U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2005.
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from _______ to ________
COMMISSION FILE NUMBER: 000-00000
SAMPLE CORP, INC.
(Name of small business issuer in its charter)
TEXAS 00-0000000
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
123 ANY STREET, SUITE A-100 78758-1234
AUSTIN, TEXAS (Zip Code)
(Address of principal executive offices)
(555) 234-0000
(Issuer's telephone number)
123 Any Street, Austin, Texas 78758-1234
(former address if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.001 par value per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [X] No
[_]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of August 12, 2005, the
issuer had 10,000,000 shares of its common stock issued and outstanding.
Transitional Small Business Disclosure Format (check one): Yes [_] No [X]
TABLE OF CONTENTS
PART I - FINANCIAL INFORMATION.......................................F-1
Item 1. Financial Statements....................................F-1 to F-11
Item 2. Management's Discussion and Analysis or Plan
of Operation............................................3
Item 3. Controls and Procedures.................................8
PART II - OTHER INFORMATION..........................................8
Item 1. Legal Proceedings.......................................8
Item 2. Unregistered Sales of Equity Securities and
Use of Proceeds.........................................8
Item 3. Defaults Upon Senior Securities.........................9
Item 4. Submission of Matters to a Vote of Security Holders.....9
Item 5. Other Information.......................................9
Item 6. Exhibits................................................9
SIGNATURES..........................................................11
Page 2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
SAMPLE CORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
June 30, 2005
June 30,
2005
------------
Assets
Cash and cash equivalents $ 00,000
Accounts receivable, net of allowance of $12,000 000,000
Inventories 000,000
Other current assets 00,000
------------
Total current assets 000,000
Property and equipment, net of accumulated depreciation of $681,295 000,000
------------
Total assets $ 000,000
============
LIABILITIES AND (DEFICIENCY IN) STOCKHOLDERS' EQUITY:
Accounts payable and accrued expenses (Note C) $ 0,000,000
Due to de-consolidated entities 0,000,000
Notes payable - related parties (Note D) 00,000
------------
Total current liabilities 0,000,000
Notes payable - long term, net of discount (Note E) 000,000
Commitments and contingencies (Note H)
(Deficiency in) stockholders' equity:
Preferred Stock, $0.001 par value; 10,000,000 shares authorized;
none issued and outstanding at June 30, 2005 --
Common stock, $0.001 par value; 100,000,000 shares authorized;
20,000,000 shares issued and outstanding at June 30,2005 (Note(F)) 00,000
Common stock cancellation receivable (0,000)
Additional paid-in capital 00,000,000
Accumulated deficit (00,000,000)
------------
Total (Deficiency in) stockholders' equity (0,000,000)
------------
Total liabilities and (deficiency in) stockholders' equity $ 0,000,000
============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
F-1
SAMPLE CORP
CONDENSED CONSOLIDATED STATEMENTS OF LOSSES
(UNAUDITED)
Three months ended Nine months ended
June 30, June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Revenues, net $ 0,000,000 $ 000,000 $ 0,000,000 $ 0,000,000
Cost of Goods Sold 0,000,000 000,000 0,000,000 000,000
------------ ------------ ------------ ------------
Gross Profit 000,000 00,000 0,000,000 000,000
Operating expenses:
Selling, general, and administrative expenses 000,000 0,000,000 0,000,000 0,000,000
Depreciation and amortization 00,000 00,000 00,000 00,000
Goodwill impairment 0,000,000 0,000,000
------------ ------------ ------------ ------------
Total operating expenses 000,000 00,000,000 0,000,000 00,000,000
Income (loss) from operations 000,000 (00,000,000) (00,000) (00,000,000)
Other Income (expenses) :
Other income (expense) -- 00,000 -- 00,000
Interest income (expense) (000,000) (0,000) (000,000) (0,000)
------------ ------------ ------------ ------------
Total other income (expense) (000,000) 00,000 (000,000) 00,000
Income (Loss) before provision for income
taxes and discontinued operations (00,000) (00,000,000) (000,000) (00,000,000)
Provison for income taxes -- -- -- (00,000)
------------ ------------ ------------ ------------
Net income (loss) from continuing operations (00,000) (00,000,000) (000,000) (00,000,000)
Net income (loss) from discontinued operations -- (0,000,000) -- (00,000,000)
------------ ------------ ------------ ------------
Net income (loss) $ (00,000) $(00,000,000) $ (000,000) $(00,000,000)
============ ============ ============ ============
Income (loss) per share - basic and fully diluted $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============ ============ ============ ============
Income (loss) per share - continuing operations $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============ ============ ============ ============
Income (loss) per share - discontinued operations N/A $ (0.00) N/A $ (0.00)
============ ============ ============ ============
Basic and diluted weighted average
number of shares outstanding 00,000,000 00,000,000 00,000,000 0,000,000
============ ============ ============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
F-2
SAMPLE CORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
