[LETTERHEAD OF STEVEN L. SISKIND]
December 27, 2011
United States Securities & Exchange Commission
Division of Corporate Finance
100 F Street NE
Washington, DC 20549
Attn: Caroline Kim, Staff Attorney
Craig Arakawa, Staff Accountant
Re: Amincor, Inc.
Dear Ms. Kim and Mr. Arakawa:
Attached is a draft of Amincor, Inc.'s proposed response to the
Commission's October 6, 2011 comment letter (the "Comment Letter"). As
previously agreed, we are submitting the proposed response to the Comment Letter
for your review and approval prior to the filing of our amended Form 10 and Form
10-K.
Thank you for your courtesies in this matter.
Very truly yours,
/s/ Steven L. Siskind
------------------------------
Steven L. Siskind
SLS:ah
Enclosure
Amincor, Inc.
1350 Avenue of the Americas, 24th Floor
New York, New York 10019
Tel. # 347-821-3452
December __, 2011
United States Securities and Exchange Commission
Division of Corporation Finance
100 F. Street NE
Washington, DC 20549
Attn: Caroline Kim
Re: Amincor, Inc.
Amendment No. 4 to Registration Statement on Form 10
Filed August 8, 2011
Form 10-Q for the Quarter Ended September 30, 2011
Filed November 30, 2010
Form 10-K for the Year Ended December 31, 2010
Filed April 18, 2011, as amended August 25, 2011
Form 10-Q for the Quarter Ended June 30, 2011
Filed August 16, 2011
File No. 000-49669
Dear Ms. Kim:
We have submitted today for filing Amendment No. 5 to the Registration Statement
on Form 10 for Amincor, Inc. as referenced above in response to the Securities
and Exchange Commission letter dated October 6, 2011. We are also responding
herewith to the Commission's other comments with respect to the other filings
referenced above.
AMENDMENT NO. 4 TO REGISTRATION STATEMENT ON FORM 10 FILED AUGUST 8, 2011.
GENERAL
1. We refer you to prior comments 1 and 2 from our letter to you dated
November 3, 2010. Where appropriate, make corresponding revisions to the
amended Form 10-K and to subsequent Forms 10-Q as well.
ANSWER
We have complied with these comments.
1
2. We note your response to prior comment 2 from our letter to you dated June
15, 2011. Please provide us with a copy of the Consent Order from the
Cayman Islands Court, dated November 10, 2010.
ANSWER
A copy of the Consent Order is attached hereto as Exhibit A.
3. With a view toward expanded disclosure and other than with regard to the
appointment of independent liquidators, please advise as to the status of
the winding up petition.
ANSWER
As previously advised, the legal proceeding related to the Winding-Up
Petition (the "Petition") in the Cayman Islands does not include the
Company or any of its officers or directors.
An order with respect to the Petition was entered into by consent between
the Petitioner and Capstone Cayman Special Purpose Fund, LP (the "Fund")
with the parties agreeing upon the appointment of Deloitte & Touche as
liquidators (the "Liquidators"). The Consent Order was signed by the The
Grand Court of the Cayman Islands (the "Court") on November 10, 2010 and to
our knowledge there are no further Court proceedings pending with respect
to the Petition. All of the assets of the Fund were assigned to Amincor,
Inc. upon the advice of Houlihan Smith & Company, Inc., the financial
adviser that was recommended to the Fund's management by the Petitioner. As
a result of the asset assignment, the Fund's activities were terminated. We
have been advised by the Fund's Cayman counsel that to date no formal
reports have been filed with the Court. We further understand that the
Liquidators present intention is to both file a Final Report with the Court
and to hold a final meeting in or about January 2012. It is anticipated
that thereafter an application to dissolve the Fund will be made by the
Liquidators in the first or second quarter of 2012. Additionally, we
understand from the Fund's Cayman counsel that the Liquidators do not
contemplate undertaking any formal proceedings against the Fund. Therefore,
we anticipate that the Fund will be formally dissolved in the first or
second quarter of 2012 and the Liquidators' appointment will be terminated
at that time.
FINANCIAL STATEMENTS
GENERAL
4. We have read your response to prior comment 5 explaining that you did not
include financial statements for the operating companies that you
identified for acquisition in your registration statement because you had
not determined that such entities would in fact be contributed to the
consolidated entity "until subsequent to the report dates." We do not
believe you have properly understood the criteria, which establishes the
requirement for these financial statements.
2
Under Rule 8-04 of Regulation S-X, you need to evaluate for significance
all businesses to- be-acquired that are probable at the time of filing your
registration statement or which become probable prior to the date that it
becomes effective. Under FRC ss.506.02, consummation of a transaction is
considered probable whenever financial statements of the registrant alone
would not provide investors with adequate financial information with which
to make an investment decision.
You identified the five companies in the registration statement, explained
that you had letters of intent to acquire them since January 2010, and
revealed that these entities were under common control prior to
contribution in October 2010. Given the circumstances, we do not believe
that your registration statement includes all required financial
statements. We reissue prior comment 5.
ANSWER
We are attaching as Exhibit B pro forma financial statements for the years
for which historical financial statements are required, including the years
ended December 31, 2008 and 2009.
FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2010, AS AMENDED AUGUST 25, 2011
BUSINESS
HISTORY OF THE COMPANY, PAGE 4
5. We note your response to prior comment 9 from our letter to you dated June
15, 2011, and we reissue the comment. Please amend the most recent filing
on Form 10-Q as well as your Form 10-K/A filed August 25, 2011, to provide
the disclosure we referenced in that comment.
ANSWER
We have amended the History of the Company section in the Form 10-K/A and
have included the requested disclosure in Footnote 1 "Organization and
Nature of Business" in the September 30, 2011 Form 10-Q filed on November
21, 2011 by inserting the following language where required:
"Therefore Joning, Inc. was delinquent in its Exchange Act reporting
obligations from the filing of its Form 10-Q for the quarter ended May
30, 2004 (which it filed on October 25, 2004) until June 2, 2008 when
it filed a Form 15 to terminate its registration."
3
6. We have read your response to prior comment 11 indicating that you do not
believe you should comply with Item 301 of Regulation S-K because you had
previously been a smaller reporting company, also explaining that you
believe Tyree Holdings Corporation is not your predecessor. We believe that
you will need to comply with the form requirements based on your status at
the time of filing the form; there is no allowance for not providing
details about earlier periods during which your filer status may have been
different.
You have presented in your annual report combined financial statements
reflecting the activities of companies which were under common control
prior to being contributed. The required disclosures of selected financial
data should be presented on a similar basis, including activity and
balances of all entities which are part of the consolidated group as of
December 31, 2010, on a combined basis for earlier periods when they were
also under common control.
The term predecessor is defined in Rule 405 of Regulation C. Item 301(a) of
Regulation S-K is applicable to you and your predecessor. You should
identify the predecessor, being the major portion of the business and
assets acquired, in relation to the combined operations of entities which
were under common control prior to being contributed during the year.
We understand that Tyree Holdings Corporation had significant operations in
advance of your sponsors establishing control. You filed financial
statements for this entity in a Form 8-K on October 19, 2010, which
included predecessor operations for the period January 1, 2008 through
January 17, 2008. You should have included selected financial data on a
similar basis for the 2006 and 2007 fiscal years to meet your disclosure
obligations.
If you do not have and are unable to acquire the information you should
submit an explanation of these limitations, including the reasons your
sponsors did not previously have access to this information as creditors,
if true; details of all efforts that you and your sponsors have made to
acquire the information, such as dates of contact and persons involved;
also the disclosure which you propose to explain the reasons for the
omission We reissue prior comment 11.
ANSWER
We will amend our Form 10-K filing so as to present Tyree as a predecessor
of Amincor, Inc. in the financial statements for the year ending December
31, 2008 and subsequently. However, we are not able to present any
financial information for any period prior to 2008 for the following
reason:
Prior to 2008, Tyree had incomplete and unreliable accounting records and
had never issued reliable financial statements. Consequently, the Company
is not able to present the selected financial data required by Item 301 of
Regulation S-K for each of the last five years. The Company will comply
4
with Item 301 of Regulation S-K to the extent it is able and present the
required selected financial data for each of the last three years in an
amended Form 10-K.
7. You will need to expand your disclosure to include all of the information
required to comply with Item 301 of Regulation S-K. In addition to the
foregoing, this should include a discussion of factors that materially
affect the comparability of the information; and of material uncertainties
which might cause the data not to be indicative of your future financial
condition or results of operations.
ANSWER
As noted throughout this response letter, the Company does not have and is
unable to acquire reliable financial information requested in order to
comply with Item 301 of Regulation S-K. The Company has complied with Item
301 of Regulation S-K to the extent it is able to present the required
selected financial data for each of the last three years in our amended
Form 10-K.
