The accompanying notes are an integral part of these
unaudited financial statements.
The accompanying notes are an integral part of these
unaudited financial statements.
The accompanying notes are an integral part of these
unaudited financial statements.
The accompanying notes are an integral part of these
unaudited financial statements.
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
1. BASIS OF PRESENTATION AND GOING CONCERN UNCERTAINTY:
The unaudited financial statements have been prepared by the Company, pursuant
to the rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
omitted pursuant to such SEC rules and regulations; nevertheless, the Company
believes that the disclosures are adequate to make the information presented not
misleading. These financial statements and the notes hereto should be read in
conjunction with the financial statements and notes thereto included in the
Company's Form 10-KSB for the year ended December 31, 2006, which was filed
April 27, 2007. In the opinion of the Company, all adjustments, including normal
recurring adjustments necessary to present fairly the financial position of
Utilicraft Aerospace Industries, Inc. as of September 30, 2007 and the results
of its Operations and cash flows for the nine months then ended, have been
included. The results of operations for the interim period are not necessarily
indicative of the results for the full year.
Utilicraft Aerospace Industries, Inc., (the "Company") was incorporated in the
State of Nevada on December 9, 2004 and uses a December 31 year end. It is a
development stage, research and development company. The Company was formed to
conceive and implement a solution to the problem of declining capacity in the
short haul (or feeder) route segments of the air cargo hub and spoke system. The
research and development efforts are focused on the design of a system for
moving freight, centered around a new aircraft specifically designed for feeder
route segments, the FF-1080 Freight Feeder aircraft. The Company is also engaged
in the development of related systems for fuel management and electronic freight
tracking (Note 2).
The financial statements of the Company have been prepared assuming that the
Company will continue as a going concern. However, since inception the Company
has a loss from operations of approximately $9,955,000. This is largely
attributable to the reorganization costs associated with American Utilicraft
Corporation ("AMUC") (Note 3) and the costs of sustaining a corporate
infrastructure and the related overhead deemed necessary to support the
Company's operations while raising capital to develop a prototype of the
aircraft described above. Cash losses from operations since inception have been
approximately $3,188,000. Although the Company has a working capital deficiency
of approximately $5,075,613 at September 30, 2007, approximately $3,528,081 of
this deficiency is owed to the principal officers of the Company and will be
paid when and if funds are available.
In light of the Company's current financial position and the uncertainty of
raising sufficient capital to achieve its business plan, there is substantial
doubt about the Company's ability to continue as a going concern. In the opinion
of management, approximately $15,000,000 will be required over the next twelve
months to remove any threat to the continuation of its business during such
time. The Company has entered into a financing agreement as more fully discussed
in Note 7, with PacifiCorp Funding Partners Trust ("PacifiCorp"), to potentially
provide between $40,000,000 and $80,000,000 in equity financing. Despite these
activities, there can be no assurance that management's efforts to adequately
capitalize the Company will be successful.
There have been no changes in accounting policies used by the Company during the
quarter ended September 30, 2007.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Management estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of the financial statements and
the reported amounts of operating expenses during the reporting periods. Actual
results could differ from these estimates.
Cash and cash flows
For purposes of the statements of cash flows, cash includes demand deposits and
time deposits with maturities of less than three months. None of the Company's
cash is restricted.
The Company maintains cash accounts, which could exceed federally insured
limits. The Company has not experienced any losses from maintaining cash
accounts in excess of federally insured limits. Management believes that the
Company does not have significant credit risk related to its cash accounts.
-7-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED
Fair value of financial instruments
In accordance with the reporting requirements of SFAS No. 107, Disclosures About
Fair Value of Financial Instruments, the Company calculates the fair value of
its assets and liabilities which qualify as financial instruments under this
statement and includes this additional information in the notes to the financial
statements when the fair value is different than the carrying value of those
financial instruments. The estimated fair value of the loans from related party
approximate their carrying amounts due to the short maturity of these
instruments. At September 30, 2007, the Company did not have any other financial
instruments.
Stock Based Compensation
Effective September 30, 2005, the Company adopted Statement of Financial
Accounting Standards (SFAS) 123R, Share-Based Payment, using the modified
prospective method. This statement requires the Company to recognize
compensation cost based on the grant date fair value of options granted to
employees and directors.
Recent accounting pronouncements
In July 2006, the FASB issued FASB Interpretation No. 48, Accounting for
Uncertainty in Income Taxes (FIN 48). FIN 48 clarifies the accounting for income
taxes by prescribing a minimum probability threshold that a tax position must
meet before a financial statement benefit is recognized. The minimum threshold
is defined in FIN 48 as a tax position that is more likely than not to be
sustained upon examination by the applicable taxing authority, including
resolution of any related appeals or litigation processes, based on the
technical merits of the position. The tax benefit to be recognized is measured
as the largest amount of benefit that is greater than fifty percent likely of
being realized upon ultimate settlement. FIN 48 must be applied to all existing
tax positions upon initial adoption. The cumulative effect of applying FIN 48 at
adoption, if any, is to be reported as an adjustment to opening retained
earnings for the year of adoption. FIN 48 is effective for the Company's year
end 2007, although early adoption is permitted. The Company is assessing the
potential effect of FIN 48 on its financial statements.
In 2006, the Financial Accounting Standards Board issued the following:
- SFAS No. 155: Accounting for Certain Hybrid Financial Instruments
- SFAS No. 156: Accounting for Servicing of Financial Assets
- SFAS No. 157: Fair Value Measurements
- SFAS No. 158: Employers' Accounting for Defined Benefit Pension
and Other Postretirement Plans
Management has reviewed these new standards and believes that they have no
impact on the financial statements of the Company.
Income taxes
The Company employs the asset and liability method in accounting for income
taxes pursuant to Statement of Financial Accounting Standards (SFAS) No. 109
"Accounting for Income Taxes." Under this method, deferred tax assets and
liabilities are determined based on temporary differences between the financial
reporting and tax bases of assets and liabilities and net operating loss
carryforwards, and are measured using enacted tax rates and laws that are
expected to be in effect when the differences are reversed.
