 2004, are unaudited. The accompanying
interim unaudited financial statements have been prepared by the Company in
accordance with accounting principles generally accepted in the United States
for interim financial statements and pursuant to the requirements for reporting
on Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation have been included. Operating results for the three
month period ended March 31, 2005, are not necessarily indicative of the results
that may be expected for the year ending December 31, 2005. The condensed
financial statements should be read in conjunction with the financial statements
and notes thereto included in the Form 10-K of the Company as of and for the
year ended December 31, 2004. Certain March 31, 2004 balances have been
reclassified to conform with the March 31, 2005 financial statement
presentation.
On May 20, 2003, the Company formed a subsidiary, Celerity Systems, Inc. (a
Nevada corporation), ("Celerity NV"). The assets and liabilities related to the
existing interactive video business were transferred to Celerity NV for 100% of
the common stock. As this subsidiary is not an investment company, after June 2,
2003 it is not consolidated with the parent company. The Company's investment in
Celerity NV is recorded at fair value, represented as cost, plus or minus
unrealized appreciation or depreciation, respectively.
In accordance with Article 6 of Regulation S-X under the Securities Act of 1933
and Securities Exchange Act of 1934, the Company does not consolidate portfolio
company investments in which the Company has a controlling interest.
The Company's financial statements have been prepared on a going concern basis,
which contemplates the realization of assets and the settlement of liabilities
and commitments in the normal course of business. The Company has had recurring
losses and continues to suffer cash flow and working capital shortages. Since
inception in January, 1993 through March 31, 2005 the losses total approximately
$43,771,000. As of March 31, 2005, the Company had a negative net working
capital of approximately $599,000. These factors taken together with the lack of
revenues and the absence of significant financial commitments raise substantial
doubt about the Company's ability to continue as a going concern.
On June 3, 2003, the Company elected to become a Business Development Company
which is regulated under Section 54 of the Investment Company Act of 1940. On
June 4, 2003 the Company filed an Offering Circular Under Regulation E to sell
up to $4,500,000 of its common stock at a minimum price of $0.001 to a maximum
price of $0.02 in the succeeding twelve month period. Between June 30, 2003 and
March 31, 2005, the Company sold 1,289,833,333 shares resulting in net proceeds
of $1,360,000.
There can be no assurances that the Company will be successful in its attempts
to raise sufficient capital essential to its survival. To the extent that the
Company is unable to raise the necessary operating capital it will become
necessary to further curtail operations. Additionally, even if the Company does
raise operating capital, there can be no assurances that the net proceeds will
be sufficient enough to enable it to develop its business to a level where it
will generate profits and positive cash flows. The financial statements do not
include any adjustments relating to the recovery of the recorded assets or the
classification of the liabilities that might be necessary should the Company be
unable to continue as a going concern.
5
Stock-Based Compensation
The Company has not granted any stock options in 2005 and 2004. There was no
stock-based compensation to be determined under the fair value method during the
three months ended March 31, 2005 and 2004 and there is no difference between
net loss as reported and proforma net loss.
2. Investment in Celerity Systems, Inc. (A Nevada corporation)
Celerity NV had no operations for the three months ended March 31, 2005. The
following table represents Celerity NV's operating results for the three months
ended March 31, 2004.
Sales $ --
Cost of Sales --
--------------
Gross loss --
General and administrative expenses 81,368
--------------
Net loss (81,368)
=============
The following table represents Celerity NV's balance sheet as of March 31,
2004.
Accounts receivable, net $ 24,319
Inventories, net 299,200
--------------
Total current assets 323,519
Fixed assets, net 60,433
Other 1,600
--------------
Total assets $ 385,552
============
Accounts payable $ 883,084
Other current liabilities 23,601
--------------
Total liabilities 906,685
Stockholder Deficit
Common stock 250
Additional paid-in capital 499,750
Accumulated deficit (1,021,133)
--------------
Total stockholder deficit (521,133)
--------------
Total liabilities and deficit $ 385,552
============
Celerity NV developed and manufacturered, at third party plants, digital set top
boxes and digital video servers for the interactive television and high speed
Internet markets. Celerity NV also provided a comprehensive content package for
education users.