MANAGEMENT'S DISCUSSION AND ANALYSIS
GENERAL
8. We note that you have presented a discussion and analysis of your operating
results which is focused solely on segment operations. This does not comply
with the disclosure requirements of Item 303 of Regulation S-K. You need to
expand your disclosure to include a discussion and analysis based on your
consolidated financial statements, and which is responsive to the
requirements set forth in Instructions 1 through 5 to paragraph 303(a) of
Regulation S-K.
ANSWER
We have complied with these comments and added the following language to
page __ of the Amended Form 10 K Registration Statement.
AMINCOR, INC.
MANAGEMENT'S DISCUSSION OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The accompanying management's discussion of financial condition and results
of operations are presented on a combined basis for the years ended December 31,
2010, 2009 and 2008. The combined financial statements represent periods prior
to the acquisition of the five operating subsidiaries.
5
LIQUIDITY AND CAPITAL RESOURCES
During the twelve months ended December 31, 2010, cash flows provided by
operating activities were $7,098,933. This was principally due to cash flows
generated by amounts due from factor - related party during the twelve months
ended December 31, 2010 combined with a decrease in the net loss from operations
during the twelve months ended December 31, 2010 when compared to the twelve
months ended December 31, 2009. The cash provided from the amounts due from
factor - related party was related to the termination of the subsidiary company
factoring agreements which provided cash in the form of reserve disbursements
formerly held by the factor. During the twelve months ended December 31, 2009,
cash flows used in operating activities was $3,540,406. This decrease in cash
flows provided by operating activities was primarily due to an approximately
$11.5 million net loss which was partially offset by a decrease in accounts
receivable, an increase in accounts payable and an increase in Tyree's
construction in process account.
For the twelve months ended December 31, 2010, cash flows used in investing
activities were $300,146 mainly due to the purchase of additional equipment by
Tyree and Baker's Pride. This was partially offset by the sale of some unused
equipment by Tyree. For the twelve months ended December 31, 2009, cash flows
used in investing activities were $1,901,355 which was primarily due to the
purchase of additional equipment by Tyree and Tulare Holdings.
For the twelve months ended December 31, 2010, cash used in financing activities
was $4,456,028 mainly due to the repayment of assumed liabilities and payments
of our related party borrowings. For the twelve months ended December 31, 2009,
cash provided by financing activities was $5,782,486 which primarily consisted
of proceeds from loans from related parties.
As of December 31, 2010, the Company had a working capital deficit of
approximately $1.7 million and an accumulated deficit of approximately $28.1
million. Amincor continues to seek new capital in the form of equity and debt to
support the operations of its subsidiaries. Management believes that until there
is a market for Amincor's securities, raising additional capital will remain a
challenge. Management is currently engaged in several projects to raise capital
for the Company. Management continues to work with Baker's Pride's management
towards the completion of the USDA loan which will increase products offered to
the market and increase cash flow and EBIDTA once implemented.
RESULTS FROM OPERATIONS FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 2010 AND
2009
NET REVENUES
Net revenues for the twelve month period ended December 31, 2010 totaled
$86,059,572 compared to net revenues of $86,022,448 for the twelve month period
ended December 31, 2009, an increase in net revenues of $37,124. Despite the
addition of Masonry's revenue of approximately $5.8 million, decreases in net
revenues on Tulare Holdings, Epic Sports and Tyree left net revenues relatively
unchanged when comparing the twelve months ended December 31, 2010 to the twelve
months ended December 31, 2009.
6
COST OF REVENUES
Cost of revenues for the twelve month period ended December 31, 2010 totaled
$68,569,880 or approximately 79.7% of net revenues compared to $69,946,088 or
approximately 81.3% of net revenues for the twelve month period ended December
31, 2009. Cost of revenues was relatively unchanged as a percentage of net
revenues between the twelve month period ended December 31, 2010 and December
31, 2009
OPERATING EXPENSES
Operating expenses for the twelve month period ended December 31, 2010 totaled
$23,204,327 compared to $18,814,497 for the twelve month period ended December
31, 2009, an increase in operating expenses of $4,389,830 or approximately
23.3%. The primary reason for the increase in operating expenses is related to
the addition of Masonry's operating expenses of approximately $3.0 million
combined with approximately $2.0 million of operating expenses related to
Amincor, Inc.'s corporate headquarters during the twelve months ended December
31, 2010. The increases in operating expenses were partially offset by a
decrease in operating expenses of approximately $500,000 among the other
subsidiary companies.
LOSS FROM OPERATIONS
Loss from operations for the twelve month period ended December 31, 2010 totaled
$5,714,635 compared to a loss from operations of $2,738,137 for the twelve month
period ended December 31, 2009, an increase in loss from operations of
$2,976,498 or approximately 108.7%. The primary reason for the increase in loss
from operations is related to the increases in operating expenses while net
revenues remained relatively constant during the twelve months ended December
31, 2010.
OTHER EXPENSES
Other expenses for the twelve month period ended December 31, 2010 totaled
$1,076,336 compared to $8,709,992 for the twelve month period ended December 31,
2009, a decrease in other expenses of $7,633,656 or approximately 87.6%.
NET LOSS
Net loss totaled $6,975,221 for the twelve month period ended December 31, 2010
compared to $11,448,129 for the twelve month period ended December 31, 2009, a
decrease in net loss of $4,472,908 or approximately 39.1%. The primary reason
7
for the decrease in net loss is related to the decreases in other expenses
combined with the increases in operating expenses as mentioned above.
RESULTS FROM OPERATIONS FOR THE TWELVE MONTH PERIOD ENDED DECEMBER 31, 2009 AND
2008
NET REVENUES
Net revenues for the twelve month period ended December 31, 2009 totaled
$86,022,448 compared to $73,710,300 for the twelve month period ended December
31, 2008 an increase in net revenues of $12,312,148 or approximately 16.7%. The
primary reason for the increase in net revenues is related to Baker's Pride and
ESI. Both Baker's Pride and ESI's net revenues are not reflective of a full year
for the twelve months ended December 31, 2008 due to ESI commencing operations
on September 18, 2008 and Baker's Pride commencing operations on August 28,
2008. The increase in net revenues was partially offset by a decrease in Tyree's
revenues of approximately $1.3 million.
COST OF REVENUES
Cost of revenues for the twelve month period ended December 31, 2009 totaled
$69,946,088 or approximately 81.3% of net revenues compared to $64,627,008 or
approximately 87.7% of net revenues for the twelve month period ended December
31, 2008. The primary reason for the decrease in cost of revenues is related to
Epic and Tulare Holdings' cost of revenues, which were in excess of 100% of
revenues for the twelve months, ended December 31, 2008.
OPERATING EXPENSES
Operating expenses for the twelve month period ended December 31, 2009 totaled
$18,814,497 compared to $15,149,340 for the twelve month period ended December
31, 2008, an increase in operating expenses of $3,665,157 or approximately
24.2%. The primary reason for the increase in operating expenses was due to
there being a full year worth of operating expenses for the twelve months ended
December 31, 2009 for Baker's Pride and ESI as compared to these subsidiaries
were not combined for part of the twelve month period ended December 31, 2008.
LOSS FROM OPERATIONS
Loss from operations for the twelve month period ended December 31, 2009 totaled
$2,738,137 compared to $6,066,048 for the twelve month period ended December 31,
2008, a decrease in loss from operations of $3,327,911 or approximately 54.9%.
The primary reason for the decrease in loss from operations is due to the
increase in net revenues and the decrease in cost of revenues as a percentage of
net revenues as noted above.
8
OTHER EXPENSES
Other expenses for the twelve month period ended December 31, 2009 totaled
$8,709,992 compared to $4,993,365 for the twelve month period ended December 31,
2008, an increase in other expenses of $3,716,627 or approximately 74.4%. The
primary reason for the increase in other expenses is primarily due to an
increase in interest expense on Tulare Holdings of approximately $3.0 million,
combined with a full year of interest expense for the twelve months ended
December 31, 2009 as related to Baker's Pride and ESI. The increase in other
expenses was partially offset by a decrease in interest expense related to Tyree
of approximately $1.0 million.
NET LOSS
Net loss for the twelve month period ended December 31, 2009 totaled $11,448,129
compared to $11,059,413 for the twelve month period ended December 31, 2008, an
increase in net loss of $388,716 or approximately 3.5%. The primary reason for
the increase in net loss is due to an increase in operating expenses and an
increase in other expenses.
A detailed analysis of each subsidiary's individual financial performance can be
found within their respective management's discussion and analysis section of
this amended Form 10-K.
CONTRACTUAL OBLIGATIONS
The following table presents our contractual obligations as of December 31,
2010, as well as our debt obligations:
Payments due by Period
------------------------------------------------------------------------
Total 2012 2013-2014 2015-2016 Thereafter
---------- ---------- ---------- ---------- ----------
Long-term debt obligations $2,061,000 $ 418,000 $1,213,000 $ 430,000 $ --
Loan payable to related party 714,000 714,000 -- -- --
Capital lease obligations 892,000 254,000 508,000 130,000 --
Interest on debt obligations 709,000 372,000 264,000 73,000
Operating lease obligations 955,000 473,000 425,000 57,000 --
Other long-term obligations -- -- -- -- --
---------- ---------- ---------- ---------- ----------
Total $5,331,000 $2,231,000 $2,410,000 $ 690,000 $ --
========== ========== ========== ========== ==========
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet financing arrangements.
