The discussion and analysis contained in this Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) is based upon our consolidated financial statements which have been prepared in accordance with generally accepted accounting principles in the United States (GAAP).
The preparation of these consolidated 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 on-going basis, we evaluate our critical accounting policies and estimates, including those related to revenue recognition, intangible assets, and contingencies. We base our estimates on historical experience, where available, and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the 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 under different assumptions and conditions.
Except for historical information, the statements and other information contained in this MD&A are forward-looking. Our actual results could differ materially from the results discussed in the forward-looking statements, which include certain risks and uncertainties.
Our independent registered public accounting firm’s report on our financial statements for the years ended September 30, 2018 and September 30, 2017, contains an explanatory paragraph that there is substantial doubt about our ability to continue as a going concern.
Accordingly, careful consideration of such opinion should be given in determining whether to continue or become our stockholder.
Please refer to and carefully consider the factors described in the Risk Factors section in this report.
We are in the business of supplying, distributing and selling drill bits, related tools, and other mining supplies, rail and rail material directly and through other suppliers to United States’ coal mining companies for use in their production and transportation processes. Our coal mining customers are primarily located in Ohio, Pennsylvania, Kentucky and West Virginia. Our principal executive offices and warehousing facility is located in Ashland, Kentucky. Our coal mining customers are primarily located in Ohio, Pennsylvania, Kentucky and West Virginia.
We purchase mining supplies from several manufacturers and rail products from several suppliers of such products. The products are shipped to our warehouse in Ashland, Kentucky, and then distributed to our customers. Our products are transported primarily by road to our customers. Shipping costs are born by our customers.
We distribute and sell our products through one independent sales agent who are compensated on a commission basis.
Although, the Company has experienced an increase in sales starting in the second fiscal quarter of 2017 as compared to the two prior years, when the U.S. Coal industry was phasing declining U.S. coal production and bankruptcies and restructurings among certain U.S. coal companies, the demand for, and production of, coal continue to be adversely affected by several factors, including increased environmental regulation in the U.S., declining coal consumption in the electric power sector, increased competition from natural gas, and a strong U.S. dollar.
The U.S. Energy Information Administration (EIA) forecasted in its
Short-Term Energy Outlook
(STEO) released October 10, 2018, that U. S. coal production will decline by 2% to 756MMst in 2018, despite a 12% (11MMst) increase in coal export. The production decrease is largely attributable to a forecast decline of 4% (26MMst) in domestic coal consumption in 2018. EIA expects coal production to decline by 2% (13MMst) in 2019 because it forecasts that coal exports and coal consumption will decrease by 7% and 5%, respectively.
EIA expects the share of U.S. total utility-scale electricity generation from natural gas to rise from 32% in 2017 to 35% in both 2018 and 2019 and, the forecast for electricity generation share from coal averages 28% in 2018 and 27% in 2019, down from 30% in 2017.
Electricity generators that use fossil fuels continue to be the most common sources of electricity generation in most states. In all but 15 states, coal, natural gas, or petroleum liquids were the most-used electricity generation fuel in 2017. Since 2007, the number of states where coal was the most prevalent electricity generation fuel has fallen as natural gas, nuclear or hydroelectricity have gained market share. In 2017 coal provided the largest generation share in 18 states, down from 28 states in 2007 and natural gas had the largest share in 16 states up from 11 in 2007.
Coal production for the first six months of 2018 was 368 MMst, 16 MMst (4%) lower than in the same period in 2017. Coal production is expected to decrease by 2% in 2018 and by 2% in 2019.
Coal exports for the first six months of 2018 totaled 58 MMst, compared to 44MMst in 2017 or 62% higher than the prior year. EIA expects growth in coal exports for all 2018 forecast at 108 MMst, representing a 12% increase over 2017.
Continued distress in the U.S. coal mining industry will materially affect the demand for our products.
Liquidity and Capital Resources
At September 30, 2018, we had cash and cash equivalents of $36,609 compared to cash and cash equivalents of $40,345 at September 30, 2017 a decrease of $3,736.
