AMERICAN INTERNATIONAL HOLDINGS CORP. - Quarter Report: 2009 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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ý QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
OR
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¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number: 0-50912
HAMMONDS INDUSTRIES, INC.
(Exact Name Of Registrant As Specified In Its Charter)
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Nevada |
88-0225318 |
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(State of Incorporation) |
(I.R.S. Employer Identification No.) |
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601 Cien Street, Suite 235 Kemah, TX |
77565-3077 |
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(Address of Principal Executive Offices) |
(ZIP Code) |
Registrant's Telephone Number, Including Area Code: (281) 334-9479
Securities Registered Pursuant to Section 12(g) of The Act: Common Stock, $0.0001
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ¨ No x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer, "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
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Large accelerated filer ¨ |
Accelerated filer ¨ |
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Non-accelerated filer ¨ |
Smaller reporting company x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of shares outstanding of each of the issuer’s classes of equity as of February 23, 2010 is 5,031,326 shares of common stock and 3,769,626 shares of preferred stock.
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Item |
Description |
Page | ||
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PART I - FINANCIAL INFORMATION | ||||
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ITEM 1. |
3 | |||
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ITEM 2. |
13 | |||
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ITEM 3. |
17 | |||
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ITEM 4T. |
17 | |||
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PART II - OTHER INFORMATION | ||||
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ITEM 1. |
17 | |||
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ITEM 1A. |
17 | |||
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ITEM 2. |
17 | |||
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ITEM 3. |
17 | |||
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ITEM 4. |
17 | |||
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ITEM 5. |
17 | |||
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ITEM 6. |
17 | |||
PART I - FINANCIAL INFORMATION
Financial Statements
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Financial Statements |
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4 | |
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5 | |
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6 | |
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7 |
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HAMMONDS INDUSTRIES, INC. |
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Balance Sheets |
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September 30, 2009 |
December 31, 2008 |
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Assets |
||||||||
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Current assets: |
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Cash |
$ |
- |
$ |
395 |
||||
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Current assets from discontinued operations |
- |
2,895,000 |
||||||
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Total current assets |
- |
2,895,395 |
||||||
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|
||||||||
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Other assets |
8,000 |
8,000 |
||||||
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Long-term assets from discontinued operations |
- |
4,062,622 |
||||||
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Total assets |
$ |
8,000 |
$ |
6,966,017 |
||||
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Liabilities and Stockholders' Deficit |
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Current liabilities: |
||||||||
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Accounts payable and accrued expenses |
$ |
565,289 |
$ |
348,004 |
||||
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Short-term notes payable - related parties |
802,063 |
802,063 |
||||||
| Current liabilities from discontinued operations | - | 5,657,699 | ||||||
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Total current liabilities |
1,367,352 |
6,807,766 |
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Long-term liabilities from discontinued operations |
- |
587,365 |
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Total liabilities |
1,367,352 |
7,395,131 |
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| Commitments and contingencies | - | - | ||||||
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Stockholders' deficit: |
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Preferred stock, $0.0001 par value, authorized 5,000,000 shares: |
||||||||
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3,769,626 issued and outstanding |
$ |
377 |
$ |
377 |
||||
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Additional paid-in capital - preferred stock |
4,811,573 |
4,811,573 |
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Additional paid-in capital - beneficial conversion feature |
3,272,060 |
3,272,060 |
||||||
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Common stock, $0.0001 par value, authorized 195,000,000 shares: |
||||||||
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5,031,326 issued and outstanding |
503 |
503 |
||||||
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Additional paid-in capital - common stock |
7,668,025 |
7,668,025 |
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Accumulated deficit |
(17,111,890 |
) |
(16,181,652 |
) | ||||
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Total stockholders' deficit |
(1,359,352 |
) |
(429,114 |
) | ||||
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Total liabilities and stockholders' deficit |
$ |
8,000 |
$ |
6,966,017 |
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The accompanying notes are an integral part of these unaudited financial statements. |
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Three Months Ended |
Nine Months Ended |
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September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 |
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Revenues |
$ | - | $ |
- |
$ | - | $ |
- |
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Costs and expenses: |
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Cost of sales |
- |
- |
- |
- |
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Selling, general and administrative |
(17 | ) |
24,435 |
350 |
133,264 |
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Total operating expenses |
(17 | ) |
24,435 |
350 |
133,264 |
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Operating income (loss) |
17 | (24,435 | ) | (350 | ) | (133,264 | ) | |||||||||
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Other income (expenses): |
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Interest income |
- |
- |
- |
4,671 |
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| Interest expense | - | (5,077 | ) | (37,855 | ) | (35,458 | ) | |||||||||
| Realized loss on the sale of trading securities | - | - | - | (100,000 | ) | |||||||||||
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Unrealized gain loss on trading securities |
- |
- |
- |
71,686 |
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Total other expense |
- |
(5,077 |
) | (37,855 | ) |
(59,101 |
) | |||||||||
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Income (loss) before income tax |
17 |
(29,512 |
) | (38,205 | ) |
(192,365 |
) | |||||||||
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Income tax expense |
- | - | - | - | ||||||||||||
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Income (loss) from continuing operations, net of income taxes |
17 |
(29,512 |
) | (38,205 | ) |
(192,365 |
) | |||||||||
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Loss from discontinued operations, net of income taxes |
- |
(965,836 |
) | (712,033 | ) | (2,279,592 | ) | |||||||||
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Net income (loss) |
17 |
(995,348 |
) | (750,238 | ) | (2,471,957 | ) | |||||||||
| Preferred dividends: | ||||||||||||||||
| Regular dividends | (60,000 | ) | (60,000 | ) | (180,000 | ) | (165,000 | ) | ||||||||
| Net loss applicable to common shareholders | $ | (59,983 | ) | $ | (1,055,348 | ) | $ | (930,238 | ) | $ | (2,636,957 | ) | ||||
| Net loss per common share - basic and diluted: | ||||||||||||||||
| Continuing operations | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.07 | ) | ||||
| Discontinued operations | $ | - | $ | (0.19 | ) | $ | (0.14 | ) | $ | (0.46 | ) | |||||
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Total |
$ | (0.01 | ) | $ | (0.21 | ) | $ | (0.18 | ) | $ | (0.53 | ) | ||||
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Weighted average common shares - basic and diluted |
5,031,326 |
4,996,211 |
5,031,326 |
4,986,776 |
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The accompanying notes are an integral part of these unaudited financial statements.