-8-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -CONTINUED
Net loss per share
------------------
Basic net loss per share is computed based upon the weighted average number of
common shares outstanding during the periods, adjusted for contingently
returnable shares (see Note 7) and is computed by dividing net loss by the
adjusted weighted average number of shares during the periods. Diluted net loss
per share is based upon the weighted average number of common shares outstanding
during the periods, adjusted for contingently returnable shares, plus the number
of incremental shares of common stock contingently issuable upon the exercise of
the outstanding warrants, (Notes 5 and 7). No effect has been given to the
potential exercise of the warrants because their effect would be anti-dilutive.
Basic net loss per share has been computed as follows:
Nine Months Nine Months
Ended Ended
September 30, September 30,
2007 2006
------------- -------------
Net loss $ (1,346,881) $ (1,333,526)
============= =============
Weighted average common shares outstanding 215,857,989 213,560,692
Less - weighted average contingently returnable shares (56,833,202) (58,634,061)
------------- -------------
Adjusted weighted average for basic net loss per share 159,024,787 154,926,631
computation
============= =============
Basic net loss per share $ (0.01) $ (0.01)
============= =============
|
Engineering, research and development
The Company expenses engineering, research and development costs as they are
incurred. For the nine months ended September 30, 2007 and the years ended
December 31, 2006 and 2005, respectively, and for the period from December 9,
2004 (inception) through September 30, 2007, such costs were $51,420, $174,445,
$261,428 and $491,173, respectively. These amounts relate to research and
development of the Company's new aircraft design.
Performance Flight Test Aircraft
Costs directly related to building the Performance Flight Test Aircraft ("PFTA")
amounting to $563,149 as of September 30, 2007 include engineering design, wind
tunnel testing and costs associated with the construction of the fuselage. Upon
completion, these costs and other costs related to building the completed PFTA
will be depreciated over the then estimated useful life of the PFTA.
Patents
In December 2004, the Company obtained the assignment of rights to three U.S.
patents from its President pursuant to the terms of his "Employment Agreement."
One patent is for the design of the FF-1080 aircraft. Another is a method patent
that incorporates the design in an integrated air cargo information system for
an electronic freight tracking system. The third patent is for a system that
computes the most economical route segment based on the change in aircraft gross
weight on each segment resulting in better fuel efficiency.
The Company's access to the patents was obtained from the Employment Agreement
discussed above with its President, and were not assigned any value because all
of the costs and obligations incurred in connection with obtaining access to the
patents were not paid to its President but were paid to AMUC, its stockholders
and creditors aggregating approximately $3,519,000 and were expensed at the
reorganization date of December 9, 2004 and reflected in the accompanying
financial statements as "Related party reorganization costs."
-9-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
3. TRANSACTIONS WITH AMERICAN UTILICRAFT CORPORATION
The Company was effectively reorganized from American Utilicraft Corporation
("AMUC") through the issuance of 111,444,769 Common shares to AMUC and 294,000
common shares issued directly to AMUC stockholders, effective for accounting
purposes as of December 9, 2004. AMUC distributed the shares it received to its
stockholders.
AMUC was engaged in the development of the FF-1080-300ER prior to the forming of
UAI. As consideration for the release of any claims to the patent rights (Note
2), the Company paid approximately $1,146,000 to AMUC or directly to its
creditors and assumed liabilities for deferred compensation to former officers
and employees of AMUC of approximately $1,892,000 and debt to an officer of
approximately $532,000. Such amounts have been reflected as "Related party
reorganization costs" in the accompanying statements of operations as discussed
in Note 2.
Since the Company acquired none of the assets of AMUC nor assumed any business
formerly operated by AMUC, no financial statements of AMUC are presented. The
reorganization transactions were accounted for at the fair value of cash paid
and liabilities assumed.
4. NOTE PAYABLE
The Note Payable of $142,894 is at no interest with installments due as set
forth below. At September 30, 2007, the Company was delinquent on the payments
due through September 15, 2007.
$15,000 on July 5, 2007
$50,000 on July 31, 2007
$25,000 on August 15, 2007
$13,085 on September 15, 2007
$39,809 within 5 business days of first flight of PFTA or July 3, 2008,
whichever date comes first.
5. CAPITAL STRUCTURE DISCLOSURES
The Company's capital structure is not complex. The Company is authorized to
issue 25,000,000 shares of preferred stock with a par value of $.0001 per share.
The Company is authorized to issue 475,000,000 shares of common stock with a par
value of $.0001 per share.
Preferred stock
No shares of preferred stock have been issued as of September 30, 2007.
Common stock
Each common stock share has one voting right and the right to dividends if and
when declared by the Board of Directors.
Stock options, warrants and other rights
As of September 30, 2007, the Company has not adopted any employee stock option
plans.
Valuation of stock issued for services
Effective May 6, 2005, the Company issued 20,000,000 shares to two executive
officers for services rendered in connection with pre-incorporation services and
their agreement to serve as directors. The shares were valued at $.07 per share
based on shares issued in February and March 2005 for cash at $.10 per share.
Management of the Company estimated the value below the cash price of $.10 per
share because the shares contained no registration rights and contain resale
restrictions. The expense is reflected in the accompanying statements of
operations under "compensation and related costs."
In June of 2007, the Company issued 250,000 shares of restricted common stock to
its Vice President and Chief Financial Officer as stipulated in his employment
agreement and valued the shares at $0.15 per share.
In June of 2007, the Company issued 500,000 shares of restricted common stock to
a consulting firm for advisory and investment banking services and valued the
shares at $0.15 per share.
-10-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
5. CAPITAL STRUCTURE DISCLOSURES -CONTINUED
Warrants
A summary of all the Company's warrants outstanding at September 30, 2007,
December 31, 2006 and 2005, respectively and the changes during the years then
ended is presented in the following table.
