UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED DECEMBER 29, 2007
COMMISSION FILE NUMBER: 0-15840
KINGSTON SYSTEMS INC.
(Exact name of registrant as specified in its charter)
Delaware 14-1688816
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8 Merrill Industrial Drive Unit 12
Hampton, New Hampshire 03842
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(Address of principal executive offices) (Zip code)
Registrant's telephone number: 603-758-1333
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports); and (2) has been subject to such filing
requirements for the past 90 days. YES /X/ NO / /
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). YES / / NO /X/
Indicate by check mark whether the registrant is an accelerated Filer (as
defined in Rule 12-b-2 of the Exchange Act). YES / / NO /X/
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.
Title of Class Number of Shares Outstanding
----------------------------- -----------------------------
Common Stock
(par value $0.01 per share) 5,576,234 as of February 8, 2008
Transitional small business disclosure format (Check one) YES / / NO /X/
FORM 10-QSB PAGE 1
INDEX
PAGE
NUMBER
------
PART I. FINANCIAL INFORMATION
ITEM 1. Unaudited Financial Statements
Unaudited Condensed Consolidated Balance Sheets as of
December 29, 2007 and March 31, 2007 2
Unaudited Condensed Consolidated Statements of Operations for the
Three Months Ended December 29, 2007 and December 30, 2006 3
Unaudited Condensed Consolidated Statements of Operations for the
Nine Months Ended December 29, 2007 and December 30, 2006 4
Unaudited Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended December 29, 2007 and December 30, 2006 5
Notes to the Unaudited Condensed Consolidated Financial Statements 6-10
ITEM 2. Management's Discussion and Analysis or Plan 10-15
of Operations
ITEM 3. Controls and procedures 16
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings 17
ITEM 2. Unregistered Sales of Equity Securities 17
ITEM 3. Defaults Upon Senior Securities 17
ITEM 4. Submission of Matters to a Vote of Security Holders 17
ITEM 5. Other Information 17
ITEM 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits
FORM 10-QSB PAGE 2
ITEM 1: FINANCIAL STATEMENTS
KINGSTON SYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
December 29, 2007 March 31, 2007
------------------ ------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 3,959 $ 42,194
Accounts receivable, less allowance for doubtful accounts of $2,474 and $0 as of
December 29, 2007 and March 31, 2007, respectively 196,136 110,749
Inventory 171,542 89,391
Related party leases, current portion 34,123 25,841
Related party receivable 77,083 60,378
Other current assets 9,219 5,444
------------------ ------------------
TOTAL CURRENT ASSETS 492,062 333,997
OTHER ASSETS:
Property and equipment, net of accumulated depreciation of $23,330 and $16,202 as
of December 29, 2007 and March 31, 2007, respectively 37,355 40,598
Software, net of accumulated amortization of $6,916 and $2,315 as
of December 29, 2007 and March 31, 2007, respectively 12,959 17,559
Software development costs, net of accumulated amortization of $43,485 and $29,006
as of December 29, 2007 and March 31, 2007, respectively 112,202 126,681
Security deposits 12,000 12,000
Related party leases, non-current portion 40,636 31,956
------------------ ------------------
TOTAL ASSETS $ 707,214 $ 562,791
================== ==================
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 125,172 $ 41,613
Related party advances 1,455,182 854,848
Accrued expenses 53,458 63,964
Deferred revenue 158,834 24,582
Capitalized lease obligations, current portion 45,880 36,048
Credit card advances, related party 85,300 72,128
Credit card liability 77,083 60,378
Wages payable, related party 46,300 46,300
Notes payable, related parties, current portion including accrued interest of
$11,228 and $6,416 as of December 29, 2007 and March 31, 2007, respectively 27,428 38,616
Loan payable, Flood Trust, related party, including accrued interest of
$13,984 and $8,000 as of December 29, 2007 and March 31, 2007, respectively 113,984 108,000
------------------ ------------------
TOTAL CURRENT LIABILITIES 2,188,621 1,346,477
LONG TERM LIABILITIES:
Note payable, related party, non-current portion 64,000 48,000
Capitalized lease obligations, non-current portion 58,826 59,168
------------------ ------------------
TOTAL LIABILITIES 2,311,447 1,453,645
------------------ ------------------
SHAREHOLDERS' DEFICIT:
Common stock:
$0.01 par value; 10,000,000 shares authorized; 5,601,140 shares issued and 5,576,234
shares outstanding as of December 29, 2007 and March 31, 2007, respectively 56,012 56,012
Additional paid-in capital 11,838,230 11,838,230
Accumulated deficit (13,457,719) (12,744,340)
Treasury stock at cost; 24,906 shares (40,756) (40,756)
------------------ ------------------
TOTAL SHAREHOLDERS' DEFICIT (1,604,233) (890,854)
------------------ ------------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 707,214 $ 562,791
================== ==================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
FORM 10-QSB PAGE 3
KINGSTON SYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED
----------------------------------------
December 29, 2007 December 30, 2006
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Revenue $ 22,440 $ 273,318
Manufacturing and materials cost of sales 17,097 188,429
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Gross profit 5,343 84,889
------------------ ------------------
Operating expense:
Selling 28,682 25,901
General and administrative 141,305 196,750
Research and development 59,362 25,533
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Total operating expense 229,349 248,184
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Operating loss (224,006) (163,295)
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Other expense:
Interest expense and financing fees (10,633) (16,519)
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Total other expense (10,633) (16,519)
------------------ ------------------
Net loss before provision for income taxes (234,639) (179,814)
Provision for income taxes - -
------------------ ------------------
Net loss $ (234,639) $ (179,814)
================== ==================
Basic and diluted loss per share $ (0.04) $ (0.03)
================== ==================
Weighted-average number of common shares outstanding 5,576,234 5,576,234
================== ==================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
FORM 10-QSB PAGE 4
KINGSTON SYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
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December 29, 2007 December 30, 2006
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Revenue $ 201,190 $ 427,478
Manufacturing and materials cost of sales 182,059 332,547
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Gross profit 19,131 94,931
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Operating expense:
Selling 101,686 58,129
General and administrative 438,114 387,741
Research and development 164,702 115,444
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Total operating expense 704,502 561,314
------------------ ------------------
Operating loss (685,371) (466,383)
------------------ ------------------
Other expense:
Interest expense and financing fees (28,008) (45,110)
------------------ ------------------
Total other expense (28,008) (45,110)
------------------ ------------------
Net loss before provision for income taxes (713,379) (511,493)
Provision for income taxes - -
------------------ ------------------
Net loss $ (713,379) $ (511,493)
================== ==================
Basic and diluted loss per share $ (0.13) $ (0.09)
================== ==================
Weighted-average number of common shares outstanding 5,576,234 5,576,234
================== ==================
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
FORM 10-QSB PAGE 5
KINGSTON SYSTEMS INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
----------------------------------------
December 29, 2007 December 30, 2006
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (713,379) $ (511,493)
Adjustments to reconcile net loss to net cash
from operating activities:
Depreciation and amortization 26,207 22,583
Changes in assets and liabilities:
Accounts receivable (85,387) 58,425
Inventory (82,151) 129,015
Accounts payable 83,559 (81,230)
Other current assets (3,775) (4,265)
Deferred revenue 134,252 (94,312)
Accrued expenses (10,506) 1,700
Accrued interest 10,796 34,682
------------------ ------------------
NET CASH FROM OPERATING ACTIVITIES (640,384) (444,895)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and software (3,885) (16,190)
Note receivable, related party - (1,621)
------------------ ------------------
NET CASH FROM INVESTING ACTIVITIES (3,885) (17,811)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Related party working capital advances 790,574 678,864
Payment of related party advances (190,239) (221,779)
Receipts from credit card advances, related party 13,172 2,138
Payments on capital lease (7,473) (2,369)
------------------ ------------------
NET CASH FROM FINANCING ACTIVITIES 606,034 456,854
------------------ ------------------
Net decrease in cash (38,235) (5,852)
Cash and cash equivalents, beginning 42,194 19,722
------------------ ------------------
Cash and cash equivalents, ending $ 3,959 $ 13,870
================== ==================
Supplemental disclosure of cash flow information:
Non-cash investing and financing activities:
Shares issued in acquisition of Robotics, net of cash acquired $ - $ 1,797,764
Assumption of credit card liability from related party 16,705 57,632
Assumption of capital lease from related party 36,652 9,209
Reduction in capital lease liability from related party (19,689) (11,151)
Cash paid for interest $ 13,146 $ 8,044
Cash paid for income taxes - -
The accompanying notes are an integral part of these unaudited condensed
consolidated financial statements.