5 |
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HAMMONDS INDUSTRIES, INC. |
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Statements of Cash Flows
(Unaudited) |
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Nine Months Ended September 30, |
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2009 |
2008 |
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Cash flows from operating activities: |
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Net loss |
$ |
(750,238 |
) |
$ |
(2,471,957 |
) | ||
| Loss from discontinued operations | 712,033 | 2,279,592 | ||||||
| Loss from continuing operations | (38,205 | ) | (192,365 | ) | ||||
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Realized loss on trading securities |
- |
100,000 |
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Unrealized gain on trading securities |
- |
(71,686 |
) | |||||
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Share-based compensation |
- |
104,000 |
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Change in operating assets and liabilities: |
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Prepaid expenses |
- |
(8,000 |
) | |||||
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Accounts payable and accrued expenses |
37,810 |
(9,007 |
) | |||||
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Net cash used in operating activities |
(395 |
) |
(77,058 |
) | ||||
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Cash flows from investing activities: |
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Investment in Hammonds' Discontinued Subsidiaries |
- |
(793,000 |
) | |||||
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Net cash provided by (used in) investing activities |
- |
(793,000 |
) | |||||
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Net decrease in cash and cash equivalents |
$ |
(395 |
) |
$ |
(870,058 |
) | ||
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Cash and cash equivalents at beginning of year |
395 |
869,865 |
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Cash and cash equivalents at end of year |
$ |
- |
$ |
(193 |
) | |||
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Discontinued operations: |
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Net cash used in operating activities |
$ |
(254,536 |
) |
$ |
(1,510,043 |
) | ||
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Net cash used in investing activities |
(14,960 |
) |
(272,220 |
) | ||||
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Net cash provided by (used in) financing activities |
(33,884 |
) |
1,158,617 |
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Net decrease in cash and cash equivalents |
(303,380 |
) |
(623,646 |
) | ||||
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Cash and cash equivalents at beginning of period |
303,380 |
727,496 |
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Cash and cash equivalents at end of period |
$ |
- |
$ |
103,850 |
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Supplemental schedule of cash flow information: |
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Interest paid |
$ |
44,359 |
$ |
213,079 |
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Taxes paid |
$ |
- |
$ |
12,785 |
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Non-cash transactions: |
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Acquisition of fixed assets under capital lease obligations |
$ |
- |
$ |
203,515 |
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| Accrued debt discount for common shares to be issued | $ | - | $ | 58,000 | ||||
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The accompanying notes are an integral part of these unaudited financial statements. | ||||||||
Note 1 - Summary of Significant Accounting Policies
The accompanying unaudited interim financial statements of Hammonds Industries, Inc. (“Hammonds”), f/k/a International American Technologies, Inc., have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission and should
be read in conjunction with the audited consolidated financial statements and notes thereto contained in Hammonds’ latest Annual Report filed with the SEC on Form 10-K. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected
for the full year. Notes to the financial statements that would substantially duplicate the disclosure contained in the audited financial statements for the most recent fiscal year as reported in the Form 10-K have been omitted.
Certain reclassifications have been made to amounts in prior periods to conform with the current period presentation.
Organization, Ownership and Business
In 2005, Hammonds, through its parent company, acquired 51% of the capital stock of Hammonds Technical Services, Inc. Hammonds Technical Services, Inc. and Hammonds Fuel Additives, Inc. were separate privately-owned Texas companies. In connection with the 2005 acquisition by Hammonds, Hammonds Fuel Additives was merged into Hammonds Technical
Services. In April 2005 and January 2006, respectively, Hammonds Fuel Additives and Hammonds Water Treatment Systems, respectively, were reincorporated as separate entities from Hammonds Technical Services, and all three entities are wholly-owned subsidiaries of Hammonds. On August 1, 2006, Hammonds acquired the 49% minority interest of Hammonds Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc. in consideration for the issuance of 1,600,000 restricted shares
of common stock, valued at a price of $2.50 per share, the price of Hammonds' common stock at the date of the transaction.