Net cash used in operating activities was $5,281 during the year ended September 30, 2018, comparing negatively to net cash provided by operating activities of $258,040 in 2017.
There was no cash flow from investing activities for either 2018 or 2017.
Cash provided by financing activities during the current year was $1,545 as compared to cash used in financing activities of $220,757 in 2017. The current year cash provided by financing activities resulted from stockholder’s net advances of $58,500, partially offset by a repayment of our term loan of $56,955. During 2017, cash used by stockholder’s net advance repayment was $164,650 and cash repayment of our term loan was $56,107.
Mr. William Shrewsbury, our Chairman and CEO, has provided financing in the form of a consolidated promissory note in the amount of $2,000,000 (“Consolidated Note”) on which we have accrued interest of $459,726, and the principal and interest under the Consolidated Note is due February 24, 2024 The principal bears interest at the rate of 5% per annum or prime rate if higher than 5% per annum, and is subject to certain events of default. The Consolidated Note is secured or otherwise payable by us out of the death benefit proceeds of key man insurance of $2 million that has been purchased by us on the life of Mr. Shrewsbury. As of September 30, 2018, Mr. Shrewsbury had also provided non-interest-bearing advances to us of $92,487.
In November, 2012, we obtained a bank line of credit of $250,000 which was subsequently increased to $750,000. The line of credit was secured by a lien on our inventory and accounts receivable and guaranteed by Mr. Shrewsbury. On December 3, 2015, we entered into a new loan agreement with a bank under which we obtained a term loan in the amount of $711,376. We utilized proceeds of the new loan to repay our line of credit. The new loan is for a term of five years and matures on December 3, 2020. Interest under the new loan is variable and is based upon the Wall Street Journal Prime rate, currently 5.25
% per annum.
Our indebtedness to Mr. Shrewsbury is subordinated to the new bank loan. During the current year, we repaid $56,955 leaving an outstanding balance of $549,050 under the new loan.
Our success is dependent upon our ability to increase sales of our rail products and mining supplies, of which there can be no assurance.
We were incorporated in the State of Georgia in May, 2000.
Results of Operations
Year Ended September 30,
20
1
8
Compared w
ith Year Ended September 30,
20
1
7
Revenues from Operations
Revenues for 2018 and 2017 were$3,840,095 and $3,006,599, respectively, an increase for 2018 of $833,496 or approximately 27.7%. The increase in revenue in 2018 resulted from higher sales as U.S. coal mine operators continue ramping-up operations and opening new, or re-opening previously closed, mines to meet the higher demand for coal. Sales to new customers during 2018 account for incremental sales over the prior year.
Cost of Goods Sold
During 2018, cost of goods sold was $3,184,900 as compared to cost of goods sold of $2,273,214 for 2017, an increase of $911,686 or 40.1%. The increase in cost of goods is solely related to the increase in sales over the prior year and, the sale of higher cost products in the current year. Cost of goods sold as a percentage of sales increased from 75.6% in 2017 to 82.9% in 2018.
Gross Profit
Gross profit for 2018 was $655,195, a decrease of $78,190 or 10.6% when compared to 2017. The lower gross profit is the result of higher sales of lower margin products during 2018 as compared to 2017.
Operating Expense
s
The Company incurred operating expenses of $597,463 in 2018 as compared to $742,941 in 2017, a decrease of $145,478 or approximately 19.6%. As a percentage of revenue, operating expenses decreased from 24.7% in 2017 to 15.6% in 2018. The decrease is attributed to the impact of our fixed operating expenses while generating higher revenue during 2018.