AMUC Related
Stockholders PacifiCorp Party Total
----------- ----------- ----------- -----------
Warrants outstanding, December 31, 2004 17,287,664 -- -- 17,287,664
Issued -- 60,000,000 -- 60,000,000
----------- ----------- ----------- -----------
Warrants outstanding, December 31, 2005 17,287,664 60,000,000 -- 77,287,664
Issued -- -- 1,084,388 1,084,388
Exercised -- (2,502,960) -- (2,502,960)
----------- ----------- ----------- -----------
Warrants outstanding, December 31, 2006 17,287,664 57,497,040 1,084,388 75,869,092
Issued 250,000 250,000
Exercised -- (750,000) -- (750,000)
----------- ----------- ----------- -----------
Warrants outstanding, September 30, 2007 17,287,664 56,747,040 1,334,388 75,369,092
=========== =========== =========== ===========
|
As of September 30, 2007, the Company has outstanding warrants issued to AMUC
stockholders that are exercisable to purchase 17,287,664 shares of the Company's
common stock at prices ranging from $.10 to $5.00 per share. All such warrants
expire in January 2008. See Note 7 for a description of warrants issued in
connection with a financing agreement to purchase 60,000,000 shares of common
stock.
In January and March 2006, the Company agreed to issue warrants to its President
to purchase 897,416 and 186,972, respectively, shares of common stock in lieu of
paying interest and for consideration of default risk on the additional loans
made to the Company during 2005 and 2006 (Note 8). The warrants are exercisable
at $1.00 per share over three years from January 15, 2006 and March 31, 2006.
In March of 2007, the Company issued warrants its Vice President and Chief
Financial Officer 250,000 warrants to purchase 250,000 shares of common stock as
part of his employment agreement. The warrants are exercisable at $.50 per
share.
6. INCOME TAXES
The Company accounts for corporate income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under SFAS No. 109, deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases. In addition,
future tax benefits, such as those from net operating loss carry forwards, are
recognized to the extent that realization of such benefits is more likely than
not. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in the period that
includes the enactment date.
-11-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
6. INCOME TAXES - CONTINUED
At September 30, 2007, December 31, 2006 and December 31, 2005, the Company's
only deferred tax assets are offset by a valuation allowance, (there were no
deferred tax liabilities) which totaled approximately $3,361,000, $2,912,000 and
$2,335,660, respectively (using an anticipated effective tax rate of 34%) and
was attributable to its net operating tax loss carryforwards of approximately
$7,271,000 incurred since inception. These operating losses expire from 2024
through 2026.
A reconciliation of income tax expense at the statutory federal rate of 34% to
income tax expense at the Company's effective tax rate is as follows:
Period From
Nine Months December 9,
Ended Year Ended Year Ended 2004
September December December (Inception) to
30, 31, 31, September 30,
2007 2006 2005 2007
----------- ----------- ----------- -----------
Tax benefit computed at statutory rate $ 344,600 $ 577,000 $ 1,116,000 $ 3,361,000
Increase in valuation allowance (344,600) (577,000) (1,116,000) (3,361,000)
Net Change $ -- $ -- $ -- $ --
|
7. COMMITMENTS AND CONTINGENCIES
Funding commitment
The Company entered into a financing agreement (the "Agreement") effective
September 12, 2005 with PacifiCorp Funding Partners Trust ("PacifiCorp") to
provide equity financing of a minimum of $40,000,000 and a maximum of
$80,000,000 through the exercise of warrants for the purchase of up to
60,000,000 shares. The terms of the warrants are as follows:
(i) Warrants for the purchase of 20 million shares are exercisable at $.50
per share for a period of 360 days after execution of the Agreement
(the exercise period has been extended to December 31, 2007 by the
Company);
(ii) Warrants for the purchase of 30 million shares are exercisable at
$1.50 per share for a period of 540 days after execution of the
Agreement (the exercise period has been extended to December 31, 2007
by the Company);
(iii) And, warrants for the purchase of 10 million shares are exercisable
at $2.50 per share for a period of 720 days after execution of the
Agreement (the exercise period has been extended to December 31, 2007
by the Company).
As consideration for PacifiCorp's funding efforts, the Company and two executive
officers collectively agreed to contribute a total of 80,000,000 shares (the
"PacifiCorp Shares") of restricted common stock of the Company to PacifiCorp.
The PacifiCorp Shares consist of 60,584,260 common shares newly issued by the
Company to PacifiCorp (these shares are considered legally issued and
outstanding and are entitled to full voting rights and dividends, provided that
in the event PacifiCorp fails to meet its funding obligations and the subsequent
return of any portion of the shares, PacifiCorp will have an obligation to repay
any dividends on returned shares), and a total of 19,415,740 common shares
personally transferred to PacifiCorp from the two executive officers.
In the event that PacifiCorp fails to exercise warrants sufficient to generate
the minimum funding ($40,000,000) within 540 days following the execution of the
Agreement (effectively, March 6, 2007), extended by the Company to December 31,
2007, upon demand, PacifiCorp will be obligated to return all of the PacifiCorp
Shares to the Company and return all unexercised warrants for cancellation or
resale. The Agreement allows the parties to renegotiate the terms of exercise of
the warrants, whether as to exercise price or period, in the event of the
establishment of a public market for the Company's common stock.
-12-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
7. COMMITMENTS AND CONTINGENCIES - CONTINUED
The 60,584,260 new PacifiCorp Shares issued by the Company were not valued under
the provisions of SFAS 123R since there is no performance commitment other than
to return the shares. The value of the above warrants was determined by
management to be insignificant and, accordingly, no value was assigned to the
warrants. Any shares returned by PacifiCorp due to failure to exercise
sufficient warrants to generate the minimum funding will be returned pro-rata to
the Company and the executive officers. Though PacifiCorp may be obligated to
return the PacifiCorp Shares, upon obtaining authorization from an Officer of
the Company, it is authorized to transfer such shares to third parties during
the period the Agreement remains in effect. Because the new PacifiCorp shares
are contingently returnable until the minimum funding of $40,000,000 is reached,
all unearned shares as of December 31, 2006 (58,363,129 common shares) have been
excluded from the weighted average common shares used in computing basic net
loss per share until all necessary conditions have been satisfied or when the
shares are no longer returnable.