FORM 10-QSB PAGE 6
KINGSTON SYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, ACQUISITIONS AND MERGERS AND CONTROLLING SHAREHOLDER -- Kingston
Systems Inc. ("Kingston" or the "Company") was incorporated in 1983 and
reincorporated in Delaware on January 12, 1987. From 1987 through 1988, the
Company operated a proprietary recovery system that reclaimed paper pulp and
non-biodegradable polyethylene from packaging material scrap. The Company sold
the recovered fiber as substitute for virgin wood pulp and the reclaimed
polyethylene for use in injection molding. The Company experienced some
difficult and turbulent periods and was dormant for an extended period, from its
Securities and Exchange Commission ("SEC") filing of a Form 10-Q for the period
ended December 31, 1988 until August of 2005 when, as disclosed in a Form 8-K
filed on August 19, 2005, the Company acquired all of the issued and outstanding
common stock of Parallel Robotics Systems Corporation ("Robotics"), making
Robotics a wholly-owned subsidiary.
Robotics is in the business of manufacturing robotic machinery and it has been
an operating company since February 11, 2002.
The majority and controlling shareholders of the Company are the following:
NAME SHARES COMMENTS
---- ------ --------
Kingston Associates 105,902 Limited Partnership 60% controlled by Ralph McKittrick, CEO of Kingston Systems
Ralph McKittrick 32,453
Thor Corporation 2,332,133 Thor Corporation is 100% controlled by Ralph McKittrick
Flood Trust 612,251
Treasury Shares 24,906
All others 2,493,495
---------
TOTAL 5,601,140
=========
NATURE OF BUSINESS -- The Company's revenue generating subsidiary, Robotics, is
in the business of building robots, called rotopods and hexapods. These robots
are similar to the type of apparatus used to move flight simulators. The robots
allow movement in all geometric planes of motion and are primarily purchased by
companies for product development and testing, although some robots are used in
manufacturing. A significant component of the robot package is the customized
software program that operates the robot's motions. On average, it takes three
to six months to build a robot. Although many of the components of a robot are
standard from contract to contract, each contract typically requires certain
modifications to the standard product. A single contract typically generates
revenue of approximately $125,000.
BASIS OF PRESENTATION -- The financial statements included in the Form 10-QSB
have been prepared in accordance with generally accepted accounting principles
("GAAP") for interim financial information and with the instructions to Form
10-QSB and Item 310(b) of Regulation SB of the Securities Exchange Act of 1934.
The financial information furnished in the accompanying condensed consolidated
financial statements reflects all adjustments (consisting of only normal,
recurring adjustments) which, in the opinion of management, are necessary for a
fair presentation of the Company's financial position, the results of operations
and cash flows for the periods presented. Certain information and footnote
disclosures normally contained in financial statements prepared in accordance
with GAAP have been omitted, pursuant to such rules and regulations. The
Company's fiscal year is from April 1 through March 31 (April 1, 2007 through
March 31, 2008 is referred to as fiscal 2008 in this report).
CONDENSED INTERIM FINANCIAL STATEMENTS -- The accompanying unaudited condensed
consolidated financial statements include the accounts of Kingston, and its
subsidiary, Robotics. These financial statements should be read in conjunction
with the Company's Form 10-KSB for the fiscal year ended March 31, 2007, on file
with the SEC. These financial statements are condensed and, therefore, do not
include all disclosures normally required by accounting principles generally
accepted in the United States of America. In particular, the Company's
organization, nature of operations and significant accounting policies were
presented in Note 1 to the financial statements in that report. The results of
operations presented in the accompanying condensed consolidated financial
statements are not necessarily indicative of the results that may be expected
for the full year ending March 31, 2008.
CONSOLIDATION -- The accompanying unaudited condensed consolidated financial
statements include the accounts and transactions of Kingston and Robotics for
all periods presented. Intercompany accounts and transactions have been
eliminated in consolidation.
USE OF 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, disclosure of contingent assets and
liabilities and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
FORM 10-QSB PAGE 7
KINGSTON SYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION -- The Company categorizes all pre-shipment progress
payments from the customers and prepaid service agreement revenues as "deferred
revenue" on the balance sheet. Upon shipment of the robot, the Company releases
the pre-shipment liabilities to revenue, along with the related cost of sales.
The Company recognizes any prepaid service agreement revenue over the life of
the agreement, typically three years. Costs are recognized as incurred.
BUSINESS CONDITION -- The accompanying unaudited condensed consolidated
financial statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. As shown in the unaudited condensed consolidated
financial statements for the nine month period ended December 29, 2007, the
Company incurred a net loss of $713,379. As noted in the previous paragraph, the
Company's subsidiary, Robotics, receives progress payments from customers that
are not recognized as revenue until the product is shipped or billed as a
completed unit sold. That customer pre-shipment liability was $127,584 at
December 29, 2007 (shown as a component of "deferred revenue" on the Company's
balance sheet). The Company's losses from operations and the current ratio
deficit raise substantial doubt about the Company's ability to continue as a
going concern for a reasonable period of time. The condensed consolidated
financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets or the amount and
classification of liabilities which might be necessary should the Company be
unable to continue as a going concern. The Company's continuation as a going
concern is dependent upon its ability to generate sufficient cash flows to meet
its obligations on a timely basis, to obtain additional financing as may be
required, and ultimately to attain successful operations for an extended period
of time. Should the Company not succeed in its pursuit of either equity
financing, debt financing, or significant sales improvements, the Company may
not be able to continue as a going concern and may need to curtail or cease
operations.
ACCOUNTS RECEIVABLE -- Accounts receivable are recorded at the invoiced amount.
An allowance for doubtful accounts would be the Company's best estimate of the
amount of probable credit losses in the Company's existing accounts receivable.
Management regularly analyzes accounts receivable, including any historical
write-off experience, customer creditworthiness and current economic trends to
determine a need, if any, for an allowance for doubtful accounts. As of December
29, 2007 and March 31, 2007, allowance for doubtful accounts was $2,474 and $0,
respectively.
In November, 2006 the Company negotiated the terms of sale for segments of the
Company's accounts receivable to LSQ Funding Group, L.C. ("LSQ") located in
Orlando, Florida. The terms include the provisions that the initial payment to
the Company will be approximately 80% of the approved receivables purchased and
that the Company is to receive the balance of 20% of the total receivable, less
applicable finance fees of 2% of the receivable balance factored and additional
administrative fees, when the customer pays the total receivable to LSQ. In the
third quarter of the Company's 2008 fiscal year, the Company had $0 in new
factoring transactions and received $60,180 in payment of receivables from
previous transactions, less applicable fees of $524 (shown as a component of
interest expense in the Company's statement of operations). In the first nine
months of fiscal 2008, the Company had $62,622 in new factoring transactions and
received $114,070 in payment of receivables from previous transactions, less
applicable fees of $4,086.