The following table details the components of operating expenses, as well as the dollar and percentage changes for the year end periods.
|
|
Year
Ended
|
|
|
|
9/30/201
8
|
|
|
9/30/201
7
|
|
|
$ Change
|
|
|
%Change
|
|
Operating Expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commission expense
|
|
$
|
159,027
|
|
|
$
|
149,884
|
|
|
$
|
9,143
|
|
|
|
6.1
|
|
Professional fees
|
|
|
23,840
|
|
|
|
16,739
|
|
|
|
7,101
|
|
|
|
42.4
|
|
Bad debt expense
|
|
|
37,672
|
|
|
|
6,936
|
|
|
|
30,736
|
|
|
|
443.1
|
|
Depreciation expense
|
|
|
7,168
|
|
|
|
9,799
|
|
|
|
(2,631
|
)
|
|
|
(26.9
|
)
|
Other operating expense
|
|
|
369,756
|
|
|
|
559,583
|
|
|
|
(189,827
|
)
|
|
|
(33.9
|
)
|
Total
|
|
$
|
597,463
|
|
|
$
|
742,941
|
|
|
$
|
(145,478
|
)
|
|
|
(19.6
|
)
|
Commission expense for the year ended September 30, 2018 was $159,027 compared to $149,884 for the same period in 2017, an increase of $9.143 or 6.1%. The higher commission, during the year ended September 30, 2018, is a direct result of the increased sales resulting from operational increase in the domestic coal mining industry. As a percentage of revenue, commission expense decreased from 5.0% in 2017 to 4.1% in 2018.
Professional fees increased $7,101 or 42.4% for the year ended September 30, 2018, as compared to the prior year. The higher expenses were the result of higher legal expenses, related to general corporate matters, of $7,101 or 42.4%.
Bad debt expense increased $30,736 or 443.1% for the twelve months ended September 30, 2018, as compared to the prior year. Bad debt expense recorded for one customer filing for bankruptcy accounted for the higher expense.
Depreciation expenses decreased by $2,631 or 26.9% in 2018 as compared to 2017. The lower depreciation resulted from a delivery truck becoming fully depreciated in 2017.
For the year ended September 30, 2018, other operating expenses were $369,756, a decrease of $189,827 or 33.9% from the $559,583 incurred during 2017. The lower operating expenses resulted from the write-off of the Bag Rack inventory ($144,726) in 2017 and, lower compensation ($32,053) and lower Board Fees ($7,500) in 2018.The Bag rack inventory write-off resulted from management’s decision to exit the business as product sales did not materialize.
Income
/
(
Loss
)
from O
perations
For 2018, we had income from operations of $57,732 as compared to a loss of $9,556 in 2017, an increase of $67,288. The increase in income from operations resulted from the write-off of the Bag Rack inventory ($144,726) in 2017 partially offset by lower profit margins on sales ($78,190) in 2018.
Other Income and (
E
xpense)
Other expense was $112,932 in 2018 as compared to $114,950 in 2017, a decrease of $2,018. The decrease resulted from higher scrap sales of $5,386 in 2018 offset by higher interest expense of $3,068 in 2018, associated with our term loan.
Net Loss
.
During 2018 the Company had a net loss of $55,200 compared to a net loss of $124,506 for 2017, representing a net loss decrease of $69,306. The decrease resulted from the inventory write-off of our Bag Rack operations in 2017 of $144,726 partially offset by an increase in bad debt expense of $30,736 in 2018 over the prior year.
Net Loss Per
Common
Share
Net earnings per share (basic and diluted) as a result of the net loss remains a negative $0.00 in 2018, compared to a negative $0.00 in the prior year.
Net Operating Loss Carry F
orward for Tax Purposes
As of September 30, 2018, the Company had tax net operating loss carry forwards totaling approximately $8,199,000, which expire in 2018 through 2038. Approximately $1,200,000 of such net operating losses were incurred prior to December 12, 2002 at which date MA&N acquired 51% of the Company and are consequently subject to certain limitation described in Section 382 of the Internal Revenue Code.The Company estimates that, due to the limitations and expiration dates, only $424,000 of the net operating losses incurred prior to December 12, 2002 will be available to offset future taxable income.
There can be no assurance that these deferred tax assets will ever be used. A deferred tax asset can be used only if there is future taxable income, of which there can be no assurance.
