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| FCPN.OB > SEC Filings for FCPN.OB > Form 10-Q on 14-Nov-2008 | All Recent SEC Filings |
14-Nov-2008
Quarterly Report
FORWARD-LOOKING STATEMENT AND INFORMATION
We are including the following cautionary statement in this Form 10-Q to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of First Capital International, Inc. (the "Company"). Forward-looking statements include statements concerning plans, objectives, goals, strategies, expectations, future events or performance and underlying assumptions and other statements which are other than statements of historical facts. Certain statements contained herein are forward-looking statements and, accordingly, involve risks and uncertainties which could cause actual results or outcomes to differ materially from those expressed in the forward-looking statements.
Our expectations, beliefs and projections are expressed in good faith and we believe that they have a reasonable basis, including without limitations, management's examination of historical operating trends, data contained in our records and other data available from third parties, but there can be no assurance that our expectations, beliefs or projections will result or be achieved or accomplished. In addition to other factors and matters discussed elsewhere herein, the following are important factors that, in our view, could cause actual results to differ materially from those discussed in the forward-looking statements: our ability to operate on a global basis; our ability to effectuate and successfully operate acquisitions, and new operations; our ability to obtain acceptable forms and amounts of financing to fund current operations and planned acquisitions; the political, economic and military climate in nations where we may have interests and operations; the ability to engage the services of suitable consultants or employees in foreign countries; and competition and the ever-changing nature of the technology industry. We have no obligation to update or revise these forward-looking statements to reflect the occurrence of future events or circumstances.
The following discussion should be read in conjunction with our unaudited consolidated interim financial statements and related notes thereto included in this quarterly report and in our audited consolidated financial statements and Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") contained in our Form 10-KSB for the year ended December 31, 2007. Certain statements in the following MD&A are forward looking statements. Words such as "expects", "anticipates", "estimates" and similar expressions are intended to identify forward looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The Company's discussion and analysis of its financial condition and results of operations are based upon its consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances. These estimates and assumptions provide a basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates making it reasonably possible that a change in the estimates could occur in the near term.
REVENUE RECOGNITION
The Company enters into two types of sales of VIP Systems: sales to end-users and sales to resellers. Revenue on sales to end-users is recognized upon completion of installation and testing of the system. Revenue on sales to resellers is recognized either upon delivery of systems or for major long-term projects, recognized upon completion of each phase of installation.
The company entered into consulting services for power plant projects in Russia in 2007. Revenue from these services are billed and recognized monthly.
Payments and advances received for future sales or installation of systems are deferred until the delivery and/or installation is complete. For major long-term projects, revenue is recognized upon completion of each phase of installation.
STOCK-BASED COMPENSATION
Until December 31, 2005, we accounted for employee stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees, and had adopted the disclosure-only alternative of SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure. Under the intrinsic value method, we only recorded stock-based compensation resulting from options granted at below fair market value. Effective January 1, 2006, we adopted SFAS No. 123R, "Share Based Payments", which requires that we measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award, and recognize that cost over the vesting period.
Valuation and Amortization Method - We estimate the fair value of stock options granted using the Black-Scholes option-pricing formula and a single option award approach. This fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period.
Expected Term - The expected term represents the period that our stock-based awards are expected to be outstanding and is determined based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior as influenced by changes to the terms of its stock-based awards.
Expected Volatility - Stock-based payments made prior to January 1, 2006 were accounted for using the intrinsic value method under APB 25. The fair value of stock based payments made subsequent to December 31, 2005 is valued using the Black-Scholes valuation method with a volatility factor based on our historical stock trading history.
Risk-Free Interest Rate - We base the risk-free interest rate used in the Black-Scholes valuation method on the implied yield currently available on U.S. Treasury securities with an equivalent term.
Estimated Forfeitures - When estimating forfeitures, we consider voluntary termination behavior as well as analysis of actual option forfeitures.
