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 June 30, 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
Incorporation or Organization) Identification No.)
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 4,390,579,206 shares of common Stock outstanding as of August
1, 2005.
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CELERITY SYSTEMS, INC.
Balance Sheets
(unaudited)
Assets June 30, 2005 December 31,2004
------------- ----------------
Cash $ 842,992 $ 1,863
Other current assets 152,879 2,664
------------ ------------
Total current assets 995,871 4,527
------------ ------------
Fixed assets, net 32,791 38,391
Investment in Yorkville Advisors Management, LLC, at cost which
approximates fair value -- 5,240,000
Investment in and advances to Celerity Systems-NV, at fair value -- --
Debt offering costs, net -- 40,529
------------ ------------
Total assets $ 1,028,662 $ 5,323,447
============ ============
Liabilities and Stockholders' Equity
Accounts payable $ 423,554 $ 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) 11,609 321,629
Notes payable - related party -- 510,000
Other current liabilities 17,350 11,311
------------ ------------
Total current liabilities 567,513 1,717,252
Convertible debentures - related party, net -- 583,517
Convertible debentures, net 232,500 1,703,495
------------ ------------
232,500 2,287,012
------------ ------------
Total liabilities 800,013 4,004,264
------------ ------------
Commitments and contingencies -- --
Stockholders' Equity
Common stock, $.001 par value, 5,000,000,000 shares authorized, 4,390,579,206
shares and 4,796,102,805 shares issued and outstanding
in 2005 and 2004, respectively 4,390,580 4,796,103
Additional paid-in capital 39,981,350 40,555,128
Treasury stock, at cost - 226,843,599 shares in 2004 -- (561,334)
Accumulated deficit (44,143,281) (43,470,714)
------------ ------------
Total stockholders' equity 228,649 1,319,183
------------ ------------
Total liabilities and stockholders' equity $ 1,028,662 $ 5,323,447
============ ============
The accompanying notes are an integral part of these condensed financial
statements
2
CELERITY SYSTEMS, INC.
Statements of Operations (unaudited)
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2005 June 30, 2004 June 30, 2005 June 30, 2004
------------- ------------- ------------- -------------
Unrealized loss on investments $ -- $ (121,578) $ -- $ (224,961)
Realized gain on investments 39,944 -- 39,944 --
Dividend income -- 350,000 -- 695,000
--------------- --------------- --------------- ---------------
39,944 228,422 39,944 470,039
General and administrative expenses 192,239 135,785 392,920 332,574
--------------- --------------- --------------- ---------------
Operating income (loss) (152,295) 92,637 (352,976) 137,465
Other income (expense)
Amortization of debt offering costs -- (11,863) (40,529) (48,987)
Beneficial conversion feature -
convertible debentures (53,709) (48,252) (242,988) (223,578)
Interest expense (9,374) (43,819) (68,112) (92,026)
Settlement of debt (156,408) 39,979 32,038 39,979
Other income -- -- -- 1,114
--------------- --------------- --------------- ---------------
Total other income (expense) (219,491) (63,955) (319,591) (323,498)
--------------- --------------- --------------- ---------------
Net loss attributable to common
stockholders $ (371,786) $ 28,682 $ (672,567) $ (186,033)
=============== =============== =============== ===============
Loss per common share, basic and diluted
Net loss per common share attributable to
common stockholders $ (0.00) $ 0.00 $ (0.00) $ (0.00)
=============== =============== =============== ===============
Weighted average shares outstanding -
basic and diluted 4,428,073,650 4,794,080,467 4,491,955,173 4,824,716,663
=============== =============== =============== ===============
The accompanying notes are an integral part of these condensed financial
statements
3
CELERITY SYSTEMS, INC.
