|
ITEM 1.
CONSOLIDATED FINANCIAL STATEMENTS
|
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
|
MAY 31,
|
|
|
FEBRUARY 28,
|
|
|
|
|
2014
|
|
|
2014
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
Cash
|
|
$
|
7,887
|
|
|
$
|
7,731
|
|
|
Accounts receivable, net of allowance of $481 and $481, respectively
|
|
|
134,473
|
|
|
|
83,152
|
|
|
Accounts receivable, factored
|
|
|
15,739
|
|
|
|
19,190
|
|
|
Inventories
|
|
|
289,126
|
|
|
|
319,348
|
|
|
Note receivable, related party
|
|
|
1,009,792
|
|
|
|
1,009,792
|
|
|
Due from related party
|
|
|
485,107
|
|
|
|
485,107
|
|
|
Other receivables, including related party receivables of $208,655 and $183,263, respectively
|
|
|
263,333
|
|
|
|
269,169
|
|
|
Prepaid expenses
|
|
|
-
|
|
|
|
3,082
|
|
|
Total Current Assets
|
|
|
2,205,457
|
|
|
|
2,196,571
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment, net of accumulated depreciation of $2,859,763 and $2,821,551, respectively
|
|
|
2,621,554
|
|
|
|
2,655,230
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER ASSETS:
|
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
6,546
|
|
|
|
4,578
|
|
|
Investment, available for sale
|
|
|
82,500
|
|
|
|
-
|
|
|
Total Other Assets
|
|
|
89,046
|
|
|
|
4,578
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
4,916,057
|
|
|
$
|
4,856,379
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable, including related party payables of $13,500 and $13,500, respectively
|
|
$
|
82,744
|
|
|
$
|
122,383
|
|
|
Accrued expenses, including related party balances of $28,359 and $28,024, respectively
|
|
|
65,034
|
|
|
|
62,655
|
|
|
Accrued interest, including related party balances of $2,603 and $35,449, respectively
|
|
|
318,240
|
|
|
|
308,849
|
|
|
Current portion of notes payable, related parties
|
|
|
-
|
|
|
|
-
|
|
|
Current portion of notes payable
|
|
|
246,909
|
|
|
|
246,460
|
|
|
Total Current Liabilities
|
|
|
712,927
|
|
|
|
740,347
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Notes payable, net of current portion
|
|
|
458,008
|
|
|
|
391,969
|
|
|
Notes payable, related party, net of current portion
|
|
|
379,560
|
|
|
|
465,737
|
|
|
Due to stockholders
|
|
|
1,427,610
|
|
|
|
1,669,510
|
|
|
Total Long-Term Liabilities
|
|
|
2,265,178
|
|
|
|
2,527,216
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Liabilities
|
|
|
2,978,105
|
|
|
|
3,267,563
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
Preferred stock; $0; 5,000,000 shares authorized:
|
|
|
|
|
|
|
|
|
|
Series A; cumulative and convertible; $0.001 par value; 600 shares authorized
|
|
|
|
|
|
|
|
|
|
102 shares issued and outstanding; liquidating preference $376,125
|
|
|
-
|
|
|
|
-
|
|
|
Series B; cumulative and convertible; $0.001 par value; 3,950 shares authorized
|
|
|
|
|
|
|
|
|
|
3,944 shares issued and outstanding; liquidating preference $3,944,617
|
|
|
3
|
|
|
|
3
|
|
|
Common stock, $0.002 par value; 1,500,000 shares authorized; 1,036,243,946 and 1,036,243,946
|
|
|
|
|
|
|
|
|
|
shares issued and 1,035,721,946 and 1,035,721,946 shares outstanding, respectively
|
|
|
2,315,626
|
|
|
|
2,072,489
|
|
|
Additional paid-in capital
|
|
|
19,084,073
|
|
|
|
19,017,210
|
|
|
Stock subscription receivable
|
|
|
(10,000
|
)
|
|
|
(10,000
|
)
|
|
Accumulated other comprehensive loss
|
|
|
(20,821
|
)
|
|
|
-
|
|
|
Accumulated deficit
|
|
|
(19,165,403
|
)
|
|
|
(19,225,360
|
)
|
|
|
|
|
2,203,478
|
|
|
|
1,854,342
|
|
|
Treasury stock at cost; 522,000 shares of common
|
|
|
(265,526
|
)
|
|
|
(265,526
|
)
|
|
Total Stockholders' Equity
|
|
|
1,937,952
|
|
|
|
1,588,816
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
$
|
4,916,057
|
|
|
$
|
4,856,379
|
|
See notes to the unaudited financial statements
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS (Unaudited)
|
|
|
For the Three Months Ended May 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
REVENUE:
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