Compensation expenses for Restricted Stocks issued to employees and others are calculated based on the fair market value on the grant date. We recognized $9,831 stock-based compensation cost in the three months ended September 30, 2008 for the options and there were 0 shares of restricted stock issued to employees and others.
The following description of our business, our financial position and results of operations should be read in conjunction with our Unaudited Consolidated Condensed Financial Statements and the Notes to Financial Statements contained in this report on Form 10-Q.
RECENT ACCOUNTING PRONOUNCEMENTS
The Company does not expect the adoption of recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.
INTRODUCTION
First Capital International, Inc. (the "Company"), formerly Ranger/USA, Inc., incorporated as a Delaware Corporation on April 21, 1994, assumed its current name in August 1998 when new management took over the Company. At the time new management assumed control, the Company had no existing operations, and began implementation of a new business plan. Beginning in 1998, the Company's original focus was the identification, acquisition and operation of businesses serving or focused on Central and Eastern European markets. Since 2001, the Company has focused its operations on the development of its "smart house" technology and markets for the Company's new home command center.
References to First Capital International, Inc. in this Form 10-Q include First Capital International, Inc. and our wholly-owned subsidiary VIP Systems, Inc., which is a home automation and video surveillance solutions firm.
At the annual meeting of the stockholders held on July 14, 2006, the stockholders approved a 1-for-3 reverse split. The effect of our reverse split is reflected in all references to the price of our common stock and the audited financial statements herein.
Our principal executive offices are located at 5120 Woodway, Suite 9024, Houston, Texas 77056; voice: (713) 629-4866 fax: (713) 629-4913. Our corporate web site is at www.FirstCap.net.
We are engaged in the design, production and sale of security system for homeland security applications as well as home automation and video surveillance systems, including highly sophisticated marine video surveillance applications. It is our intent to grow through the continued development and marketing of this new and innovative technology.
Patents
In October 2001, we filed a US patent application for our VIP Systems(TM) with fully integrated software/hardware and began assembling units for Beta testing. On September 30, 2003, we received Patent # US 6,628,510 for our VIP Systems(TM).
We developed an Industrial Security Solution ("Solution") for complex industrial projects including projects related to the oil and gas industry. This Solution allows a client to monitor remote sites, record events on video and exercise full control over any power units at the industrial site remotely. This system can also be used as an anti-terrorist device to preclude unauthorized use of important industrial equipments in case of a takeover attempt. We believe that this Solution can be marketed through governmental agencies, as well as major industrial companies. At the present time, we are looking into possible alliances in order to market this product worldwide.
In January 2004, we filed an application for a patent with the U.S. Patent Office for use of our technology in a manner that addresses issues of the new Air Sea Ground Defense System ("ASGDS") with Active Control Link. This new ASGDS technology allows an air/sea and/or ground control center to actually see inside an aircraft or ship when it is still in the air/open sea and allow the ground center to take control of the respective aircraft/ship in the event of a hijacking attempt or other terrorist attempts to take over an airplane/ship. In cooperation with the US Coast Guard and the Port of Houston Authorities, we successfully completed the pilot project and installed a Marine Security System on one of the MARAD's military vessels at the Port of Houston. The presentation of this technology was held on October 12, 2004 at the Port of Houston facilities.
Our second demonstration of our ASGDS was on May 11, 2006. This event was hosted by the Port of Houston Authority and US Department of Homeland Security. At this event, we demonstrated our technology, fully integrated with the satellite broadband service and the new DefendIR camera system, manufactured by ICX, Inc. In June 2006, we signed an exclusive two year contract to market ICX cameras in the former Soviet Union countries.
In the first and second quarters of 2006, we had several meetings with the representatives of Russian Government regarding our ASGDS and believe that good opportunities exist in Russia for our security solutions, due to rapidly growing business of LNG export from Russia to USA.