For the nine months ended
June 30,
2005 2004
------------ ------------
Cash flows from operating activities:
Net (loss) $ (000,000) $(00,000,000)
Add (deduct):
Loss on discontinued operations -- 00,000,000
------------ ------------
Loss from continuing operations (00,000,000)
Depreciation and amortization 00,000 00,000
Amortization of discount on note payable 200,000 --
Goodwill impairment -- 0,000,000
Changes in current assets and liabilities:
Accounts receivable (000,000) 000,000
Inventory (00,000) 00,000
Due to de-consolidated entities -- --
Construction in progress 00,000 --
Other assets (00,000) (00,000)
Accounts payable 000,000 000,000
------------ ------------
Net cash (used in) operating activities (000,000) (0,000,000)
------------ ------------
Cash flows from investing activities:
Purchase of assets (00,000) (000,000)
------------ ------------
Net cash used in investing activities (00,000) (000,000)
------------ ------------
Cash flows from financing activities:
Sale of common stock for cash -- 0,000,000
Proceeds from notes payable 000,000 --
Proceeds from notes payable - related parties 00,000 --
Principal payments on NP - related parties (00,000) --
------------ ------------
Net cash provided by financing activities 000,000 0,000,000
------------ ------------
Net increase in cash and cash equivalents (00,000) (000,000)
Cash and cash equivalents at beginning of period 000,000 000,000
------------ ------------
Cash and cash equivalents at end of period $ 00,000 $ 00,000
============ ============
The accompanying notes are an integral part of these
unaudited condensed consolidated financial statements.
F-3
SAMPLE CORP
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
UNAUDITED
For the nine months ended June 30,
2005 2004
------------ -----------
Supplemental Disclosures of Cash Flow Information :
Cash paid during the period for interest $ 0,000 $ 0,000
============ ===========
Cash paid during the period for income taxes $ -- $ 00,000
============ ===========
Common stock issued to employees for services $ -- $ 000
============ ===========
Common stock issued to consultants for services $ -- $ 000,000
============ ===========
Acquisition of Company:
Net liabilities assumed in excess of assets $ 0,000,000
-----------
Total consideration paid - goodwill $ -- $ 0,000,000
============ ===========
Acquisition of Advanced Fuel:
Net liabilities assumed in excess of assets $ 0,000,000
Note payable $ 0,000,000
-----------
Total consideration paid - goodwill $ -- $ 0,000,000
============ ===========
Acquisition of Company:
Net liabilities assumed in excess of assets $ (00,000)
Note payable $ 0,000,000
-----------
Total consideration paid - goodwill $ -- $ 000,000
============ ===========
Acquisition of Company:
Net liabilities assumed in excess of assets $ 000
Note payable $ 00,000
Cash paid $ 000,000
-----------
Total consideration paid - goodwill $ -- $ 000,000
============ ===========
------------ -----------
Amortization of discount on note payable $ 000,000 $ --
============ ===========
------------ -----------
Value of warrants issued with convertible note $ 000,000 $ --
============ ===========
------------ -----------
1,500,000 shares issued, expected to be returned for
cancellation (at par) $ 0,000 $ --
============ ===========
------------ -----------
189,000 shares issued for settlement of amount due
to service providers (at par) $ 000 $ --
============ ===========
------------ -----------
500,000 shares issued for legal settlement $ 00,000 $ --
============ ===========
16,667 shares issued pursuant to repricing of previous ------------ -----------
private placement shares sold (at par) $ 00 $ --
============ ===========
------------ -----------
157,500 shares issued for settlement of amount due to
service providers (at par) $ 000 $ --
============ ===========
The accompanying notes are an integral part of these
Unaudited condensed consolidated financial statements.
F-4
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION
JUNE 30, 2005
(UNAUDITED)
NOTE A - SUMMARY OF ACCOUNTING POLICIES
General
-------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America for interim financial information and with the instructions to Form
10-QSB. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Accordingly, the results from operations for the three-month and nine-month
periods period ended June 30, 2005 are not necessarily indicative of the results
that may be expected for the year ended September 30, 2005. The unaudited
condensed consolidated financial statements should be read in conjunction with
the consolidated September 30, 2004 financial statements and footnotes thereto
included in the Company's SEC Form 10-KSB.
Business and Basis of Presentation
----------------------------------
SAMPLE CORP, Inc. ("SAMPLE CORP" or the "Company"), formerly Widgets, Inc., was
formed in June, 1998 under the laws of the State of Texas. The Company provides
diagnostic and maintenance services to widget service facilities in the
southwestern part of the United States of America.
The accompanying financial statements include the accounts of the Company and
its wholly-owned subsidiaries, Little Widgets, Inc., a California corporation
and ("Little Widgets"). All significant intercompany transactions and balances
have been eliminated in the consolidated financial statements
Reclassification
----------------
Certain reclassifications have been made to conform prior periods' data to the
current presentation. These reclassifications had no effect on reported losses.