BAKER'S PRIDE INC., PAGE 33
9. We note your response to prior comment 13 explaining that you removed the
hypothetical 2008 annualized financial information for Baker's Pride Inc.
and revised to limit the discussion of its results of operations for the
year ended December 31, 2008 to actual performance. However, your amended
Form 10-K does not reflect the changes you describe. We reissue prior
comment 13.
ANSWER
As was stated in a prior response to your June 15, 2011 comment letter, the
financial statements for the period from January 1, 2008 to August 28, 2008
were not presented because the Baker's Pride's predecessor business owners
did not maintain sufficient and reliable accounting records for the
preparation of financial statements. The Company agrees that Rule 8-02 of
Regulation S-X applies and that predecessor financial information for the
9
period from January 1, 2008 to August 28, 2008 would normally be presented.
However, the Company continues to be faced with a dilemma because
predecessor financial information is simply not available. Further, the
Company has no reasonable basis to support any assumptions that might be
used to prepare annualized financial statements. Therefore, we are not able
to comply with Rule 8-02 of Regulation S-X for the period from January 1,
2008 to August 28, 2008. Alternatively, as you suggest in your prior
comment 13, we will include disclosure that focuses on the actual results
of operations. However, while Instruction 1 to paragraph 303(a) of
Regulation S-K includes the sentence "Generally, the discussion shall cover
the three-year period covered by the financial statements......" we believe
that these circumstances are not `generally' present for a three year
period. We have complied with the regulations to the best of our ability,
but we are not able to comply with Instruction 1 to paragraph 303(a) of
Regulation S-K for a time frame more than two years. The amended
information is below.
BAKER'S PRIDE, INC.
SEASONALITY
Seasonality does not influence revenue or results in BPI's present operation;
however, as BPI expands and diversifies into additional categories seasonality
will become more of a factor.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NET REVENUE
Net revenue for the year ended December 31, 2010 totaled $13,292,090 compared to
$13,345,574 for the year ended December 31, 2009, a decrease of $53,484 or
approximately 0.4%. All revenue was generated by BPI's Jefferson Street Bakery,
Inc. as the Mt. Pleasant facility is awaiting funds to complete start-up of
donut, brownie and cookie production.
There were two unusual events that negatively affected sales during the period:
a flash flood at the Jefferson Street Bakery on May 13, 2010 which resulted in 6
days of lost production and sales totaling approximately $227,000; on December
24, 2010 a fire in a neighboring building to the Jefferson Street Bakery
resulted in lost production and sales of approximately $24,000. Had these
unusual events not occurred sales for the year ended December 31, 2010 would
have been approximately $13,543,090; an increase of approximately $251,000 or
approximately 1.9%
Bread sales for year ended December 31, 2010 totaled $12,274,475 compared to
$12,171,169 for year ended December 31, 2009, a increase of $103,306 or
approximately 0.8%. This increase was primarily due to an increase in produced
units and less waste in manufacturing. Donut sales for year ended December 31,
2010 totaled $1,018,107 compared to $1,174,801 for the year ended December 31,
2009, a decrease of $156,694 or approximately 13.3%. This decrease was primarily
10
due to one of our customer's divisions discontinuing the purchase of our donuts
to test a competitor's donuts.
There was a great deal of increased competitive pressure in the markets we
service; as bakers of branded bread and bun products sought to take back market
share that they have lost to private label bakeries over the past several years.
Their announced strategy was to do this by running very aggressive promotions;
which proved to be very negative to their operating profits. This increase in
competitive pressure did not result in a decrease of BPI's bread sales; but did
limit pricing adjustments in the Fourth Quarter of 2010.
COST OF REVENUE
Cost of revenue for the year ending December 31, 2010 totaled $9,120,205 or
approximately 68.6% of net revenue compared to $9,154,517 or 68.6 % of net
revenue for the year ending December 31, 2009, a decrease of $34,312 or
approximately 0.4%. Cost of Revenue benefited from the following efficiencies: a
new benefit package was installed that required more employee cost participation
and modified work schedules at the Jefferson Street Bakery resulted in a
reduction of the number of employees and supervisors required. The resulting
savings for the year December 31, 2010 compared to the year ending December 31,
2009 for direct labor costs was $97,563 a reduction in direct labor costs of
approximately 3.3%.
Moderating input costs in the first half of the 2010 reduced cost of revenue for
that period; but a drought in Russia and Ukraine in August of 2010 caused wheat,
grain and subsequently flour prices to surge dramatically. Even with BPI taking
a multi month flour position earlier in 2010 that offered price protection; the
benefit of the moderating input costs early in the year were effectively
negated.
In the fourth quarter of 2010, the weakness of the dollar, increased demand and
speculation added to price increases that were a result of the Russian drought
and added even more volatility to input costs. Additional input costs in late
October, November and December collectively amounted to approximately $110,000;
which BPI was not able to pass along to its customers due to competitive
pressure.
Prior to year end, BPI began the process of reviewing wholesale prices with
customers as Management sought to compensate for the increased input costs. A 7%
wholesale price was instituted in March 2011.
OPERATING EXPENSE
Operating expenses for the year ended December 31, 2010 totaled $3,964,582 or
approximately 29.7% of net revenue compared to $4,319,410 or approximately 32.4%
of net revenue for the year ended December 31, 2009, a decrease of $354,828 or
approximately 8.2%. The decrease in operating expenses during fiscal 2010 was a
primarily a result of a voluntary reduction in salary from the executive and
administration staff. Executive and administration salaries for the year ended
December 31, 2010 totaled $768,495 compared to $1,065,381 for the year ending
December 31, 2009, a decrease of $296,886 or approximately 27.9%.
11
INCOME (LOSS) FROM OPERATIONS
Profit from operations for the year ended December 31, 2010 totaled $207,303 or
approximately 1.5% of net revenue compared to loss from operations of ($128,353)
or approximately (0.96%) of net revenue for the year ended December 31, 2009, a
decrease in net loss of $335,656. The decrease in loss from operations was
primarily due to aforementioned cost of revenue decreases and general and
administration expenses decreases.
INTEREST AND OTHER EXPENSES (INCOME)
Interest and other expenses (income) for the year ended December 31, 2010
totaled $476,916 or approximately 3.6% of net revenue compared to interest and
other expenses (income) of $654,844 or approximately 4.9% of net revenue for the
year ended December 31, 2009, a decrease in interest and other expenses of
$177,928, or approximately 27.1%.
Other income for the year ended December 31, 2010 totaled ($102,776) compared to
other income of ($77,100) for the year ended December 31, 2009, an increase in
other income of $25,676 or approximately 33.3%. The increase in other income was
a result of insurance payments for a portion of the loss due to the flashflood.
Interest and other expenses for the year ended December 31, 2010 totaled
$579,692 compared to interest and other expenses of $731,944 for the year ended
December 31, 2009, a decrease of $152,252 or approximately 20.8%. The decrease
in interest and other expenses was primarily due to a decrease in the interest
rate on the financing agreements.
NET LOSS
Net loss for the year ended December 31, 2010 totaled $269,613 compared to net
loss of $783,197 for the year ended December 31, 2009, a decrease in net loss of
$513,584 or approximately 65.6%. The decrease in net loss was primarily due to
stable sales even with several unusual events, the aforementioned decrease in
cost of revenue as a result of efficiencies that more than offset the increase
in input costs, a decrease in operating expenses and an increase in other income
that more than offset the increase in other expenses.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
NET REVENUE
Net revenue for the year ended December 31, 2009 totaled $13,345,574 compared to
$2,888,904 for the year ended December 31, 2008, an increase of $10,456,670 or
approximately 362.0%. The increase in net revenue is due to a full year of
operations for the year ended December 31, 2009 compared to 2.5 months of
operations for the year ended December 31, 2008.
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COST OF REVENUE
Cost of revenue for the year ending December 31, 2009 totaled $9,154,517 or
approximately 68.6% of net revenue compared to $2,189,976 or 75.8% of net
revenue for the year ending December 31, 2008, an increase of $6,964,541 or
approximately 318.0%.
OPERATING EXPENSE
Operating expenses for the year ended December 31, 2009 totaled $4,319,410 or
approximately 32.4% of net revenue compared to $979,336 or approximately 33.9%
of net revenue for the year ended December 31, 2008, an increase of $3,340,074
or approximately 341.1%.
LOSS FROM OPERATIONS
Loss from operations for the year ended December 31, 2009 totaled $128,353 or
approximately 1.0% of net revenue compared to a loss from operations of $280,408
or approximately 9.7% of net revenue for the year ended December 31, 2008, a
decrease in net loss of $152,055 or approximately 54.2%.