During the year ended December 31, 2006, PacifiCorp transferred funds totaling
$1,466,439 to the Company for exercise of warrants for the purchase of 2,502,960
shares at an exercise price of $.50 per share. Notwithstanding the fact that
PacifiCorp has only paid for the purchase of 2,502,960 shares as of December 31,
2006, it has requested and obtained transfer of a total of 5,078,160 PacifiCorp
Shares to third parties. Since the Company has not retained a security interest
in the PacifiCorp Shares and retains no right to demand return of the shares
from a third party in the event PacifiCorp defaults on its minimum funding
obligations as of December 31, 2006, the Company has recognized 2,221,131 of the
60,584,260 PacifiCorp Shares transferred as "earned." In addition, 711,829 of
the 19,415,740 previously issued and outstanding shares personally transferred
by the two executive officers, have also been considered as "earned."
During the nine months ended September 30, 2007, PacifiCorp transferred funds
totaling $160,000 to the Company for exercise of warrants for the purchase of
320,000 shares at an exercise price of $.50 per share. The Company is also in
the process of issuing PacifiCorp 430,000 shares for exercises in 2006. As of
September 30, 2007 PacifiCorp has acquired a total of 5,918,960 shares by the
exercise of 3,252,960 warrants and the sale of 2,999,333 its shares for
$850,100, which shares were issued to PacificCorp under this funding agreement
as set forth above. PacifiCorp made the decision to have the $850,100 come to
the Company for production of the Performance Flight Test Aircraft and since the
shares were not originally valued the $850,100 was added to the Company's
additional capital as these shares relate to the funding commitment.
Notwithstanding the fact that PacifiCorp has acquired the 5,918,960 shares as
set forth above, it has requested and obtained transfer of a total of 7,744,160
PacifiCorp Shares to third parties in the process of acting on its funding
agreement. Since the Company has not retained a security interest in the
PacifiCorp Shares and retains no right to demand return of the shares from a
third party in the event PacifiCorp defaults on its minimum funding obligations
as of September 30, 2007, the Company has recognized 3,751,058 of the 60,584,260
PacifiCorp Shares transferred as "earned." In addition, 1,177,872 of the
19,415,740 previously issued and outstanding shares personally transferred by
the two executive officers, have also been considered as "earned."
The Company protects its rights with respect to return of the PacifiCorp Shares
(in the event PacifiCorp fails to meet its minimum funding obligation) by
maintaining control over the certificates representing PacifiCorp Shares that
are registered in the name of PacifiCorp (i.e., the shares that have not been
transferred to third parties) as well as any shares issued upon the exercise of
the warrants in the name of PacifiCorp ("PacifiCorp Warrant Shares"). As such,
the Company is effectively able to insure that PacifiCorp will be able to meet
share return obligations in the event it is unable to meet minimum funding
obligations under the Agreement.
Operating leases
The Company is presently obligated under several operating leases.
Ground Lease, City of Albuquerque, New Mexico
This lease, effective March 31, 2005, is for the Company's future primary
operations and manufacturing facility. The City of Albuquerque has agreed to
abate certain portions of the monthly rentals until the end of the initial five
year lease in January 2010. The abatement results in 100% of the first year's
rent and 50% of the next four years' rent to be deferred until January 2010, at
which time, the abated rent, aggregating $144,000, will be due and payable.
During the first year of the lease, abated monthly rentals of $4,000 were
accrued. In April 2006, the abated monthly rentals were reduced to $2,000 per
month. This abated rent obligation is reflected in the accompanying balance
sheet as "Deferred rent obligation." During the nine months ended September 30,
2007 and the years ended December 31, 2006 and 2005, respectively, the Company
recorded rent expense under this lease of $18,000, $48,000 and $48,000,
respectively.
At the end of the initial five year period, the lease provides for changes in
the annual rent during each successive five year period throughout its 20 year
term based on changes in the fair market value of the underlying land.
-13-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
7. COMMITMENTS AND CONTINGENCIES - CONTINUED
Office Space Lease, Plaza II Executive Center
The Company entered into a Lease Agreement with Plaza II Executive Center, Inc.
on July 25, 2005. Pursuant to the Lease Agreement the Company leased 1,500 sq.
ft. of office space located at 125 Lincoln Avenue, Suite 400, 125 Lincoln Plaza,
Santa Fe, New Mexico for an initial term of eight (8) months beginning on August
1, 2005 and ending on March 1, 2006. The lease was automatically extended
pursuant to its terms to July 31, 2007 and was amended to extend the term of the
lease to July 31, 2008. Pursuant to the amendment, the monthly rent on the
extended lease is $2,465 and the lease provides for a minimum $50 monthly
support service charge, and a $10 per month, per person, kitchen fee.
Hanger Lease, City of Albuquerque, New Mexico
This lease is for temporary space until the Company's permanent facility is
constructed as discussed above. Monthly rentals are $3,600 on a month-to-month
basis beginning March 1, 2006. During the nine months ended September 30, 2007
and the year ended December 31, 2006, the Company recorded lease expense under
this lease of $32,400 and $50,699, respectively.
Aircraft Lease, Related Party, J.D. Aero, LLC
The Company leases an aircraft from a company wholly owned by the Company's
President. The lease is for five year term with monthly payments of $2,500.
During the nine months ended September 30, 2007 and the years ended December 31,
2006 and 2005 and for the period from December 9, 2004 (inception) through
December 31, 2006, the Company recorded rent expense under this lease of
$22,500, $30,000, $21,478 and $66,478, respectively.
In April 2006, the Company paid $25,489 for electronics that were added to the
aircraft for testing purposes for the FF-1080. Under terms of the lease, these
additions remain the property of J.D. Aero, L.L.C.
The following is a schedule of future minimum rental payments required under the
above long-term operating leases for the next five calendar years:
Year Amount
--------------- ----------
2007 $41,050
2008 95,605
2009 78,000
2010 63,000
----------
$ 277,655
==========
|
Purchase commitments
Once production of the Company's prototype aircraft commences, purchase
commitments will consist primarily of agreements for raw materials and parts
needed in the Company's aircraft manufacturing operations.
The Company estimates it will require approximately $15,000,000 over the next 12
months for its Performance Flight Test Aircraft ("PFTA"), engineering and
general and administrative expenses, and FAA Part 25 Type Certification.