Stock Based Compensation
--------------------------
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure-an amendment of SFAS 123." This statement
amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of SFAS No. 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company has chosen to continue to account
for stock-based compensation using the intrinsic value method prescribed in APB
Opinion No. 25 and related interpretations. Accordingly, compensation expense
for stock options is measured as the excess, if any, of the fair market value of
the Company's stock at the date of the grant over the exercise price of the
related option. The Company has adopted the annual disclosure provisions of SFAS
No. 148 in its financial reports for the year ended September 30, 2003 and the
interim disclosure provisions for its financial reports for the subsequent
periods. The Company does not have any awards of stock-based employee
compensation issued and outstanding at June 30, 2004 and 2005.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based equity awards,
stock appreciation rights, and employee share purchase plans. The provisions of
SFAS 123R are effective as of the first interim period that begins after
December 15, 2005. Accordingly, the Company will implement the revised standard
in the third quarter of fiscal year 2005. Currently, the Company accounts for
its share-based payment transactions under the provisions of APB 25, which does
not necessarily require the recognition of compensation cost in the financial
statements. Management is assessing the implications of this revised standard,
which may materially impact the Company's results of operations in the first
quarter of fiscal year 2006 and thereafter.
Had compensation costs for the Company's stock options been determined based on
the fair value at the grant dates for the awards, the Company's net loss and
losses per share would have been as follows:
For the three For the nine
months ended June 30, months ended June 30,
2005 2004 2005 2004
------------ ------------ ------------ ------------
Net loss - as reported $ (00,000) $(00,000,000) $ (000,000) $(00,000,000)
Add: Total stock based employee compensation expense
as reported under intrinsic value mathod (APB No. 25) -- -- -- --
Deduct: Total stock based employee compensation expense
as reported under fair value based method (SFAS No. 123) -- -- -- --
------------ ------------ ------------ ------------
Net loss - Pro forma $ (00,000) $(00,000,000) $ (000,000) $(00,000,000)
Net loss attributable to common stockholders - Pro forma $ (00,000) $(00,000,000) $ (000,000) $(00,000,000)
Basic and diluted loss per share - as reported $ (--) $ (0.00) $ (0.00) $ (0.00)
============ ============ ============ ============
Basic and diluted loss per share - Pro forma $ (--) $ (0.00) $ (0.00) $ (0.00)
------------ ------------ ------------ ------------
F-5
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (continued)
JUNE 30, 2005
(UNAUDITED)
Revenue Recognition
-------------------
SERVICES
For revenue from products and services, the Company recognizes revenue in
accordance with SEC Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB 101"). SAB 101 requires that four basic criteria
must be met before revenue can be recognized: (1) persuasive evidence of an
arrangement exists; (2) delivery has occurred or services have been rendered;
(3) the selling price is fixed and determinable; and (4) collectibility is
reasonably assured. Determination of criteria (3) and (4) are based on
management's judgments regarding the fixed nature of the selling prices of the
products delivered/services rendered and the collectibility of those amounts.
Provisions for discounts and rebates to customers, estimated returns and
allowances, and other adjustments are provided for in the same period the
related sales are recorded. The Company defers any revenue for which the product
has not been delivered or services has not been rendered or is subject to refund
until such time that the Company and the customer jointly determine that the
product has been delivered or services has been rendered or no refund will be
required.
On December 17, 2003, the SEC staff released Staff Accounting Bulletin (SAB) No.
104, Revenue Recognition. The staff updated and revised the existing revenue
recognition in Topic 13, Revenue Recognition, to make its interpretive guidance
consistent with current accounting guidance, principally EITF Issue No. 00-21,
"Revenue Arrangements with Multiple Deliverables." Also, SAB 104 incorporates
portions of the Revenue Recognition in Financial Statements - Frequently Asked
Questions and Answers document that the SEC staff considered relevant and
rescinds the remainder. The company's revenue recognition policies are
consistent with this guidance; therefore, this guidance will not have an
immediate impact on the company's financial statements.
