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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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Form 10-K/A
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended June 30, 2008
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
Commission File Number 0-25753
NuSTATE ENERGY HOLDINGS, INC.
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(Exact name of registrant as specified in its charter)
Nevada 87-0449667
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
902 Clint Moore Road, Suite 204, Boca Raton, Florida 33487
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 998-7557
Securities registered pursuant to Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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None Not applicable
Securities registered pursuant to Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
[ ] Yes [X] No
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act.
[ ] Yes [X] No
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 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ ] Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
[ ] Yes [X] No
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company:
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
(Do not check if smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act)
[ ] Yes [X] No
State the aggregate market value of the voting and non-voting common equity held
by non-affiliates computed by reference to the price at which the common equity
was sold, or the average bid and asked prices of such common equity, as of the
last business day of the registrant's most recently completed fiscal quarter
$3,079,403 on September 30, 2008.
Indicated the number of shares outstanding of each of the registrant's classes
of common stock, as of the latest practicable date. 321,453,161 shares of common
stock are issued and outstanding as of November 7, 2008.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K (e.g., Part I, Part II, etc.) into which the document is
incorporated: (1) Any annual report to security holders; (2) Any proxy or
information statement; and (3) Any prospectus filed pursuant to Rule 424(b) or
(c) under the Securities Act of 1933. The listed documents should be clearly
described for identification purposes (e.g., annual report to security holders
for fiscal year ended December 24, 1980). None.
2
TABLE OF CONTENTS
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Page
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Part I
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Item 1. Business. 5
Item 1A. Risk Factors 10
Item 1B. Unresolved Staff Comments. --
Item 2. Properties. 16
Item 3. Legal Proceedings. 16
Item 4. Submission of Matters to a Vote of Security Holders. 16
Part II
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Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities. 17
Item 6. Selected Financial Data. 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation. 19
Item 7A. Quantative and Qualitative Disclosures About Market Risk. 27
Item 8. Financial Statements and Supplementary Data. 27
Item 9. Changes In and Disagreements With Accountants on Accounting and Financial Disclosure. 27
Item 9A. Controls and Procedures. 27
Item 9B. Other Information. 29
Part III
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Item 10. Directors, Executive Officers and Corporate Governance. 29
Item 11. Executive Compensation. 32
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. 36
Item 13. Certain Relationships and Related Transactions, and Director Independence. 38
Item 14. Principal Accountant Fees and Services. 40
Part IV
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Item 15. Exhibits, Financial Statement Schedules. 41
When used in this annual report, the terms the "Company," "NuState
Energy Holdings," "we," "our," and "us" refers to NuState Energy Holdings, Inc.,
a Nevada corporation and our subsidiaries. The information which appears on our
websites at www.emmologic.com and www.mydriverseat.com are not part of this
annual report.
Cautionary Statements Regarding Forward Looking Information
Certain statements in this annual report contain or may contain
forward-looking statements that are subject to known and unknown risks,
uncertainties and other factors which may cause actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. These
forward-looking statements were based on various factors and were derived
utilizing numerous assumptions and other factors that could cause our actual
results to differ materially from those in the forward-looking statements. These
factors include, but are not limited to, our ability to implement our business
model, raise sufficient capital to fund our operating losses and pay our ongoing
obligations, economic and market conditions and fluctuations, government and
3
industry regulation, competition, and other factors. Most of these factors are
difficult to predict accurately and are generally beyond our control. You should
consider the areas of risk described in connection with any forward-looking
statements that may be made herein. Readers are cautioned not to place undue
reliance on these forward-looking statements and readers should carefully review
this annual report in its entirety, including the risks described in Part I.
Description of Business - Risk Factors. Except for our ongoing obligations to
disclose material information under the Federal securities laws, we undertake no
obligation to release publicly any revisions to any forward-looking statements,
to report events or to report the occurrence of unanticipated events. These
forward-looking statements speak only as of the date of this annual report, and
you should not rely on these statements without also considering the risks and
uncertainties associated with these statements and our business.
4
PART I
ITEM 1. BUSINESS.
NuState Energy Holdings, Inc. is a holding company that owns 100% of
Commodity Express Transportation, Inc. (CXT), a provider of truck transportation
and third party logistics services, and 49% of Rentar Logic, Inc., a
privately-held Delaware company that develops and markets fuel management
systems and various other telematics applications for commercial vehicle fleets
and distributes a proprietary pre-combustion fuel catalyst that reduces fuel
consumption and harmful exhaust emissions for a variety of diesel engines.
Currently, the operations of CXT represent the primary business of our company
in terms of revenue and assets. CXT, a wholly owned subsidiary, was acquired in
March 2005 through the asset purchase of a South Carolina corporation. CXT
presently serves the southeastern United States as both a freight carrier and a
freight broker fully licensed by the U.S. Department of Transportation. As of
September 30, 2008, CXT's fleet consists of 87 tractors comprised of 47 leased
units and 40 owner-operator units with which it has independent contractor lease
agreements and 549 leased trailers. However, CXT was notified in November 2008
that the contract with its largest customer had been terminated. CXT currently
is reducing the size of its fleet to reflect this loss of business. In addition,
CXT operates a freight brokerage and a warehouse operation.
The Company sold its intellectual properties and software developed for
the worldwide transportation and security industries to Rentar Logic in April
2008. This sale included its patent and trademarks as well as numerous web-based
applications that provide pertinent, real-time information to customers. These
applications rely on telematics to collect various vehicle and container-based
data and integrate it with information gathered from various disparate legacy
systems across the supply chain. The data is then synthesized and reformatted
into valuable, actionable information, and delivered to appropriate end-users
across the logistics value chain through secure web-based applications. Among
the many capabilities of these telematics solutions are on-demand live
diagnostics, two-way communication, temperature alerts, electronic fuel tax
payment, inventory/asset visibility, secure trucking and matching of available
freight with available trucks. Also, included in the sale to Rentar logic was a
proprietary software application that provides critical information that may be
used to validate nearly any products designed to improve fuel efficiency or
reduce harmful gas emissions more accurately and quickly than any other method.
At the same time, this software application may be used as a fuel management
tool to provide real-time information, such as vehicle speeds, idling times,
out-of-route notifications, and unauthorized use, which translates to
significant fuel savings. No assurances can be given as to when, if ever, the
Company will be able to record any profit or receive any dividends from its 49%
ownership of Rentar Logic.
We generated less than 1% of our revenue during fiscal year 2008 from
developing and implementing a custom software solution for Averitt Express, a
leading provider of freight transportation and supply chain management services
operating more than 4,000 tractors and 11,250 trailers in more than 100
countries. This software is a web-based integration platform that provides the
locations and availability of the trucks in all of Averitt's four main operating
divisions. Previously, each division only had visibility of its own
transportation assets. Furthermore, we programmed a load board into the platform
to support a completely automated process of matching and moving loads of
freight whether utilizing an Averitt truck, a partner carriers' truck or a truck
arranged through a freight broker. In addition to software development,
consulting and training fees associated with this project, we generated monthly
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hosting fees during fiscal year 2008. The monthly hosting fees terminated in
August 2008 as Averitt reacted to the economic slowdown by eliminating this
project.
Future Revenue Sources
The Company intends to pursue acquisitions or joint ventures with
developers of other transportation-related technologies as well as third-party
logistics companies with networks of agents and/or sales people located
throughout the nation. We specifically are seeking operations which can
significantly benefit from the technology solutions offered by Rentar Logic and
complement our current logistics operations. As of the date of this Report, the
Company had no such transactions pending and, even if it did, does not have any
capital required to consummate such transactions and no assurances can be
provided that it could raise the required capital under acceptable terms and
conditions, if at all.
Key Customers
During fiscal years 2008 and 2007, a substantial portion of CXT's
revenue was generated by transporting freight to and from particular
manufacturing facilities and distribution centers for Amcor PET Packaging. This
customer represented approximately 48.8% and 61.9% of CXT's gross revenue during
fiscal years 2008 and 2007, respectively. Amcor PET Packaging is a leading
global packaging company providing PET (polyethylene terephthalate) packaging
solutions to the consumer products industry. Our Amcor transportation business
is derived from our agreement with TPS Logistics, an independent freight
brokerage company owned by the spouse of the former-President of CXT, which has
an annual logistics agreement with Amcor that may be terminated under certain
conditions with thirty days advance notification. On November 6, 2008, CXT was
notified that TPS was terminating its agreement with CXT effective November 7,
2008 due to alleged contract breaches by CXT. CXT responded to this notice by
denying the occurrence of any such contract breaches and notifying TPS that the
alleged termination by TPS, among other actions, constituted contract breaches
by TPS. The immediate affect of TPS' actions has been the loss of Amcor as a
customer and the loss of certain of our employees who were primarily responsible
for servicing the Amcor account. The Company believes it has claims against its
former-President and his affiliates related to this matter and has engaged legal
counsel to proceed to litigation.
During the second quarter of fiscal year 2008 we became the dedicated
transportation provider for a major corrugated box manufacturing plant in South
Carolina. This customer generated $4,565,263 or approximately 16.8% of CXT's
total revenue for fiscal year 2008. The Company estimates that this customer
will generate approximately $6,000,000 in revenue during fiscal year 2009.
Competition
The transportation industry is highly competitive and fragmented. We
compete against a large number of other asset-based and non-asset based
transportation companies, as well as non-asset based logistics companies, third
party freight brokers, carriers offering logistics services and freight
forwarders. We believe that our technology, based on an open architecture,
provides us with a competitive advantage. Our technology is unique because it
integrates into a myriad of legacy systems on both shipper and carrier ends of
the supply chain. We believe that while some competitors provide components of
our technology, no single competitor provides the same end-to-end, fully
integrated solution.
6
History
NuState Energy Holdings, Inc. is a Nevada corporation that was
incorporated on October 28, 1987 as Jaguar Investments, Inc. On March 11, 2003,
a wholly owned subsidiary of the Company merged with Freight Rate, Inc., a
development stage company in the logistics software business. On May 8, 2003,
the Company changed its name to Power2Ship, Inc. On October 11, 2006, the
Company merged with a newly formed, wholly-owned subsidiary, Fittipaldi
Logistics, Inc., a Nevada corporation, with the Company surviving but its name
being changed to Fittipaldi Logistics, Inc. effective November 9, 2006. On
December 10, 2007, the Company merged with a newly formed, wholly-owned
subsidiary, NuState Energy Holdings, Inc., a Nevada corporation, with the
Company surviving but renamed NuState Energy Holdings, Inc. effective December
20, 2007.
The Company initially was a shell company with no business or
operations. In December 2001, it acquired 100% of the issued and outstanding
shares of common stock of Premier Sports Media and Entertainment Group, Inc. in
exchange for 1,000,000 shares of our common stock in a private transaction
exempt from registration under the Securities Act of 1933. The shares of common
stock issued to the Premier Sports Media and Entertainment Group stockholders in
this transaction represented approximately 8% of our issued and outstanding
common stock immediately after the transaction. Before this transaction we did
not engage in any material business operations.
On March 11, 2003, we consummated a merger with Freight Rate, Inc.
d/b/a Power2Ship, under which Freight Rate became our wholly owned subsidiary.
At the effective time of the merger, the holders of Freight Rate's common and
preferred stock, warrants and options exchanged those securities for the
following of our securities:
o 11,907,157 shares of our common stock,
o options to acquire an aggregate of 13,986,679 shares of common
stock at exercise prices of $.38 to $.75 per share,
o common stock purchase warrants to acquire 3,913,204 shares of
our common stock at exercise prices of $.75 to $1.75 per
share,
o 100,000 shares of our Series X Preferred Stock which are
convertible on March 11, 2004 into shares of common stock
based upon the degree to which a one-year funding schedule of
up to $2.5 million is met. If the entire $2.5 million of
funding is concluded, the Series X Preferred Stock will be
cancelled, and
o 87,000 shares of our Series Y Preferred Stock issued to our
CEO in exchange for an equal number of Freight Rate's Series C
Convertible Preferred Stock owned by him at the time of the
merger.
For accounting purposes, the transaction was treated as a
recapitalization of Freight Rate and accounted for as a reverse acquisition.
In connection with the merger, R&M Capital Partners, Inc., a principal
stockholder of our company prior to the merger with Freight Rate, agreed to
cancel 2,650,000 shares of our common stock they owned for no consideration.
Prior to the merger, R&M Capital Partners, Inc. owned an aggregate of 6,500,000
shares of our common stock, which represented approximately 52% of our
outstanding common stock immediately prior to the merger. A term of the merger
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agreement as negotiated by Freight Rate provided that the Freight Rate
shareholders would own 70% of our securities on a fully diluted basis following
the closing of the merger. R&M Capital Partners, Inc., whose sole shareholder
had been a shareholder of Premier Sports Media and Entertainment Group, Inc.,
agreed to the cancellation at our request in order to facilitate the merger. We
believe R&M Capital Partners, Inc. agreed to the cancellation in order to
facilitate our merger with Freight Rate based upon its business judgment and
since Freight Rate was not prepared to complete the merger and allow R&M Capital
Partners, Inc. to retain as significant as a concentration of stock in our
company. Following the cancellation of these shares, R&M Capital Partners, Inc.
owned 3,850,000 shares of our common stock. For accounting purposes, the
cancellation of the 2,650,000 shares was treated as part of the
recapitalization.
Under the terms of the merger agreement, we issued an aggregate of
100,000 shares of our Series X Convertible Preferred Stock to holders of Freight
Rate's common stock and Series C Convertible Preferred Stock prior to the
transaction, including to Mr. Gass, a former member of our board of directors
and Mr. Richard Hersh, our Chairman and former CEO.
Simultaneous with closing the merger we entered into a stock purchase
agreement under which we sold 95% of the issued and outstanding common stock of
Premier Sports Media and Entertainment Group to The DAR Group, Inc., an
unaffiliated third party, in consideration for the forgiveness by The DAR Group
of all of our indebtedness to The DAR Group of approximately $2.0 million and
the assumption by The DAR Group of all of our liabilities as of the closing date
of the stock purchase agreement.
On February 25, 2005, we formed P2S Holdings, Inc., now known as
Fittipaldi Carriers, Inc., a Florida corporation, as a wholly owned subsidiary.
Then, on March 21, 2005, Commodity Express Transportation, Inc. (CXT), a wholly
owned subsidiary of Fittipaldi Carriers, formed as a Delaware corporation on
March 21, 2002, acquired certain assets and liabilities representing the
business of a South Carolina company engaged in the business of motor carriage
specializing in full truckload transportation services primarily using dry vans.
Under the terms of the mutual agreement we acquired the assets for a
purchase price of $100,000 in cash and the assumption of liabilities in the
amount of $193,655. At the closing we also assumed certain leases related to the
operation of the seller's business, including tractor and trailer leases,
owner/operator leases and a warehouse lease. We also entered into leases with
the seller to lease certain commercial property and certain trailers described
in greater detail below. At closing, we replaced certain deposits and letters of
credit previously made or issued on the seller's behalf with third parties in
the aggregate amount of approximately $145,000 related to the operation of the
seller's business, and replaced additional letters of credit totaling
approximately $20,000 after closing. The mutual agreement contained customary
representations and warranties and cross-indemnification provisions.
At closing we entered into an equipment lease agreement with the seller
to lease commercial trailers used to haul dry commodities. The monthly lease
charges ranged from $170 to $240 per trailer and the lease expiration dates
range from March 2006 to March 2010. The agreement contains customary default
provisions, requires the seller to pay for any damage to an individual trailer
in excess of $250 and requires us to maintain and repair the trailers and tires
as needed.
CXT also entered into an agreement with TPS Logistics, Inc. wherein TPS
engaged CXT as its exclusive carrier to perform all of TPS' transportation needs
for its customers. The agreement will terminate the earlier of March 20, 2010 or
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when the agreement between TPS and its current largest customer is no longer
effective. As compensation, TPS receives a percentage of the revenue derived
from its current largest customer for freight hauled to and from Blythewood,
South Carolina. Mr. W. A. Stokes, former president of CXT, is the vice president
and his wife is the principal owner of TPS.
On March 21, 2005, Power2Ship Intermodal acquired certain assets and
liabilities representing the business of GFC, Inc., a company in the business of
motor carriage specializing in intermodal drayage transportation services. Under
the terms of the asset purchase agreement with GFC, Inc., we purchased certain
of their assets including trucking and brokerage authority permits, contracts
with shipping customers, agents, and truck owner-operators and escrow deposits
for a purchase price of $300,000. The purchase price consisted of a $100,000
secured promissory note from the seller that we forgave and $200,000 to be paid
$8,333 per month on the 24 consecutive monthly anniversaries of the closing date
beginning on the first monthly anniversary of the closing date. At the closing
we also assumed the obligations corresponding to the escrow deposits. In
addition, we issued the seller a warrant to purchase 200,000 shares of our
common stock for $.27 per share for the three year period commencing on the
closing date. The asset purchase agreement contained customary representations
and warranties and cross-indemnification provisions. In March 2006, the Company
entered into a settlement agreement and mutual release with the parties that
sold it the GFC assets in which the Company agreed to issue the seller 300,000
shares of its common stock valued at $42,000 and to pay the seller a total of
$36,000 over two years in full settlement of the $191,667 outstanding balance of
the purchase price. In March 2006, the Company recorded an impairment of
intangible assets of $113,667 based on this settlement. The Company made the
first three of these monthly payments and not made any further payments since
May 2006. The operations of Power2Ship Intermodal ceased to exist effective June
30, 2006 and the Company recorded impairments to intangible assets of $185,578
associated with this event. On February 27, 2008, GFC, Inc. filed a lawsuit in
the Supreme Court of New York, New York County (Case No. 600582/08) naming as
defendants Power2Ship, Inc., Power2Ship Intermodal, Inc. and Fittipaldi
Logistics, Inc. The complaint listed several causes of action with the most
material being that the Company breached the Asset Purchase Agreement it entered
into in February 2005 with GFC, Inc. by failing to pay $200,000 and breached the
Settlement Agreement and Mutual General Release it entered into in February 2006
with GFC, Inc. by not paying $33,000. The Company believes it has substantial
defenses and counterclaims against GFC, Inc. The due date for submitting its
answer has been delayed while the parties work in good faith toward a
settlement.
In April 2008, we entered into an agreement with Rentar Environmental
Solutions, Inc., a privately-held Delaware corporation ("Rentar") and Rentar
Logic, Inc., a Delaware corporation ("RLI") formed by Rentar in May 2008,
pursuant to which it granted RLI a global perpetual license for its intellectual
properties and agreed to sell RLI its intellectual properties for $3,000,000 and
49% of RLI's issued and outstanding shares. In addition, Rentar agreed to
contribute $18,000 per month to RLI to pay expenses of the Company's information
technology department, provide office space for some of the Company's personnel
and place 600,000 shares of its common stock valued at $3,000,000 in escrow as
security for payment of the $3,000,000 purchase price. These escrowed shares are
to be released to Rentar as RLI pays the $3,000,000 purchase price for the
intellectual properties. As of September 30, 2008, the Company had received
approximately $862,000 of the purchase price.
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Government Regulation
We are subject to licensing and regulation as a transportation broker
and are licensed by the U.S. Department of Transportation ("DOT"). CXT has a DOT
license to engage in operations, in interstate or foreign commerce, arranging or
brokering transportation of freight (except household goods) by motor vehicle.
CXT has a DOT certificate and permit authorizing it to engage in transportation
as a common carrier of property by motor vehicle in interstate or foreign
commerce. The DOT license remains in effect as long as we maintain adequate
insurance coverage for the protection of the public as well as designation of
our agents for service of process.
The transportation industry has been subject to legislative and
regulatory changes that have affected the economics of the industry by requiring
changes in operating practices or influencing the demand for, and cost of
providing, transportation services. We cannot predict the effect, if any, that
future legislative and regulatory changes may have on the transportation
industry.
Intellectual property
We sold our intellectual properties and software developed for the
worldwide transportation and security industries to Rentar Logic in April 2008.
Our methods for protecting any future proprietary rights, are that we generally
rely on copyright, trademark and trade secret laws, confidentiality agreements
with employees and third parties, and agreements with consultants, vendors and
customers, although we have not signed such agreements in every case. Despite
such protections, a third party could, without authorization, copy or otherwise
obtain and use some or all of intellectual property. In general, there can be no
assurance that our efforts to protect our intellectual property rights will be
effective or that these protections will be sufficient so as to prevent
misappropriation of our intellectual property. Our failure or inability to
protect our proprietary rights could materially adversely affect our business,
financial condition and results of operations.
Employees
As of September 30, 2008, we had 6 full-time employees located in
Florida and Illinois and our subsidiary CXT had approximately 66 full-time
workers who were employed through a personnel leasing firm and approximately 40
owner-operators with whom the company has independent contractor lease
agreements. However, CXT was notified in November 2008 that the contract with
its largest customer had been terminated. CXT currently is terminating a number
of its full-time workers to reflect this termination. None of our employees are
subject to collective bargaining agreements, and we believe that we have
satisfactory relationships with our employees.
ITEM 1A. RISK FACTORS
Before you invest in our common stock, you should be aware that there
are various risks. You should consider carefully these risk factors, together
with all of the other information included in this annual report before you
decide to purchase our securities. If any of the following risks and
uncertainties develops into actual events, our business, financial condition or
results of operations could be materially adversely affected and you could lose
all of your investment in our company.
10
We presently do not have sufficient financial resources to fund our ongoing
operations beyond November 30, 2008. We will require additional capital to fund
our ongoing operations and satisfy our debt obligations. If we are unable to
raise additional capital, then we will not be able to continue operations.
While we reduced our selling, general and administrative expenses
during fiscal year 2008, our revenue was not significant enough to generate
sufficient gross profits to fund our daily operations. We do not presently have
sufficient financial resources to fund our ongoing operations beyond November
30, 2008. We cannot accurately predict when or if our revenue and gross profits
will increase to the level necessary to sustain our operations. As of November
7, 2008, we were past due on the repayment of $750,741 principal amount of
secured convertible debentures and promissory notes and $675,000 principal
amount of unsecured debentures and promissory notes and accrued interest on the
aforementioned debentures and notes. Also, a $1,250,000 secured promissory note
becomes due on December 1, 2008. In addition, as of September 30, 2008, CXT had
approximately $151,247 of secured equipment financing outstanding. In order to
provide sufficient capital to fund our ongoing operations, pay our obligations
as they become due and provide additional working capital for the future
development of our business model, we will need to raise additional capital. We
do not presently have any additional sources of capital other than approximately
$2,100,000 in receivables due from Rentar Logic from the sale of our
intellectual properties which receivable does not have any defined payment
schedule or maturity date. While we are seeking additional sources of capital,
there are no assurances we will be successful in raising additional capital as
needed. If we are unable to raise additional working capital as needed, we may
be required to curtail or discontinue some or all of our business and
operations.
We have a history of losses and an accumulated deficit. We expect losses to
continue for the foreseeable future and we may be unable to continue as a going
concern.
For fiscal years 2008 and 2007 we reported total revenue of $27,159,724
and $22,706,654, respectively, and a net loss available to common stockholders
of $5,529,002 and $6,747,950, respectively. At June 30, 2008 we had an
accumulated deficit of $37,008,323. Further, during fiscal years 2008 and 2007,
we reported net cash used in operating activities of $1,466,822 and $1,458,455,
respectively. Our revenue has not been sufficient to sustain our operations and
we cannot predict if or when we will have profitable operations. The independent
auditor's report for the fiscal year ended June 30, 2008 on our financial
statements includes an explanatory paragraph to their audit opinion stating that
our recurring losses from operations and negative operating cash flows raise
substantial doubt about our ability to continue as a going concern. Our
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. As described below, we will need to raise
additional working capital in order to implement our business model and sustain
our operations. We cannot guarantee you that we will ever report profitable
operations or generate sufficient revenue to sustain our company as a going
concern and we may be forced to cease some or all of our operations.
Our primary assets serve as collateral under certain of our outstanding secured
debentures and promissory notes. If we should default on these obligations, the
holders could foreclose on our assets and we would be unable to continue our
business and operations.
We have granted security interests in our assets to certain lenders. As
of November 7, 2008, we had granted blanket security interests in all of our
assets and properties to the holders of $542,500 of secured convertible
debentures all of which are past due. In addition, as of November 7, 2008, we
had granted a security interest in all our assets with the exception of the
assets and properties related to our trucking operations of Fittipaldi Carriers,
11
Inc., a Florida corporation, and its subsidiaries to holders of $1,458,241 of
secured promissory notes $208,241 of which are past due and $1,250,000 of which
is becomes due on December 1, 2008. We do not presently have sufficient funds to
satisfy these obligations. If we receive notices of non-compliance and potential
default, we would have an obligation to rectify these defaults or otherwise
obtain a waiver from these holders under the terms of those agreements. While we
have not received any such notices to date, it is possible that notices could be
provided in the future, which would likely cause our company to be in default
under our agreements and obligations to the holders. Any default would
accelerate our obligations to these debenture holders and perhaps other
obligations owed to other parties. We cannot assure you that we would be in a
position to arrange alternative financing to satisfy these obligations. In the
event we were unable to satisfy these obligations, then the holders could seek
to foreclose on our primary assets. If the holders were successful, we would be
unable to conduct our business as it is presently conducted and our ability to
generate revenue and fund our ongoing operations would be materially adversely
affected and we would be forced to cease operations.
Historically, we have been dependent on revenue from a limited number of
customers. If we were to be deprived of revenue from one or more these key
customers, our future revenue and business operations could be materially and
adversely effected.
For fiscal year 2008, revenue from our largest two customers accounted
for approximately 65.6% of our gross revenue and no other customer accounted for
more than 10% of our total revenue. Our agreement with these customers may be
cancelled upon 30 days notice. We are continuing our efforts to expand our
customer base in fiscal year 2009 in order to eliminate our dependence upon
revenue from a limited number of customers. Because of the significant nature of
the revenue from these two customers to our results of operations, however, the
loss of either of these customers, prior to our obtaining additional customers,
would have a material adverse effect on our business operations and prospects.
Our business with both these customers is derived from our agreement
with TPS Logistics, an independent freight brokerage company owned by the spouse
of the former-President of CXT, which has an annual logistics agreement with
Amcor that may be terminated under certain conditions with thirty days advance
notification. On November 6, 2008, CXT was notified that TPS was terminating its
agreement with CXT effective November 7, 2008 due to alleged contract breaches
by CXT. CXT responded to this notice by denying the occurrence of any such
contract breaches and notifying TPS that the alleged termination by TPS, among
other actions, constituted contract breaches by TPS. The immediate affect of
TPS' actions has been the loss of Amcor as a customer and the loss of certain of
our employees who were primarily responsible for servicing the Amcor account.
We are dependent on short term contracts with our customers. If these contracts
were terminated, our results of operations would be materially adversely
affected.
We have entered into agreements to provide transportation services with
some of our shipper customers. These agreements, however, do not commit them to
using us for any specific volume of transportation services and the agreements
can be terminated on 30 days notice. The termination of any of these contracts
could have a material adverse effect on our business operations and prospects.
12
The exercise of outstanding options and warrants and the conversion of shares of
our convertible preferred stock and convertible debentures will be dilutive to
our existing stockholders.