OTHER EXPENSES
Other expenses for the year ended December 31, 2009 totaled $654,844 or
approximately 4.9% of net revenue compared to other expenses of $73,903 or
approximately 2.6% of net revenue for the year ended December 31, 2008, an
increase in other expenses of $580,941, or approximately 786.1%.
NET LOSS
Net loss for the year ended December 31, 2009 totaled $783,197 compared to a net
loss of $354,311 for the year ended December 31, 2008, an increase in net loss
of $428,886 or approximately 121.0%.
EPIC SPORTS INTERNATIONAL, INC., PAGE 38
10. We note your response to prior comment 14 stating that you removed the
combined 2008 predecessor/successor results for Epic Sports International,
Inc., and revised to limit the discussion of its results of operations for
the year ended December 31, 2008 to actual performance. However, your
amended Form 10-K does not reflect the changes you describe. We reissue
prior comment 14.
ANSWER
The information which we will include in our amended Form 10-K is set forth
below.
13
EPIC SPORTS INTERNATIONAL, INC. MD&A
SEASONALITY
The tennis industry is seasonal, based on the factors including the weather and
the various climates of the markets we serve. Internationally, the tennis season
peaks between March and November. The season is similar in the U.S., however it
starts earlier in the year, during February, for the Southern states. The
ordering cycle for the international markets occurs in the Fall for Spring
deliveries to retail accounts. In the U.S., pre-orders are taken 2 - 3 months
prior to products being available for delivery to retailers.
ESI's sales are typically front loaded in the year, with approximately 60% of
sales occurring in the first half and the remaining 40% in the second half.
Sales are also affected by the launch of new products and the timing of those
launches. There are typically two launch periods per year: Spring/ Summer and
Fall/ Winter. The Spring/ Summer launch is typically the larger of the two with
more products and marketing efforts when compared to the Fall/ Winter launch.
Other spikes in tennis product sales occur around the Grand Slam Tournaments,
which occur in January, May, July and September. Media exposure and tennis
participation both increase between 35% - 50% during these periods.
DUE FROM FACTOR (RECEIVABLES)
In February 2007 ESI entered into a factoring agreement with Capstone Business
Credit, LLC. ("Factor"). Under the terms of the agreement the Factor agreed to
purchase the eligible receivables at the calculated borrowing base (80% of the
aggregate value of all eligible receivables) for the then immediately preceding
calculation period.
A 2% commission was charged on all receivables purchased by the Factor. The
annual minimum commission under the agreement was $131,200 in all years.
The factoring agreement was terminated in November 2010, when ESI entered into a
strategic alliance agreement with Samsung C&T America, Inc. Under the terms of
the agreement, ESI acts as a brand manager and sales agent for Boris Becker and
Volkl products, while Samsung will purchase and ship inventory, bill for product
sales and collect the resulting receivables. As compensation for the services to
be rendered by ESI, it will be paid a commission on a monthly basis equal to 21%
of the net invoice amount billed to customers after certain adjustments and
chargebacks, as defined in the agreement, have been applied.
In exchange for its services, Samsung will earn 10% of the gross invoice amount
on domestic orders and 6% of the gross invoice amount on international orders.
INVENTORY
There was no inventory as of December 31, 2010, having been sold in November
2010 to Samsung under the financing arrangement. Prior to November 2010,
inventory consisted of finished goods, and was valued at the lower of cost or
market using the first-in, first-out method. Market was determined based on net
realizable value with appropriate consideration given to obsolescence, excessive
14
levels and other market factors. An inventory reserve was recorded wherever the
carrying amount of the inventory exceeded its estimated market value.
LIQUIDITY
ESI has incurred losses and negative cash flows from operations for the years
ended December 31, 2010, 2009 and 2008. As a result, ESI has taken steps to
improve its liquidity including converting to a more efficient Xperia accounting
system, partnering with Samsung C&T America, consolidating operations and
seeking additional operational efficiencies where available. ESI has proven to
possess the ability to generate sales when products are available and in stock.
During the period between July and September of 2010, ESI had over $800,000
worth of orders in house, but were unable to deliver based on the cash flow
difficulties and lack of available working capital. These shortages resulted in
cancelled orders, a delayed start to the 2011 season and damaged vendor
relationships.
CAPITAL RESOURCES
On September 30, 2008, the ESI entered into an amended purchase order financing
agreement with a related party ("lender") which matures on September 30, 2013.
Under the agreement, ESI is allowed to take advances in an amount equal to the
lesser of (a) $1,165,976 or (b) the borrowing base for the then immediately
preceding calendar month.
Payment on advances are due on the earlier of sixty days from the date of an
advance or the day on which any of the goods paid for by an advance are shipped
to a customer. The advances bear interest at a rate of 16% per annum (over a 360
day period) and do not begin to accrue any interest until the 31st day following
the date on which such advance was made. If ESI is in default of the agreement,
the advances bear interest at a rate of 24% per annum (over a 360 day period).
The purchase money advances are secured by a promissory note from ESI covering
the entire amount.
Additionally, under the terms of the agreement the lender may issue letters of
credit in favor of ESI's suppliers in order to enable ESI to acquire
merchandise. The letters of credit bear interest at annual rates of 1.50% for
the first 30 days that the letter of credit is outstanding and 0.75% for every
14 days thereafter that such letter of credit remains outstanding.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009
NET REVENUE
Net revenue for the year ended December 31, 2010 totaled $3,233,925 compared to
$3,803,853 for the year ended December 31, 2009, a decrease of $569,928 or
approximately 15.0%. The decrease is primarily due to cash flow constraints
which has led some of ESI's main suppliers to hold back products for which there
were customer orders. In addition, for November and December 2010, ESI earned
commissions of only $128,537 due to the implementation of the Samsung C&T
Strategic Alliance Agreement. As a result of the cash flow constraints, there
has not been a sufficient amount of product to sell and international orders
15
have been filled from the U.S. supply. During 2010, some markets including the
U.K., Spain, and Germany were in constant need of additional products. Due to
the lack of available product and steady growth of new distributors in Europe,
demand slowed as products were sought from competitors. The effect of this on
2010's business was a loss of sales and a projected three month delay to the
beginning of the Spring 2011 season.
COST OF REVENUE
Cost of revenue for the year ended December 31, 2010 totaled $2,496,242 or
approximately 77.2% of net revenue compared to $2,654,319, or 69.8% of net
revenue for the year ended December 31, 2009, a decrease of $158,077 or
approximately 6.0%. The decrease in the dollar amount was due to a lower net
revenue figure in 2010 than was seen in 2009. Despite the decrease in dollar
amount, cost of revenue as a percent of net revenues increased by 9.3% 7.4% due
to an higher level of international sales which is typically carry a lower
profit margin when compared to its domestic counterpart. The ratio of sales to
distributors outside of the U.S. is higher when compared to sales to
distributors within the U.S. which indicates greater competition in the market
abroad and is reflected in lower per unit product prices and higher freight
expenses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses for the year ended December 31,
2010 totaled $2,251,570, or approximately 69.6% of net revenue compared to
$2,416,120 or approximately 63.5% of net revenue for the year ended December 31,
2009, a decrease of $164,550 or approximately 6.8%. The decrease in selling,
general and administrative expenses during the year ended December 31, 2010 was
primarily due to an initiative to control spending; more specifically with
emphasis on expenditures related to marketing and promotion expenses.
Accordingly, marketing and promotion expenses totaled $62,316 and $229,944 for
the years ended December 31, 2010 and 2009, respectively, a decrease of $167,677
or approximately 5.2% of net revenues.
Further reductions in expense are attributable to the relocation of ESI's
headquarters from Fall River, Massachusetts to New York, New York enabling
efficiencies resulting in the consolidation of back office operations and
personnel. Despite the decrease in dollar amount, selling, general and
administrative expenses as a percent of net revenues increased by 6.1% due to
increased expenses associated with travel expenditures for Sean Frost and Brian
Dillman. Travel and entertainment expenses totaled $166,372 and $143,047, for
the years ended December 31, 2010 and 2009, respectively, an increase of $23,325
or approximately 16.3%. The increase in travel and entertainment expenses is due
to the higher costs associated with traveling internationally as reflective in
higher international sales during 2010. In addition, royalty fees for Volkl
totaled $192,890 and $89,024 for the years ended December 31, 2010 and 2009,
respectively, an increase of $103,866 or approximately 116.7%. The increase in
royalty fees for Volkl is due to the increase in royalty rates and minimum
royalty payments in accordance with the licensing agreement ESI holds with
Volkl.
16
LOSS FROM OPERATIONS
Loss from operations for the year ended December 31, 2010 totaled $1,513,887, or
approximately 46.8% of net revenue, compared to a loss from operations of
$1,266,586 or approximately 33.3% of net revenue for the year ended December 31,
2009, an increase in loss from operations of $247,301 or approximately 19.5%.