Inventories
-----------
Inventory is stated at the lower of cost, using the average cost method, or
market. Components of inventories as of June 30, 2005 are as follows:
Finished goods $ 000,000
---------
F-6
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (continued)
JUNE 30, 2005
(UNAUDITED)
New Accounting Pronouncements
-----------------------------
In May 2005 the FASB issued Statement of Financial Accounting Standards (SFAS)
No. 154, "Accounting Changes and Error Corrections, a replacement of APB Opinion
No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective application to
prior periods' financial statements for changes in accounting principle, unless
it is impracticable to determine either the period-specific effects or the
cumulative effect of the change. SFAS 154 also requires that retrospective
application of a change in accounting principle be limited to the direct effects
of the change. Indirect effects of a change in accounting principle, such as a
change in non-discretionary profit-sharing payments resulting from an accounting
change, should be recognized in the period of the accounting change. SFAS 154
also requires that a change in depreciation, amortization, or depletion method
for long-lived, non-financial assets be accounted for as a change in accounting
estimate effected by a change in accounting principle. SFAS 154 is effective for
accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Early adoption is permitted for accounting changes and
corrections of errors made in fiscal years beginning after the date this
Statement is issued. The Company does not expect the adoption of this SFAS to
have a material impact on its consolidated financial position, results of
operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47, "Accounting for
Conditional Asset Retirement Obligations, an interpretation of FASB Statement
No. 143," which requires an entity to recognize a liability for the fair value
of a conditional asset retirement obligation when incurred if the liability's
fair value can be reasonably estimated. The Company is required to adopt the
provisions of FIN 47 no later than the end of its fiscal 2005. The Company does
not expect the adoption of this Interpretation to have a material impact on its
consolidated financial position, results of operations or cash flows.
The adoption of this pronouncement is not expected to have material effect on
the Company's financial statements.
F-7
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (continued)
JUNE 30, 2005
(UNAUDITED)
NOTE B - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at June 30, 2005:
Vehicles $ 000,000
Office equipment 000,000
Field equipment 000,000
Office furniture 00,000
Computer equipment 00,000
--------
000,000
Accumulated depreciation (000,000)
--------
$ 000,000
========
NOTE C - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at June 30, 2005 are as follows:
Trade payables and accrued liabilities $ 000,000
Payroll and related liabilities 000,000
Accrued interest payable 00,000
----------
$0,000,000
==========
NOTE D - NOTE PAYABLE - RELATED PARTIES
During the three months ended March 31, 2005, the Company received a loan from
its President and Chief Executive Officer in the amount of $20,000. The loan
bears interest at the rate of 10% per annum, and interest is payable monthly.
The amount of $10,000 was paid on the note on April 13, 2005, and the remaining
$10,000 was paid on May 4, 2005.
NOTE E - NOTE PAYABLE - LONG TERM
In September 2004, the Company entered into a Note Purchase Agreement (the "Note
Purchase Agreement") whereby the Company would borrow a minimum of $100,000 and
a maximum of $1,500,000 pursuant to a secured note or notes (the "Notes").
Noteholder has the option to convert unpaid note principal to the Company's
common stock at a rate of $0.025 per share (the "Conversion Price") at any time.
The Notes have a term of two years. The Notes bear interest at the rate of 8%
per annum, and be secured by a first lien and security interest on all assets of
the Company and its subsidiaries. The Company shall have no right to prepay the
Notes. In addition, the Company will issue common stock purchase warrants to
purchase 15 shares of common stock for every $1.00 of principal borrowed under
the Note Purchase Agreement. (the "Note Warrants"). The Note Warrant will have
an exercise price of $0.15 per share, and a term of five years.
At September 30, 2004, the Company had borrowed a total of $561,912 under the
Note Purchase Agreement, and had calculated the discounts associated with the
beneficial conversion feature of the notes and warrants issued with the notes to
be $321,093 and $240,819, respectively, for a total discount of $561,912 at
September 30, 2004. In October and November 2004, The Company borrowed an
additional $490,000 under the Note Purchase Agreement for a total amount
borrowed of $1,051,912. The Company calculated the fair value of the beneficial
conversion feature and of the warrants issued under the $490,000 borrowed during
October and November 2004 $133,711 and $356,289, respectively, for a total of
$490,000. This amount is considered a discount to the note, and was charged to
additional paid-in capital during the six months ended March 31, 2005. At June
30, 2005, the Company has borrowed a total of $1,051,912 pursuant to the Note
Purchase Agreement, and the aggregate discounts associated with the beneficial
conversion features and warrants was $1,051,912. This discount is being
amortized to interest expense over the term of the note, which ends September
30, 2006. During the three months ended June 30, 2005, $132,613 of this discount
was amortized to interest expense; at June 30, 2005, a total of $387,471 of this
discount has been amortized, and a discount of $664,441 remains. The net book
value of the Notes at June 30, 2005 is $387,471. The principal, discount, and
number of common shares issuable pursuant to warrants and the potential
conversion of the amounts loaned under the Note Purchase Agreement are
summarized as follows:
F-8
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (continued)
JUNE 30, 2005
(UNAUDITED)
NOTE E - NOTE PAYABLE - LONG TERM (continued)
Notes payable balance at June 30, 2005 consists ofthe following:
June 30, 2005
-------------
Aggregate amount of notes $ 0,000,000
Debt discount - value attributable to
beneficial conversion feature, net of
accumulated amortization of $167,526
at June 30, 2005 (000,000)
Debt discount - value attributable to
warrants attached to notes, net of
accumulated amortization of $219,944
at June 30, 2005 (000,000)
-----------
Total 000,000
Less: current portion --
-----------
Notes payable - long term $ 000,000
===========
Shares
Warrant issuable upon Total shares
Shares conversion issuable
---------------------------------------
Balance at September 30, 2004 0,000,000 00,000,000 00,000,000
3 months ended December 31, 2004 0,000,000 00,000,000 00,000,000
3 months ended March 31, 2005 -- -- --
3 months ended June 30, 2005 -- -- --
---------------------------------------
Balance at June 30, 2005 00,000,000 00,000,000 00,000,000
=======================================
The discount, resulting amortization to expense, and number of shares issuable
under the conversion feature and the warrants will increase should the Company
borrow additional funds under the Note Purchase Agreement.