The Company charged Celerity NV for salaries and benefits and a portion of costs
as a facility charge. During the first three months of 2004, the Company
advanced $103,383 to Celerity NV to fund operations. This amount resulted in an
unrealized depreciation on the investment in Celerity NV of $103,383 as
reflected in the statement of operations of the Company.
In September 2004, the Company decided to cease operations within Celerity NV
and exchanged all of the operating assets, customer lists and a cash payment of
$15,000 for a 25% equity interest in Escent Systems, Inc. The Company has no
managerial involvement and has not guaranteed or otherwise committed any future
financing to the venture. Because of the start up nature of the new company,
Celerity NV has valued its investment in Escent at nil. Also, in 2004, the
Company recognized a loss of its cost and the unrealized depreciation of its
cost and advances in Celerity NV.
6
3. Investment in Sagamore Holdings, Inc.
In September 2004, the Company entered into a business development agreement
with Sagamore Holdings, Inc. with an effective date of October 4, 2004. The
Company received 7,500,000 shares of Sagamore common stock as consideration for
its agreement to provide future services regarding capital formation and
management advice. The Company has reviewed the valuation of the Sagamore stock
using fair value, and, based on the liquidation preference of the preferred
stockholder, management has considered the value of the stock as nil. Also, the
Company has rendered no specific services in 2005 or 2004. There have been no
events or circumstances occurring in the three months ended March 31, 2005 that
would change the valuation. Accordingly, the Board of Directors has continued to
include the value of the Sagamore stock in its financial statements as nil and
has not recognized any revenue from the transaction
4. Investment in Yorkville Advisors Management, LLC
On December 1, 2003 the Company purchased a minority interest in Yorkville
Advisors Management, LLC ("Yorkville"). Yorkville is the investment manager of a
private equity fund that is a principal holder of equity securities of the
Company. The purchase price amounted to $5,240,000. The acquisition was funded
through the sale of 2,000,000,000 shares of common stock to the aforementioned
private equity fund, resulting in net proceeds of $4,000,000 and the balance
paid using the proceeds received from the issuance of convertible notes payable.
During the year ended December 31, 2004 and 2003, the Company received proceeds
of $1,255,000 and $65,000 respectively from this investment, which amounts have
been recorded as dividend income in the statements of operations. In 2005, the
Company was informed that Yorkville is in the process of an orderly liquidation
of its business. Under the terms of a Preferential Rights Agreement, the
Company's membership interest in Yorkville has been converted into a new class
with certain preferential rights and the Company shall receive consideration
equal to the original purchase price of the investment less certain debt of
approximately $1,500,000 due to an affiliated company of Yorkville. In the three
months ended March 31, 2005, the Company received $2,240,000 net of payment of
$1,500,000 to a related party for debt the Company had recorded at $1,681,901.
The resulting gain has been recorded as income in the operating statements for
the period ended March 31, 2005 (see Note 10). Management has reviewed the
valuation of its investment in Yorkville and has determined that the investment
is recorded at fair value.
5. Loss Per Share
Basic and diluted loss per share were computed by dividing net loss attributable
to common stock by the weighted average number of common shares outstanding
during each period. Potential common equivalent shares are not included in the
computation of per share amounts in the periods because the Company reported a
net loss and their effect would be anti-dilutive.
6. Issuance of Convertible Debentures
The long-term debt of the Company includes the following items:
7
March 31, 2005 December 31, 2004
---------------- ------------------
4% convertible debentures $ 12,500 $ 12,500
5% convertible debentures 1,687,500 1,812,500
10% secured convertible debenture 0 705,000
---------------- ------------------
1,700,000 2,530,000
Less: Unamortized debt discount (53,709) (242,988)
---------------- ------------------
Long-term debt less current maturities $ 1,646,291 $ 2,287,012
================ ==================
During the three months ended March 31, 2005 no convertible debentures were
presented for conversion, accordingly, no shares of its common stock were
issued.