The increase in loss from operations was primarily due to increased
international sales and the increase of selling, general, and administrative
expenses as a percent of net revenues as noted above.
OTHER EXPENSES
Other expenses for the year ended December 31, 2010 totaled $169,721 compared to
other expenses of $966,985 for the year ended December 31, 2009, a decrease in
other expenses of $797,264 or approximately 82.4%. The decrease in other
expenses was due to decreases attributed to interest payments and fees connected
to ESI's purchase order financing agreement in conjunction with a debt to equity
conversion that took place on December 31, 2009. Due to this debt to equity
conversion, purchase order interest expense on the purchase order financing
agreement decreased to $21,286 from $801,290 for the years ended December 31,
2010 and 2009, respectively, a decrease of $780,004 or approximately 97.3%.
NET LOSS
Net loss for the year ended December 31, 2010 totaled $1,683,608 compared to a
net loss of $2,233,571, an improvement of $549,963 or approximately 24.6%. As a
percentage of total revenues, the net loss for the year ended December 31, 2010
was approximately 52.1% compared to a percentage of total sales of approximately
58.7% for the year ended December 31, 2009, an improvement of approximately
6.7%. The decrease in net loss is attributable to the decrease in selling,
general and administrative expenses as well as the decrease in other expenses as
noted above.
RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
The below exhibit demonstrates the performance for the years ended December 31,
2009 and December 31, 2008.
17
(Predecessor and (Successor Company) (Predecessor Company)
Twelve Months Successor Companies) For the Period For the Period
Ended Year Ended September 18, 2008 to January 1, 2008 to
December 31, December 31, December 31, September 17,
2009 2008 2008 2008
------------ ------------ ------------ ------------
Net sales $ 3,803,853 $ 3,315,489 $ 578,432 $ 2,737,057
Cost of sales 2,654,319 2,524,915 810,829 1,714,086
------------ ------------ ------------ ------------
Gross profit 1,149,534 790,574 (232,397) 1,022,971
Operating expenses 2,416,120 1,958,164 573,273 1,384,891
------------ ------------ ------------ ------------
Loss from operations (1,266,586) (1,167,590) (805,670) (361,920)
Other expenses 966,985 1,350,229 448,007 902,222
------------ ------------ ------------ ------------
Net loss $ (2,233,571) $ (2,517,819) $ (1,253,677) $ (1,264,142)
============ ============ ============ ============
For the purposes of comparison between the years ended December 31, 2009 and
December 31, 2008, the following MD&A includes ESI's predecessor's performance
from January 1, 2008 through September 17, 2008. The following analysis is
pro-forma in nature. ESI's actual performance for the year ended December 31,
2008 can be found above as the information related to September 18, 2008 to
December 31, 2008. Amincor Inc.'s consolidated financials, as presented
elsewhere in this Amended Form 10-K for the year ended December 31, 2008 does
not include the performance of ESI's predecessor company.
NET REVENUE
Net revenue for the year ended December 31, 2009 totaled $3,803,853 compared to
$3,315,489 for the year ended December 31, 2008, an increase of $488,364 or
approximately 14.7%. The increase in net revenue is due to an increased focus on
Sales during the twelve months ended December 31, 2009.
COST OF REVENUE
Cost of revenue for the year ended December 31, 2009 totaled $2,654,319 or
approximately 69.8% of net revenue compared to $2,524,915 or 76.2% of net
revenue for the year ended December 31, 2008. As a percentage of sales, cost of
revenue decreased by approximately 6.4% due to a better mix of inventory in 2009
when compared to 2008. The starting inventory at ESI's inception was sold at a
lower margin in order to turn over the existing old inventory and replace it
with faster moving inventory.
18
OPERATING EXPENSES
Operating expenses for the year ended December 31, 2009 totaled $2,416,120, or
approximately 63.5% of net revenue compared to $1,958,164 or approximately 59.1%
of net revenue for the year ended December 31, 2008, an increase of $457,956 or
approximately 23.4%. The increase in Operating expenses is primarily due to the
increased focus on sales and expenses related to selling.
LOSS FROM OPERATIONS
Loss from operations for the year ended December 31, 2009 totaled $1,266,586, or
approximately 33.3% of net revenue, compared to a loss from operations of
$1,167,590 or approximately 35.2% of net revenue for the year ended December 31,
2008, an increase in loss from operations of $98,996 or approximately 8.5%.
OTHER EXPENSES
Other expenses for the year ended December 31, 2009 totaled $966,985 compared to
other expenses of $1,350,229 for the year ended December 31, 2008, a decrease in
other expenses of $383,244 or approximately 28.4%. The decrease in other
expenses is primarily related to a more favorable interest rate on ESI's loan
due to a related party.
NET LOSS
Net loss for the year ended December 31, 2009 totaled $2,233,571 compared to a
net loss of $2,517,819 for the year ended December 31, 2008, a decrease in net
loss of $284,248 or approximately 11.3%. As a percentage of total sales, the net
loss for the year ended December 31, 2009 was approximately 58.7% compared to a
percentage of total sales of approximately 75.9% for the year ended December 31,
2008, an improvement of approximately 17.2%.
FINANCIAL STATEMENTS STATEMENT OF STOCKHOLDERS' EQUITY, PAGE F-7
11. We note your response to prior comment 15 concerning the issuance of shares
to Mr. Fikkert which you have disassociated from the receipt of the Tulare
Holdings Inc. net assets in your equity statement. You will need to revise
your equity statement to report all of the common control transactions on a
retrospective basis to comply with FASB ASC 805-50-45-2, 4 and 5. We
suggest that you contact us by telephone if you require further
clarification or guidance.
ANSWER
We have revised the equity statement as you state above in our amended Form
10-K. Attached hereto as Exhibit C is a revised equity statement,
retrospectively combining all of the common control transactions as of the
date of the acquisitions in 2008 and 2009.
19
12. We note your response to prior comment 16 stating that the "additional paid
in capital of $39,309,000 related to the contribution of real property of
the New Companies...." You indicate that Capstone Business Credit, LLC
contributed $25,640,000 of these assets to Amincor Other Assets, Inc., a
wholly owned subsidiary of Amincor, Inc. and you attribute the difference
to additional debt that was converted to equity. We understand the "New
Companies" to be Baker's Pride, Inc. Tyree Holdings Corp., Epic Sports
International Inc. and Imperia Masonry Supply Corp. Please address the
following points:
* Tell us the extent to which the $25,640,000 of assets contributed to
Amincor Other Assets, Inc. were formerly held by the New Companies, and
explain why these assets are not included among the assets of the New
Companies reported on pages F-17 and F-18. To the extent these were not
associated with the New Companies, identify the names of the entities that
formerly held these assets and disclose your rationale for the
contribution.
* Tell us why related party loans of $17,165,000 and $13,669,000, appearing
as conversions in your equity statement, are not apparent in your
disclosures on pages F- 17 and F-18, among the assets and liabilities of
the five operating businesses received from your sponsors.
* Tell us the number of shares issued in exchange for the loans of
$12,424,000 and $1,245,000, amounting to the $13,669,000 mentioned above,
and identify the line item where these are reported; it should be clear why
these amounts are not associated with any incremental equity interests in
your equity statement, i.e., additional common shares, contrary to the
representation you made in response to prior comment 16.
* Tell us why the 2009 assignment of the $25,640,000 in assets did not
trigger accounting recognition for the year ended December 31, 2009.
ANSWER
FIRST BULLET POINT:
Of the assets comprising the $25,640,000, $19,065,000 were held by the
predecessor businesses and $6,575,000 were held by other Capstone Fund
borrowers. Upon foreclosure of the loans these assets were held by the
Lenders and were not transferred to the new entities formed to operate the
predecessor businesses because, in the Lenders' view, they are not
operating assets of the respective businesses. The transfers were not made
because, for legal reasons, the Lenders were the property owner and a
related party lessor to the operating businesses under a Transition
Services Agreement. Subsequently, it was determined that this legal
structure was not necessary and Amincor Other Assets, Inc. was formed to
act as an intercompany lessor to the operating businesses.
20
SECOND BULLET POINT:
The only company that owed money to a related party as of its acquisition
date was Epic Sports International, Inc. The amount due was $1,345,000. The
remainder balances of the $17,165,000 and the $13,669,000 were loans that
were made to the operating businesses after the assets and liabilities of
the predecessor operating businesses were contributed by our sponsors upon
formation of the Company. These amounts, excluding $1,345,000, do not
relate to the amounts on pages F17 and F18 because they are not liabilities
assumed in the acquisition transactions. These figures are included in the
noncash investing activities on the 2010 and 2009 statements of cash flows.
THIRD BULLET POINT:
No additional shares were issued when the loans amounting to $13,669,000
were converted to equity. All shares of stock were issued to the former
limited partners in the Capstone Funds and various officers as of December
31, 2009. It was not necessary to issue additional shares because the
relative ownership percentage of each shareholder would not have changed.
On the December 31, 2009 balance sheet, the Loans payable to related
parties was $13,451,000.