608,886
|
|
|
$
|
677,085
|
|
|
|
|
|
608,886
|
|
|
|
677,085
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD
|
|
|
257,947
|
|
|
|
316,968
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
350,939
|
|
|
|
360,117
|
|
|
|
|
|
|
|
|
|
|
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
|
|
|
358,398
|
|
|
|
378,615
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(7,459
|
)
|
|
|
(18,498
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
84,102
|
|
|
|
-
|
|
|
Interest expense
|
|
|
(22,606
|
)
|
|
|
(33,492
|
)
|
|
Interest income
|
|
|
5,920
|
|
|
|
3,867
|
|
|
TOTAL OTHER EXPENSE (INCOME)
|
|
|
67,416
|
|
|
|
(29,625
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
59,957
|
|
|
$
|
(48,123
|
)
|
|
Unrealized loss on fair value of investment
|
|
|
(20,821
|
)
|
|
|
-
|
|
|
COMPREHENSIVE INCOME (LOSS)
|
|
$
|
39,136
|
|
|
$
|
(48,123
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) INCOME PER COMMON SHARE, BASIC AND DILUTED
|
|
$
|
0.00
|
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING, BASIC AND DILUTED
|
|
|
748,873,964
|
|
|
|
663,100,066
|
|
See notes to the unaudited financial statements
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Stock
|
|
|
Accumulated
Other
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
Preferred Stock
|
|
|
Common Stock
|
|
|
Paid-In
|
|
|
Subscription
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
Treasury
|
|
|
Stockholders'
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Receivable
|
|
|
Loss
|
|
|
Deficit
|
|
|
Stock
|
|
|
Deficit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2013
|
|
|
3,944
|
|
|
$
|
3
|
|
|
|
663,622,066
|
|
|
$
|
1,327,245
|
|
|
$
|
18,908,713
|
|
|
$
|
(10,000
|
)
|
|
$
|
-
|
|
|
$
|
(19,056,299
|
)
|
|
$
|
(265,526
|
)
|
|
$
|
904,136
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock for deposit on acquisition
|
|
|
-
|
|
|
|
-
|
|
|
|
10,000,000
|
|
|
|
20,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital contribution from shareholder
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
21,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock in conversion of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
362,621,880
|
|
|
|
725,244
|
|
|
|
86,497
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
811,741
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(169,061
|
)
|
|
|
-
|
|
|
|
(169,061
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2014 (audited)
|
|
|
3,944
|
|
|
$
|
3
|
|
|
|
1,036,243,946
|
|
|
$
|
2,072,489
|
|
|
$
|
19,017,210
|
|
|
$
|
(10,000
|
)
|
|
$
|
-
|
|
|
$
|
(19,225,360
|
)
|
|
$
|
(265,526
|
)
|
|
$
|
1,588,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares of common stock in conversion of debt
|
|
|
-
|
|
|
|
-
|
|
|
|
121,568,627
|
|
|
|
243,137
|
|
|
|
66,863
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
310,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss on fair value of investment
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,821
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(20,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss for the three months ended May 31, 2014 (unaudited)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
59,957
|
|
|
|
-
|
|
|
|
59,957
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, May 31, 2014 (unaudited)
|
|
|
3,944
|
|
|
$
|
3
|
|
|
|
1,157,812,573
|
|
|
$
|
2,315,626
|
|
|
$
|
19,084,073
|
|
|
$
|
(10,000
|
)
|
|
$
|
(20,821
|
)
|
|
$
|
(19,165,403
|
)
|
|
$
|
(265,526
|
)
|
|
$
|
1,937,952
|
|
See notes to the unaudited financial statements
AMERICAN COMMERCE SOLUTIONS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
|
|
|
For the Three Months Ended May 31,
|
|
|
|
|
2014
|
|
|
2013
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
59,957
|
|
|
$
|
(48,123
|
)
|
|
Adjustments to reconcile net income (loss) to net cash and cash equivalents
used by operating activities:
|
|
|
|
|
|
|
.