NOTE F - COMMON STOCK
During the three months ended March 31, 2005, the Company issued 1,500,000
shares of common stock to a former officer and director. The Company has taken
the position that these shares were not due to this individual, and the
Company's management is currently in negotiations to recover these shares. The
1,500,000 shares are shown at their par value of $1,500 as Share Cancellation
Receivable on the Company's balance sheet at June 30, 2005.
During the three months ended June 30, 2005, the Company recorded the issuance
of 500,000 shares of common stock in settlement litigation regarding the
Company's prior subsidiary AFFS. The shares were valued at their market price of
$0.16, and the amount of $80,000 was recorded as a reduction in the liability to
AFFS at 06.30.05.
In June 2005, the Company issued 16,667 shares of common stock to
investors in an earlier sale of common stock as a goodwill restructuring of the
terms of the previous sale. The Company charged the amount of $17 to additional
paid-in capital.
NOTE G - STOCK OPTIONS AND WARRANTS
Warrants
--------
The following table summarizes the changes in warrants outstanding and the
related prices for the shares of the Company's common stock issued to
non-employees of the Company.
F-9
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (continued)
JUNE 30, 2005
(UNAUDITED)
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Warrants (continued)
--------------------
Warrants Outstanding Warrants Exercisable
---------------------------------------------------- ------------------------
Weighted Average Weighted Weighted
Remaining Average Average
Exercise Number Contractual Life Exercise Number Exercise
Prices Outstanding (Years) Price Exercisable Price
--------- ----------- ----------------- --------- ----------- -----------
$0.00 0,000,000 0.00 $ 0.00 0,000,000 $ 0.00
0.00 0,000,000 0.00 0.00 0,000,000 0.00
0.00 0,000,000 0.00 0.00 0,000,000 0.00
0.00 000,000 0.00 0.00 000,000 0.00
0.00 0,000,000 0.00 0.00 0,000,000 0.00
0.00 000,000 0.00 0.00 000,000 0.00
0.00 000,000 0.00 0.00 000,000 0.00
0.00 0,000,000 0.00 0.00 0,000,000 0.00
0.00 0,000,000 0.00 0.00 0,000,000 0.00
----------- ----------------- --------- ----------- -----------
00,000,000 0.00 $ 0.00 00,000,000 $ 0.00
=========== ================= ========= =========== ===========
Transactions involving warrants are summarized as follows:
Weighted Average
Number of Shares Price Per Share
---------------- -----------------
Outstanding at September 30, 2003 - $ -
---------------- -----------------
Granted 00,000,000 0.00
Exercised - .
Canceled or expired - -
---------------- -----------------
Outstanding at September 30, 2004 00,000,000 $ 0.00
Granted 0,000,000 0.00
Exercised - -
Canceled or expired - -
---------------- -----------------
Outstanding at June 30, 2005 00,000,000 $ 0.00
================ =================
The Company did not grant any compensatory warrants to non-employees during the
three months or nine months ended June 30, 2005 and all previously granted
warrants were fully vested at the grant date. Accordingly, no expense was
charged to operations for the period ended June 30, 2005.
The weighted-average fair value of stock options granted to non-employees during
the periods ended June 30, 2005 and September 30, 2004 and the weighted-average
significant assumptions used to determine those fair values, using a
Black-Scholes option pricing model are as follows:
F-10
SAMPLE CORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL INFORMATION (continued)
JUNE 30, 2005
(UNAUDITED)
NOTE G - STOCK OPTIONS AND WARRANTS (continued)
Warrants (continued)
--------------------
2005 2004
---- ----
Significant assumptions (weighted average)
Risk-free interest rate at grant date 3.75% 3.75%
Expected stock price volatility 431% to 433% 431%
Expected dividend payout 0 0
Expected option life-years based on contractual
expiration dates 5 5
NOTE H - COMMITMENTS AND CONTINGENCIES
In June 8, 2005 a Federal Tax Lien was filed with the Los Angeles County
Recorder's Office for unpaid taxes for the first three quarters of 2004. At June
30, 2005, the balance of the lien was $37,810.73.
