UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 2008
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
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 87-04496677
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
902 Clint Moore Road, Suite 204, Boca Raton, Florida 33487-2802
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(Address of principal executive offices) (Zip Code)
(561) 998-7557
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(Registrant's telephone number, including area code)
not applicable
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since
last report)
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 past 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 whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a small reporting company. See
the definitions of "large accelerated filer", "accelerated filer" and "small
reporting company" in Rule 12b-2 of the Exchange Act.
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 [ ] No [ ]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [ ] No [ ]
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date. As of December 1, 2008, the
number of outstanding shares of the issuer's common stock was 325,453,161.
2
TABLE OF CONTENTS
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Page
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PART I. FINANCIAL INFORMATION 4
Item 1. Financial Statements. 4
Consolidated Balance Sheet, September 30, 2008 (Unaudited) and
June 30, 2008 (Audited) 4
Consolidated Statements of Operations, Three Months Ended
September 30, 2008 and 2007 (Unaudited) 5
Consolidated Statements of Cash Flows, Three Months Ended
September 30, 2008 and 2007 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. 27
Item 3. Controls and Procedures. 35
PART II. OTHER INFORMATION 36
Item 1. Legal Proceedings. 36
Item 1A. Risk Factors. 36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 36
Item 3. Defaults Upon Senior Securities. 36
Item 4. Submission of Matters to a Vote of Security Holders. 36
Item 5. Other Information. 36
Item 6. Exhibits. 37
When used in this quarterly report, the terms the "Company," "NuState Energy
Holdings," "our," and "us" refers to NuState Energy Holdings, Inc., a Nevada
corporation and our subsidiaries. The information which appears on our web sites
at www.emmologic.com www.mydriverseat.com are not part of this quarterly report.
Cautionary Statements Regarding Forward Looking Information
Certain statements in this quarterly 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
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 quarterly report in its entirety. 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 quarterly report,
and you should not rely on these statements without also considering the risks
and uncertainties associated with these statements and our business.
3
PART I. FINANCIAL INFORMATION
-----------------------------
ITEM 1. FINANCIAL STATEMENTS
- ------ --------------------
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
September 30, 2008 June 30, 2008
------------------ -------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 142,420 $ 77,539
Restricted cash 150,824 150,824
Accounts receivable, net of allowance of $310,314 and
$308,483, respectively 2,448,514 1,731,782
Receivables - affiliates and other 2,152,927 2,462,028
Prepaid expenses and other current assets 253,814 272,569
------------ ------------
Total current assets 5,148,499 4,694,742
Property and equipment, net 635,633 658,209
Intangible asset, net of accumulated amortization of $33,916
and $31,620, respectively 12,009 14,305
Other assets 171,345 171,345
------------ ------------
Total assets $ 5,967,486 $ 5,538,601
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Notes payable - short term $ 2,387,918 $ 2,417,509
Convertible notes payable less discount of $69,860
and $32,111, respectively 1,411,450 1,653,047
Accounts payable 2,576,475 2,090,953
Accrued expenses 1,883,561 1,663,459
Accrued salaries 386,419 388,769
Deferred gain on sale 968,063 1,044,851
------------ ------------
Total current liabilities 9,613,886 9,258,588
Long term debt:
Long term notes payable 74,064 93,215
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Total liabilities 9,687,950 9,351,803
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 332 issued and outstanding 3 3
Series D convertible; 40 authorized; 25 and 38 issued and outstanding -- --
Series F convertible; 500,000 authorized; 130 and 132 issued and outstanding 1 1
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 2 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; 305,163,702 and
289,769,388 issued; and 273,163,702 and 257,769,388 outstanding 305,164 289,770
Additional paid-in capital 33,712,286 32,933,980
Treasury stock, $.001 par value; 32,000,000 and 32,000,000 shares held (32,000) (32,000)
Accumulated deficit (37,709,285) (37,008,323)
------------ ------------
Total stockholders' deficit (3,720,464) (3,813,202)
------------ ------------
Total liabilities and stockholders' deficit $ 5,967,486 $ 5,538,601
============ ============
See notes to unaudited consolidated financial statements
4
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended
September 30,
---------------------------------------
2008 2007
------------------ ------------------
(Unaudited) (Unaudited)
Revenue:
Freight transportation $ 7,235,504 $ 6,103,223
Other revenues 5,040 29,469
----------------- -----------------
Total revenue 7,240,544 6,132,692
Operating expenses:
Freight transportation 6,503,413 5,558,977
Selling, general and administrative:
Salaries, benefits and consulting fees 752,795 664,198
Other selling, general and administrative 384,791 464,496
----------------- -----------------
Total operating expenses 7,640,999 6,687,671
----------------- -----------------
Loss from operations (400,455) (554,979)
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Other expense:
Gain on sale 76,787 -
Interest income 52,666 -
Interest expense, net (412,460) (1,666,389)
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Total other expense (283,007) (1,666,389)
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Net loss $ (683,462) $ (2,221,368)
================= =================
Preferred stock dividend (17,500) (75,800)
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Net loss available to common shareholders $ (700,962) $ (2,297,168)
================= =================
Loss per share-basic and diluted $ - $ (0.01)
================= =================
Weighted average shares outstanding
- basic and diluted 261,957,176 183,702,962
================= =================