7. Stock Buyback Program
In September 2004 the Board of Directors authorized the Company to establish a
stock buyback program whereby the Company would acquire up to 500,000,000 shares
of its common stock over a twelve month period from the open market at favorable
prices. There was no obligation to acquire any specific number of shares or
purchase at any specific price. At December 31, 2004, the Company had acquired
226,843,599 shares at a cost of $561,334 and from January through March 2005,
the Company acquired 87,180,000 shares at a cost of $228,321. The acquisitions
have been accounted for as treasury stock. The funding was provided primarily
through a short term note of $500,000 from a related party through December
2004. In the three month period through March 2005, the purchases were funded
from proceeds from the liquidation of its Yorkville investment. When the buyback
program is complete, the Company plans to retire all shares acquired under the
program.
8. Judgments and Defaults Payable
In January 2002, the Company terminated the Equity Line of Credit entered into
on September 14, 2001 due to delays in getting related shares registered and in
order to pursue other types of financing arrangements. As a result, the Company
does not have an effective registration statement including common shares to be
issued in connection with certain debentures issued in 2001 and the first
quarter of 2002 under the 1999 Line of Credit Agreement. The Company is required
to pay liquidated damages in the form of increased interest on the convertible
debentures as a result of not filing an effective registration statement for
these debentures at a rate of 2% of the principal plus interest per month. The
liability for liquidated damages has been accrued at its maximum amount. The
Company has remaining accrued liquidated damages of $36,000 at March 31, 2005.
In December 2001, Veja Electronics, Inc. d/b/a Stack Electronics sued the
Company for breach of contract and is seeking damages in excess of $106,000.
This action relates to amounts alleged to be owed from the cancellation of a
purchase order. During 2003 a judgment was rendered against the Company in the
amount of $71,000, which has been accrued at March 31, 2005.
In 2003, Del Rio Enterprises sued the Company for non-payment of services
rendered. During 2003 a judgment was rendered against the Company in the amount
of $8,000. This amount has been accrued at March 31, 2005.
In addition, certain creditors have threatened litigation if not paid. The
Company is seeking to make arrangements with these creditors. There can be no
assurance that any claims, if made, will not have an adverse effect on the
Company. These amounts are included in the Company's accounts payable and are
accruing applicable late fees and interest.
9. Common Stock
During the three months ended March 31, 2005 the Company did not issue any
shares of its common stock.
8
10. Subsequent Events
Subsequent to March 31, 2005, the Company collected the remainder of the
$3,000,000 relating to its investment in Yorkville and has retired Approximately
$1,550,000 in convertible debentures and accrued interest.
The Company entered into two business development agreements in 2004 in which
the Company was to receive shares of common stock for providing capital
formation and management services in the future. However, no consideration has
been received and no services performed as of March 31, 2005 and to the date of
this report. The Company and the respective parties are currently negotiating a
termination agreement.
Effective April 22, 2005, the Company dismissed Marcus & Kliegman, LLP as its
independent registered public accounting firm. Marcum & Kliegman, LLP's reports
did not contain any adverse opinions, there were no disagreements on any matter
of accounting principals or practices and there were no reported events under
(a)(1)(v) of Item 304 of Regulation S-K.
Effective May 3, 2005, the Company engaged HJ & Associates, LLC as its certified
public accountants.
ITEM 2. MANAGEMENT'S PLAN OF OPERATION AND DISCUSSION AND ANALYSIS
Introductory Statements
Forward-Looking Statements and Associated Risks. This filing contains
forward-looking statements, including statements regarding, among other things,
(a) our company's projected profitability, (b) our company's growth strategies,
(c) our company's future financing plans and (d) our company's anticipated needs
for working capital. In addition, when used in this filing, the words
"believes," "anticipates," "intends," "in anticipation of," "expects," and
similar words are intended to identify forward-looking statements. These
forward-looking statements are based largely on our company's expectations and
are subject to a number of risks and uncertainties, including those described in
"Business Risk Factors" of our Form 10-K for the year ended December 31, 2004.