Statements of Cash Flows (unaudited)
Six Months Six Months
Ended Ended
June 30, June 30,
2005 2004
---- ----
Cash flows from operating activities:
Net loss $ (672,567) $ (186,033)
Adjustments to reconcile net loss to net
cash used in operating activities:
Settlement of debt (181,901) --
Unrealized loss on investments -- 224,961
Depreciation and amortization 5,600 4,375
Beneficial conversion - convertible notes 242,988 230,767
Amortization of debt offering costs 40,529 48,987
Changes in operating assets and liabilities:
Other assets (150,215) 1,520
Accounts payable (50,083) 56,075
Judgments and defaults payable (103,774) (142,381)
Accrued interest (310,020) (23,407)
Other current liabilities 6,039 2,984
----------- -----------
Net cash provided by (used in) operating activities (1,173,404) 217,848
Cash flows from investing activities:
Purchase of fixed assets -- (6,658)
Advances to Celerity Systems-NV -- (224,961)
Proceeds from liquidation of Yorkville Advisors Management, LLC 5,240,000 --
----------- -----------
Net cash provided by (used in) investing activities 5,240,000 (231,619)
Cash flows from financing activities:
Proceeds from notes payable - related party -- --
Payments on notes payable - related party (1,265,000) (105,000)
Proceeds from convertible debentures 537,500
Principal payments on debt (1,542,500) (475,000)
Proceeds from issuance of common stock -- 200,000
Acquisition of treasury stock (417,967) (189,808)
----------- -----------
Net cash used in financing activities (3,225,467) (32,308)
Net increase (decrease) in cash 841,129 (46,079)
Cash, beginning of period 1,863 56,156
----------- -----------
Cash, end of period $ 842,992 $ 10,077
=========== ===========
Cash paid for:
Interest $ 302,040 $ 201,285
=========== ===========
Taxes $ -- $ 1,450
=========== ===========
The accompanying notes are an integral part of these condensed financial
statements
4
CELERITY SYSTEMS, INC.
Statement of Changes in Stockholders' Equity
For the six months ended June 30, 2005
Total
Common Stock Additional Stockholders'
------------------------ Paid-In Treasury Accumulated (Deficit)
Shares Amount Capital Stock 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) (417,967) (417,967)
Retirement of treasury
stock (unaudited) (405,523,599) (405,523) (573,778) 979,301 --
Net loss (unaudited) (672,567) (672,567)
------------- ------------- ------------- ------------- ------------- -------------
Balance, June 30, 2005 4,390,579,206 $ 4,390,580 $ 39,981,350 $ -- $ (44,143,281) $ 228,649
============= ============= ============== ============= ============= =============
The accompanying notes are an integral part of these condensed financial
statements
5
CELERITY SYSTEMS, INC.
Notes to Unaudited Condensed Financial Statements
Overview
Celerity Systems, Inc., a Delaware corporation (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 June 30, 2005 and for the six
months ended June 30, 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 six month period
ended June 30, 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 June 30, 2004 balances have been reclassified to
conform with the June 30, 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 of Celerity NV. 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 June 30, 2005 the losses
total approximately $44,143,000. 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.
6
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 June 30, 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.
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 six months ended June 30, 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 six months ended June 30, 2005. The
following table represents Celerity NV's operating results for the six months
ended June 30, 2004.
Sales $ --
Cost of Sales --
-----------
Gross loss --
General and administrative expenses 134,772
-----------
Net loss (134,772)
===========
The following table represents Celerity NV's balance sheet as of June 30,
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 $ 936,488
Other current liabilities 23,601
-----------
Total liabilities 960,089
Stockholder Deficit
Common stock 250
Additional paid-in capital 499,750
Accumulated deficit (1,074,637)
-----------
Total stockholder deficit (574,537)
-----------
Total liabilities and deficit $ 385,552
===========
Celerity NV developed and manufactured, 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 with over 1,300 titles available. Due to a lack of
funding prior to June 30, 2004 Celerity NV has been targeting the education
market, to the exclusion of other markets available to them.
7
Prior to September 2004, the Company charged Celerity NV for salaries and
benefits and a portion of overhead costs as a facility charge. During the first
six months of 2004, the Company advanced $224,961 to Celerity NV to fund
Celerity NV's operations. This amount resulted in an unrealized depreciation on
the investment in Celerity NV of $224,961 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.
3. Investment in Sagamore Holdings, Inc.
In September 2004, the Company entered into a business development
agreement with Sagamore Holdings, Inc. ("Sagamore") 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 advise. 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 six months ended June 30, 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 entitling the Company to 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 six
months ended June 30, 2005, the Company received $5,240,000 net 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 June 30, 2005.
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:
June 30, 2005 December 31, 2004
------------- -----------------
4% convertible debentures $ 0 $ 12,500
5% convertible debentures 232,500 1,812,500
10% secured convertible debenture 0 705,000
----------- -----------
232,500 2,530,000
Less: Unamortized debt discount (0) (242,988)
----------- -----------
Long-term debt less current
maturities $ 232,500 $ 2,287,012
=========== ===========
8
During the six months ended June 30, 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 June 2005, the Company acquired 178,680,000 shares at a cost of
$417,967. The acquisitions have been accounted for as treasury stock until the
cancellation of 405,523,599 shares on June 2, 2005. The funding was provided
primarily through a short term note of $500,000 from a related party through
December 2004. In the six month period through June 2005, the purchases were
funded from proceeds from the liquidation of its Yorkville investment.