PROJECTS
During 2005-2006, we completed several security installations at Marriott Hotel Group properties in Texas, Florida and Louisiana. Our marketing efforts with the Marriott Hotels allowed us to secure contracts to install video surveillance systems in several Marriott Hotels in Florida and Texas. We are now working on much larger proposals for their new "under construction" hotels.
Projects in Florida
In March 2005, we signed a contract with the Dinerstein Companies, a large real estate developer, to provide basic home automation/security package for their mid-rise project in Florida. We're currently conducting upsell marketing efforts and have been able to secure upsell option for 40% of the development.
We are bidding on several hi-rise commercial building projects in Florida and believe that our efforts will bring contracts to provide CCTV/automation solutions for these projects. We believe our Florida operations are positioned to bring substantial revenue for the company.
Projects in Texas
We are bidding on several high-rise condominium projects in the Houston area. As a result, we signed an initial contract in August 2007 with a new luxury high-rise complex in Houston to install security solution as well as to design for the owners a new state-of-the-art "Concierge" Digital Living Automation software. This has created new opportunities for our home automation solutions. We started marketing the "Concierge" concept into other regions and are working on several proposals. This hi-rise condo project will also be a good source for the company's revenue through upsell activities.
We are also actively involved in Houston hotels installation projects, predominantly Marriott Hotels as well as upscale residential projects in Houston.
We are considering launching our "Concierge" software platform nationwide. We have numerous discussions with integrators and hi-rise management companies that showed interest in purchasing our concierge platform. As a result, we are developing strategies for selling and marketing the "Concierge" platform nationwide.
Projects in Russia
In May 2007, we signed an agreement with a major Russian electronic defense contractor, OAO Ruselectronics. Under this agreement, we will develop a marketing strategy to sell our products for the Russian market and Ruselectronics will provide the resources to complete the developed projects in Russia. We believe this forthcoming demonstration and support from Ruselectronics and the recent interest in this technology from the members of the Russian Congress and Senate will give us opportunities to implement this technology jointly with Ruselectronics in the Russian Federation.
In September 2007, we have signed a joint working agreement with Decisive Analytics Corporation, a US defense system integrator. We are working with them on possibilities of implementing some of our technologies into their current research product. We are also working with them on possibilities on designing complex security solutions for potential power plant projects in Russia currently under development with URS, Washington Group Division.
Other International Projects
We are currently bidding on a full security solution project in Equatorial Guinea for Marathon Oil Company. During 2007, we visited Equatorial Guinea and surveyed a future job site. As a result, we became very familiar with the project and believe we can complete should we be awarded the project. We are also currently considering alliances with several companies in the Middle East to capitalize on the rapid growth in the region.
We are working with a marketing company in Kuwait to become our representative in the middle east in order to penetrate highly lucrative market in Dubai.
Trade Shows
To build awareness and demand for our VIP Systems, we have participated in a number of key trade shows, including:
· International Security Conference in Brussels, Belgium in February 2007;
· International Anti-Terrorist Security Conference in Moscow, Russia in November 2006;
· Port of Houston Homeland Security Demonstration event using US Merchant Fleet ship - "New challenges for Port Security" in Houston, Texas in May 2006;
· Houston Apartment Association Show in Houston, Texas in April 2006;
· International Security Conference in Brussels, Belgium in February 2006;
· US Department of Homeland Security Exhibit in Washington, DC in March 2005;
· US Trade Mission and exhibit in Moscow, Russia in February 2005;
GOING CONCERN CONSIDERATION
Since we began operations, we have been dependent on debt and equity raised from individual investors and related parties to sustain our operations. We incurred net losses of $313,142 during the nine months ended September 30, 2008. We also had negative cash flows from operations of $205,147 during the nine months ended September 30, 2008. These factors and our history of recurring losses raise substantial doubt about our ability to continue as a going concern. Our long-term viability as a going concern is dependent upon three key factors as follows:
· Our ability to obtain adequate sources of debt or equity funding to meet current commitments and fund the continuation of our business operations;
· Our ability to acquire or internally develop viable businesses; and
· Our ability to ultimately achieve profitability and cash flows from operations in amounts that would sustain our operations.
