IRONSTONE PROPERTIES, INC. - Quarter Report: 2008 September (Form 10-Q)

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

o		TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

IRONSTONE GROUP, INC.

(Exact name of Registrant as specified in its charter)

Delaware		95-2829956
(State or other jurisdiction of		(IRS Employer Identification No.)
incorporation or organization)

Pier 1, Bay 3, San Francisco, California 94111
(Address of principal executive offices, including zip code)

(415) 551-3260
(Registrant’s telephone number, including area code)

NONE
(Former name, former address and former fiscal year, if changed since last report)

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 past 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    þ       No   o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer. or a smaller reporting company. See the definition of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company þ
				(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)       Yes     þ       No   o

As of September 30, 2008, 742,108 shares of Common Stock, $0.01 par value, were outstanding.

 

 

IRONSTONE GROUP, INC. AND SUBSIDIARIES
INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

PART I—FINANCIAL INFORMATION
Item 1. Financial Statements (unaudited)
Condensed consolidated balance sheets at September 30, 2008 and December 31, 2007			3
Condensed consolidated statements of operations and comprehensive income (loss) for the three months ended September 30, 2008 and 2007 and for the nine months ended September 30, 2008 and 2007			4
Condensed consolidated statements of cash flows for the nine months ended September 30, 2008 and 2007			5
Notes to condensed consolidated financial statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			10
Item 3. Quantitative and Qualitative Disclosures About Market Risk			11
Item 4. Controls and Procedures			12
PART II—OTHER INFORMATION
Item 6. Exhibits			13
Signatures			14
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

IRONSTONE GROUP, INC. AND SUBSIDIARIES

		September 30, 2008				December 31, 2007
ASSETS:
Current assets:
Cash		$	3,507			$	6,140
Marketable securities available for sale, at fair value			14,040				34,320
Salon Media Group, Inc. common stock, at fair value			83,968				127,952
Salon Media Group, Inc. Series C Preferred, at fair value			885,150				1,348,800
Total assets		$	986,665			$	1,517,212
LIABILITIES AND SHAREHOLDERS’ EQUITY:
Current liabilities:
Line of credit borrowings		$	313,175			$	307,175
Note payable to related party			100,000
Accounts payable			37,028				22,650
Total liabilities			450,203				329,825
Shareholders’ equity:
Preferred stock, $0.01 par value, 5,000,000 shares authorized of which there are no issued and outstanding shares
Common stock, $0.01 par value, 25,000,000 shares authorized of which 1,487,644 shares are issued			14,878				14,878
Additional paid-in capital			21,170,385				21,170,385
Accumulated deficit			(20,407,355	)			(20,284,343	)
Accumulated other comprehensive income			280,429				808,342
			1,058,337				1,709,262
Less: Treasury Stock, 745,536 shares, at cost			(521,875	)			(521,875	)
Total shareholders’ equity			536,462				1,187,387
Total liabilities and shareholders’ equity		$	986,665			$	1,517,212

The accompanying notes are an integral part of these condensed consolidated financial statements.

IRONSTONE GROUP, INC. AND SUBSIDIARIES

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2008				2007				2008				2007
Costs and expenses:
Professional fees		$	13,736			$	11,820			$	80,388			$	57,504
State filing fee			2,567				18				21,092				5,689
Miscellaneous expenses			590				532				647				635
Total costs and expenses			16,893				12,370				102,127				63,828
Loss from operations			(16,893	)			(12,370	)			(102,127	)			(63,828	)
Interest expense, net			(7,804	)			(5,590	)			(20,884	)			(15,156	)
Net loss		$	(24,697	)		$	(17,960	)		$	(123,011	)		$	(78,984	)
COMPREHENSIVE INCOME (LOSS), NET OF TAX:
Net (loss)		$	(24,697	)		$	(17,960	)		$	(123,011	)		$	(78,984	)
Unrealized holding gain (loss) arising during the period			(373,868	)			321,610				(527,914	)			(483,454	)
Comprehensive income (loss)		$	(398,565	)		$	303,650			$	(650,925	)		$	(562,438	)
Basic and diluted loss per share:
Net loss per share		$	(0.03	)		$	(0.02	)		$	(0.17	)		$	(0.11	)
Weighted average shares			742,108				742,108				742,108				742,108

The accompanying notes are an integral part of these condensed consolidated financial statements.