As of February 12, 2008, the Company terminated its relationship with LSQ
Funding Group. Effective February 2, 2008, the Company entered into an agreement
with Coastline Financial Services Group ("Coastline") for the sale of segments
of the Company's accounts receivables. The terms of the agreement are
essentially the same as the terms the Company had with LSQ. The Company can sell
up to $400,000 of its receivables to Coastline.
INVENTORY -- Inventory is stated at the lower of cost (first-in, first-out) or
market. Market value is estimated based upon assumptions made about future
demand and market conditions. If the Company determines that the actual market
value differs from the carrying value of the inventory, the Company will make an
adjustment to reduce the value of the inventory. At December 29, 2007 and March
31, 2007, inventory consisted of work in process materials, capitalized labor
and spare parts. Those amounts were:
INVENTORY AS OF: DECEMBER 29, 2007 MARCH 31, 2007
----------------- -----------------
Work in Process $ 104,369 $ 26,414
Capitalized Labor 40,526 40,526
Spare Parts 22,451 26,647
----------------- -----------------
Total $ 171,542 $ 89,391
INCOME TAXES -- No income taxes have been paid or accrued because the Company
has had no net taxable income since inception for any fiscal period for which a
tax return is required. The Company recognizes the amount of income taxes
payable or refundable for the current year and recognizes deferred tax assets
and liabilities for the future tax consequences attributable to differences
between the financial statement amounts of certain assets and liabilities and
their respective tax bases (if such a difference exists), and the effect of net
operating loss carry-forwards. Deferred tax assets would be reduced by a
valuation allowance to the extent that uncertainty exists as to whether the
deferred tax assets would be ultimately realized.
NET INCOME (LOSS) PER SHARE -- Basic earnings (loss) per share is calculated by
dividing the income or loss available to common shareholders by the
weighted-average number of common shares outstanding during each period. Diluted
earnings (loss) per share is identical to basic earnings (loss) per share, as
the Company has no dilutive securities at this time.
FORM 10-QSB PAGE 8
KINGSTON SYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
INTANGIBLE ASSETS -- The Company has an intangible asset, identified as
"Software development" reflected on its consolidated balance sheets as of
December 29, 2007 and March 31, 2007. This robotic software is a long-term asset
and is the Company-built control system software for operating the machines that
Robotics has been manufacturing and selling, and continues to sell to various
industries. The amortization periods for the software development asset have
been determined to be five and ten years. The five year amortization period
applies to the portion of the asset that was developed to support additional
generic motion control systems. The ten year amortization period applies to the
portion of the asset that was developed as additions to the core application
programming, essential to the basic operation of the robot.
The carrying value of the software development asset is compared to its net
realizable value at each balance sheet date, with any impairment recognized
immediately. No material changes to management's net realizable value estimate
occurred in the three or nine month period ended December 29, 2007.
SHIPPING COSTS -- Costs to ship products to customers are charged to cost of
sales as incurred and billed to customers at cost. During the three month
periods ended December 29, 2007 and December 30, 2006, the Company incurred
$1,554 and $3,567 of shipping costs, respectively. During the nine month periods
ended December 29, 2007 and December 30, 2006, the Company incurred $5,497 and
$4,035 of shipping costs, respectively.
NOTE 2 -- RELATED PARTY TRANSACTIONS
As of December 29, 2007, the Company was involved in the following related party
transactions:
- The Company has a note payable, related party, to George Coupe, Chief
Financial Officer of the Company and President of Robotics, in the amount
of $200, included in notes payable, related parties, current portion on
the Company's December 29, 2007 and March 31, 2007 balance sheets. This
demand note was issued in 2002 as part of the initial capitalization of
Robotics and is due March 31, 2011. The note was non-interest bearing
through April 1, 2006. Subsequent to that date, the note bears interest
at the rate of 8.0% per year (accrued interest of $28 as of December 29,
2007).
- The Company has a note payable, related party, non-interest bearing to
Ralph McKittrick in the amount of $46,300 for unpaid wages prior to
December 31, 1988. The amount of the debt has not changed since it was
incurred. It is reflected in current liabilities on the Company's
December 29, 2007 and March 31, 2007 balance sheets.
- The Company, through its Robotics subsidiary, has a relationship with a
privately owned company named Holo-Dek Gaming Inc. ("Holo-Dek"). Ralph
McKittrick, the CEO of Kingston, is also the CEO of Holo-Dek (Ralph
McKittrick is the largest shareholder, directly and indirectly, in
Kingston and the second largest shareholder in Holo-Dek). Robotics and
Holo-Dek share office facilities, a number of employees and certain
expenses. The Flood Trust (the "Trust"), an investor in Kingston and
Robotics, is also a significant lender of working capital to Holo-Dek. As
of December 29, 2007 and March 31, 2007, Holo-Dek has provided working
capital advances to the Company in the amount of $1,455,182 and $854,848,
which are shown in current liabilities on the Company's balance sheet.
The indebtedness to Holo-Dek is evidenced by a note payable on demand on
or after March 31, 2008. The note payable presently does not require the
payment of interest. After March 31, 2008, the note will bear interest at
the rate of 8.0% per annum.
- The Company has credit card advances, related party, recorded in current
liabilities on its December 29, 2007 and March 31, 2007 balance sheets.
Those advances are from George Coupe, Chief Financial Officer of the
Company and President of Robotics. Those advances are for the financing
of operations and certain capital asset purchases. Those advances consist
of the balances on personal credit cards of George Coupe that were and
are being used exclusively for the Company's expenditures. The interest
rates being paid to the credit card companies for the three and nine
month periods ended December 29, 2007 varied between 12.15% and 24.24%.
The interest rates being paid to the credit card companies for the three
and nine month periods ended December 30, 2006 varied between 2.99% and
24.24%. The average interest rate paid for the three and nine month
periods ended December 29, 2007 were 15.26% and 15.54%, respectively.
The average interest rate paid for the three and nine month periods ended
December 30, 2006 were 12.56% and 9.93%, respectively.
- Robotics has a licensing and royalty agreement with the Hexel Corporation
("Hexel") relating to the co-ownership of certain robotics technology
originally developed by Hexel. Hexel is still in existence, though, with
limited operations. Two current employees of Robotics are stockholders in
Hexel. In addition, a major stockholder in the Company also owns a minor
interest in Hexel. Hexel has licensed the use of all intellectual
property to Robotics. Under the agreement, Robotics is required to pay to
Hexel, on a quarterly reporting basis, 2% of gross sales, less shipping,
tax, and other customary costs normally born by the seller, on products
sold which incorporate the licensed software and intellectual property
(the payment date was extended by Hexel to March 31, 2008). Any
enhancements or developments by Robotics to the robot technology,
including software, are co-owned with Hexel pursuant to the licensing
agreement. At December 29, 2007 and March 31, 2007, $26,226 and $23,291
was owed to Hexel (included in accrued expenses on the Company's balance
sheet), with $2,935 recorded as expense during the three and nine months
ended December 29, 2007 and $1,892 and $3,928 recorded as expense during
the three and nine months ended December 30, 2006, respectively.
- The Company has a related party note and loan payable to the Trust,
discussed in Note 3, and the Company is the lessee on seven related party
capital leases, discussed in Note 7.
- The Company's Robotics subsidiary is the named owner on a number of
credit cards used by Holo-Dek. As of December 29, 2007 and March 31,
2007, the balances on those credit cards totaled $77,083 and $60,378,
respectively, and are recorded as a related party receivable and credit
card liability on the Company's balance sheets. Additionally, there is
approximately $98,000 of total credit limit available on all Robotics
credit cards, whether used by Robotics or Holo-Dek.
