Neon Bloom, Inc. - Quarter Report: 2008 September (Form 10-Q)
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
DC 20549
(Mark
One)
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þ
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Quarterly
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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for
the quarterly period ended September 30,
2008
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o
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Transition
report pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
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For
the transition period from _______________________ to
________________
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Commission
File Number 333-140257
Phoenix
International Ventures, Inc.
(Exact
name of registrant as specified in its charter)
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Nevada
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20-8018146
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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42 Carry
Way
Carson
City, NV 89706
(Address
of principal executive offices)
(775)
882-9700
(Registrant’s
telephone number, including area code)
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 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 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 o
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Accelerated
filer o
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Non-accelerated
filer o
(do
not check if a smaller reporting company)
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Smaller
reporting company þ
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act): Yes o No þ
The
number of shares outstanding of the issuer’s common stock, as of November 14,
2008 was 8,046,718.
-1-
Phoenix
International Ventures, Inc.
TABLE
OF CONTENTS
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Page
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PART
I FINANCIAL INFORMATION
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3
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14
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18
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18
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PART
II. OTHER INFORMATION
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19
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19
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19
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19
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20
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20
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20
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-2-
PART
I FINANCIAL INFORMATION
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Item
1.
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Financial
Statements
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Index
to Financial Statements
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Page
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4
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5
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6
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7
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-3-
Phoenix
International Ventures, Inc.
Condensed
Consolidated Balance Sheet
As of
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September
30, 2008
(Unaudited)
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December
31, 2007
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|||||||
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Assets
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||||||||
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Current
assets
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||||||||
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Cash
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59,543 | 70,314 | ||||||
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Accounts
receivable
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337,986 | 86,929 | ||||||
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Inventory
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200,449 | 164,248 | ||||||
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Lease
deposits
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4,000 | 4,000 | ||||||
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Prepaid
expenses
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1,300 | 530 | ||||||
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Total
current assets
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603,278 | 326,021 | ||||||
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Property
and equipment, net
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51,353 | 61,581 | ||||||
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Total
assets
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654,631 | 387,602 | ||||||
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Liabilities and
Stockholders' (Deficit)
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||||||||
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Current
liabilities
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||||||||
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Line
of credit
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50,708 | 35,000 | ||||||
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Accounts
payable and accrued expenses
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595,702 | 508,243 | ||||||
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Customer
deposits
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223,462 | 307,106 | ||||||
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Notes
payable
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204,959 | 87,526 | ||||||
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Legal
settlement
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384,000 | 950,154 | ||||||
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Due
related party
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211,567 | 240,875 | ||||||
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Officer
advances
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38,961 | 48,610 | ||||||
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Total
current liabilities
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1,709,359 | 2,177,514 | ||||||
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Long
term liabilities
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||||||||
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Notes
payable
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27,093 | 36,960 | ||||||
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Officer
advances
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369,375 | 369,375 | ||||||
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Total
liabilities
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2,105,827 | 2,583,849 | ||||||
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Stockholders'
(deficit)
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||||||||
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Preferred
stock - $0.001 par value; 1,000,000 shares
|
||||||||
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authorized;
zero shares issued and outstanding
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- | - | ||||||
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Common
stock - $0.001 par value; 50,000,000 shares
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||||||||
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authorized;
8,035,618 shares issued and outstanding
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8,035 | 7,746 | ||||||
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Paid
in capital
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1,365,450 | 1,145,397 | ||||||
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Subscription
receivable
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- | (63,020 | ) | |||||
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Income
(loss) for the period
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(2,824,681 | ) | (3,286,370 | ) | ||||
| (1,451,196 | ) | (2,196,247 | ) | |||||
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Total
liabilities and stockholders' (deficit)
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654,631 | 387,602 | ||||||
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The
accompanying notes are an integral part of the financial
statements
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||||||||
-4-
Phoenix
International Ventures, Inc.
Condensed
Consolidated Statements of Operations
(Unaudited)
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Three
Months Ended
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Nine
Months Ended
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|||||||||||||||
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September
30,
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September
30,
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|||||||||||||||
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2007
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2007
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|||||||||||||||
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2008
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(Restated)
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2008
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(Restated)
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|||||||||||||
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Sales
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746,137 | 77,192 | 1,678,843 | 789,682 | ||||||||||||
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Cost
of sales
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461,202 | 88,616 | 1,014,418 | 583,283 | ||||||||||||
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Gross
margin
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284,935 | (11,424 | ) | 664,425 | 206,399 | |||||||||||
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Operating
expenses
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||||||||||||||||
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General
and administrative expenses
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282,315 | 293,812 | 727,122 | 1,026,078 | ||||||||||||
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Total
operating expenses
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282,315 | 293,812 | 727,122 | 1,026,078 | ||||||||||||
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Income
(Loss) from operations
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2,620 | (305,236 | ) | (62,697 | ) | (819,679 | ) | |||||||||
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Recovery
of Contingency
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- | - | 566,154 | - | ||||||||||||
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Interest
expense
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(28,434 | ) | (4,548 | ) | (41,768 | ) | (13,289 | ) | ||||||||
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Net
(loss) before taxes
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(25,814 | ) | (309,784 | ) | 461,689 | (832,968 | ) | |||||||||
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Income
taxes
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- | - | - | (9 | ) | |||||||||||
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Net
income (loss)
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(25,814 | ) | (309,784 | ) | 461,689 | (832,977 | ) | |||||||||
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Net
Income (loss) per common share:
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||||||||||||||||
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Basic
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(0.00 | ) | (0.04 | ) | 0.06 | (0.12 | ) | |||||||||
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Diluted
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(0.00 | ) | (0.04 | ) | 0.05 | (0.12 | ) | |||||||||
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Weighted
average shares outstanding:
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||||||||||||||||
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Basic
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8,035,618 | 7,096,000 | 7,749,439 | 7,096,000 | ||||||||||||
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Diluted
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8,035,618 | 7,096,000 | 9,861,346 | 7,096,000 | ||||||||||||
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The
accompanying notes are an integral part of the financial
statements
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||||||||||||||||
-5-
Phoenix
International Ventures, Inc.