Prior to the year ended December 31, 2008, in accordance with FIN 46(R) (ASC 810-10), American International Industries, Inc. (American), consolidated Hammonds, even though its ownership was less than 51%, because American appointed the members of Hammonds’ board of directors.
On December 31, 2008, the board of directors of American approved the deconsolidation of Hammonds Industries, Inc. (“Hammonds”) from American. To effect the deconsolidation of Hammonds, American was required to reduce its ownership percentage, board membership, and guarantee of Hammonds’ debt. After the distribution of
the special dividend of approximately 1.74 million shares of Hammonds’ common stock to American's shareholders of record on December 31, 2008, American's ownership is approximately 13% of Hammonds' issued and outstanding common stock. Effective December 31, 2008, Carl Hammonds was appointed Chairman and CEO and John Stump, III was appointed CFO. Hammonds accepted the resignations of Daniel Dror, as Chairman of the Board and CEO, Sherry L. Couturier, as Director, CFO and Vice President, and
Charles R. Zeller, as Director, and appointed Richard C. Richardson as a new board member unrelated to American. As a result, the majority of Hammonds’ board of directors is no longer controlled by American. Additionally, a reduction of American's guarantee of Hammonds’ debt to $1,000,000 was obtained from Texas Community Bank.
On April 16, 2009, Hammonds entered into an Asset Purchase Agreement with FabCorp, Inc., a Houston-based manufacturing company, pursuant to which Hammonds sold all of its assets, including all of the shares of its discontinued subsidiaries, Hammonds Fuel Additives, Inc., Hammonds Technical Services, Inc., Hammonds Water Treatment Systems,
Inc. and Hammonds ODV, Inc. (collectively, the “Discontinued Subsidiaries”) to a newly formed Texas company, Hammonds Technologies, LLC., a wholly owned subsidiary of FabCorp, Inc. For additional information, see Note 7.
On August 13, 2009, Hammonds, American, Delta Seaboard Well Service, Inc. (Delta), American's 51% owned subsidiary, and the minority interest owners of Delta entered into an agreement to commence a reverse merger of Delta into Hammonds. As
part of the merger, Hammonds effected a 1 for 10 reverse stock split for its common stock. Additionally, the Company intends to issue shares of Common Stock to the present stockholders of Delta as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,352.61 in principal and accrued interest of debt payable by the Company to American; and (ii) a total
of 21,316,510 shares to Robert W. Derrick, Jr., Delta’s president and a director of American and Ron Burleigh, Delta’s vice president, in consideration for their 49% equity ownership of Delta, and 9,607,843 post-Reverse Split shares in consideration for extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American will own 32,859,935 shares of Common Stock, representing 48.2% of the Company’s
total outstanding shares and Messrs. Derrick and Burleigh, will own 30,924,353 shares of Common Stock, representing 45.4% of the Company’s total outstanding shares. All other stockholders of the Company will own 4,357,962 shares of Common Stock, representing 6.4% of the Company’s total 68,142,250 outstanding shares.
Income Taxes
Hammonds is a taxable entity and recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected
to be in effect when the temporary differences reverse. The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the year that includes the enactment date of the rate change. A valuation allowance is used to reduce deferred tax assets to the amount that is more likely than not to be realized. Interest and penalties associated with income taxes are included in selling, general and administrative expense.
Net Loss Per Share
The basic net loss per common share is computed by dividing the net loss by the weighted average number of shares outstanding during a period. Diluted net loss per common share is computed by dividing the net loss, adjusted on an as if converted basis, by the weighted average number of common shares outstanding
plus potential dilutive securities.
Management's Estimates and Assumptions
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, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues
and expenses. Actual results could differ from these estimates.
Fair Value of Financial Instruments
Effective January 1, 2008, Hammonds adopted the framework for measuring fair value that establishing a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements)
and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described below:
Basis of Fair Value Measurement
|
Level 1 |
Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. | |
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Level 2 |
Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data
by correlation or other means. | |
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Level 3 |
Unobservable inputs reflecting Hammonds' own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available. |
Hammonds believes that the fair value of its financial instruments comprising cash, accounts payable, and notes payable approximate their carrying amounts. The interest rates payable by Hammonds on its notes payable approximate market rates. As of September 30, 2009, Hammonds did not have any significant Level 1, 2 or 3 financial
assets or liabilities.
New Accounting Standards
In June 2009, the FASB issued SFAS No. 168, The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles (“SFAS 168” or ASC 105-10). SFAS 168 (ASC 105-10) establishes the Codification as the sole source of authoritative accounting principles recognized by the FASB to be applied by
all nongovernmental entities in the preparation of financial statements in conformity with GAAP. SFAS 168 (ASC 105-10) was prospectively effective for financial statements issued for fiscal years ending on or after September 15, 2009, and interim periods within those fiscal years. The adoption of SFAS 168 (ASC 105-10) on July 1, 2009 did not impact American’s results of operations or financial condition. The Codification did not change GAAP; however, it did change the way GAAP is organized and presented.