Liquidity
and Capital Resources
The following table presents a summary of our net cash provided by/(used in) operating, investing and financing activities:
|
|
Twelve Months Ended
|
|
Liquidity and capital resources
|
|
9/30/2018
|
|
|
9/30/2017
|
|
Net cash provided /(used) in operating activities
|
|
$
|
(5,281
|
)
|
|
$
|
258,040
|
|
Net cash provided/(used) in investing activities
|
|
|
—
|
|
|
|
—
|
|
Net cash provided/(used) in financing activities
|
|
|
1,545
|
|
|
|
(220,757
|
)
|
Net increase/(decrease) in cash equivalents
|
|
$
|
(3,736
|
)
|
|
$
|
37,283
|
|
At September 30, 2018, the Company had cash and cash equivalents of $36,609 compared to cash and cash equivalents of $40,345 at September 30, 2017 a decrease of $3,736. The decrease in cash is the direct result of the net cash used in operating activities of $5,281 partially offset by net cash from financing activities of $1,545.
Cash
Flows
Provided/(
U
sed
)
in
Operating Activities
Cash used in operating activities during 2018 was $5,281 as compared to cash provided by operating activities of $258,040 during 2017.
During the year ended September 30, 2018, the Company incurred a net loss of $55,200.
An increase in inventory (current and non-current) of $108,190 and a decrease in accounts payable of $124,920 were partially offset by a decrease in accounts receivable of $160,877, a decrease in commission advances of $22, 648 and an increase in accrued liabilities of $28,418.
Accounts receivable decreased by $160,877 compared to an increase of $229,737 during 2017. The receivable decrease is the result of managing the account receivable balance commensurate with sales levels and, several customers payments received during the last week of the current year end.
Accrued liabilities as of September 30, 2018, increased by $28,418. The increase results primarily from accrued interest of $100,000 on a loan due to Mr. Shrewsbury, partially offset by a reduction in accrued payroll related expenses of $68,000 in 2018.
Accounts payable decreased $124,920 in 2018 compared to a $29,686 increase in the prior year. The decrease is the result of higher payments of vendors’ outstanding payables.
Cash Flows Used in Investing Activities
There were no investing activities during 2018 or 2017.
Cash Flows Provided
/(used) in
Financing Activities
During 2018, cash provided by financing activities was $1,545 as compared to cash used in financing activities of $220,757 during 2017. During 2018, the Company repaid $56,955 on the outstanding term loan and received proceeds from stockholder/officer’s net advances of $58,500. In 2017 the Company repaid $56,107 on the term loan and repaid net advances from our CEO of $164,650.
The Company’s primary source of financing during 2018 was advances received from our CEO.
In November 2012, we obtained a $250,000 line of credit from a bank. On August 26, 2014, the bank increased the Company’s existing bank line of credit from $250,000 to $750,000 and extended the term of the loan. The loan which was refinanced in December 2015 was secured by a priority security interest in the Company’s inventory and accounts receivable and matured on November 7, 2015. Interest on the loan was payable monthly and was calculated on the basis of a variable index. As of September 30, 2015, the Company had borrowed $712,449 under the loan. The rate of interest under the loan was 3.25% per annum. Principal, interest and collection costs under the loan were guaranteed by Mr. Shrewsbury. On December 3, 2015, we obtained a new term loan from the bank in the amount of $711,376. We utilized the proceeds of the new loan to repay the line of credit. The new loan is for a term of five years and matures on December 3, 2020. During the term of the loan we have agreed to make equal monthly repayments of principal and interest of $6, 967 commencing January 3, 2016 and a final payment on December 3, 2020, of the outstanding balance of the interest and principal then due, estimated to be approximately $391, 896. Interest under the new loan is variable and is based upon the Wall Street Journal Prime rate, currently 5.25% per annum. In the event of a default, interest under the loan may be increased by 2%. The new loan is secured by a priority security interest in our inventory and accounts receivable and guaranteed by our CEO. As of September 30, 2018 the term loan balance is $549,050.