As of November 7, 2008, we had the following securities outstanding
which were exercisable or convertible into shares of our common stock as
follows:
Options to purchase a total of 38,549,993 shares at prices ranging
between $0.01 and $0.38 per share;
Warrants to purchase a total of 96,810,626 shares at prices ranging
between $0.01 and $0.75 per share;
Convertible Preferred Stock:
o 149,600 Series B shares convertible into 2,992,000 shares of
common stock;
o 332 Series C shares convertible into 33,200 shares of common
stock;
o 25 Series D shares convertible into 25,000,000 shares of common
stock;
o 129.5 Series F shares convertible into 25,896,000 shares of
common stock;
o 1 Series G shares convertible into 1,000,000 shares of common
stock;
o 69.9 Series H shares convertible into 2,796,000 shares of
common stock;
o 100,000 Series I shares convertible into 50,000,000 shares of
common stock (of which 65,000 convertible into 32,500,000 shares
are held in an escrow account as collateral for a $1,250,000
promissory note);
o 2 Series J shares convertible into 500,000 shares of common stock;
o 87,000 Series Y shares convertible into 230,405 shares of common
stock;
Convertible Debentures and Promissory Notes (excluding accrued interest
which may be convertible to common stock at the holders' sole
discretion):
o $482,500 of 14.25% secured convertible debentures convertible into
1,805,088 shares of common stock;
o $288,810 of amended 14.25% secured convertible debentures
convertible into 11,552,400 shares of common stock;
o $275,000 of 8% unsecured convertible promissory notes convertible
into 4,700,000 shares of common stock;
o $50,000 of 16% unsecured convertible promissory notes convertible
into 3,333,333 shares of common stock; and
13
o $10,000 of 14% unsecured convertible debentures convertible into a
maximum of 1,000,000 shares of common stock;
The exercise of these warrants and options and the conversion of the
debentures and shares of our preferred stock may materially adversely affect the
market price of our common stock and will have a dilutive effect on our existing
stockholders.
We have not voluntarily implemented various corporate governance measures, in
the absence of which, solders may have more limited protections against
interested director transactions, conflicts of interest and similar matters.
Recent Federal legislation, including the Sarbanes-Oxley Act of 2002,
has resulted in the adoption of various corporate governance measures designed
to promote the integrity of the corporate management and the securities markets.
Some of these measures have been adopted in response to legal requirements.
Others have been adopted by companies in response to the requirements of
national securities exchanges, such as the NYSE, or the Nasdaq Stock Market, on
which their securities are listed. Among the corporate governance measures that
are required under the rules of national securities exchanges and Nasdaq are
those that address board of directors' independence, audit committee oversight,
and the adoption of a code of ethics. Although we have adopted a Code of Ethics,
we have not yet adopted any of these other corporate governance measures and,
since our securities are not yet listed on a national securities exchange, we
are not required to do so. We have not adopted corporate governance measures
such as an audit or other independent committees of our board of directors as we
presently only have one independent director. If we expand our board membership
in future periods to include additional independent directors, we may seek to
establish an audit and other committees of our board of directors. It is
possible that if we were to adopt some or all of these corporate governance
measures, stockholders would benefit from somewhat greater assurances that
internal corporate decisions were being made by disinterested directors and that
policies had been implemented to define responsible conduct. For example, in the
absence of audit, nominating and compensation committees comprised of at least a
majority of independent directors, decisions concerning matters such as
compensation packages to our senior officers and recommendations for director
nominees may be made by a majority of directors who have an interest in the
outcome of the matters being decided. Prospective investors should bear in mind
our current lack of corporate governance measures in formulating their
investment decisions.
We may be exposed to potential risks relating to our internal controls over
financial reporting and our ability to have those controls attested to by our
independent auditors.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002 ("SOX
404"), the Securities and Exchange Commission adopted rules requiring public
companies to include a report of management on the company's internal controls
over financial reporting in their annual reports, including Form 10-K. In
addition, the independent registered public accounting firm auditing a company's
financial statements must also attest to and report on management's assessment
of the effectiveness of the company's internal controls over financial reporting
as well as the operating effectiveness of the company's internal controls.
Presently, we will become subject to compliance with SOX 404 for our fiscal year
ending June 30, 2008 when our management must report on the effectiveness of our
internal controls.
While we expect to expend resources in developing the necessary
documentation and testing procedures required by SOX 404, we are unable at this
time to quantify the amount we will spend to develop the necessary documentation
and testing required by SOX 404. Regardless of the amount, we presently do not
14
have sufficient resources to fund the documentation and testing required by SOX
404, and we do not have available funds to engage qualified staff or consultants
to assist us with this project.
We are not currently aware of any significant deficiencies or material
weaknesses in our internal controls that we cannot remediate in a timely manner.
However, if we identify any significant deficiency or material weakness,
investors and others may lose confidence in the reliability of our financial
statements and our ability to obtain equity or debt financing could suffer.
Provisions of our articles of incorporation and bylaws may delay or prevent a
takeover which may not be in the best interests of our stockholders.
Provisions of our articles of incorporation and bylaws may be deemed to
have anti-takeover effects, which include when and by whom special meetings of
our stockholders may be called, and may delay, defer or prevent a takeover
attempt. In addition, certain provisions of Nevada law also may be deemed to
have certain anti-takeover effects which include that control of shares acquired
in excess of certain specified thresholds will not possess any voting rights
unless these voting rights are approved by a majority of a corporation's
disinterested stockholders.
In addition, our articles of incorporation authorize the issuance of up
to 1,000,000 shares of preferred stock with such rights and preferences as may
be determined by our board of directors. Our board of directors may, without
stockholder approval, issue preferred stock with dividends, liquidation,
conversion or voting rights that could adversely affect the voting power or
other rights of our common stockholders.
Our common stock is currently quoted on the OTCBB, but trading in our stock is
limited. Because our stock currently trades below $5.00 per share, and is quoted
on the OTC Bulletin Board, our stock is considered a "penny stock" which can
adversely affect its liquidity.
The market for our common stock is extremely limited and there are no
assurances an active market for our common stock will ever develop. Accordingly,
purchasers of our common stock cannot be assured any liquidity in their
investment. In addition, the trading price of our common stock is currently
below $5.00 per share and we do not anticipate that it will be above $5.00 per
share in the foreseeable future. Because the trading price of our common stock
is less than $5.00 per share, our common stock is considered a "penny stock,"
and trading in our common stock is subject to the requirements of Rule 15g-9
under the Securities Exchange Act of 1934, as amended. Under this rule,
broker/dealers who recommend low-priced securities to persons other than
established customers and accredited investors must satisfy special sales
practice requirements. SEC regulations also require additional disclosure in
connection with any trades involving a "penny stock," including the delivery,
prior to any penny stock transaction, of a disclosure schedule explaining the
penny stock market and its associated risks. These requirements severely limit
the liquidity of our securities in the secondary market because few broker or
dealers are likely to undertake these compliance activities.
15
ITEM 2. PROPERTIES.
Our principal executive offices are located in approximately 2,036
square feet of commercial office space in Boca Raton, Florida. We lease these
premises from an unaffiliated third party under a two-year lease expiring in
December 2008. This lease requires monthly payments of base rent of
approximately $2,823 during 2008.
As of November 7, 2008, CXT leased the following facilities:
- Its principal executive offices located in approximately 5,000
square feet in West Columbia, South Carolina are leased from the
company from which we acquired CXT. The lease term expires in
March 2010 with a one year extension at our option. Further, we
have the right to immediately terminate the lease in the event
that the contract with our largest customer is not renewed. Also,
we agreed to pay, prior to the respective due dates thereof, all
insurance premiums, charges, costs, expenses and payment required
to be paid in accordance with the lease. The lease agreement
contains customary default provisions and requires the prior
written consent of the landlord to alter the property or to assign
the lease to unaffiliated third parties.
- 1,071 square foot terminal facility in Chattanooga, Tennessee that
expires in September 2011 although CXT has the right to terminate
the lease in September 2009 by providing ninety days written
notice to the lessor.
The aggregate monthly rent for the CXT facilities as of November 7,
2008 was approximately $5,635. In addition to monthly rent, we must maintain
adequate liability insurance and are charged customary common area maintenance
expenses that are allocated to us based on the percentage of the total rentable
space that we rent in each facility.
ITEM 3. LEGAL PROCEEDINGS.
On February 27, 2008, GFC, Inc. filed a lawsuit in the Supreme Court of
New York, New York County (Case No. 600582/08) naming as defendants Power2Ship,
Inc., Power2Ship Intermodal, Inc. and Fittipaldi Logistics, Inc. The complaint
listed several causes of action with the most material being that the Company
breached the Asset Purchase Agreement it entered into in February 2005 with GFC,
Inc. by failing to pay $200,000 and breached the Settlement Agreement and Mutual
General Release it entered into in February 2006 with GFC, Inc. by not paying
$33,000. The Company believes it has substantial defenses and counterclaims
against GFC, Inc. The due date for submitting its answer has been delayed while
the parties work in good faith toward a settlement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
16
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES.
Our common stock is quoted on the OTC Bulletin Board under the symbol
FPLD. The following table sets forth the reported high and low sale prices for
our common stock as reported on the OTC Bulletin Board for the periods
indicated. The quotations represent inter-dealer prices without retail mark-ups,
mark-downs or commissions, and may not necessarily represent actual
transactions. The quotations may be rounded for presentation.
High Low
---- ---
Fiscal Year 2009
- ----------------
July 1 to September 30, 2008 $ 0.01 $ 0.03
Fiscal Year 2008
- ----------------
April 1 to June 30, 2008 $ 0.01 $ 0.02
January 1 to March 31, 2008 $0.008 $ 0.025
October 1 to December 31, 2007 $0.022 $ 0.036
July 1 to September 30, 2007 $0.035 $ 0.023
Fiscal Year 2007
- ----------------
April 1 to June 30, 2007 $0.041 $ 0.025
January 1 to March 31, 2007 $ 0.07 $ 0.035
October 1 to December 31, 2006 $ 0.12 $ 0.035
July 1 to September 30, 2006 $0.058 $0.0218
On November 7, 2008 the last reported sale price of our common stock as
reported on the OTC Bulletin Board was $0.01 per share. As of July 3, 2008, we
had approximately 608 stockholders of record with shares held in securities
brokerage accounts. In addition, there are an undetermined number, estimated to
be between 200 and 300, of other stockholders that have not deposited their
shares in securities brokerage accounts and are not included as stockholders of
record.
Dividend Policy
We have never paid cash dividends on our common stock. We intend to
keep future earnings, if any, to finance the expansion of our business. We do
not anticipate that any cash dividends will be paid in the foreseeable future.
Under Nevada law, a company is prohibited from paying dividends if the company,
as a result of paying such dividends, would not be able to pay its debts as they
become due, or if the company's total liabilities and preferences to preferred
stockholders exceed total assets. Any payment of cash dividends on our common
stock in the future will be dependent on our financial condition, results of
operations, current and anticipated cash requirements, plans for expansion, as
well as other factors the Board of Directors deems relevant.
17
The holders of our Series B Preferred Stock are entitled to receive a
10% per annum cumulative dividend when, as and if, declared by our board of
directors. The dividend, if declared, is payable annually in arrears in cash or
in shares of our common stock at our option. If the dividend is paid in shares
of common stock, then such shares are valued at the average closing price of our
common stock for the 10 trading days immediately preceding the date of such
dividend.
Recent Sales of Unregistered Securities
In June and July 2008 we issued 9 shares of our Series J convertible
preferred stock to six investors, all of which were previous Company
shareholders, for $2,500 per share in a private transaction exempt from
registration under the Securities Act in reliance on an exemption provided by
Section 4(2) of that act. We paid no sales commissions in this offering. No
general solicitation or advertising was used in connection with this offering.
The purchasers had access to business and financial information concerning our
company. The purchaser represented that he was acquiring the securities for
investment purposes only, and not with a view towards distribution or resale
except in compliance with applicable securities laws.
In June 2008 we issued $10,000 principal amount of our 14% secured
debentures with a maturity date of December 4, 2008 to one investor in a private
transaction exempt from registration under the Securities Act in reliance on an
exemption provided by Section 4(2) of that act. We paid no sales commissions in
this offering. No general solicitation or advertising was used in connection
with this offering. The purchasers had access to business and financial
information concerning our company. The purchaser represented that he was
acquiring the securities for investment purposes only, and not with a view
towards distribution or resale except in compliance with applicable securities
laws.
Purchases of Equity Securities by the Small Business Issuer and Affiliated
Purchasers
Richard Hersh, former Chief Executive Officer and our current Chairman
of the Board of Directors, became the beneficial owner of one share of our
Series D convertible preferred stock for $25,000 in a private transaction in
August 2006, and acquired 70,000 and 120,000 shares of our common stock in open
market purchases in November and December 2006, respectively.
Orin Neiman, Chief Executive Officer of Fittipaldi Carriers, Inc., the
parent company of CXT, purchased one share of our Series D convertible preferred
stock for $25,000 in a private transaction in September 2006.
William A. Stokes, former President and Director of CXT, purchased five
shares of our Series F convertible preferred stock for $25,000 in a private
transaction in December 2006 and converted these shares into 1,000,000 shares of
common stock in December 2007.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable for a smaller reporting company.
18
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following discussion and analysis of financial condition and
results of our operations should be read in conjunction with the consolidated
financial statements and the notes to those statements included elsewhere in
this Annual Report.
Critical Accounting Policies
Financial Reporting Release No. 60, which was released by the SEC,
requires all companies to include a discussion of critical accounting policies
or methods used in the preparation of financial statements. Note 1 to our
consolidated financial statements appearing elsewhere herein includes a summary
of the significant accounting policies and methods used in the preparation of
our consolidated financial statements. The following is a brief discussion of
the more significant accounting policies and methods used by us:
The preparation of financial statements in conformity with generally
accepted accounting principles 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. Actual results could differ from those estimates.
We follow the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, we record
revenue when persuasive evidence of an arrangement exists, services have been
rendered or product delivery has occurred, the sales price to the customer is
fixed or determinable, and collectability is reasonably assured. The following
policies reflect specific criteria for the reported revenue streams of our
company:
Freight transportation revenue consists of the total dollar value of
services purchased from us by our customers. We recognize freight transportation
revenue when shipments of goods reach their destinations and the receiver of the
goods acknowledges their receipt by signing a bill of lading which for the vast
majority of the Company's shipments occurs on the same day as the goods are
picked up. At that time, our obligations to the customer are completed and
collection of receivables is reasonably assured. Emerging Issues Task Force
Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an
Agent", establishes the criteria for recognizing revenues on a gross or net
basis. When we provide these freight transportation services, we are the primary
obligor, we are a principal to the transaction not an agent, we have the risk of
loss for collection, we have discretion to select the supplier when we do not
supply the services and we have latitude in pricing decisions.
Other revenue, generated from providing various services such as
warehouse management or leasing equipment to owner-operators, generally is
recognized in the month that such services are provided. In those instances when
we provide equipment, on any basis in which ownership is retained by our
Company, then we recognize the revenue generated from such equipment ratably
over the term of the agreement providing for the use of such equipment. Other
revenue is expected to be negligible in the foreseeable future.
19
The Company has adopted SFAS No. 123R, "Share Based Payments". SFAS No.
123R requires companies to expense the value of employee stock options and
similar awards and applies to all outstanding and vested stock-based awards. In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying SFAS No. 123R approximated
$1,116,490 and $1,157,270 in additional compensation expense during the years
ended June 30, 2008 and 2007, respectively. Such amount is included in general
and administrative expenses on the statement of operations.
Based on the guidance in SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets", we evaluate long-lived assets, such as property
and equipment and intangible assets subject to amortization for impairment at
each balance sheet date. Among the factors considered in such evaluations is the
occurrence of a significant event, a significant change in the environment in
which the business assets operate, or if the expected future undiscounted cash
flows are determined to be less than the carrying value of the assets. If
impairment is deemed to exist, an impairment charge would be recognized equal to
the amount by which the carrying amount of the asset exceeds the fair value of
the assets. Management also evaluates events and circumstances to determine
whether revised estimates of useful lives are warranted. Assets to be disposed
of would be separately presented in the consolidated balance sheet and reported
at the lower of the carrying amount or fair value less costs to sell, and would
no longer be depreciated. The assets and liabilities of a disposed group
classified as held for sale would be presented separately in the appropriate
asset and liability sections of the consolidated balance sheet. As of June 30,
2008, management expected its long-lived assets to be fully recoverable.
GOING CONCERN
We had a net loss available to common shareholders of $5,529,002 and
used $1,466,822 in operating activities and $242,284 in investing activities
during fiscal year 2008. Further, our accumulated deficit through June 30, 2008
was $37,008,323. Our current operations do not provide an adequate source of
cash to fund future operations. As described elsewhere herein, we only have
sufficient cash on hand to fund our operating activities through November 30,
2008. Also, the report of our independent registered public accounting firm,
dated November 14, 2008, on our financial statements for the year ended June 30,
2008 stated that our net loss and cash used in operations for the fiscal year
ended June 30, 2008, raised substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is dependent upon our
ability to obtain the necessary financing to meet our obligations and repay our
liabilities when they become due and to increase our revenues and generate
profitable operations in the future. We plan to continue to provide for our
capital requirements through the sale of equity or debt securities. However, we
20
have no firm commitments from any third parties to provide this financing and we
cannot assure you we will be successful in raising working capital as needed.
There are no assurances that we will have sufficient funds to execute our
business plan, pay our obligations as they become due or generate positive
operating results. If we are unable to raise additional capital, we may be
required to reduce or eliminate certain of our operations.
OVERVIEW
In April 2008 we entered into an agreement with Rentar Environmental
Solutions, Inc., a privately-held Delaware corporation ("Rentar") and Rentar
Logic, Inc., a Delaware corporation formed by Rentar ("RLI"), pursuant to which
we granted RLI a global perpetual license for our intellectual properties and
agreed to sell RLI our intellectual properties and software applications for
$3,000,000 and 49% of RLI's issued and outstanding shares of common stock. RLI's
business plan is to develop and market fuel management systems and various other
telematics applications for commercial vehicle fleets and distribute a line of
proprietary pre-combustion fuel catalysts developed and patented by Rentar that
reduces fuel consumption and harmful exhaust emissions for a wide variety of
diesel engines.
For the years ended June 30, 2008 and 2007, virtually all of our
revenue was generated by providing freight transportation services. This revenue
includes the total dollar value of services purchased from us by our customers.
In some instances, our freight transportation services are provided to our
customers using our own transportation equipment, referred to as asset-based
services. In other instances, our freight transportation services are provided
to our customers using the transportation equipment of independent truck
owner-operators under contract with CXT as well as by numerous unaffiliated
trucking companies located throughout the United States arranged by CXT's
freight transportation brokerage, referred to as non-asset based services.
We are a principal in the transaction to transport the freight. By
accepting our customer's order, we accept certain responsibilities for
transportation of the load from its origin to its destination. In instances when
we arrange for transportation of the load by an unaffiliated independent
carrier, the carrier's contract is with our company, not our shipper customer,
and we are responsible for prompt payment of carrier charges but are not
responsible to our shipper customer for any claims for damage to freight while
in transit. The price we charge for these freight transportation services
depends largely upon the prices charged by our competitors as well as upon
several factors, including the distance the freight is being transported, the
type of transportation equipment required to move the freight, the distance that
equipment is from the origin of the freight and whether or not that equipment is
available in our fleet, the value of the freight and the availability of loads
near the locations where the freight is to be delivered.
To a far lesser extent, we generated revenue by providing various
services including software development, system integration, consulting,
training, implementation and access to our proprietary software applications.
For the years ended June 30, 2008 and 2007, less than 1% of our total revenue
was attributable to revenue from providing these other services. This source of
revenue ended upon the sale of our intellectual properties and software
applications to Rentar Logic in April 2008.
During the year ended June 30, 2008, revenue generated from two
customers represented $17,807,250 or approximately 65.6% of our freight
transportation revenue. During the year ended June 30, 2007, revenue generated
from one of these same customers represented $14,050,765 or approximately 61.9%
of our freight transportation revenue. Because our agreement with these
21
customers can be terminated upon a 30 days notice to us, our dependence on
revenues from these customers puts us at risk until such time, if ever, that we
can diversify our revenue base. In November 2008, CXT was notified that the
contract with one of these two large customers had been terminated. In order to
lessen the risks to us from this dependence on certain customers, we are
marketing our services to the maximum extent permitted by our limited sales and
marketing budget.
During fiscal year 2009, our greatest challenge is expected to continue
to be raising sufficient capital to fund our ongoing operations, repay past due
debts and repay other debts as they become due. As of November 7, 2008, we had
$2,914,551 in total debt either past due or due in fiscal year 2009. If we are
unable to secure additional capital as needed, then we may be unable to satisfy
this debt which could adversely affect our ability to continue our operations as
presently conducted. In the event we were unable to satisfy these obligations,
then the holders could seek to foreclose on our primary assets. If the holders
were successful, we would be unable to conduct our business as it is presently
conducted and our ability to generate revenue and fund our ongoing operations
would be materially adversely affected.
RESULTS OF OPERATIONS
Revenue
Total revenue generated during fiscal year 2008 increased by $4,453,070
or approximately 19.6% as compared with total revenue generated during the
fiscal year 2007. Approximately 98.7% of this increase was attributed to an
increase of $4,394,105 or approximately 19.4% in revenue from freight
transportation by CXT. This significant increase primarily was attributed to CXT
becoming the dedicated transportation provider for a major corrugated box
manufacturing plant in South Carolina in September 2007. The remaining increase
of $58,965 was generated from the Company's logistics technology operation which
was sold to Rentar Logic, Inc. in April 2008.
We anticipate that our total revenue will decrease in fiscal year 2009
by approximately 30%. This revenue decline primarily is attributable to the loss
of CXT's largest customer in November 2008 and, to a much lesser extent to the
sale of the Company's logistics technology operation which was sold to Rentar
Logic, Inc. in April 2008. We are seeking to offset this decline by obtaining
additional customers for our freight transportation and brokerage operations
and, subject to the availability of sufficient financing, to acquire one or more
logistics and transportation services companies. However, we currently do not
have any such financing commitments nor entered into any acquisition agreements
and cannot predict if and when we may do so.
Operating Expenses
Total operating expenses incurred during fiscal year 2008 increased by
$2,666,693 or approximately 9.9% as compared with total operating expenses
incurred during fiscal year 2007. This increase primarily consisted of an
increase of $3,884,507 or approximately 18.7% in freight transportation costs
that partially were offset by declines of $912,664 or approximately 24.3% in
salaries, benefits and consulting expenses and $337,408 or 100% in impairment
expense.
The increase in freight transportation expenses during fiscal year 2008
was directly attributed to the increase in freight transportation revenue as
these expenses are variable costs that change by relatively the same percentage
as freight transportation revenue assuming a constant gross margin is
22
maintained. We expect freight transportation expenses in fiscal year 2009 to
decrease proportionately with our estimated 30% decrease in freight
transportation revenue in fiscal year 2009.
Approximately 98.6% of the reduction in salaries, benefits and
consulting expenses in fiscal year 2008 was attributed to a $899,737 or
approximately a 31.3% decrease by our Florida corporate operations. This decline
primarily consisted of a $546,413 or approximately a 76.5% decline in salaries
due to a reduction in the number of personnel and a decrease of $334,260 or
approximately 35.1% in consulting expenses primarily due to having less of a
need for consulting services.
The $337,408 or 100% decrease in impairment expense was attributed to
having no impairments during fiscal year 2008 as compared with the $337,408
write-off of the unamortized value of the License Agreement with EF Marketing
LLC and Emerson Fittipaldi during fiscal year 2007.
We expect operating expenses in fiscal year 2009 to decline by 30%
primarily as a result of CXT eliminating personnel and overhead expenses
associated with providing transportation services to Amcor following the loss of
this customer in November 2008.
Other Income (Expense)
Total other expense increased by $486,629 or approximately 19.5% in
fiscal year 2008 as compared with fiscal year 2007. The major other expenses
that contributed to this increase were:
o interest expense which increased by $821,481 or approximately
33.8%, primarily as a result of a net increase in non-cash
interest expenses in connection with:
o the sale of accounts receivable, conversion of notes payable
into preferred stock, assignments of convertible notes,
issuances of notes payable and our line of credit which, in
aggregate, increased by $794,717 to $1,275,245 in fiscal year
2008 from $480,528 in fiscal year 2007; and
o issuances of common and preferred stock and warrants primarily
related to our settlement in July 2007 with the holder of
$1,750,000 of 5% secured convertible debentures and as monthly
penalties for non-repayment of a $1,250,000 secured promissory
note commencing on its maturity date in February 2008 which,
in aggregate, increased by $879,840 to $892,789 in fiscal year
2008 from $12,949 in fiscal year 2007;
that partially were offset by
o amortization of deferred financing costs and discounts on
notes payable, recorded as interest expense, which declined,
in aggregate by $997,380 to $385,153 during fiscal year 2008
from $1,382,533 in fiscal year 2007.
o gain on settlement of debt which declined to $0 during fiscal year
2008 as compared with $81,777 in fiscal year 2007 when there was a
$33,277 gain on forgiveness of accrued interest to a debenture
holder and $48,500 from the forgiveness of notes payable from
Power2Ship Intermodal to a vendor that had been providing software
maintenance service.
23
These other expenses partially were offset by the following other
income items:
o gain on sale, which increased from $0 in fiscal year 2007 to
$289,705 in fiscal year 2008 due to the sale of our intellectual
properties to Rentar Logic; the gain on sale was calculated by
multiplying the total deferred gain on sale of $1,334,556 by the
percentage of the discounted purchase price paid to us on behalf
of Rentar Logic by June 30, 2008; and
o forgiveness of debt, which increased to $0 during fiscal year 2008
from a loss of $97,384 during fiscal year 2007, of which $94,864
was associated with the settlement agreement the Company entered
into with Richard Hersh, the Company's former Chief Executive
Officer.
We expect interest expense to be lower in fiscal year 2009 based upon
our assumption that most of our convertible debentures will be converted to
equity securities or repaid with the proceeds from the sale of our intellectual
properties to Rentar Logic. However, there can be no assurance that such
conversions will occur or when and how much, if any, of the purchase price
Rentar Logic will pay.
Our net loss available to common stockholders decreased by $1,218,948
or approximately 18.1% in fiscal year 2008 as a result of our $1,299,748 or
23.1% decrease in our net loss plus a $80,800 increase in preferred stock
dividends as the preferred dividend for record holders on June 30, 2007 was
declared and paid in the first quarter of fiscal year 2008.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced losses and negative cash flows from operations
since our inception, and our independent auditors' report on our financial
statements for fiscal 2007 contains an explanatory paragraph regarding our
ability to continue as a going concern. As of June 30, 2008, we had an
accumulated deficit of $37,008,323, a stockholders' deficit of $3,813,202, and
cash and cash equivalents of $77,539.
The Company reduced its working capital deficit by $219,852 to
$4,563,846 at June 30, 2008 as compared with $4,783,698 at June 30, 2007. This
improvement was attributed to an increase in current assets of $1,137,260 that
partially was offset by an increase of $917,408 in current liabilities.
The increase in current assets during fiscal year 2008 of $1,102,569 or
approximately 31.0% resulted from increases in:
o Cash and cash equivalents by $33,383;
o Receivables - affiliates and other by $2,455,190 which primarily
consisted of $2,218,314, net of $122,694 of imputed interest, due
from Rentar Logic related to the sale of the Company's
intellectual properties and $243,654 due from Transport Clearing
East, the finance company CXT used to factor its accounts
receivable, and
o Prepaid expenses and other current assets by $37,934
24
that partially was offset by decreases in:
o Restricted cash by $1,089,637 primarily as a result of the
$1,100,000 held in an escrow account that was released in July
2007 to make a final payment of $1,800,000 to one of our debenture
holders less a $10,363 increase in the amount of certificates of
deposit that CXT is required to maintain to secure letters of
credit provided to certain equipment finance companies and
o Accounts receivable, net of allowances for doubtful accounts, by
$299,610 and
The increase in current liabilities during fiscal year 2008 of $882,717
or approximately 10.6% resulted from increases in:
o Short term notes payable of $760,570;
o Accounts payable and accrued expenses of $1,222,843;
o Accrued salaries of $80,850; and
o Deferred gain on sale of $1,044,851 related to the sale of the
Company's intellectual properties to Rentar Logic in April 2008;
that partially were offset by decreases in:
o Convertible notes payable by $1,328,953, net of a $32,111 increase
in discounts on notes payable;
o Outstanding balance of the line of credit by $761,836 as the
Company terminated its line of credit during fiscal year 2008 and
entered into a factoring arrangement with Transport Clearing East;
and
o Loans payable by $100,917.