An engineering contract for the wing design and a wind tunnel is in place for
approximately $325,000, of which approximately $285,085, has been paid through
September 30, 2007, and $198,085 is reflected in "Performance flight test
aircraft and Prototypes for design aircraft" assets on the accompanying balance
sheet.
Executive compensation
The Company is obligated under the terms of employment contracts for seven of
its executive officers. The terms of the contracts are generally five years and
provide for annual salaries of $95,000 to $300,000 each. The annual compensation
for these seven executive officers aggregates approximately $1,120,000.
-14-
UTILICRAFT AEROSPACE INDUSTRIES, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2007
7. COMMITMENTS AND CONTINGENCIES - CONTINUED
The contracts provide for substantial increases based on certain future events
that, if achieved by the Company, would raise the aggregate annual compensation
to approximately $1,500,000, subject to inflation adjustments.
The contracts also provide for bonuses based on certain numbers of aircrafts
sold in the future. Certain officers may earn a bonus based on rates varying
from 1/16 of 1% to 3% of the aircraft's selling price.
The employment agreement for the President of the Company also provides that he
will receive a bonus equal to 4% of the "net profits," as defined, in each
fiscal year.
If there is a change in control, of the Company, as defined, each officer is
subject to significant severance benefits, which provide, among other things,
for ten times then current salary, allowance to surrender stock options, receive
health benefits for two years and to pay legal expenses to defend the officer's
contract up to $250,000 each.
Royalties to officer/founder
As part of the consideration for transferring use of the patents to the Company
that are owned by the President, in December 2004, the Company agreed to pay
royalties in the amount of 3% of the Company's gross proceeds on all sales of
the FF-1080 Series of aircraft to its President. Such royalties are payable
within thirty days of receipt for payments on such aircraft. Royalties are
payable on the first 2,000 aircraft sold by the Company.
Pursuant to the employment agreement of the President, if it expires without
renewal or is terminated for any reason except one that would cause revocation
of the patent assignments, the Company may continue the development, manufacture
and sale of the FF-1080 Series of aircraft subject to the payment of additional
royalties equal to 3% of the gross sales of the products. This would be in
addition to the royalties payable that are discussed above.
8. RELATED PARTY TRANSACTIONS
As discussed in Note 3, the Company assumed the obligation for loans and
advances made to AMUC by J.D. Aero, LLC ("Aero") and the Company's President, of
$532,000. As of September 30, 2007, these loans and advances, which bear
interest at 4% and are unsecured, aggregated $413,569, plus accrued and unpaid
interest of $63,250, and are reflected in "Loans and advances from related
party" and "Accrued interest, related party" on the accompanying balance sheet.
For the nine months ended September 30, 2007, and the years ended December 31,
2006 and 2005 and the period from December 9, 2004 (inception) to December 31,
2006, interest expense of $14,376, $30,393, $23,199 and $63,820, respectively,
has been reflected in the accompanying statements of operations.
In January and March 2006, the Company agreed to issue warrants to its President
to purchase 897,416 and 186,972, respectively, shares of common stock in lieu of
paying interest and for consideration of default risk on the advance portion of
the loans, which were $317,841 at the conversion date (Note 4). Accordingly,
accrued interest of $3,378 has been included in additional paid-in capital
during the year ended December 31, 2006. The warrants are exercisable at $1.00
per share over three years from January 15, 2006 and March 31, 2006.
In March of 2007, the Company issued warrants to its Vice President and Chief
Financial Officer 250,000 warrants to purchase 250,000 shares of common stock as
part of his employment agreement. The warrants are exercisable at $.50 per
share.
In June of 2007, the Company issued 250,000 shares of restricted common stock to
its Vice President and Chief Financial Officer as part of his employment
agreement and valued the shares at $0.15 per share.
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Item 2. Management's Discussion and Analyses of Financial Condition and Results
of Operation
The following discussion should be read in conjunction with our consolidated
financial statements provided in this annual report on Form 10-KSB. Certain
statements contained herein may constitute forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. These
statements involve a number of risks, uncertainties and other factors that could
cause actual results to differ materially, as discussed more fully herein.
The forward-looking information set forth in this annual report is as of the
date of this filing, and we undertake no duty to update this information. More
information about potential factors that could affect our business and financial
results is included in the section entitled "Risk Factors" of this annual
report.
The budget for completion of the PFTA and FAA certification, both in time and
money, is largely based on the availability of funds. If we are unable to obtain
required funding on a timely basis, both these budgets will likely be exceeded,
and it will cost more and take longer to accomplish these tasks.
Overview
We are a development stage research and development company with no product to
sell, no revenue stream, significant operating losses and negative cash flow
from operations. The Company has incurred net losses from operations of
$9,954,955 for the period from inception to September 30, 2007. Our ability to
continue as a going concern is subject to sales of stock, the vagaries of the
market for our stock and various other factors. There is no assurance that we
can continue as a going concern.
Our plan is to focus on completing the PFTA and expediting the certification of
the FF-1080-200 in furtherance of our goal to bring the aircraft to market. We
expect these tasks and processes will cost approximately $51,000,000, and take a
minimum of 24 months. We anticipate that the PFTA will cost approximately
$11,000,000, and that Phase I and Phase II FAA certification will cost
approximately $40,000,000. We expect to continue to fund these operations
through private-placement sales of common stock and/or warrants.
Phase I will include the development of the certification plan, filing of the
certification application, certification of the detailed production engineering,
construction of the static test articles and the conformity aircraft
subassemblies, and initial flight tests using the prototype aircraft. Phase II,
which will begin 6 months after commencement of Phase I, will include final
assembly of the conformity aircraft, certification flight-testing and receipt of
final FAA Part 25 Type Certification.
To implement the foregoing time schedule, we expect to complete the detailed
engineering of the PFTA and to construct the aircraft during the first 12 months
of the plan. The PFTA will be a pre-certified, non-production aircraft that will
be built under the regulations for experimental aircraft.
Upon completion of the detailed CAD engineering of the PFTA, we will initiate
the FAA Part 25 Type Certification program, which is anticipated to be completed
over a 24 month period. We have completed approximately 80% of our detailed CAD
engineering, and can finish this work within two months, pending availability of
funds.