NOTE I - GOING CONCERN MATTERS
The accompanying condensed consolidated financial statements have been prepared
on a going concern basis, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. As shown in the
Company's audited financial statements for the year ended September 30, 2004 as
filed on Form 10-KSB, the Company incurred a loss from continuing operations of
$ 15,991,591. The Company also has a limited operating history. These factors
among others indicate that the Company may be unable to continue as a going
concern for a reasonable period of time.
The Company may require additional financing in order to successfully implement
its business plan. There can be no assurance the Company will be successful in
obtaining these funds on terms favorable to the Company, if at all.
If operations and cash flows continue to improve, management believes that the
Company can continue to operate. However, no assurance can be given that
management's actions will result in profitable operations or the resolution of
its liquidity problems.
The Company's existence is dependent upon management's ability to develop
profitable operations and resolve its liquidity problems. Management anticipates
the Company will attain profitable status and improve its liquidity through the
continued developing, marketing and selling of its services and additional
equity investment in the Company. The accompanying condensed consolidated
financial statements do not include any adjustments that might result should the
Company be unable to continue as a going concern.
F-11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS.
FORWARD-LOOKING INFORMATION
Much of the discussion in this Item is "forward looking" as that term is
used in Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act of 1934. Certain statements included in this Form 10-QSB,
including, without limitation, statements related to anticipated cash flow
sources and uses, and words including but not limited to "anticipates",
"believes", "plans", "expects", "future" and similar statements or expressions,
identify forward looking statements. Actual operations and results may
materially differ from present plans and projections due to changes in economic
conditions, new business opportunities, changed business conditions, and other
developments. Other factors that could cause results to differ materially are
described in our filings with the Securities and Exchange Commission.
There are several factors that could cause actual results or events to
differ materially from those anticipated, and include, but are not limited to
general economic, financial and business conditions, changes in and compliance
with governmental laws and regulations, including various state and federal
environmental regulations, our ability to obtain additional financing from
outside investors and/or bank and mezzanine lenders and our ability to generate
sufficient revenues to cover operating losses and position us to achieve
positive cash flow.
Readers are cautioned not to place undue reliance on the forward-looking
statements contained herein, which speak only as of the date hereof. We believe
the information contained in this Form 10-QSB to be accurate as of the date
hereof. Changes may occur after that date. We will not update that information
except as required by law in the normal course of its public disclosure
practices.
Additionally, the following discussion regarding our financial condition
and results of operations should be read in conjunction with the financial
statements and related notes contained in Item 1 of Part I of this Form 10-QSB,
as well as the financial statements in Item 7 of Part II of our Form 10-KSB for
the fiscal year ended September 30, 2004.
RESULTS OF OPERATIONS
CONTINUING OPERATIONS
REVENUE
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE THREE MONTHS ENDED JUNE 30,
2004.
Page 3
Total revenues for the three months ended June 30, 2005 were $2,012,746, an
increase of $1,620,183 or 413% percent compared to total revenues of $392,563
for the comparable period of the prior year. Revenue in the period increased due
to successful sales and marketing efforts pointed at captive or long term
customers. Construction services were introduced and multiple projects where
awarded and successfully completed in the period.
Our gross profit for the three months ended June 30, 2005 compared to three
months ended June 30,2004 increased by approximately 873% to $728,482, compared
to $74,854 in the comparable period of the prior year. Gross margin as a
percentage of sales increased to approximately 36% for the three month period
ending June 30, 2005 compared to approximately 19% for the comparable period of
2004. The target gross margin (as a percentage of sales) goal for the Company is
35% to 50% depending on the scope of services provided. Service activities
typically perform at the top of the scale while large construction projects are
bid to achieve 35% (minimum) margins. Due to the mix of services offered,
management expects, but cannot assure gross profits to average within the
aforementioned range.
Interest expense for the three months ended June 30, 2005 increased to
$155,096 from $1,250 in the same period of 2004. Interest expense attributable
to amortization of the beneficial conversion feature of notes payable amounted
to $132,613, and accrued interest on notes payable amounted to $20,681. The
Company does not expect interest expense on its current debt to change
substantially over the coming twelve months; however, should the Company acquire
additional debt financing, then interest expense would necessarily increase.
For the reasons stated above, the Company had a net loss from continuing
operations for the three months ended June 30, 2005 of $48,690, an improvement
of $10,132,543 or to a net loss from continuing operations of $10,181,233 during
the three months ended June 30, 2004. During the three months ended June 30,
2004, the Company also had a net loss from discontinued operations of
$9,965,074, and had no such loss during the current period. Net loss including
discontinued operations was $48,690 for the three months ended June 30, 2005,
compared to a net loss including discontinued operations of $20,146,307 in the
prior period as a result of the factors described above.
NINE MONTHS ENDED JUNE 30, 2005 COMPARED TO THE NINE MONTHS ENDED JUNE 30,
2004
Total revenues for the nine months ended June 30, 2005 increased by 327% to
$4,560,254 from $1,068,979 for the comparable period of the prior year. The
increase in revenue is based largely on the implementation of additional
construction services. The Company had previously focused on providing
specialized aircraft system maintenance. The Company successfully engaged
in complete widget system construction and increased its maintenance client base
during the period.