Actual results could differ materially from these forward-looking statements as
a result of changes in trends in the economy, competition, reductions in the
availability of financing and other factors. In light of these risks and
uncertainties, there can be no assurance that the forward-looking statements
contained in this filing will in fact occur.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires our management to make
assumptions, estimates and judgments that affect the amounts reported in the
financial statements, including the notes thereto, and related disclosures of
commitments and contingencies, if any. We consider our critical accounting
policies to be those that are complex and those that require significant
judgments and estimates in the preparation of our financial statements,
including valuation of our investments. Management relies on historical
experience and on other assumptions believed to be reasonable under the
circumstances in making its judgment and estimates. Actual results could differ
materially from those estimates.
Estimates- The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
Fair Value of Financial Instruments - The carrying amount of items included in
working capital approximates fair value because of the short maturity of those
instruments. The carrying value of the Company's debt approximates fair value
because it bears interest at rates that are similar to current borrowing rates
for loans of comparable terms, maturity and credit risk that are available to
the Company.
9
Debt Offering Costs - Debt offering costs are related to private placements and
are being amortized on a straight line basis over the term of the related debt,
most of which is in the form of convertible debentures. Should conversion occur
prior to the stated maturity date the remaining unamortized cost is expensed.
Investment Valuation - Investments in equity securities are recorded at fair
value, represented as cost, plus or minus unrealized appreciation or
depreciation, respectively. The fair value of investments that have no ready
market, are determined in good faith by management, and approved by the Board of
Directors, based upon assets and revenues of the underlying investee companies
as well as general market trends for businesses in the same industry. Because of
the inherent uncertainty of valuations, management's estimates of the values of
the investments may differ significantly from the values that would have been
used had a ready market for the investments existed and the differences could be
material.
Income Taxes - The Company accounts for income taxes using the asset and
liability method, whereby deferred tax assets and liabilities are determined
based upon the differences between financial reporting and tax bases of assets
and liabilities and are measured using the enacted tax rates and laws that will
be in effect when the differences are expected to reverse. A valuation allowance
related to the deferred tax assets is also recorded when it is more likely than
not that some or all of the deferred tax asset will not be realized.
Going Concern - The Company's financial statements have been prepared on a going
concern basis, which contemplates the realization of asset and the settlement of
liabilities and commitments in the normal course of business. The Company has
had recurring losses and continues to suffer cash flow and working capital
shortages. Since inception in January 1993 through March 31, 2005, the losses
total approximately $43,771,000. As of March 31, 2005, the Company had a
negative net working capital of approximately $599,000. These factors taken
together with the lack of revenues and the absence of significant financial
commitments raise substantial doubt about the Company's ability to continue as a
going concern. The Company's source of income during 2004 has been dividends
from its minority investment in Yorkville Management Advisors, LLC. The
Company's investment in the minority interest of Yorkville Management Advisors,
LLC was made on December 1, 2003 and the Company has received $1,310,000 in
dividend proceeds since that date. In 2005, the Company was informed that
Yorkville is in the process of an orderly liquidation of its business. Under the
terms of a Preferential Rights Agreement, the Company's membership interest in
Yorkville has been converted into a new class with certain preferential rights
and the Company shall receive consideration equal to the original purchase price
of the investment less certain debt of approximately $1,500,000 due to an
affiliated company of Yorkville.
Results of Operations
Three Months Ended March 31, 2005 Compared to Three Months Ended March 31, 2004
Unrealized loss on investments
Since the election to operate as a Business Development Company, the Company has
recorded a realized loss on its investment in Celerity NV. This loss is
comprised of two elements:
Effect of recording advances at fair value $ 633,008
Effect of recording equity investments at fair value 500,000
------------
$ 1,133,008
The write-down of the Company's advances to and investment in Celerity NV
recognized that without additional sales, there was a substantial risk that
Celerity NV would not be able to continue operation. On November 4, 2004,
Celerity NV entered into an Asset Purchase Agreement with Escent Systems, Inc.
whereby Celerity NV sold its assets and interactive video business to Escent in
return for 25% of Escent's equity. Celerity NV also provided $15,000 in cash
toward the working capital of the new venture. Because Escent has limited sales
history and lack of necessary product and content development capacity, Celerity
NV has determined that the fair value of the investment to be nil.