During fiscal year 2008 our cash and cash equivalent balance increased
by $33,383. This increase consisted of $1,466,822 used in operating activities
and $242,284 used in investing activities which were offset by $1,742,489
provided by financing activities.
The $1,466,822 used in operating activities during fiscal year 2008
represented a decrease of $8,367 from $1,458,455 used in operating activities
during fiscal year 2007. This minor change resulted from the Company's net loss
declining by $1,299,748 or approximately 19.3% that was offset by a decrease of
$1,084,860 or approximately 112.3% in cash provided by changes in operating
assets and liabilities and a net decrease of $223,255 or approximately 5.2% in
various non-cash expenses.
The $242,284 used in investing activities represented a decrease of
$165,181 or approximately 40.5% in fiscal year 2008 from $407,465 used in
investing activities during fiscal year 2007. The decrease resulted from an
25
increase in purchases of property and equipment $72,047 or approximately 74.7%
that was more than offset by $176,730 received from the sale of assets to Rentar
Logic and a decrease in capitalized costs of software development of $60,498 or
approximately 19.5% due to the sale of the Company's intellectual properties in
April 2008.
The $1,742,489 provided by financing activities represented a decrease
of $139,169 or approximately 7.4% in fiscal year 2008 from $1,881,658 provided
by financing activities during fiscal year 2007. This decrease resulted from
decreases in cash associated with:
o Repayments of promissory notes and notes payable increasing by
$1,379,579 or approximately 253.4%;
o Decreases in proceeds received from the:
o Sale of shares of preferred stock and common stock purchase
warrants by $1,461,000 or approximately 99.7% and the
o Exercise of stock options by $12,500 or 100%.
that partially were offset by increases in cash associated with:
o Increases in proceeds from:
o Convertible promissory notes by $295,000 or approximately
63.4%; and
o Notes payable and loans payable by $1,707,045 or approximately
247.4%
o Net proceeds from the line of credit by $711,865 to $561,414 in
net proceeds during fiscal year 2008 from $150,451 of net
repayments made during fiscal year 2007.
We estimate that our cash on hand on November 7, 2008 will fund our
operating activities until approximately November 30, 2008. If we are unable to
obtain additional working capital before then, we will defer certain employees'
compensation and eliminate certain personnel and administrative costs so that we
may continue to meet operating obligations until such time as we can raise
additional working capital. If we are unable to raise additional working capital
as needed, we may be required to curtail or discontinue some or all of our
business and operations.
Our future capital requirements depend primarily on the rate at which
we can decrease our use of cash to fund operations. Cash used for operations
will be affected by numerous known and unknown risks and uncertainties
including, but not limited to, our ability to successfully market our products
and services, the degree to which competitive products and services are
introduced to the market, and our ability to attract key personnel as we grow.
As long as our cash flow from operations remains insufficient to completely fund
operations, we will continue depleting our financial resources and seeking
additional capital through equity and/or debt financing. If we raise additional
26
capital through the issuance of debt, this will result in increased interest
expense. If we raise additional funds through the issuance of equity or
convertible debt securities, the percentage ownership of NuState Energy Holdings
held by existing stockholders will be reduced and those stockholders may
experience significant dilution. In addition, new securities may contain certain
rights, preferences or privileges that are senior to those of our common stock.
There can be no assurance that acceptable financing to fund our ongoing
operations and for future acquisitions or for the integration and expansion of
existing operations can be obtained on suitable terms, if at all. Our ability to
continue our existing operations and to continue to implement our growth and
acquisition strategy could suffer if we are unable to raise the additional funds
on acceptable terms which will have the effect of adversely affecting our
ongoing operations and limiting our ability to increase our revenues or possibly
attain profitable operations in the future. If we are unable to raise sufficient
working capital as needed, our ability to continue our business and operations
will be in jeopardy. As of November 7, 2008, all of our assets served as
collateral for $771,310 of our 14.25% secured convertible debentures, $542,500
of which are past due, and certain of our assets, excluding those held by
Fittipaldi Carriers, Inc. and its subsidiaries, served as collateral for
$1,458,241 of our 16% secured promissory notes, $208,241 of which is past due.
If we default on our obligations under either of these securities, including,
but not limited to, the payment of interest when due, then the debenture holders
could foreclose on our assets and we would be unable to continue our business
and operations.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Not applicable for a smaller reporting company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The financial statements are included beginning at F-1 following Item
15 of this Report. See Index to the Financial Statements.
ITEM 9. CHANGES IN AND DISAGREEMENT WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE.
None.
ITEM 9A. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. We maintain
"disclosure controls and procedures" as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934. In designing and evaluating our
disclosure controls and procedures, our management recognized that disclosure
controls and procedures, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of disclosure
controls and procedures are met. Additionally, in designing disclosure controls
and procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures is based
partially upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions.
27
Our management, including our Chief Executive Officer, who also serves
as our principal financial and accounting officer, evaluated the effectiveness
of our disclosure controls and procedures as of the end of the period covered by
this annual report. Based on such evaluation and as a result of the material
weaknesses in our internal controls and procedures as discussed in greater
detail below, our Chief Executive Officer concluded that, as of the end of the
period covered by this annual report, our disclosure controls and procedures
were not effective:
- to give reasonable assurance that the information required to be
disclosed by us in reports that we file under the Securities
Exchange Act of 1934 is recorded, processed, summarized and
reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and
- to ensure that information required to be disclosed in the reports
that we file or submit under the Securities Exchange Act of 1934
is accumulated and communicated to our management, including our
Chief Executive Officer, to allow timely decisions regarding
required disclosure.
Management's Report on Internal Control Over Financial Reporting. Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) of the Securities
Exchange Act of 1934. Our internal control over financial reporting includes
those policies and procedures that:
- pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of
our assets,
- provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that
our receipts and expenditures are being made only in accordance
with authorization of management and directors, and
- provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use or disposition of our
assets that could have a material effect on our financial
statements.
In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework. Our management has concluded that, as
of June 30, 2008, our internal control over financial reporting was not
effective based on these criteria.
During the assessment of our internal controls as of June 30, 2008 in
connection with our implementation of Section 404 of the Sarbanes-Oxley Act of
2002, we identified a number of control deficiencies related to (i) our untimely
reconciliation of various general ledger accounts, (ii) our untimely recognition
of accounts receivable reserves, and (iii) the inability of our accounting
department to provide a draft of this annual report on Form 10-K, including our
financial statements, to our management and our accounting and legal
professionals with sufficient time to perform an adequate review of this
document and to ensure the timely filing thereof.
28
While we have taken certain remedial steps during the three months
ended September 30, 2008 to correct these control deficiencies, we have an
inadequate number of personnel with the requisite expertise in generally
accepted accounting principles to ensure the proper application thereof. Due to
the nature of these material weaknesses in our internal control over financial
reporting, there is more than a remote likelihood that misstatements which could
be material to our annual or interim financial statements could occur that would
not be prevented or detected.
A material weakness (within the meaning of PCAOB Auditing Standard No.
5) is a deficiency, or a combination of deficiencies, in internal control over
financial reporting, such that there is a reasonable possibility that a material
misstatement of our annual or interim financial statements will not be prevented
or detected on a timely basis. A significant deficiency is a deficiency, or a
combination of deficiencies, in internal control over financial reporting that
is less severe than a material weakness, yet important enough to merit attention
by those responsible for oversight of the company's financial reporting.
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over financial
reporting. Our management's report was not subject to attestation by our
registered public accounting firm pursuant to temporary rules of the Securities
and Exchange Commission that permit us to provide only management's report in
this annual report.
Changes in Internal Control over Financial Reporting. There have been
no changes in our internal control over financial reporting during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Directors and Executive Officers
The following table sets forth information on our executive officers
and directors as of November 7, 2008.
Name Age Positions
- ---- --- ---------
Richard Hersh 65 Chairman of the Board of Directors
Frank P. Reilly 44 Chief Executive Officer and Member, Board of Directors
RICHARD HERSH. Mr. Hersh has been Chairman since March 2003 and
currently provides various management consulting services to the Company
pursuant to a five-year consulting agreement that extends through September
2013. Previously, he served as our Chief Executive Officer from March 2003 until
September 2006. Mr. Hersh served as Chairman and Chief Executive Officer of
Freight Rate, Inc. from August 2001 until March 2003. Mr. Hersh served as Chief
Operating Officer of Freight Rate, Inc. from 1998 until being elected CEO and
29
Chairman in April 2001. Prior to joining Freight Rate, Inc., he held several
management positions including Operations Manager of Express Web, Inc., Chief
Executive Officer of TRW, Inc. a start-up recycling company, Vice President of
Operations for Book Warehouse, a discount bookstore chain, and Director of
Operations for Dollar Time. Also, Mr. Hersh founded and was Chief Executive
Officer of Helyn Brown's, a retailer of women's apparel with stores in Florida
and Louisiana, which he sold after approximately 16 years.
FRANK P. REILLY. Mr. Reilly has been Chief Executive Officer since June
2007, a Director since April 2007 and was the Company's Executive Vice
President, Strategy and Market Development from November 2006 until becoming
Chief Executive Officer. In October 2008, the Company entered into a five-year
employment agreement with Mr. Reilly to be its Chief Executive Officer,
Principal Financial and Accounting Officer, President, Treasurer and Secretary.
During the five years prior to becoming employed by the Company, Mr. Reilly has
held, and currently holds, positions as President of Rancho Alegre Lodge Jackson
Hole Wyoming, President of Frank P. Reilly, Inc., Managing Director of Sports
and Entertainment Realty, Managing Director of YOUMEHIM, LLC and Managing
Director of International Logistics Solutions, Inc.
All directors are elected at each annual meeting and serve for one year
or until their successors are elected and qualified. Our officers serve at the
pleasure of our board of directors.
Key Employees
ORIN NEIMAN. Mr. Neiman became Chief Executive Officer of Fittipaldi
Carriers, Inc. in December 2006 and the Company has engaged his consulting firm
since January 2003. Previously, Mr. Neiman served as Chief Executive Officer and
Chairman of Transcon Inc., previously listed on the NYSE. He also held the same
positions for Transcon's subsidiary Transcon Lines, the nation's 15th largest
trucking firm at the time. He subsequently, served as Chief Executive Officer
and Chairman of Polar Express Inc., a NASDAQ-traded motor carrier specializing
in the transportation of time sensitive and temperature controlled freight. Mr.
Neiman was a former Vice President of the American Trucking Association.
DANIEL G. BAUSUM. Mr. Bausum became President of Commodity Express
Transportation in May 2008. Previously, in 2005, he founded Plumline Freight
Services, a dry-van carrier operating in the southeastern United States, and was
its President and Chief Executive Officer until March 2008. During 2004 and 2005
he was the Regional Sales Manager for The TLC Companies, a provider of human
resources services to trucking companies. He was the Director of Customer
Operations for USF Glen Moore, the truckload division of USF from 2002 through
2004.
Potential Conflicts of Interest
We have no arrangement, understanding or intention to enter into any
transaction for participating in any business opportunity with any officer,
director, or principal stockholder or with any firm or business organization
with which such persons are affiliated, whether by reason of stock ownership,
position as an officer or director, or otherwise.
30
There can be no assurance that members of management will resolve all
conflicts of interest in our favor. Our officers and directors are accountable
to our Company and its stockholders as fiduciaries, which means they are legally
obligated to exercise good faith and integrity in handling our affairs and in
their dealings with our company. Failure by them to conduct our business in its
best interests may result in liability to them.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Exchange Act requires our officers, directors and
persons who beneficially own more than 10% of our common stock to file reports
of securities ownership and changes in such ownership with the Securities and
Exchange Commission. Officers, directors and greater than 10% beneficial owners
also are required by rules promulgated by the Securities and Exchange Commission
to furnish us with copies of all Section 16(a) forms they file. Based solely on
our review of copies of the Section 16(a) reports filed for the fiscal year
ended June 30, 2008, there were no delinquent filings.
Committees of the Board of Directors
Our Board of Directors has not established any committees, including an
Audit Committee, a Compensation Committee or a Nominating Committee, any
committee performing a similar function. The functions of those committees are
being undertaken by the entire board as a whole. Because we do not have any
independent directors, our Board of Directors believes that the establishment of
committees of the Board would not provide any benefits to our company and could
be considered more form than substance.
We do not have a policy regarding the consideration of any director
candidates which may be recommended by our stockholders, including the minimum
qualifications for director candidates, nor has our Board of Directors
established a process for identifying and evaluating director nominees. We have
not adopted a policy regarding the handling of any potential recommendation of
director candidates by our stockholders, including the procedures to be
followed. Our Board has not considered or adopted any of these policies as we
have never received a recommendation from any stockholder for any candidate to
serve on our Board of Directors. Given our financial condition and lack of
directors and officers insurance coverage, we do not anticipate that any of our
stockholders will make such a recommendation in the near future. While there
have been no nominations of additional directors proposed, in the event such a
proposal is made, all members of our Board will participate in the consideration
of director nominees.
None of our directors is an "audit committee financial expert" within
the meaning of Item 401(e) of Regulation S-X. In general, an "audit committee
financial expert" is an individual member of the audit committee or Board of
Directors who:
o understands generally accepted accounting principles and
financial statements,
o is able to assess the general application of such principles
in connection with accounting for estimates, accruals and
reserves,
o has experience preparing, auditing, analyzing or evaluating
financial statements comparable to the breadth and complexity
to our financial statements,
o understands internal controls over financial reporting, and
o understands audit committee functions.
31
Our Board of Directors is comprised of individuals who were either
integral to our formation or who are involved in our day to day operations.
While we would prefer that one or more of our directors be an audit committee
financial expert, none of these individuals who have been key to our development
have professional backgrounds in finance or accounting. At such time as we are
able to expand our Board of Directors to include one or more independent
directors, we intend to establish an Audit Committee of our Board of Directors.
It is our intention that one or more of these independent directors will also
qualify as an audit committee financial expert. Our securities are not quoted on
an exchange that has requirements that a majority of our Board members be
independent and we are not currently otherwise subject to any law, rule or
regulation requiring that all or any portion of our Board of Directors include
"independent" directors, nor are we required to establish or maintain an Audit
Committee or other committee of our Board of Directors.
Code of Ethics
We have adopted a Code of Ethics and Business Conduct to provide
guiding principles to our principal executive officer, principal financial
officer, and principal accounting officer or controller of our company in the
performance of their duties. Our Code of Ethics and Business Conduct also
strongly recommends that all directors and employees of our company comply with
the code in the performance of their duties. Our Code of Ethics and Business
Conduct provides that the basic principle that governs all of our officers,
directors and employees is that our business should be carried on with loyalty
to the interest of our stockholders, customers, suppliers, fellow employees,
strategic partners and other business associates. We believe that the philosophy
and operating style of our management are essential to the establishment of a
proper corporate environment for the conduct of our business.
Generally, our Code of Ethics and Business Conduct provides guidelines
regarding:
* conflicts of interest,
* financial reporting responsibilities,
* insider trading,
* inappropriate and irregular conduct,
* political contributions, and
* compliance with laws.
A copy of our Code of Ethics has been filed with the Securities and
Exchange Commission as an exhibit to this annual report. We will provide a copy,
without charge, to any person desiring a copy of the Code of Ethics, by written
request to us at our principal offices.
ITEM 11. EXECUTIVE COMPENSATION.
The following table summarizes all compensation recorded by us in each
of the last two completed fiscal years for our principal executive officer, each
other executive officer serving as such whose annual compensation exceeded
$100,000 and up to two additional individuals for whom disclosure would have
been made in this table but for the fact that the individual was not serving as
an executive officer of our company at June 30, 2008.
32
SUMMARY COMPENSATION TABLE
--------------------------
Non-Equity Non-qualified
Incentive Deferred All
Stock Option Plan Compensation Other
Name and principal Salary Bonus Awards Awards Compensation Earnings Compensation Total
position Year ($) ($) ($) ($) ($) ($) ($) ($)
- ------------------ ---- ------ ----- ------ ------ ------------ ------------- ------------ -----
Frank P. Reilly, 2008 120,000 0 0 205,875 0 0 0 325,875
Chief Executive
Officer (1) 2007 75,000 20,000 0 324,923 0 0 0 419,923
- --------------------------------------------------------------------------------------------------------------------------
Richard Hersh, 2008 0 0 0 73,560 0 0 133,750 207,310
former Chief
Executive Officer (2) 2007 0 0 0 534,600 0 0 90,000 624,600
- --------------------------------------------------------------------------------------------------------------------------
Orin Neiman, Chief 2008 120,000 0 0 0 0 0 0 120,000
Executive Officer
of Fittipaldi 2007 60,000 0 0 295,087 0 0 0 355,087
Carriers, Inc. (3)
- --------------------------------------------------------------------------------------------------------------------------
(1) Mr. Reilly's accrued salary was $190,850 and $80,000 as of June 30, 2008 and
2007, respectively. Mr. Reilly became Chief Executive Officer on June 6, 2007.
(2) Mr. Hersh's accrued salary was $152,000 and $42,500 as of June 30, 2008 and
2007, respectively. Mr. Hersh resigned as Chief Executive Officer on September
15, 2006 and entered into a Separation and Severance Agreement with the Company
pursuant to which he agreed to settle all accrued salary and other obligations
the Company owed him and to the cancellation of all his stock options in
consideration for $20,000 and the granting of a five-year warrant to purchase
11,000,000 shares of common stock for $0.025 per share. On the same date, Mr.
Hersh entered into a consulting agreement with the Company having a five-year
term which provides for a monthly consulting fee of $10,000. This consulting
agreement was replaced with a new agreement dated January 15, 2008 which
extended the term until September 14, 2013 and increased the monthly consulting
fee to $12,500.
(3) Mr. Neiman had accrued salary of $ and $0 as of June 30, 2008 and 2007,
respectively. Mr. Neiman became Chief Executive Officer of Fittipaldi Carriers,
Inc., a wholly owned subsidiary of the Company, on January 1, 2007.
Employment Agreements
The Company's employment agreements as of the date of this Report are
summarized below.
Effective October 1, 2008, the Company commenced a five-year employment
agreement with Frank P. Reilly to be its Chief Executive Officer, Principal
Financial and Accounting Officer, President, Treasurer and Secretary. The term
of employment may be automatically renewed for successive one year terms
beginning on the five-year anniversary of the agreement unless previously
terminated according to the termination provisions in the agreement or if the
Company or Mr. Reilly elects to terminate the agreement by written notice at
least ninety days prior to the expiration of the then-current term of
33
employment. Mr. Reilly will be entitled to a signing bonus of $39,643 to
compensate him for the $30,000 annual salary increase he should have received
upon becoming the Company's Chief Executive Officer on June 6, 2007. The base
salary in year one of the term will be $150,000 with annual raises of a minimum
of 20%. Also, within ten business days of filing each quarterly or annual report
with the U.S. Securities and Exchange Commission ("SEC"), the Company will grant
Mr. Reilly a five-year, fully vested option to purchase that number of shares of
common stock such that, following such grant, the aggregate number of shares
underlying all of Mr. Reilly's outstanding options represent no less than five
percent of the total issued and outstanding shares of common stock of the
Company as reported in its quarterly or annual report. The exercise price for
these options will be equal to the greater of i) the average closing price of
the Company's common stock for the ten trading days immediately preceding the
filing of the quarterly or annual report or ii) the closing price of the common
stock on the tenth trading day after filing the annual or quarterly report. In
addition, within ten business days of the Company filing an annual report with
the SEC in which the Company reports a net profit before tax for its most
recently completed fiscal year, Mr. Reilly shall be entitled to receive a bonus
equal to 4.0% of such net profit before tax which may be paid, at Mr. Reilly's
option, in cash or shares of the Company's common stock. If he elects to receive
common stock, then the price per share used to calculate the number of shares to
be issued to him shall be the average closing share price for the ten trading
days immediately preceding the filing of the annual report with the SEC. As of
June 30, 2008, accrued salary owed to Mr. Reilly was $183,350.
Effective January 1, 2007, the Company commenced a two-year employment
agreement with Orin Neiman to be Chief Executive Officer of Fittipaldi Carriers,
Inc. The term of employment may be automatically renewed for successive one year
terms beginning on the two-year anniversary of the agreement unless previously
terminated according to the termination provisions in the agreement or if the
Company or Mr. Neiman elects to terminate the agreement by written notice at
least ninety days prior to the expiration of the then-current term of
employment. Mr. Neiman receives a base salary of $120,000 per year, was granted
a five-year, fully vested stock option to purchase 6,000,000 shares of common
stock for $0.025 per share and agreed to the cancellation of all stock options
and warrants previously granted to him or to Carriers Consolidation, Inc., his
consulting company.
34
The following table provides information concerning unexercised
options, stock that has not vested and equity incentive plan awards for each
named executive officer outstanding as of June 30, 2008:
- --------------------------------------------------------------------------------------------------------------------------------
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR-END
- --------------------------------------------------------------------------------------------------------------------------------
OPTION AWARDS STOCK AWARDS
- --------------------------------------------------------------------------------------------------------------------------------
Equity Equity
Incentive Incentive
Market Plan Plan
Value Awards: Awards:
Number of Number Market
Equity of Shares of or
Incentive Shares or Unearned Payout
Plan or Units Shares, Value of
Number of Number of Awards: Units of Units Unearned
Securities Securities Number of of Stock or Shares,
Underlying Underlying Securities Stock That Other Units or
Unexercised Unexercised Underlying Option That Have Rights Other
Options Options Unexercised Exercise Option Have Not that Rights
(#) (#) Unearned Price Expiration Not Vested Have That
Name Exercisable Unexercisable Options (#) ($) Date Vested (#) ($) Not Vested Have Not
(a) (b) (c) (d) (e) (f) (g) (h) (#)(i) Vested (#)(j)
- --------------------------------------------------------------------------------------------------------------------------------
Frank P. Reilly 6,000,000 0 0 0.025 11/16/2011 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
5,000,000 0 0 0.025 11/5/2012 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
9,000,000 0 0 0.01 3/4/2013 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
Richard Hersh 11,000,000 0 0 0.025 9/15/2011 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
9,000,000 0 0 0.01 3/4/2013 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
Orin Neiman 6,000,000 0 0 0.025 1/1/2012 0 0 0 0
- --------------------------------------------------------------------------------------------------------------------------------
Directors' Compensation
We have in the past and may, at the sole discretion of the Board of
Directors in the future, provide our non-employee, independent directors with
shares of our common stock as compensation for participating on our board of
directors. At no time during fiscal year 2008 did our company have any
non-employee, independent directors and none of our directors received any
compensation for being a director.
2001 Employee Stock Compensation Plan
In January 2001 we adopted the 2001 Employee Stock Compensation Plan.
The plan is intended to further the growth and advance the best interests of our
company, by supporting and increasing our ability to attract, retain and
compensate persons of experience and ability and whose services are considered
valuable, to encourage the sense of proprietorship in such persons, and to
stimulate the active interest of such persons in the development and success of
NuState Energy Holdings. The plan provides for stock compensation through the
award of shares of our common stock.
35
The board of directors may appoint a Compensation Committee of the
board of directors to administer the plan. In the absence of such appointment,
our board of directors is responsible for the administration of this plan. To
date, our board has not appointed a Compensation Committee to administer the
plan. The board of directors has the sole power to award shares of common stock
under the plan, as well as determining those eligible to receive an award of
plan shares. Awards of shares under the plan may be made as compensation for
services rendered, directly or in lieu of other compensation payable, as a bonus
in recognition of past service or performance or may be sold to an employee.
The maximum number of shares which may be awarded under the plan is
5,000,000. At the date of this annual report 4,881,000 shares had been granted
under the plan. Awards may generally be granted to:
* executive officers, officers and directors (including advisory and
other special directors) of NuState Energy Holdings;
* full-time and part-time employees of our company;
* natural persons engaged by us as a consultant, advisor or agent;
and
* a lawyer, law firm, accountant or accounting firm, or other
professional or professional firm engaged by us.
Grants to employees may be made for cash, property, services rendered
or other form of payment constituting lawful consideration under applicable law.
Shares awarded other than for services rendered may not be sold at less than the
fair value of our common stock on the date of grant.
The plan will terminate on the tenth anniversary of its effective date,
unless terminated earlier by the board of directors or unless extended by the
board of directors, after which time no incentive award grants can be authorized
under the plan. The board of directors has absolute discretion to amend the plan
with the exception that the board has no authority to extend the term of the
plan, to increase the number of shares subject to award under the plan or to
amend the definition of "Employee" under the plan.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.
The following table sets forth information available to us as of
November 7, 2008, with respect to the beneficial ownership of the outstanding
shares of each class of our voting stock by:
* each person who is the beneficial owner of more than 5% of
the outstanding shares of any class of voting stock;
* each director
* each executive officer; and
* all executive officers and directors as a group.
Unless otherwise indicated, the business address of each person listed
is in care of 902 Clint Moore Road, Suite 204, Boca Raton, Florida 33487. We
believe that all persons named in the table have sole voting and investment
power with respect to all shares beneficially owned by them. Under securities
laws, a person is considered to be the beneficial owner of securities he owns
and that can be acquired by him within 60 days from November 7, 2008 upon the
exercise of options, warrants, convertible securities or other understandings.
We determine a beneficial owner's percentage ownership by assuming that options,
warrants or convertible securities that are held by him, but not those held by
any other person and which are exercisable within 60 days of November 7, 2008,
have been exercised or converted.
36
Amount and Nature of Percent Percent of
Name of Beneficial Owner Beneficial Ownership of Class Voting Control (1)
- ------------------------ -------------------- -------- ------------------
Common Stock:
Richard Hersh (2) 21,579,528 6.3 10.8
Frank P. Reilly (3) 21,251,952 6.2 6.2
All officers and directors
as a group (two persons) (2), (3) 42,831,480 11.8 15.9
Michael Garnick (4) 56,566,667 15.8 15.0
The Adamas Fund, LLLP (5) 33,475,000 9.9 9.4
Robert F. Green, Jr. (6) 26,437,563 8.1 7.7
Carmelo Luppino (7) 22,084,541 6.6 6.3
The Amber Capital Fund Ltd. (8) 20,425,113 6.3 6.0
Arthur Notini (9) 17,557,812 5.4 5.1
Series Y Preferred Stock:
Richard Hersh (2) 87,000 100% 10.8
Frank P. Reilly (3) 0 * *
All officers and directors as a
group (two persons) (2), (3) 87,000 100% 15.9
* represents less than 1%
(1) Percent of Voting Control is based upon the number of issued and outstanding
shares of our common stock and our Series Y Convertible Preferred Stock on
November 7, 2008. On that date we had 321,453,161 outstanding shares of common
stock with one vote per share and 87,000 shares of Series Y Convertible
Preferred Stock with 200 votes per share for an aggregate of 338,853,161 votes.
(2) Mr. Hersh's beneficial ownership includes 11,000,000 shares of common stock
underlying a warrant exercisable at $0.01 per share which expires on September
15, 2011, 9,000,000 shares of common stock underlying a warrant exercisable at
$0.01 per share which expires on March 4, 2013 and 1,000,000 shares of common
stock underlying Series D convertible preferred stock convertible at $0.025 per
share owned my Mr. Hersh's spouse.