IRONSTONE GROUP, INC. AND SUBSIDIARIES

		Nine Months Ended
		September 30,
		2008				2007
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss)		$	(123,011	)		$	(78,984	)
Adjustments to reconcile net loss to net cash used in operating activities:
Changes in operating assets and liabilities:
Accounts payable			14,378				(8,655	)
Net cash used in operating activities			(108,633	)			(87,639	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from line of credit			6,000				89,000
Proceeds from related party note payable			100,000
Net cash provided by financing activities			106,000				89,000
Net increase (decrease) in cash			(2,633	)			1,361
Cash at beginning of period			6,140				2,369
Cash at end of period		$	3,507			$	3,730
Supplemental disclosure of cash flow information:
Cash paid during the period for interest		$	17,835			$	15,169

The accompanying notes are an integral part of these condensed consolidated financial statements.

IRONSTONE GROUP, INC. AND SUBSIDIARIES

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Activities

Ironstone Group, Inc. and subsidiaries have no operations but are seeking appropriate business combination opportunities.

Principles of Consolidation

The accompanying unaudited condensed consolidated financial statements include the accounts of Ironstone Group, Inc. and its subsidiaries, AcadiEnergy, Inc., Belt Perry Associates, Inc., DeMoss Corporation, and TaxNet, Inc., (collectively the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

Marketable Securities

Marketable securities have been classified by management as available for sale in accordance with Statement of Financial Accounting Standards No. 115, “Accounting for Certain Investments in Debt and Equity Securities” (“SFAS 115”). In accordance with SFAS 115, marketable securities are recorded at fair value and any unrealized gains or losses are excluded from earnings and reported as a separate component of shareholders’ equity until realized. The fair value of the Company’s marketable securities and investments at September 30, 2008 is based on quoted market prices. For the purpose of computing realized gains and losses, cost is identified on a specific identification basis. For marketable securities for which there is an other-than-temporary impairment, an impairment loss is recognized as a realized loss.

Unaudited Interim Financial Statements

The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. In the opinion of management, all adjustments and reclassifications considered necessary for a fair and comparable presentation have been included and are of a normal recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the Company’s most recent Annual Report on Form 10-KSB for the year ended December 31, 2007.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)

Earnings (Loss) per Share

Basic earnings (loss) per share (“EPS”) excludes dilution and is computed by dividing net income (loss) applicable to common shareholders by the weighted average number of common shares actually outstanding during the period. Diluted EPS reflects the potential dilution from potentially dilutive securities, except where inclusion of such potentially dilutive securities would have an anti-dilutive effect, using the average stock price during the period in the computation and because of the net loss for the periods presented.

Options to purchase 2,800 shares of the Company’s common stock were outstanding during the nine-month period ended September 30 2007, but were not included in the computation of diluted EPS as their effect would be anti-dilutive. These options expired unexercised on January 2, 2008.

Income Taxes

The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are provided for the tax effects of transactions reported in the financial statements and consist of taxes currently due plus deferred income taxes. Deferred income taxes are recognized for differences between the financial statement and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future. Deferred income taxes are also recognized for net operating loss carryforwards that are available to offset future taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

In July 2006, the Financial Accounting Standards Board (FASB) issued Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with Statement of Financial Accounting Standards (SFAS) No. 109, “Accounting for Income Taxes” (“SFAS 109”). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure, and transition. The Company adopted FIN 48 effective January 1, 2007. In accordance with FIN 48, the Company has decided to classify interest and penalties as a component of tax expense. The adoption of FIN 48 had no material effect on the Company.

IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (concluded)

Recent Accounting Pronouncements

In December 2007, the FASB issued SFAS 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) will significantly change the accounting for and reporting of business combination transactions in consolidated financial statements. SFAS 141(R) is effective for the first annual reporting period beginning on or after December 15, 2008. Thus, the Company is required to adopt SFAS 141(R) on January 1, 2009. Earlier adoption is prohibited. We do not expect the adoption of SFAS 141(R) to have a material impact on the Company’s consolidated results of operations or financial position.

2. FAIR VALUE MEASUREMENTS

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value, establishes a framework for measuring fair value under accounting principles generally accepted in the United States of America and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. SFAS 157 describes a fair value hierarchy based on three levels of inputs of which the first two are considered observable and the last unobservable, that may be used to measure fair value which are the following:

		Level 1		Quoted prices in active markets for identical assets or liabilities.
		Level 2		Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
		Level 3		Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

In addition to using the guidelines set forth in SFAS 157 for valuing fixed income securities, each company is also required to disclose information that enables users of its financial statements to assess the inputs used to develop those valuations. Market values were determined for each security in the investment portfolio based on quoted market prices and quoted market prices for similar securities.