10
During the three month period ended March 31, 2004, Celerity NV recorded no
sales or gross profit and incurred other general and administrative expenses
that resulted in a net loss of $81,368 for the period. During such period
Celerity NV received advances from the Company of $103,383 to fund its working
capital requirements. Management recorded a write-down of the Company's advances
since without additional sales, there is a substantial risk that Celerity NV
will not be able to continue operation.
Dividend income
Since its investment in Yorkville on December 1, 2003, the Company has received
$1,255,000 in 2004 and $65,000 in 2003 in proceeds, which have been recorded as
dividend income in the statements of operations. On January 31, 2005 the members
of Yorkville decided to wind up its operations and amended its Operating
Agreement to establish a new class of membership with preferential rights. The
Company's investment interest was converted to this new class of ownership. The
preferential rights allow the Company to receive its investment purchase price
returned in cash by December 31, 2005, but receive no other dividend income
distributions. During the three month period ended March 31, 2005, the Company
has received $2,240,000 net of payment of related party debt of $1,500,000.
During the three month period ended March 31, 2004, the Company received
$345,000 in proceeds from its investment in Yorkville, which has been recorded
as dividend income in the statement of operations.
Operating Expenses
Operating expenses for the three months ended March 31, 2005 were $200,681
compared to $196,788 for the three months ended March 31, 2004. Increased
operating expenses for the three months ended March 31, 2005 can be attributed
to higher professional service expenses (approximately $22,000). For the three
months ended March 31, 2005, expenses were reduced by lower payroll ($11,000)
and office and other operating costs ($7,400).
Amortization of debt offering costs
Amortization of debt offering costs for the three months ended March 31, 2005
was $40,529 compared to $37,124 in same period of 2004.
Beneficial conversion feature - convertible notes
Non-cash interest expense relating to amortization of a beneficial conversion
feature for the various convertible debentures issues amounted to $189,279 and
$175,326 for the three months ended March 31, 2005 and 2004, respectively. This
increase results primarily from the payment of certain debt in 2004 which caused
full recognition of the related beneficial conversion feature in this period
compared to the longer amortization period for debt not converted.
Interest Expense
Interest expense for the three months ended March 31, 2005 was $58,738 compared
to $48,207 for the same period in 2004. The increase is attributable to higher
levels of debt and delinquent accounts in 2005.
Settlement of Debt
For the three months ended March 31, 2005, the Company settled certain trade
payables wherein the total amount due was reduced by $188,446. For the three
months ended March 31, 2004, there were no settlements of debt.
Net Loss Attributable to Common Stockholders
As a result of the foregoing, the Company had a net loss of $300,781, or $0.00
per share, for the three months ended March 31, 2005 compared to a net loss of
$214,714, or $0.00 per share, for the three months ended March 31, 2004.
11
Liquidity and Capital Resources
The primary source of financing for us since our inception has been through the
issuance of common and preferred stock and debt. We had cash balances on hand of
$141,961 as of March 31, 2005 and $1,863 as of December 31, 2004. Our cash
position continues to be uncertain. Our primary need for cash is to fund our
ongoing operations until such time that income from our investments generate
enough proceeds to fund operations. In addition, our need for cash includes
satisfying current liabilities of $743,844, consisting primarily of accounts
payable of $490,782, accrued interest of $112,521 and judgments and defaults
payable of $115,000, including a judgment of $71,000 obtained by Veja
Electronics, Inc. for breach of contract, a judgment of $8,000 obtained by Del
Rio Enterprises for non-payment of services, and liquidated damages resulting
from the lack of filing a registration statement relating to certain convertible
debentures of $36,000. We do not currently have sufficient funds to pay these
obligations. We will need significant new funding from the sale of securities or
from proceeds from our investments to fund our ongoing operations and to satisfy
the above obligations. We anticipate that preferential distribution proceeds
from the liquidation of our investment in Yorkville will provide sufficient
funds (approximately $3,740,000) in 2005 to operate the Company after satisfying
certain related party debt of $1,500,000. We currently do not have any
commitments for funding.