Condensed
Consolidated Statements of Cash Flows
for
the Nine Months Ended September 30,
(Unaudited)
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2008
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2007
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|||||||
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Net
cash used in operating activities
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$ | (244,066 | ) | 110,495 | ||||
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Cash
flows from investing activities
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||||||||
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Cash
purchased in acquisition of subsidiary
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3,334 | |||||||
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Purchase
of fixed assets
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(1,200 | ) | ||||||
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Net cash provided from investing activities
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- | 2,134 | ||||||
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Cash
flows from financing activities
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||||||||
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Proceeds
from subscription receivables
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63,020 | - | ||||||
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Proceeds
from line of credit
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15,708 | 10,404 | ||||||
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Proceeds
from notes payable
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236,536 | - | ||||||
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Repayment
of notes payable
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(132,444 | ) | (6,637 | ) | ||||
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Issuance
of common shares
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1,900 | - | ||||||
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Proceeds
of officer advances
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48,575 | (8,980 | ) | |||||
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Net
cash provided by financing activities
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233,295 | (5,213 | ) | |||||
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Increase
(Decrease) in cash
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(10,771 | ) | 107,416 | |||||
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Cash,
beginning of year
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70,314 | 16,343 | ||||||
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Cash,
end of period
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$ | 59,543 | 123,759 | |||||
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Cash
paid for
|
||||||||
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Interest
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$ | 6,828 | 5,928 | |||||
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Income
taxes
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$ | - | - | |||||
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Non-cash
investing and financing activities:
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||||||||
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Issuance
of 396,000 shares of common stock in exchange for debt
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- | 198,000 | ||||||
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Issuance
of 274,000 shares of common stock in redemption of accrued
expenses
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137,000 | |||||||
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The
accompanying notes are an integral part of the financial
statements
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||||||||
-6-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial
Statements
September
30, 2008
Note
1 - Summary of Significant Accounting Policies
Nature
of Activities
Phoenix
International Ventures, Inc. (“PIV” or the “Company”) was organized August 7,
2006 as a Nevada corporation to develop business in the market of defense and
aerospace. Our primary business is manufacturing, re-manufacturing and upgrading
of Ground Support Equipment (“GSE”) used in military and commercial
aircraft.
Basis
of Presentation
The
accompanying unaudited consolidated financial statements of the Company are
presented in accordance with the requirements for Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with accounting principles
generally accepted in the United States of America (“US GAAP’) have been
condensed or omitted pursuant to such SEC rules and regulations. In the opinion
of management, all adjustments (consisting of normal recurring adjustments)
considered necessary for a fair presentation have been made. The results for
these interim periods are not necessarily indicative of the results for the
entire year. The accompanying consolidated financial statements should be read
in conjunction with the December 31, 2007 financial statements and the notes
thereto included in the Company’s Report on Form 10-KSB filed with the SEC on
April 2, 2008.
The
consolidated financial statements include the accounts of the Company and its
wholly owned US subsidiary Phoenix Aerospace, Inc. (“PAI”) and an Israeli
subsidiary, Phoenix Europe Ventures, Ltd. (“PEV). Significant inter-company
accounts and transactions have been eliminated in consolidation. The
consolidated financial statements have been prepared in accordance with US
GAAP.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with the
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain amounts reported and disclosed in our
condensed consolidated financial statements and accompanying notes. Actual
results could differ from those estimates.
Net
Income per Common Share
Basic
income/earnings per share is based on the weighted effect of all common shares
issued and outstanding and is calculated by dividing net income/ (loss) by the
weighted average shares outstanding during the period. Diluted earnings per
share is calculated by dividing net income / (loss) by the weighted average
number of common shares used in the basic earnings per share calculation plus
the number of common shares that would be issued assuming exercise or conversion
of all potentially dilutive common shares outstanding. The Company excludes
equity instruments from the calculation of diluted weighted average shares
outstanding if the effect of including such instruments is anti-dilutive to
earnings per share.
-7-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2008
Recent
Accounting Pronouncements
In March
2008, the FASB issued SFAS 161, Disclosures about Derivative Instruments and
Hedging Activities- an amendment of FASB Statement No. 133. This statement is
effective for financial statements issued for fiscal years and interim periods
beginning after November 25, 2008, with early application encouraged. This
statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity’s position, financial performance, and cash flows.