See notes to unaudited consolidated financial statements
5
NUSTATE ENERGY HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended
September 30,
2008 2007
------------ -----------
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $ (683,462) $(2,221,368)
Non-cash adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation 29,785 52,852
Bad debt expense 3,059 -
Amortization of software development costs - 13,523
Amortization of intangible asset 2,296 2,296
Amortization of deferred compensation 14,766 14,763
Amortization of deferred financing costs - 10,417
Amortization of discount on notes payable 37,251 173,589
Gain on sale (76,787) -
Interest income in connection with the payment of Rentar
common stock (18,249) -
Fair value of stock options issued for services 239,966 212,355
Issuance of stock warrants for services 93,136 26,621
Interest expense in connection with the conversion of
notes payable into preferred stock - 126,765
Interest expense in connection with the assignment of
convertible notes - 703,397
Issuance of common stock
and warrants for interest and debt settlements - 454,789
Released of preferred stock in escrow as interest expense
in connection with a note payable 137,500 -
Issuance of common stock for services 25,433 53,100
Changes in operating assets and liabilities:
Increase in restricted cash - (4,400)
Decrease (increase) in accounts receivable (369,945) 50,410
Decrease in other receivable 132,527 -
(Increase) decrease in prepaid expenses 18,755 (11,064)
(Decrease) increase in accounts payable and
accrued expenses 740,900 (162,168)
----------- -----------
Net cash provided by (used in) operating activities 326,931 (504,123)
----------- -----------
Cash flows from investing activities:
Purchases of property and equipment (7,209) (54,249)
Collection on other receivables 28,030 -
Capitalized costs of software development - (80,525)
----------- -----------
Net cash provided by (used in) investing activities 20,821 (134,774)
----------- -----------
Cash flows from financing activities:
Proceeds from convertible promissory notes - 550,000
Repayments of convertible promissory notes - (1,800,000)
Repayments of loans payable - (35,839)
Proceeds from notes payable and loans payable 65,000 1,560,000
Proceeds from line of credit - 412,118
Repayments of notes payable and promissory notes (372,545) (49,752)
Proceeds from exercise of stock warrants 7,174 -
Proceeds from sale of preferred stock and warrants net
of costs of $0 and $0, respectively 17,500 -
----------- -----------
Net cash (used in) provided by financing activities (282,871) 636,527
----------- -----------
Net increase (decrease) in cash and cash equivalents 64,881 (2,370)
Cash and cash equivalents, beginning of year $ 77,539 $ 44,156
----------- -----------
Cash and cash equivalents, end of period $ 142,420 $ 41,786
=========== ===========
(Continued on next page)
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for:
Interest $ 79,184 $ 79,303
=========== ===========
Income taxes $ - $ -
=========== ===========
Non-cash investing and financing activities:
Conversion of notes and accrued interest to common stock $ 163,225 $ 745,368
=========== ===========
See notes to unaudited consolidated financial statements
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
quickly than any other method. At the same time, this software application may
7
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 unaudited financial statements for the period ended September
30, 2008 have been prepared in accordance with generally accepted accounting
principles for interim financial information and with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles as would be included in audited
financial statements and should be read in conjunction with the audited
financial statements and footnotes contained in the Company's Annual Report on
Form 10-K for the year ended June 30, 2008. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. The results of operations for the
quarterly period ended September 30, 2008 are not necessarily indicative of the
results to be expected for the fiscal year ending on June 30, 2009.
The Company has experienced net losses and working capital deficits for the past
several years. During the quarterly periods ended September 30 2008 and 2007,
the Company incurred net losses available to common shareholders of $700,500 and
$2,297,168, respectively, and, as of September 30 and June 30, 2008, had working
capital deficits of $4,465,387 and $4,563,846, 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 generate sufficient cash from debt or
equity financings and from operations to repay its past due debt obligations,
and accrued interest thereon, and its current debt and other liabilities as they
become due in the future. 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 capital as needed. 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
- ---------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiaries. All material intercompany transactions have been
eliminated.
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
- ----------------
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 and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
8
Significant estimates during the quarterly periods ended June 30, 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.
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 as of September 30 and June 30,
2008 was $310,314 and $308,483, 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. 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.
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 streams 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.
9
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.
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
$239,966 and $212,355 in additional compensation expense during the quarterly
periods ended September 30, 2008 and 2007, respectively. Such amount is included
in general and administrative expenses on the statement of operations.
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
performance of business operations, the operating environment and business
strategy, competitive information and market trends. At September 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 September 30, 2008, the Company's cash balance at one
institution exceeded the insurable limit by approximately $25,000. The Company
has not experienced any losses in such accounts and believes it is not exposed
10
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 September 30, 2008. The Company
maintains reserves for potential credit losses and such losses historically have
been within management's expectations.