Description		Quoted Market Prices In Active Markets (Level 1)		Significant Other Observable Input (Level 2)		Total Carrying Value In The Condensed Consolidated Balance Sheet at September 30, 2008
Securities available for sale		$98,008		$885,150		$983,158

Effective January 1, 2008, the Company also adopted SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis. If an entity elects the fair value option for an eligible item, changes in the item’s fair value must be reported as unrealized gains and losses in earnings at each subsequent reporting date. The Company did not elect to adopt the fair value option under SFAS 159.

IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

3. INVESTMENT IN SALON MEDIA GROUP, INC.

The Company owns 843 shares of Series C Preferred Stock of Salon Media Group, Inc. (“Salon”). These shares resulted from the December 31, 2003 conversion of Convertible Promissory Notes purchased by the Company and are convertible to common stock at any time. The Series C Preferred Stock is convertible into common stock of Salon at the conversion rate determined by dividing the Series C Preferred Stock per share price of $800 by the Series C Conversion Price of $0.80, or at the rate of one share of Series C Preferred Stock to 1,000 shares of common stock. If converted, the Company’s shares of Series C Preferred Stock represent 843,000 common shares of Salon, or 7.4% of Salon’s common stock outstanding as of September 30, 2008 and December 31, 2007, respectively. The investment in Salon is valued at the converted common stock value of $1.05 and $1.60 per share, or $885,150 and $1,348,800 at September 30, 2008 and December 31, 2007, respectively.

Additionally, in conjunction with making the investment in Salon, the Company received warrants to purchase common stock in Salon. In 2006, the Company exercised its warrants to purchase a total of 79,970 shares of common stock of Salon. The investment in common shares of Salon is valued at $1.05 and $1.60 per share, or $83,968 and $127,952 at September 30, 2008 and December 31, 2007, respectively.

4. RELATED PARTY TRANSACTIONS

A Director and a former President and Chief Executive Officer of Salon is the sister of a member of the Board of Directors and the daughter of the Chief Executive Officer.

On May 6, 2008, the Company borrowed $100,000 from Mr. William R. Hambrecht at the same interest rate charged by First Republic Bank on its line of credit. Interest is payable to Mr. Hambrecht monthly. The unsecured note matures on May 5, 2009.

5. LINE OF CREDIT ARRANGEMENT

The Company has a line of credit arrangement with First Republic Bank (the “lender”) with a borrowing limit of $350,000 with interest based upon the lender’s prime rate. Interest is payable monthly at 7.75% at September 30, 2008. The line is guaranteed by William R. Hambrecht, Chief Executive Officer, and Robert H. Hambrecht, Board Director and is collateralized by all of the Company’s assets. The line of credit is due on September 11, 2009. At September 30, 2008, the outstanding balance under the line was $313,175.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Special Note Regarding Forward-Looking Statements

Certain of the statements in this document that are not historical facts, including, without limitation, statements of future expectations, projections of financial condition and results of operations, statements of future economic performance and other forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, are subject to known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of the Company to differ materially from those contemplated in such forward-looking statements. In addition to the specific matters referred to herein, important factors which may cause actual results to differ from those contemplated in such forward-looking statements include (i) the results of the Company’s efforts to implement its business strategy; (ii) actions of the Company’s competitors and the Company’s ability to respond to such actions; (iii) changes in governmental regulation, tax rates and similar matters; and (iv) other risks detailed in the Company’s other filings with the Commission.

Results of Operations

Comparison of 2008 to 2007

Costs and expenses for the three-month period ended September 30, 2008 increased $4,523 or 37% compared to the same period in 2007. This was primarily due to an increase in accounting and audit fees of approximately $1,900 and a increase in state taxes of approximately $2,500.

Costs and expenses for the nine-month period ended September 30, 2008 increased $38,299 or 60% compared to the same period in 2007. This was primarily due to an increase in accounting and audit fees of approximately $22,900 and an increase in state taxes of approximately $15,400.

Liquidity and Capital Resources

Net cash used in operating activities for the nine months ended September 30, 2008 was $108,633. Working capital at September 30, 2008 was $536,462, a decrease of $650,925 from December 31, 2007. The decrease was primarily due to the valuation of Salon Media Group, Inc. Series C Preferred, at fair value conversion price. Cash decreased by $2,633 from $6,140 at December 31, 2007 to $3,507 at September 30, 2008.

The Company has a line of credit agreement with First Republic Bank which it will use to meet its cash needs (Note 5 of Notes to Condensed Consolidated Financial Statements). On March 24, 2008, with the approval of the Board of Directors, William R. Hambrecht agreed to lend $100,000 to the Company. Subsequently on May 6, 2008, the Company borrowed the $100,000 with interest at 7.75% per annum and a maturity of May 5, 2009.

