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| AXTG.PK > SEC Filings for AXTG.PK > Form 10-K/A on 15-Jun-2009 | All Recent SEC Filings |
15-Jun-2009
Annual Report
Forward Looking Statements and Information
This document contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties and are based on the beliefs and assumptions of management and information currently available to management. The use of words such as "believes," "expects," "anticipates," "intends," "plans," "estimates," "should," "likely" or similar expressions, indicates a forward-looking statement.
Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. Future results may differ materially from those expressed in the forward-looking statements. Many of the factors that will determine these results are beyond our ability to control or predict. Stockholders are cautioned not to put undue reliance on any forward-looking statements, which speak only to the date made. For those statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events, or performance and underlying assumptions and other statements, which are other than statements of historical facts. These statements are subject to uncertainties and risks including, but not limited to, product and service demands and acceptance, changes in technology, economic conditions, the impact of competition and pricing, and government regulation and approvals. The Company cautions that assumptions, expectations, projections, intentions, or beliefs about future events may, and often do, vary from actual results and the differences can be material. Some of the key factors which could cause actual results to vary from those the Company expects include changes in product prices, the timing of planned capital expenditures, availability of acquisitions, operational factors, the condition of the capital markets generally, as well as our ability to access them, and uncertainties regarding environmental regulations or litigation and other legal or regulatory developments affecting our business.
Our expectations, beliefs and projections are expressed in good faith and are believed to have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties. There can be no assurance, however, that our expectations, beliefs or projections will result, be achieved, or be accomplished. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. We undertake no duty to update these forward-looking statements.
Results of Operation
Year Ended December 31, 2008:
Consolidated net sales for the year ended December 31, 2008 and 2007 totaled $686,528 and $162,195, respectively, for an increase of $524,333. This increase is due to increased product awareness as the Company continues to market its ballasts nationwide. Cost of goods sold for the year ended December 31, 2008 and 2007 was $566,694 and $126,589, respectively, an increase of $440,105. The increase is primarily due to our increase in sales volume. After deducting costs of goods sold, including warehouse salaries and allocated overhead, we finished the year ended December 31, 2008 with $119,834 in gross profit, compared to a gross profit of $35,606 for the year ended December 31, 2007, an increase of $84,228. Gross profit as a percentage of sales for the year ended December 31, 2008 was 17.4%, compared to 22.0% for the year ended December 31, 2007, a 4.6% decrease in gross profit as a percentage of sales. This decrease in gross profit as a percentage of sales is primarily attributable to promotional discounts and a one-time write-off of defective inventory for the year ended December 31, 2008, which promotional discounts and write-off was not present for the year ended December 31, 2007. However, our increased sales volume has allowed us to improve our overall gross profit by covering relatively fixed and unchanged overhead costs.
For the year ended December 31, 2008, operating expenses totaled $924,608 compared to $792,474 for the year ended December 31, 2007, an increase of $132,134. This increase is primarily due to additional professional fees, including audit, accounting and legal fees, incurred in connection with our Form 10 filing and obtaining listing on the OTC Bulletin Board. For the year ended December 31, 2008 compared to the year ended December 31, 2007, professional fees increased by about $99,000, salaries and wages increased by approximately $24,000 (which increase is due to an increase in amounts paid to existing employees), consulting fees and commissions increased by roughly $54,000 (which increase is due to an increase in sales growth) and research and development expenses rose by approximately $17,000, which was partially offset by a $63,000 decrease in advertising and marketing expenses.
For the year ended December 31, 2008, interest expense was $843,543 compared to $20,845 for the year ended December 31, 2007, an increase of $822,698. This increase was the result of the Company issuing a convertible note payable that had significant transaction costs that are being amortized and debt discounts related to an original issue discount, warrants issued and a beneficial conversion feature that are being accreted over the term of the debt to interest expense. Non-cash interest expense for the year ended December 31, 2008 included $737,973 attributable to the amortization of the original issue discount, beneficial conversion feature, debt issuance costs and warrant discounts. The details of this note are listed below, in "Liquidity and Capital Resources."
For the year ended December 31, 2008, the net loss was $1,644,296 compared to a net loss of $775,019 for the year ended December 31, 2007, an increase of $869,277. This increase in net loss is attributable to the increase in interest expense and operating expenses, partially offset by the increase in gross profit, as described above.
Assets, Liabilities and Employees; Research and Development
As of December 31, 2008, the Company has total current assets of $565,289, which includes $12,205 of cash, $150,609 of accounts receivable, $337,566 of inventory, $58,497 of inventory deposits and $3,412 of prepaid expenses. As of December 31, 2008, the Company also has $18,188 of property and equipment, less accumulated depreciation of $12,899, and total other assets of $194,710, consisting primarily of debt financing costs.