FOURTH BULLET POINT:
The 2009 assignment refers to the listing of the particular assets serviced
under the Transition Services Agreement on a Company specific basis. As
previously noted, the actual legal transfer of the assets did not occur
until 2010.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION, PAGE F-12
13. We note your response to prior comment 17 related to your change in revenue
recognition method from the completed contract method to the percentage of
completion method. You state that as of January 1, 2010, Tyree had improved
its ability to make estimates that were sufficiently dependable to justify
the change in method. Therefore, we do not understand your rationale in
computing an adjustment to the accumulated deficit as if you had the
information necessary to apply the percentage-of-completion method in
earlier periods.
The guidance in FASB ASC 605-35-05-5 (and 605-35-25-1) clarifies that the
completed contract method and percentage-of-completion method are not to be
utilized as acceptable alternatives for the same circumstances.
Accordingly, we would not anticipate transitioning accounting methodologies
for open contracts where the initial method had been appropriately
selected. We would expect that you would apply the percentage-of-completion
method to contracts initiated subsequent to having established your
capability to estimate.
21
Your selection should adhere to the criteria outlined in FASB ASC
605-35-25-56 through 61 (percentage-of-completion) and FASB ASC
605-35-25-90 through 93 (completed contract). The circumstances for
changing from one to the other are described in FASB ASC 605-35-25-94 and
95.
Please address the following points:
* Tell us the extent to which you believe the completed contract method
was incorrectly selected for application prior to 2010 and describe
the scope of your inability to prepare dependable estimates in earlier
periods.
* If you have determined that you were capable of making dependable
estimates prior to 2010, then submit the analysis that you performed
in determining that you would not recognize the error correction.
* Provide details of the changes in circumstances that led to Tyree
being able to make reasonably dependable estimates as of January 1,
2010.
ANSWER
We agree that under ASC 605-35-05-5 (and 605-35-25-1) the completed
contract method and percentage-of-completion method are not to be utilized
as acceptable alternatives for the same circumstances. In addition, we are
aware of the Circumstances Appropriate for Using the
Percentage-of-Completion Method described in ASC 605-35-25-56 through 61
and we are aware of the Circumstances Appropriate for Using the
Completed-Contract Method described in ASC 605-35-25-90 through 93.
The guidance in ASC 605-35-25-57 states that the percentage-of-completion
method is considered preferable as an accounting policy in circumstances in
which reasonably dependable estimates can be made and in where three stated
conditions exist, while the guidance in ASC 605-35-25-94 states that the
completed-contract method is preferable in circumstances in which estimates
cannot meet the reasonable dependability criteria in ASC 605-35-25-57.
In direct response to your bullet points:
* We do not believe that the completed contract method was incorrectly
selected for application prior to 2010. In fact, we applied the
completed contract method to the specific contracts that were
completed prior to 2010. However, in accounting for our change in the
accounting principle used, we relied on the guidance in ASC 250-10-45
which we believe is appropriate in circumstances where an entity
becomes able to use a preferable accounting policy.
* As a result of the SEC comment which we received, we have reexamined
all contracts in progress as of December 31, 2009 and 2008 on a
"single contract specific basis" in order to determine which contracts
could be recorded on a percentage of completion basis, and which
contracts were to be recorded on a completed contract basis. The
percentage of completion method is being applied to contracts for
22
which the Company was able to make reasonable estimates. The completed
contract method was utilized on contracts where the Company was not
able to prepare dependable estimates in earlier periods due to
unsophisticated contract recordkeeping and less formal estimating
procedures.
* As a result of our reexamination of all of the contracts in progress,
we have eliminated the adjustment to the Company's accumulated
deficit, and the Company has recorded additional net income of
$787,725 and $27,580 for the years ended December 31, 2009 and 2008,
respectively.
Pursuant to this comment, we have revised the revenue recognition
calculations on Tyree's contracts in progress. The recalculations have
been reflected in the Pro Forma statements of the amended Form 10 that
we have included in the answer to question 4, and in the amended Form
10-K including Note 2.
* In response to your comment, we do not mean to assert that the Company
became able to make dependable percentage-of-completion estimates for
contracts completed before 2010. Instead, more dependable estimates
became possible due to improved contract recordkeeping and more
skilled and formal estimating.
The Company's management has developed more sophisticated contract
recordkeeping and more skilled and formal estimating procedures which
has enabled Tyree to be able to make reasonably dependable estimates
on all its contracts in progress as of January 1, 2010 and for all
periods subsequent.
NOTE 3 - BUSINESS COMBINATIONS, PAGE F-15
14. We understand from your response to prior comment 18, and your disclosure
under this heading, that you have not recognized material fixed tangible
assets for BPI, ESI or Tulare. Please expand your Business and Property
disclosures as necessary to identify the principal fixed assets required to
operate these entities, and to describe the terms under which you are able
to utilize them. If you now own these assets then also expand your MD&A
disclosures to describe the nature, amount and timing of capital
expenditures made subsequent to the foreclosures when the operations were
acquired by your sponsors.
ANSWER
The principal fixed tangible assets required to operate BPI and Tulare were
part of the assets assigned to Amincor, Inc. on December 31, 2009. These
principal fixed tangible assets are leased by BPI and Tulare from Amincor.
BPI's principal fixed tangible assets consisted of three parcels of real
estate, plant machinery and equipment. Tulare's principal fixed tangible
assets consisted of two parcels of real estate, plant machinery and
equipment.
23
ESI was operating out of leased office space and the only ESI fixed assets
included were some computer hardware with immaterial value.
There have been no material capital expenditures on the principal fixed
tangible assets subsequent to the foreclosures when the operations were
acquired.
15. We note your disclosure explaining that the forgiveness of debt under the
factoring and financing agreements with CBC and CCGI constituted the amount
and form of consideration paid to acquire the five operating businesses.
However, you also explain that in accounting for the acquisitions you
disregarded these amounts and instead utilized unrelated measures of
enterprise values.
You state that such enterprise values, including the amounts assigned to
the assets acquired, liabilities assumed, and goodwill, were determined by
independent valuation experts. You need to identify the valuation experts
in your disclosure if you obtain their permission for your public
attribution of responsibility. Otherwise, you should delete all such
references to valuation experts as your officers must assume full
responsibility for the valuations. Since you also associate the decline in
value to periods prior to foreclosure, we would like to understand why you
have related party notes payable that are not apparent in your purchase
price allocations. These include the $17,165,000 and $13,669,000 closed to
equity during 2009 and 2010, as shown on page F-7. If you believe these
amounts are appropriately reflected in your combined financial statements
because they did not represent debt in excess of your measures of
enterprise value, then disclose the circumstances under which these amounts
arose, the terms established for repayment, and an explanation of why there
appears to be no exchange of equity interests in their conversion.
You state "the amounts of the loans forgiven exceeded the decline in value
when measured as being the difference between the principal amount of those
loans and the underlying enterprise value of each business." Revise this
statement to also clarify that the amounts of the loans forgiven also
exceeded the enterprise values, which you calculated, if true.
ANSWER
* We do not agree that the enterprise values used to account for the
acquisitions are unrelated measures. In each acquisition, the Company
has recorded the identifiable assets acquired and liabilities assumed
which constitute the business (as defined) at their acquisition date
fair values as required by ASC 805-20-30-1. Goodwill, the residual
difference between the consideration paid and the net sum of fair
values of the identifiable assets acquired and liabilities assumed in
the acquisition of the business and defined as "an asset representing
the future economic benefits arising from other assets acquired in a
business combination" as referred to by ASC 805-30-30-1. The
consideration paid, under ASC 805-30-30-7, is measured at fair value
calculated as the sum of the acquisition-date fair values of the
assets transferred by the acquirer, the liabilities incurred by the
24
acquirer to former owners of the acquiree, and the equity interests
issued by the acquirer. The fair values of the equity interests of the
acquirer are the enterprise values of the businesses acquired. The
consideration paid is not the same as the face amounts of the debt
forgiven to acquire the businesses because the fair values of the debt
forgiven are less than the face amounts of such debt. The fair values
of the debt forgiven, in accordance with ASC 820-10-30-1, must be
measured as the price that would be received to sell it "in an orderly
transaction between market participants at the measurement date." The
enterprise values, which in these cases must necessarily be determined
based on Level 3 inputs under the fair value hierarchy in ASC section
820-10-35, are the best measure of the fair value of the debt
forgiven. (Please note that ASC 820-10-35-1 states that the fair value
measurement framework applies to both initial and subsequent
measurement if fair value is required or permitted by other
Subtopics.)
* Houlihan Smith & Company, Inc., an independent valuation expert,
prepared the valuations.
* The amounts converted to equity amounted to $17,165,000 and
$13,669,000 in 2009 and 2010, respectively, and were amounts that were
loaned to the Borrower Entities in 2008 and 2009, after the business
foreclosures, under their financing loans with the Lenders. Thus,
these loans do not relate to the foreclosures. These loans were made
to stabilize and maintain the business operations of the borrower
entities.