The Company is currently evaluating the impact this statement may have on its
future financial statements.
In May
2008, the FASB issued SFAS 162, The Hierarchy of Generally Accepted Accounting
Principles. This statement is effective 60 days following the SEC’s approval of
the Public Company Accounting Oversight Board amendments to AU Section 411, The
Meaning of Present Fairly in Conformity With Generally Accepted Accounting
Principles. This statement identifies the sources of accounting principles and
the framework for selecting the principles to be used in the preparation of
financial statements of nongovernmental entities that are presented in
conformity with generally accepted accounting principles (GAAP) in the United
States (the GAAP hierarchy). The FASB believes that the GAAP hierarchy should be
directed to entities because it is the entity (not its auditor) that is
responsible for selecting accounting principles for its financial statements
that are presented in conformity with GAAP. The Company does not expect SFAS 162
to have a material impact on its consolidated financial statements.
In May
2008, the FASB issued SFAS 163, Accounting for Financial Guarantee Insurance
Contract - an interpretation of FASB Statement No. 60. This Statement is
effective for financial statements issued for fiscal years beginning after
December 15, 2008, and all interim periods within those fiscal years, except for
some disclosures about the insurance enterprise’s risk-management activities.
This Statement requires expanded disclosures about financial guarantee insurance
contracts. The Company is currently evaluating the impact this statement may
have on its future financial statements.
In May,
2008, the FASB issued FSP Accounting Principles
Board ("APB") 14-1 –Accounting for Convertible Debt Instruments That May
be Settled in Cash upon Conversion (including Partial Cash Settlement) ("FSP
APB 14-1"). FSP
APB 14-1requires the issuer of certain convertible debt instruments
that may be settled in cash (or other assets) on conversion to separately
account for the liability (debt) and equity (conversion option) components of
the instrument in a manner that reflects the issuer’s nonconvertible debt
borrowing rate. The FSP is effective for financial statements issued for fiscal
years beginning after December 15, 2008, and interim periods within those years.
The Company is currently evaluating the potential impact this statement may have
on its future financial statements.
Note
2 – Restatement
During
the preparation of the financial statements for the twelve months ended December
31, 2007, the Company discovered that the fair value of the options it issued
during that nine months ended September 30, 2007 were understated in
its Quarterly Report on Form 10-QSB that was filed with the SEC on November 14,
2007 for the period ended September 30, 2007 (the “September 30, 2007 10-QSB”).
Due to the fact that the financial statements for the year ended December 31,
2007 reflect the correct fair value, it was decided that there was no need to
restate the financial statements included in the September 30, 2007
10-QSB.
The fair
value of the options issued in the nine months ended September 30, 2007 was
restated to be $315,157 more than what was stated in the September 30, 2007
10-QSB. This restatement had caused net loss per share to be restated to (0.12)
from (0.07) in the September 30, 2007 10-QSB. These restatements had no effect
on the cash flows statement for the period ended September 30, 2007.
-8-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2008
Note
3 – Reclassifications
The
Company reviewed the classification of its operating expenses and other income
items for the period ended September 30, 2007. As a result of the review,
certain amounts have been reclassified to cost of sales to conform to the
current presentation. The reason for the reclassifications was the
reallocation of certain departmental expenses. The reclassifications were all
contained in the operating expense classification of the Consolidated Statement
of Operations and the results of the reclassifications did not impact previously
reported financial position, cash flows, or results of operations.
|
Nine
Months Ended September 30, 2008
|
||||||||||||
|
As
|
Amount
|
As
|
||||||||||
|
Reported
|
Reclassified
|
Reclassified
|
||||||||||
|
Reclassified
items:
|
||||||||||||
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Cost
of Sales
|
$ | 418,504 | $ | 164,779 | $ | 583,283 | ||||||
|
General
and Administrative
|
||||||||||||
|
(as
restated)
|
861,299 | (164,779 | ) | 1,026,078 | ||||||||
|
Net
effect of reclassification
|
- | - | - | |||||||||
Note
4 - Financial Condition, Liquidity, and Going Concern
At
September 30, 2008, the Company has a working capital deficit of $1,106,081 and
an accumulated deficit of $2,824,681. These conditions raise substantial doubt
about the Company's ability to continue as a going concern. To date, the Company
has been dependent upon officer advances to finance operations. The Company has
developed a plan to address its precarious financial situation. The plan is
based primarily on the Company’s current financial assets, backlog and
expectations regarding revenues and operating costs and is further supplemented
by the Company’s capital raising efforts through the issuance of debt and
equity. The Company believes it can meet the financial requirements of the
current plan for year ended 2008 without raising additional funds although it is
currently in the process of raising capital through the issuance of
debt.
The
ability of the Company to achieve its goals is dependent upon future capital
raising efforts, obtaining and maintaining favorable contracts, and the ability
to achieve future operating efficiencies anticipated with increased production
levels. There can be no assurance that the Company’s future efforts and
anticipated operating improvements will be successful.
The
condensed consolidated unaudited financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the possible inability of the Company to continue as a going
concern.