On February 25, 2014, the Company and Mr. Shrewsbury entered into an agreement to consolidate an aggregate of $2,000,000 of the amounts due to Mr. Shrewsbury and issued in replacement a Secured Consolidated Note (“Consolidated Note”) for such amount. The Consolidated Note bears interest at 5% per annum or prime rate if higher than 5% per annum, principal and interest are repayable ten years from February 25, 2014, and it is subject to customary events of default. Payment of the Consolidated Note is to be secured or otherwise payable by the Company out of the death benefit proceeds of key man insurance of $2 million that has been purchased by the Company on the life of Mr. Shrewsbury.
During 2018, the Company received $256,000 in cash advances from Mr. Shrewsbury and repaid $197,500, bringing the total outstanding advance balance to $92,487. Cash advances from Mr. Shrewsbury are repayable upon demand and do not bear interest.
Property and Equipment, net, was $39,812 as of September 30, 2018 compared to $46,980 as of September 30, 2017. Delivery equipment depreciation recorded in the current year accounts for the reduction in Property and Equipment.
As of September 30, 2018, the Company had accrued and unpaid an amount of $358,179 due to Jose Fuentes, CFO, as payment for past services.
Financial Condition and Going Concern Uncertainties
Since inception, except for the six consecutive quarters ended June 30, 2014, and the fiscal year ended September 30, 2017, we have not generated sufficient cash to fund operations and have incurred operating losses. Currently, the Company will continue to rely substantially upon financing provided by Mr. Shrewsbury, our CEO, and secured bank indebtedness to fund its operations. In view of these matters, realization of certain assets in the accompanying balance sheet is dependent upon continued operations, which in turn, is dependent on our ability to meet our financial requirements, upon the continued provision of financing by Mr. Shrewsbury and under the Company’s term loan, and the success of our future operations.
Our independent registered public accounting firm’s report on the financial statements included in our Annual Report on Form 10-K for the year ended September 30, 2018, contains an explanatory paragraph that there is substantial doubt about our ability to continue as a going concern. Accordingly, careful consideration of such opinion should be given in determining whether to continue or to become our stockholder.
As of September 30, 2018, the Company had cash and cash equivalents of $36,609 as compared to $40,345 as of September 30, 2017. The $3,736 decrease in cash resulted primarily from an increase in inventory ($108,190) and a decrease in accounts payable ($124,920), partially offset by cash generated from a decrease in receivable ($160,877) and net cash advances from our CEO ($58,500).
The Company’s accounts receivable was $259,694 as of September 30, 2018, as compared to $458,203 as of September 30, 2017, a decrease of $198,509 or 43.3%. The decrease from managing the receivable balance to appropriate sales related levels and large payments from several customers received the last week of the current year.
Inventory was $1,798,540 as of September 30, 2018 as compared to $1,690,350 as of September 30, 2017, an increase of $108,190 or 6.4%. The inventory increase is attributable to the increase in sales ((27.7%) in the current year over the prior year.
During 2018, our stockholders’ deficit increased from $15,555,936 in the prior year to 15,611,136, an increase of $55,200 or 0.3%. The net loss for the year ended September 30, 2018 accounts for the increase in stockholders’ deficit.
During the year ended September 30, 2018, the Company’s net loss was $55,200 compared to a net loss of $124,506 for 2017 representing a loss decrease of $69,306. The decrease can be directly attributed to an inventory write-off of $144,726 recorded in the prior year partially offset by $78,190 lower sales margins in the current year as compared to the prior year.
Currently, in addition to funds utilized to purchase inventory, the Company is spending approximately $60,000 per month on operations. Management believes that the Company’s cash flows from its operations, the loans and advances provided by Mr. Shrewsbury, and the loan provided by the bank to be sufficient to fund the Company operations for the next 12 months. However, the Company will require additional financing to meet any large capital requirements or to meet its current obligations if its business does not generate sufficient operational cash flow.
The Company continues to rely substantially upon financings provided by Mr. Shrewsbury and the bank to fund its operations, discussed below.