As discussed in the overview section, on June 3, 2003 the Company elected to
become a BDC which is regulated under Section 54 of the Investment Company Act
of 1940. As a BDC the Company may sell shares of its common stock up to
$5,000,000 in a twelve month period. Shares sold are exempt from registration
under Regulation E of the Securities Act of 1933. To that end, at our Annual
Meeting of Shareholders held on January 14, 2003, the shareholders approved an
increase in our authorized capital stock to 5 billion shares of common stock. On
June 4, 2003 the Company filed an Offering Circular Under Regulation E to sell
up to $4,500,000 of its common stock at a minimum price of $0.001 to a maximum
price of $0.02. Between June 4, 2003 and March 31, 2005 the Company has sold
1,289,833,333 shares resulting in net proceeds of $1,360,000.
We are also looking at several other options in terms of improving our cash
shortage. We are continuing to seek to arrange financing, including possible
strategic investment opportunities or opportunities to sell some or all of our
assets and business, while continuing to pursue sales opportunities. We have
granted a security interest in our personal property to the investors in the 10%
convertible debentures issued in 2002. Such security interests may hinder our
efforts to obtain financing. The lack of sales or a significant financial
commitment raises substantial doubt about our ability to continue as a going
concern or to resume a full-scale level of operations.
During the three months ended March 31, 2005, we had a net increase in cash of
$140,098. Our sources and uses of funds were as follows:
Cash Flows From Operating Activities. We used net cash of $541,581 in our
operating activities in the three months ended March 31, 2005. Our net cash used
in operating activities resulted primarily from the Company's net loss of
$300,781 non-cash income of $181,901 related to the settlement of debt, and the
payment of judgments and defaults and accrued interest of $312,882. Cash was
provided by non-cash expenses of depreciation and amortization of fixed assets,
($2,800), beneficial conversion feature ($189,278) and debt offering costs
($40,529). In addition, cash was provided by increases in accounts payable and
other current liabilities of $21,375.
Cash Flows From Investing Activities. We provided cash of $2,240,000 in
investing activities in the three months ended March 31, 2005 from the proceeds
from preferential distributions from Yorkville Advisors Management, LLC. These
funds were used to fund the operating activities of the Company and purchase
shares under the Company's stock buyback program.
Cash Flows From Financing Activities. We used $1,558,321 in net cash for
financing activities, consisting primarily of principal payments on debt to a
related party of $1,330,000 and the purchase of treasury stock under the
Company's stock buyback program.
As of March 31, 2005 we had a negative net working capital of approximately
$599,000. We have reduced overhead expenses, which will have a favorable impact
on cash required to fund the business. Under the Company's stock buyback
program, the Company is still actively pursuing the purchase of stock at
favorable prices if adequate cash flows are available, however there are no
purchase requirements or commitments to purchase any number of shares of stock.
We had no significant capital spending or purchase commitments at March 31, 2005
other than a certain lease of corporate office space
12
We have no existing bank lines of credit.
There can be no assurances that we will be successful in our attempts to raise
sufficient capital essential to our survival. To the extent that we are unable
to raise the necessary operating capital it will become necessary to further
curtail operations. Additionally, even if we raise operating capital, there can
be no assurances that the net proceeds will be sufficient enough to enable us to
develop our business to a level where we will generate profits and positive cash
flows. These matters raise substantial doubt about our ability to continue as a
going concern.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest Rate Sensitivity
The Company does not have any exposure to market risk as it relates to changes
in interest rates as all of the borrowings of the Company are at a fixed rate of
interest.
The Company has no cash equivalents or short-term investments that are subject
to market risk.
Foreign Currency Risk
The Company does not do any business that has any risk of foreign exchange rate
fluctuations.
Equity Security Price Risk
We do not have any investment in marketable equity securities; therefore, we do
not have any direct equity price risk.
Commodity Price Risk
We no not do any business involving commodities; therefore, we do not have any
commodity price risk.