As a result of potential liquidity problems, our auditors have added an explanatory paragraph in their opinion on our financial statements for the years ended December 31, 2007 and 2006, indicating that substantial doubt exists concerning our ability to continue as a going concern.
Our ability to achieve profitability depends on our ability to successfully develop and market home automation and video security technology. We can give no assurance that we will be able to achieve commercial success. We are subject to all risks inherent in a growing venture, including the need to develop marketing expertise and produce significant revenue. We may incur losses for the foreseeable future due to the significant costs associated with home automation and video security technology operations.
Recurring losses have resulted in an accumulated deficit of $11,426,790 on September 30, 2008. Revenues for the nine months ended September 30, 2008 were $528,908 compared to revenues of $348,126 for the nine months ended September 30, 2007. The increase in revenue is the result of our marketing efforts with real estate developers and hotel chains.
Our losses were attributable primarily to the developmental stage of our business. Our new focus has resulted in our further development of VIP Systems(TM) that we feel will improve our operating results. Although we believe that our revenues will increase, and that we will ultimately be profitable, we can provide no assurance that profitability will occur.
COMPETITION
There are presently several major competitors in the home automation industry. Many of our competitors are more established companies with substantially greater capital resources and substantially greater marketing capabilities than us. We cannot give any assurances that we will be able to successfully compete in this market.
RESULTS OF OPERATION FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO THE THREE MONTHS ENDED SEPTEMBER 30, 2007
During the three months ended September 30, 2008, our revenues were $228,436 as compared to $148,880 for the three months ended September 30, 2007 because of our marketing efforts with real estate developers.
During the three months ended September 30, 2008, selling, general and administrative expenses decreased by $35,591 or 19% to $176,468 as compared to the three months ended September 30, 2007. This was mainly attributable to decreases in materials and personnel related expenses partially offset by an increase in contracted services.
During the three months ended September 30, 2008, we had a net loss of $44,984 as compared to a net loss of $149,175 in the three months ended September 30, 2007.
RESULTS OF OPERATION FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 2007
During the nine months ended September 30, 2008, our revenues were $528,908 as compared to $348,126 for the nine months ended September 30, 2007, due to our marketing activities.
During the nine months ended September 30, 2008, selling, general and administrative expenses decreased by $226,964 or 31% to $520,923 as compared to the nine months ended September 30, 2007. The net decrease was mainly attributable to decreased issuance of options to employees and management which resulted in decreased charges to compensation expense, decrease in materials charges, personnel related expenses, travel and entertainment expenses partially offset by increases in contracted services, professional fees and rent expenses.
During the nine months ended September 30, 2008, we had a net loss of $313,142 as compared to a net loss of $633,830 in the nine months ended September 30, 2007.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2008, we had cash resources of $2,102. We estimate that during the three months ending December 30, 2008, our cash requirements will be approximately $180,000 (or approximately $60,000 per month). We believe that our revenue-producing operations will expand. Such an expansion of operations will require funding for pending contracts. We anticipate raising additional capital through the sale of our stock or through borrowing. Although we plan to obtain additional financing through the sale of our common stock and by obtaining debt financing, there is no assurance that capital will be available from any source, or, if available, upon terms and conditions acceptable to us.
We currently have no material commitments for capital expenditures for our U.S. operations. We anticipate that the following expenditures will be made in 2008 if funds are available: $100,000 for continued development of our home automation and video security business and $250,000 for marketing expenses.
During the nine months ended September 30, 2008, we received $56,600 cash from the sale of our securities and $6,265 in subscription receivables. A $12,000 short-term loan was subsequently converted into a stock purchase transaction.