Gross profit for the nine months ended June 30, 2005 was $1,801,917
compared to $323,059 during the nine months ended June 30, 2004, an increase of
$1,478,858 or approximately 458%. Gross profit as a percentage of sales for the
nine months ended June 30, 2005 was approximately 40%, compared to approximately
30% for the comparable period ended June 30, 2004. The target gross margin (as a
percentage of sales) goal for the Company is 35% to 50% depending on the scope
of services provided. Service activities typically perform at the top of the
scale while large construction projects are bid to achieve 35% (minimum)
margins. Due to the mix of services offered, management expects gross profit to
average within the aforementioned range.
Page 4
Total sales, general and administrative expenses ("SG&A") expenses for the
nine months ended June 30, 2005 were $1,849,358, a decrease of $5,041,262 or
approximately 73% compared to SG&A expenses of $6,890,620 for the comparable
period of the prior year. SG&A in the prior year included approximately
$3,256,000 of charges to fully reserve Intercompany receivables belonging to Company
and AFFS. SG&A for the current period consists primarily of employee's salary
and related costs of $869,178; vehicle costs of $265,024; legal and accounting
fees of $246,378; other professional fees of $107,970; insurance expense of
$106,238; office expenses of $101,193, and rent and facilities expense of
$93,842. Management anticipates that SG&A expense will increase slightly as the
Company continues to grow. Although management is focused on increasing
efficiency, additional staff, equipment and facilities will be required to
support field activity.
Interest expense, net for the nine months ended June 30, 2005 increased to
$461,356 compared to $1,250 in the same period of 2004. Interest expense
attributable to amortization of the beneficial conversion feature of notes
payable amounted to $387,471, and accrued interest on notes payable amounted to
$61,125.
For the reasons stated above, the Company had a net loss from continuing
operations of $546,266 for the nine months ended June 30, 2005, compared to a
net loss from continuing operations of $13,658,523 for the nine months ended
June 30, 2004. This represents an improvement $13,112,257 over the prior period.
During the nine months ended June 30, 2004, the Company also had a net loss from
discontinued operations of $12,890,790, and had no such loss during the current
period. Net profit including discontinued operations was $546,266 for the nine
months ended June 30, 2005, compared to a net loss including discontinued
operations of $26,549,313 in the prior period as a result of the factors
described above.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 2005, we had a deficiency in working capital of $(884,004).
For the nine months ended June 30, 2005, we generated a net cash flow deficit
from operating activities of $(534,859) consisting primarily of year to date
losses of $(546,266), adjusted for non cash expenses of $424,939 and a change in
the components of working capital of ($413,532). Cash used in investing
activities totaled $(28,399), used for property, plant, and equipment. Cash
provided by financing activities totaled $490,000 consisting primarily of the
net proceeds from issuance of convertible notes payable.
We expect capital expenditures to be minimal for the next twelve months.
Although the Company currently possesses adequate assets to support the targeted
revenue goals, expenditures for capital equipment may be appropriate if
additional business opportunities are located. No assurances can be given that
such additional business opportunities will be forthcoming.
By adjusting our operations and development to the level of capitalization,
we believe we have sufficient capital resources to meet projected cash flow
deficits. However, if during that period or thereafter, we are not successful in
generating sufficient liquidity from operations or in raising sufficient capital
resources, on terms acceptable to us, this could have a material adverse effect
on our business, results of operations liquidity and financial condition.
The Company's independent registered certified public accountant has stated
in their report included in the Company's September 30, 2004 Form 10-KSB, that
the Company has suffered recurring losses from operations , and that the Company
is dependent upon management's ability to develop profitable operations. These
factors among others may raise substantial doubt about the Company's ability to
continue as a going concern.
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements in conformity with
accounting principles generally accepted in the United States requires us to
make estimates and judgments that affect our reported assets, liabilities,
revenues, and expenses, and the disclosure of contingent assets and liabilities.
We base our estimates and judgments on historical experience and on various
other assumptions we believe to be reasonable under the circumstances. Future
events, however, may differ markedly from our current expectations and
assumptions. While there are a number of significant accounting policies
affecting our consolidated financial statements, we believe the following
critical accounting policy involve the most complex, difficult and subjective
estimates and judgments.
Page 5
STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148 - Accounting for Stock-Based
Compensation - Transition and Disclosure. This statement amends SFAS No. 123 -
Accounting for Stock-Based Compensation, providing alternative methods of
voluntarily transitioning to the fair market value based method of accounting
for stock based employee compensation. FAS 148 also requires disclosure of the
method used to account for stock-based employee compensation and the effect of
the method in both the annual and interim financial statements. The provisions
of this statement related to transition methods are effective for fiscal years
ending after December 15, 2002, while provisions related to disclosure
requirements are effective in financial reports for interim periods beginning
after December 31, 2002.