|
|
|
Depreciation
|
|
|
48,040
|
|
|
|
48,775
|
|
|
Amortization of loan costs
|
|
|
3,082
|
|
|
|
10,417
|
|
|
Loss on disposal of equipment
|
|
|
547
|
|
|
|
-
|
|
|
Investment received for services
|
|
|
(82,500
|
)
|
|
|
-
|
|
|
Unrealized loss on investment
|
|
|
(20,821
|
)
|
|
|
-
|
|
|
(Increase) decrease in:
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(51,321
|
)
|
|
|
(1,068
|
)
|
|
Inventories
|
|
|
30,222
|
|
|
|
(39,723
|
)
|
|
Other assets
|
|
|
(1,968
|
)
|
|
|
(4,027
|
)
|
|
Increase (decrease) in:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(27,869
|
)
|
|
|
35,068
|
|
|
Net cash (used) provided by operating activities
|
|
|
(42,631
|
)
|
|
|
1,319
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in other receivables
|
|
|
5,836
|
|
|
|
(13,107
|
)
|
|
Acquisition of property and equipment
|
|
|
(14,911
|
)
|
|
|
(18,112
|
)
|
|
Net cash used by investing activities
|
|
|
(9,075
|
)
|
|
|
(31,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in due from factor
|
|
|
3,451
|
|
|
|
(5,624
|
)
|
|
Proceeds from notes payable and long-term debt
|
|
|
82,600
|
|
|
|
48,929
|
|
|
Principal payments on notes payable
|
|
|
(92,289
|
)
|
|
|
(73,842
|
)
|
|
Increase in due to stockholders
|
|
|
58,100
|
|
|
|
58,100
|
|
|
Net cash provided by financing activities
|
|
|
51,862
|
|
|
|
27,563
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
|
|
156
|
|
|
|
(2,337
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, beginning of period
|
|
|
7,731
|
|
|
|
21,751
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
7,887
|
|
|
$
|
19,414
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
10,133
|
|
|
$
|
18,298
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH FINANCING AND INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Conversion of debt to equity
|
|
$
|
310,000
|
|
|
$
|
-
|
|
See notes to the unaudited financial statements
American Commerce Solutions, Inc. and Subsidiary
Notes to Condensed Consolidated Financial Statements
As of May 31, 2014 and for the
Three Months Ended May 31, 2014 and 2013
(unaudited)
1. BACKGROUND INFORMATION
American Commerce Solutions, Inc., located and operating in West Central Florida, was incorporated in Rhode Island in 1991 under the name Jaque Dubois, Inc., and was re-incorporated in Delaware in 1994. In July 1995, Jaque Dubois, Inc. changed its name to JD American Workwear, Inc. In December 2000, the stockholders voted at the annual stockholders meeting to change the name of JD American Workwear, Inc. to American Commerce Solutions, Inc. (the “Company”). In August of 2012, the Company was re-incorporated in Florida.
The Company is primarily a holding company with one wholly owned subsidiary; International Machine and Welding, Inc. is engaged in the machining and fabrication of parts used in heavy industry, and parts sales and service for heavy construction equipment.
2. GOING CONCERN
The Company has incurred substantial operating losses since inception and has used approximately $42,600 of cash in operations for the three months ended May 31, 2014. Additionally, the Company is in default on several notes payable. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent upon its ability to reverse negative operating trends, raise additional capital, and obtain debt financing.
Management has revised its business strategy to include expansion into other lines of business through the acquisition of other companies in exchange for the Company’s stock to facilitate manufacturing contracts under negotiation. In conjunction with the anticipated new contracts, management is currently negotiating new debt and equity financing, the proceeds from which would be used to settle outstanding debts at more favorable terms, to finance operations, and to complete additional business acquisitions. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary if the Company is unable to continue as a going concern.
3. RECENT ACCOUNTING PRONOUNCEMENTS
Recent accounting pronouncements issued by FASB (including EITF), the AICPA and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.
4. STOCK BASED COMPENSATION
At May 31, 2014, the Company has two stock-based employee compensation plans, both which have been approved by the shareholders.