As a result, these changes impact how companies reference GAAP in their financial statements and in their significant accounting policies. American implemented the Codification in this Report by providing references to the Codification topics alongside references to the corresponding standards.
In addition to the pronouncements noted above, there were various other accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position, operations or cash flows.
Note 2 - Sale of Assets of Hammonds' Discontinued Subsidiaries
On April 16, 2009, Hammonds entered into an Asset Purchase Agreement with FabCorp, Inc., a Houston-based manufacturing company, pursuant to which Hammonds sold all of its assets, including all of the shares of its discontinued subsidiaries, Hammonds Fuel Additives, Inc., Hammonds Technical Services, Inc., Hammonds Water Treatment
Systems, Inc. and Hammonds ODV, Inc. (collectively, the “Discontinued Subsidiaries”) to a newly formed Texas company, Hammonds Technologies, LLC., a wholly owned subsidiary of FabCorp, Inc.
The Board of Directors decision to enter into the Asset Purchase Agreement was based upon the following reasons, among others: the poor business outlook for the Discontinued Subsidiaries because of Hammonds’ inability to raise sufficient capital, either through equity or debt financing to continue its operations and grow the
businesses of the Discontinued Subsidiaries; the weak financial viability of the Discontinued Subsidiaries without a substantial infusion of capital; that at December 31, 2008, Hammonds total current liabilities were about $6.9 million compared to current assets of about $2.8 million and total liabilities were about $7.3 million or about $460,000 more than total assets (all amounts unaudited); for more than the past year, Hammonds’ management had been actively seeking financing, either through
equity or debt, necessary to support ongoing operations and to that end had retained investment banking consultants pursuing several possible financing opportunities, but none of these efforts were successful and no additional financing was raised; the ongoing upheaval in the credit and investment environment; and the determination by Hammonds management that it would be unable to continue as a “going concern.”
Pursuant to the Asset Purchase Agreement, FabCorp purchased all of the assets, free and clear of all liens and other encumbrances, in consideration for the payment of liabilities of Hammonds to Texas Community Bank in the amount of $2.6 million, payment of the senior promissory bridge note of $250,000 to Hammonds’
institutional investor, Vision Opportunity Master Fund, Ltd., the assumption of all payables and liabilities of the Discontinued Subsidiaries of approximately $2.6 million and the commitment to provide continuing financial support for the Discontinued Subsidiaries.
Based upon the foregoing, Hammonds’ Board of Directors determined that is was in the best interests of Hammonds and its shareholders that Hammonds enter into the Asset Purchase Agreement, so that Hammonds could pursue other business opportunities through a merger, acquisition or other business combination with an operating
entity.
Note 3 - Trading Securities
In February 2007, Hammonds paid $100,000 for an option to buy 104,398 shares of American International Industries, Inc. stock for $5.00 per share from a former Hammonds' minority shareholder as part of a lawsuit settlement. Hammonds estimated the fair value of this stock option at December 31, 2007, by using the Black-Scholes
option-pricing model with the following weighted-average assumptions as follows:
|
December 31, 2007 |
||||
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Dividend yield |
0.00 |
% | ||
|
Expected volatility |
39.74 |
% | ||
|
Risk free interest |
6.25 |
% | ||
|
Expected life |
2 months |
|||
As a result, this option was revalued to $28,314, and an unrealized loss of $71,686 was recorded in other income (expense) for the year ended December 31, 2007. This option expired in February 2008, resulting in a realized loss of $100,000 and a reversal of the previously recorded unrealized loss of $71,686.
Note 4 - Notes Payable - Related Parties
|
September 30, 2009 |
December 31, 2008 |
|||||||
|
Note payable, principal balance due on December 31, 2008, interest at 10% through maturity and at 15% thereafter (a) |
$ |
552,063 |
$ |
552,063 |
||||
| Note payable for $250,000, principal due December 31, 2008, with interest at 10% through maturity and at 15% thereafter (a) | 250,000 | 250,000 | ||||||
| $ | 802,063 | $ | 802,063 | |||||
During September 2008, American provided a bridge loan of $250,000. This loan has a 10% interest rate and was due December 31, 2008, or upon Hammonds receiving significant equity financing. As additional consideration, Hammonds issued 100,000 shares of restricted common stock to American, resulting in finance
expense of $29,000.
On August 13, 2009, Hammonds, American, Delta Seaboard Well Service, Inc. (Delta), American's 51% owned subsidiary, and the noncontrolling interest owners of Delta entered into an agreement to commence a reverse merger of Delta into Hammonds. As part of this agreement, these notes payable were converted into 10,000,000 Hammonds' common
shares in February 2010.