NOTE 3 - CONCENTRATIONS
During the quarter ended September 30, 2008, two customers accounted for
$4,771,973 or approximately 66.0% of the Company's revenue and those same two
customers accounted for $458,064 or approximately 21.6% of accounts receivable,
net of allowance for doubtful accounts, as of September 30, 2008. During the
quarter ended September 30, 2007, one customer accounted for $4,213,416 or
approximately 68.7% of the Company's revenue and that same customer accounted
for $521,789 or approximately 26.7% of accounts receivable, net of allowance for
doubtful accounts, as of September 30, 2007. During these periods, no other
customer 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 September 30,
2008, the receivable due from Rentar Logic had decreased by approximately
$862,000 to approximately $2,138,000 as a result of Rentar Environmental
Solutions, on behalf of Rentar Logic, issuing 120,650 shares of its common stock
valued at $603,250 to repay approximately that amount of the Company's
promissory notes and accrued interest thereon to four note holders, paying
$90,000 in capital contributions on behalf of the Company, paying two of the
Company's note holders accrued interest of $36,657, paying $54,362 to one of the
Company's consultants and paying the Company $77,819.
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 for the
quarter ended September 30, 2008 of $76,787 reducing the deferred gain on asset
sales to $968,063.
As of September 30, 2008, $81,907 was due from Marquette Transportation Finance.
This amount represented approximately 8.6% of the total invoices against which
Marquette provided advances for certain CXT accounts receivable as of that date.
NOTE 5 - INTANGIBLE ASSETS
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 September 30, 2008, the net
book value of these intangible assets was $12,009.
11
The Company recorded amortization expense for all intangible assets for the
quarters ended September 30, 2008 and 2007 of $2,296 and $2,296, respectively.
At September 30, 2008, future amortization expense for the remaining intangible
assets was as follows:
Fiscal Year
-----------
2009 $ 6,888
2010 5,121
-------
$12,009
=======
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. As of September 30, 2008, the
remaining balance of the deferred gain on sale was $986,063. During the quarters
ended September 30, 2008 and 2007, the Company recorded amortization expense on
its capitalized software development of $0 and $13,523, respectively.
NOTE 6 - NOTES PAYABLE AND CONVERTIBLE NOTES PAYABLE
As of September 30 and June 30, 2008, the balances of the Company's outstanding
debt were as follows:
September 30, June 30,
2008 2008
------------- -----------
Notes payable - short term $2,387,918 $2,417,509
Convertible notes payable
(less discounts of $69,860 and $32,111) 1,411,450 1,653,047
Long term notes payable 74,064 93,215
------------- -----------
Total notes payable $3,873,432 $4,163,771
============= ===========
The Company's short term notes payable on September 30, 2008 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
12
Company's common stock held in escrow. The financing agreement with the
investor specified 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-Q, 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
such dates. As of September 30, 2008, 35,000 shares of the Series I
preferred shares, convertible into 17,500,000 shares of common stock,
had been released to the investor, of which 10,000 were released during
the quarter ended September 30, 2008 and recorded as $77,500 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%. The note
and accrued interest were not repaid by the revised maturity date and,
on October 9, 2008, the Company entered into an agreement to pay the
holder $1,250,000 by December 1, 2008 in satisfaction of all
obligations related to the note. The agreement also required the holder
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 of making the agreement, the Company expected to obtain the
funds for this payment from the proceeds of its sale of intellectual
properties and software to Rentar Logic, its minority-owned affiliate,
for $3,000,000 as disclosed in a current report on Form 8-K filed April
17, 2008. However, as of December 1, 2008, Rentar Logic had not
received any financing commitments that would enable it to pay the
Company and the Company had not repaid the note. If the Company is
unable to make the required payment prior to December 6, 2008, then the
note will be in default.
- $670,994 owed to Marquette Transportation Finance for providing funding
secured by selected CXT accounts receivable; Marquette has full
recourse to CXT for any accounts receivable that remain uncollected
after ninety days; Marquette maintained a reserve of CXT accounts
receivable equal to 10% of the gross invoice amount that the Company
recorded as accounts receivables - other and Marquette charged a
financing fee of approximately 1.3% to 1.4% of the gross invoice amount
that was recorded as interest expense
- $208,241 of 16% secured promissory notes issued to three investors that
were past due. 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.
- $125,000 of 16% unsecured promissory notes issued to one investor that
was past due. The investor also received 5,000,000 shares of common
stock that were recorded as $140,000 of interest expense.
- $25,000 of 8% unsecured short-term promissory notes to one investor
that was past due;
13
- $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;
- $77,183 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 September
30, 2008, the outstanding balance of these notes was $151,247 of which
$74,064 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 September 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
9 - "Subsequent Events" for further details.
The Company's convertible notes payable of $1,411,450, net of discounts on notes
payable of $69,860, on September 30, 2008 consisted of:
- $542,500 of 14.25% secured convertible debentures held by 21 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 $482,500
of these debentures is approximately $0.267 per share and the
conversion price for $60,000 of these debentures is $0.025 per share.