We will revise our disclosures to identify Houlihan Smith & Company
Inc. as the independent valuation expert and to clarify that the
amounts of the loans forgiven also exceeded the enterprise values.
NOTE 6 - PROPERTY PLANT AND EQUIPMENT, PAGE F-20
16. We note your response to prior comment 19 related to the $6,575,000 of
assets held for sale as of December 31, 2010, explaining that Capstone
Business Credit, LLC (CBC) took control of these assets on December 31,
2009. Given that you must present combined financial statements on the
basis of common control for periods prior to consolidation, tell us why you
report these assets as contributed during the year ended December 31, 2010,
rather than acquired in 2009 when CBC took control. Add disclosure that
reveals the nature of these assets, your valuation methodology, and the
basis for your accounting approach.
ANSWER
The $6,575,000 of assets held for sale as of December 31, 2010 are part of
$25,640,000 of assets discussed under Comment 12 above, that were
contributed to Amincor Other Assets, Inc., by Capstone Business Credit,
LLC. As discussed under Comment 12 above the Lenders were the owner and
related party lessor to the operating businesses under a Transition
Services Agreement until they were contributed to Amincor Other Assets,
Inc. in 2010.
25
The $6,575,000 of assets held for sale was comprised of equipment, land and
buildings. They were valued at the selling price based on bona fide offers
that were made before the end of 2010.
FORM 10-Q FOR THE QUARTER ENDED JUNE 30, 2011
GENERAL
17. We note that the cover page of the report now indicates that you are a
"Smaller reporting company." Please explain to us why you have made this
change. Include in your response a discussion of the Exchange Act Rule
12b-2 definition of the term and the explanation regarding the
determination of "smaller reporting company" status which appears in that
same rule under paragraph (4)(iii) of the definition. In that regard, we
notice that disclosure at page 30 of your Form 10-K/A indicates that your
revenues for 2010 were in excess of $86,000,000.
ANSWER
The indication on the cover page of the Form 10-Q for the Quarter Ended
June 30, 2011 that we are a "Smaller Reporting Company" was an inadvertent
error which was corrected by the filing on October 24, 2011 of an Amended
Form 10-Q for the Quarter Ended June 30, 2011.
The Company hereby acknowledges that :
* the company is responsible for the adequacy and accuracy of the
disclosure in the filing;
* staff comments or changes to disclosure in response to staff comments
do not foreclose the Commission from taking any action with respect to
the filing; and
* the company may not assert staff comments as a defense in any
proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Very truly yours,
By: /s/ John R. Rice III
---------------------------------------
John R. Rice III, President
26
EXHIBIT A
CONSENT ORDER
IN THE GRAND COURT OF THE CAYMAN ISLANDS
FINANCIAL SERVICES DIVISION
CAUSE NO FSD: 165 OF 2010
IN THE MATTER OF THE COMPANIES LAW
AND IN THE MATTER OF THE EXEMPTED LIMITED PARTNERSHIP LAW
AND IN THE MATTER OF CAPSTONE CAYMAN SPECIAL PURPOSE FUND LP
CONSENT ORDER
UPON it being made to appear by the signatures of the Attorneys representing
Capstone Cayman Special Purpose Fund LP ("the Partnership"), and the Attorneys
representing ABN AMRO Fund Services Custodial (IOM) Limited (formerly known as
Fortis Custodial Services (IOM) Limited) ("the Petitioner") that they have
agreed to the following terms
AND UPON the Partnership and the General Partner of the Partnership making no
admissions as to the matters contained in the Petition dated 25 June 2010 and
upon each and every allegation therein being expressly denied by the Partnership
and the General Partner of the Partnership
BY CONSENT IT IS ORDERED THAT:
(1) The Partnership be wound up under the provisions of the Companies Law.
(2) Mr. Stuart Sybersma and Mr Michael Pearson of Deloitte & Touche, Citrus
Grove, PO Box 1787 Grand Cayman be appointed as joint official liquidators
of the Partnership with power to act jointly and severally ("the
Liquidators").
(3) The Liquidators be authorised to exercise any of the powers listed in the
Third Schedule to the Companies Law without the further sanction or
intervention of the Court.
(4) The Liquidators be authorised to do any act or things considered by them to
be necessary or desirable in connection with the liquidation of the
Partnership and the winding up of its affairs.
(5) The Liquidators do file with the Clerk of the Court, within six months of
the date of this Order, a report in writing of the position of the
Partnership and the progress which the Liquidators have made with the
winding up of the Partnership, with the realisation of its assets and in
27
relation to any other matters connected to the winding up of the
Partnership, and to produce such further reports every six months
thereafter during the period of their appointment.
(6) The Liquidators be at liberty to appoint such counsel, attorneys,
professional advisors, whether in the Cayman Islands or elsewhere, as they
may consider necessary to advise and assist them in the performance of
their duties and on such terms as they may think fit and to remunerate them
out of the assets of the Partnership.
(7) The Liquidators and their staff be remunerated out of the assets of the
Partnership at the usual customary rate.
(8) The Liquidators be at liberty to apply generally.
(9) The Petitioner's costs of and occasioned by the Petition shall be paid out
of the assets of the Partnership as an expense of the liquidation to be
taxed if not agreed between the Liquidators and the Petitioner.
DATED this 10 day of November 2010
FILED this 10th day of November 2010
/s/ Cresswell
-------------------------------------------
The Honourable Mr Justice Cresswell [SEAL]
Judge of the Grand Court
/s/ Stuarts Walker Hersant
----------------------------------------
Stuarts Walker Hersant
Attorneys for the Partnership
Ogier
----------------------------------------
Attorneys for the Petitioner
THIS CONSENT ORDER WAS FILED BY OGIER, ATTORNEYS FOR THE PETITIONER, WHOSE
ADDRESS FOR SERVICE IS 89 NEXUS WAY, CAMANA BAY, GRAND CAYMAN KY1-90047
CAYMAN ISLANDS
28
EXHIBIT B
Pro Forma Financial Statements
Amincor, Inc. and Subsidiaries
Combined Balance Sheets
December 31,
2009 2008
------------ ------------
(As restated) (As restated)
ASSETS
CURRENT ASSETS:
Cash $ 390,310 $ 71,144
Accounts receivable, net of allowance of $905,000
and $786,802, respectively 8,361,040 9,401,423
Note receivable 522,501 522,501
Due from factor - related party 4,639,532 4,589,414
Due from related party 1,399,946 --
Inventories, net 5,710,883 7,025,780
Costs and estimated earnings in excess
of billings on uncompleted contracts 113,336 92,224
Construction in process -- 6,251,783
Prepaid expenses and other current assets 788,921 865,776
------------ ------------
Total current assets 21,926,469 28,820,045
------------ ------------
PROPERTY AND EQUIPMENT, NET 25,881,461 26,566,235
------------ ------------
OTHER ASSETS:
Mortgages receivable 6,180,000 6,180,000
Goodwill 15,569,400 15,569,400
Other intangible assets, net 16,300,688 18,357,390
Deferred financing costs, net 475,933 632,426
Other assets 366,729 410,750
------------ ------------
Total other assets 38,892,750 41,149,966
------------ ------------
Total assets $ 86,700,680 $ 96,536,246
============ ============
29
Amincor, Inc. and Subsidiaries
Combined Balance Sheets
December 31,
2009 2008
------------ ------------
(As restated) (As restated)
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 9,614,561 $ 8,079,615
Assumed liabilities - current portion 3,983,203 2,593,631
Accrued expenses and other current liabilities 3,256,331 2,560,941
Loans payable to related party 18,281,863 23,447,653
Notes payable - current portion 439,965 1,731,256
Capital lease obligations - current portion 138,955 212,681
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,357,777 84,982
Billings on construction -- 6,757,457
Due to officer / shareholder 159,944 131,903
------------ ------------
Total current liabilities 37,232,599 45,600,119
------------ ------------
LONG-TERM LIABILITIES:
Assumed liabilities - net of current portion 298,578 4,281,783
Capital lease obligations - net of current portion 303,303 345,338
Notes payable - net of current portion 1,534,796 780,352
Other long-term liabilities 97,596 28,423
------------ ------------
Total long-term liabilities 2,234,273 5,435,896
------------ ------------
Total liabilities 39,466,872 51,036,015
------------ ------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
AMINCOR SHAREHOLDERS' EQUITY:
Convertible preferred stock, $0.001 par value per share;
3,000,000 authorized, 1,752,823 issued and outstanding 1,753 1,753
Common stock - class A; $0.001 par value; 22,000,000
authorized, 7,478,409 issued and outstanding 7,478 7,478
Common stock - class B; $0.001 par value; 40,000,000
authorized, 21,176,262 issued and outstanding 21,176 21,176
Additional paid-in capital 79,433,271 62,268,160