Our business plan calls for the completion of up to 36 aircraft during the
period in which are obtaining the FAA Part 25 Type Certification, depending on
customer orders; that is to say we could deliver our first production aircraft
and begin recognizing revenues immediately upon obtaining certification. We
would finance building these type-conforming aircraft through production
progress payments from customers in accordance with standard industry practices.
Though we have no firm orders secured as of the date of this report, we expect
to begin obtaining orders during the Part 25 Type Certification process.
Notwithstanding the anticipations and estimates set forth in this section, it
should be noted that the timeline for the development stages has been and may be
further delayed due to lack of funding, the timing of FAA reviews and
certification, or other factors..
We continue to pursue various direct sales initiatives with prospective
customers. Our current focus is on the international market, where we believe
buyers would be willing to begin committing funds to eventual purchases of our
planes earlier than their domestic counterparts. Our current marketing and
customer-development program is aimed at securing orders for the FF-1080-200
aircraft. The Company has imposed threshold requirements for parties seeking to
qualify as distributors. Prospective distributors must demonstrate sufficient
finances and business operating history (current financial statement) to prove
that they are viable on-going and solvent companies, and are able to support
their current and future aerospace business or MRO operations.
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Results of Operations
Nine and Three Months Ended September 30, 2007 Compared to Nine and Three Months
Ended September 30, 2006.
Net sales. The Company remains in the development stage and has not
had any sales since its inception date of December 9, 2004.
Operating expenses. The Company remains in the development stage its
operating expenses consisting of compensation related costs, general and
administrative expenses, engineering, research and development for the nine and
three months ended September 30, 2007 and 2006 are comparative for each of the
periods as indicated in the following summary:
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
September 30, September 30, September 30, September 30,
2007 2006 2007 2006
---------- ---------- ---------- ----------
Compensation related costs $ 251,758 $ 259,465 $ 827,021 $ 721,020
General and Administrative Expenses 102,770 47,171 414,255 409,525
Engineering, Research and Development 15,547 85,656 51,420 179,183
Interest Expense 4,148 7,433 54,185 23,798
---------- ---------- ---------- ----------
Total Operating Expenses $ 374,223 $ 399,724 $1,346,881 $1,333,526
========== ========== ========== ==========
|
The Compensation related costs increased as the Company increased its
management staff in preparation for the building of the FF-1080 prototype plan
and the related marketing efforts.
The General and Administrative Expenses increased primarily due to an
increase in corporate, legal and hanger expenses.
Interest expense increased for the periods in 2007 as compared to 2006 due
to the interest charges on the wind tunnel agreement with Analytical Methods,
Inc.
Net Result. As the result of the Company not having any sales for the
periods, our net loss for the nine months ended September 30, 2007 and 2006 and
the three months ended September 30, 2007 and 2006, respectively, equaled the
total operating expenses for the periods as set forth in the tables above.
Liquidity and Future Capital Requirements
Since inception we initially funded operations from proceeds from a private
placement. We were initially capitalized with approximately $2,000,000 raised
from a private placement offering of 20,000,000 shares of common stock on
January 19, 2005, and have received approximately $2,400,000 million in
additional subscriptions or for exercise of warrants since then.
We will require approximately $15,000,000 to sustain operations over the next 12
months, which includes PFTA engineering and construction costs of approximately
$11,000,000 and general and administrative expenses of approximately $3,000,000.
The balance will be reserved for contingency items that may occur in this
process. Budgeted amounts not spent due to cost-savings and additional funds
received by the Company will be allocated to initiate FAA Part 25 Type
Certification. We cannot satisfy our current cash requirements without raising
additional funds through our agreement with PacifiCorp Funding Partners Trust or
obtaining debt or equity financing through other qualified lenders or investors.
We entered into an Amended Master Financing Agreement (referred to herein as the
"PacifiCorp Agreement") Between PacifiCorp Funding Partners Trust and Utilicraft
Aerospace Industries, Inc. effective as of September 12, 2005. Pursuant to the
terms of the PacifiCorp Agreement, PacifiCorp Funding Partners Trust
("PacifiCorp"), a trust formed under the laws of the Republic of Mauritius has
agreed to potentially provide a minimum of $40,000,000 and a maximum of
$80,000,000 in financing through the exercise of warrants (the "PacifiCorp
Warrants") granted to PacifiCorp for the purchase of up to 60,000,000 shares of
our common stock. The PacifiCorp Agreement provides that PacifiCorp will utilize
its best efforts to provide funding but does not obligate PacifiCorp to exercise
any of the PacifiCorp Warrants. The PacifiCorp Warrants consist of (1) warrants
for the purchase of 20,000,000 shares of common stock at a price of $0.50 per
share, exercisable for a period of 360 days (the exercise period has been
extended by the Company to December, 31, 2007); (2) warrants for the purchase of
30,000,000 shares of common stock at a price of $1.50 per share, exercisable for
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a period of 540 days (the exercise period has been extended by the Company to
December 31, 2007); and (3) warrants for the purchase of 10,000,000 shares of
common stock at a price of $2.50 per share, exercisable for a period of 720
days. The PacifiCorp Agreement expressly states that the parties reserve the
right, without obligation, to renegotiate the terms of exercise of the
PacifiCorp Warrants, whether as to exercise price or period, in the event of the
establishment and based on the condition (price and volume) of a public market
for our common stock. In addition, the Company, John Dupont and Darby Boland
collectively agreed to contribute a total of 80,000,000 shares (the "PacifiCorp
Shares") of restricted common stock of the Company to PacifiCorp. The PacifiCorp
Shares consist of 60,584,260 shares newly issued by the Company, 11,660,000
shares contributed and transferred by John Dupont personally, and 7,755,740
shares contributed and transferred by Darby Boland personally. The PacifiCorp
Trustee is entitled to exercise full voting rights relating to the PacifiCorp
Shares. In the event that PacifiCorp fails to exercise PacifiCorp Warrants
sufficient to generate the minimum funding (i.e., $40,000,000) provided for in
the PacifiCorp Agreement within 540 days following execution (the exercise
period has been extended by the Company to December 31, 2007), PacifiCorp is
obligated to return the PacifiCorp Shares and all unexercised PacifiCorp
Warrants for cancellation. Notwithstanding the foregoing obligation, the
PacifiCorp Agreement allows for transfer of the PacifiCorp Shares to third
parties but provides that any transfer during the period the PacifiCorp
Agreement is in effect requires a counter-party signature from an Officer of the
Company. No security interest in the PacifiCorp Shares is reserved pursuant to
the PacifiCorp Agreement, and absent any subsequent agreement between the
parties with respect to resale of the PacifiCorp shares, the Company retains no
right to demand return of the shares from a third party in the event PacifiCorp
defaults on its obligations. None of the PacifiCorp Shares or shares to be
issued upon exercise of the PacifiCorp Warrants have been registered.