- $50,000 of 16% secured convertible promissory notes issued to one
investor which was past due. The note is secured by a lien on the
Company's assets excluding the assets of Fittipaldi Carriers, Inc. and
14
its subsidiaries. The note, 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 600,000 shares valued at $12,200 were
accrued as interest expense during the quarter ended September 30,
2008.
- $100,000 of a 16% secured convertible debenture issued to one investor
which was past due. The debenture is secured by a first priority lien
on all the Company's assets. The debenture and accrued interest thereon
are convertible into common stock at $0.025 per share and provides the
Company with a right of redemption at any time without penalty subject
to the investor's 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.
- $100,000 of an 8% unsecured convertible promissory note issued to an
unaffiliated private company that was past due. The note and accrued
interest thereon are convertible into common stock at $0.025 per share
and 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.
- $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.
- $6,714, net of $68,286 remaining balance of discounts on notes payable
recorded due to the beneficial conversion provision and warrants
associated with $75,000 of 10% convertible debentures due in March 2009
issued to two lenders; the notes, and accrued interest thereon, are
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 7,500,000 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 $75,000 that
is being amortized as interest expense over the six-month term of the
notes.
15
- $8,426, net of a $1,574 remaining balance of the discount on notes
payable recorded due to the beneficial conversion provision valued at
$2,000 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 valued using the Black-Scholes option pricing
model at $1,500.
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 9 -
"Subsequent Events" for further details.
During the quarter ended September 30, 2008, the Company recognized debt
discounts of $75,000 related to issuances of $75,000 of convertible notes
payable during the period. Amortization of debt discounts, recorded as interest
expense, was $37,251 during the quarter ended September 30, 2008.
As of September 30, 2008, the Company's long term debt of $74,064 consisted of
the long term portion of two promissory notes issued by CXT in January and March
2007 for an aggregate of $288,960 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 September 30, 2008, the outstanding
balance of these notes was $151,247 of which $77,183 was recorded as short-term
notes payable.
As of June 30, 2008, the Company's short term notes payable of $2,417,509, net
of $32,111, 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
16
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
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 ("TCE") for providing funding
secured by selected CXT accounts receivable; TCE has full recourse to
CXT for any accounts receivable that are not collected within ninety
days; TCE maintained a reserve of CXT accounts receivable equal to
approximately 10% of the gross invoice amount that the Company recorded
as accounts receivables - other and TCE charged a financing fee of
approximately 1.5% of the gross invoice amount that was recorded as
interest expense;
- $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;
17
- $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,
2008, the outstanding balance of these notes was $173,946 of which
$93,215 was recorded as long term notes payable.
As of June 30, 2008, the Company's convertible notes payable of $1,653,047, net
of discounts on notes payable of $32,111, 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.
- $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
18
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.
During the fiscal year ended June 30, 2008, the Company recognized debt
discounts of $337,933 related to issuances of convertible notes payable and
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's long term debt of $93,214 consisted of the
long term portion of two promissory notes issued by CXT in January and March
2007 for an aggregate of $288,960 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 $80,731 was recorded as short-term notes
payable.
NOTE 7 - STOCKHOLDERS' DEFICIT
Preferred Stock
- ---------------
During the quarters ended September 30, 2008 and 2007, the following changes
occurred with respect to the Company's preferred stock:
- 15,000 shares of Series I preferred stock being held in escrow were
released to the holder of a $1,250,000 16% promissory note at the rate
of 5,000 shares per month during the quarter ended September 30, 2008
as a penalty for not repaying the note and accrued interest following
its maturity date of February 8, 2008. The value of these preferred
19
shares was calculated by multiplying the market value of the Company's
common stock on each release date by the 2,500,000 shares of common
stock underlying each 5,000 shares of preferred stock for an aggregate
value of $137,500 that was recorded as interest expense. There were no
changes with respect to the Series I preferred stock during the quarter
ended September 2007
- Series F preferred stockholders converted two and approximately 23
shares into 400,000 and 4,661,445 shares of common stock during the
quarters ended September 30, 2008 and 2007, respectively.
- Series D convertible preferred stockholders converted three and 0
shares into 3,000,000 and 0 shares of common stock during the quarters
ended September, 30, 2008 and 2007, respectively.
Common Stock
- ------------
The Company issued an aggregate of 15,394,314 and 48,146,008 shares of its
common stock during the quarters ended September 30, 2008 and 2007,
respectively.