(3) Mr. Reilly's beneficial ownership includes 6,000,000 shares of common stock
underlying an option exercisable at $0.01 per share which expires on November
16, 2011, 5,000,000 shares of common stock underlying an option exercisable at
$0.01 per share which expires on November 5, 2012, 9,000,000 shares of common
stock underlying an option exercisable at $0.01 per share which expires on March
4, 2013 and 120,000 shares underlying warrants exercisable at $0.26 per share
which expire on March 31, 2008.
(4) Mr. Garnick's address is 1590 Stockton Road, Meadowbrook, Pennsylvania
19046. His beneficial ownership includes 15,000,000 shares of common stock
underlying warrants exercisable at $0.02 per share which expire on April 23,
2011 and 3,333,333 shares of common stock underlying a $50,000 16% promissory
note dated April 23, 2008.
(5) Mr. Harvey Altholtz is the General Partner of Wealth Strategy Partners LLP
which is the General Partner of the Adamas Fund, LLLP. Wealth Strategy Partners
LLP is located at 1800 Second St., Suite 758, Sarasota, Florida 34236. Its
beneficial ownership includes 17,500,000 shares of common stock underlying
35,000 shares of Series I convertible preferred stock at 500 shares per share.
37
(6) Mr. Green's address is 607 Dwyer Avenue, Arlington Heights, Illinois 60005.
His beneficial ownership includes 200,000 shares of our common stock underlying
a warrant exercisable at $0.05 per share expiring on February 2, 2008, 333,333
shares underlying a warrant exercisable at $0.05 per share expiring on October
31, 2008 and 250,000 shares underlying a warrant exercisable at $0.05 per share
expiring on April 17, 2009.
(7) Mr. Luppino's address is 77 Sheather Road, Mt. Kisko, New York 10549. Mr.
Luppino is the control person of both Luppino Landscaping & Masonry, LLC and
Triple L Concrete, LLC. His beneficial ownership includes 5,883,333 shares of
common stock underlying warrants granted to him that are exercisable at $0.025
per share, 666,667 shares underlying a warrant granted to Luppino Landscaping &
Masonry, LLC that is exercisable at $0.025 per share and 333,333 shares
underlying a warrant granted to Triple L Concrete, LLC that is exercisable at
$0.025 per share all of which expire on April 10, 2010 and 6,000,000 shares
underlying $150,000 of our Series D convertible preferred stock.
(8) Michael B. Collins is a control person of The Amber Capital Fund Ltd. which
is located at 5 Park Road, Hamilton, Bermuda HM09. Its beneficial ownership
includes 1,500,000 shares underlying a warrant exercisable at $0.01 per share
expiring on October 14, 2011 and 1,500,000 shares underlying $15,000 principal
amount of convertible debentures at a conversion price of $0.01 per share based
on 50% of the average closing price of our common stock for the ten trading days
immediately preceding the date the Company receives a notice of conversion from
Investor but in no event less than $0.01 per share as of November 7, 2008.
(9) Mr. Notini's address is 1055 Mammoth Road, Dracut, Massachusetts 01826. His
beneficial ownership includes 1,666,667 shares underlying a warrant exercisable
at $0.01 per share that expires on October 16, 2011 and 1,666,700 shares
underlying $16,667 principal amount of convertible debentures at a conversion
price of $0.01 per share based on 50% of the average closing price of our common
stock for the ten trading days immediately preceding the date the Company
receives a notice of conversion from Investor but in no event less than $0.01
per share as of November 7, 2008.
Securities Authorized for Issuance under Equity Compensation Plans
Number of
securities
remaining
for future
Number of securities Weighted average issuance
to be issued upon exercise price of (excluding
exercise of outstanding securities
outstanding options options, warrants reflected in
Plan Category warrants, and rights and rights column (a))
- -------------------------------------------------------------------------------------------------
2001 Employee Stock
Compensation Plan 0 n/a 119,000
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR
INDEPENDENCE.
During the period commencing July 1, 2007 through the date of this
Report, the Company entered into the transactions described below with related
persons.
38
Effective October 1, 2008, the Company commenced a five-year employment
agreement with Frank P. Reilly to be its Chief Executive Officer, Principal
Financial and Accounting Officer, President, Treasurer and Secretary. See Item
11 - "Executive Compensation" for the material terms and condition of this
employment agreement.
Effective January 15, 2008, the consulting agreement dated September
2006 with Richard Hersh, the Company's Chairman of the board of directors, was
amended to increase his monthly consulting fee from $10,000 to $12,500 and
extend its term from until September 2011 to September 2013.
On April 23, 2008, the Company entered into a transaction with Michael
J. Garnick in which he forgave $300,000 of 16% secured promissory notes that
were past due in consideration for receiving 1) shares of Rentar Environmental
Solutions common stock valued at $250,000, which reduced the balance owed to the
Company related to Rentar's purchase of the intellectual properties by $250,000
and 2) a $50,000 principal amount 16% promissory note due in July 2008. In
addition, the Company issued the investor 3,000,000 shares of its common stock
and granted the investor a three-year warrant to purchase 15,000,000 shares of
its common stock for $0.02 per share in connection with the new note and
recognized a debt discount of $50,000 to be amortized over the term of the new
note. The new $50,000 promissory note may be converted into common stock at a
50% discount to the 10-day average closing price of the common stock with a
minimum conversion price of $0.015 per share. If not repaid in full by its
maturity date, the note is to incur late payment fees of 200,000 shares of
common stock on the monthly anniversary of the maturity date as long as the note
has not been repaid in full. The Company agreed to pay the balance of $23,112 in
accrued interest due on the $350,000 16% secured promissory note outstanding as
of the date of the settlement by May 31, 2008 and, if not paid by that date,
interest would commence accruing at 16% per annum and would incur late payment
fees of 200,000 shares of common stock at the end of each month until the
accrued interest is paid in full. Also, the Company issued Mr. Garnick 1,500,000
shares valued at $27,000 to repurchase previously issued warrants to purchase
3,000,000 shares at $0.025 per share.
On March 19, 2008, The Black Diamond Fund, LLLP, now known as the
Adamas Fund, LLLP, waived its right to receive payment of principal of
$1,250,000 and accrued interest thereon due on February 8, 2008 on a 16% secured
promissory note issued May 8, 2007 and consented to the changing of the maturity
date of the note to September 18, 2008. As consideration for obtaining this
waiver, the Company agreed to increase the interest rate of the note from 16%
compounded daily to an annual rate of 32% from February 8, 2008 until March 17,
2008 and, for the remainder of the term of the note, to reduce the interest to
an annual rate of 25%. The Company was unable to repay the note and accrued
interest thereon by the amended maturity date. However, on October 9, 2008, the
Company was able to negotiate an agreement with the manager of the fund to pay
$1,250,000 by December 1, 2008 in satisfaction of all obligations related to the
note. The fund has agreed that, promptly after the Company makes the required
payment, it will return all shares of Series I convertible preferred stock
issued to it, retaining approximately 16,000,000 shares of our common stock
issued to it in conjunction with the issuance of the promissory note, and to
release its security interest in the Company's assets. If the Company is unable
to make the required payment prior to December 6, 2008, then the note would be
in default. No assurance can be given that the Company would be in a position to
arrange alternative financing to satisfy the obligations to the holder in the
event of a default. If the Company is unable to arrange alternative financing or
obtain a waiver from the holder, then the note, and all accrued and unpaid
interest thereon, would become due and payable without further notice. In the
event the Company is unable to satisfy these obligations, then the holder could
seek to foreclose on the assets securing the note. If the holder was successful,
39
the Company would be unable to conduct its business as it is presently conducted
and its ability to generate revenue and fund our ongoing operations would be
materially adversely affected. Should the Company make the required by December
6, 2008, the Company would record a gain on debt settlement of approximately
$750,000 reflecting both the forgiveness of accrued interest and the return of
all outstanding shares of Series I convertible preferred stock.
Directors' Independence
None of the members of our Board of Directors are "independent" within
the meaning of Marketplace Rule 4200 of the National Association of Securities
Dealers, Inc.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
Our financial statements for fiscal years 2008 and 2007 were audited by
Sherb & Co. LLP. The following table shows the fees that we paid or accrued for
the audit, tax and other services provided by Sherb & Co., LLP during fiscal
years 2008 and 2007.
FY 2008 FY 2007
------- -------
Audit Fees $77,000 $72,600
Audit-Related Fees 0 0
Tax Fees 0 5,500
All Other Fees 15,000 0
-------- --------
Total $92,000 $78,100
======== ========
Audit Fees -- This category includes the audit of our annual
financial statements, review of financial statements included in our Quarterly
Reports on Form 10-QSB and services that are normally provided by the
independent auditors in connection with engagements for those fiscal years. This
category also includes advice on audit and accounting matters that arose during,
or as a result of, the audit or the review of interim financial statements.
Audit-Related Fees -- This category consists of assurance and
related services by the independent auditors that are reasonably related to the
performance of the audit or review of our financial statements and are not
reported above under "Audit Fees." The services for the fees disclosed under
this category include consultation regarding our correspondence with the SEC and
other accounting consulting.
Tax Fees -- This category consists of professional services rendered
by the independent auditor for tax compliance and tax advice. The services for
the fees disclosed under this category include tax return preparation and
technical tax advice.
All Other Fees -- This category consists of fees for other
miscellaneous items.
The board of directors has adopted a procedure for pre-approval of all
fees charged by Sherb & Co., LLP. Under the procedure, the board approves the
engagement letter with respect to audit, tax and review services. Other fees are
subject to pre-approval by the board, or, in the period between meetings, by a
designated member of the board. Any such approval by the designated member is
disclosed to the entire board at the next meeting. The audit and tax fees paid
to Sherb & Co., LLP with respect to fiscal year 2008 were pre-approved by the
entire board of directors.
40
PART IV
ITEM 15. EXHIBITS.
Exhibit No. Description of Document
- ----------- -----------------------
2.1 Merger Agreement Between Jaguar Investments, Inc., Freight Rate,
Inc., and Jag2 Corporation (1)
2.2 Agreement and Plan of Merger Between Fittipaldi Logistics, Inc.
and State Petroleum Distributors, Inc. (30)
3.1 Articles of Incorporation (2)
3.2 Certificate of Amendment to Articles of Incorporation (3)
3.3 Certificate of Amendment to the Articles of Incorporation (4)
3.4 Certificate of Voting Powers, Designations, Preferences and Rights
to Series B Convertible Preferred Stock (10)
3.5 Certificate of Voting Powers, Designations, Preferences and Rights
to Series C Convertible Preferred Stock (10)
3.6 Certificate of Voting Powers, Designations, Preferences and Rights
to Series Y Preferred Stock (5)
3.7 Certificate of Correction of Certificate of Voting Powers,
Designations, Preferences and Right to Series Y Preferred Stock
(5)
3.8 Certificate of Amendment to Articles of Incorporation Increasing
Authorized Shares of Common Stock to 250,000,000 filed on August
13, 2004 (9)
3.9 Certificate of Voting Powers, Designations, Preferences and Rights
to Preferred Stock of Series X Convertible Preferred Stock (5)
3.10 Bylaws (2)
3.11 Amended Bylaws dated March 31, 2003 (5)
3.12 Certificate to Set Forth Designations, Preferences and Rights to
Series D Convertible Preferred Stock (23)
3.13 Certificate to Set Forth Designations, Preferences and Rights to
Series E Convertible Preferred Stock (29)
3.14 Certificate to Set Forth Designations, Preferences and Rights to
Series F Convertible Preferred Stock (29)
3.15 Certificate to Set Forth Designations, Preferences and Rights to
Series G Convertible Preferred Stock (29)
3.16 Certificate to Set Forth Designations, Preferences and Rights to
Series H Convertible Preferred Stock (29)
3.17 Certificate to Set Forth Designations, Preferences and Rights to
Series I Convertible Preferred Stock (29)
3.18 Certificate to Set Forth Designations, Preferences and Rights to
Series J Convertible Preferred Stock **
4.1 Form of Common Stock Purchase Warrant to Newbridge Securities
Corporation for Business Advisory Agreement (10)
4.2 $ 1,747,000 principal amount 14.25% secured convertible debenture
(10)
4.3 $2,000,000 principal amount Series B 5% secured convertible
debenture (6)
4.4 Form of non-plan option agreement (10)
4.5 Form of common stock purchase warrant (10)
4.6 Form of Common Stock Purchase Warrant re: 14.25% secured
convertible debentures (10)
4.7 Form of Common Stock Purchase Warrant issued to Newbridge
Securities Corporation as Placement Agent for 14.25% secured
convertible debentures (10)
4.8 Form of Warrant for 2005 Unit Offering (17)
4.9 Form of Series C 10% unsecured convertible debenture (20)
4.10 Form of Warrant for Series C 10% unsecured convertible debenture
offering (20)
41
4.11 Form of Series D 8% unsecured convertible debenture (22)
4.12 Form of Warrant for Series D 8% unsecured convertible debenture
(22)
4.13 Articles of Merger between Power2Ship, Inc. and Fittipaldi
Logistics, Inc. (25)
4.14 Form of Term Sheet for Purchase of Outstanding Debentures (Version
2) (28)
4.15 Form of Term Sheet for Purchase of Outstanding Debentures (Version
1) (28)
4.16 Form of Non-Plan Stock Option Agreement for Employees (29)
4.17 Form of Non-Plan Stock Option Agreement for Executives (29)
4.18 Articles of Merger between Fittipaldi Logistics, Inc. and NuState
Energy Holdings, Inc. (31)
10.1 Securities Purchase Agreement (6)
10.2 Investor Registration Rights Agreement (6)
10.3 Placement Agent Agreement with Newbridge Securities Corporation
(6)
10.4 2001 Employee Stock Compensation Plan (3)
10.5 Form of Registration Rights Agreement dated as of December 21,
2001, by and between Jaguar Investments, Inc. and certain
shareholders of Jaguar Investments, Inc. (7)
10.6 Employment Agreement with Richard Hersh (8)
10.7 Employment Agreement with Michael J. Darden (8)
10.8 Employment Agreement with John Urbanowicz (8)
10.9 Business Advisory Agreement with Newbridge Securities Corporation
(10)
10.10 Form of Intellectual Property Assignment Agreement between
Power2Ship, Inc. and each of Richard Hersh, Michael J. Darden and
John Urbanowicz (10)
10.11 Security Agreements for 14.25% secured convertible debentures (10)
10.12 Registration Rights Agreement for 14.25% secured convertible
debentures (10)
10.13 Consulting Agreement with Michael Garnick (11)
10.14 Form of Motor Carrier Transportation Agreement (11)
10.15 Asset Purchase Agreement with GFC, Inc. (14)
10.16 Commission Sales Agreement with Associated Warehouses, Inc. (12)
10.17 Mutual Agreement with Commodity Express Transportation, Inc. (15)
10.18 Loan and Security Agreement with Mercantile Capital, LP (12)
10.19 Escrow Agreement with Commodity Express Transportation, Inc. (15)
10.20 Equipment Lease Agreement with Commodity Express Transportation,
Inc. (15)
10.21 Commercial Lease with Commodity Express Transportation, Inc. (15)
10.22 Commodity Express Transportation, Inc. - TPS Logistics, Inc.
Agreement (15)
10.23 Consulting Agreement with Stokes Logistics Consulting, LLC (15)
10.24 Employment Agreement with W.A. Stokes (15)
10.25 Fee Assumption Agreement (15)
10.26 Asset Purchase Agreement with GFC, Inc. (16)
10.27 Consulting Agreement with Michael Allora (16)
10.28 Form of Unsecured Promissory Note (13)
10.29 Agreement with Welley Shipping (China) Company, Limited (18)
10.30 Termination Agreement with Cornell Capital Partners, LP (19)
10.31 Form of Shipper Agreement (22)
10.32 Form of Carrier Agreement (22)
10.33 Letter of Engagement Between Power2Ship, Inc. and Averitt Express
(21)
10.34 Separation and Severance Agreement with Richard Hersh (23)
10.35 Consulting Agreement with Richard Hersh (23)
10.36 Employment Agreement with David S. Brooks (23)
10.37 Employment Agreement with S. Kevin Yates (23)
10.38 Consulting Agreement with David S. Brooks and S. Kevin Yates (as
42
amended) (23)
10.39 Agreement to Amend Debentures Held by Cornell Capital Partners, LP
and/or its Affiliate, Montgomery Equity Partners, Ltd. (23)
10.40 Amendment No. 1 To License Agreement Between Power2Ship, Inc., EF
Marketing, LLC and Emerson Fittipaldi (24)
10.41 Agreement to Satisfy All Outstanding Obligations to Cornell
Capital Partners, LP and its Affiliate Montgomery Equity Partners,
Ltd. (26)
10.42 $1,250,000 Financing Agreement with The Black Diamond Fund, LLLP
(28)
10.43 Promissory Note with The Black Diamond Fund, LLLP (28)
10.44 Employment Agreement with Frank P. Reilly. Executive Vice
President, Strategy and Market Development (27)
10.45 Amendment No. 1 to Agreement to Satisfy All Outstanding
Obligations to Cornell Capital Partners, LP and its Affiliate
Montgomery Equity Partners, Ltd. (28)
10.46 Employment Agreement with Orin Neiman, Chief Executive Officer,
Fittipaldi Carriers, Inc. (29)
10.47 Employment Agreement with John M. Urbanowicz, Executive Vice
President, Information Technology (29)
10.48 Agreement Dated March 19, 2008 Amending the $1,250,000 16% Secured
Promissory Note Issued to The Black Diamond Fund, LLLP on May 8,
2007 (32)
10.49 Software Transaction Agreement Between NuState Energy Holdings,
Inc., Rentar Environmental Solutions, Inc. and the organizers of a
new company to be formed (33)
10.50 Capital Contribution Agreement Between Rentar Logic, Inc., Rentar
Environmental Solutions, Inc. and NuState Energy Holdings, Inc.
(33)
10.51 Rentar Logic, Inc. Shareholders Agreement (33)
10.52 Voting Trust Agreement Between Rentar Logic, Inc., Rentar
Environmental Solutions, Inc. and NuState Energy Holdings, Inc.
(33)
10.53 Employment Agreement with Frank P. Reilly, Chief Executive
Officer, Principal Financial and Accounting Officer, President,
Treasurer and Secretary **
10.54 Email of Agreement Dated October 9, 2008 Amending the $1,250,000
16% Secured Promissory Note Issued to The Black Diamond Fund, LLLP
on May 8, 2007 (34)
14.1 Code of Ethics (11)
21.1 Subsidiaries of Registrant (20)
23.1 Consent of Sherb & Co., LLP
31.1 Section 302 Certificate of Chief Executive Officer
31.2 Section 302 Certificate of Principal Financial and Accounting
Officer
32.1 Section 906 Certificate of Chief Executive Officer and Principal
Financial and Accounting Officer
** Filed herewith
(1) Incorporated by reference to Current Report on Form 8-K filed on
March 26, 2003.
(2) Incorporated by reference to registration statement on Form 10-SB,
as amended.
(3) Incorporated by reference to definitive Schedule 14C Information
Statement filed on February 2, 2001.
(4) Incorporated by reference to definitive Schedule 14C Information
Statement filed on April 22, 2003.
(5) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended December 31, 2002.
(6) Incorporated by reference to Current Report on Form 8-K filed on
43
July 8, 2004.
(7) Incorporated by reference to Current Report on Form 8-K filed on
January 3, 2002.
(8) Incorporated by reference to Quarterly Report on Form 10-QSB for
the period ended March 31, 2003.
(9) Incorporated by reference to Preliminary Information Statement on
Schedule 14C filed on July 8, 2004.
(10) Incorporated by reference to registration statement on Form SB-2,
SEC File No. 333-118792, filed on September 3, 2004.
(11) Incorporated by reference to Amendment No. 1 to registration
statement the Form SB-2, SEC File No. 333-118792, filed on October
20, 2004.
(12) Incorporated by reference to Amendment No. 3 to the registration
statement on Form SB-2, SEC File No. 333-118792, filed on December
15, 2004.
(13) Incorporated by reference to Quarterly Report on Form 10-QSB for
the period ended December 31, 2004 filed on February 14, 2005.
(14) Incorporated by reference to Current Report on Form 8-K/A filed on
February 25, 2005.
(15) Incorporated by reference to Current Report on Form 8-K filed on
March 25, 2005.
(16) Incorporated by reference to Current Report on Form 8-K filed on
March 28, 2005.
(17) Incorporated by reference to Quarterly Report on Form 10-QSB for
the period ended March 31, 2005.
(18) Incorporated by reference to Current Report on Form 8-K filed on
June 3, 2005.
(19) Incorporated by reference to Current Report on Form 8-K filed on
July 28, 2005.
(20) Incorporated by reference to registration statement on Form SB-2,
SEC File No. 333-131832 filed on February 14, 2006.
(21) Incorporated by reference to Current Report on Form 8-K filed on
February 17, 2006.
(22) Incorporated by reference to Amendment No. 1 to registration
statement the Form SB-2, SEC File No. 333-131832 filed on May 5,
2006.
(23) Incorporated by reference to Annual Report on Form 10-K for the
fiscal year ended June 30, 2006 filed on October 13, 2006.
(24) Incorporated by reference to Current Report on Form 8-K filed on
October 17, 2006.
(25) Incorporated by reference to Current Report on Form 8-K filed on
October 24, 2006 (Note: Exhibit 4.13 is incorrectly numbered in
filing as 4.1).
(26) Incorporated by reference to Current Report on Form 8-K filed on
January 26, 2007 (Note: Exhibit 10.41 is incorrectly numbered in
filing as 10.40).
(27) Incorporated by reference to Current Report on Form 8-K filed on
April 30, 2007 (Note: Exhibit 10.44 is incorrectly numbered in
filing as 10.40).
(28) Incorporated by reference to Current Report on Form 8-K filed on
July 25, 2007 (Note: Exhibit 4.15 is incorrectly numbered in
filing as 4.13).
(29) Incorporated by reference to Annual Report on Form 10-KSB filed on
October 15, 2007
(30) Incorporated by reference to Current Report on Form 8-K filed on
November 15, 2007
(31) Incorporated by reference to Current Report on Form 8-K filed on
December 31, 2007
(32) Incorporated by reference to Current Report on Form 8-K filed on
March 25, 2008
(33) Incorporated by reference to Current Report on Form 8-K filed on
June 13, 2008
(34) Incorporated by reference to Current Report on Form 8-K filed on
October 16, 2008 (Note: Exhibit 10.49 is incorrectly numbered; it
should have been 10.54). 44
SIGNATURES
----------
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated: November 19, 2008
NuSTATE ENERGY HOLDINGS, INC.
By: /s/ Frank P. Reilly
-----------------------
Name: Frank P. Reilly
Titles: Chief Executive Officer, Principal
Executive Officer and Principal Financial
and Accounting Officer
In accordance with the Exchange Act, this report has been signed by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Signature Titles Date
--------- ------ ----
/s/ Frank P. Reilly Chief Executive Officer, Principal Executive
- ------------------- Officer and Principal Financial and
Frank P. Reilly Accounting Officer November 19, 2008
/s/ Richard Hersh Director November 19, 2008
- -----------------
Richard Hersh
45
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
Page
----
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheet, June 30, 2008 and 2007 F-3
Consolidated Statements of Operations, Years Ended June 30, 2008 and 2007 F-4
Consolidated Statement of Changes in Stockholders' Deficit for the Period from
July 1, 2005 through June 30, 2008 F-5
Consolidated Statements of Cash Flows, Years Ended June 30, 2008 and 2007 F-6
Notes to Consolidated Financial Statements F-7
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
NuState Energy Holdings, Inc.