Bank Loan
Under the terms of a business loan agreement, originally entered into on November 7, 2012, and as amended through August 26, 2014, the Company obtained a secured revolving line of credit in the amount of $750,000 from Town Square Bank. Interest on the loan was payable monthly in arrears. Interest under the loan was variable and based upon Wall Street Journal Prime Rate.
On December 3, 2015, we entered into a new loan agreement with Town Square Bank pursuant to which we obtained a term loan in the amount of $711,376. We utilized proceeds of the new loan to repay our line of credit. The loan is for a term of five years and matures on December 3, 2020.
During the term of the loan, we have agreed to make equal monthly repayments of principal and interest of $6,967 commencing January 3, 2016, and to make a final payment on December 3, 2020, of the outstanding balance of the interest and principal then due, estimated to be approximately $391,896. Early repayment of amounts due under the loan will not affect the monthly repayment amount, unless otherwise agreed to by the bank.
An event of default under the loan will occur upon the occurrence of any of the following events:
|
●
|
we fail to make any payment when due under the note;
|
|
●
|
we fail to comply with any term, obligation, covenant or condition in the loan documents or any other agreement between the bank and the Company:
|
|
●
|
we default under any loan, extension of credit, security agreement, purchase or sales agreement or other agreement with any creditor that materially affects the Company’s property or its ability to repay the loan or perform its obligation under the loan documents;
|
|
●
|
a warranty, representation or statement we made to the bank under the loan document is or becomes materially false or misleading;
|
|
●
|
the dissolution or termination of our existence, our insolvency, the appointment of a receiver for any part of our property, any assignment for the benefit of creditors, any type of creditor workout, or the commencement of any proceeding under any bankruptcy or insolvency laws by or against us;
|
|
●
|
the commencement of foreclosure or forfeiture proceedings by any creditor of ours or any governmental agency against any collateral securing the loan;
|
|
●
|
any of the preceding events occurs with respect to any loan guarantor;
|
|
●
|
a 25% or more change in the ownership of our common stock;
|
|
●
|
a material adverse change in our financial condition, or the bank believes the prospect of payment or performance of the loan is impaired; or
|
|
●
|
the bank in good faith believes itself insecure.
|
The loan agreements contain certain affirmative covenants, including an obligation to: notify the bank of a material adverse change in our financial condition and of any threatened litigation or claim or other proceeding which could materially affect our financial condition; maintain certain liability insurance in amounts acceptable to the bank; maintain qualified executive and management personnel; comply with applicable environmental laws and perform environmental studies required by the bank; and certify annually to the bank compliance with the representations and warranties in the bank loan documents. The loan agreements contain certain other customary covenants, terms and conditions.
In addition, the loan agreements contain certain negative covenants, including that we will not, without the bank’s consent:
|
●
|
incur any indebtedness other than to the bank or for trade debt incurred in the ordinary course;
|
|
●
|
sell, transfer, mortgage, assign, pledge, lease, grant a security interest in, or encumber any of our assets, except for permitted liens;
|
|
●
|
sell our accounts receivable, except to the bank;
|
|
●
|
engage in business activities substantially different from our current activities;
|
|
●
|
cease operations, liquidate, merge, transfer, acquire or consolidate with another entity, change our name, dissolve, or sell the inventory or accounts receivable secured under the loan;
|
|
●
|
pay any dividend other than in stock;
|
|
●
|
lend money, invest or advance money or assets to another person or entity;
|
|
●
|
purchase, create or acquire an interest in any other entity;
|
|
●
|
incur any obligation as a surety or guarantor other than in the ordinary course; or
|
|
●
|
enter into any agreement containing any provision which would be violated or breached by the performance of our obligations under the loan agreements.
|
Interest under the loan is variable and is based upon the Wall Street Journal Prime rate, currently 5.25% per annum. In the event of a default, interest under the loan may be increased by 2%. The line of credit is secured by a priority security interest in the Company’s inventory and accounts receivable and has been guaranteed by our CEO.