The issuances during the quarter ended September 30, 2008 consisted of:
- 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;
- 1,500,000 shares issued to an institutional investor to re-purchase
warrants to purchase an aggregate of 3,000,000 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;
- 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;
- 983,333 shares issued to three investors upon exercise of warrants at
$0.01 per share;
- 400,000 shares issued to one investor upon conversion of 2 shares of
Series F preferred stock, purchased for $5,000 per preferred share,
into common stock at $0.025 per share;
- 133,333 shares issued to a consultant working for CXT that were valued
at $2,933;
The issuances during the quarter ended September 30, 2007 consisted of:
- 13,000,000 shares valued at $390,000, in addition to a payment of
$1,800,000 and the issuance of a warrant to purchase 5,000,000 shares
of common stock with an exercise price of $0.03 per share and an
expiration date of July 31, 2011 valued at approximately $138,000 in
20
full satisfaction 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 of $13,178. The Company
recorded an additional interest expense of $454,789 in connection with
this transaction;
- 24,800,000 shares issued to four investors upon their conversion of
$620,000 of Series B secured convertible debentures, and accrued
interest thereon, as amended, that had been purchased from, or been
assigned by, the original debenture holder;
- 5,661,445 shares issued to five investors upon their conversion of
approximately 28.3 shares of Series F convertible preferred stock;
- 2,659,653 shares valued at $75,800 issued as a dividend to the holders
of Series B convertible preferred stock;
- 1,770,000 shares issued to 7 consultants recorded as $53,100 consulting
expense;
- 254,910 shares valued at $8,833 issued as an interest payment to one
holder of $100,000 of 8% Series D convertible debentures;
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.
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 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
$239,966 and $212,355 in additional compensation expense during the quarters
ended September 30, 2008 and 2007, respectively. Such amount is included in
general and administrative expenses on the statement of operations.
21
Also, during the quarter ended September 30, 2008, the Company reduced the
exercise price of outstanding options to purchase an aggregate of 27,950,000
shares of common stock to $0.01 per share held by four employees valued using
the Black Scholes Option Pricing Model at $58,132 which was recorded as
stock-based compensation and are being amortized over the remaining service
period.
For the quarter ended September 30, 2007, the Company recorded stock-based
compensation expense of $212,355 related to stock options granted in fiscal
2007, which are being amortized over the remaining service period.
A summary of the stock options as of September 30, 2008 and 2007 and changes
during the periods is presented below:
Quarter Ended September 30, 2008 Quarter Ended September 30, 2007
--------------------------------- --------------------------------
Number of Weighted Average Number of Weighted Average
Options Exercise Price Options Exercise Price
------------- -------------- ----------- --------------
Balance at June 30 38,549,993 $ 0.02 44,749,076 $0.03
Granted - - - -
Exercised - - - -
Expired - - (18,797,938) $0.03
Cancelled - - - -
------------- -------------- ------------ --------------
Balance at September 30 38,549,993 $ 0.01 25,951,138 $0.03
Options exercisable at
September 30 38,239,584 $ 0.01 21,374,059 $0.03
============= ============== ============ ==============
The following table summarizes information concerning stock options outstanding
and exercisable at September 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 36,950,000 3.55 Years $ 0.01 36,702,083 $ 0.01
$ 0.025 1,500,000 3.10 Years $ 0.025 1,437,508 $ 0.025
$ 0.38 99,993 0.30 Years $ 0.38 99,993 $ 0.38
---------------- -------------- ------------- --------------
38,549,993 $ 0.01 38,239,584 $ 0.02
================ ============== ============= ==============
22
The following table summarizes information concerning stock options outstanding
and exercisable at September 30, 2007:
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
--------------- ---------------- --------------- ----------- ---------------- --------------
$ 0.025 25,449,996 4.10 Years $ 0.025 20,872,917 $ 0.025
0.15 -0.38 501,142 0.54 Years 0.33 501,142 0.33
---------------- -------------- ---------------- --------------
25,951,138 $ 0.03 21,374,059 $ 0.03
================ ============== ================ ==============
Warrants
- --------
During the quarter ended September 30, 2008, the Company granted three-year
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 in conjunction with the issuances of an aggregate of 7 shares
of Series J convertible preferred stock to five investors; the warrants
were valued using the Black Scholes option pricing model at $11,680
recorded as a deemed dividend;
- 7,500,000 shares of common stock for $0.01 per share in conjunction
with the issuances of $75,000 of 10% convertible debentures due in
March 2009; the warrants 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 $75,000 that will be
amortized as interest expense over the six-month term of the notes; and
- granted one-year warrants to purchase an aggregate of 2,300,000 shares
of common stock for $0.01 per share to three consultants valued using
the Black Scholes Option Pricing Model at $50,332 which was recorded to
consulting expense.
Also, during the quarter ended September 30, 2008, the Company reduced the
exercise price of outstanding warrants to purchase an aggregate of 17,893,360
shares of common stock to $0.01 per share held by two consultants and a law firm
valued using the Black Scholes Option Pricing Model at $41,712 which was
recorded as consulting and legal expenses.
During the quarter ended September 30, 2007, the Company:
- reduced the exercise price of warrants to purchase an aggregate of
3,000,000 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 170%, risk-free interest
rate of 5%, no dividend yield, and an expected life of 5 years, and
recorded approximately $14,000 as consulting fees during the three
months ended September 30, 2007; and
23
- granted a three-year warrant to purchase 500,000 shares of common stock
to a consultant at an exercise price of $.05 per share for services
rendered. The Company valued these warrants utilizing the Black-Scholes
options pricing model at approximately $0.025 or $12,563 and recorded a
stock-based consulting expense of $12,563 for the three months ended
September 30, 2007.