During the year ended December 31, 2006, PacifiCorp transferred net funds
totaling $1,466,439 to us for exercise of PacifiCorp Warrants for the purchase
of 2,502,960 shares at an exercise price of $.50 per share. Notwithstanding the
fact that PacifiCorp has only paid for the purchase of 2,502,960 shares as of
December 31, 2006, it has requested and obtained transfer of a total of
5,078,160 of the PacifiCorp Shares to third parties.
During the nine months ended September 30, 2007, PacifiCorp transferred net
funds totaling $160,000 to us for exercise of PacifiCorp Warrants for the
purchase of 320,000 shares at an exercise price of $.50 per share. The Company
is also in the process of issuing PacifiCorp 430,000 shares for exercises in
2006. During this period, PacifiCorp also sold 2,999,333 of its shares received
from the Company as part of its funding agreement and elected to have the
$850,100 come directly to the Company for the development of the Performance
Flight Test Aircraft and the Company added the $850,100 to its additional paid
in capital account as the proceeds related to the stock issued to PacifiCorp as
part of the funding agreement.
We protect our rights with respect to return of the PacifiCorp Shares under the
PacifiCorp Agreement (in the event PacifiCorp fails to meet its minimum funding
obligation) by maintaining control over the certificates representing PacifiCorp
Shares that are registered in the name of PacifiCorp (i.e., the shares that have
not been transferred to third parties). While we do not have the right to
recover shares sold or pledged by PacifiCorp to third-parties, we do ensure
receipt of funds for Warrant exercise prior to permitting transfers from the
PacifiCorp certificates. Because we also hold the certificates representing
shares issued upon the exercise of the PacifiCorp Warrants in the name of
PacifiCorp ("PacifiCorp Warrant Shares"), we can use these shares to partially
offset our inability to recover shares held by third-parties. While we cannot
have complete assurances as to recovery of all the PacifiCorp Shares in the
event it is unable to meet minimum funding obligations under the PacifiCorp
Agreement, we believe that the funds generated by the Warrant exercise provides
us with substantial benefits and that the retention of certificates representing
the PacifiCorp Shares and the PacifiCorp Warrant Shares provides us with
adequate assurances and protections.
While PacifiCorp has agreed to provide potential financing, we do not intend to
stop looking for other means of funding our needs. Among other things, we will
continue to explore debt and equity financing from qualified lenders or
investors. The PacifiCorp Agreement contains no anti-dilution provisions or
other restrictions that would prevent the Company from obtaining other
financing. John Dupont has, when necessary, personally loaned the Company or
paid Company expenses to maintain Company operations.
We do not believe that inflation has had a material impact on our business or
operations.
Material Commitments for Expenditures
Depending on our ability to arrange financing, we expect to pay one or more
other aircraft fabricators a significant portion of the amount budgeted for
construction and assembly of the PFTA during the next 12 months. We have an
agreement with Metalcraft Technologies, Inc., but it is non-exclusive and
requires us to agree to several material terms, including pricing and delivery
schedules, such that we have the flexibility to choose the fabricator we deem
best suited to our work. At September 30, 2007 the Company has advanced
Metalcraft $100,000 towards the purchase of materials for manufacturing the
fuselage. See "Liquidity and Future Capital Requirements" section above for
details regarding our plans to finance such expenditures. In addition, apart
from our current lease obligations for the hangar and assembly facility at
Double Eagle-II in Albuquerque, New Mexico, we expect to spend between $200,000
and $400,000 for leasehold improvements to our facilities to make them suitable
for final assembly of the aircraft. See "DESCRIPTION OF PROPERTY" section below.
-18-
Additionally, we have committed to pay $323,276 to Analytical Models, Inc. for
construction of the wind tunnel model and related engineering and testing, of
which we have paid a total of $285,235. We have also contracted with D3
Technologies, Inc. ("D3") to provide structural analysis and design integration
services. The services to be provided by D3 will total approximately $137,750;
we have paid $52,563 for work done to date.
Going Concern
Due to our continuing to be a development stage company and not having generated
revenues, in their Notes to our financial statements for the year ended December
31, 2006, our independent auditors included an explanatory paragraph regarding
concerns about our ability to continue as a going concern.
The continuation of our business is dependent upon obtaining further financing
and achieving a break even or profitable level of operations. The issuance of
additional equity securities by us could result in a significant dilution in the
equity interests of our current or future stockholders.
There are no assurances that we will be able to either (1) achieve a level of
revenues adequate to generate sufficient cash flow from operations; or (2)
obtain additional financing through either private placements, public offerings
and/or bank financing necessary to support our working capital requirements. To
the extent that funds generated from operations and any private placements,
public offerings and/or bank financing are insufficient, we will have to raise
additional working capital. No assurance can be given that additional financing
will be available, or if available, will be on terms acceptable to us. If
adequate working capital is not available we may not increase our operations.
These conditions raise substantial doubt about our ability to continue as a
going concern. The financial statements do not include any adjustments relating
to the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that might be necessary should we be unable to
continue as a going concern.
Off-Balance Sheet Arrangements
We are not a party to any off-balance sheet arrangements and do not engage in
trading activities involving non-exchange traded contracts. In addition, we have
no financial guarantees, debt or lease agreements or other arrangements that
could trigger a requirement for an early payment or that could change the value
of our assets.