Note 5 - Preferred Stock
In August and September 2006, Hammonds sold to Vision Opportunity Fund Limited (“VOMF”) 833,333 shares of Series A Preferred Stock and 833,333 shares of Series B Preferred Stock, respectively (the “2006 Private Financing Transactions”). In connection with the sale of the Series A Convertible
Preferred Stock, Hammonds issued VOMF: (i) Series A Warrants to purchase 833,333 shares of common stock at $1.80 per share, expiring in August 2011; and (ii) Series B Warrants to purchase an additional 833,333 shares of common stock at $1.80 per share, expiring in August 2007. In connection with the sale of the Series B Convertible Preferred Stock, Hammonds issued VOMF: (i) Series C Warrants to purchase an additional 833,333 shares of common stock at $5.00 per share, expiring on September 29, 2011; and (ii) Hammonds
agreed to extend the expiration dates on the Series B Warrants issued in the 2006 Private Financing Transactions from August 2007 to August 2008.
Each share of Series A and Series B Convertible Preferred Stock is convertible into one share of Hammonds' common stock.
On September 20, 2007, Hammonds and VOMF agreed to amend the Series A, B and C Warrants to: (i) adjust the exercise price of all of the Warrants to $1.00; and (ii) provide for the issuance of a total of 2,102,960 shares of Hammonds' newly authorized Series C Convertible Preferred Stock in lieu of 2,102,960
shares of common stock. On September 21, 2007, VOMF delivered a notice of exercise of all 2,102,960 Series A, B and C Warrants at an exercise price of $1.00 per warrant from which Hammonds received net proceeds of $1,981,162. As a result of this agreement, there are no warrants outstanding related to the Series A, B and C Convertible Preferred Stock.
Hammonds reviewed the following accounting standards to determine the appropriate accounting for these issuances:
- SFAS No. 133: Accounting for Derivative Instruments and Hedging Activities (ASC 815-10)
- SFAS No. 150: Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity (ASC 480-10)
- EITF 00-19: Accounting for Derivative Financial Instruments Indexed to (ASC 815-10), and Potentially Settled in, a Company’s Own Stock (ASC 815-40)
- EITF 98-5: Accounting for Convertible Securities with Beneficial Conversion Features or Contingently Adjustable Conversion Ratios (ASC 505-10)
- EITF 00-27: Application of Issue No. 98-5 to Certain Convertible Instruments (ASC 505-10)
- EITF Topic D-98: Classification and Measurement of Redeemable Securities (ASC 505-10)
- ASR No. 268: Redeemable Preferred Stocks (ASC 505-10)
We concluded that all components of these issuances should be classified as equity, because the only way for the value of the conversion feature to be realized is through the issuance of shares. Hammonds has sufficient authorized and unissued shares available to settle the contracts after considering all other
commitments that may require the issuance of stock.
We valued the warrants using the Black-Scholes model and allocated the proceeds from the preferred share issuances based on the relative fair values of the securities issued.
We determined that a beneficial conversion feature exists for the Series A, B and C Convertible Preferred Stock issuances. Based on authoritative guidance above, the amount of proceeds allocated to the Series A and Series B Convertible Preferred Stock should be assigned to the embedded conversion feature
with a corresponding amount recorded as a "deemed dividend" to the preferred shareholders. This is based on ASC 505-10, which states that "the discount assigned to the beneficial conversion feature is limited to the amount of the proceeds allocated to the convertible instrument."
We allocated the following amounts to the embedded conversion feature and recorded a deemed dividend to the preferred shareholders:
|
Preferred A – August 8, 2006 |
$ |
387,499 |
||
|
Preferred A – August 23, 2006 |
176,643 |
|||
| Preferred B – September 30, 2006 | 726,756 | |||
|
Preferred C – September 20, 2007 |
1,981,162 |
|||
|
Total deemed dividend |
$ |
3,272,060 |
On July 25, 2007, VOMF agreed that accrued dividends may be paid, at Hammonds' option, in cash or in restricted shares of Hammonds' common stock. The number of shares of common stock to be issued as payment of accrued and unpaid
dividends shall be determined by dividing (i) the total amount of accrued and unpaid dividends to be converted into common stock by (ii) eighty percent (80%) of the average of the VWAP for the twenty (20) Trading Days immediately preceding the dividend payment date. The term "VWAP" means, for any date, (i) the daily volume weighted average price of the common stock for such date on the OTC Bulletin Board as reported by Bloomberg Financial L.P. (based on a trading day from 9:30 a.m. Eastern Time to 4:02 p.m. Eastern
Time); (ii) if the common stock is not then listed or quoted on the OTC Bulletin Board and if prices for the common stock are then reported in the "Pink Sheets" published by the Pink Sheets, LLC (or a similar organization or agency succeeding to its functions of reporting prices), the most recent bid price per share of the common stock so reported; or (iii) in all other cases, the fair market value of a share of common stock as determined by an independent appraiser selected in good faith by the Investor and
reasonably acceptable to Hammonds.