8. Judgments and Defaults Payable
In January 2002, the Company terminated the Equity Line of Credit with
Cornell Capital Partners, LP because of delays in getting the related shares
registered and, also, 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 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 principle
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 June 30, 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 June 30, 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 June 30, 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 six months ended June 30, 2005 the Company did not issue any
shares of its common stock.
10. Subsequent Events
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 June 30, 2005 and to the date of
this report. The Company and the respective parties are currently negotiating a
termination agreement.
9
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 sales and profitability, (b) our company's growth
strategies, (c) anticipated trends in our company's industry, (d) our company's
future financing plans and (e) 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 and our company's industry, demand for our
company's products, competition, reductions in the availability of financing and
availability of raw materials, 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.
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.
10
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 June 30, 2005, the
losses total approximately $44,143,000. 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. As of June 30, 2005, the Company has liquidated all of its interest in
Yorkville and will not receive any further dividend income in the future.
Results of Operations
Three Months Ended June 30, 2005 Compared to Three Months Ended June 30,
2004
Realized loss on investments
Since the election to operate as a Business Development Company ("BDC")
the Company has recorded a realized loss on its investment in Celerity Systems,
Inc., a Nevada corporation ("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 operations. On November 4, 2004,
Celerity NV entered into an Asset Purchase Agreement with Escent Systems, Inc.
("Escent") 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.
During the three month period ended June 30, 2004, Celerity NV recorded no
sales or gross profit and incurred other general and administrative expenses
that resulted in a net loss of $53,404 for the period. During such period
Celerity NV received parent company advances of $121,578 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 operations.
The Company has had no transactions with Celerity NV in the six months
ended June 30, 2005
Dividend income
Since its investment in Yorkville Advisors Management, LLC ("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 allowed 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 June 30, 2005, the Company has received $3,000,000 in
proceeds and the Company has no further interest in Yorkville.
During the three month period ended June 30, 2004 the Company received
$350,000 in proceeds from its investment in Yorkville and recorded these
receipts as dividend income in the statement of operations.
11
Operating Expenses
Operating expenses for the second quarter of 2005 were $192,239 compared
to $135,785 for the second quarter of 2004, an increase of $56,454 or 41.6%.
Increased operating expenses in 2005 can be attributed to higher professional
service expenses (approximately $46,000), higher payroll (approximately $2,400)
and higher operating and administrative costs (approximately $21,500). Expenses
were reduced by lower facility charges ($13,400).
Amortization of debt offering costs
Amortization of debt offering costs for the second quarter of 2005 was nil
compared to $11,863 in same period of 2004. The debt associated with the debt
offering costs was paid off in the first quarter of 2005.
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
$53,709 and $48,252 for the three months ended June 30, 2005 and 2004,
respectively, an increase of $5,457 or 11.3%. This increase results primarily
from the payment of certain debt in 2005 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 June 30, 2005 was $9,374
compared to $43,819 for the same period in 2004, a decrease of $34,445 or 78.6%.
The decrease is attributable to the repayment of debt primarily from the funds
from the liquidation of the Yorkville investment in 2005.
Settlement of Debt
For the three months ended June 30, 2005, the Company settled certain
convertable notes and trade payables wherein the net amount due was increased by
$156,408. For the three months ended June 30, 2004 debt settlements resulted in
net gains of $39,979.
Net Loss Attributable to Common Stockholders
As a result of the foregoing, the Company had a net loss of $371,786, or
($0.00) per share, for the three months ended June 30, 2005 compared to a net
gain of $28,682, or $0.00 per share, for the three months ended June 30, 2004, a
decrease of $400,468 or 1,396.2%.
Six Months Ended June 30, 2005 Compared to Six Months Ended June 30, 2004
Unrealized loss on investments
Since the election to operate as a BDC 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
------------
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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 operations. On November 4, 2004,
Celerity NV entered into an Asset Purchase Agreement with Escent 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.
During the six month period ended June 30, 2004, Celerity NV recorded no
sales or gross profit and incurred other general and administrative expenses
that resulted in a net loss of $134,773 for the period. During such period
Celerity NV received parent company advances of $224,961 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 operations.
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 allowed the Company to receive its investment
purchase price returned in cash by December 31, 2005, but receive no other
dividend income distributions. During the six month period ended June 30, 2005,
the Company has received its entire investment cost of $5,240,000 and the
Company has no further interest in Yorkville.