The Company may obtain additional equity or working capital through additional bank borrowings and public or private sales of equity securities and exercises of outstanding stock options. The Company may also borrow additional funds from Mr. William R. Hambrecht. There can be no assurance, however, that such additional financing will be available on terms favorable to the Company, or at all.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (concluded)

Liquidity and Capital Resources (continued)

While the Company explores new business opportunities, the primary capital resource of the Company is 843 shares of Series C Preferred Stock of Salon Media Group, Inc. (“Salon”). These shares were converted on December 31, 2003 from Convertible Promissory Notes purchased by the Company and are convertible to common stock at any time. The Series C Preferred Stock is convertible into common stock of Salon at the conversion rate determined by dividing the Series C Preferred Stock per share price of $800 by the Series C Conversion Price of $0.80, or at the rate of one share of Series C Preferred Stock to 1,000 shares of common stock. If converted, the Company’s shares of Series C Preferred Stock represent 843,000 shares or 7.4% of Salon’s common stock outstanding as of September 30, 2008. The investment in Salon is valued at the converted common stock value of $1.05 per share, or $885,150 at September 30, 2008.

In conjunction with making the investment in Salon, the Company received warrants to purchase common stock in Salon. In 2006, the Company exercised its warrants to purchase a total of 79,970 shares of common stock of Salon. The investment in common shares of Salon is valued at $1.05 per share, or $83,968 at September 30, 2008.

The investment of Salon and other marketable securities are classified as available for sale and, therefore, a related unrealized loss of $373,868 has been included in comprehensive income in the third quarter of 2008.

As of October 24, 2008, Salon’s common stock was trading at $.50 per share. There can be no assurance that a market will continue to exist for either the Series C Preferred Stock or the common stock of Salon.

Trends and Uncertainties

Termination of Historical Business Lines

Since winding down the Company’s traditional lines of business, Management and the Board of Directors have been seeking appropriate business combination opportunities for the Company. In the alternative, management and the Board are looking for an investment opportunity for the Company to invest some or all of its remaining liquid assets. Otherwise, the Company’s cash assets are invested in corporate securities and demand deposit accounts. If the Company does not find an operating entity to combine with, and if its assets are not invested in certain types of securities (primarily government securities), it may be deemed to be an investment company under the terms of the Investment Company Act of 1940, as amended.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are a Smaller Reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We have established disclosure controls and procedures to ensure that material information relating to the Company is made known to the officers who certify the financial statements and to other members of senior management and the Board of Directors.

We conducted an evaluation, under the supervision and with the participation of our chief executive officer and chief financial officer of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). Based on this evaluation our chief executive officer and chief financial officer have concluded that, as of September 30, 2008, our disclosure controls and procedures are effective.

Changes in Internal Control Over Financial Reporting

There have been no changes in our internal controls over financial reporting for the three-months ended September 30, 2008 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Management’s Report on Internal Controls over Financial Reporting

The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements.

All internal controls over financial reporting, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention or overriding of controls. Therefore, even effective internal control over financial reporting can provide only reasonable, and not absolute, assurance with respect to financial statement preparation and presentation. Further, because of changes in conditions, the effectiveness of internal controls over financial reporting may vary over time.

Our management, including our chief executive officer and chief financial officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2008. In making its assessment of internal control over financial reporting, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control—Integrated Framework. Based on our evaluation, management concluded that, as of September 30, 2008, our internal control over financial reporting was not effective based on those criteria because of the existence of the following material weaknesses.

	1)		The Company does not have an adequate number of independent board members nor therefore an independent audit committee.
	2)		Our limited number of employees results in the Company’s inability to have a sufficient segregation of duties within its accounting and financial reporting activities.

These absences constitute material weaknesses in the Company’s corporate governance structure. These weaknesses were also reported in our December 31, 2007 Form 10-KSB filing.

PART II — OTHER INFORMATION

Item 6. Exhibits

	31.1		Section 302 — Principal Executive Officer Certification
	31.2		Section 302 — Principal Financial Officer Certification
	32.1		Section 1350 — Certification — Chief Executive Officer
	32.2		Section 1350 — Certification — Chief Financial Officer

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

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 dates indicated.

Signature		Title		Date
/s/ William R. Hambrecht   William R. Hambrecht		Director, Chief Executive Officer (Principal Executive Officer)		October 30, 2008
/s/ Quock Q. Fong   Quock Q. Fong		Chief Financial Officer		October 30, 2008
/s/ Robert H. Hambrecht   Robert H. Hambrecht		Director, Secretary		October 30, 2008
/s/ Edmund H. Shea, Jr.   Edmund H. Shea, Jr.		Director		October 30, 2008