Note 6 - Loss Per Share
Basic losses per share are calculated on the basis of the weighted average number of common shares outstanding. Diluted losses per share, in addition to the weighted average determined for basic loss per share, include common stock equivalents, which would arise from the conversion of the preferred stock to common shares.
|
Three Months Ended |
Nine Months Ended |
|||||||||||||||
|
|
September 30, 2009 |
September 30, 2008 |
September 30, 2009 |
September 30, 2008 |
||||||||||||
| Basic loss per share: | ||||||||||||||||
|
Income (loss) from continuing operations, net of income taxes |
$ | 17 | $ |
(29,512 |
) | $ | (38,205 | ) | $ |
(192,365 |
) | |||||
|
Loss from discontinued operations, net of income taxes |
- |
(965,836 |
) | (712,033 | ) | (2,279,592 | ) | |||||||||
|
Net income (loss) |
17 |
(995,348 |
) | (750,238 | ) | (2,471,957 | ) | |||||||||
| Preferred dividends: | ||||||||||||||||
| Regular dividends | (60,000 | ) | (60,000 | ) | (180,000 | ) | (165,000 | ) | ||||||||
| Net loss applicable to common shareholders | $ | (59,983 | ) | $ | (1,055,348 | ) | $ | (930,238 | ) | $ | (2,636,957 | ) | ||||
| Weighted average common shares outstanding - basic and diluted | 5,031,326 | 4,996,211 | 5,031,326 | 4,986,776 | ||||||||||||
| Net loss per share - basic and diluted | ||||||||||||||||
| Continuing operations | $ | (0.01 | ) | $ | (0.02 | ) | $ | (0.04 | ) | $ | (0.07 | ) | ||||
| Discontinued operations | - | (0.19 | ) | (0.14 | ) | (0.46 | ) | |||||||||
| Total | $ |
(0.01 |
) | $ | (0.21 | ) | $ | (0.18 | ) | $ | (0.53 | ) | ||||
Note 7 - Discontinued Operations
On April 16, 2009, Hammonds entered into an Asset Purchase Agreement with FabCorp, Inc., a Houston-based manufacturing company, pursuant to which Hammonds sold all of its assets, including all of the shares of its discontinued subsidiaries, Hammonds Fuel Additives, Inc., Hammonds Technical Services, Inc., Hammonds
Water Treatment Systems, Inc. and Hammonds ODV, Inc. (collectively, the “Discontinued Subsidiaries”) to a newly formed Texas company, Hammonds Technologies, LLC., a wholly owned subsidiary of FabCorp, Inc. For additional information, see Note 2.
Hammonds' Discontinued Subsidiaries' revenues and loss before income tax for the nine months ended September 30, 2009 and 2008 are summarized below:
|
Nine Months Ended |
|||||||||
|
|
September 30, 2009 |
September 30, 2008 |
|||||||
|
Revenues |
$ | 1,015,182 | $ |
6,428,157 |
|||||
| Loss before income tax | $ | (839,721 | ) | $ | (2,279,592 | ) | |||
Net loss from discontinued operations on the statement of operations for the nine months ended September 30, 2009 includes the gain on the sale of Hammonds' Discontinued Subsidiaries. Net loss from discontinued operations for the nine months ended September 30, 2009 is summarized
below:
|
|
Nine Months Ended September 30, 2009 |
|||
|
Book value of Hammonds' Discontinued Subsidiaries' liabilities assumed at April 16, 2009 |
$ |
5,833,750 |
||
|
Book value of Hammonds' Discontinued Subsidiaries' assets sold at April 16, 2009 |
5,706,062 | |||
| Gain on sale of Hammonds' Discontinued Subsidiaries | 127,688 | |||
|
Hammonds' Discontinued Subsidiaries' net loss January 1, 2009 through April 16, 2009 |
(839,721 |
) | ||
| Net loss from discontinued operations |
$ |
(712,033 |
) | |
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATION
As used in this Quarterly Report, the terms "we", "us", "our" and the "Company" means Hammonds Industries, Inc., formerly International American Technologies, Inc., a Nevada corporation, and its subsidiaries, Hammonds Technical Services, Inc., Hammonds Fuel Services, Inc. and Hammonds Water Treatment Systems, Inc. (collectively, "Hammonds").
To the extent that we make any forward-looking statements in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" in this Quarterly Report, we emphasize that forward-looking statements involve risks and uncertainties and our actual results may differ materially from those expressed or implied by our forward-looking statements. Our forward-looking statements in this Quarterly Report reflect our current views about future events and are based on assumptions and are subject
to risks and uncertainties. Generally, forward-looking statements include phrases with words such as "expect", "anticipate", "intend", "plan", "believe", "seek", "estimate" and similar expressions to identify forward-looking statements.
Overview
Hammonds Industries, Inc., a Nevada corporation, is publicly traded on the Pink Sheets: Symbol "HMDI". The Company was incorporated on August 18, 1986. In 2005, the Company, through its parent company, acquired 51% of the capital stock of Hammonds Technical Services, Inc. Hammonds Technical Services, Inc. and Hammonds
Fuel Additives, Inc. were separate privately-owned Texas companies. In connection with the 2005 acquisition by the Company, Hammonds Fuel Additives was merged into Hammonds Technical Services. In April 2005 and January 2006, respectively, Hammonds Fuel Additives and Hammonds Water Treatment Systems, respectively, were reincorporated as separate entities from Hammonds Technical Services, and all three entities are wholly-owned subsidiaries of the Company. On August 1, 2006, the Company acquired the 49% minority
interest of Hammonds Technical Services, Inc., Hammonds Fuel Additives, Inc., and Hammonds Water Treatment Systems, Inc. in consideration for the issuance to Carl Hammonds of 1,600,000 restricted shares of common stock, valued at a price of $2.50 per share, the price of the Company's common stock at the date of the transaction.