During the six month period ended June 30, 2004, the Company received
$695,000 in proceeds from its investment in Yorkville and recorded these
receipts as dividend income in the statement of operations.
Operating Expenses
Operating expenses for the first six months of 2005 were $392,920 compared
to $332,574 for the first six months of 2004, an increase of $60,346 or 18.2%.
Increased operating expenses in 2005 can be attributed to higher professional
service expenses (approximately $68,800), higher operating and administrative
costs (approximately $9,100). Expenses were reduced by lower facility charges
and payroll ($17,500).
Amortization of debt offering costs
Amortization of debt offering costs for the first six months of 2005 was
$40,529 compared to $48,987 in same period of 2004, a decrease of $8,458 or
17.3%. The debt associated with the debt offering costs was paid off in the
first quarter of 2005.
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
$242,988 and $223,578 for the six months ended June 30, 2005 and 2004,
respectively. This increase results primarily from the payment of certain debt
in 2005 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 six months ended June 30, 2005 was $68,112
compared to $92,026 for the same period in 2004, a decrease of $23,914 or 26.0%.
The decrease is attributable to the repayment of debt primarily from the funds
from the liquidation of the Yorkville investment in 2005.
Settlement of Debt
For the six months ended June 30, 2005, the Company settled certain
convertable notes and trade payables wherein the net amount due was decreased by
$32,037. For the six months ended June 30, 2004 debt settlements resulted in net
gains of $41,093.
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Net Loss Attributable to Common Stockholders
As a result of the foregoing, the Company had a net loss of $672,567, or
($0.00) per share, for the six months ended June 30, 2005 compared to a net loss
of $186,033, or ($0.00) per share, for the six months ended June 30, 2004 an
increase of $486,534 or 261.5%.
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 $842,992 as of June 30, 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 $567,513, consisting primarily of
accounts payable of $423,554, accrued interest and other liabilities of $11,609
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 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 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 June 30, 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. 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 six months ended June 30, 2005, we had a net increase in cash
of $841,129. Our sources and uses of funds were as follows:
Cash Flows From Operating Activities. We used net cash of $1,173,404 in
our operating activities in the six months ended June 30, 2005. Our net cash
used in operating activities resulted primarily from the Company's net loss of
$672,567 non-cash income of $181,901 related to the settlement of debt, the
acquisition of miscellaneous assets of $150,215 and the payment of accounts
payable, judgments and defaults and accrued interest of $463,877. Cash was
provided by non-cash expenses of depreciation of fixed assets of 5,600,
beneficial conversion feature of $242,988 and debt offering costs of $40,529. In
addition, cash was provided by increases in other current liabilities of $6,039.
Cash Flows From Investing Activities. We provided cash of $5,240,000 in
investing activities in the six months ended June 30, 2005 from the proceeds
from preferential distributions from Yorkville. As of June 30, 2005, we had no
further interest in Yorkville. These funds were used to fund the operating
activities of the Company, liquidate certain convertible notes and purchase
shares under the Company's stock buyback program.
Cash Flows From Financing Activities. We used $3,225,467 in net cash for
financing activities, consisting primarily of principal payments on debt to a
related party of $1,265,000, principal payments on certain convertible
debentures and the purchase of treasury stock under the Company's stock buyback
program.
As of June 30, 2005 we had net working capital of approximately $428,358.
We have reduced overhead expenses, which will have a favorable impact on cash
required to fund the business. We had no significant capital spending or
purchase commitments at June 30, 2005 other than a certain lease of corporate
office space
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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 six months ended June 30, 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 for which we have accrued liabilities and
other claims, have threatened litigation if they were 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.
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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
(b) Reports on Form 8-K.
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 HJ & Associates, L.L.C. has
been engaged as its registered public accounting firm, effective May 3, 2005.
The Company has not consulted with HJ & Associates on any matters described in
paragraph (a)(2)(i) or (ii) of Item 304 of Regulation S-B during the last two
years.
Report on Form 8-K filed August 3, 2005 pursuant to Item 8.01 (Other
Events) reported that the Company has engaged the services of Worldwide Stock
Transfer, LLC as its new stock transfer agent effective July 26, 2005.
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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: August 15, 2005 CELERITY SYSTEMS, INC.
By: /s/ Robert Legnosky
-------------------------------
Robert Legnosky
Chief Executive Officer and
Interim Chief Financial Officer
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