The Company recognizes all share-based payments to employees, including grants of employee stock options, as compensation expense in the financial statements based on their fair values. That expense will be recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).
The value of each grant is estimated at the grant date using the Black-Scholes model. There were no options granted or exercised during the three months ended May 31, 2014 and 2013.
5. BASIS OF PRESENTATION
In the opinion of management, all adjustments consisting only of normal recurring adjustments necessary for a fair statement of (a) the results of operations for the three month periods ended May 31, 2014 and 2013, (b) the financial position at May 31, 2014, and (c) cash flows for the three month periods ended May 31, 2014 and 2013, have been made.
The unaudited consolidated financial statements and notes are presented as permitted by Form 10-Q. Accordingly, certain information and note disclosures normally included in condensed financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been omitted. The accompanying consolidated financial statements and notes should be read in conjunction with the audited consolidated financial statements and notes of the Company for the fiscal year ended February 28, 2014. The results of operations for the three month period ended May 31, 2014 are not necessarily indicative of those to be expected for the entire year.
6. ACCOUNTS RECEIVABLE, FACTORED
During the three months ended May 31, 2014, the Company factored receivables of approximately $81,700. In connection with the factoring agreement, the Company incurred fees of approximately $5,100 and $4,300 during the three months ended May 31, 2014 and 2013, respectively. Any and all of the Company’s indebtedness and obligations to the Factoring Company is guaranteed by two stockholders and collateralized by the Company’s inventory and fixed assets.
7. INVENTORIES
Inventories consist of the following:
|
|
|
May 31,
2014
|
|
|
February 28,
2014
|
|
|
Work-in process
|
|
$
|
9,542
|
|
|
$
|
9,646
|
|
|
Finished goods
|
|
|
279,584
|
|
|
|
309,702
|
|
|
Raw materials
|
|
|
-
|
|
|
|
-
|
|
|
Total inventories
|
|
$
|
289,126
|
|
|
$
|
319,748
|
|
8. RELATED PARTY TRANSACTIONS
The following transactions with our officer’s, in the aggregate amount of $310,000 and 121,568,627 shares of common stock, were reported in Form S8 as filed with the Securities and Exchange Commission on May 1, 2014:
During the three month ended May 31, 2014, two executives who are stockholders of the Company deferred $58,100 of compensation earned during this period. The balance due to stockholders at May 31, 2014 and 2013, totaled $1,427,610 and $1,895,210, respectively. The amounts are unsecured, non-interest bearing, and have no specific repayment terms; however, the Company does not expect to repay these amounts within the next year. During the three months ended May 31, 2014, the Company issued 58,823,529 shares of common stock to each of the executives valued at $0.00255, in exchange for the reduction $300,000 of deferred compensation.
In April 2014, the Company exchanged $10,000 of debt due to the related parties for 3,921,569 shares of common stock. The shares were valued at $0.00255 per share.
Certain notes to related parties have conversion features, whereby, at the holder’s option, the notes may be converted, in whole or in part upon written notice, into the Company’s common shares at a discount to the fair market value. The Company considered the value of the beneficial conversion features of the notes, and when deemed material, recorded the beneficial conversion value as deferred financing costs and amortized the amount over the period of the loan, charging interest expense. The convertible notes are to related parties, who have the majority of the voting rights. The related parties have waived their conversion rights since the inception of these notes until such time that the Company’s market price of shares rise sufficiently or the Company amends the capital structure (through a reverse split or increase in the authorized shares) or combination of all factors, whereby a conversion of any single note, or portion thereof, will not exceed the authorized shares of the Company.
The above amounts are not necessarily indicative of the amounts that would have been incurred had comparable transactions been entered into with independent parties.
9. SEGMENT INFORMATION
The Company had two reportable segments during 2014 and 2013; manufacturing and other. For the three months ended May 31, 2014 and 2013 the Company has included segment reporting.