Warrant activity for the quarters ended September 30, 2008 and 2007 is
summarized as follows:
Quarter Ended September 30, 2008 Quarter Ended September 30, 2007
-------------------------------- --------------------------------
Weighted
Weighted Average
Number of Average Number of Exercise
Warrants Exercise Price Warrants Price
----------- -------------- ----------- -----
Balance at beginning of year 91,160,626 $0.05 76,566,312 $0.11
Granted 11,200,000 $0.01 500,000 $0.05
Exercised (3,983,333) $0.01 ( - ) -
Cancelled - - ( 916,667) $0.16
Expired (4,483,333) $0.13 ( - ) -
----------- -----------
Balance at end of period 93,893,960 $0.03 76,149,645 $0.08
=========== ====== =========== =====
Warrants exercisable at end of period 93,493,960 $0.03 75,355,201 $0.08
=========== ====== =========== =====
Weighted average fair value of warrants
granted during the period $0.015 $0.02
The following table summarizes information concerning warrants outstanding and
exercisable at September 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 92,593,960 2.44 $ 0.03 92,593,960 $ 0.03
$ 0.38 - $0.50 1,000,000 1.42 $ 0.50 600,000 $ 0.50
$ 0.75 300,000 0.42 $ 0.75 300,000 $ 0.75
---------- ----------
93,893,960 93,493,960
========== ==========
24
The following table summarizes information concerning warrants outstanding and
exercisable at September 30, 2007:
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
-------------- -------- ------------- -------------- ----------- --------------
$ 0.025 - $0.15 73,942,960 2.03 $ 0.07 73,748,516 $ 0.07
$ 0.20 - $0.50 1,906,685 1.46 $ 0.42 1,306,685 $ 0.38
$ 0.75 300,000 1.42 $ 0.75 300,000 $ 0.75
---------- ----------
76,149,645 75,355,201
========== ==========
NOTE 8 - RELATED PARTY TRANSACTIONS
During the quarter ended September 30, 2008, the Company has entered into the
following transactions with its officers, directors and other related parties:
- Reduced the exercise price to $0.01 per share of five-year options to
purchase an aggregate of 11,000,000 shares of common stock to Frank
Reilly, the Company's Chief Executive Officer, of which 6,000,000 were
granted in November 2006 and 5,000,000 were granted in November 2007.
The Company valued the re-pricing of these options using the Black
Scholes Option Pricing Model at $21,371 which was recorded as
stock-based compensation.
- Reduced the exercise price to $0.01 per share of a five-year warrant to
purchase 11,000,000 shares of common stock granted in September 2006 to
Richard Hersh, the Company's current Chairman of its board of directors
and its former Chief Executive Officer. The Company valued the
re-pricing of this warrant using the Black Scholes Option Pricing Model
at $25,015 which was recorded as consulting expense.
- Reduced the exercise price to $0.01 per share of a five-year warrant to
purchase 6,000,000 shares of common stock granted in January 2007 to
Orin Neiman, Chief Executive Officer of Fittipaldi Carriers, Inc., the
parent company of Commodity Express Transportation. The Company valued
the re-pricing of these options using the Black Scholes Option Pricing
Model at $23,996 which was recorded as stock-based compensation.
NOTE 9 - SUBSEQUENT EVENTS
Since October 1, 2008, the Company has issued 20,289,459 shares of its common
stock as follows:
- 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;
- 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;
25
- 5,766,667 shares issued to three investors to re-purchase warrants to
purchase an aggregate of 10,416,666 shares of common stock for prices
ranging from $0.01 to $0.05 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;
- 1,250,000 shares issued to a consulting company for services to be
performed over one year; the shares were valued at $18,750 and will be
recorded as consulting expense ratably over the term of the consulting
agreement;
- 200,000 shares issued to one investor upon conversion of 1 shares of
Series F preferred stock, purchased for $5,000 per preferred share,
into common stock at $0.025 per share;
- 133,333 shares issued to a consultant working for CXT that were valued
at $1,067;
Also, since October 1, 2008, the Company has:
- decreased other receivables due from Rentar Logic by approximately
$36,000 as a result of Rentar Environmental Solutions, on behalf of
Rentar Logic, paying $18,000 of the Company's payroll expense; as of
December 1, 2008, the other receivables due from Rentar Logic was
approximately $2,102,000;
- issued three lenders $55,417 of 10% convertible debentures due in March
and April 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 5,766,700
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
$57,667 that will be amortized as interest expense over the six-month
term of the notes;
- granted one-year warrants to purchase 200,000 shares of common stock
for $0.01 per share to one investor valued using the Black Scholes
Option Pricing Model at $1,090 which was recorded to consulting
expense;
- 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
26
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
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 December 1,
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 will 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.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis of financial condition and results of our
operations should be read in conjunction with the unaudited consolidated
financial statements and the notes to those statements included elsewhere in
this report.
27
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.
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
28
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
$239,966 and $212,355 in additional compensation expense during the quarters
ended September 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 September
30, 2008, management expected its long-lived assets to be fully recoverable.