FORM 10-QSB PAGE 9
KINGSTON SYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3 -- NOTE AND LOAN PAYABLE
The Company has a note payable to the Trust for $80,000. Of that amount, $16,000
principal and $11,200 accrued interest is a current liability and $64,000 is a
long term liability. This note was issued in 2002 as part of the initial
capitalization of Robotics and required yearly principal payments of $16,000
beginning in fiscal 2007 through March 31, 2011. The note was non-interest
bearing through April 1, 2006 and now bears interest at the rate of 8.0% per
year (unpaid interest will be compounded). The Company received a waiver on
payment of principal and interest (and late fees, if applicable) until August
31, 2007 and, subsequent to that date, payments are only required if the Flood
Trust makes a written demand to Robotics (see Item 2, "Overview" for more detail
on the Company's relationship with the Flood Trust). As of the date of this
report, the Trust has not made a written demand for payments and the Company has
not yet made a payment on this note.
The Company has a loan payable to the Trust in the amount of $100,000, plus
accrued interest of $13,984, shown in current liabilities on the Company's
December 29, 2007 balance sheet. This loan was made in March of 2006 and was
payable on demand on or after March 16, 2007 at the discretion of the Trust. The
loan bears an annual interest rate of 8.0%. There has been no demand for payment
by the Trust and no payments have been made by the Company.
See Note 7 regarding the Company's capital lease obligations.
NOTE 4 -- INTANGIBLE ASSETS
The Company has an intangible asset, identified as "Software development"
reflected on its consolidated balance sheets as of December 29, 2007 and March
31, 2007. This is a long-term asset and consists of the Robotics-built control
system software for operating the machines that Robotics manufactures and sells
to various industries. The software is used to drive the motion simulation
robots that have been sold for bio medical research, positioning system robots
for automotive parts production and motion testing robots for oil pipeline
equipment. An analysis of the new robotic capability or features that each new
software project supports is conducted after the software project is completed
and after the new capability is tested functionally in the robot. The results of
this analysis are used to determine the expected life of the software for this
new capability in terms of future revenues. This software is co-owned with the
Hexel Corporation (see Note 2), the corporation that patented the robotic
technology and licensed the robotic technology to Robotics. The carrying value
of this software development asset is compared to its net realizable value at
each balance sheet date, with any impairment recognized immediately. No material
changes to management's net realizable value estimate occurred in the three or
nine month periods ended December 29, 2007 and management believes that the
value of the software is not impaired at December 29, 2007. The amortization
periods for the software development asset have been determined to be five and
ten years. The five year amortization period applies to the portion of the asset
that was developed to support additional generic motion control systems. The ten
year amortization period applies to the portion of the asset that was developed
as additions to the core application programming, essential to the basic
operation of the robot.
NOTE 5 -- SHAREHOLDERS' DEFICIT
At December 29, 2007 and March 31, 2007, the Company had 5,601,140 shares of
common stock issued and 5,576,234 shares outstanding. At December 29, 2007 and
March 31, 2007, the Company had 10,000,000 shares authorized with a par value of
$0.01. At December 29, 2007 and March 31, 2007, the Company had $11,838,230 in
additional paid-in capital, and an accumulated deficit of $13,457,719 and
$12,744,340, respectively. At December 29, 2007 and March 31, 2007, the Company
had 24,906 shares of treasury stock, stated at a cost of $40,756.
NOTE 6 -- INCOME TAXES
The Company had net operating loss ("NOL") carry-forwards up to March 1988 when
it last filed with the SEC before an extended period of dormancy (the next
filing with the SEC was for the year ended March 31, 2005) and has had net
operating losses since that date. These net operating loss carry-forwards expire
after 15 years for losses incurred through March 1997 and after 20 years for
losses incurred beginning with the March 1998 year-end. In accordance with the
Internal Revenue Code, the amount of these NOL's which can be utilized by the
Company is limited to an annual amount of approximately $79,531 and a total
limit of approximately $1,590,627 over a 20 year period. As of March 31, 2007
(fiscal year end), the Company had consolidated net operating loss
carry-forwards for federal income tax reporting purposes of approximately
$2,206,584 which, if unused, will expire between 2008 and 2027.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
OPERATING LEASE
The Company's Robotics subsidiary has a lease obligation for office space and an
assembly/ research and development facility in Hampton, New Hampshire, which is
accounted for as an operating lease. The term of the lease is six years, ending
March 31, 2008. The lease includes a base rent and common area/maintenance
payment. As discussed in Note 2, Robotics shares office space with Holo-Dek. The
costs of leasing the facility in Hampton, New Hampshire are allocated between
the two companies based upon square footage used. The Company's share of the
leasing costs for the three and nine month periods ended December 29, 2007 were
$12,956 and $34,549, respectively. The Company's share of the leasing costs for
the three and nine month periods ended December 30, 2006 were $8,421 and
$25,263, respectively. The increase in rent over the prior year periods was
primarily due to an increase in space being used by Robotics. Kingston required
no space during the nine month periods ended December 29, 2007 or December 30,
2006.
FORM 10-QSB PAGE 10
KINGSTON SYSTEMS INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS AND ITEM 2
CAPITAL LEASES
The Company has executed capital leases for manufacturing equipment and software
in the aggregate amount of $44,447. As of December 29, 2007, accumulated
depreciation on the equipment was $13,209 and the net book value was $31,238.
The Company's Robotics subsidiary is the named lessee on seven leases used to
acquire equipment for Holo-Dek (see Note 2). The Company has ultimate
responsibility to make all payments regarding the leases. A total of $124,199 of
equipment was acquired. The leases are reflected on the Company's balance sheet
as a related party lease asset and a capitalized lease obligation. All monthly
payments on the leases were made by Holo-Dek during the nine month period ended
December 29, 2007.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the
condensed consolidated financial statements and notes thereto appearing
elsewhere in this Form 10-QSB. This management's discussion and analysis
contains certain "forward-looking statements". Such statements relating to
future events and financial performance are forward-looking statements that
involve risks and uncertainties, detailed from time to time in the Company's
various SEC filings. No assurance can be given that any such matters will be
realized.
OVERVIEW Management's plan of operations for the next twelve months is to expand
Robotic's business, increasing revenue volume and improving operating margins,
in order to reduce, and eventually eliminate, its net losses. There are current
activities that are critical to successfully achieving that plan. The Company
has succeeded in manufacturing and shipping a new robot application system,
consisting of a hexapod-mounted water jet cutter ("Hex-A-Jet"), into industrial
markets where castings (or attachments to castings) are trimmed of excess
material ("flash") - a market application that has been previously untapped for
hexapodic robot sales. In addition, the Company has been in continuing
discussions with Holo-Dek to become a significant supplier of robots to
Holo-Dek's planned build-out of video gaming centers (the Company has also been
in continuing discussions with Holo-Dek regarding acquiring Holo-Dek as part of
Kingston's business expansion plan). There can be no assurance that management's
plan of operations will be successful.
The Company is also evaluating its cost structure and robot designs in order to
reduce cost of sales for each robot sale. A good portion of that cost reduction
is expected to come from cost savings related to significant product redesigns
that simplify component manufacturing and to volume purchases of fabrications
and purchased parts. The Company continues to focus on standardization, in order
to reduce or eliminate non-recurring engineering and design costs, and to
develop new applications and additional markets for existing robot designs. In
addition, the Company has recently designed a hexapod that employs slides
instead of carriages around a ring, or actuators and integral electromechanical
systems, eliminating the need for a large and expensive control cabinet that
currently is situated near each robot, with control and power cables connecting
the cabinet to the robot. As a result of this new design, this system is
expected to be produced at a much lower cost than any robot the Company has ever
made before, with significantly expanded market opportunities due to the lower
prices that will now be possible for this new type of hexapod.