For the three months ended May 31, 2014, information regarding operations by segment is as follows:
|
|
|
Manufacturing
|
|
|
Other (a)
|
|
|
Total
Continuing
Operations
|
|
|
Revenue
|
|
$
|
608,886
|
|
|
|
|
|
$
|
608,886
|
|
|
Interest expense
|
|
$
|
15,650
|
|
|
|
6,956
|
|
|
|
22,606
|
|
|
Depreciation
|
|
$
|
48,040
|
|
|
|
|
|
|
|
48,040
|
|
|
Net income (loss)
|
|
$
|
80,395
|
|
|
|
(20,438
|
)
|
|
|
59,957
|
|
|
Property and equipment, net of accumulated depreciation
|
|
$
|
2,621,554
|
|
|
|
|
|
|
|
2,621,544
|
|
|
Segment assets
|
|
$
|
3,325,367
|
|
|
|
1,590,690
|
|
|
|
4,916,057
|
|
For the three months ended May 31, 2013, information regarding operations by segment is as follows:
|
|
|
Manufacturing
|
|
|
Other (a)
|
|
|
Total
|
|
|
Revenue
|
|
$
|
677,085
|
|
|
|
|
|
$
|
677,085
|
|
|
Interest expense
|
|
$
|
19,340
|
|
|
|
14,152
|
|
|
|
33,492
|
|
|
Depreciation
|
|
$
|
48,775
|
|
|
|
|
|
|
|
48,775
|
|
|
Net income (loss)
|
|
$
|
70,021
|
|
|
|
(118,144
|
)
|
|
|
(48,123
|
)
|
|
Property and equipment, net of accumulated depreciation
|
|
$
|
2,745,165
|
|
|
|
|
|
|
|
2,745,165
|
|
|
Segment assets
|
|
$
|
3,524,413
|
|
|
|
1,544,643
|
|
|
|
5,069,056
|
|
______________
|
(a)
|
The “other” segment is mainly related to the holding company expenses and general overhead, as well as the stock based compensation awards.
|
Segment 1, manufacturing, consists of International Machine and Welding, Inc. and derives its revenues from machining operations, sale of parts and service.
The manufacturing segment, International Machine and Welding, Inc. has a broad and diverse base of customers. The segment does have a significant customer which accounts for 36% of total sales; the loss of this customer would have a material adverse effect on the segment. Also, this segment generates a significant amount of revenues from sales and services provided to three different industries.
|
ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
|
This FILING contains forward-looking statements. The words “anticipated,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “will,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect the Company’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, general economic and business conditions, changes in foreign, political, social, and economic conditions, regulatory initiatives and compliance with governmental regulations, the ability to achieve further market penetration and additional customers, and various other matters, many of which are beyond the Company’s control. Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those ANTICIPATED, believed, estimated, or otherwise indicated. Consequently, all of the forward-looking statements made in this FILING are qualified by these cautionary statements and there can be no assurance of the actual results or developments.
The Company cautions readers that in addition to important factors described elsewhere, the following important facts, among others, sometimes have affected, and in the future could affect, the Company’s actual results, and could cause the Company’s actual results during the year ended February 28, 2015 and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the Company.
This Management’s Discussion and Analysis or Plan of Operation presents a review of the consolidated operating results and financial condition of the Company for the three month periods ended May 31, 2014 and 2013. This discussion and analysis is intended to assist in understanding the financial condition and results of operation of the Company and its subsidiary. This section should be read in conjunction with the consolidated financial statements and the related notes.
RESULTS OF OPERATIONS
MANUFACTURING SEGMENT
The manufacturing subsidiary, International Machine and Welding, Inc., generates its revenues from three divisions. Division 1 provides specialized machining and repair services to heavy industry and original equipment manufacturers. Division 2 provides repair and rebuild services on heavy equipment used in construction and mining as well as sales of used equipment. Division 3 provides parts sales for heavy equipment directly to the customer. The primary market of this segment is the majority of central and south Florida with parts sales expanding its market internationally. The current operations can be significantly expanded using the 38,000 square foot structure owned by International Machine and Welding, Inc.
COMPARISON OF THE RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 31, 2014 AND 2013
General
The Company’s consolidated net sales decreased to $608,886 for the three months ended May 31, 2014, a decrease of $68,199 or 10%, from $677,085 for the three months ended May 31, 2013. Management believes the decrease is due to changes in the construction industry as machines are between their life cycles.
Gross profit for the consolidated operations decreased to $350,939 for the three months ended May 31, 2014 from $360,117 for the three months ended May 31, 2013. Gross profit as a percentage of sales increased to 58% for the three months ended May 31, 2014 from 53% for the three months ended May 31, 2014.