We elected to continue to account for stock-based compensation plans using
the intrinsic value-based method of accounting prescribed by APB No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. Under
the provisions of APB No. 25, compensation expense is measured at the grant date
for the difference between the fair value of the stock and the exercise price.
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
published Statement of Financial Accounting Standards No. 123 (Revised 2004),
Share-Based Payment ("SFAS 123R"). SFAS 123R requires that compensation cost
related to share-based payment transactions be recognized in the financial
statements. Share-based payment transactions within the scope of SFAS 123R
include stock options, restricted stock plans, performance-based equity awards,
stock appreciation rights, and employee share purchase plans. The provisions of
SFAS 123R are effective as of the first interim period that begins after
December 15, 2005. Accordingly, the Company will implement the revised standard
in the third quarter of fiscal year 2005. Currently, the Company accounts for
its share-based payment transactions under the provisions of APB 25, which does
not necessarily require the recognition of compensation cost in the financial
statements. Management is assessing the implications of this revised standard,
which may materially impact the Company's results of operations in the first
quarter of fiscal year 2006 and thereafter.
RECENT ACCOUNTING PRONOUNCEMENTS
Page 6
In May 2005 the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 154, "Accounting Changes and Error Corrections, a replacement of APB
Opinion No. 20 and FASB Statement No. 3." SFAS 154 requires retrospective
application to prior periods' financial statements for changes in accounting
principle, unless it is impracticable to determine either the period-specific
effects or the cumulative effect of the change. SFAS 154 also requires that
retrospective application of a change in accounting principle be limited to the
direct effects of the change. Indirect effects of a change in accounting
principle, such as a change in non-discretionary profit-sharing payments
resulting from an accounting change, should be recognized in the period of the
accounting change. SFAS 154 also requires that a change in depreciation,
amortization, or depletion method for long-lived, non-financial assets be
accounted for as a change in accounting estimate effected by a change in
accounting principle. SFAS 154 is effective for accounting changes and
corrections of errors made in fiscal years beginning after December 15, 2005.
Early adoption is permitted for accounting changes and corrections of errors
made in fiscal years beginning after the date this Statement is issued. The
Company does not expect the adoption of this SFAS to have a material impact on
its consolidated financial position, results of operations or cash flows.
In March 2005, the FASB issued FASB Interpretation (FIN) No. 47,
"Accounting for Conditional Asset Retirement Obligations, an interpretation of
FASB Statement No. 143," which requires an entity to recognize a liability for
the fair value of a conditional asset retirement obligation when incurred if the
liability's fair value can be reasonably estimated. The Company is required to
adopt the provisions of FIN 47 no later than the end of its fiscal 2005. The
Company does not expect the adoption of this Interpretation to have a material
impact on its consolidated financial position, results of operations or cash
flows.
The adoption of this pronouncement is not expected to have material effect
on the Company's financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
Page 7
ITEM 3. CONTROLS AND PROCEDURES.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
principal executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure.
We carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer and
Principal Financial Officer, of the effectiveness of our disclosure controls and
procedures, as defined in Rules 13a-15(e) and 15d-15(e) of the Securities
Exchange Act of 1934 as of the end of the period covered by this report. Based
on that evaluation, our Chief Executive Officer and Principal Financial Officer
have concluded that our disclosure controls and procedures as of June 30, 2005
were effective to ensure that information required to be disclosed by us in
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission's rules and forms.
There have been no material changes in our internal controls over financial
reporting or in other factors that could materially affect, or are reasonably
likely to affect, our internal controls over financial reporting during the
quarter ended June 30, 2005.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
There have been no material development s in our legal proceedings reported
on our Quarterly Report on Form 10-QSB for the period ended December 31, 2004,
filed with the Commission on March 31, 2005, except as follows:
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
In June 2005, the Company issued 16,667 shares of common stock to investors
in an earlier sale of common stock as a goodwill restructuring of the terms of
the previous sale. These shares were issued in a private placement transaction
pursuant to Section 4(2) and Regulation D under the Securities Act of 1933, as
amended. No underwriters were involved in this transaction.
Page 8
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None.
Item 6. Exhibits.
EXHIBIT NO. IDENTIFICATION OF EXHIBIT
----------- -------------------------
1.1** Investment Banking Agreement with Smith Production Partners
dated October 24, 2003
2.1** Plan and Agreement of Triangular Merger Between
Sample Corp, Inc., Widgets2, Inc. and Jones
Development dated December 29, 2003
----------
* Filed herewith.
** Previously Filed
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SAMPLE CORP,
INC.
Dated August 15, 2005. By /s/ John Doe
---------------------------
John Doe, President and Chief
Financial Officer
Page 11