The Company is currently reliant upon working capital loans that originate
primarily from the Flood Trust through its investments and loans to Holo-Dek
which, in turn, are provided to the Company to assist in the funding of
Robotic's operations. Although this funding source has proven reliable in the
past (as the Trust, previously a significant provider of funding directly to
Robotics, is also a significant provider of funding to Holo-Dek), there is no
guarantee that this funding source will continue to be available for the next
twelve months. The Company is also continuing to seek private investments from
other sources, but presently has no definitive agreements in place with respect
to obtaining such investments.
Should the Company not be able to generate the funding necessary to meet its
obligations on a timely basis, the Company may not be able to continue as a
going concern and may need to curtail or cease operations.
PLAN OF OPERATIONS
As discussed in Note 1 and below in the Management's Discussion and Analysis,
Kingston was a dormant company from 1988 until, in August of 2005, Kingston
acquired Robotics in an attempt to revive itself. Robotic's business, although
not yet profitable or cash flow self-sufficient, presents opportunities for
expansion. Management believes that Robotic's products are unique in the
industry because they are more technologically advanced than potential
competitor's products.
The Company's sales force is focused on selling robots into a number of venues.
In existing markets, such as universities using the robots for bio-medical
research, the Company is approaching existing customers for additional orders
and exploring opportunities to sell products to other universities. But, the
Company feels that its ability to achieve profitability is contingent upon new
products and applications in new markets. The Company's P3000 Water-Jet Cutter
is a new product, (the water jet cutter is more accurate than the current
devices in use and handles 5 axis work, which is currently rare in the
industry), being direct-marketed at this time primarily to the heavy equipment
industry and to defense contractors. The first Hex-A-Jet robot (casting excess
material removal) manufactured by Robotics was sold to Armor Holdings, a
subsidiary of BAE Systems, PLC, a major defense contractor, in the first fiscal
quarter of the Company's current fiscal year, and was shipped by Robotics to Jet
Edge, Inc. in September, 2007. Jet Edge is attaching their water jet cutting
machine to the Robotics robot and plans to install the complete system in the
Armor Holdings plant by the end of the Company's fourth quarter. In addition,
Robotics has produced a special R 2000 machine for Holo-Dek. With this machine,
Robotics is working on the perfection of a package that will allow Holo-Dek to
integrate the simulator platform with different video games for the amusement of
its customers. Robotics hopes to offer a similar product to companies involved
with flight training for small aircraft. Finally, the Company is exploring new
applications in the separation of tire and rubber compunds from steel belting
for a tire material recycling customer using the Hex-A-Jet technology.
FORM 10-QSB PAGE 11
Robotics also intends to adopt a strategy of pursuing the licensing of its core
technology to strategic alliance partners. To date, no potential partners have
signed a strategic partnership agreement with the Company. The plan is to have
these partners manufacture and distribute entire machines, or Robotics may elect
to provide only the core components. Robotics intends to be the primary provider
of six degrees of freedom parallel platform manipulator robots to various new
applications. By establishing such strategic relationships and leveraging the
manufacturing and marketing strengths of such strategic partners, Robotics
expects to gain greater recognition and increase its revenue.
Given that the Company has limited funds available at this time, extensive
marketing of its products is still only in the planning stages. The Company
currently uses its sales force, its web site and business contacts to market its
products. In addition, the Company's sales force is being expanded from one to
three field sales positions at this time. The Company plans to develop more
extensive use of print advertising and display its products at numerous industry
conferences if improved sales provide additional funding.
Ongoing research and development is a priority of the Company, with the aim of
providing both standardized and custom advanced hardware and software solutions
to its customers in a wide variety of machine tooling, manufacturing, defense,
R&D and other commercial settings. Currently, the Company's engineers are
focusing on a number of different arenas for research and development efforts.
First, the Company will continue to work on the software algorithms to expand
the applications and industries served by the Company. Second, the Company is
developing new robot component parts designs with its suppliers and
manufacturing partners. This will allow the Company to purchase lower cost
components. Third, the Company is planning to use one of its platforms as a
simulator for both the small aircraft flight training industry, as well as an
interactive ride for video game entertainment. The research and development
effort will seek to create the tools necessary for game developers and flight
schools to integrate their current or future software products with the
Company's simulator.
Another area of research and development on which Robotics is focused on
perfecting is the software and hardware capabilities of the R Series line for
Robotic's bio-medical opportunities. The main concentration has been
implementing a dual encoder set-up on the motors to allow for precise motion
under heavy and varied load, coupled with a software interface that allows
communication directly with Math Lab and the Lab View products (which are
standard in this industry).
On the P Series line, Robotics has focused on improving the joint retaining
rings and sockets for even greater accuracy, manufacturability and ease of
assembly. The design of a new P3000 model robot for use in various water-jet
applications has been successful and two units of this model have now been
manufactured and shipped by Robotics to its customers.
In regards to the Company's Robotics business, given the current sales volumes,
the Company does not expect to acquire or dispose of any significant amount of
capital assets, nor does it expect to significantly expand or contract its
current number of employees. If one or more of the above noted plans is
successful and sales increase significantly, the Company would have to expand
resources. Until sales improve, the Company will continue to be reliant upon
working capital advances from the Flood Trust (through the Trust's investments
in Holo-Dek - the Company has been and is reliant upon the Flood Trust for the
majority of its working capital financing) and other less significant sources of
funding, to maintain its liquidity and continue operations. If such advances
cease or are reduced, the Company would be forced to contract resources.
RESULTS OF OPERATIONS SUMMARY
Kingston was incorporated in 1983 and re-incorporated in Delaware in 1987. The
Company operated a proprietary recovery system that reclaimed paper pulp and
non-biodegradable polyethylene from packaging material scrap. The Company sold
the recovered fiber as substitute for virgin wood pulp and the reclaimed
polyethylene for use in injection molding. The Company experienced some
difficult and turbulent periods and was dormant for an extended period, from its
last SEC filing of a Form 10-Q for the period ended December 31, 1988 until
August of 2005 when, as disclosed in a Form 8-K filed on August 19, 2005, the
Company acquired all of the issued and outstanding common stock of Parallel
Robotics Systems Corporation, making Robotics a wholly-owned subsidiary.
During the three and nine month periods ended December 29, 2007, the Company
focused a significant amount of resources on developing its Robotics business.
The Company focused its engineering staff on research and development, exploring
new methods of utilizing the Company's products in a variety of industries.
The Company, through its Robotics subsidiary, has a relationship with a
privately owned company named Holo-Dek (see Note 2). Robotics and Holo-Dek share
office facilities, a number of employees and certain expenses. Consequently, the
Company has developed allocation methodologies to best determine the expenses to
charge to each company. Space related costs are allocated based upon office
square footage, while payroll related costs are allocated based upon time
reports provided by the employees whose time is shared. This arrangement between
the two companies provides flexibility to quickly re-allocate resources,
dependent upon business conditions.
FORM 10-QSB PAGE 12
THE THREE MONTHS ENDED DECEMBER 29, 2007 COMPARED TO THE THREE MONTHS ENDED
DECEMBER 30, 2006
Revenues for the third quarters of fiscal 2008 and 2007 were $22,440 and
$273,318, respectively, reflecting solely the revenues of Robotics in both
periods. Equipment sales were $0 and $263,040 in the third quarters of fiscal
2008 and 2007, respectively. No robots were shipped in the three months ended
December 29, 2007 and two robots were shipped in the three months ended December
30, 2006. Total revenue related to the amortization of service agreement revenue
was $3,333 and $2,083 for the third quarters of fiscal 2008 and 2007,
respectively. The remaining revenue reflects service-related charges and
accessory sales. As stated in Note 1, the Company accounts for all pre-shipment
payments on its robotics products as a liability until the product is completed.