We have audited the accompanying consolidated balance sheet of NuState Energy
Holdings, Inc. and subsidiaries as of June 30, 2008 and 2007, and the related
consolidated statements of operations, stockholders' deficit and cash flows for
the years ended June 30, 2008 and 2007. These consolidated financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. The Company
is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purposes
of expressing an opinion on the effectiveness of the Company's internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects the financial position of NuState Energy
Holdings, Inc. and subsidiaries as of June 30, 2008 and 2007, and the results of
its operations and its cash flows for the years ended June 30, 2008 and 2007, in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 to the
consolidated financial statements, the Company had net losses and cash used in
operations of $5,529,002 and $782,285, respectively, for the year ended June 30,
2008. This raises substantial doubt about its ability to continue as a going
concern. Management's plans in regards to these matters are also described in
Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/Sherb & Co., LLP
----------------------------
Certified Public Accountants
New York, New York
November 14, 2008
F-2
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
June 30,
-----------------------------------------
2008 2007
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents $ 77,539 $ 44,156
Restricted cash 150,824 1,240,461
Accounts receivable, net of allowance of $308,483 and $199,095,
respectively 1,731,782 2,031,392
Receivables - affiliates and other 2,462,028 6,838
Prepaid expenses and other current assets 272,569 234,635
-------------- --------------
Total current assets 4,694,742 3,557,482
Property and equipment, net 658,209 675,147
Software development costs, net of accumulated amortization of $207,432 - 1,290,454
Deferred financing costs - 27,778
Intangible asset, net of accumulated amortization of $31,620 and
$22,434, respectively 14,305 23,491
Restricted cash for interest on debentures - 2,395
Other assets 171,345 189,160
-------------- --------------
Total assets $ 5,538,601 $ 5,765,907
============== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable - short term $ 2,417,509 $ 1,656,939
Convertible notes payable less discount of $32,111 and $0,
respectively 1,653,047 2,982,000
Loans payable - 100,917
Lines of credit - 761,836
Accounts payable 2,090,953 1,459,169
Accrued expenses 1,663,459 1,072,400
Accrued salaries 388,769 307,919
Deferred gain on sale 1,044,851 -
-------------- --------------
Total current liabilities 9,258,588 8,341,180
Long term debt:
Long term notes payable 93,215 163,553
Convertible notes payable less discount of $50,054 - 49,946
-------------- --------------
Total liabilities 9,351,803 8,554,679
Stockholders' deficit :
Preferred stock, $.01 par value, 1,000,000 shares authorized:
Series B convertible; 200,000 shares authorized; 149,600 and 149,600
issued and outstanding 1,496 1,496
Series C convertible; 20,000 authorized; 332 and 832 issued and outstanding 3 8
Series D convertible; 40 authorized; 28 and 38 issued and outstanding - -
Series F convertible; 500,000 authorized; 132 and 169 issued and outstanding 1 2
Series G convertible; 6 shares authorized; 2 and 2 issued and outstanding - -
Series H convertible; 1,600 authorized; 70 and 70 issued and outstanding 1 1
Series I convertible; 100,000 authorized; 100,000 and 100,000
issued and outstanding 1,000 1,000
Series J convertible; 80 authorized; 2 and 0 issued and outstanding - -
Series Y convertible; 87,000 authorized; authorized; 87,000 and 87,000
issued and outstanding 870 870
Common stock, $.001 par value; 750,000,000 shares authorized; 289,769,389 and
149,857,393 issued; and 257,769,389 and 149,857,393 outstanding 289,770 149,858
Additional paid-in capital 32,933,980 28,537,314
Treasury stock, $.001 par value; 32,000,000 and 0 shares issued (32,000) -
Accumulated deficit (37,008,323) (31,479,321)
-------------- --------------
Total stockholders' deficit (3,813,202) (2,788,772)
-------------- --------------
Total liabilities and stockholders' deficit $ 5,538,601 $ 5,765,907
============== ==============
See notes to audited consolidated financial statements
F-3
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
June 30,
----------------------------------------------
2008 2007
---------------- ---------------
Revenue:
Freight transportation $ 27,065,202 $ 22,671,097
Other revenues 94,522 35,557
---------------- ---------------
Total revenue 27,159,724 22,706,654
Operating expenses:
Freight transportation 24,642,517 20,758,010
Selling, general and administrative:
Salaries, benefits and consulting fees 2,850,015 3,762,679
Impairment expense - 337,408
Other selling, general and administrative 2,138,903 2,106,645
---------------- ---------------
Total operating expenses 29,631,435 26,964,742
---------------- ---------------
Loss from operations (2,471,711) (4,258,088)
---------------- ---------------
Other expense:
Loss on asset disposal - (23,649)
Forgiveness of debt - (97,384)
Gain on settlement of debt - 81,777
Gain on sale 289,705 -
Interest income 43,980 4,400
Interest expense, net (3,254,403) (2,432,922)
Other income (expense) (55,773) (22,084)
---------------- ---------------
Total other expense (2,976,491) (2,489,862)
---------------- ---------------
Net loss $ (5,448,202) $ (6,747,950)
================ ===============
Preferred stock dividend (80,800) -
---------------- ---------------
Net loss available to common shareholders $ (5,529,002) $ (6,747,950)
================ ===============
Loss per share-basic and diluted $ (0.03) $ (0.06)
================ ===============
Weighted average shares outstanding
- basic and diluted 219,515,608 120,218,735
================ ===============
See notes to audited consolidated financial statements
F-4
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED JUNE 30, 2008 AND 2007
Series B Stock Series C Stock Series D Stock
------------------ -------------- ----------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------- ------ ------
Balance, June 30, 2006 155,600 $ 1,556 832 $ 8 - $ -
Conversion of notes and accrued interest to common stock - - - - - -
Conversion of notes and accrued interest to Series F preferred stock - - - - - -
Conversion of notes and accrued interest to Series H preferred stock - - - - - -
Conversion of notes and accrued interest to Series G preferred stock - - - - - -
Conversion of notes and accrued interest to Series D preferred stock - - - - 14 -
Conversion of Series B preferred stock to common stock (6,000) (60) - - - -
Conversion of Series D preferred stock to common stock - - - - (2) -
Conversion of Series F preferred stock to common stock - - - - - -
Conversion of Series G preferred stock to common stock - - - - - -
Issuance of common stock for accrued expenses - - - - - -
Issuance of common stock for exercise of stock options - - - - - -
Issuance of common stock for services - - - - - -
Issuance of Series F preferred Stock for cash - - - - - -
Issuance of Series D preferred Stock for cash - - - - 26 -
Issuance of Series I Preferred Stock as collateral for a note payable - - - - - -
Fair value of options issued to employees - - - - - -
Issuance of stock warrants for services - - - - - -
Issuance of stock warrants for license rights - - - - - -
Issuance of stock warrants issued in connection with a severance agreement - - - - - -
Amortization of deferred compensation - - - - - -
Beneficial conversion for convertible notes payables - - - - - -
Net loss - - - - - -
-------- ------- ---- ----- ----- ------
Balance, June 30, 2007 149,600 1,496 832 8 38 -
Issuance of common stock for services - - - - - -
Conversion of notes and accrued interest to Series F preferred stock and
corresponding interest expense - - - - - -
Conversion of notes to common stock - - - - - -
Conversion of Series F preferred stock to common stock - - - - - -
Conversion of Series C preferred stock to common stock - - (500) (5) - -
Issuance of Series J preferred Stock for cash - - - - - -
Conversion of Series D preferred stock to common stock - - - - (10) -
Issuance of common stock in connection with notes payable - - - - - -
Issuance of common stock in connection with a note payable and
a corresponding debt discount - - - - - -
Issuance of common stock for settlement of debt - - - - - -
Issuance of common stock to the Company's subsidiary - - - - - -
Issuance of stock warrants for settlement of debt - - - - - -
Issuance of common stock for accrued interest - - - - - -
Issuance of common stock for dividends on preferred stocks - - - - - -
Issuance of stock warrants for services - - - - - -
Issuance of stock warrants for accounts payable - - - - - -
Fair value of warrants issued in connection with notes payable - - - - - -
Fair value of options issued to employees - - - - - -
Fair value of options issued to a consultant - - - - - -
Release of Series I preferred stock in connection with a debt - - - - - -
Amortization of deferred compensation - - - - - -
Beneficial conversion for convertible notes payables - - - - - -
Deemed preferred stock dividend - - - - - -
Net loss - - - - - -
-------- ------- ---- ----- ----- ------
Balance, June 30, 2008 149,600 $ 1,496 332 $ 3 28 $ -
======== ======= ==== ===== ===== ======
Series F Stock Series G Stock Series H Stock
---------------- -------------- ----------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, June 30, 2006 - $ - - $ - - $ -
Conversion of notes and accrued interest to common stock - - - - - -
Conversion of notes and accrued interest to Series F preferred stock 61 - - - - -
Conversion of notes and accrued interest to Series H preferred stock - - - - 70 1
Conversion of notes and accrued interest to Series G preferred stock - - 6 - - -
Conversion of notes and accrued interest to Series D preferred stock - - - - - -
Conversion of Series B preferred stock to common stock - - - - - -
Conversion of Series D preferred stock to common stock - - - - - -
Conversion of Series F preferred stock to common stock (54) - - - - -
Conversion of Series G preferred stock to common stock - - (4) - - -
Issuance of common stock for accrued expenses - - - - - -
Issuance of common stock for exercise of stock options - - - - - -
Issuance of common stock for services - - - - - -
Issuance of Series F preferred Stock for cash 162 2 - - - -
Issuance of Series D preferred Stock for cash - - - - - -
Issuance of Series I Preferred Stock as collateral for a note payable - - - - - -
Fair value of options issued to employees - - - - - -
Issuance of stock warrants for services - - - - - -
Issuance of stock warrants for license rights - - - - - -
Issuance of stock warrants issued in connection with a severance agreement - - - - - -
Amortization of deferred compensation - - - - - -
Beneficial conversion for convertible notes payables - - - - - -
Net loss - - - - - -
----- ------- ---- ------ ----- ------
Balance, June 30, 2007 169 2 2 - 70 1
Issuance of common stock for services - - - - - -
Conversion of notes and accrued interest to Series F preferred stock and
corresponding interest expense 26 - - - - -
Conversion of notes to common stock - - - - - -
Conversion of Series F preferred stock to common stock (63) (1) - - - -
Conversion of Series C preferred stock to common stock - - - - - -
Issuance of Series J preferred Stock for cash - - - - - -
Conversion of Series D preferred stock to common stock - - - - - -
Issuance of common stock in connection with notes payable - - - - - -
Issuance of common stock in connection with a note payable and
a corresponding debt discount - - - - - -
Issuance of common stock for settlement of debt - - - - - -
Issuance of common stock to the Company's subsidiary - - - - - -
Issuance of stock warrants for settlement of debt - - - - - -
Issuance of common stock for accrued interest - - - - - -
Issuance of common stock for dividends on preferred stocks - - - - - -
Issuance of stock warrants for services - - - - - -
Issuance of stock warrants for accounts payable - - - - - -
Fair value of warrants issued in connection with notes payable - - - - - -
Fair value of options issued to employees - - - - - -
Fair value of options issued to a consultant - - - - - -
Release of Series I preferred stock in connection with a debt - - - - - -
Amortization of deferred compensation - - - - - -
Beneficial conversion for convertible notes payables - - - - - -
Deemed preferred stock dividend - - - - - -
Net loss - - - - - -
----- ------- ---- ------ ----- ------
Balance, June 30, 2008 132 $ 1 2 $ - 70 $ 1
===== ======= ==== ====== ===== ======
Series I Stock Series J Stock Series Y Stock
--------------- --------------- ---------------
Shares Amount Shares Amount Shares Amount
------ ------ ------ ------ ------ ------
Balance, June 30, 2006 - $ - - $ - 87,000 $ 870
Conversion of notes and accrued interest to common stock - - - - - -
Conversion of notes and accrued interest to Series F preferred stock - - - - - -
Conversion of notes and accrued interest to Series H preferred stock - - - - - -
Conversion of notes and accrued interest to Series G preferred stock - - - - - -
Conversion of notes and accrued interest to Series D preferred stock - - - - - -
Conversion of Series B preferred stock to common stock - - - - - -
Conversion of Series D preferred stock to common stock - - - - - -
Conversion of Series F preferred stock to common stock - - - - - -
Conversion of Series G preferred stock to common stock - - - - - -
Issuance of common stock for accrued expenses - - - - - -
Issuance of common stock for exercise of stock options - - - - - -
Issuance of common stock for services - - - - - -
Issuance of Series F preferred Stock for cash - - - - - -
Issuance of Series D preferred Stock for cash - - - - - -
Issuance of Series I Preferred Stock as collateral for a note payable 100,000 1,000 - - - -
Fair value of options issued to employees - - - - - -
Issuance of stock warrants for services - - - - - -
Issuance of stock warrants for license rights - - - - - -
Issuance of stock warrants issued in connection with a severance agreement - - - - - -
Amortization of deferred compensation - - - - - -
Beneficial conversion for convertible notes payables - - - - - -
Net loss - - - - - -
------- ------- ----- ------- ------ -----
Balance, June 30, 2007 100,000 1,000 - - 87,000 870
Issuance of common stock for services - - - - - -
Conversion of notes and accrued interest to Series F preferred stock and
corresponding interest expense - - - - - -
Conversion of notes to common stock - - - - - -
Conversion of Series F preferred stock to common stock - - - - - -
Conversion of Series C preferred stock to common stock - - - - - -
Issuance of Series J preferred Stock for cash - - 2 - - -
Conversion of Series D preferred stock to common stock - - - - - -
Issuance of common stock in connection with notes payable - - - - - -
Issuance of common stock in connection with a note payable and
a corresponding debt discount - - - - - -
Issuance of common stock for settlement of debt - - - - - -
Issuance of common stock to the Company's subsidiary - - - - - -
Issuance of stock warrants for settlement of debt - - - - - -
Issuance of common stock for accrued interest - - - - - -
Issuance of common stock for dividends on preferred stocks - - - - - -
Issuance of stock warrants for services - - - - - -
Issuance of stock warrants for accounts payable - - - - - -
Fair value of warrants issued in connection with notes payable - - - - - -
Fair value of options issued to employees - - - - - -
Fair value of options issued to a consultant - - - - - -
Release of Series I preferred stock in connection with a debt - - - - - -
Amortization of deferred compensation - - - - - -
Beneficial conversion for convertible notes payables - - - - - -
Deemed preferred stock dividend - - - - - -
Net loss - - - - - -
------- ------- ----- ------- ------ -----
Balance, June 30, 2008 100,000 $ 1,000 2 $ - 87,000 $ 870
======= ======= ===== ======= ====== =====
Common Stock
------------------------------- Paid-In
Shares Amount Capital
---------- ----------- -------------
Balance, June 30, 2006 84,347,750 $ 84,346 $ 21,671,358
Conversion of notes and accrued interest to common stock 46,083,404 46,086 993,096
Conversion of notes and accrued interest to Series F preferred stock - - 665,067
Conversion of notes and accrued interest to Series H preferred stock - - 196,618
Conversion of notes and accrued interest to Series G preferred stock - - 150,000
Conversion of notes and accrued interest to Series D preferred stock - - 340,000
Conversion of Series B preferred stock to common stock 120,000 120 (60)
Conversion of Series D preferred stock to common stock 2,000,000 2,000 (2,000)
Conversion of Series F preferred stock to common stock 10,995,400 10,995 (10,995)
Conversion of Series G preferred stock to common stock 4,000,000 4,000 (4,000)
Issuance of common stock for accrued expenses 1,662,687 1,663 86,137
Issuance of common stock for exercise of stock options 500,000 500 12,000
Issuance of common stock for services 148,152 148 12,801
Issuance of Series F preferred Stock for cash - - 805,998
Issuance of Series D preferred Stock for cash - - 660,000
Issuance of Series I Preferred Stock as collateral for a note payable - - (1,000)
Fair value of options issued to employees - - 1,157,270
Issuance of stock warrants for services - - 148,035
Issuance of stock warrants for license rights - - 393,097
Issuance of stock warrants issued in connection with a severance agreement - - 534,600
Amortization of deferred compensation - - 368,292
Beneficial conversion for convertible notes payables - - 361,000
Net loss - - -
----------- ----------- -------------
Balance, June 30, 2007 149,857,393 149,858 28,537,314
Issuance of common stock for services 3,470,000 3,470 81,630
Conversion of notes and accrued interest to Series F preferred stock and
corresponding interest expense - - 273,818
Conversion of notes to common stock 51,939,088 51,939 1,169,269
Conversion of Series F preferred stock to common stock 12,538,345 12,538 (12,537)
Conversion of Series C preferred stock to common stock 50,000 50 (45)
Issuance of Series J preferred Stock for cash - - 5,000
Conversion of Series D preferred stock to common stock 10,000,000 10,000 (10,000)
Issuance of common stock in connection with notes payable 12,000,000 12,000 242,000
Issuance of common stock in connection with a note payable and
a corresponding debt discount 2,000,000 2,000 28,000
Issuance of common stock for settlement of debt 13,000,000 13,000 377,000
Issuance of common stock to the Company's subsidiary 32,000,000 32,000 -
Issuance of stock warrants for settlement of debt - - 137,968
Issuance of common stock for accrued interest 254,910 255 8,578
Issuance of common stock for dividends on preferred stocks 2,659,653 2,660 73,140
Issuance of stock warrants for services - - 165,732
Issuance of stock warrants for accounts payable - - 132,131
Fair value of warrants issued in connection with notes payable - - 18,754
Fair value of options issued to employees - - 1,042,930
Fair value of options issued to a consultant - - 73,560
Release of Series I preferred stock in connection with a debt - - 180,000
Amortization of deferred compensation - - 59,059
Beneficial conversion for convertible notes payables - - 345,679
Deemed preferred stock dividend - - 5,000
Net loss - - -
----------- ----------- -------------
Balance, June 30, 2008 289,769,389 $ 289,770 $ 32,933,980
=========== =========== =============
Treasury Accumulated
Stock Deficit Total
----------- ------------- --------------
Balance, June 30, 2006 - $(24,731,371) $(2,973,233)
Conversion of notes and accrued interest to common stock - - 1,039,182
Conversion of notes and accrued interest to Series F preferred stock - - 665,067
Conversion of notes and accrued interest to Series H preferred stock - - 196,619
Conversion of notes and accrued interest to Series G preferred stock - - 150,000
Conversion of notes and accrued interest to Series D preferred stock - - 340,000
Conversion of Series B preferred stock to common stock - - -
Conversion of Series D preferred stock to common stock - - -
Conversion of Series F preferred stock to common stock - - -
Conversion of Series G preferred stock to common stock - - -
Issuance of common stock for accrued expenses - - 87,800
Issuance of common stock for exercise of stock options - - 12,500
Issuance of common stock for services - - 12,949
Issuance of Series F preferred Stock for cash - - 806,000
Issuance of Series D preferred Stock for cash - - 660,000
Issuance of Series I Preferred Stock as collateral for a note payable - - -
Fair value of options issued to employees - - 1,157,270
Issuance of stock warrants for services - - 148,035
Issuance of stock warrants for license rights - - 393,097
Issuance of stock warrants issued in connection with a severance agreement - - 534,600
Amortization of deferred compensation - - 368,292
Beneficial conversion for convertible notes payables - - 361,000
Net loss - (6,747,950) (6,747,950)
-------- ------------ -----------
Balance, June 30, 2007 - (31,479,321) (2,788,772)
Issuance of common stock for services - - 85,100
Conversion of notes and accrued interest to Series F preferred stock and
corresponding interest expense - - 273,818
Conversion of notes to common stock - - 1,221,208
Conversion of Series F preferred stock to common stock - - -
Conversion of Series C preferred stock to common stock - - -
Issuance of Series J preferred Stock for cash - - 5,000
Conversion of Series D preferred stock to common stock - - -
Issuance of common stock in connection with notes payable - - 254,000
Issuance of common stock in connection with a note payable and
a corresponding debt discount - - 30,000
Issuance of common stock for settlement of debt - - 390,000
Issuance of common stock to the Company's subsidiary (32,000) - -
Issuance of stock warrants for settlement of debt - - 137,968
Issuance of common stock for accrued interest - - 8,833
Issuance of common stock for dividends on preferred stocks - (75,800) -
Issuance of stock warrants for services - - 165,732
Issuance of stock warrants for accounts payable - - 132,131
Fair value of warrants issued in connection with notes payable - - 18,754
Fair value of options issued to employees - - 1,042,930
Fair value of options issued to a consultant - - 73,560
Release of Series I preferred stock in connection with a debt - - 180,000
Amortization of deferred compensation - - 59,059
Beneficial conversion for convertible notes payables - - 345,679
Deemed preferred stock dividend - (5,000) -
Net loss - (5,448,202) (5,448,202)
-------- ------------ -----------
Balance, June 30, 2008 $(32,000) $(37,008,323) $(3,813,202)
======== ============ ============
See notes to audited consolidated financial statements
F-5
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
June 30,
2008 2007
------------ -------------
Cash flows from operating activities:
Net loss $ (5,448,202) $ (6,747,950)
Non- cash adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 185,430 132,864
Bad debt expense 193,393 101,808
Amortization of software development costs 42,072 54,092
Amortization of intangible asset 9,186 75,017
Amortization of deferred compensation 59,060 368,292
Amortization of deferred financing costs 27,778 72,947
Amortization of discount on notes payable 357,375 1,309,586
Impairment of intangible assets -- 337,408
Loss on asset disposal -- 23,649
Loss on settlement of debt 45,773 97,384
Gain on settlement of debt -- (48,500)
Gain on sale (289,705) --
Interest income in connection with the payment of Rentar common stock (11,644) --
Fair value of stock options issued for services 1,116,490 1,157,270
Issuance of stock warrants for services 165,732 148,035
Interest expense in connection with the sale of accounts receivable 37,128 --
Interest expense in connection with the conversion of notes payable
into preferred stock 140,361 480,528
Interest expense in connection with the assignment of convertible notes 703,397 --
Interest expense in connection with notes payable 305,000 --
Interest expense in connection with the line of credit 89,359 --
Issuance of common stock for services, interest and litigation settlements -- 12,949
Issuance of common stock and warrants for interest and debt settlements 658,789 --
Released of preferred stock in escrow as interest expense
in connection with a note payable 180,000 --
Issuance of common stock for services 85,100 --
Changes in operating assets and liabilities:
Decrease in restricted cash (10,363) 54,646
Decrease (increase) in accounts receivable (1,458,056) 637,879
Increase in other receivable (122,280) (6,838)
(Increase) decrease in prepaid expenses (37,934) 36,172
Decrease in other assets 20,210 264,068
(Decrease) increase in accounts payable and accrued expenses 1,489,729 (19,761)
------------ ------------
Net cash used in operating activities (1,466,822) (1,458,455)
------------ ------------
Cash flows from investing activities:
Purchases of property and equipment (168,492) (96,445)
Collection on other receivables 176,730 --
Capitalized costs of software development (250,522) (311,020)
------------ ------------
Net cash used in investing activities (242,284) (407,465)
------------ ------------
Cash flows from financing activities:
Proceeds from convertible promissory notes 760,000 465,000
Repayments of convertible promissory notes 672,037 (525,000)
Proceeds from promissory notes (12,500) 646,000
Repayments of loans payable (56,925) (56,925)
Proceeds from notes payable and loans payable 1,725,000 43,992
Proceeds from exercise of stock options -- 12,500
Proceeds from line of credit 11,189,417 --
Repayments of notes payable and promissory notes (124,037) (19,458)
Repayments of line of credit (10,628,003) (150,451)
Proceeds from sale of preferred stock and warrants net of costs of $0
and $0, respectively 5,000 1,466,000
------------ ------------
Net cash provided by financing activities 1,742,489 1,881,658
------------ ------------
Net decrease in cash and cash equivalents 33,383 15,738
Cash and cash equivalents, beginning of year $ 44,156 $ 28,418
------------ ------------
Cash and cash equivalents, end of year $ 77,539 $ 44,156
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 313,448 $ 368,703
============ ============
Income taxes $ -- $ --
============ ============
Non-cash investing and financing activities:
Conversion of notes and accrued interest to common stock $ 1,221,208 $ 1,039,182
============ ============
Conversion of notes and accrued interest to preferred stock $ 133,457 $ 1,351,686
============ ============
Common stock issued for accrued expenses $ 73,179 $ 87,800
============ ============
Issuance of stock warrants for license rights $ -- $ 393,097
============ ============
Issuance of stock warrants issued in connection with
a severance agreement $ -- $ 534,600
============ ============
Issuance of notes payable for acquisition of equipment $ -- $ 352,300
============ ============
Warrants issued for accounts payable $ 132,131 $ --
============ ============
See notes to audited consolidated financial statements
F-6
NOTE 1 - DESCRIPTION OF BUSINESS
Organization
- ------------
NuState Energy Holdings, Inc. (the "Company") is a Nevada corporation that was
incorporated on October 28, 1987 as Jaguar Investments, Inc. On March 11, 2003,
a wholly owned subsidiary of the Company merged with Freight Rate, Inc., a
development stage company in the logistics software business. On May 8, 2003,
the Company changed its name to Power2Ship, Inc. On October 11, 2006, the
Company merged with a newly formed, wholly-owned subsidiary, Fittipaldi
Logistics, Inc., a Nevada corporation, with the Company surviving but its name
being changed to Fittipaldi Logistics, Inc. effective November 9, 2006. On
December 10, 2007, the Company merged with a newly formed, wholly-owned
subsidiary, NuState Energy Holdings, Inc., a Nevada corporation, with the
Company surviving but renamed NuState Energy Holdings, Inc. effective December
20, 2007.
NuState Energy Holdings, Inc. is a holding company that owns 100% of Commodity
Express Transportation, Inc. (CXT), a provider of truck transportation and third
party logistics services, and 49% of Rentar Logic, Inc., a privately-held
Delaware company that develops and markets fuel management systems and various
other telematics applications for commercial vehicle fleets and distributes a
proprietary pre-combustion fuel catalyst that reduces fuel consumption and
harmful exhaust emissions for a variety of diesel engines.
Currently, the operations of CXT represent the Company's primary business in
terms of revenue, assets and personnel. CXT was acquired in an asset purchase
transaction in March 2005 by CXT, a Delaware corporation formed in March 2002
and wholly-owned subsidiary of Fittipaldi Carriers, Inc., a Florida corporation
and wholly-owned subsidiary of the Company formed in February 2005. See Note 5 -
"Intangible Assets" for further details. CXT, based in Columbia, South Carolina,
presently serves the southeastern United States as both a freight carrier and a
freight broker, through a wholly-owned subsidiary of CXT, Commodity Express
Brokerage, Inc., a Florida corporation formed on March 3, 2005. It is fully
licensed by the U.S. Department of Transportation.
Also, on March 21, 2005, Power2Ship Intermodal, Inc. ("P2SI"), a wholly owned
subsidiary of CXT formed as a Delaware corporation on March 21, 2002, acquired
certain assets and liabilities representing the business of GFC, Inc. P2SI was a
New Jersey based company in the business of motor carriage specializing in
intermodal drayage transportation services. The operations of P2SI ceased
effective June 30, 2006. See Note 5 - "Intangible Assets" for further details.
The Company sold all its intellectual properties and software developed for the
worldwide transportation and security industries to Rentar Logic in April 2008.
See Note 4 - "Receivables - Affiliates and Other" for further details of this
transaction. The assets acquired in the sale included its patent and trademarks
as well as numerous web-based applications that provide pertinent, real-time
information to customers. These applications rely on telematics to collect
various vehicle and container-based data and integrate it with information
gathered from various disparate legacy systems across the supply chain. The data
is then synthesized and reformatted into valuable, actionable information, and
delivered to appropriate end-users across the logistics value chain through
secure web-based applications. Among the many capabilities of these telematics
solutions are on-demand live diagnostics, two-way communication, temperature
alerts, electronic fuel tax payment, inventory/asset visibility, secure trucking
and matching of available freight with available trucks. Also, included in the
sale to Rentar Logic was a proprietary software application that provides
critical information that may be used to validate nearly any products designed
to improve fuel efficiency or reduce harmful gas emissions more accurately and
F-7
quickly than any other method. At the same time, this software application may
be used as a fuel management tool to provide real-time information, such as
vehicle speeds, idling times, out-of-route notifications, and unauthorized use,
which translates to significant fuel savings. No assurances can be given as to
when, if ever, the Company will be able to record any profit or receive any
dividends from its 49% ownership of Rentar Logic.
The accompanying audited financial statements for the period ended June 30, 2008
have been prepared in accordance with generally accepted accounting principles
and with instructions to Form 10-K. The Company has experienced losses and
negative cash flows from operations since its inception. During fiscal years
2008 and 2007, the Company incurred net losses available to common shareholders
of $5,529,002 and $6,747,950, respectively and, for the same periods, had
negative cash flows from operations of $1,466,882 and $1,458,455, respectively.
Also, the report of the Company's independent registered public accounting firm
on its financial statements for fiscal year 2008 contained an explanatory
paragraph regarding its ability to continue as a going concern. Its ability to
continue as a going concern is dependent upon its ability to obtain the
necessary financing to pay its past due debt obligations, and accrued interest
thereon, and repay its current debt and other liabilities when they become due
and to increase its revenue and generate profitable operations in the future.
The Company plans to continue to provide for its capital requirements through
the sale of equity or debt securities; however, it has no firm commitments from
any third parties to provide this financing and no assurance can be provided
that it will be successful in raising working capital as needed. There are no
assurances that it will have sufficient funds to execute its business plan, pay
its obligations, much of which is past due, or generate positive operating
results. If the Company is unable to raise additional capital, it may be
required to reduce or eliminate some or all of its operations. The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES AND OTHER MATTERS
Principles of Consolidation
- ---------------------------
These consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material transactions and balances between
the Company and its subsidiaries have been eliminated in consolidation.
Reclassifications
- -----------------
Certain prior period balances have been reclassified to conform to the current
year's presentation. These reclassifications had no impact on previously
reported results of operations or stockholders' deficit.
Use of Estimates
- ----------------
In preparing financial statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities at the date of the financial
statements, and revenues and expenses during the periods presented. Actual
results may differ from these estimates.
Significant estimates during fiscal year 2008 and 2007 include depreciable lives
on property and equipment, the valuation of stock options/warrants granted for
services, the value of warrants issued in connection with debt and equity
related financings and the valuation and related amortization of software
development costs and intangible assets pursuant to Statement of Financial
Accounting Standards ("SFAS") No. 63.
F-8
Cash and Cash Equivalents
- -------------------------
The Company considers all unrestricted deposits and highly liquid investments,
readily convertible to known amounts, with an original maturity of three months
or less, to be cash equivalents.
Allowance for Doubtful Accounts
- -------------------------------
Management estimates the amount of required allowances for potential
non-collectability of accounts receivable based upon past collection experience
and consideration of other relevant factors. However, past experience may not be
indicative of future collections and therefore additional charges could be
incurred in the future to reflect differences between estimated and actual
collections. The allowance for doubtful accounts at June 30, 2008 and 2007 was
$308,483 and $199,095, respectively.
Property and Equipment
- ----------------------
Property and equipment is stated at cost. Depreciation on property and equipment
is calculated using the straight-line method over the estimated useful lives of
the assets ranging from three to seven years. Expenditures for major renewals
and betterments that extend the useful lives of the assets are capitalized.
Expenditures for maintenance and repairs of the assets are charged to expense as
incurred.
Income Taxes
- ------------
Under the asset and liability method of FASB Statement 109, deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities, and their respective tax bases and operating loss and tax
credit carryforwards. Deferred tax assets and liabilities are measured using
enacted tax rates expected to apply to taxable income in the years in which
those temporary differences are expected to be recovered or settled. Deferred
tax assets are reduced by a valuation allowance, when in the Company's opinion
it is likely that some portion or the entire deferred tax asset will not be
realized. The Company has recorded a full valuation allowance against the
deferred tax asset relating to its net operating loss carryforwards.