Advances and Loans from Our Chief Executive Officer
In connection with the expansion of the Company’s business, Mr. Shrewsbury, our Chairman and CEO, provided financing to us in the form of demand notes and advances. On February 25, 2014, we entered into a Note Exchange Agreement (“Exchange Agreement”) with Mr. Shrewsbury pursuant to which an aggregate of $2,000,000 in indebtedness due to Mr. Shrewsbury was consolidated and restructured and issued in exchange for such indebtedness a Consolidated Secured Promissory Note (the “Consolidated Note) in the principal amount of $2,000,000.
The principal and interest under the Consolidated Note is due and payable ten years from the date of issuance and is to be secured by the proceeds of key man insurance purchased by the Company on the life of Mr. Shrewsbury. The Consolidated Note bears interest at the rate of 5% per annum except that, if the prime rate reported by the Wall Street Journal (“WSJ Prime Rate”) exceeds 5%, then the Consolidated Note will bear interest at the WSJ Prime Rate. As of September 30, 2018, accrued interest on the note was $459,726
An event of default will occur under the Consolidated Note upon:
|
●
|
the Company’s failure to pay when due any principal or interest under the Consolidated Note;
|
|
●
|
the violation by the Company of any covenant or agreement contained in the Consolidated Note, the Exchange Agreement or related transaction documents;
|
|
●
|
an assignment for the benefit of creditors by the Company;
|
|
●
|
the application for the appointment of a receiver or liquidator for the Company or for property of the Company;
|
|
●
|
the filing of a petition in bankruptcy by or against the Company;
|
|
●
|
the issuance of an attachment or the entry of a judgment against the Company in excess of $250,000;
|
|
●
|
a default by the Company with respect to any other indebtedness or with respect to any installment debt whether or not owing to Mr. Shrewsbury;
|
|
●
|
the sale of all or substantially all of the Company’s assets or a transfer of more than 51% of the Company’s equity interests to a person not currently a holder of equity interests of the Company;
|
|
●
|
the termination of existence or the dissolution of the Company;
|
|
●
|
the death of Mr. Shrewsbury; or
|
|
●
|
the failure to pay when due any premium under the key man policy required to be purchased on the life of Mr. Shrewsbury under the Exchange Agreement.
|
In addition, in consideration of Mr. Shrewsbury agreeing to consolidate the indebtedness, the Company granted to Mr. Shrewsbury options to purchase an aggregate of 500,000 shares of the Company’s common stock issued February 25, 2014. The options became exercisable on April 1, 2014, and expired on March 31, 2017. The options were exercisable at a price of $0.0924 per share subject to certain anti-dilution adjustments in the event of stock dividends, subdivisions, capital reorganizations, a consolidation or merger, or sale of all or substantially all of our assets.
As of September 30, 2018, Mr. Shrewsbury had advanced an aggregate of $92,487 to the Company. The advances do not bear interest and are repayable upon demand. At September 30, 2018, the Company also has a payable of $84,000 to Mr. Shrewsbury for warehouse storage rental.
The Consolidated Note and advances are subordinate to the Company’s bank indebtedness.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU No.2014-09,
Revenue from Contracts with Customers
(Topic 606). This standard provides a single set of guidelines for revenue recognition to be used across all industries and requires additional disclosures. It is effective for annual and interim reporting periods beginning after December 15, 2017. The standard permits early adoption, but not before December 15, 2016, and permits the use of either a retrospective or cumulative effect transition method.
Based on our assessment, we ascertained the new standard does not have a material impact on our financial position and results of operations, and the new standard will be adopted commencing the first interim fiscal period of 2019. We recognize revenue on sales to customers and distributors upon satisfaction of our performance obligations when the goods are shipped. For consignment sales, we recognize revenue when the goods are pulled from consignment inventory.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
(Topic 842). The standard requires all leases that have a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest expense (for interest on the lease liability). This standard will be effective for our annual periods, including interim periods therein, beginning on or after January 1, 2019, and must be applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. Early adoption is permitted. We currently have a one-year warehouse lease which we consider an operating lease. The new standard will have no impact on our financial statements and, the lease will continue to be recorded on a straight-line basis for the remaining lease term.