ITEM 4. CONTROLS AND PROCEDURES
(A) Evaluation Of Disclosure Controls And Procedures
As of the end of the period covered by this report, the Company carried out an
evaluation, under the supervision and with the participation of the Company's
Principal Executive Officer/Acting Principal Financial Officer (one person), of
the effectiveness of the design and operation of the Company's disclosure
controls and procedures. The Company's disclosure controls and procedures are
designed to produce a reasonable level of assurance of achieving the /Company's
disclosure control objectives. The Company's Principal Executive Officer/Acting
Principal Accounting Officer has concluded that the Company's disclosure
controls and procedures are, in fact, effective at this reasonable assurance
level. In addition, we reviewed out internal controls, and there have been no
significant changes in our internal controls or in other actors that could
significantly affect those controls subsequent to the date of their last
valuation or from the end of the reporting period to the date of this Form 10-Q.
(B) Changes In Internal Controls Over Financial Reporting
In connection with the evaluation of the Company's internal controls during the
Company's three months ended March 31, 2005, the Company `s Principal Executive
Officer/Principal Financial Officer (one person) has determined that there are
no changes to the Company's internal controls over financial reporting that has
materially affected, or is reasonably likely to materially effect, the Company's
internal controls over financial reporting.
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PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There is no pending litigation against us, other than those claims described
below:
o In December 2001, Veja Electronics, Inc. d/b/a Stack Electronics
sued us for breach of contract and is seeking damages in excess of
$106,000 for products not received by us. During 2003, a judgment
was rendered against the Company in the amount of $71,000.
o In 2003, Del Rio Enterprises sued the Company for non-payment of
services rendered. During 2003 a judgment was rendered against the
Company in the amount of $8,000.
o On September 20, 2004, Joseph Banta, et al. filed an action in the
United States District Court for the Eastern District of Tennessee
at Knoxville, Tennessee in the amount of approximately $60,000 for
non-payment of salaries and benefits during a two-month period in
2002. The Company settled this case in full in January 2005.
In addition, certain creditors have threatened litigation if not paid. We are
seeking to make arrangements with these creditors. There can be no assurance
that any claims, if made, will not have an adverse effect on us.
ITEM 2. CHANGES IN 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
Not applicable.
14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description Location
- ---------- --------------------------------------- -------------------
31.1 Certification re: Section 302 Provided herewith
32.1 Certification re: Section 906 Provided herewith
Reports on Form 8-K.
Report on Form 8-K filed February 18, 2005 pursuant to Item 8.01 (Other Events)
reported that on February 11, 2005, Celerity Systems, Inc. became entitled to
receive a distribution of $5,200,000 from Yorkville Advisors Management, LLC
pursuant to the terms of a Preferential Rights Membership Interest in Yorkville.
Report on Form 8-K filed April 19, 2005 pursuant to Item 5.02 (Departure of
Directors or Principal Officers; Election of Directors; Appointment of Principal
Officers) reported that, effective April 15, 2005, David Leigh resigned from the
Board of Directors for personal reasons.
Report on Form 8-K filed April 27, 2005 pursuant to Item 4.01 (Changes in
Registrant's Certifying Accountant) reported that Marcum & Kliegman, LLP was
dismissed as its independent registered public accounting firm effective April
22, 2005. Marcum & Kliegman's reports did not contain any adverse opinions,
there were no disagreements on any matter of accounting principals or practices
and there were no reported events under (a)(1)(v) of Item 304 of Regulation S-K.
Report on Form 8-K filed May 6, 2005 pursuant to Item 4.01 (Changes in
Registrant's Certifying Accountant) reported that effective May 3, 2005, the
Company, based on the recommendation of and approval by the Company's audit
committee and the Board of Directors, approved a resolution to engage the
services of HJ & Associates, L.L.C. as its certified public accountants.
15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Date: May 11, 2005 CELERITY SYSTEMS, INC.
By: /s/ Robert Legnosky
-----------------------------------
Robert Legnosky
Chief Executive Officer and
Interim Chief Financial Officer