Revenue Recognition
- -------------------
The Company follows the guidance of the Securities and Exchange Commission's
Staff Accounting Bulletin 104 for revenue recognition. In general, the Company
records revenue when persuasive evidence of an arrangement exists, services have
been rendered or product delivery has occurred, the sales price to the customer
is fixed or determinable, and collectability is reasonably assured. The
following policies reflect specific criteria for the reported revenue of the
Company:
Freight transportation revenue consists of the total dollar value of
services purchased from us by our customers. The Company recognizes
freight transportation revenue when shipments of goods reach their
destinations and the receiver of the goods acknowledges their receipt
by signing a bill of lading which for the vast majority of the
Company's shipments occurs on the same day as the goods are picked up.
At that time, our obligations to the customer are completed and
collection of receivables is reasonably assured. Emerging Issues Task
Force Issue No. 99-19, "Reporting Revenue Gross as a Principal versus
Net as an Agent", establishes the criteria for recognizing revenues on
a gross or net basis. When we provide these freight transportation
F-9
services, we are the primary obligor, we are a principal to the
transaction not an agent, we have the risk of loss for collection, we
have discretion to select the supplier when we do not supply the
services and we have latitude in pricing decisions.
Loss Per Common Share
- ---------------------
Basic loss per common share is based upon the weighted average number of common
shares outstanding during the year. Diluted earnings (loss) per common share
include the effects of potential dilution that would occur if securities (such
as warrants) or other contracts (such as options) to issue common stock were
exercised or converted into common stock. Such instruments that are convertible
into common stock are excluded from the computation in periods in which they
have an anti-dilutive effect. Potential common shares included in the
computation are not presented in the consolidated financial statements, as their
effect would be anti-dilutive. The Company had 243,077,159 and 271,822,306
outstanding options, warrants and shares issuable upon conversion of outstanding
debt and preferred stock as of June 30, 2008 and 2007, respectively, which it
did not use in computing its diluted loss per share because the Company had net
losses for the periods presented in its financial statements and the inclusion
of these securities would have been anti-dilutive.
Stock-Based Compensation
- ------------------------
The Company has adopted SFAS No. 123R, "Share Based Payments". SFAS No. 123R
requires companies to expense the value of employee stock options and similar
awards and applies to all outstanding and vested stock-based awards. In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying SFAS No. 123R approximated
$1,116,490 and $1,157,270 in additional compensation expense during the years
ended June 30, 2008 and 2007, respectively. Such amount is included in general
and administrative expenses on the statement of operations.
Fair Value of Financial Instruments
- -----------------------------------
The carrying amounts reported in the balance sheet for cash, receivables,
accounts payable, notes payable and accrued expenses approximate their fair
market value based on the short-term maturity of these instruments.
Impairment of long-lived assets
- -------------------------------
The Company evaluates the recoverability and carrying value of its long-lived
assets at each balance sheet date, based on guidance issued in SFAS No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets." Among other
factors considered in such evaluation is the historical and projected operating
F-10
performance of business operations, the operating environment and business
strategy, competitive information and market trends. During fiscal year 2007,
the Company recorded an impairment expense of $337,408 to recognize management's
assessment that there was no continuing value associated with its License
Agreement with EF Marketing, LLC and Emerson Fittipaldi. At June 30, 2008, the
Company had no assets which were considered to be impaired.
Concentrations of Credit Risk and Accounts Receivable
- -----------------------------------------------------
Financial assets that potentially subject the Company to significant
concentrations of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company's investment policy is to invest in low risk,
highly liquid investments. The Company does not believe it is exposed to any
significant credit risk in its cash investments.
The Company maintains its cash balances at financial institutions that are
insured by the Federal Deposit Insurance Corporation up to $100,000 per account
per institution. At June 30, 2008, the Company's cash balances did not exceed
the insurable limit although at various times during fiscal year 2008 the
Company may have had cash balances in excess of the insurable limit. The Company
has not experienced any losses in such accounts and believes it is not exposed
to any significant credit risk on cash on deposit. In October 2008, Congress
temporarily increased FDIC deposit insurance from $100,000 to $250,000 per
depositor through December 31, 2009.
The Company performs on-going credit evaluations of its customer base including
those that represent its accounts receivable at June 30, 2008. The Company
maintains reserves for potential credit losses and such losses historically have
been within management's expectations.
Recent accounting pronouncements
- --------------------------------
In September 2006, the FASB issued Statement of Financial Accounting Standards
No. 157, "Fair Value Measurements" ("FAS 157"). FAS 179 defines fair value as
used in numerous accounting pronouncements, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosure related to the use of fair value measures in financial statements.
FAS 179 was incorporated in the Company's financial statements issued in 2008.
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", under which entities will now be permitted to measure many
financial instruments and certain other assets and liabilities at fair value on
an instrument-by-instrument basis. 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 SFAS 157. The Company currently is assessing the impact, if any,
that the adoption of SFAS 159 will have on its financial statements.
Other accounting standards that have been issued or proposed by the FASB or
other standards-setting bodies that do not require adoption until a future date
are not expected to have a material impact on the consolidated financial
statements upon adoption.
NOTE 3 - CONCENTRATIONS
During the fiscal year ended June 30, 2008, two customers accounted for
$17,807,250 or approximately 65.6% of the Company's revenue and those same two
F-11
customers accounted for $758,698 or approximately 43.8% of accounts receivable,
net of allowance for doubtful accounts, as of June 30, 2008. During the fiscal
year ended June 30, 2007, one customer accounted for $14,050,765 or
approximately 61.9% of the Company's revenue and the same customer accounted for
$321,069 or approximately 15.8% of accounts receivable, net of allowance for
doubtful accounts, as of June 30, 2007. During these periods, no other customers
accounted for more than 10% of revenue or accounts receivable.
NOTE 4 - RECEIVABLES - AFFILIATES AND OTHER
The Company sold its intellectual properties, including its capitalized
software, to Rentar Logic on April 10, 2008 in consideration for a $3,000,000
payment obligation by Rentar Logic, secured by escrowed shares of common stock
of Rentar Logic's parent company, Rentar Environmental Solutions, valued at
$3,000,000, and 49% of the common stock of Rentar Logic. As of June 30, 2008,
the Company had decreased the receivable due from Rentar Logic by $658,992 to
$2,341,008 as a result of Rentar Environmental Solutions paying, on behalf of
Rentar Logic, $208,992 of the Company's accrued and operating expenses and
issuing 50,000 shares of its common stock to repay $250,000 of the Company's 16%
promissory notes.
On the sale date, the Company recorded a deferred gain on sale of $1,334,556 due
to there not being any specific payment dates or amounts related to Rentar
Logic's $3,000,000 payment obligation. This deferred gain was calculated by
subtracting the net book value of the Company's capitalized software of
$1,498,904 from the present value of the estimated payment dates or amounts
related to Rentar Logic's $3,000,000 payment obligation using a discount rate of
10% which came to $2,833,460. The Company recorded a gain on asset sales of
$289,705 reducing the deferred gain on asset sales to $1,044,851. This gain was
calculated by multiplying the total deferred gain on sale by the percentage of
the discounted purchase price paid on behalf of Rentar Logic by its parent
company from the sale date until June 30, 2008.
As of June 30, 2008, $243,654 was due from Transport Clearing East, the finance
company CXT used to factor its accounts receivable, consisting of a reserve
equal to approximately 10% of the total invoices purchased by Transport Clearing
East as required by the factoring arrangement and CXT accounts receivables
purchased in the last few days of June 2008 for which payment had not yet been
received.
NOTE 5 - INTANGIBLE ASSETS
In October 2006, the Company entered into an Amendment to a License Agreement
dated March 1, 2005 with EF Marketing, LLC and Emerson Fittipaldi. The Amendment
included provisions providing the Company with the exclusive right to use the
property licensed from EF Marketing globally rather than solely in the United
States and its territories and the right to change its corporate name to include
the name Fittipaldi. Also, the term of the License Agreement was extended
indefinitely. In consideration for these and other amendments, the Company
agreed to provide EF Marketing with a percentage of the net operating cash (as
defined in the Amendment) generated by the Company's operations, a five-year
warrant to purchase 8,000,000 shares of its common stock at an exercise price of
$0.025 per share. The Company valued the warrant utilizing the Black-Scholes
options pricing model at approximately $0.049 per share or $393,097 and,
accordingly, recorded an intangible asset of $393,097 that was being amortized
over its useful life assumed to be 5 years. At June 30, 2007, the Company
recorded an impairment expense of $337,408 to recognize management's assessment
that there was no continuing value associated with the License Agreement.
F-12
In March 2005, the Company allocated $89,874 of the purchase price for certain
assets of Commodity Express Transportation, Inc. to intangible assets that are
being amortized over their estimated useful lives of 5 years. In March 2006, the
Company determined that the net realizable value of the intangible assets of
Commodity Express Transportation, Inc. should be reduced to $45,925 and recorded
$43,949 of impairments to intangible assets. As of June 30, 2008, the net book
value of these intangible assets was $14,305.
Also, in March 2005, the Company allocated $334,600 of the purchase price for
certain assets of GFC, Inc. to intangible assets attributable to the customer
lists of these businesses. These intangible assets were being amortized over
their estimated useful lives of 5 years. In March 2006, the Company entered into
a settlement agreement and mutual release with the parties that sold it the GFC
assets in which the Company agreed to issue the seller 300,000 shares of its
common stock valued at $38,700 and to pay the seller a total of $36,000 over two
years in full settlement of the $191,667 outstanding balance of the purchase
price. Based on this settlement, the Company determined that the net realizable
value of the intangible assets purchased from GFC should be reduced to $220,933
and recorded $113,667 of impairments to intangible assets. Power2Ship Intermodal
ceased operations effective June 30, 2006 and the Company recorded $185,578 of
impairment to reduce the intangible assets to $0.
In July and August, 2004, the Company entered into Intellectual Property
Assignment Agreements with three of its executives pursuant to which each of
them assigned to the Company all of their right, title and interest in and to
all the intellectual property which they had contributed to the Company in the
past in consideration for an aggregate of 600,000 shares of the Company's common
stock that was issued in January 2005. The Company believes that there are no
other parties with any claims to any right, title and interest in and to any of
the Company's intellectual property. The shares issued in this transaction were
valued at their fair market value of $226,000 and recorded as an intangible
asset which was amortized over its estimated useful life of 24 months from the
effective dates of the Intellectual Property Assignment Agreements which ended
in the quarter ended September 30, 2006.
The Company recorded amortization expense for all intangible assets for the
years ended June 30, 2008 and 2007 of $9,015 and $75,017, respectively. At June
30, 2008, future amortization expense for the remaining intangible assets was as
follows:
Fiscal Year
-----------
2009 $ 9,184
2010 5,121
--------
$ 14,305
========
Since fiscal year 2003, the Company had capitalized a total of $1,748,408 of its
software development costs. The accumulated amortization taken on this software
through June 30, 2008 was $249,504 leaving a net book value of $1,498,904 of
software development costs. The Company sold its intellectual properties,
including its capitalized software, to Rentar Logic on April 10, 2008 and
recorded a deferred gain on sale of $1,334,556. See Note 4 - "Receivables -
Affiliates and Other" for further details about this transaction.
During fiscal years 2008 and 2007, the Company recorded amortization expense on
its capitalized software development of $42,072 and $54,093, respectively.
F-13
NOTE 6 - RELATED PARTY TRANSACTIONS
Effective January 1, 2007, the Company commenced a two-year employment agreement
with Orin Neiman to be the Chief Executive Officer of Fittipaldi Carriers, Inc.,
the parent company of Commodity Express Transportation. The term of employment
may be automatically renewed for successive one year terms beginning on the
two-year anniversary of the agreement unless previously terminated according to
the termination provisions in the agreement or if the Company or Mr. Neiman
elects to terminate the agreement by written notice at least ninety days prior
to the expiration of the then-current term of employment. Mr. Neiman receives a
base salary of $120,000 per year, was granted a five-year, fully vested stock
option to purchase 6,000,000 shares of common stock for $0.025 per share and
agreed to the cancellation of all stock options and warrants previously granted
to him or to Carriers Consolidation, Inc., his consulting company. The accrued
salary for Mr. Neiman as of June 30, 2008 was $40,869.
Effective November 16, 2006, the Company commenced a two-year employment
agreement with Frank P. Reilly to be its Executive Vice President, Strategy and
Market Development. The term of employment may be automatically renewed for
successive one year terms beginning on the two-year anniversary of the agreement
unless previously terminated according to the termination provisions in the
agreement or if the Company or Mr. Reilly elects to terminate the agreement by
written notice at least ninety days prior to the expiration of the then-current
term of employment. Mr. Reilly receives a base salary of $120,000 per year, was
granted a fully vested option to purchase 6,000,000 shares of common stock for
$0.025 per share that expires in five years and will receive a signing bonus of
$20,000 upon the Company achieving a certain level of funding. In April 2007,
Mr. Reilly was elected to the Company's Board of Directors and, in June 2007,
became its Chief Executive Officer. The accrued salary for Mr. Reilly as of June
30, 2008 was $183,350. See Note 14 - "Subsequent Events" for details of a new
employment agreement enter into with Mr. Reilly during fiscal year 2009.
In September 2006, Richard Hersh, the Chairman of the Company's board of
directors, resigned as Chief Executive Officer of the Company and entered into a
Separation and Severance Agreement. Pursuant to this agreement, all of Mr.
Hersh's outstanding options were cancelled, including options to purchase an
aggregate of 6,182,642 shares of the Company's common stock exercisable at
prices ranging from $0.25 to $0.38 per share and an option to purchase 10% of
the common stock of the Company's subsidiary Commodity Express Transportation,
Inc. for $60,000, a convertible promissory note from the Company to him with a
principal balance of $115,000 and accrued interest of $32,241 was forgiven,
$313,201 in accrued compensation to him was written off, and he settled any
other claims with, or obligations by, the Company, in consideration for $20,000
and a five-year warrant to purchase 11,000,000 shares of common stock for $0.025
per share.
Upon Mr. Hersh's resignation, he entered into a five-year consulting agreement
with the Company to advise the Company's management and board of directors on
various business matters including identifying and introducing the Company to
prospective investors, lenders, strategic partners, acquisition and merger
candidates and joint venture partners. The agreement provided for a monthly
consulting fee of $10,000. In January 2008, this consulting agreement was
amended to increase the monthly consulting fee to $12,500 and extended its term
to the five-year anniversary of the date of the amendment.
In September 2006, David S. Brooks, the Company's former Chief Executive
Officer, entered into an employment agreement with the Company having a term of
two years with one-year renewals thereafter unless terminated by either party
prior thereto. Mr. Brooks' annual base salary of $150,000 may be deferred until
the Company has raised an aggregate of $3,000,000 and he received an option to
F-14
purchase 9,000,000 shares of common stock for $0.025 per share that expires in
five years. During fiscal year 2007, Mr. Brooks was paid $32,500. The Company
recorded $73,750 in accrued salary for Mr. Brooks as of June 30, 2007. In August
2006, Mr. Brooks purchased one share of the Company's Series D convertible
preferred stock for $25,000 in a private transaction and in October 2006
purchased five shares of the Company's Series F convertible preferred stock for
$25,000 in a private transaction. In June 2007, Mr. Brooks resigned as an
officer and director of the Company and its subsidiaries and entered into a
consulting agreement with the Company pursuant to which the Company agreed to
compensate him an aggregate of $75,000 which only would be payable if certain
funding was obtained by the Company.
In September 2006, S. Kevin Yates, the Company's former Chief Operating Officer,
entered into an employment agreement with the Company having a term of two years
with one-year renewals thereafter unless terminated by either party prior
thereto. Mr. Yates' annual base salary of $150,000 may be deferred until the
Company has raised an aggregate of $3,000,000 and he received an option to
purchase 9,000,000 shares of common stock for $0.025 per share that expires in
five years. During fiscal year 2007, Mr. Yates was paid $42,500. The Company
recorded $63,750 in accrued salary for Mr. Yates as of June 30, 2007. In June
2007, Mr. Yates resigned as an officer and director of the Company and its
subsidiaries and entered into a consulting agreement with the Company pursuant
to which the Company agreed to compensate him an aggregate of $75,000 which only
would be payable if certain funding was obtained by the Company.
In September 2006, the Company terminated its employment agreement with Michael
Darden, its former President. Thereafter, Mr. Darden resigned as a Director of
the Company and its subsidiaries. In October 2006, Mr. Darden filed a lawsuit in
Broward County, Florida naming as defendant Freight Rate, Inc., d/b/a
Power2Ship, Inc. and alleging breach of his employment agreement. Pursuant to a
mediation held in May 2007, the litigation between former employee Darden and
the Company was amicably settled. The case has been dismissed and all
allegations of wrongdoing by Darden as set forth in the Company's previous
filings and counterclaim have been withdrawn. The parties provided each other
with mutual releases of all claims with the exception of the agreed upon
payments totaling $65,000 the Company agreed to pay Mr. Darden in three
installments within 90 days of the mediation agreement. In addition to the
aforementioned payments, the Company forgave $50,000 in accounts receivable from
Mr. Darden that was recorded as a reduction to other receivables and wrote off
$92,726 in accrued salary to Mr. Darden that was recorded as other income during
fiscal year 2007. As of June 30, 2007, the Company owed Mr. Darden $40,000.
In August 2006, prior to joining the Company as executive officers and
employees, David S. Brooks and Kevin Yates, the Company's former Chief Executive
Officer and Chief Operating Officer, respectively, entered into a consulting
agreement to provide the Company with business advisory services including
strategic evaluation, planning and advice, fund-raising support, sales and
marketing support, contract negotiation and business development. The term of
the agreement was 12 months with an optional six-month extension. Subject to the
successful completion of various financing activities the Company is pursuing,
the Company agreed to pay each of them a fee of $100,000.
In April 2005, Richard Hersh, the former Company Chief Executive Officer and
Michael J. Darden, the former Company President, were granted options providing
each of them with the right to purchase ten percent of the shares of common
stock of Commodity Express Transportation, Inc., our wholly owned subsidiary,
for an exercise price of $60,000 expiring three years from the date these
options were granted. In September 2006, Mr. Hersh entered into a Separation and
Severance Agreement that, among other terms and conditions, cancelled his option
to purchase shares of Commodity Express Transportation, Inc. In May 2007, the
F-15
Company entered into a Mediated Settlement Agreement with Mr. Darden that, among
other terms and conditions, cancelled his option to purchase shares of Commodity
Express Transportation, Inc.
Pursuant to our agreement to acquire certain assets and liabilities of Commodity
Express Transportation, Inc. in March 2005, we entered into an employment
agreement with William A. Stokes, the former President of CXT and the founder
and previous President and owner of the company from which we acquired CXT (see
Note 11 - "Employment Agreements"). In addition, we entered into several other
agreements with entities affiliated with Mr. Stokes including:
- a commercial lease to rent approximately 5,000 square feet of office
space in West Columbia, South Carolina to serve as the principal
executive offices of CXT. The lease has a term of five years with a one
year extension at our option. Further, we have the right to immediately
terminate the lease in the event that the contract with Amcor PET
Packaging ("Amcor"), our largest customer, is not renewed. The monthly
rent is $4,200 during the five-year initial term and $5,040 during the
one-year option period. Also, we agreed to pay, prior to the respective
due dates thereof, all insurance premiums, charges, costs, expenses and
payment required to be paid in accordance with the lease. The lease
agreement contains customary default provisions and requires the prior
written consent of the landlord to alter the property or to assign the
lease to unaffiliated third parties.
- an equipment lease agreement to lease 181 commercial trailers used to
haul dry commodities. The monthly lease charges range from $170 to $240
per trailer and total $35,190 per month at the beginning of the lease
term. The lease expiration dates range from March 2006 to March 2010.
The agreement contains customary default provisions, requires the
lessor to pay for any damage to an individual trailer in excess of $250
and requires us to maintain and repair the trailers and tires as
needed.
- a consulting agreement to have Mr. Stokes maintain and build the
business relationship with Amcor and to work on other matters as
requested by the Chief Executive Officer and Board of Directors of CXT.
The term of the agreement is five years and it may be extended for two
successive one-year periods. The monthly compensation associated with
the agreement equals a percentage of the gross revenue of CXT.
- an agreement that engages CXT as the exclusive carrier for Mr. Stokes'
freight brokerage company. The agreement was to terminate the earlier
of March 20, 2010 or when the agreement between Mr. Stokes' company and
Amcor was no longer effective. The compensation for this agreement is a
percentage of the revenue CXT derives from Amcor.
In July and August, 2004, the Company entered into Intellectual Property
Assignment Agreements with three of its executives pursuant to which each of
them assigned to the Company all of their right, title and interest in and to
all the intellectual property which they had contributed to the Company in the
past in consideration for an aggregate of 600,000 shares of the Company's common
stock issued in January 2005. See Note 5 - "Intangible Assets" for a further
description of these transactions.
F-16
NOTE 7 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
June 30, 2008 June 30, 2007 Estimated Useful Life
------------- ------------- ---------------------
(in years)
Computer hardware and software $ 179,321 $ 179,321 5
Vehicle 21,694 21,694 5
Machinery and equipment 920,211 765,219 3 to 5
Furniture and fixtures 99,484 88,826 7
Leasehold improvements 5,870 3,028 4
--------- ---------
1,226,580 1,058,088
Accumulated Depreciation (568,371) (382,941)
--------- ---------
Net Fixed Assets $ 658,209 $ 675,147
========= =========
Depreciation expense was $185,430 and $132,864 for fiscal years 2008 and 2007,
respectively.
NOTE 8 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
As of June 30, 2008, the Company's revolving line of credit with Branch Banking
and Trust Company had been terminated by the Company as it switched to factoring
its accounts receivable with Transport Clearing East. Under this factoring
arrangement, CXT may sell its eligible accounts receivable to Transport Clearing
East for approximately 98.6% of the gross invoice amount with full recourse to
CXT. Transport Clearing East maintains a reserve of CXT funds which the Company
records as other receivables (see Note 4 - "Receivable - Affiliates and Other").
As of June 30, 2008, the Company had short term notes payable of $2,417,509
which consisted of:
- $1,250,000 of a 16% secured promissory note with an original due date
of February 8, 2008 issued to one investor. Upon funding in May 2007,
the investor was assigned $400,000 principal amount of an amended
version of the Company's 5% Series B secured convertible debentures
that was recorded as $400,000 of interest expense. The investor
immediately converted the debenture into 16,000,000 shares of common
stock at $0.025 per share. The note originally was secured by a primary
or secondary lien on the Company's assets excluding those assets owned
by its subsidiary Fittipaldi Carriers, Inc. and 100,000 shares of
Series I preferred stock convertible into 50,000,000 shares of the
Company's common stock held in escrow. The financing agreement with the
investor specifies that 50,000 shares of the Series I preferred stock
were to be released to the Company from escrow upon issuance of the
16,000,000 shares underlying the Series B debentures although, as of
the date of filing this Form 10-KSB, none of the Series I preferred
shares have been released to the Company. The remaining 50,000 shares
of Series I preferred stock were to be released to the Company upon
full repayment of the note and accrued interest within 15 days of its
original maturity date or, if not repaid by then, 5,000 shares are to
be released to the investor commencing 15 days after the maturity date
and on each of the next nine monthly anniversary dates thereafter as
long as the note and accrued interest have not been repaid in full by
F-17
such dates. During the year ended June 30, 2008, 25,000 shares of the
Series I preferred shares, convertible into 12,500,000 shares of common
stock, were released to the investor and recorded as $180,000 of
interest expense. The note and accrued interest were not repaid when
due and from February 8, 2008 until March 17, 2008 the interest rate
increased to 32%. On March 19, 2008, the investor agreed to extend the
maturity date of the note, and accrued interest thereon, until
September 18, 2008 and its interest rate was increased to 25%.
- $684,537 owed to Transport Clearing East which is recorded as a note
payable due to Transport Clearing East having full recourse to CXT for
any accounts receivable purchased from CXT;
- $208,241 of 16% secured promissory notes due January 15, 2008 issued to
three investors. These investors also were assigned an aggregate of
$160,000 principal amount of an amended version of 5% Series B secured
convertible debentures which were recorded as $160,000 of interest
expense. These investors immediately converted the debentures into
6,400,000 shares of common stock at $0.025 per share. These notes were
not repaid by their maturity date.
- $125,000 of 16% unsecured promissory notes due March 4, 2008 issued to
one investor. The investor also received 5,000,000 shares of common
stock that were recorded as $140,000 of interest expense. The note and
accrued interest were not paid when due and, on March 24, 2008, the
investor agreed to extend the maturity date of the note, and accrued
interest thereon, until September 4, 2008.
- $37,500 of 8% unsecured short-term promissory notes to two investors;
- $31,500 owed to GFC, Inc., the seller of the business which became
Power2Ship Intermodal, Inc. In March 2006, the Company entered into a
Settlement Agreement and Mutual Release with the parties that sold it
the business. The Company issued the seller 300,000 shares of its
common stock valued at $38,700 and agreed to pay the seller a total of
$36,000 over two years, $1,500 per month, in full settlement of the
outstanding balance of the purchase price. The Company made the first
three of these monthly payments and has not made any further payments
since May 2006. On February 27, 2008, GFC, Inc. filed a lawsuit in the
Supreme Court of New York, New York County (Case No. 600582/08) naming
as defendants Power2Ship, Inc., Power2Ship Intermodal, Inc. and
Fittipaldi Logistics, Inc. The complaint listed several causes of
action with the most material being that the Company breached the Asset
Purchase Agreement it entered into in February 2005 with GFC, Inc. by
failing to pay $200,000 and breached the Settlement Agreement and
Mutual General Release it entered into in February 2006 with GFC, Inc.
by not paying $33,000. The Company believes it has substantial defenses
and counterclaims against GFC, Inc. The due date for submitting its
answer has been delayed while the parties work in good faith toward a
settlement;
- $80,731 which is the short-term portion of three secured promissory
notes issued by CXT in fiscal year 2007 related to the purchase of
twelve used trucks. Two of these notes have interest rates of
approximately 11%, are being repaid in 42 equal monthly payments
totaling $6,880 including interest and have maturity dates in the first
and second quarters of fiscal year 2011. The third note has a variable
interest rate equal to the prime rate plus 1% and is being repaid in 17
equal monthly payments of $2,787 with a final payment of all remaining
principal and accrued interest due on December 5, 2008. As of June 30,
F-18
2008, the outstanding balance of these notes was $173,946 of which
$93,215 was recorded as long term notes payable.
If the Company receives a notice of non-compliance and potential default from
any holder of past due notes, the Company would have an obligation to rectify or
otherwise receive a waiver from the holder. While the Company had not received
any such notices as of June 30, 2008, it is possible that notice could be
provided at any time in the future, which would likely cause the Company to be
in default under its agreement and obligations to the debt holder(s). Any
default could accelerate the Company's obligations to repay all debt holders,
including all accrued and unpaid interest thereon, and perhaps other obligations
owed to other parties. We cannot assure you that we would be in a position to
arrange alternative financing to satisfy these obligations in the event of a
default. In the event we were unable to satisfy these obligations, then the
holders with security interests in certain of our assets could seek to foreclose
on these assets. If the holders were successful, we would be unable to conduct
our business as it is presently conducted and our ability to generate revenue
and fund our ongoing operations would be materially adversely affected. See Note
14 - "Subsequent Events" for further details.
As of June 30, 2008, the Company had convertible notes payable of $1,653,047,
net of discounts on notes payable of $32,111, which consisted of:
- $572,500 of 14.25% secured convertible debentures held by 22 investors
which were past due. These debentures are secured by a first priority
lien on all of the Company's assets. The conversion price for $512,500
of these debentures is approximately $0.267 per share and the
conversion price for $60,000 of these debentures is $0.025 per share.