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 quarters ended September 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
29
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
quarters ended September 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 quarter ended September 30, 2008, revenue generated from two
customers represented $4,771,973 or approximately 66.0% of our freight
transportation revenue. During the quarter ended September 30, 2007, revenue
generated from one of these same customers represented $4,213,416 or
approximately 69.0% of our freight transportation revenue. Because our agreement
with these 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 20, 2008, we had
$2,914,551 in total debt and accrued interest thereon 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 these obligations 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
Quarter Ended September 30, 2008 compared to the Quarter Ended September 30,
2007
Revenue
Total revenue generated during the quarter ended September 30, 2008 increased by
$1,107,852 or approximately 18.1% compared with total revenue generated during
the quarter ended September 30, 2007. Most of this increase can be attributed to
CXT being the dedicated transportation provider for a major corrugated box
manufacturing plant in South Carolina for the entire first quarter of fiscal
year 2009 but only during the last month of the first quarter of fiscal year
2008.
We anticipate that our total revenue will decrease during the remaining three
quarters of fiscal year 2009 by approximately 40%. This revenue decline
primarily is a result of 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 to Rentar Logic, Inc. in April 2008. We are seeking to offset this
30
decline by obtaining additional customers for our freight transportation and
brokerage operations as well as for the products and services offered by Rentar
Logic, Inc., our minority-owned affiliate.
Operating Expenses
Total operating expenses incurred during the quarter ended September 30, 2008
increased by $953,328 or approximately 14.3% compared with the quarter ended
September 30, 2007. Nearly all of this increase was due to a $944,436 or
approximately 17.0% increase in freight transportation expenses. The increase in
freight transportation expenses during the quarter ended September 30, 2008 was
directly attributed to the increase in freight transportation revenue as they
are variable costs that change by relatively the same percentage as freight
transportation revenue assuming a constant gross margin is maintained. We expect
freight transportation expenses during the remaining three quarters of fiscal
year 2009 to decrease proportionately with our estimated 40% decrease in freight
transportation revenue during the remaining three quarters of fiscal year 2009.
Selling, general and administrative expenses were nearly unchanged on a
percentage basis as a increase of $88,597 or approximately 13.3% in salaries,
benefits and consulting fees mostly was offset by a decrease of $79,705 or
approximately 17.2% in other selling, general and administrative expenses. The
increase in salaries, benefits and consulting expenses during the quarter ended
September 30, 2008 consisted of a $65,038 increase by our corporate operations
and a $23,559 increase by CXT. This increase was offset by a decrease in other
selling, general and administrative expenses which consisted of decreases of
$78,726 by our corporate operations and $6,498 by Power2Ship Intermodal and an
increase of $5,519 by CXT. Management expects quarterly other selling, general
and administrative expenses for existing operations during the remainder of
fiscal year 2009 to be comparable to the amount incurred during the first
quarter of fiscal year 2009.
Other Income (Expenses)
Total other expenses decreased by $1,383,382 or approximately 83.0% during the
quarter ended September 30, 2008 as compared with the quarter ended September
30, 2006. This decrease primarily was due to a decrease in interest expense, net
of interest income, of $1,306,595 or approximately 78.4%. In addition, other
expense was reduced due to a $76,787 gain on sale recorded as a result of
payments made to the Company by Rentar Logic.
The decrease in interest expense, net of interest income, primarily was a result
of reductions in non-cash interest expense incurred in the quarter ended
September 30, 2007 in connection with:
- conversions of notes payable into Series F preferred stock of $126,765;
- assignments of $700,000 of convertible debentures as additional
consideration to five lenders that provided the Company with
$2,000,000; and
- common stock and warrants issued for interest and debt settlements of
$454,789;
plus a reduction of $136,338 in discounts on notes payables recorded as
interest expense during the quarter ended September 30, 2008.
These reductions in non-cash interest expenses partially was offset by an
increase in non-cash interest expense of $137,500 incurred in the quarter
31
ended September 30, 2008 in connection with the release of Series I
preferred stock as a penalty for not repaying a $1,250,000 secured
promissory note to one investor;
Management expects quarterly other expenses during the remainder of fiscal year
2009 to be lower than during the quarter ended September 30, 2008 primarily
since we are negotiating with the holders of our convertible debentures and
promissory notes to convert their some or all of their debt securities into our
equity securities. However, we cannot provide any assurance that such
negotiations will be successful and, if not, if we can raise sufficient capital
to satisfy the obligations related to these debentures and promissory note.
Further, if outstanding debt is re-structured or replaced with other debt, then
interest expense could increase as a result of costs incurred in such lending
arrangements that may include higher interest rates, penalties and other
transaction fees.
LIQUIDITY AND CAPITAL RESOURCES
We have experienced losses and negative cash flows from operations since our
inception, and the report of our independent registered public accounting firm
on our financial statements for the fiscal year ended June 30, 2008 states that
our historical financial results raise substantial doubt about our ability to
continue as a going concern. As of September 30, 2008, we had an accumulated
deficit of $37,709,285, a stockholders' deficit of $3,720,464, and unrestricted
cash and cash equivalents of $142,420.