As of December 29, 2007, that liability was $127,584, related to an order
received in October that totaled approximately $318,000 and is expected to ship
in the Company's fourth quarter. As of December 29, 2007, the Company had no
progress payments not yet invoiced on robots in process.
Cost of sales was $17,097 and $188,429 for the third quarters of fiscal 2008 and
2007, respectively. In the third quarter of fiscal 2008, the amount primarily
reflects costs related to manufacturing shop overhead. In the third quarter of
fiscal 2007, cost of sales was related to the direct costs and overhead for the
two robots that were shipped during that period. Those costs were $141,641 for
materials and $5,735 for direct labor used in the production of the robots. The
remaining amount of $41,053 was primarily manufacturing shop overhead. As stated
in Note 1, the Company capitalizes direct material, direct labor and overhead
costs that apply to Robotic's customer orders in progress. That inventory is
reclassified to cost of sales at the time the product is completed. As of
December 29, 2007, the Company's inventory was $171,542, $103,621 of which
reflects customer order related inventory.
Selling expenses for the third quarters of fiscal 2008 and 2007 reflect solely
the expenses of Robotics. The Company's expenses were $28,682 and $25,901
respectively, which were comprised primarily of salaries related to the selling
of Robotic's products. The reason for the increase over the prior year period
was primarily due to the additional charges to Robotics for increased time spent
on robot sales by Holo-Dek personnel.
General and administrative expenses were $141,305 and $196,750 in the third
quarters of fiscal 2008 and 2007. For the third quarter of fiscal 2008, the
amount consisted of accounting and audit expenses of $11,553, engineering
related expenses of $30,943, other payroll related expenses of $47,417, legal
expenses of $7,197, rent and utility expenses of $11,313, insurance expenses of
$11,987 and stockholder relations costs of $12,736. The remaining expenses of
$8,159 were for travel, depreciation and other costs. For the third quarter of
fiscal 2007, the amount consisted of accounting and audit expenses of $61,890,
engineering related expenses of $30,253, $22,734 of other payroll related
expenses, legal expenses of $19,460, rent and utility expenses of $14,118,
stockholder relations expenses of $12,001 and insurance expenses of $21,491. The
remaining expenses of $14,803 were for travel, depreciation and other costs. The
year over year decrease in expenses was primarily due to accounting and audit
expense resulting from a reclass in the prior year from Holo-Dek to Robotics,
partially offset by an increase in payroll related expenses resulting from an
addition to management and, to a lesser degree, additional usage of Holo-Dek
resources by Robotics.
Research and development expenses were $59,362 and $25,533 for the third
quarters of fiscal 2008 and 2007. In both quarters, those costs were primarily
related to the allocation of the compensation of the engineering staff for time
spent in the continuing development of Robotic's products, primarily focused on
robotic control enhancements. The increase over the prior year period was
primarily due to the allocation of a higher proportion of engineering time to
research and development during the third quarter of 2008, compared with the
third quarter of 2007, as the Hex-A-Jet system being tested for a customer
required a significant amount of additional development time by Robotics
engineering personnel during the fiscal 2008 third quarter.
Interest expense for the third quarters of fiscal 2008 and 2007 was $10,633 and
$16,519. In the third quarter of 2008, this reflects interest related to the
notes payable, related parties, the costs related to the factoring of the
receivables and the credit card advances, related party. In fiscal 2007, the
interest expense was primarily related to the judgment payable, which was
subsequently settled at a considerable discount in the fourth quarter of the
Company's 2007 fiscal year, and, to a lesser degree, the notes payable, related
parties, the costs related to the factoring of the receivables and the credit
card advances, related party.
The Company's loss for the third quarter of fiscal 2008 was $234,639 and the
Company's loss for the third quarter of fiscal 2007 was $179,814. These losses
resulted in a per share loss of $0.04 and a per share loss of $0.03 in the third
quarters of fiscal 2008 and 2007, respectively. The losses in the third quarters
of 2008 and 2007 resulted primarily from the level of general and administrative
expenses (as discussed previously) and a revenue level insufficient to cover the
fixed costs of operations.
THE NINE MONTHS ENDED DECEMBER 29, 2007 COMPARED TO THE NINE MONTHS ENDED
DECEMBER 30, 2006
Revenues for the first nine months of fiscal 2008 and 2007 were $201,190 and
$427,478, respectively, reflecting solely the revenues of Robotics in both
periods. In the first nine months of 2008 and 2007, $8,333 and $7,083 of the
total revenue was related to the amortization of service agreement revenue,
respectively. During the first nine months of fiscal 2008, the Company completed
one major project for one robot and recognized the sales for that project.
Additionally, the Company had sales due to smaller projects, such as frames and
repairs. In the prior year period, the sales were primarily related to the
completion of three major projects and, to a lesser degree, smaller projects
such as frames and repairs. As stated in Note 1, the Company accounts for all
pre-shipment payments on its robotics products as a liability until the product
is completed. As of December 29, 2007, that liability was $127,584, primarily
related to an order received in October that totaled approximately $318,000 and
is expected to ship in the Company's fourth quarter. As of December 29, 2007,
the Company had no progress payments not yet invoiced on robots in process.
In the first nine months of fiscal 2008 and 2007, cost of sales was $182,059 and
$332,547, respectively. Such amounts primarily reflect costs related to the
Robotics sales orders shipped in the periods, of which $106,066 and $237,589,
respectively, were for materials and $19,384 and $21,253, respectively, were for
direct labor used in the production of the robots. The remaining amounts of
$56,609 and $73,705, respectively, were primarily manufacturing shop overhead.
The decrease in the cost of sales, period over period, was primarily due to
lower robot sales.
FORM 10-QSB PAGE 13
As stated in Note 1, the Company capitalizes direct material, direct labor and
overhead costs that apply to Robotic's customer orders in progress. That
inventory is reclassified to cost of sales at the time the product is completed.
As of December 29, 2007, the Company's inventory was $171,542, $103,621 of which
reflects customer order related inventory.
Selling expenses for the first nine months of fiscal 2008 and 2007 reflect
solely the expenses of Robotics. The Company's expenses were $101,686 and
$58,129, respectively, which were comprised primarily of salaries related to the
selling of Robotic's products. The reason for the increase over the prior year
period was primarily due to additional charges to Robotics for increased sales
personnel time spent promoting robotics products by Holo-Dek personnel, which
helped generate the Company's new, third quarter order.
General and administrative expenses were $438,113 and $387,741 in the first nine
months of fiscal 2008 and 2007. For the first nine months of fiscal 2008, the
amount consisted of accounting and audit expenses of $64,329, engineering
related expenses of $110,508, $107,783 of other payroll related expenses, legal
expenses of $15,057, rent and utility expenses of $33,061, insurance expenses of
$34,899 and stockholder relations expenses of $33,856. The remaining expenses of
$38,620 were for travel, depreciation and other costs. For the first nine months
of fiscal 2007, that amount consisted of engineering related expenses of
$101,727, $64,688 of other payroll related expenses, accounting and audit
expenses of $64,206, rent and utility expenses of $41,731, stockholder relations
expenses of $25,126, legal expenses of $20,959 and insurance expenses of
$29,519. The remaining expenses of $23,741 were for travel, depreciation and
other costs. The year over year increase in expenses was primarily due to an
increase in other payroll related expenses resulting from an addition to
management. Additionally, there was some usage of Holo-Dek resources by
Robotics.