As of December 31, 2008, the Company has total liabilities, consisting entirely of current liabilities, of $1,323,399, including $145,108 of accounts payable, $92,053 of accrued expenses, $600,601 of convertible note payable and $485,637 of accrued salary of officers/stockholders.
As of December 31, 2008, the Company has a working capital deficit of $761,110.
At December 31, 2008 our ballast inventory represented 44.3% of our assets. Inventory is manufactured in China and is shipped to our warehouse in Lincoln, Nebraska. The time from ordering the product to receipt of the product can exceed 90 days. We are currently working to reduce this turnaround time to 60 days. We maintain our inventory at levels that are deemed reasonable based upon projected sales.
At this time, we do not anticipate purchasing or selling any significant equipment or other assets in the near term. Neither do we anticipate any imminent or significant changes in the number of our employees. We may, however, increase the number of independent sales representatives in the event that we expand into other markets or our current market significantly increases.
We expect that we will invest time, effort, and expense in the continued development and refinement of our current and next generation ballasts, through our relationship with CLTC and the power companies.
Liquidity and Capital Resources; Anticipated Financing Needs
For the year ended December 31, 2008, we incurred net operating losses aggregating $804,774 which was the result of funding, marketing and advertising, business development and other activities as discussed above.
Net cash of $820,582 was used in operating activities during the year ended December 31, 2008, compared to $763,382 in cash used for the year ended December 31, 2007. Net cash used in operating activities for the year ended December 31, 2008 is primarily attributable to $1,644,296 of net loss and an increase of $111,293 in accounts receivable, partially offset by $60,060 of amortization of original issue discount, $137,372 of amortization of debt issuance cost, $540,541 of non-cash interest expense related to issuance of warrants and beneficial conversion feature, $96,105 of increased accounts payable, and $41,931 of increased accrued salary to officers/stockholders.
Net cash used in investing activities for the year ended December 31, 2008 totaled $1,095, compared to $909 used for the year ended December 31, 2007.
Net cash of $819,354 was provided by financing activities during the year ended December 31, 2008, compared to $582,569 in cash provided for the year ended December 31, 2007. Cash flows from financing activities for the year ended December 31, 2008 included payments for debt issuance costs totaling $203,572 and a repayments of the bank note of $195,074, offset by cash proceeds from debt issuance of $1,218,000.
On April 25, 2008, the Company issued a convertible debt instrument generating net cash proceeds of $1,218,000 for working capital purposes and to pay off the Company's bank note which was due on June 10, 2008. The convertible note payable is a 10% Senior Secured Convertible Promissory Note in the principal amount of $1,388,889. The face amount of the note of $1,388,889 was reduced by an original issue discount of $138,889 and other issuance costs of $32,000 to arrive at net proceeds of $1,218,000. The note has a maturity date of April 25, 2010 and is secured by all assets of the Company. The note accrues interest at a rate of 10% per annum, and such interest is payable on a quarterly basis commencing July 26, 2008, with the principal balance of the Note, together with any accrued and unpaid interest thereon, due in twelve monthly installments beginning May 1, 2009. The note is convertible at the option of the holder at any time into shares of the Company's common stock at an initial conversion price of $0.26 per share.
Under the terms of the note and as additional consideration for the loan, the Company issued a five-year warrant to purchase up to 5,341,880 shares of its common stock at an exercise price of $0.26 per share which was deemed to have a fair value of $861,778. The Company calculated the intrinsic value of the beneficial conversion feature embedded in the note. As the amount of the beneficial conversion feature exceeded the fair value allocated to the note, the amount of the beneficial conversion feature to be recorded was limited to the proceeds allocated to the note. Accordingly, the beneficial conversion feature was calculated to be $388,222 and was recorded as an additional discount on the Note.
Non-cash interest expense for the year ended December 31, 2008 included $737,973 attributable to the amortization of the original issue discount, beneficial conversion feature, debt issuance costs and warrant discounts.
In addition to the net proceeds of $1,218,000 received from the convertible debt issuance on April 25, 2008 and anticipated revenue increases from the sale of our current ballasts, we expect to seek additional capital funding for the final development and introduction of our next generation ballast, as well as for the purchase of adequate inventory. On March 25, 2009, the Company received cash proceeds of $150,000 on a 90 day 10% Senior Secured Note Payable. Assuming that we successfully obtain additional funding, of which there can be no assurances, we believe that such funding will be sufficient to finance our operations through December 31, 2009. Thereafter, we believe that revenues from our current and next generation products will be sufficient to fund operations, of which there can be no assurances.