- $80,784, net of $16,667 of discounts on notes payable, of 16% secured
convertible promissory notes which were past due to two investors in
consideration for the investors' exchange of $97,451 of unsecured
promissory notes and accrued interest thereon. One note, for $50,000
and accrued interest thereon, is convertible into common stock at
$0.015 per share and, commencing May 31, 2008, is subject to a penalty
of 200,000 shares of common stock at the end of each month until the
note and accrued interest thereon are fully repaid. Penalties of
400,000 shares valued at $5,600 were accrued as of June 30, 2008. The
other note for $47,451 and accrued interest thereon is convertible into
common stock at $0.025 per share. Both notes are secured by a lien on
the Company's assets excluding the assets of Fittipaldi Carriers, Inc.
and its subsidiaries.
- $201,397 of Series B secured convertible debentures, as amended, held
by two investors which were past due. These debentures are secured by a
first priority lien on all of the Company's assets. The debentures were
amended upon their issuance to these investors to increase the interest
rate to 16%, extend the maturity date to January 15, 2008, fix the
conversion price at $0.025 per share and provide the Company with a
right of redemption at any time without penalty subject to the
investors' conversion rights.
- $428,810 of 14.25% unsecured convertible debentures held by two
investors. The debenture for $200,000, which was past due, has a
conversion price of $0.01 per share. Upon making the loan, the holder
of this debenture received 2,000,000 shares of common stock valued at
$30,000 and a three-year warrant to purchase 2,000,000 shares of common
stock for $0.02 per share valued at $15,000. The other debenture for
$228, 810 has a conversion price of $0.025 per share and a maturity
date of March 5, 2009.
F-19
- $94,918, net of a $5,082 remaining balance of the discount on notes
payable recorded due to the beneficial conversion provision associated
with the issuance of an 8% $100,000 unsecured convertible promissory
note to an unaffiliated private company. The note has a maturity date
of September 27, 2008, provides the lender with the right to convert
principal and accrued interest into shares of the Company's common
stock at $0.025 per share, provides the Company with a right of
redemption to prepay the note and accrued interest at any time without
penalty subject to lender's conversion right, provides the lender with
a right of first refusal to purchase CXT on the same terms and
conditions as may be offered by any other party. The conversion price
resulted in a beneficial conversion provision due to the conversion
being less than the market price of the common stock at the time of the
issuance which was recorded as additional interest expense of $20,000
that is being amortized over the term of the note.
- $175,000 of 8% unsecured convertible promissory notes, and accrued
interest thereon, which is past due. The conversion price for this note
is $0.25 per share. The note holder has notified the Company in writing
that it is seeking to accelerate full repayment of the note and accrued
interest and, if not repaid, may pursue all available remedies. This
acceleration request and certain actions that may be taken by the note
holder may result in acceleration of other Company obligations to other
parties. We are seeking to negotiate a settlement with the note holder
but cannot assure you that we will be able to do so and, may not be in
a position to arrange alternative financing to satisfy this note and
obligations to other parties that may become accelerated.
- $92,803, net of a $7,197 remaining balance of the discount on notes
payable recorded due to the beneficial conversion provision associated
with $100,000 of a Series D 8% unsecured convertible debenture with a
conversion price of $0.02 per share.
- $6,833, net of a $3,167 remaining balance of the discount on notes
payable recorded due to the beneficial conversion provision associated
with a $10,000 convertible debenture having a conversion price equal to
a 50% of the average closing price of the common stock for the ten
trading days immediately preceding the conversion date and a warrant to
purchase 200,000 shares of common stock at $0.03 per share.
If the Company receives notice of noncompliance and potential default from any
holder of these convertible notes and debentures, the Company would have an
obligation to rectify or otherwise receive a waiver from the holder. While the
Company currently does not have any such notices, it is possible that notice
could be provided at any time in the future, which would likely cause the
Company to be in default under its agreement and obligations to the note holder.
Any default could accelerate the Company's obligations to repay all note
holders, including all accrued and unpaid interest thereon, and perhaps other
obligations owed to other parties. We cannot assure you that we would be in a
position to arrange alternative financing to satisfy these obligations in the
event of a default. In the event we were unable to satisfy these obligations,
then the secured holders could seek to foreclose on a portion of our primary
assets. If these holders were successful, we would be unable to conduct our
business as it is presently conducted and our ability to generate revenue and
fund our ongoing operations would be materially adversely affected. See Note 14
- - "Subsequent Events" for further details.
During the fiscal year ended June 30, 2008, the Company recognized debt
discounts of $337,933 related to issuances of convertible notes payable and
F-20
assignments of Series B secured convertible debentures during the period.
Amortization of debt discounts, recorded as interest expense, was $314,518
during the fiscal year ended June 30, 2008.
As of June 30, 2008, the Company had long term debt of $108,993 from two
promissory notes issued by CXT in January and March 2007 for $154,518 and
$134,442, respectively, secured by seven used trucks. These notes have interest
rates of approximately 11% and are to be repaid in 42 equal monthly payments of
$6,880 plus interest. As of June 30, 2008, the outstanding balance of these
notes was $173,946 of which $64,953 was recorded as short-term notes payable.
As of June 30, 2007, the balance on CXT's revolving line of credit with Branch
Banking and Trust Company was $761,836. This asset-based line of credit permits
CXT to borrow 85% of eligible accounts receivable up to a maximum of $3,000,000.
The variable interest rate on the outstanding balance equals the bank's prime
rate plus 1%. The line of credit expired on October 25, 2007.
As of June 30, 2007, the Company had short term notes payable of $1,656,939
which consisted of:
- $1,250,000 of a 16% secured promissory note due February 8, 2008 issued
in May 2007 to one investor. $1,000,000 was placed in an escrow account
for release only if included in the final payment to the holder of the
Company's 5% Series B secured convertible debentures. The Company also
agreed to assign the investor $400,000 principal amount of 5% Series B
secured convertible debentures, as amended to reduce the conversion
price to $0.025 per share. The note is secured by a primary or
secondary lien in the Company's assets excluding those assets owned by
its subsidiary Fittipaldi Carriers, Inc. and 100,000 shares of Series I
preferred stock convertible into 50,000,000 shares of common stock of
the Company to be held in an escrow account. One-half of these
preferred shares are to be released to the Company from escrow upon
exercise of the Company's option to purchase 13,000,000 escrowed shares
from the holder of the Company's 5% Series B secured convertible
debentures for $400,000. The remainder of these preferred shares are to
be released to the Company upon full repayment of the note and interest
by the maturity date or, if not repaid by then, 5,000 shares will be
released to the investor commencing on the due date and on each monthly
anniversary thereafter if the note and interest have not been repaid in
full by such dates.
- $320,000 of 12% short term unsecured promissory notes issued to five
investors of which $100,000 was placed in an escrow account for release
only if included in the final payment to the holder of the Company's 5%
Series B secured convertible debentures.
- $31,500 owed to the seller of the business which became Power2Ship
Intermodal, Inc. that payable $1,500 per month for 24 months commencing
in March 2006. $0 was paid during fiscal year 2007.
- $55,439 from two secured promissory notes totaling $238,450 issued by
CXT in January and March 2007 related to the purchase of seven used
trucks. These notes have interest rates of approximately 11% and are to
be repaid in 42 equal monthly payments of $6,880 plus interest. As of
June 30, 2007, the outstanding balance of these notes was $218,992 of
which $163,553 was recorded as long term notes payable.
As of June 30, 2007, the Company had convertible notes payable of $2,982,000
which consisted of:
F-21
- $1,057,000 of 14.25% secured convertible debentures, and accrued
interest thereon, after an aggregate of $540,000 was converted during
fiscal year 2007 into shares of preferred stock or repaid. $952,000 of
these debentures had become or was past due and the maturity date for
the remaining $105,000 was amended to December 31, 2007. If the Company
receives notice of noncompliance and potential default from any of its
debenture holders, the Company would have an obligation to rectify or
otherwise receive a waiver from them. While the Company currently does
not have any such notices, it is possible that notice could be provided
at any time in the future, which would likely cause the Company to be
in default under its agreement and obligations to the debenture holder.
Any default could accelerate the Company's obligations to repay all
debenture holders, including all accrued and unpaid interest thereon,
and perhaps other obligations owed to other parties. We cannot assure
you that we would be in a position to arrange alternative financing to
satisfy these obligations in the event of a default.
The $540,000 decrease in the outstanding balance of these debentures resulted
from:
- Six debenture holders converting $260,000 and $25,260 of accrued
interest thereon, into approximately 57 shares of Series F
convertible preferred stock. These conversions resulted in a
beneficial conversion provision due to the difference in the
conversion price between the debentures, which was approximately
$0.27 per share, and the preferred stock, which was $0.025 per
share, which was recorded as additional interest expense of
$353,807.
- One debenture holder converting $65,000, and $4,898 of accrued
interest thereon, into approximately 70 shares of Series H
convertible preferred stock. This conversion resulted in a
beneficial conversion provision due to the difference in the
conversion price between the debentures, which was approximately
$0.27 per share, and the preferred stock, which was $0.025 per
share, which was recorded as additional interest expense of
$126,721.
- Three debenture holders converting $155,000 of their debentures,
and $3,404 of accrued interest thereon, into 6,336,145 shares of
common stock. These debenture holders were three of the five
investors that purchased an aggregate of $465,000 of these 14.25%
secured convertible debentures in private transactions from six
debenture holders. Upon the consummation of these transactions,
the Company and new holders agreed to revise the debentures to
change the maturity date to June 30, 2007 and reduce the
conversion price to $0.025 per share. The revision of the
conversion price resulted in a beneficial conversion provision due
to the difference in the conversion price between the debentures,
which was approximately $0.27 per share, and the preferred stock,
which was $0.025 per share, which was recorded as additional
interest expense of $361,000.
- One debenture holder being repaid $60,000.
- $1,750,000 of the Company's Series B 5% secured convertible debentures,
after the sole holder converted $150,000 of these debentures during
fiscal year 2007 into 4,166,245 shares of common stock. These
debentures were not repaid when due in June and September 2006. In
January 2007, the Company entered into an agreement pursuant to which
F-22
the debenture holder agreed not to exercise its rights of conversion
under, or accrue further interest on, the debentures until June 30,
2007, subject to the Company paying the outstanding balance of $350,000
of its 14.25% secured convertible debentures held by the debenture
holder over a four month period commencing February 1, 2007 and,
thereafter, paying the debenture holder a lump sum of $2,000,000 and
issuing the debenture holder 13,000,000 shares of its common stock by
June 30, 2007. The Company made the required payments in February
through May 2007 totaling $240,000 and in June 2007 entered into a
supplement to its agreement with the debenture holder pursuant to which
it agreed to make a final payment of $1,800,000 and grant the holder a
warrant to purchase 5,000,000 shares of common stock for $0.03 per
share that expires in July 2011, in addition to issuing the holder
13,000,000 shares of common stock, in full settlement of all
obligations to this debenture holder (see Note 14 - Subsequent Events).
- $175,000 of 8% unsecured convertible promissory notes, and accrued
interest thereon, due on June 30, 2006. The note holder has notified
the Company that it is seeking to accelerate full repayment of the note
and accrued interest and, if not repaid, may pursue all available
remedies. This acceleration request and certain actions that may be
taken by the note holder may result in acceleration of other Company
obligations to other parties. We are seeking to negotiate a settlement
with the note holder but cannot assure you that we will be able to do
so and, may not be in a position to arrange alternative financing to
satisfy this note and obligations to other parties that may become
accelerated.
As of June 30, 2007, the Company had short term loans payable of $100,917 which
consisted of:
- $56,925 related to the purchase of 275 trailer tracking devices in
March 2007 by CXT for $113,850 with no interest payable in four
installments of $28,462.50 at the end of March, June, September and
December 2007. The first two installments were paid during fiscal year
2007 and
- $43,992 related to the purchase of five tractors in May 2007 by CXT for
$46,350 with an interest rate of prime plus 1% payable $2,786 plus
interest per month for 18 months.
As of June 30, 2007, the Company had long term debt of $213,499 which consisted
of:
- $163,533 from two secured promissory notes issued by CXT in January and
March 2007 for $154,518 and $134,442, respectively, related to the
purchase of seven used trucks. These notes have interest rates of
approximately 11% and are to be repaid in 42 equal monthly payments of
$6,880 plus interest. As of June 30, 2007, the outstanding balance of
these notes was $218,992 of which $55,439 was recorded as short-term
notes payable and
- $49,946 from $100,000 of our Series D 8% unsecured convertible
debentures less the remaining balance of the discount of $50,054
related to the beneficial conversion provision associated with the
debenture. During fiscal year 2007, five debenture holders converted an
aggregate of $590,000 principal amount of Series D 8% unsecured
convertible debentures, and $24,228 of accrued interest thereon, into
29,753,574 shares of common stock and three debenture holders exchanged
F-23
an aggregate of $250,000 of these debentures into $250,000 of Series D
convertible preferred stock.
During fiscal year 2007, the following other debt-related transactions occurred:
- Two debenture holders converted an aggregate of $105,000 principal
amount of Series C 10% unsecured, convertible debentures, and $11,549
of accrued interest thereon, into 5,827,440 shares of common stock and
two debenture holders exchanged an aggregate of $40,000 of debentures
into $40,000 of Series D convertible preferred stock. The outstanding
balance of Series C convertible debentures as of June 30, 2007 was $0.
- a $40,000 short-term 10% unsecured promissory note was issued to one
accredited investor in August 2006. In October 2006, the holder
exchanged the $40,000 note for 1.6 shares of the Series D convertible
preferred stock.
- $36,000 of short-term 10% unsecured promissory notes was issued to five
investors in July 2006. In October, one holder exchanged a $10,000 note
for 0.4 shares of the Series D convertible preferred stock and the
other four holders exchanged $26,000 of these notes for 5.2 shares of
Series F convertible preferred stock.
- a $50,000 short-term 10% unsecured promissory note issued to one
investor in June 2006 was exchanged in September 2006 for two shares of
the Series D convertible preferred stock.
- a $115,000 8% convertible promissory note and accrued interest thereon,
was forgiven in September 2006 by Richard Hersh, the Company's Chairman
of the Board of Directors and former Chief Executive Officer, upon the
Company entering into a Separation and Severance Agreement with him in
which he agreed to settle all outstanding claims against the Company
and to permit the cancellation of all options previously granted to him
in consideration for $20,000 and a five-year warrant to purchase
11,000,000 shares of common stock for $0.025 per share.
NOTE 9 - ACCRUED EXPENSES
The Company's accrued expenses consisted of:
June 30, 2008 June 30, 2007
------------- -------------
Corporate:
Interest $ 676,330 $ 278,936
Consulting 319,847 202,160
Professional fees 211,284 211,138
Other 123,416 119,333
------------ ----------
Corporate Subtotal 1,330,877 811,567
CXT:
Compensation 110,286 39,800
Settlements for owner-operators 110,006 76,986
Escrow accounts and reserves 84,041 113,084
Other 28,249 30,969
------------ ----------
CXT Subtotal 332,582 260,839
------------ ----------
Total accrued expenses $ 1,663,459 $1,072,400
============ ==========
F-24
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Operating Leases
- ----------------
Commodity Express Transportation, Inc. leases tractors and trailers under
operating leases with terms ranging from two to ten years. At June 30, 2008,
minimum future lease commitments were as follows:
Fiscal Year
-----------
2009 $1,779,758
2010 1,069,345
2011 627,807
2012 517,009
----------
$3,993,919
==========
Commodity Express Transportation also leased space in three facilities pursuant
to operating leases that expire as follows: an office and terminal facility in
West Columbia, South Carolina ending in March 2010; a warehouse in Blythewood,
South Carolina ending in October 2008; and a terminal in Chattanooga, Tennessee
ending in August 2011. At June 30, 2008, minimum future payments associated with
these leases were as follows:
Fiscal Years
------------
2009 $ 180,960
2010 36,414
----------
$ 217,374
==========
For fiscal years 2008 and 2007, rent expense was $297,454 and $313,599,
respectively.
The Company leases office space in Boca Raton, Florida under a two-year
operating lease terminating at the end of December 2008. At June 30, 2008, the
minimum future payments associated with this lease in fiscal year 2009 was
$24,086. For fiscal years 2008 and 2007, rent expense was $66,477 and $117,735,
respectively.
NOTE 11 - EMPLOYMENT AGREEMENTS
Effective November 16, 2006, the Company commenced a two-year employment
agreement with Frank P. Reilly to be its Executive Vice President, Strategy and
Market Development. The term of employment may be automatically renewed for
successive one year terms beginning on the two-year anniversary of the agreement
unless previously terminated according to the termination provisions in the
agreement or if the Company or Mr. Reilly elects to terminate the agreement by
written notice at least ninety days prior to the expiration of the then-current
term of employment. Mr. Reilly receives a base salary of $120,000 per year, was
granted a fully vested option to purchase 6,000,000 shares of common stock for
$0.025 per share that expires in five years and will receive a signing bonus of
$20,000 upon the Company achieving a certain level of funding. In April 2007,
Mr. Reilly was elected to the Company's Board of Directors and, in June 2007,
became its Chief Executive Officer. See Note 14 - "Subsequent Events" for
subsequent employment agreement entered into with Mr. Reilly.
F-25
Effective January 1, 2007, the Company commenced a two-year employment agreement
with Orin Neiman to be the Chief Executive Officer of Fittipaldi Carriers, Inc.
The term of employment may be automatically renewed for successive one year
terms beginning on the two-year anniversary of the agreement unless previously
terminated according to the termination provisions in the agreement or if the
Company or Mr. Neiman elects to terminate the agreement by written notice at
least ninety days prior to the expiration of the then-current term of
employment. Mr. Neiman receives a base salary of $120,000 per year, was granted
a fully vested option to purchase 6,000,000 shares of common stock for $0.025
per share that expires in five years and agreed to the cancellation of all stock
options and warrants previously granted to him and to Carriers Consolidation,
Inc., his consulting company.
Effective September 25, 2006, the Company commenced a two-year employment
agreement with John Urbanowicz to be its Executive Vice President of Technology.
The term of employment may be automatically renewed for successive one year
terms beginning on the two-year anniversary of the agreement unless previously
terminated according to the termination provisions in the agreement or if the
Company or Mr. Urbanowicz elects to terminate the agreement by written notice at
least ninety days prior to the expiration of the then-current term of
employment. Mr. Urbanowicz receives a base salary of $150,000 per year, was
granted a fully vested option to purchase 5,000,000 shares of common stock for
$0.025 per share that expires in five years and agreed to the cancellation of
all stock options previously granted to him.
Effective March 21, 2005, the Company commenced a one-year employment agreement
with William A. Stokes to be the President of CXT. The agreement was extended
for two additional one-year periods and then terminated March 21, 2008. Mr.
Stokes received a base salary of $150,000 per year, a bonus equal to 0.25% of
the gross revenue that Mr. Stokes is responsible for generating from Amcor other
than to and from its South Carolina facility, and a $600 per month automobile
allowance.
At June 30, 2008, the aggregate future commitments pursuant to these employment
agreements is $142,500 through the end of their respective initial employment
terms and, if renewed, an additional $247,500 during fiscal year 2009 and
$390,000 per fiscal year thereafter.
NOTE 12 - INCOME TAXES
The Company had available at June 30, 2008, operating loss carryforwards for
federal and state taxes of approximately $24,870,000, which could be applied
against taxable income in subsequent years through 2028. Such amounts would be
subject to the limitations contained under Section 382 of the Internal Revenue
Code relating to changes in ownership. However, given that the realization of
this tax effect is uncertain, a full valuation allowance was recorded.
F-26
The table below summarizes the differences between the Company's effective tax
rate and the statutory federal rate as follows for the periods ended June 30,
2008 and 2007:
Year Ended June Year Ended
30, 2008 June 30, 2007
----------------- --------------------
Tax benefit computed at "expected" statutory rate - 35% $ 1,907,000 $ 2,362,000
State income taxes, net of benefit - 4% 218,000 270,000
Non-deductible non-cash expenses (1,103,000) (1,522,000)
Effect of changes in expected tax rates (30,000) 514,000
Change in deferred tax asset valuation allowance (992,000) (1,624,000)
----------------- --------------------
Net income tax benefit $ - $ -
================= ====================
Temporary differences that give rise to significant deferred tax assets are as
follows:
June 30, 2008 June 30, 2007
------------------- ------------------
Deferred tax assets:
Net operating loss carryforward $ 9,700,000 $ 8,751,000
Allowance for doubtful account 120,000 77,000
Less: Valuation allowance (9,820,000) (8,828,000)
------------------- ------------------
- -
=================== ==================
NOTE 13 - STOCKHOLDERS' DEFICIT
Preferred Stock
- ---------------
All issued and outstanding shares of the Company's preferred stock has a par
value of $0.01 per share and rank prior to any class or series of the Company's
common stock as to the distribution of assets upon liquidation, dissolution or
winding up of the Company or as to the payment of dividends.
Series B Convertible Preferred Stock
During fiscal years 2003 and 2004, the Company issued an aggregate of 198,000
shares of Series B convertible preferred stock for $861,000 and the exchange of
a $125,000 promissory note and $4,000 of accrued interest thereon. The preferred
stock has a stated value of $5.00 per share and no voting rights. Each share is
convertible at a price of $0.25 per share into 20 shares of the Company's common
stock. In addition, the holders of the preferred stock are entitled to receive
annual dividends of 10% payable in cash or shares of the Company's common stock
at the option of the Company and received preferred registration rights. Prior
to fiscal year 2008, investors had converted 48,400 preferred shares into
968,000 shares of common stock leaving 149,600 preferred shares issued and
outstanding which remained the outstanding balance as of June 30, 2008. During
fiscal year 2008, the Company issued 2,624,565 shares of common stock as a 10%
dividend to the holders of record of the Series B preferred stock as of June 30,
2007 which were recorded at their fair market value of $74,800.
F-27
Series C Convertible Preferred Stock
During fiscal year 2004, the Company issued 10,832 shares of its Series C
convertible preferred stock for $324,960 less commissions of $30,000. The
preferred stock has a stated value of $30.00 per share, no voting rights, and is
not entitled to any dividends. Each share is convertible at a price of $0.30 per
share into 100 shares of the Company's common stock. In addition, the holders of
the preferred stock received warrants to purchase 541,600 shares of common stock
exercisable at $1.00 per share for a period of three years and preferred
registration rights. Prior to fiscal year 2007, investors had converted 10,000
preferred shares into 1,000,000 shares of common stock. During fiscal year 2008,
investors converted 500 preferred shares into 50,000 shares of common stock
leaving 332 preferred shares issued and outstanding as of June 30, 2008.
Series D Convertible Preferred Stock
During fiscal year 2007, the Company issued 40 shares of its Series D
convertible preferred stock of which 26.4 shares were purchased for $660,000 by
21 investors, 10 shares were issued in exchange for $250,000 of Series D 8%
unsecured convertible debentures by three debenture holders, 1.6 shares were
issued in exchange for $40,000 of Series C 10% unsecured convertible debentures
by two debenture holders and 2 shares were issued in exchange for $50,000 in 10%
short-term promissory notes by one investor. The preferred stock has a stated
value of $25,000 per share, no voting rights, and is not entitled to any
dividends. Each share is convertible at a price of $0.025 per share into
1,000,000 shares of the Company's common stock. In addition, the holders of the
preferred stock are entitled to receive a participation interest in the annual
net profits generated from any future business activities undertaken by the
Company in Brazil. Prior to fiscal year 2008, investors converted two preferred
shares into 2,000,000 shares of common stock. During fiscal year 2008, investors
converted 37 preferred shares into 10,000,000 shares of common stock leaving 28
preferred shares issued and outstanding as of June 30, 2008.
Series F Convertible Preferred Stock
During fiscal year 2007, the Company issued approximately 223.4 shares of its
Series F convertible preferred stock for $5,000 per share of which approximately
161.2 shares were purchased for $806,000 from 54 investors, 57 shares were
issued upon exchanges of $260,000 of 14.25% secured convertible debentures by
six debenture holders and 5.2 shares were issued upon conversion of $26,000 of
10% promissory notes. The exchanges resulted in a beneficial conversion
provision due to the difference in the conversion price between the debentures,
which was approximately $0.27 per share, and the preferred stock, which was
$0.025 per share, which was recorded as additional interest expense of $353,807.
The preferred stock has a stated value of $5,000 per share, no voting rights,
and is not entitled to any dividends. Each share is convertible at a price of
$0.025 per share into 1,000,000 shares of the Company's common stock. Prior to
fiscal year 2008, investors converted approximately 54.9 shares into 10,995,400
shares of common stock. During fiscal year 2008, the Company issued
approximately 26.7 shares of its preferred shares upon exchanges of $112,000 of
14.25% secured convertible debentures by five debenture holders and $18,960 of
accrued interest thereon, and $2,500 of 8% unsecured promissory note by one note
holder which resulted in a beneficial conversion provision of $130,958. Also
during fiscal year 2008, investors converted 63.7 shares of preferred stock into
12,740,000 common shares leaving approximately 131.5 preferred shares issued and
outstanding as of June 30, 2008.
Investors converted 10 preferred shares into 10,000,000 shares of common stock
leaving 28 preferred shares issued and outstanding as of June 30, 2008leaving
169 shares issued and outstanding as of June 30, 2007.
F-28
Series G Convertible Preferred Stock
During fiscal year 2007, the Company issued 6 shares of its Series G convertible
preferred stock upon the exchange of $150,000 of its 10% short-term promissory
notes to three debenture holders. The preferred stock has a stated value of
$25,000 per share, no voting rights, and is not entitled to any dividends. Each
share is convertible at a price of $0.025 per share into 1,000,000 shares of the
Company's common stock. In addition, the holders of the preferred stock are
entitled to receive a participation interest in the annual net profits generated
from any future business activities undertaken by the Company in Brazil. During
fiscal year 2007, two stockholders converted four shares into 4,000,000 shares
of common stock leaving two shares issued and outstanding as of June 30, 2007
which remained the outstanding balance as of June 30, 2008.
Series H Convertible Preferred Stock
During fiscal year 2007, the Company issued 69.9 shares of its Series H
convertible preferred stock upon conversion of $65,000 and accrued interest of
$4,898, of its 14.25% convertible debentures to one debenture holder. This
conversion resulted in a beneficial conversion provision due to the difference
in the conversion price between the debentures, which was approximately $0.27
per share, and the preferred stock, which was $0.025 per share, which was
recorded as additional interest expense of $126,721.The preferred stock has a
stated value of $1,000 per share, no voting rights, and is not entitled to any
dividends. Each share is convertible at a price of $0.025 per share into
1,000,000 shares of the Company's common stock. During fiscal years 2008 and
2007, no shares were converted leaving 69.9 shares issued and outstanding as of
June 30, 2008.
Series I Convertible Preferred Stock
During fiscal year 2007, the Company authorized and issued 100,000 shares of its
Series I convertible preferred stock that were placed in escrow as collateral
for a $1,250,000 16% promissory note issued in May 2007 to one investor. The
preferred stock has a stated value of $10.00 per share, no voting rights, and is
not entitled to any dividends. Each preferred share is convertible into 500
shares of the Company's common stock. One-half or 50,000 of these preferred
shares were to be released from escrow to the Company upon the issuance of
16,000,000 shares of the Company's common stock to the investor. Although the
16,000,000 shares were issued in July 2007, the 50,000 preferred shares have not
been released from escrow to the Company. The remainder of the preferred shares
were to be released to the Company upon full repayment of the note and interest
by the maturity date of February 8, 2008 or, if not repaid by then, 5,000 shares
were be released to the investor commencing on the due date and on each monthly
anniversary thereafter until the note and accrued interest had been repaid in
full. As of June 30, 2008, the promissory note had not been repaid and 25,000
shares of the preferred shares had been released from the escrow account to the
investor and recorded as interest expense of $180,000.