Accumulated deficit (30,739,912) (15,950,521)
------------ ------------
Total Amincor shareholders' equity 48,723,766 46,348,046
------------ ------------
NONCONTROLLING INTEREST EQUITY (1,489,958) (847,815)
------------ ------------
Total shareholders' equity 47,233,808 45,500,231
------------ ------------
Total liabilities and shareholders' equity $ 86,700,680 $ 96,536,246
============ ============
30
AMINCOR, INC. AND SUBSIDIARIES
Combined Statements of Operations
For the Year Ended December 31,
2009 2008
------------ ------------
(As restated) (As restated)
Net revenues $ 96,148,990 $ 87,354,749
COST OF REVENUES 79,588,747 75,949,741
------------ ------------
Gross profit 16,560,243 11,405,008
SELLING, GENERAL AND ADMINISTRATIVE 22,048,624 21,116,523
------------ ------------
Loss from operations (5,488,381) (9,711,515)
------------ ------------
OTHER EXPENSE (INCOME):
Interest expense, net 10,020,253 7,019,620
Other income (77,100) (2,072)
------------ ------------
Total other expenses (income) 9,943,153 7,017,548
------------ ------------
Loss before provision for income taxes (15,431,534) (16,729,063)
Provision for income taxes -- --
------------ ------------
Net loss (15,431,534) (16,729,063)
------------ ------------
Net loss attributable to non-controlling interests (642,143) (847,815)
------------ ------------
Net loss attributable to Amincor stockholders $(14,789,391) $(15,881,248)
============ ============
LOSS PER SHARE - BASIC AND DILUTED
Net loss attributable to Amincor stockholders $ (0.52) $ (0.55)
============ ============
Weighted average shares outstanding - basic and diluted 28,654,671 28,654,671
============ ============
31
AMINCOR, INC. AND SUBSIDIARIES
Combined Statements Cash Flows
For the Year Ended December 31,
2009 2008
------------ ------------
(As restated) (As restated)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(15,431,534) $(16,729,063)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization of property and equipment 2,690,574 2,473,690
Amortization of intangible assets 2,056,702 1,367,010
Amortization of deferred financing cost 156,493 1,558,087
Loss (gain) on sale of equipment -- 233,436
(Recovery of bad debt) / provision for doubtful accounts 314,198 786,802
Changes in assets and liabilities:
Accounts receivable 726,185 1,064,681
Due from factor - related party (50,118) (4,097,114)
Due from related party (1,399,946) --
Inventory 1,314,897 (834,468)
Costs and estimated earnings in excess of billings
on uncompleted contracts (21,112) (92,224)
Construction in process 6,251,783 3,198,363
Prepaid expenses and other current assets 76,855 (300,208)
Other assets 44,021 (321,641)
Accounts payable 1,534,946 113,798
Accrued expenses and other current liabilities 695,389 (1,375,161)
on uncompleted contracts 1,272,795 84,982
Billings on construction (6,757,457) (5,226,961)
Other long-term liabilities 69,173 (15,860)
------------ ------------
Net cash used in operations (6,456,156) (18,111,851)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (1,940,891) (966,416)
Proceeds from sales of equipment -- 25,000
------------ ------------
Net cash used in investing activities (1,940,891) (941,416)
------------ ------------
32
AMINCOR, INC. AND SUBSIDIARIES
Combined Statements Cash Flows
For the Year Ended December 31,
2009 2008
------------ ------------
(As restated) (As restated)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net payments/proceeds from loans with related parties 11,999,321 24,363,927
Principal payments of capital lease obligations (180,670) (30,994)
Net proceeds/payments from notes payable (536,847) 660,327
Due to officer / shareholder 28,041 (99,157)
Proceeds from issuance of stock -- 9,980
Payments of assumed liabilities (2,593,632) (5,921,745)
------------ ------------
Net cash provided by financing activities 8,716,213 18,982,338
------------ ------------
Increase (decrease) in cash 319,166 (70,929)
CASH, beginning of year 71,144 142,073
------------ ------------
CASH, end of year $ 390,310 $ 71,144
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ 5,546,571 $ 2,172,276
============ ============
Income taxes $ 116,387 $ --
============ ============
NON-CASH INVESTING ACTIVITIES:
Conversion of loans from related parties $ 17,165,111 $ --
============ ============
33
AMINCOR, INC. AND SUBSIDIARIES
Combined Statement of Changes in Shareholders' Equity
For the Years Ended December 31, 2009 and 2008
Amincor, Inc. and Subsidiaries
-------------------------------------------------------------------------
Convertible Common Stock - Common Stock -
Preferred Stock Class A Class B
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at January 1, 2008, as restated 1,752,823 $ 1,753 7,478,409 $ 7,478 21,176,262 $ 21,176
Net loss -- -- -- -- -- --
--------- ------- --------- ------- ---------- --------
Balance at December 31, 2008, as restated 1,752,823 1,753 7,478,409 7,478 21,176,262 21,176
--------- ------- --------- ------- ---------- --------
Conversion of loans from related parties -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------- --------- ------- ---------- --------
Balance at December 31, 2009, as restated 1,752,823 $ 1,753 7,478,409 $ 7,478 21,176,262 $ 21,176
========= ======= ========= ======= ========== ========
Amincor, Inc. and Subsidiaries
------------------------------
Additional
Paid-in Accumulated Non-controlling Total
Capital Deficit Interest Equity
------- ------- -------- ------
Balance at January 1, 2008, as restated $62,268,160 $ (69,273) $ -- $ 62,229,294
Net loss -- (15,881,248) (847,815) (16,729,063)
----------- ------------ ----------- ------------
Balance at December 31, 2008, as restated 62,268,160 (15,950,521) (847,815) 45,500,231
----------- ------------ ----------- ------------
Conversion of loans from related parties 17,165,111 -- -- 17,165,111
Net loss -- (14,789,391) (642,143) (15,431,534)
----------- ------------ ----------- ------------
Balance at December 31, 2009, as restated $79,433,271 $(30,739,912) $(1,489,958) $ 47,233,808
=========== ============ =========== ============
34
EXHIBIT C
Amincor, Inc. and Subsidiaries
Consolidated or Combined Statement of Shareholders' Equity
For the Three Years Ended December 31, 2010
Amincor, Inc. and Subsidiaries
-------------------------------------------------------------------------
Convertible Common Stock - Common Stock -
Preferred Stock Class A Class B
-------------------- -------------------- --------------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance at January 1, 2008
(combined, as restated) -- $ -- 7,476,809 $ 7,476 -- $ --
Acquisition of businesses, real
property and equipment, mortgages
and equipment notes receivable by
the Capstone Group 1,673,740 1,674 1,600 2 20,220,843 20,221
Net loss -- -- -- -- -- --
--------- ------- --------- ------- ---------- --------
Balance at December 31, 2008
(combined, as restated) 1,673,740 1,674 7,478,409 7,478 20,220,843 20,221
--------- ------- --------- ------- ---------- --------
Acquisition of a business by
the Capstone Group 79,083 79 -- -- 955,419 955
Conversion of loans from related parties -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------- --------- ------- ---------- --------
Balance at December 31, 2009
(combined, as restated) 1,752,823 1,753 7,478,409 7,478 21,176,262 21,176
--------- ------- --------- ------- ---------- --------
Conversion of loans from related parties -- -- -- -- -- --
Net loss -- -- -- -- -- --
--------- ------- --------- ------- ---------- --------
Balance at December 31, 2010,
(consolidated, as restated) 1,752,823 $ 1,753 7,478,409 $ 7,478 21,176,262 $ 21,176
========= ======= ========= ======= ========== ========
Amincor, Inc. and Subsidiaries
------------------------------
Additional
Paid-in Accumulated Non-controlling Total
Capital Deficit Interest Equity
------- ------- -------- ------
Balance at January 1, 2008
(combined, as restated) $ 61,797 $ (69,273) $ -- $ --
Acquisition of businesses, real
property and equipment, mortgages
and equipment notes receivable by
the Capstone Group 58,430,517 -- -- 58,452,414
Net loss -- (10,495,803) (563,611) (11,059,414)
------------ ------------ ----------- ------------
Balance at December 31, 2008
(combined, as restated) 58,492,314 (10,565,076) (563,611) 47,393,000
------------ ------------ ----------- ------------
Acquisition of a business by
the Capstone Group 2,760,797 -- -- 2,761,831
Conversion of loans from related parties 17,165,261 -- -- 17,165,261
Net loss -- (10,805,986) (642,143) (11,448,129)
------------ ------------ ----------- ------------
Balance at December 31, 2009
(combined, as restated) 78,418,372 (21,371,062) (1,205,754) 55,871,963
------------ ------------ ----------- ------------
Conversion of loans from related parties 8,047,029 -- -- 8,047,029
Net loss -- (6,704,451) (270,770) (6,975,221)
------------ ------------ ----------- ------------
Balance at December 31, 2010,
(consolidated, as restated) $ 86,465,401 $(28,075,513) $(1,476,524) $ 56,943,771
============ ============ =========== ============