The Company's working capital deficit decreased by $98,459 or approximately 2.2%
to $4,465,387 at September 30, 2008 as compared with $4,563,846 at June 30,
2008. This lower deficit was attributed to current assets increasing by $453,757
while current liabilities increased by $355,298.
The increase in current assets from June 30 to September 30, 2008 resulted from
increases in:
- Cash of $64,881 and
- Accounts receivable of $716,732
that partially were offset by:
- Decreases in receivables - affiliates and other of $309,101,
primarily from the repayment of a portion of the obligation from
Rentar Logic for their purchase of our intellectual properties in
April 2008, and
- Prepaid expenses of $18,755.
The increase in current liabilities from June 30 to September 30, 2008 resulted
from increases in accounts payable and accrued expenses of $705,624 that
partially were offset by decreases in:
- Short term and convertible notes payable of $271,188;
- Deferred gain on sale of $76,788 and accrued salaries of $2,350.
Our $64,881 increase in unrestricted cash and cash equivalents from June 30 to
September 30, 2008 consisted of $326,932 provided by operating activities and
$20,821 provided by investing activities that partially were offset by $282,871
used in financing activities.
32
The Company's net cash from operating activities improved by $831,054 to
$326,931 during the quarter ended September 30, 2008 compared with a use of
$504,123 during the quarter ended September 30, 2007 as a result of:
- Net loss decreasing by $1,537,906 or 69.2%; and
- Cash provided by changes in operating assets and liabilities
increasing by $649,459 to $522,237 from a use of $127,222 in the
quarter ended September 30, 2007
that partially were than offset by:
- Adjustments to reconcile the net loss to net cash used in operating
activities of $1,356,311 associated with non-cash expenses that
consisted of decreases in:
- Depreciation and amortization totaling $183,342;
- Gain on sale of $76,787;
- Expenses associated with the issuance of our common stock and
warrants as payment for services, interest and debt settlement of
$415,941;
- Interest expense in connection with the conversion of notes
payable and assignment of convertible debentures of $830,162; and
- Interest income in connect with the payment of Rentar common stock
of $18,249;
that partially were offset by increases in:
- Interest expense of $137,500 related to the release of Series I
preferred stock as a penalty for not repaying a $1,250,000 secured
promissory note to one investor;
- Fair value of stock options issued to employees of $27,611; and
- Bad debt expense of $3,059.
Net cash from investing activities during the quarter ended September 30, 2008
improved by $155,595 to $20,821 provided by investing activities compared with
$134,774 used in investing activities in the quarter ended September 30, 2007.
The increase resulted from decreases of $47,040 in purchases of property and
equipment and $80,525 in capitalized costs of software development combined with
$28,030 collected on the note receivable from Rentar Logic from the sale of its
intellectual properties in April 2008.
Net cash provided by financing activities decreased by $919,398 to a use of
$282,871 during the quarter ended September 30, 2008 compared with a source of
$636,527 during the quarter ended September 30, 2007 as a result of a:
- decrease of $2,045,000 in proceeds received from issuances of
promissory notes and notes payable;
- decrease of $412,118 in proceeds received from our line of credit which
terminated during fiscal year 2008; and
- increase of $322,793 in repayments of notes payable and promissory
notes;
33
that partially were offset by:
- Reduced repayments of promissory notes, loans payable and notes payable
by $1,835,839;
- Proceeds of $17,500 from the sale of preferred stock and warrants; and
- Proceeds of $7,174 from the exercise of stock warrants;
We estimate that our cash on hand on December 1, 2008 will fund our operating
activities for approximately ninety days. This estimate is based on our cash and
cash equivalents of $142,420 as of September 30, 2008 and the proceeds received
since September 30, 2008 from the issuance of $55,417 of our 10% convertible
debentures to three investors and $60,461 received from Rentar Environmental
Solutions, on behalf of Rentar Logic, related to their purchase of our
intellectual properties in April 2008. If we are unable to obtain additional
working capital before then, we will request that certain management personnel
defer some or all of their compensation and attempt to further reduce our
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 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 December 1, 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, all of which is past due. If we
default on our obligations under any 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.
34
ITEM 3. 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.
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
quarterly 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 quarterly 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
35
Internal Control-Integrated Framework. Our management has concluded that, as of
September 30, 2008, our internal control over financial reporting was not
effective based on these criteria.
During the assessment of our internal controls as of September 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 quarterly report on Form 10-Q, 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.
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.
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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
36
ITEM 6. EXHIBITS
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive
Officer and Principal Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Principal Financial
and Accounting Officer
32.1 Certification Pursuant to 18 U.S.C. Section 1350 as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 of
Chief Executive Officer, Principal Executive Officer and
Principal Financial and Accounting Officer
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: December 3, 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
- -------------------
Frank P. Reilly Chief Executive Officer, Principal Executive
Officer and Principal Financial and
Accounting Officer December 3, 2008
/s/ Richard Hersh Director December 3, 2008
- -----------------
Richard Hersh
37