Series J Convertible Preferred Stock
During fiscal year 2008, the Company issued 2 shares of its Series J convertible
preferred stock for $5,000 to one investor. The preferred stock has a stated
value of $2,500 per share, no voting rights, and is not entitled to any
dividends. The stated value of each preferred share is convertible into common
shares using a conversion price equal to fifty percent of the average closing
price of the Company's common stock for the ten trading days immediately
preceding the conversion date, although in no instance less than $0.01 per share
or greater than $0.03 per share. The discounted conversion price results in a
F-29
beneficial conversion provision which was recorded as a deemed dividend of
$5,000. There were two shares issued and outstanding as of June 30, 2008.
Series Y Convertible Preferred Stock
In connection with the reverse merger of Freight Rate, Inc. with the Company in
March 2003, the Company issued 87,000 shares of Series Y preferred stock to
Richard Hersh, the Chief Executive Officer of Freight Rate, Inc., who became the
Company's Chief Executive Officer upon the merger. The preferred stock has a
stated value and par value of $.01, pays no dividends and has no liquidity
preference. Each share of Series Y convertible preferred stock has 200 votes per
share and has the right to vote with the common shareholders in all matters. As
of June 30, 2007, these voting rights provided the holder with voting control of
approximately 7.8% of the Company's shares. The shares are convertible into
230,405 shares of the Company's common stock at the holder's option.
Common Stock
- ------------
During fiscal year 2008, the Company issued an aggregate of 139,911,996 shares
of its common stock consisting of:
- 51, 939,088 shares issued upon the conversions of an aggregate of
$1,202,000 of debentures and promissory notes and $48,018 of accrued
interest thereon to nine lenders;
- 32,000,000 shares issued to Commodity Express Transportation as payment
for $450,000 of inter-company account payable owed by the Company to
CXT;
- 13,000,000 shares valued at $390,000 as part of a settlement of all
obligations to the holder of $1,750,000 of Series B secured convertible
debentures and $110,000 of 14.25% secured convertible debentures and
accrued interest thereon;
- 12,538,345 shares upon the conversion of approximately 62.7 shares of
the Company's Series F convertible preferred stock to 17 shareholders;
- 10,000,000 shares upon the conversion of 10 shares of the Company's
Series D convertible preferred stock to seven shareholders;
- 10,000,000 shares, valued at $234,000 and recorded as interest expense,
issued in conjunction with the sale of $375,000 of debentures and
promissory notes to three lenders;
- 4,000,000 shares, valued at $54,000 and recorded as interest expense,
issued as a penalty for not repaying a $350,000 16% convertible
promissory note to one lender;
- 3,470,000 shares, valued at $88,400 and recorded as consulting expense,
issued to nine consultants for providing various management consulting
services;
- 2,659,653 shares, valued at $75,800 and recorded as preferred stock
dividends, issued to the holders of record on June 30, 2007 of the
Company's Series B convertible preferred stock;
- 254,910 shares, valued at $8,833 and recorded as interest expense,
issued to one holder of the Company's Series D 8% convertible
debenture; and
F-30
- 50,000 shares issued upon the conversion of 500 shares of the Company's
Series F convertible preferred stock to one shareholder;
During fiscal year 2007, the Company issued an aggregate of 65,509,643 shares of
its common stock consisting of:
- 29,753,574 shares issued upon conversion of $590,000 of its Series D 8%
unsecured convertible debentures and accrued interest by five debenture
holders;
- 4,166,245 shares issued upon conversion of $150,000 of its Series B 5%
secured convertible debentures by one debenture holder;
- 5,827,440 shares issued upon conversion of $105,000 of its 10%
promissory notes and accrued interest to two note holders;
- 6,336,145 shares issued upon conversion of $155,000 principal balance
of its 14.25% secured convertible debentures and accrued interest to
three debenture holders;
- 10,995,400 shares issued upon conversion of 55.2 shares of its Series F
convertible preferred stock by six preferred stockholders;
- 4,000,000 shares issued upon conversion of four shares of its Series G
convertible preferred stock by two preferred stockholders;
- 2,000,000 shares issued upon conversion of two shares of its Series D
convertible preferred stock by one preferred stockholder;
- 120,000 shares issued upon conversion of 6,000 shares of its Series B
convertible preferred stock by three preferred stockholders;
- 1,462,687 shares issued for payment of dividends to its Series B
preferred stockholders amounting to $77,800;
- 25,000 shares issued for consulting services rendered valued at the
fair market value on the date of grant at $0.05 per share or $1,250. In
connection with the issuance of these shares, the Company recorded
stock-based consulting expense of $1,250 for the year ended June 30,
2007;
- 200,000 shares issued for accrued services rendered valued at the fair
market value on the date of grant at $0.05 per share or $10,000. In
connection with the issuance of these shares, the Company recorded an
offset of $7,480 against accrued expenses and a loss on forgiveness of
debt of $2,520 for the year ended June 30, 2007;
- 123,152 shares issued for consulting services rendered valued at the
fair market value on the date of grant at $0.095 per share or $11,699.
In connection with the issuance of these shares, the Company recorded
stock-based consulting expense of $11,699 for the year ended June 30,
2007; and
- 500,000 shares issued upon exercise of stock warrants at $0.025 per
share for $12,500.
Options and Warrants
- --------------------
The Company's board of directors has the authority to determine when and to whom
it grants options and warrants to purchase shares of the Company's common stock.
F-31
In addition, the board determines the number of options and warrants to be
granted and all other terms and conditions related to these securities such as
the recipients' vesting schedules, expiration dates, exercise prices and
restrictions.
Stock Options
- -------------
The Company's board of directors has the authority to determine when and to whom
it grant options and warrants to purchase shares of the Company's common stock.
In addition, the board determines the number of options and warrants to be
granted and all other terms and conditions related to these securities such as
the recipients' vesting schedules, expiration dates, exercise prices and
restrictions.
The Company has adopted SFAS No. 123R, "Share Based Payments". SFAS No. 123R
requires companies to expense the value of employee stock options and similar
awards and applies to all outstanding and vested stock-based awards. In
computing the impact, the fair value of each option is estimated on the date of
grant based on the Black-Scholes options-pricing model utilizing certain
assumptions for a risk free interest rate; volatility; and expected remaining
lives of the awards. The assumptions used in calculating the fair value of
share-based payment awards represent management's best estimates, but these
estimates involve inherent uncertainties and the application of management
judgment. As a result, if factors change and the Company uses different
assumptions, the Company's stock-based compensation expense could be materially
different in the future. In addition, the Company is required to estimate the
expected forfeiture rate and only recognize expense for those shares expected to
vest. In estimating the Company's forfeiture rate, the Company analyzed its
historical forfeiture rate, the remaining lives of unvested options, and the
amount of vested options as a percentage of total options outstanding. If the
Company's actual forfeiture rate is materially different from its estimate, or
if the Company reevaluates the forfeiture rate in the future, the stock-based
compensation expense could be significantly different from what we have recorded
in the current period. The impact of applying SFAS No. 123R approximated
$1,116,490 and $1,157,270 in additional compensation expense during the years
ended June 30, 2008 and 2007, respectively. Such amount is included in general
and administrative expenses on the statement of operations.
The assumptions used in the Black Scholes option pricing model for calculating
the estimated fair values of share-based payment awards were as follows:
June 30, 2008 June 30, 2007
------------- -------------
Expected volatility 87% - 172% 197%-211%
Expected term (in years) 3 to 5 3 to 5
Risk-free interest rate 1.84%-5.07% 4.39%-4.77%
Expected dividend yield 0% 0%
During fiscal year 2008, the Company
- granted stock options to purchase an aggregate of 14,000,000 shares of
common stock to the Company's Chief Executive Officer of which
5,000,000 were exercisable at $0.025 per share and 9,000,000 were
exercisable for $0.01 per share. The Company accounts for stock options
issued to employees in accordance with the provisions of SFAS 123R and
related interpretations. The fair value of these option grants were
estimated on their respective dates of grant using the Black-Scholes
option-pricing model and recorded as $205,875 of stock-based
compensation for the year ended June 30, 2008; and
- had stock options to purchase 20,199,080 shares of common stock expire.
F-32
During fiscal year 2007, the Company granted stock options to purchase an
aggregate of 45,150,000 shares of common stock which consisted of options to
purchase:
- 23,000,000 shares of common stock with an exercise price of $0.025 per
share in connection with employment agreements with two of its officers
and an employee. The Company accounts for stock options issued to
employees in accordance with the provisions of SFAS 123R and related
interpretations. The fair value of this option grant was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield of 0%; expected
volatility of 199%; risk-free interest rate of 4.5% and an expected
holding period of five years. In connection with these options, the
Company recorded stock-based compensation expense of $419,175 for the
year ended June 30, 2007.
- 12,000,000 shares of common stock for $0.025 per share in connection
with employment agreements with two of its employees. The Company
accounts for stock options issued to employees in accordance with the
provisions of SFAS 123R and related interpretations. The fair value of
this option grant was estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: dividend yield of 0%; expected volatility of 199%;
risk-free interest rate of 4.39% to 4.67% and an expected holding
period of five years. In connection with these options, the Company
recorded stock-based compensation expense of $187,601 for the year
ended June 30, 2007.
- 9,900,000 shares of common stock at an exercise price of $.025 per
share to various employees. The Company accounts for stock options
issued to employees in accordance with the provisions of SFAS 123R and
related interpretations. The fair value of this option grant was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend yield
of 0%; expected volatility of 199%; risk-free interest rate of 4.8% and
an expected holding period of five years. In connection with these
options, the Company recorded stock-based compensation expense of
$549,729 for the year ended June 30, 2007.
- 250,000 shares of its common stock at an exercise price of $.025 per
share to one of its employees. The Company accounts for stock options
issued to employees in accordance with the provisions of SFAS 123R and
related interpretations. The fair value of this option grant was
estimated on the date of grant using the Black-Scholes option-pricing
model with the following weighted-average assumptions: dividend yield
of 0%; expected volatility of 199%; risk-free interest rate of 4.6% and
an expected holding period of five years. In connection with these
options, the Company recorded stock-based compensation expense of $766
for the year ended June 30, 2007.
During the year ended June 30, 2007, the Company cancelled stock options to
purchase an aggregate of 9,461,091 shares of common stock which consisted of:
- 5,785,392 shares for prices ranging from $0.25 to $0.38 per share
expiring in 2008 granted to the Company's previous Chief Executive
Officer upon entering into a Separation and Severance Agreement;
- 3,146,033 shares for prices ranging from $0.15 to $0.52 per share
expiring from 2006 through 2008 granted to certain employees; and
F-33
- 529,666 shares for $0.38 per share expiring in 2008 granted to one
consultant.
During the year ended June 30, 2007, options to purchase an aggregate of
4,540,574 shares of common stock expired.
A summary of the stock options as of June 30, 2008 and 2007 and changes during
the periods is presented below:
-------------------------------------------------------------------------------------------------------------------
Year Ended June 30, 2008 Year Ended June 30, 2007
-------------------------------------------------------------------------------------------------------------------
Weighted
Number of Average Number of Weighted Average
Options Exercise Price Options Exercise Price
-------------------------------------------------------------------------------------------------------------------
Balance at beginning of year 44,749,080 $ 0.03 13,600,744 $ 0.35
-------------------------------------------------------------------------------------------------------------------
Granted 14,000,000 0.015 45,150,000 0.025
-------------------------------------------------------------------------------------------------------------------
Exercised - - - -
-------------------------------------------------------------------------------------------------------------------
Expired (20,199,080) 0.04 (4,540,574) 0.30
-------------------------------------------------------------------------------------------------------------------
Cancelled - - (9,461,090) 0.34
-------------------------------------------------------------------------------------------------------------------
Balance at end of year 38,550,000 $ 0.02 44,749,080 $ 0.03
============================================================================
Options exercisable at end of year 37,308,334 $ 0.02 38,761,580 $ 0.03
============================================================================
Weighted average fair value of
options granted during the year $ 0.01 $ 0.025
-------------------------------------------------------------------------------------------------------------------
The following table summarizes information concerning stock options outstanding
and exercisable at June 30, 2008:
Options Outstanding Options Exercisable
------------------------------------------------------------------------------ ----------------------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Price Outstanding Life Price Exercisable Price
--------------- ----------------- --------------- ------------ ------------------ ------------
$ 0.01 9,000,000 4.70 Years $ 0.01 9,000,000 $ 0.01
0.025 29,450,000 3.51 Years $ 0.025 28,208,341 $ 0.025
0.38 99,993 0.60 Years 0.31 99,993 0.38
----------------- ------------ ------------------ ------------
38,549,993 $ 0.02 37,308,334 $ 0.02
================= ============ ================== ============
Warrants
- --------
The Company charged to expense the fair value of the instruments granted for
services using the Black-Scholes option-pricing model.
F-34
During fiscal year 2008, the Company granted common stock purchase warrants for:
- 19,650,000 shares exercisable at prices ranging from $0.01 to $0.06 per
share expiring three years from their respective grant dates to six
vendors and consultants. The warrants were valued utilizing the
Black-Scholes options pricing model at $321,067 of which $249,343 was
expensed as consulting expenses and legal fees, $35,857 was recorded as
stock-based consulting and $35,867 was recorded as deferred
compensation to be expensed as consulting expense over the respective
terms of the consulting agreements; and
- 17,200,000 shares exercisable at prices ranging from $0.02 to $0.03 per
share expiring three years from their respective grant dates granted to
three private lenders in conjunction with the issuance of an aggregate
of $260,000 in promissory notes and convertible debentures; the
warrants were valued utilizing the Black-Scholes options pricing model
and recorded as $17,139 of discounts on notes payable that will be
amortized as interest expense over the term of the loans;
- 400,000 shares of which 200,000 are exercisable at $0.02 per share and
200,000 are exercisable at $0.025 per share expiring three years from
their grant date to one investor in conjunction with the issuance of
two shares of Series J convertible preferred stock; the warrants were
valued utilizing the Black-Scholes options pricing model and recorded
as deemed dividends of $3,454;
Also, during the year ended June 30, 2008, warrants to purchase 18,739,019
shares of common stock expired, warrants to purchase 916,667 shares of common
stock were cancelled and the Company reduced the exercise price of warrants to
purchase an aggregate of 9,469,999 shares of common stock to $0.025 per share.
The Company valued the re-priced warrants utilizing the Black-Scholes option
pricing model using the following assumptions: estimated volatility of 102%,
risk-free interest rate of 3.71%, no dividend yield, and an expected life of 3
years, and recorded approximately $69,000 as consulting fees during the six
months ended December 31, 2007.
During fiscal year 2007, the Company granted warrants to purchase an aggregate
of 21,325,000 shares of common stock consisting of:
- 11,000,000 shares at an exercise price of $0.025 per share that expire
in September 2011 granted to the Company's previous Chief Executive
Officer upon entering into a Separation and Severance Agreement with
him in September 2006. The warrant was valued utilizing the
Black-Scholes options pricing model at approximately $0.048 per share
or $534,600.
- 8,000,000 shares at an exercise price of $0.025 per share that expire
in October 2011 granted to EF Marketing, LLC in October 2006 upon
entering into an Amendment to the License Agreement dated March 1, 2005
with EF Marketing, LLC and Emerson Fittipaldi. The warrant was valued
utilizing the Black-Scholes options pricing model at approximately
$0.049 per share or $393,097 and, accordingly, recorded an intangible
asset of $393,097.
- 100,000 shares at an exercise price of $.025 per share that expires in
November 2009 to one consultant. The Company valued these warrants
utilizing the Black-Scholes options pricing model at approximately
$0.047 or $4,725 and recorded a stock-based consulting expense of
$4,725 for the year ended June 30, 2007.
- 1,525,000 shares at an exercise price of $.025 per share that expires
in February 2010 to two consultants. The Company valued these warrants
utilizing the Black-Scholes options pricing model at approximately
$0.048 or $72,916 and recorded a stock-based consulting expense of
$72,916 for the year ended June 30, 2007.
F-35
- 700,000 shares at an exercise price of $.05 per share that expires in
February 2010 to two consultants. The Company valued these warrants
utilizing the Black-Scholes options pricing model at approximately
$0.047 or $32,796 and recorded a stock-based consulting expense of
$32,796 for the year ended June 30, 2007.
In November 2006, the Company reduced the exercise price of warrants to purchase
an aggregate of 718,375 shares of common stock to $0.025 per share and changed
their expiration dates to November 17, 2006. During the year ended June 30,
2007, the warrant holder exercised warrants to purchase 500,000 shares for
$12,500 and the Company cancelled the remaining warrants to purchase 218,375
shares. The Company valued the re-priced warrants utilizing the Black-Scholes
option pricing model using the following assumptions: estimated volatility of
199%, risk-free interest rate of 5%, no dividend yield, and an expected life of
3 years, and recorded approximately $34,000 as consulting fees during the year
ended June 30, 2007.
In April 2007, the Company reduced the exercise price of warrants to purchase an
aggregate of 7,216,667 shares of common stock to $0.025 per share and changed
their expiration dates to April 10, 2010. The Company valued the re-priced
warrants utilizing the Black-Scholes option pricing model using the following
assumptions: estimated volatility of 181%, risk-free interest rate of 4.6%, no
dividend yield, and an expected life of 5 years, and recorded approximately
$4,000 as consulting fees during the year ended June 30, 2007.
During the year ended June 30, 2007, the Company cancelled warrants to purchase
500,000 shares of common stock at an exercise price of $0.25 per share expiring
in 2008 to one consulting company.
Stock warrant activity for the years ended June 30, 2008 and 2007 is summarized
as follows:
Year Ended June 30, 2008 Year Ended June 30, 2007
----------------------------- -----------------------------
Weighted Weighted
Average Average
Number of Exercise Number of Exercise
Warrants Price Warrants Price
-------- ----- -------- -----
Balance at beginning of year 76,566,312 $ 0.12 59,912,536 $ .13
Granted 37,250,000 0.02 21,325,000 0.025
Exercised (3,000,000) 0.025 (500,000) 0.025
Cancelled (916,667) 0.16 (718,375) .42
Expired (18,739,019) 0.12 (3,452,849) .47
----------- ------------
Balance at end of year 91,160,626 $ 0.05 76,566,312 $ 0.12
=========== ============
Warrants exercisable at end of year 90,760,626 $ 0.04 75,688,535 $ 0.09
=========== ============
Weighted average fair value of
options granted during the year $ 0.015 $ 0.025
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The following table summarizes information concerning warrants outstanding and
exercisable at June 30, 2008:
Warrants Outstanding Warrants Exercisable
----------------------------------------------------------------------- --------------------------------
Weighted
Average Weighted Weighted
Range of Number of Remaining Average Number Average
Exercise Price Warrants Life in Years Exercise Price Exercisable Exercise Price
-------------- ----------- ------------- -------------- ----------- --------------
$ 0.01 -$0.15 89,860,626 2.50 $ 0.04 89,860,626 $ 0.04
$ 0.38 -$0.50 1,000,000 1.67 $ 0.50 600,000 $ 0.50
$ 0.75 300,000 0.67 $ 0.75 300,000 $ 0.75
----------- ----------
91,160,626 90,760,626
=========== ==========
NOTE 14 - SUBSEQUENT EVENTS
The Company issued 31,683,773 shares of common stock since July 1, 2008
consisting of:
- 6,110,089 shares issued to a private lender upon conversion of $60,000
of 10% convertible debentures, and $1,101 of accrued interest thereon,
at a conversion price of $0.01 per share;
- 5,493,333 shares issued to an institutional investor upon conversion of
$100,000 of 8% Series D convertible debentures and $9,867 of accrued
interest thereon, at a conversion price of $0.02 per share;
- 4,829,370 shares issued to an institutional investor upon conversion of
$100,000 of 16% convertible debentures and $20,734 of accrued interest
thereon, at a conversion price of $0.025 per share;
- 3,266,667 shares issued to three investors to re-purchase warrants to
purchase an aggregate of 6,533,333 shares of common stock for prices
ranging from $0.01 to $0.05 per share;
- 3,000,000 shares issued to two investors upon conversion of 3 shares of
Series D preferred stock, purchased for $25,000 per preferred share,
into common stock at $0.025 per share;
- 2,134,315 shares issued to a private lender upon conversion of $47,451
of 16% secured convertible debentures and $5,907 of accrued interest
thereon, at a conversion price of $0.025 per share;
- 2,000,000 shares issued to an institutional investor upon conversion of
2 shares of Series G preferred stock, purchased for $25,000 per
preferred share, into common stock at $0.025 per share;
- 1,750,000 shares issued to five investors upon their conversion of 7
shares of Series J preferred stock, purchased for $2,500 per preferred
share, into common stock at $0.01 per share;
- 1,250,000 shares issued to a consulting company for services to be
performed over one year; the shares were valued at $18,750 and will be
F-37
recorded as consulting expense ratably over the term of the consulting
agreement;
- 983,333 shares issued to three investors upon exercise of warrants at
$0.01 per share;
- 600,000 shares issued to two investors upon conversion of 3 shares of
Series F preferred stock, purchased for $5,000 per preferred share,
into common stock at $0.025 per share;
- 266,666 shares issued to a consultant working for CXT that were valued
at $3,726;
Also, since July 1, 2008 the Company:
- decreased other receivables due from Rentar Logic, through September
30, 2008, by approximately $207,250 as a result of Rentar Environmental
Solutions, on behalf of Rentar Logic, paying $54,000 of the Company's
payroll expense and issuing 30,650 shares of its common stock valued at
$153,250 to repay $131,397, and $21,432 of accrued interest thereon, to
two debenture holders stock resulting in a loss on debt settlement of
$421; as of September 30, 2008, the other receivables due from Rentar
Logic was approximately $2,138,000;
- issued 7 units to five investors consisting of an aggregate of 7 shares
of Series J convertible preferred stock and warrants to purchase
1,400,000 shares of common stock of which 700,000 have an exercise
price of $0.02 per share and 700,000 have an exercise price of $0.025
per share for $17,500; the warrants were valued using the Black Scholes
option pricing model at $11,680 and, when combined with a beneficial
conversion provision due to the conversion price being less than the
market price of the common stock at the time of the issuance, resulted
in a deemed dividend totaling $14,060;
- released from escrow 5,000 shares of Series I preferred stock
convertible into 2,500,000 shares of common stock to the holder of
$1,250,000 secured promissory note as a penalty for not repaying the
note when due in February 2008; the Series I preferred shares were
valued at $30,000 using the market value of the common stock underlying
the preferred stock on the date released and recorded as interest
expense;
- issued four lenders $92,667 of 10% convertible debentures due in March
2009 and convertible into shares of our common stock at the greater of
$0.01 per share or 50% of the average closing price of our common stock
for the ten trading days immediately preceding the date we receive a
notice of conversion from the lender; also, we granted the holders
three-year warrants to purchase an aggregate of 9,266,700 shares of our
common stock for $0.01 per share that were valued using the Black
Scholes Option Pricing Model at more than the principal amount of the
debentures and recorded as discounts on notes payable of $92,667 that
will be amortized as interest expense over the six-month term of the
notes;
- granted one-year warrants to purchase an aggregate of 2,500,000 shares
of common stock for $0.01 per share to three investors valued using the
Black Scholes Option Pricing Model at $51,422 which were recorded to
consulting expense;
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- reduced the exercise price of options and warrants held by 9 employees,
2 consultants and 1 law firm to purchase an aggregate of 45,843,360
shares of common stock to $0.01 per share valued using the Black
Scholes Option Pricing Model at $99,844 which were recorded to
stock-based compensation, consulting expense and legal expense;
- CXT entered into an accounts receivable factoring arrangement with
Marquette Transportation Finance that replaced CXT's factoring
arrangement with Transport Clearing East; under this arrangement, CXT
may sell Marquette up to $3,000,000 of its eligible accounts receivable
for approximately 98.6% of their gross invoice amounts; upon closing
this transaction, the Company's receivables due from, and obligations
owed to, Transport Clearing East were settled; Marquette has recourse
to CXT for any accounts receivable it purchases and maintains a reserve
of CXT funds equal to approximately 10% of accounts receivable; CXT
records this reserve as other receivables;
- commenced a five-year employment agreement with Frank P. Reilly to be
its Chief Executive Officer, Principal Financial and Accounting
Officer, President, Treasurer and Secretary. The term of employment is
automatically renewed for successive one-year terms beginning on the
five-year anniversary of the agreement unless previously terminated
according to the termination provisions in the agreement or if the
Company or Mr. Reilly elects to terminate the agreement by written
notice at least ninety days prior to the expiration of the then-current
term of employment. Mr. Reilly is entitled to a signing bonus of
$39,643 to compensate him for the $30,000 annual salary increase he
should have received upon becoming the Company's Chief Executive
Officer on June 6, 2007. The base salary in year one of the term is
$150,000 with annual raises of a minimum of 20%. Also, within ten
business days of filing each quarterly or annual report with the U.S.
Securities and Exchange Commission ("SEC"), the Company will grant Mr.
Reilly a five-year, fully vested option to purchase that number of
shares of common stock such that, following such grant, the aggregate
number of shares underlying all of Mr. Reilly's outstanding options
represent no less than five percent of the total issued and outstanding
shares of common stock of the Company as reported in its quarterly or
annual report. The exercise price for these options will be equal to
the greater of i) the average closing price of the Company's common
stock for the ten trading days immediately preceding the filing of the
quarterly or annual report or ii) the closing price of the common stock
on the tenth trading day after filing the annual or quarterly report.
In addition, within ten business days of the Company filing an annual
report with the SEC in which the Company reports a net profit before
tax for its most recently completed fiscal year, Mr. Reilly shall be
entitled to receive a bonus equal to 4.0% of such net profit before tax
which may be paid, at Mr. Reilly's option, in cash or shares of the
Company's common stock. If he elects to receive common stock, then the
price per share used to calculate the number of shares to be issued to
him shall be the average closing share price for the ten trading days
immediately preceding the filing of the annual report with the SEC;
- entered into an agreement with the holder of a $1,250,000 promissory
note that was due on September 18, 2008 to pay the holder $1,250,000 by
December 1, 2008 in satisfaction of all obligations related to the
note. Promptly after making the payment, the holder has agreed to
return all shares of Series I convertible preferred stock issued to it,
retaining approximately 16,000,000 shares of our common stock issued to
it in July 2007 in conjunction with the issuance of the promissory
note, and to release its security interest in our assets. At the time
F-39
of making the agreement in October, the Company expected to obtain the
funds for this payment from the proceeds of the sale of its
intellectual properties and software to Rentar Logic, its
minority-owned affiliate for $3,000,000 as disclosed in the current
report on Form 8-K filed April 17, 2008. However, as of November 14,
2008, Rentar Logic had not received any financing commitments that
would enable it to pay the Company. If the Company is unable to make
the required payment prior to December 6, 2008, then the note would be
in default. No assurance can be given that the Company would be in a
position to arrange alternative financing to satisfy the obligations to
the holder in the event of a default. If the Company is unable to
arrange alternative financing or obtain a waiver from the holder, then
the note, and all accrued and unpaid interest thereon, would become due
and payable without further notice. In the event the Company is unable
to satisfy these obligations, then the holder could seek to foreclose
on the assets securing the note. If the holder was successful, the
Company would be unable to conduct its business as it is presently
conducted and its ability to generate revenue and fund our ongoing
operations would be materially adversely affected. Upon closing this
transaction, the Company estimates that it would record a gain on debt
settlement of approximately $750,000 reflecting both the forgiveness of
accrued interest and the return of all outstanding shares of Series I
convertible preferred stock.
F-40