Description of Property
The Company operates from the Double Eagle II Airport in Albuquerque, New
Mexico. We have entered into a Ground Lease with the City of Albuquerque for 10
acres located on the Double Eagle II Airport, at a rate of $48,000 per year for
the initial five year period and is adjusted each successive five year period
throughout the 20 year term based on changes in the fair market value of the
land. The City of Albuquerque has agreed to abate certain portions of the
monthly rentals until the end of the initial five years of the lease, in January
2010. The abatement results in 100% of the first year's rent and 50% of the next
four years' rent to be deferred until January 2010, at which time, the abated
rent, aggregating $144,000, will be due and payable.
We plan to construct, or have constructed for us, a Final Assembly Facility on
this property. The 80,000 sq. ft. hangar-like structure will be designed to
support the planned production rate of eight aircraft per month or 96 aircraft
per year. The facility is also expected to include 26,000 sq. ft. of office
space. A second 100,000 sq. ft. facility may also be constructed to handle
future increased production rates. We intend to perform the final assembly of
all of the FF-1080-200 aircraft in New Mexico. Our Quality Assurance flight
testing program will be conducted at the planned facility in New Mexico.
Additionally our customer on-site engineering employees will be housed at this
facility as well as the final customer flight test and Final Delivery inspection
personnel.
In the interim, we have also entered into a Hangar Lease with the city,
subsequently amended by a First Amendment to the Double Eagle II Airport Hangar
Lease (the original Hangar Lease, as Amended is referred to herein as the
"Amended Hangar Lease"), which provides for a 14,400 square foot hangar at a
rate of $3,600 per month. The Amended Hangar Lease also provides that we will
pay certain fees relating to maintenance, identification badges and refuse
containment. The city of Albuquerque has reserved the right to adjust the rent
annually in an amount equal to 3% of the previous year's rent. The term of the
Amended Hangar Lease is month to month, commencing on March 1, 2006.
Additionally, we have signed a letter of intent with R&D Development, Inc., an
Illinois corporation, to construct and lease to us a 40,500 square foot assembly
hangar, and a 15,000 square foot attached office facility to complete final
assembly of the PFTA and up to two FF-1080-200 aircraft per month The property
is an industrial park space, with runway access and is adjacent to the hangar we
lease under the Amended Hangar Lease.
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The Company entered into a Lease Agreement with Plaza II Executive Center, Inc.
on July 25, 2005. Pursuant to the Lease Agreement the Company leased 1,500 sq.
ft. of office space located at 125 Lincoln Avenue, Suite 400, 125 Lincoln Plaza,
Santa Fe, New Mexico for an initial term of eight (8) months beginning on August
1, 2005 and ending on March 1, 2006. The lease was automatically extended
pursuant to its terms to July 31, 2006 and was amended on August 1, 2007 to
again extend the term of the lease to July 31, 2008. Pursuant to the amendment,
the monthly rent on the extended lease is $2,465 and the lease provides for a
minimum $50 monthly support service charge, and a $10 per month, per person,
kitchen fee.
Risk Factors
We are subject to a high degree of risk as we are considered to be in unsound
financial condition. These risks factors include, but are not limited to, our
limited operating history, history of operating losses, the inability to obtain
for additional capital, the failure to successfully expand our operations, the
competition in the aircraft industry from competitors with substantially greater
resources, the legal and regulatory requirements and uncertainties related to
our industry, the loss of key personnel, adverse economic conditions, the
classification of our common stock as "penny stock," the absence of any right to
dividends, the costs associated with the issuance of and the rights granted to
additional securities, the unpredictability of the trading of our common stock.
If any one or more occurs, it could materially harm our business, financial
condition or future results of operations, and the trading price of our common
stock could decline.
For a more detailed discussion as to the risks related to Utilicraft Aerospace
Industries, Inc., our industry and our common stock, please see the section
entitled, "Description of Business - Risk Factors," in our Annual Report on Form
10-KSB, as filed with the Securities and Exchange Commission on April 27, 2007.
Impact of Inflation
Management does not believe that general inflation has had or will have a
material effect on operations.
Critical Accounting Policies and Estimates
Use of Estimates
The discussion and analysis of the financial condition and results of operations
are based on the financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Note 2 of the Notes describes the significant accounting policies essential to
the financial statements. The preparation of these financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes, some of which may require
revision in future periods. Actual results could differ materially from those
estimates.
We believe the following to be critical accounting policies and estimates. That
is, they are both important to the portrayal of the Company's financial
condition and results, and they require significant management judgment and
estimates about matters that are inherently uncertain. As a result of inherent
uncertainty, there is a likelihood that materially different amounts would be
reported under different conditions or using different assumptions. Although we
believe that our judgments and estimates are reasonable, appropriate and
correct, actual future results may differ materially from our estimates.
Stock Based Compensation
The Company accounts for equity instruments issued to employees for services
based on the fair value of the equity instruments issued and accounts for equity
instruments issued to other than employees based on the fair value of the
consideration received or the fair value of the equity instruments, whichever is
more reliably measurable. The determined value is recognized as an expense in
the accompanying statements of operations.
Contingencies
In the normal course of business, the Company is subject to certain claims and
legal proceedings. The Company records an accrued liability for these matters
when an adverse outcome is probable and the amount of the potential liability is
reasonably estimable. The Company does not believe that the resolution of these
matters will have a material effect upon its financial condition, results of
operations or cash flows for an interim or annual period.
Recently Issued Accounting Pronouncements
Recently issued accounting pronouncements and their effect on us are discussed
in the notes to the financial statements in our December 31, 2006 audited
financial statements that can be found in our Annual Report on Form 10-KSB, as
filed with the Securities and Exchange Commission on April 27, 2007.
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Item 3. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on an evaluation under the supervision and with the participation of
management, our principal executive officer and principal financial officer have
concluded that our disclosure controls and procedures as defined in rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended
("Exchange Act") were effective as of September 30, 2007 to ensure that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is (i) recorded, processed, summarized and reported
within the time periods specified in the Securities and Exchange Commission
rules and forms and (ii) accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during
the third quarter of 2007, which were identified in connection with management's
evaluation required by paragraph (d) of rules 13a-15 and 15d-15 under the
Exchange Act, that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
PART II -- OTHER INFORMATION