During 2008, we obtained loans from Alex Genin, our Chief Executive Officer and Acting Chief Financial Officer and companies controlled or related to him. Mr. Genin is a significant stockholder of the company. The following is a summary of all the loan transactions through September 30, 2008.
United Capital Group, a company controlled by Alex Genin, our chief executive officer has several loans outstanding under 14 separate promissory notes bearing 8% interest rate and maturing between March 2009 and December 2010. None of these notes were collateralized. As of September 30, 2008, the total principal amount due on all notes to United Capital Group is $198,983.
During 2008, Alex Genin, our chief executive officer, made several loans to us under six separate promissory notes for a total principal amount of $44,000 which bear interest at the rate between 0% and 8% and which are due between January 2010 and April 2011. No interest has been imputed due to the immateriality of the amount. Five promissory notes originally due in 2008 bearing interest between 6% and 7% for a total principal amount of $111,200 were extended between three and five years. Seven promissory notes due between February 2008 and October 2008 were offset by an option Mr. Genin exercised in January 2008. The total principal and interest paid on these notes are $63,469 and $10,210 respectively. Four promissory notes with a total principal amount of 36,000 were paid off. None of these notes were collateralized. As of September 30, 2008, the total principal amount due on all notes to Alex Genin is $209,000.
During 2008, Eastern Credit Limited, Inc., a company controlled by Alex Genin, our chief executive officer, made a loan to us under an $18,000 promissory note which bear interest at the rate of 7% and which is due February 2011. During the same period, eleven notes maturing between January 2008 and October 2008 for a total principal amount of $100,500 which bear interest at the rate ranging between 6% and 7% were extended between three and four years. Two promissory notes originally made in October 2004 and August 2006 bearing 8% interest for a total principal amount of $3,000 were paid off. A promissory note bearing 8% interest for a total principal amount of $18,000 to First National Energy Corporation, a company controlled by Alex Genin, was re-assigned to Eastern Credit Limited, Inc. in July 2008. None of these notes were collateralized. As of September 30, 2008, the total principal amount due on all notes to Eastern Credit Limited is $245,300.
During 2008, ECL Trading Co, Inc., a company controlled by Alex Genin, our chief executive officer, made a loan to us under a $14,500 promissory note bearing 8% interest and which is due February 2011. A partial payment in the amount of $6,500 was made on this note. This note was not collateralized. As of September 30, 2008, the total principal amount due on all notes to ECL Trading is $8,000.
During 2008, First National Energy Corporation, a company controlled by Alex Genin, our chief executive officer, made a loan to us under a $20,000 promissory note bearing 8% interest and which is due February 2010. A partial payment in the amount of $2,000 was made on this note. The remaining balance of $18,000 on this note was re-assigned to Eastern Credit Limited, Inc., a company controlled by Alex Genin.
First National Petroleum, Inc., a company controlled by Alex Genin, our chief executive officer, has two outstanding promissory notes which bear interest at the rate of 8% and are due April 2009 and June 2010. None of these notes were collateralized. As of September 30, 2008, the total principal amount due on all notes to First National Petroleum is $14,500.
During 2008, Pacific Commercial Credit, Ltd., a company controlled by Alex Genin, our chief executive officer, made loans to us under five separate promissory notes for a total principal amount of 41,500 bearing 8% interest and which are due between March and May 2011. These notes were not collateralized. As of September 30, 2008, the total principal amount due on all notes to Pacific Commercial Credit, Ltd. is $87,400.
Stromberg Development, Inc., a company owned by Alex Genin, our chief executive officer, had eight outstanding promissory notes made during 2007 which bear interest at the rate of 8% and are due in three years between April 2010 and September 2010. During 2008, three promissory notes for a total principal amount of $9,300 were paid off. None of these notes were collateralized. As of September 30, 2008, the total principal amount due on all notes to Stromberg Development, Inc. is $35,000.
In May 2008, one other director made a short term loan to us for a total principal amount of $18,000 bearing 6% interest and which is due in 2008. This loan was not collateralized.
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