-9-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2008
Note
5 - Geographical Segments
Product
revenues are attributed to regions based upon the location of the customer. The
following table summarizes the Company’s geographical customer concentration of
total product revenue:
|
Nine
months ended September 30,
|
||||||||
|
Region:
|
2008
|
2007
|
||||||
|
United
States
|
64 | % | 100 | % | ||||
|
Europe
|
36 | % | ||||||
|
Total:
|
100 | % | 100 | % | ||||
Note
6 - Inventory
Inventory
consists of used equipment that can be re-manufactured for re-sale and parts. At
September 30, 2008, inventory consisted of the following:
|
September
30, 2008
|
December
31, 2007
|
|||||||
|
Raw
materials
|
$ | 160,545 | 114,000 | |||||
|
Work
in process
|
39,904 | 50,248 | ||||||
| $ | 200,449 | 164,248 | ||||||
Note
7 - Notes Payable
The
Company has a revolving line of credit from a financial institution totaling
$35,000. At September 30, 2008, the line of credit was fully extended
and the Company has required monthly payments of interest at 6.5% above Prime
Rate. On September 30 the interest rate for this loan was 11.5%.. On
October 18, 2009, the outstanding balance on the line of credit converts to a
note payable of equal installments of interest and principal until September 30,
2013.
The
Company has a revolving line of credit from a foreign financial institution
totaling $15,708. At September 30, 2008 the line of credit was fully
extended to the Company. The line of credit bears a monthly interest ranging
from 10%-13% based upon the amount extended.
In
June, July, August and September 2008, the Company entered into promissory note
agreements with five Israeli investors and two Israeli corporations for the
aggregate amount of $236,000. Some of these notes were in New Israeli Shekels
and some in U.S. Dollars. These notes are to be paid in full at various
dates between June 22 and August 18, 2009 and bear 15% interest per annum. In
addition, these notes were discounted by shares and warrants. In total the
Company issued an aggregate of 13,575 shares, and warrants to
purchase an aggregate of 33,950 shares at a price per shares that
varies between $2.40 and $2.60 per share for 2 years. Some of these notes have
been collateralized by a fixed number of shares of the Company’s common stock.
-10-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2008
At
September 30, 2008 notes payable consist of the following:
|
Total
amount
|
Current
|
|||||||
|
Note
payable to a financial institution in a foreign country; 12.4% per annum;
monthly payments of $242
|
$ | 2,934 | $ | 2,934 | ||||
|
Note
payable to a financial institution; 0% interest per annum; monthly
payments of $756 to 2012; collateralized by an automobile.
|
36,920 | 9,827 | ||||||
|
Promissory
note agreements at 15% per annum
|
178,082 | 178,082 | ||||||
|
Note
payable to an individual; interest at 7%
|
14,116 | 14,116 | ||||||
| $ | 232,052 | $ | 204,959 | |||||
Note
8 - Legal Settlement
On June
10, 2004, the Company entered into a business arrangement with Kellstrom Defense
Aerospace, Inc. which contained a covenant not to compete, confidentiality
provision, and restrictions to do business in the Ground Support Equipment with
its clients. This business arrangement failed and a Termination Agreement was
signed by the Company on December 8, 2004 wherein the Company was obligated to
pay a sum of $1,187,275.
On May
26, 2006, the Company entered into a settlement agreement whereby it agreed to
issue purchase credits in the amount of $500,000 and make cash payments of
$150,000. In addition, the Company agreed to pay an additional sum of $566,154,
in the event that (a) the Company defaulted on purchase credits or (b) if the
Company is awarded a one-time specific contract from a specific customer before
May 26, 2008. This one-time specific contract was not received. If the Company
does not default on the remaining purchase credits, no further obligation will
be due. Therefore, the contingency sum of $566,154 has been recovered
and recorded as a recovery of contingency. At September 30, 2008, the remaining
balance of the legal settlement was $384,000 in trade credits.
Note
9 - Related Party Transactions
As of
September 30, 2008 the Company owed an officer for his advances of an aggregate
of $408,336, of which $38,961 is currently due. These advances are non-interest
bearing and the officer has agreed not to demand payment of the long term
portion during the next twelve months. During the nine months ended September
30, 2008, the Company repaid $9,649 of previously accrued officer
advances.
During
the nine months ended September 30, 2008 the Company accrued salaries to
officers in the aggregate amount of $52,859. At September 30, 2008,
the total accrued officer salaries were $196,730. $4,526 was owed to other
related parties as of September 30, 2008.
On April
26, 2007, the Company entered into a consulting agreement with a related party
to assist the Company with its business development. Consulting fees
under the agreement require a minimum annual payment of $120,000. At September
30, 2008 the Consultant exercised an option to purchase 274,000 shares of the
Company’s common stock for $137,000. This transaction has reduced the accrued
fees to $10,311.
-11-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2008
Note
10 - Leases
The
Company leases a 7,500 square foot operating facility under a non-cancelable
lease expiring September 30, 2009. The lease contains a one-year renewal
option. Minimum lease payments through September 30, 2009 are $37,800. Lease
expenses for the nine months ended September 30, 2008 and 2007 totaled $27,000
and $48,288 respectively.
Note
11 – Share Capital
As of
September 30, 2008, the Company had 8,035,618 shares outstanding.