Additional financing may not be available on terms favorable to us, especially in light of current debt and equity markets. If additional funds are raised by the issuance of our equity securities, such as through the issuance and/or exercise of common stock warrants, then existing stockholders will experience dilution of their ownership interest. If additional funds are raised by the issuance of debt or other types of (typically preferred) equity instruments, then we may be subject to certain limitations in our operations, and issuance of such securities may have rights senior to those of the then existing holders of our common stock. If adequate funds are not available or not available on acceptable terms, we may be unable to fund expansion, develop or enhance products or respond to competitive pressures.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and results of operations are based on its financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities and expenses and related disclosure of contingent assets and liabilities. Management reviews its estimates on an on going basis. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. While the Company's significant accounting policies are described in more detail in Note 1 to its financial statements, management believes the following accounting policies to be critical to the judgments and estimates used in the preparation of its financial statements:
Revenue Recognition: We recognize revenue when persuasive evidence of an arrangement exists, transfer of title has occurred, the selling price is fixed or determinable, collectability is reasonably assured and delivery has occurred per the contract terms.
Warranty and return costs are estimated and accrued based on historical rates.
Accounts Receivable and Allowance for Doubtful Accounts: The accounts receivable arise in the normal course of business of providing services to customers. Accounts are written-off as they are deemed uncollectible based upon a periodic review of the accounts. As of December 31, 2008 and 2007, we have estimated that accounts receivable is fully collectible, and thus, has not established an allowance for doubtful accounts.
Supplier Concentrations and Inventory: We maintain our inventory on a perpetual basis utilizing the first-in first-out (FIFO) method. Inventories have been valued at the lower of cost or market. We have not recorded an obsolescence reserve for inventory at December 31, 2008 and 2007 as all inventory is considered usable and market value is above cost.
Deferred Financing Costs: Costs and discounts related to the convertible note payable issued by the Company on April 25, 2008, are being amortized and accreted using the effective interest method over the term of the debt instrument to April 2010 (see Note 6 of the Financial Statements).
Recently Issued Accounting Pronouncements
In June 2008, the FASB ratified the consensus reached by the EITF on Issue No. 07-5, Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity's Own Stock ("EITF No. 07-5"). EITF No. 07-5 provides guidance for determining whether an equity-linked financial instrument (or embedded feature) is indexed to an entity's own stock. EITF No. 07-5 applies to any freestanding financial instrument or embedded feature that has all of the characteristics of a derivative or freestanding instrument that is potentially settled in an entity's own stock (with the exception of share-based payment awards within the scope of SFAS 123(R)). To meet the definition of "indexed to own stock," an instrument's contingent exercise provisions must not be based on (a) an observable market, other than the market for the issuer's stock (if applicable), or (b) an observable index, other than an index calculated or measured solely by reference to the issuer's own operations, and the variables that could affect the settlement amount must be inputs to the fair value of a "fixed-for-fixed" forward or option on equity shares. EITF No. 07-5 is effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The Company is currently evaluating the impact of EITF No. 07-5 on their financial statements.
In April 2008, the FASB issued FASB Staff Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible Assets. This guidance addresses the determination of the useful life of intangible assets which have legal, regulatory, or contractual provisions that potentially limit a company's use of an asset. Under the new guidance, a company should consider its own historical experience in renewing or extending similar arrangements. We are required to apply the new guidance to intangible assets acquired after December 31, 2008.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities. This guidance states that unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents are participating securities and should be included in the computation of earnings per share using the two-class method outlined in SFAS No. 128, Earnings per Share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared and participation rights in undistributed earnings. The terms of our restricted stock units and restricted stock awards do provide a nonforfeitable right to receive dividend equivalent payments on unvested awards. As such, these awards are considered participating securities under the new guidance. Effective January 1, 2009, we will begin reporting earnings per share under the two-class method and will restate all historical earnings per share data. We are currently evaluating the impact of this new guidance on our reported earnings per share.
In February 2008, the FASB issued FASB Staff Position FAS 157-2 ("FSP FAS 157-2"). Effective Date of FASB Statement No. 157 which delays the effective date of SFAS No. 157 for non-financial assets and non-financial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis to fiscal years beginning after November 15, 2008. These non-financial items include assets and liabilities such as reporting units measured at fair value in a goodwill impairment test and non-financial assets acquired and non-financial liabilities assumed in a business combination. We have not applied the provisions of SFAS No. 157 to our non-financial assets and non-financial liabilities in accordance with FSP FAS 157- 2.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in Consolidated Financial Statements-an amendment of ARB No. 51. SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. The adoption of this statement is not expected to have a material effect on our future reported financial position or results of operations.
In December 2007, the FASB issued Statement No. 141R, Business Combinations, which establishes principles for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired and liabilities assumed in a business combination, the goodwill acquired in a business combination, and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of a business combination. We are required to apply this standard prospectively to business combinations for which the acquisition date is on or after January 1, 2009. Earlier application is not permitted.
OFF BALANCE SHEET ARRANGEMENTS
None.
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