The Company received approximately $5.4 million from the 2006 and 2007 VOMF Private Financing Transactions. The material terms of these preferred stock issuances are included in note 5 to the financial statements.
Prior to the year ended December 31, 2008, in accordance with FIN 46(R), American International Industries, Inc. (American), consolidated Hammonds, even though its ownership was less than 51%, because American appointed the members of Hammonds’ board of directors.
On December 31, 2008, the board of directors of American approved the deconsolidation of Hammonds from American. To effect the deconsolidation of Hammonds, American was required to reduce its ownership percentage, board membership, and guarantee of Hammonds’ debt. After the distribution of the special dividend of approximately 1.74
million shares of Hammonds’ common stock to American's shareholders of record on December 31, 2008, American's ownership is approximately 13% of Hammonds' issued and outstanding common stock. Effective December 31, 2008, Carl Hammonds was appointed Chairman and CEO and John Stump, III was appointed CFO. Hammonds accepted the resignations of Daniel Dror, as Chairman of the Board and CEO, Sherry L. Couturier, as Director, CFO and Vice President, and Charles R. Zeller, as Director, and appointed Richard C.
Richardson as a new board member unrelated to American. As a result, the majority of Hammonds’ board of directors is no longer controlled by American. Additionally, a reduction of American's guarantee of Hammonds’ debt to $1,000,000 was obtained from Texas Community Bank.
On April 16, 2009, Hammonds entered into an Asset Purchase Agreement with FabCorp, Inc., a Houston-based manufacturing company, pursuant to which Hammonds sold all of its assets, including all of the shares of its discontinued subsidiaries, Hammonds Fuel Additives, Inc., Hammonds Technical Services, Inc., Hammonds Water Treatment Systems,
Inc. and Hammonds ODV, Inc. (collectively, the “Discontinued Subsidiaries”) to a newly formed Texas company, Hammonds Technologies, LLC., a wholly owned subsidiary of FabCorp, Inc.
The Board of Directors decision to enter into the Asset Purchase Agreement was based upon the following reasons, among others: the poor business outlook for the Discontinued Subsidiaries because of Hammonds’ inability to raise sufficient capital, either through equity or debt financing to continue its operations and grow the
businesses of the Discontinued Subsidiaries; the weak financial viability of the Discontinued Subsidiaries without a substantial infusion of capital; that at December 31, 2008, Hammonds total current liabilities were about $6.9 million compared to current assets of about $2.8 million and total liabilities were about $7.3 million or about $460,000 more than total assets (all amounts unaudited); for more than the past year, Hammonds’ management had been actively seeking financing, either through
equity or debt, necessary to support ongoing operations and to that end had retained investment banking consultants pursuing several possible financing opportunities, but none of these efforts were successful and no additional financing was raised; the ongoing upheaval in the credit and investment environment; and the determination by Hammonds management that it would be unable to continue as a “going concern.”
Pursuant to the Asset Purchase Agreement, FabCorp purchased all of the assets, free and clear of all liens and other encumbrances, in consideration for the payment of liabilities of Hammonds to Texas Community Bank in the amount of $2.6 million, payment of the senior promissory bridge note of $250,000 to Hammonds’ institutional
investor, Vision Opportunity Master Fund, Ltd., the assumption of all payables and liabilities of the Discontinued Subsidiaries of approximately $2.6 million and the commitment to provide continuing financial support for the Discontinued Subsidiaries.
Based upon the foregoing, Hammonds’ Board of Directors determined that is was in the best interests of Hammonds and its shareholders that Hammonds enter into the Asset Purchase Agreement, so that Hammonds could pursue other business opportunities through a merger, acquisition or other business combination with an operating entity. On
August 13, 2009, Hammonds, American, Delta Seaboard Well Service, Inc. (Delta), American's 51% owned subsidiary, and the minority interest owners of Delta entered into an agreement to commence a reverse merger of Delta into Hammonds.
On August 13, 2009, Hammonds Industries, Inc., American International Industries, Inc., Delta Seaboard Well Service, Inc., and the minority interest owners of Delta entered into an agreement to commence a reverse merger of Delta into Hammonds. As part of the merger, Hammonds effected a 1 for 10 reverse stock split for its common stock. Additionally,
the Company intends to issue shares of Common Stock to the present stockholders of Delta as follows: (i) 22,186,572 post-Reverse Split shares in consideration for American’s 51% equity ownership of Delta, and 10,000,000 post-Reverse Split shares in consideration for American converting $872,352 in principal and accrued interest of debt payable by the Company to American; and (ii) a total of 21,316,510 shares to Robert W. Derrick, Jr., Delta’s president and a director of American and Ron Burleigh,
Delta’s vice president, in consideration for their 49% equity ownership of Delta, and 9,607,843 post-Reverse Split shares in consideration for extending their employment agreements for five years in addition to the balance of their current employment agreements. Following the Reverse Split and Reverse Merger, American will own 32,859,935 shares of Common Stock, representing 48.2% of the Company’s total outstanding shares and Messrs. Derrick and Burleigh, will own 30,924,353 shares of Common Stock,
representing 45.4% of the Company’s total outstanding shares. All other stockholders of the Company will own 4,357,962 shares of Common Stock, representing 6.4% of the Company’s total 68,142,250 outstanding shares.