The
Company is authorized to issue 1,000,000 shares of $0.001 preferred stock and
50,000,000 shares of $0.001 par value common stock.
In June,
July, August and September 2008, the Company issued an aggregate of 13,575
shares, and warrants to purchase an aggregate of 33,950 shares at prices per share ranging from
$2.40 to $2.60
per share for a period of 2 years, as part of a note agreement.
In
September 30, 2008, a consultant to the Company, exercised an option to purchase
274,000 shares in redemption of $137,000 of accrued expenses in
accordance with a consulting agreement.
In
September 30, 2008, an investor exercised an option to purchase 1,900 shares for
$1,900 in accordance with a subscription agreement.
The
following table summarizes the outstanding warrants as of September 30,
2008:
|
Price
|
Number
|
Weighted
Average Remaining Life
|
Weighted
Average Exercise Price
|
|
$1.00
|
325,072
|
1.0
years
|
$1.00
|
|
2.47
|
15,000
|
1.75
years
|
2.47
|
|
2.58
|
4,800
|
1.75
years
|
2.58
|
|
2.60
|
10,000
|
1.83
years
|
2.60
|
|
2.40
|
4,150
|
1.83
years
|
2.40
|
-12-
Phoenix
International Ventures, Inc.
Notes
to the Condensed Consolidated Financial Statements
September
30, 2008
The
following table summarizes the outstanding options as of September 30,
2008:
|
Range
price ($)
|
Number
of Options
|
Weighted
Average Remaining Life
|
Weighted
Average Exercise Price
|
|
$0.50
|
1,046,000
|
2.25
years
|
$0.50
|
|
$1.00
|
170,000
|
1.95
Years
|
$1.00
|
Note
12 - Income Taxes
At
December 31, 2007, a temporary difference for a loss on a contingent liability
related to a legal settlement was reported. At September 30, 2008, the
contingency was not met and a recovery of this loss was recorded. The recovery
did not have a net effect on the Company’s deferred tax items as these items
continue to carry a full valuation allowance. Further, the contingent
loss recovery did not affect the Company’s taxable income for the nine months
ended September 30, 2008.
Note
13 - Subsequent Events
On
October 27, 2008, the Company issued three individuals related to its legal
counsel an aggregate of 9,000 shares of common stock in redemption of accrued
fees in the amount of $20,000. The transaction was done at market
price.
On
October 27, 2008, an investor exercised a warrant to purchase 2,100 shares for
$1.00 per share based on a subscription agreement.
-13-
|
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results
of Operations
|
FORWARD-LOOKING
STATEMENTS
The
information set forth in Management’s Discussion and Analysis of Financial
Condition and Results of Operations (“MD&A”) contains certain
“forward-looking statements,” including, among others (i) expected changes in
the Company’s revenues and profitability, (ii) prospective business
opportunities and (iii) the Company’s strategy for financing its business.
Forward-looking statements are statements other than historical information or
statements of current condition. Some forward-looking statements may be
identified by use of terms such as “believes,” “anticipates,” “intends” or
“expects.” These forward-looking statements relate to the plans, objectives and
expectations of the Company for future operations. Although the Company believes
that its expectations with respect to the forward-looking statements are based
upon reasonable assumptions within the bounds of its knowledge of its business
and operations, in light of the risks and uncertainties inherent in all future
projections, the inclusion of forward-looking statements in this report should
not be regarded as a representation by the Company or any other person that the
objectives or plans of the Company will be achieved.
You
should read the following discussion and analysis in conjunction with the
financial statements and notes attached hereto, and the other financial data
appearing elsewhere in this quarterly report.
The
Company’s revenues and results of operations could differ materially from those
projected in the forward-looking statements as a result of numerous factors,
including, but not limited to, the following: the risk of significant natural
disaster, the inability of the Company to insure against certain risks,
inflationary and deflationary conditions and cycles, currency exchange rates,
changing government regulations domestically and internationally affecting our
products and businesses.
Overview
Phoenix
International Ventures, Inc. (“PIV” or the “Company”) was incorporated on August
7, 2006. The financial statements are consolidated with the Company’s wholly
owned subsidiaries, Phoenix Aerospace, Inc. and Phoenix Europe Ventures,
Ltd.
The
Company manufactures support equipment for military aircraft which are used for
maintaining, operating or testing aircraft sub-systems. We also remanufacture
existing support equipment in order to extend usefulness and eliminate original
product defects. We are ISO 9001/2000 certified, which is due for renewal on
April 26, 2010. We have a licensing agreement with Lockheed Martin Aeronautics
Company to re-manufacture several types of Support Equipment for P-3 Orion
surveillance aircraft.
The main
users of the equipment are the United States Air Force, US Navy and
defense-aerospace companies.
Critical
Accounting Policies
Our
discussion and analysis of our financial condition and results of operation are
based on our financial statements, which have been prepared in accordance with
accounting principles generally accepted in the United States of America. The
preparation of the financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Since these estimates are inherently
uncertain, actual results may materially differ.
-14-
The
following is a discussion of our accounting policies that are both most
important to the portrayal of our financial condition and results, and that
require management’s most difficult, subjective, or complex
judgments.
Stock
Based Compensation.