Consolidated selling, general and administrative expenses decreased to $358,398 for the three months ended May 31, 2014 from $378,615 for the three months ended May 31, 2013, a decrease of $20,217 or 5%.
Consolidated interest expense for the three months ended May 31, 2014 was $22,606 compared to $33,492 for the three months ended May 31, 2013. The decrease of $10,886 or 33% is primarily due to the decrease in notes payable.
Consolidated interest income for the three months ended May 31, 2014 was $5,920 compared to $3,867 for the three months ended May 31, 2013. The increase of $2,053 or 53% is primarily due to the increase in other receivables.
The Company incurred net consolidated income of $59,957 for the three months ended May 31, 2014 compared to a net loss of $48,123 for the three months ended May 31, 2013. The increase in net income is primarily due to the increase in other income for management services provided to another company, net of the decrease in sales.
Manufacturing Segment
The manufacturing operation, International Machine and Welding, Inc. provided net sales of $608,886 for the three months ended May 31, 2014 compared to $677,085 for the three months ended May 31, 2013. The machining operations provided $221,242 or 36% of net sales with parts and service providing $387,644 or 64% of net sales for the three months ended May 31, 2014 as compared to machining operations contributing $207,142 or 31% of net sales with parts and service providing $469,943 or 69% of net sales for the three months ended May 31, 2013.
Gross profit from International Machine and Welding, Inc. was $350,939 for the three months ended May 31, 2014 compared to $360,117 during the three months ended May 31, 2013 providing gross profit margins of 58%, for the three months ended May 31, 2014 as compared to 53% for the same period ended May 31, 2013.
Selling, general and administrative expenses for International Machine and Welding, Inc. were $257,372 for the three months ended May 31, 2014 compared to $270,759 for the three months ended May 31, 2013.
Interest expense was $15,650 for the three months ended May 31, 2014 compared to $19,340 for the three months ended May 31, 2013. The decrease in interest expense is primarily due to a reduction in notes payable.
The Company does not have discrete financial information on each of the three manufacturing divisions, nor does the Company make decisions on the divisions separately; therefore they are not reported as segments.
LIQUIDITY AND CAPITAL RESOURCES
During the three months ended May 31, 2014 and 2013, the Company used net cash for operating activities of $42,631 and provided $1,319, respectively.
During the three months ended May 31, 2014 and 2013, the Company used funds for investing activities of $9,075 and $31,219, respectively.
During the three months ended May 31, 2014 and 2013, the Company provided cash from financing activities of $51,862 and $27,563, respectively. The increase in net cash provided by financing activities is due to the increase in proceeds from the issuance of notes payable.
Cash flows from financing activities provided for working capital needs and principal payments on long-term debt through fiscal 2015. To the extent that the cash flows from financing activities are insufficient to finance the Company’s anticipated growth, or its other liquidity and capital requirements during the next twelve months, the Company will seek additional financing from alternative sources including bank loans or other bank financing arrangements, other debt financing, the sale of equity securities (including those issuable pursuant to the exercise of outstanding warrants and options), or other financing arrangements. However, there can be no assurance that any such financing will be available and, if available, that it will be available on terms favorable or acceptable to the Company.
Although management has reduced debt, new financing to finance operations and to facilitate additional production is still being sought. However, there can be no assurance that the Company will be able to raise capital, obtain debt financing, or improve operating results sufficiently to continue as a going concern.
SEASONALITY
The diversity of operations in the manufacturing segment protects it from seasonal trends except in the sales of agricultural processing where the majority of the revenue is generated while the processors await the next harvest.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The accompanying consolidated financial statements include the activity of the Company and its wholly owned subsidiary. All intercompany transactions have been eliminated in consolidation. The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. The Company reviews its estimates, including but not limited to, recoverability of long-lived assets, recoverability of prepaid expenses and allowance for doubtful accounts, on a regular basis and makes adjustments based on historical experiences and existing and expected future conditions. These evaluations are performed and adjustments are made as information is available. Management believes that these estimates are reasonable; however, actual results could differ from these estimates.
We believe that the following critical policies affect our more significant judgments and estimates used in preparation of our consolidated financial statements.