Research and development expenses were $164,702 and $115,444 for the first nine
months of fiscal 2008 and 2007. In both periods, those costs were primarily
engineering salary costs related to the continuing development of Robotic's
products. The development focus over the last nine months has been robotic
control enhancements. The increase over the prior year period was primarily due
to the allocation of a higher proportion of engineering time to research and
development during the first nine months of 2008, compared with the first nine
months of 2007.
Interest expenses for the first nine months of fiscal 2008 and 2007 were $28,008
and $45,110. In the first nine months of fiscal 2008, interest expense was
primarily finance charges related to the credit card advances, related party,
the notes payable, related parties, and the receivables factoring charges,
partially offset by a vendor credit for interest previously charged to the
Company. In the first nine months of fiscal 2007, interest expense was primarily
related to the judgment payable and, to a lesser degree, the notes payable,
related parties, and the credit card advance, related party. The decrease to the
prior year period was primarily due to the settlement of the judgment payable in
the fourth quarter of fiscal 2007.
The Company's losses for the first nine months of fiscal 2008 and 2007 were
$713,379 and $511,493 which resulted in a per share loss of $0.13 and $0.09 in
the first nine months of fiscal 2008 and 2007, respectively. The losses in both
periods resulted from a revenue level insufficient to cover the fixed costs of
the operations.
LIQUIDITY AND CAPITAL RESOURCES
On an ongoing basis, the Company's primary needs for liquidity and capital
resources are for the funding of salaries and other administrative expenses
related to the management of the Company, for payment of the cost of products
sold and inventory (if these expenditures are not covered by customer
pre-shipment deposits) and, to a lesser degree, for research and development.
During the first nine months of fiscal 2008, net cash used by operations was
$640,384, compared with $444,895 used in the prior year period. In the first
nine months of fiscal 2008, the net loss, along with the increase in receivables
and inventory (there is an order for 1 robot placed by Osram, in the amount of
$318,000, that is in production with an expected ship date in the Company's
fourth quarter) was partially offset by the increase in deferred revenue from
payments received on the Osram order. There are no orders in backlog at the time
of the filing of this report. In the prior year period, the net loss and the
reduction in payables and deferred revenue was partially offset by the reduction
in receivables and inventory, resulting from the completion of three major
projects during that period.
Net cash used in investing activities was $3,885 for the first nine months of
fiscal 2008, compared with net cash used of $17,811 for the prior year period.
The use of funds in the first nine months of fiscal 2008 was for computer and
manufacturing equipment. The use of funds in the first nine months of fiscal
2007 was primarily due to the purchase of robot testing equipment.
Cash provided by financing activities was $606,034 for the first nine months of
fiscal 2008, compared with net cash provided of $456,854 for the first nine
months of fiscal 2007. The source of cash in both periods of the 2008 and 2007
fiscal years was primarily from advances from Holo-Dek, a related party,
partially offset by repayments on those advances.
In November, 2006 the Company negotiated the terms of sale for segments of the
Company's accounts receivable to LSQ Funding Group, L.C. ("LSQ") located in
Orlando, Florida. The terms include the provisions that the initial payment to
the Company will be approximately 80% of the approved receivables purchased and
that the Company is to receive the balance of 20 % of the total receivable, less
applicable finance fees of 2% of the receivable balance factored and additional
administrative fees, when the customer pays the total receivable to LSQ. In the
first nine months of the Company's 2008 fiscal year, the Company had $62,622 in
new factoring transactions and has received $114,070 in payment of receivables
from previous transactions, less applicable fees of $4,086 (shown as a component
of interest expense in the Company's statement of operations).
As of February 12, 2008, the Company terminated its relationship with LSQ
Funding Group. Effective February 2, 2008, the Company entered into an agreement
with Coastline Financial Services Group ("Coastline") for the sale of segments
of the Company's accounts receivables. The terms of the agreement are
essentially the same as the terms the Company had with LSQ. The Company can sell
up to $400,000 of its receivables to Coastline.
FORM 10-QSB PAGE 14
The Company's cash and cash equivalents of $3,959 as of December 29, 2007, along
with potential future sales revenue, is not presently sufficient to support
current levels of operations for the next twelve months and it is therefore
necessary for the Company to continue to seek additional financing. The Company
is focusing its funding efforts on increasing its level of sales of robotic
products. In the interim, the Company anticipates subsidizing its working
capital needs with working capital advances from Holo-Dek (Holo-Dek is funded by
the Trust), although there can be no assurance that funding will continue to be
available.
Given the aforementioned discussion, there is no assurance that the level of
funding ultimately received by the Company will be sufficient to sustain the
Company's future operations. Should that occur, the Company may need to cease or
curtail its operations.
OFF BALANCE SHEET ARRANGEMENTS
As of December 29, 2007, the Company had no off balance sheet arrangements with
any parties.
LEGAL CONTINGENCIES
The Company may be subject to proceedings, lawsuits and other claims, including
proceedings under laws and government regulations related to the environment,
labor, product liability and other matters. The Company is required to assess
the likelihood of any adverse judgments or outcomes to these matters, as well as
potential ranges of probable losses. A determination of the amount of reserves
required, if any, for these contingencies is based on a careful analysis of each
individual issue with the assistance of outside legal counsel. The required
reserves may change in the future due to new developments in each matter or
changes in approach such as a change in settlement strategy in dealing with
these matters. At December 29, 2007, there were no outstanding legal
proceedings, nor are there any reserves established.
CRITICAL ACCOUNTING POLICIES
The Company's discussion and analysis of its financial condition and results of
operations is based upon its financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States.
The preparation of these financial statements requires the use of estimates that
affect the reported amounts of assets, liabilities and expenses. The Company
evaluates its estimates on an ongoing basis, including estimates for income tax
assets and liabilities and the impairment of the value of investments. The
Company bases its estimates on historical experience and on actual information
and assumptions that are believed to be reasonable under the circumstances at
that time. Actual results may differ from these estimates under different
assumptions or conditions. The Company believes that the following critical
accounting policies affect its more significant estimates used in the
preparation of its financial statements.
ACCOUNTING FOR INCOME TAXES
The Company currently records a full valuation allowance against the deferred
tax benefit for net operating losses generated, since in management's opinion
the net operating losses do not meet the more likely than not criteria for
future realization.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company reviews estimates of the value of its long-lived assets each
reporting period and will record an impairment loss to the extent that
management believes that there has been an impairment to the carrying value.
INVENTORY VALUATION
Inventory is stated at the lower of cost (first-in, first-out) or market. Market
value is estimated based upon assumptions made about future demand and market
conditions. If the Company determines that the actual market value differs from
the carrying value of the inventory, the Company will make an adjustment to
reduce the value of the inventory.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 157 "Fair Value
Measurements." This standard addresses how companies should measure fair value
when they are required to use a fair value measure for recognition or disclosure
purposes under GAAP. This standard is effective for all financial statements
issued for fiscal years beginning after November 15, 2007. The Company is in the
process of evaluating whether this standard will have a material effect on its
financial position, results of operations or cash flows.