We
account for stock option grants in accordance with SFAS No. 123(R), Share-Based Payment. We
record the cost of employee and non-employee services received in exchange for
an award of equity instruments based on the grant-date fair value of the award.
That cost is recognized over the period during which an employee is required to
provide service in exchange for the award—the requisite service period (usually
the vesting period). No compensation cost is recognized for equity instruments
for which employees do not render the requisite service. The grant-date fair
value of employee share options and similar instruments is estimated using a
Black-Scholes option-pricing model. We currently do not have sufficient trading
history to estimate expected volatility, therefore, we use a
surrogate in order to calculate volatility. Further, we use the “plain vanilla”
method to estimate the expected term of options issued to officers and
employees. Under this method, the expected term is calculated as the
average of the vesting period and the contractual life of the
option.
Revenue
Recognition
We
account for sales derived from long-term study and production contracts in
conformity with the American Institute of Certified Public Accountants (AICPA)
Statement of Position No. 81-1 (SOP 81-1), Accounting for the Performance of
Construction-Type and Certain Production-Type
Contracts. Sales are recognized using various measures
of progress, as allowed by SOP 81-1, depending on the contractual terms and
scope of work of the contract.
Revenue
that is not derived from long-term contracts is recognized when persuasive
evidence of a final agreement exists, delivery has occurred, the selling price
is fixed or determinable and payment from the customer is reasonably
assured. The majority of customer sales terms are F.O.B. origin,
where revenue is recognized upon shipment.
Sales are
subject to a limited warranty that provides for repair or replacement of
defective parts. In accordance with SFAS 48, Revenue Recognition When Right of
Return Exists management has evaluated the Company’s experience with
sales returns. Historically, we have not experienced any costs
for warranty claims. As such, the warranty reserve was zero at
September 30, 2008.
Results
of Operations
Financial
Information - Percentage of Revenues
(Unaudited)
|
Nine
Months ended
|
||||||||
|
September
30,
|
||||||||
|
2008
|
2007
|
|||||||
|
Revenues
|
100 | % | 100 | % | ||||
|
Cost
of sales
|
-60 | % | -74 | % | ||||
|
Gross
margin
|
40 | % | 26 | % | ||||
|
Operating
expenses:
|
||||||||
|
General
and administrative
|
-43 | % | -130 | % | ||||
|
Total
operating expenses
|
-43 | % | -130 | % | ||||
|
Other
income (expenses)
|
31 | % | -2 | % | ||||
|
Net
(loss) before taxes
|
28 | % | -105 | % | ||||
|
Net
income (loss)
|
28 | % | -105 | % | ||||
-15-
Comparison
of the Nine Months Ended September 30, 2008 and September 30, 2007
Revenues
Revenues
increased 113% to $1,678,843 for the nine months ended September 30, 2008
compared to $789,682 for nine months ended September 30, 2007. For
the nine months ended September 30, 2008, 60% of the revenues were derived
from manufacturing and product sales, 28% were derived from study contracts and
11% were derived from remanufacturing orders. These results were
consistent with our revenues during the nine months ended September 30, 2007, in
which 49% of revenues were derived from manufacturing and product sales, 39%
were derived from study contracts and 12% were derived from
remanufacturing.
For the
nine months ended September 30, 2008, three customers represented 69% of our
revenues. As of September 30, 2008, 64% of our revenues were derived from U.S.
customers and 36% from European customers. Management believes that revenue from
European customers will continue to be a significant portion of our
sales.
Cost
of Sales
Cost of
revenues consists primarily of subcontractors and raw materials used in
manufacturing along with other related charges. Cost of sales increased 74% to
$1,014,418 for the nine months ended September 30, 2008, compared to $583,283
for nine months ended September 30, 2007, representing 60% and 74% of the total
revenues for nine months ended September 30, 2008 and September 30, 2007,
respectively. The decrease in our cost of sales as percentage of our revenues in
the nine months ended September 30, 2008 is primarily attributable to the
increase in high margin orders being delivered during the nine months ended
September 30, 2008; management may or may not be able in the future to deliver
such high margin products.
General
and Administrative Expenses
General
and administrative expenses decreased by 29% to $727,122 for the nine months
ended September 30, 2008 from $1,026,078 for the nine months ended September 30,
2007. The decrease in general and administrative costs is primarily
attributable to an approximate $460,000 option expense during the nine months
ended September 30, 2007 which did not re-occur during the nine months ended
September 30, 2008. As a percentage of revenues, general and administrative
expenses decreased to 43% for the nine months ended September 30, 2008, as
compared to 130% for the nine months ended September 30, 2007.
Other
income
We had
other income of $524,386 during the nine months ended September 30, 2008, which
is primarily due to our recovery of a $566,154 contingency related to a legal
settlement. This is non-recurring income.
Income
(loss) before Taxes
Net
income before taxes for the nine months ended September 30, 2008 amounted to
$461,689 as compared to a net loss before taxes of $832,968 for the nine months
ended September 30, 2007. The increase in net income before taxes is primarily
due to a non-recurring recovery of contingency income in the amount of
$566,154
-16-
Taxes
on income
We do not
expect to pay any income tax on profit due to carry forward of losses from prior
years.