Results of Operations
Three and Nine Months Ended September 30, 2009 Compared to Three and Nine Months Ended September 30, 2008.
The following is derived from, and should be read in conjunction with, our unaudited financial statements, and related notes for the three and nine months ended September 30, 2009 and 2008.
Revenue. We had no revenue from continuing operations for the three and nine months ended September 30, 2009 and 2008.
Selling and Administrative. Selling and administrative expenses for the nine-month period ended September 30, 2009 were $350, compared to $133,264 for the same period in 2008. Selling and administrative expenses for the nine months ended September 30, 2008 included
stock-based compensation of $104,000.
Operating Income / losses. Our operating income for the three-month period ended September 30, 2009 was $17, compared to a loss of $24,435 for the same period in 2008. Our operating loss for the nine-month period ended September 30, 2009 was $350, compared to $133,264 for the
same period in 2008.
Total Other Expenses. Other expenses for the three-month period ended September 30, 2009 were $-0-, compared to $5,077 for the same period in 2008. Interest expense for the three-month period ended September 30, 2009 was $-0-, compared to $5,077 for the same period in 2008.
Other expenses for the nine-month period ended September 30, 2009 were $37,855, compared to $59,101 for the same period in 2008. Other expenses for the nine months ended September 30, 2008 included net realized and unrealized losses on trading securities of $28,314 (see note 2 to the financial statements). Interest expense for the nine-month period ended September 30, 2009 was $37,855, compared to $35,458 for the same period in 2008.
Net income / loss. We had net income from continuing operations of $17, or $0.00 per share, for the three months ended September 30, 2009, compared to a net loss of $29,512, or $0.01 per share, for the same period in 2008. We had a net loss from discontinued operations of
$965,836, or $0.19 per share, for the three months ended September 30, 2008. Our net income was $17, or $0.00 per share, for the three months ended September 30, 2009, compared to a net loss of $995,348, or $0.20 per share, for the three months ended September 30, 2008. We had a net loss from continuing operations of $38,205, or $0.01 per share, for the nine months ended September 30, 2009, compared to a net loss of $192,365, or $0.04 per share, for the same period in 2008. We had a net loss
from discontinued operations of $712,033, or $0.14 per share, and $2,279,592, or $0.46 per share, for the nine months ended September 30, 2009 and September 30, 2008, respectively. Our net loss was $750,238, or $0.15 per share, for the nine months ended September 30, 2009, compared to a net loss of $2,471,957, or $0.50 per share, for the nine months ended September 30, 2008.
15
Liquidity and Capital Resources
At September 30, 2009 and December 31, 2008, we had total assets of $8,000 and $6,966,017, respectively. Assets from continuing operations at September 30, 2009 and December 31, 2008 were $8,000 and $8,395, respectively. Assets from discontinued operations at December 31, 2008 were $6,957,622.
Net cash used in continuing operations was $395 during the nine months ended September 30, 2009, compared to $77,058 during the same period in 2008. The cash used during the nine months ended September 30, 2008 was primarily for selling and administrative expenses.
Net cash used by investing activities was $793,000 during the nine months ended September 30, 2008. The cash used during the nine months ended September 30, 2008 was from the investment in subsidiaries.
Not applicable
Evaluation of disclosure controls and procedures. As of September 30, 2009, the Company's chief executive officer and chief financial officer conducted an evaluation regarding the effectiveness of the Company's disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e)
under the Exchange Act. Based upon the evaluation of these controls and procedures, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were not effective as of the end of the period covered by this report to provide reasonable assurance that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC’s
rules and forms, and that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is accumulated and communicated to our management, including our principal executive and financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Changes in internal controls. During the quarterly period covered by this report, no changes occurred in our internal control over financial reporting that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II - OTHER INFORMATION
None.
ITEM 1A. RISK FACTORS
For the nine months ended September 30, 2009 there were no material changes from risk factors as disclosed in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.
None.
None.
None.
None.
(a) The following documents are filed as exhibits to this report on Form 10-Q or incorporated by reference herein. Any document incorporated by reference is identified by a parenthetical reference to the SEC filing that included such document.
|
Exhibit No. |
Description |
|
31.1 |
Certification of CEO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002 |
|
31.2 |
Certification of CFO Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to the Sarbanes-Oxley Act of 2002 |
|
32.1 |
Certification of CEO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
|
32.2 |
Certification of CFO Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K During the Period Covered by this Report: None.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
/s/ Daniel Dror
CEO
Dated: February 23, 2010
/s/ Sherry L. Couturier
CFO
Dated: February 23, 2010