FORM 10-QSB PAGE 15
In February 2007, the FASB issued SFAS No. 159 "The Fair Value Option for
Financial Assets and Financial Liabilities-Including an Amendment of FASB
Statement No. 115." This Statement permits entities to choose to measure many
financial instruments and certain other items at fair value. This Statement
applies to all entities, including not-for-profit organizations. Most of the
provisions of this Statement apply only to entities that elect the fair value
option. However, the amendment to FASB Statement No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," applies to all entities with
available-for-sale and trading securities. Some requirements apply differently
to entities that do not report net income. The fair value option established by
this Statement permits all entities to choose to measure eligible items at fair
value at specified election dates. A business entity shall report unrealized
gains and losses on items for which the fair value option has been elected in
earnings (or another performance indicator if the business entity does not
report earnings) at each subsequent reporting date. This Statement is effective
as of the beginning of an entity's first fiscal year that begins after November
15, 2007. Early adoption is permitted as of the beginning of a fiscal year that
begins on or before November 15, 2007, provided the entity also elects to apply
the provisions of FASB Statement No. 157, "Fair Value Measurements." No entity
is permitted to apply this Statement retrospectively to fiscal years preceding
the effective date unless the entity chooses early adoption. The choice to adopt
early should be made after issuance of this Statement but within 120 days of the
beginning of the fiscal year of adoption, provided the entity has not yet issued
financial statements, including required notes to those financial statements,
for any interim period of the fiscal year of adoption. This Statement permits
application to eligible items existing at the effective date (or early adoption
date). The Company does not expect this standard to have a material effect on
its financial statements.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in
Consolidated Financial Statements." This Statements requires the ownership
interests in subsidiaries held by parties other than the parent be clearly
identified, labeled, and presented in the consolidated statement of financial
position within equity, but separate from the parent's equity; the amount of
consolidated net income attributable to the parent and to the non-controlling
interest be clearly identified and presented on the face of the consolidated
statement of income; changes in a parent's ownership interest while the parent
retains its controlling financial interest in its subsidiary be accounted for
consistently; when a subsidiary is deconsolidated, any retained non-controlling
equity investment in the former subsidiary be initially measured at fair value;
entities provide sufficient disclosures that clearly identify and distinguish
between the interests of the parent and the interests of the non-controlling
owners. This Statement is effective for financial statements issued for the
fiscal years beginning after December 15, 2008. Management does not anticipate
this Statement will impact the Company's consolidated financial position or
consolidated results of operations and cash flows.
In December 2007, the FASB issued a revision of SFAS No. 141, "Business
Combinations". This Statement establishes principles and requirements for how
the acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and any non-controlling
interest in the acquire; recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase; determines what
information to disclose to enable users of the financial statements to evaluate
the nature and financial effects of the business combination. This Statement
applies prospectively to business combinations for which the acquisition date is
after the beginning of the first annual reporting period beginning after
December 15, 2008. Management does not anticipate this Statement will impact the
Company's consolidated financial position or consolidated results of operations
and cash flows.
FORWARD-LOOKING STATEMENTS
Statements contained in this Form 10-QSB that are not historical facts are
forward-looking statements. Such forward-looking statements involve known and
unknown risks, uncertainties and other factors which may cause the actual
results, performance or achievements or events, or timing of events, to differ
materially from any future results, performance or achievements or events, or
timing of events, expressed or implied by such forward-looking statements. The
Company cannot assure that it will be able to anticipate or respond timely to
the changes that could adversely affect the Company's operating results in one
or more fiscal quarters. Results in operations in any past period should not be
considered indicative of results to be expected in future periods.
While the Company continues to seek additional financing to support operations,
there can be no assurance that any such financing will be available on
acceptable terms. If such financing is not available on acceptable terms, the
Company may be unable to expand or continue its business as desired and
operating results may be adversely affected. Debt financing, if available, will
increase expenses and must be repaid, regardless of operating results. Equity
financing could result in dilution to existing stockholders.
Some of the more prominent known risks and uncertainties of the Company's
business are set forth below. However, this section does not discuss all
possible risks and uncertainties to which the Company is subject, nor can it be
assumed that there are not risks and uncertainties which may be more
significant.
- The Company's losses from period to period.
- The Company's current dependence upon a limited number of investors for
financing.
- The Company's ability to successfully market and sell its products in
view of changing trends, acceptance of products and technology and other
factors affecting market conditions, including the current U.S. economic
environment and the global economic and political uncertainties resulting
from the continuing war on terrorism.
- The Company's ability to locate and retain suppliers to deliver parts
or materials on time or compliant with the specifications required by the
Company, and at competitive prices.
- The Company's reliance upon a limited number of key suppliers.
The Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
FORM 10-QSB PAGE 16
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures designed to ensure that
information required to be disclosed in the Company's reports filed under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded,
processed, summarized, and reported within the required time periods, and that
such information is accumulated and communicated to the Company's management,
including the Chief Executive Officer and Chief Financial Officer, as
appropriate, to allow for timely decisions regarding disclosure.
As required by Rule 13a-15 under the Exchange Act, the Company has completed an
evaluation, under the supervision and with the participation of management,
including the Chief Executive Officer and Chief Financial Officer, of the
effectiveness and the design and operation of the Company's disclosure controls
and procedures as of December 29, 2007. Based upon this evaluation, management,
including the Chief Executive Officer and Chief Financial Officer, have
concluded that the Company's disclosure controls and procedures were effective
as of December 29, 2007 to ensure that material information relating to the
Company is recorded, processed, summarized and reported within the time periods
in which this Report on Form10-QSB has been prepared. Management has concluded
that the consolidated financial statements included in this Form 10-QSB present
fairly, in all material respects, the results of the Company's operations and
its financial position for the periods presented, in conformity with generally
accepted accounting principles.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's Chief Executive Officer and Chief Financial Officer have concluded
that there were no significant changes in the Company's internal controls or in
other factors that could significantly affect the effectiveness of these
controls for the three months ended December 29, 2007, the date of their most
recent evaluation of such controls, and that there were no significant
deficiencies or material weaknesses in the Company's internal controls.
Section 404 Assessment. Beginning with the Company's Form 10-KSB for the fiscal
year ending on March 31, 2008, Section 404 of the Sarbanes-Oxley Act will
require the Company's management to provide an assessment of the effectiveness
of the Company's internal control over financial reporting, and, beginning with
the Company's Form 10-KSB for the fiscal year ending on March 31, 2009, the
Company's independent registered public accountants will be required to audit
management's assessment. The Company is in the process of performing the system
and process documentation, evaluation and testing required for management to
make this assessment at the end of fiscal 2008 and for the Company's independent
registered public accountants to provide their attestation report at the end of
fiscal 2009. The Company has not completed this process or its assessment, and
this process will require significant amounts of management time and resources.
The evaluation of the Company's internal controls will be conducted under the
direction of its senior management.
Limitations on Effectiveness of Controls. A system of controls, however well
designed and operated, can provide only reasonable, and not absolute, assurance
that the system will meet its objectives. The design of a control system is
based, in part, upon the benefits of the control system relative to its costs.
Control systems can be circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of the control. In
addition, over time, controls may become inadequate because of changes in
conditions, or the degree of compliance with the policies or procedures may
deteriorate. In addition, the design of any control system is based in part upon
assumptions about the likelihood of future events
FORM 10-QSB PAGE 17
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) EXHIBITS
31.1 Certification of the Chief Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
31.2 Certification of the Chief Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
b) REPORTS ON FORM 8-K
Kingston filed a current report on Form 8-K on October 18, 2007. That report
stated that, on October 12, 2007, Robotics received an order from Osram
Sylvania for the purchase of three robots. The order totals approximately
$318,000 and is expected to be completed in the fourth quarter of fiscal
2008.
FORM 10-QSB PAGE 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
KINGSTON SYSTEMS INC.
DATE: FEBRUARY 19, 2008 BY: /S/ RALPH E. MCKITTRICK
-----------------------
RALPH E. MCKITTRICK
CHIEF EXECUTIVE OFFICER
DATE: FEBRUARY 19, 2008 BY: /S/ GEORGE J. COUPE
-----------------------
GEORGE J. COUPE
CHIEF FINANCIAL OFFICER