Comparison
of the Three Months Ended September 30, 2008 and September 30, 2007
Revenues
Revenues
increased 867% to $746,137 for the three months ended September 30, 2008
compared to $77,192 for three months ended September 30, 2007 due to increased
product sales and deliveries during the quarter ended September 30, 2008 in
comparison to a low delivery volume in the three months which was primarily
attributable to the Company’s relocation during the three months ended September
30, 2007. For the three months ended September 30, 2008, 82% of the
revenues were derived from manufacturing and product sales, 16% were derived
from study contracts and 2% were derived from remanufacturing orders, as
compared with the three months ended September 30, 2007, in which 53% of
revenues were derived from product sales, 47% were derived from study contracts
and 0% were derived from remanufacturing.
For the
three months ended September 30, 2008, two customers represented 70% of our
revenues. As of September 30, 2008, 77% of our revenues were derived from U.S.
customers and 23% from European customers. Management believes that revenue from
European customers will continue to be a significant portion of our
sales.
Cost
of Sales
Cost of
revenues consists primarily of subcontractors and raw materials used in
manufacturing along with other related charges. Cost of sales increased 420% to
$461,202 for three months ended September 30, 2008, compared to $88,616 for
three months ended September 30, 2007, representing 62% and 115% of the total
revenues for three months ended September 30, 2008 and September 30, 2007,
respectively. The decrease in our cost of sales as percentage of our revenues in
the three months ended September 30, 2008 is primarily attributable to the
increased volume, as well as delivery, of higher margin orders during the three
months ended September 30, 2008; management may or may not be able in the future
to deliver such high margin products.
General
and Administrative Expenses
General
and administrative expenses decreased by 4% to $282,315 for the three months
ended September 30, 2008 from $293,812 for the three months ended September 30,
2007. As a percentage of revenues, general and administrative expenses decreased
to 38% for the three months ended September 30, 2008, as compared to 381% for
the three months ended September 30, 2007.
Liquidity
and Capital Resources
Cash as
of September 30, 2008, amounted to $59,543 as compared with $70,314 as of
December 31, 2007, a decrease of $10,771. Net cash used in operating activities
for the nine months ended September 30, 2008, was $244,066. Net cash provided by
financing activities for the nine months ended September 30, 2008 was
$233,295.
Our
capital investments are primarily for the purchase of equipment for services
that we provide or intend to provide. This equipment includes truck, shop tools,
and shop machinery.
We lease
our 7,500 square foot operating facility under a lease expiring September 30,
2009. Minimum lease payments through September 30, 2008 are
$37,800.
-17-
We will
continue to finance our operations primarily from the cash provided from
operating activities. Management believes that we will execute significant
portions of our backlog in the next twelve months, and expect to fund our
operations over the next twelve months from the proceeds from these sales. As of
September 30, 2008, we had a backlog of approximately 5,674,758. One order is for the
design and manufacture of new age ground support equipment for $2,450,450, and
we expect to execute significant portions of this contract in 2009, Successful
execution of this contract may lead to significant new orders although
management cannot be certain that this will indeed be the outcome. Two of the
orders are study contracts from two customers for the approximate amount of
$948,770. These orders are partly for time, material and agreed
profit. We collect a significant amount of these revenues on a
monthly basis and for progress towards milestone billing. For these types of
orders, which make up more than a quarter of our backlog, there is no need for
us to finance materials and labor. Additionally, management is expecting,
although there can be no assurance, that additional orders will come in. Working
capital deficit decreased to $1,105,414 at September 30, 2008 from $1,851,493 in
December 31, 2007 mainly due to a recovery of a contingency. Our senior
management is also willing to defer salary payments, if necessary. As a result,
we believe that we will have enough funds from our operations to support our
operations during the next twelve months.
We are
considering raising funds for working capital purposes through the issuance of
equity and/or debt, to fund possible acquisitions and business development
activities and for working capital. There can be no assurances that
any such fund-raising efforts will be successful.
|
Item
3.
|
Quantitative
and Qualitative Disclosures about Market
Risk
|
Not
applicable.
|
Item
4T.
|
Controls
and Procedures
|
In
accordance with SEC final rule release nos. 33-8760 and 33-8934, due to the
transition period available to newly public companies, the Company is not
required to include its management’s assessment on the Company’s internal
control over its financial reporting until it files its annual report on Form
10-K for the fiscal year ended December 31, 2008, or its auditor’s attestation
report until it files its annual report on Form 10-K for the fiscal year ended
December 31, 2009. As a result, the Company’s annual report on Form 10-KSB for
the fiscal year ended December 31, 2007 did not contain management’s assessment
or its auditor’s attestations on the Company’s internal control over its
financial reporting.
(a) Evaluation of Disclosure Controls
and Procedures: We strive to maintain disclosure controls and procedures
designed to ensure that information required to be disclosed in reports filed
under the Securities Exchange Act of 1934, as amended, is recorded, processed,
summarized and reported within the specified time periods and that such
information is accumulated and communicated to management to allow timely
decisions on required disclosure. We have concluded that our disclosure controls
and procedures regarding information required to be included in SEC reports were
not adequate.