We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We base our estimate on an analysis of the Company’s prior collection experience, customer credit worthiness, and current economic trends. If the financial condition of our customers were to deteriorate, additional allowances may be required.
We value our inventories at the lower of cost or market. Cost is determined on a standard cost basis that approximates the first-in, first-out method; market is determined based on net realizable value. We write down inventory balances for estimated obsolescence or unmarketable inventory equal to the difference between the cost of the inventory and the estimated market value based upon assumptions about future demand and market conditions. If actual market conditions are less favorable than those projected by management, additional inventory write-downs may be required.
We value our property and equipment at cost. Amortization and depreciation are calculated using the straight-line and accelerated methods of accounting over the estimated useful lives of the assets. Maintenance and repairs are charged to operations when incurred. Betterments and renewals are capitalized. When property and equipment are sold or otherwise disposed of, the asset account and related accumulated depreciation account are relieved, and any gain or loss is included in operations.
Fair value estimates used in preparation of the consolidated financial statements are based upon certain market assumptions and pertinent information available to management. The respective carrying value of certain on-balance-sheet financial instruments approximated their fair values. These financial instruments include cash, accounts receivable, accounts payable, and accrued expenses. Fair values were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s notes payable is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.
NEW ACCOUNTING PRONOUNCEMENTS
For a description of recent accounting standards, including the expected dates of adoption and estimated effects, if any, on our financial statements, see “Note 3: Recent Accounting Pronouncements” in Part I, Item 1 of this Form 10-Q.
|
ITEM 4(T).
CONTROLS AND PROCEDURES
|
Disclosure Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we carried out an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rules 13a-15(f) and 15d-15(f)) under the Exchange Act. Based on that evaluation, our Chief Executive Officer and our Chief Financial Officer have concluded that, as of May 31, 2014, our internal disclosure controls and procedures were not effective due to material weaknesses in the system of internal control. A material weakness is a deficiency, or combination of deficiencies, that creates a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely manner.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.
The material weaknesses assessed by our management were (1) we have not implemented measures that would prevent the chief executive officer and the chief financial officer from overriding the internal control system and (2) our board of directors has determined that our audit committee does not have an independent “financial expert” as such term is defined under federal securities law. We do not believe that these material weaknesses have resulted in deficient financial reporting because both the chief executive officer and the chief financial officer are aware of their responsibilities under the SEC’s reporting requirements and they both personally certify our financial reports.
Management's Report on Internal Control over Financial Reporting
Accordingly, while we have identified material weaknesses in our system of internal control over financial reporting, we believe we have taken reasonable steps to ascertain that the financial information contained in this report is in accordance with generally accepted accounting principles. Our management has determined that current resources would be appropriately applied elsewhere and when resources permit, it will address and remediate material weaknesses through implementing various controls or changes to controls. At such time as we have additional financial resources available to us, we intend to enhance our controls and procedures. We will not be able to assess whether the steps we intend to take will fully remedy the material weakness in our internal control over financial reporting until we have fully implemented them and sufficient time passes in order to evaluate their effectiveness.
Material weaknesses assessed by our management were (1) we have not implemented measures that would prevent the chief executive officer and the chief financial officer from overriding the internal control system and (2) our board of directors has determined that our audit committee does not have an independent “financial expert” as such term is defined under federal securities law. We do not believe that these material weaknesses have resulted in deficient financial reporting because both the chief executive officer and the chief financial officer are aware of their responsibilities under the SEC’s reporting requirements and they both personally certify our financial reports.
A control system, no matter how well conceived or operated, can provide only reasonable, not absolute assurance that the objectives of the control system are met under all potential conditions, regardless of how remote, and may not prevent or detect all errors and all fraud. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Limitations on the Effectiveness of Controls
Our disclosure controls and procedures are designed to provide reasonable, not absolute, assurance that the objectives of our disclosure control system are met. Because of inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues, if any, within a company have been detected.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal controls over financial reporting identified in connection with the evaluation required by paragraph (d) of Securities Exchange Act Rule 13a-15 or Rule 15d-15 that occurred in the three months ended May 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Auditor’s Report on Internal Control over Financial Reporting
This Quarterly Report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this Quarterly Report.
PART II
|
ITEM 1.
LEGAL PROCEEDINGS
|
None.