(b) Changes in Internal Control over
Financial Reporting: In light of the above, the Company performed
additional analysis and other post-closing procedures to ensure the consolidated
financial statements were prepared in accordance with generally accepted
accounting principles. Accordingly, management believes the consolidated
financial statements included in this report fairly present, in all material
respects, our financial condition, results of operations and cash flows for the
periods presented.
-18-
PART
II. OTHER INFORMATION
|
Item
1.
|
Legal
Proceedings
|
The
Company and Mr. Zahir Teja, CEO have entered into a settlement agreement with
Kellstrom Defense Aerospace, Inc. This settlement agreement compromises a final
judgment in the amount of $1,173,913 entered in connection with an action
brought by Kellstrom against the Company in the United States District Court for
the Southern District of Florida. Under this agreement, the Company has paid
Kellstrom $150,000 in cash. The Company has also issued Kellstrom a $500,000
purchase credit to be applied towards the purchase of materials and services
from the Company. As of September 30, 2008 the remaining balance of the trade
credits is approximately $384,000. Upon the Company’s payment of the
above-described $150,000 and Kellstrom’s utilization of the previously described
purchase credit, Kellstrom will forgive certain of the Company’s obligations
under an agreement previously entered into between the Company and Kellstrom. If
the Company fails to make the required settlement payments, then Kellstrom may
seek to collect the total unpaid balance of the final judgment. The Company does
not currently have the financial resources to pay off the total unpaid balance
of the final judgment.
|
Item
1A.
|
Risk
Factors
|
Not
applicable.
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of
Proceeds
|
In
June, July, August and September 2008, the Company entered into promissory note
agreements with five Israeli investors and two Israeli corporations for the
aggregate amount of $236,000. Some of these notes were in New Israeli Shekels
and some in U.S. Dollars. These notes are to be paid in full at various
dates between June 22 and August 18, 2009 and bear 15% interest per annum. In
addition these notes were discounted by incentive shares and several note
holders received warrants, as follows: investors received an aggregate of 13,575
shares and warrants to purchase an aggregate of 33,950 shares at a price per
shares that varies between $2.40 and $2.60 per share for 2 years. Some of these
notes have been collateralized by a fixed number of shares of the Company’s
common stock.
The
offering of the promissory notes, the shares of common stock and the warrants
were not registered under the Securities Act of 1933, as amended (the
“Securities Act”), in reliance upon the exemptions from the registration
requirements of the Securities Act set forth in Section 4(2) thereof as a
transaction by the Company not involving any public offering, the investors met
the “accredited investor” criteria required by the rules and regulations
promulgated under the Securities Act, there was no underwriter and no general
solicitation related to the offering.
In
September 30, 2008 Anney Business Corp, a consultant to the company, exercised
an option to purchase 274,000 shares in redemption of $137,000 of
accrued expenses in accordance with a consulting agreement.
In
September 30, 2008, an investor exercised an option to purchase 1,900 shares for
$1,900 in accordance with a subscription agreement.
|
Item
3.
|
Defaults
upon Senior Securities
|
None.
-19-
|
Item
4.
|
Submission
of Matters to a Vote of Security
Holders
|
On July
28, 2008, Phoenix International Ventures, Inc (the “Company”) held its 2008
Annual Stockholders Meeting in Carson City, Nevada to consider and vote upon two
proposals; (i) to re-elect Zahir Teja and Neev Nissenson as the Company’s
directors to serve until the next annual stockholders meeting, and (ii) to
ratify the Company’s Board of Director’s selection of Mark Bailey & Company,
Ltd. as the Company’s independent auditors for the fiscal year ended December
31, 2008. During the Annual Stockholders Meeting, the Company
approved the following proposals; (i) the re-election of Zahir Teja
and Neev Nissenson as the Company’s directors, to serve until the next annual
stockholders meeting, and (ii) the ratification of the Board’s appointment of
Mark Bailey & Company, Ltd. as the Company’s independent auditors for the
fiscal year ended December 31, 2008.
Following
is a summary of the votes cast at the meeting:
|
Votes For
|
Votes
Against
|
Abstain
|
||||
|
Election of Zahir
Teja
|
4,547,750
|
0
|
0
|
|||
|
Election of Neev
Nissenson
|
4,547,750
|
0
|
0
|
|||
|
Ratification of Mark Bailey &
Company, Ltd.
|
4,547,750
|
0
|
0
|
|||
|
Item
5.
|
Other
Information
|
None.
|
Item
6.
|
Exhibits
|
|
No.
|
Exhibit
|
|
31.1
|
Certification by
Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
31.2
|
Certification by
Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002.
|
|
32.1
|
Certification by
Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
|
32.2
|
Certification by
Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
-20-
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Phoenix
International Ventures, Inc.
(Registrant)
|
||
|
November
14, 2008
|
By:
|
/s/
Zahir Teja
|
|
Zahir
Teja
|
||
|
President
and Chief Executive Officer
|
||
|
November
14, 2008
|
By:
|
/s/
Teja N. Shariff
|
|
Teja
N. Shariff
|
||
|
Chief
Financial Officer and Chief Accounting
Officer
|
||
-21-
INDEX
TO EXHIBITS
|
No.
|
Exhibit
|
|
31.1
|
Certification
by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
31.2
|
Certification
by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
|
32.1
|
Certification
by Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
|
32.2
|
Certification
by Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
|
-22-