Exhibit 99.6
UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
INTRODUCTION AND BASIS OF PRESENTATION
On August 9, 2006, Xxxxxxxxxxxxx.xxx, Inc. (the "Registrant" or "CARS") executed
an Agreement and Plan of Merger ("Merger Agreement") with Pump Acquisition
Corp., a wholly-owned subsidiary of the Registrant ("PAC"), Innopump, Inc., a
Nevada corporation ("Innopump"), and certain Innopump stockholders. Pursuant to
the Merger Agreement, the Registrant issued 568,134,259 shares of its common
stock to shareholders of Innopump in consideration of Innopump merging with and
into PAC and becoming a wholly-owned subsidiary of the Registrant ("Merger").
Holders of Innopump convertible notes, warrants and options received equivalent
amount of notes, warrants and options convertible or exercisable into that
number of Registrant common stock had they converted or exercised immediately
prior to the closing.
The Merger Agreement required CARS to issue to the Innopump stockholders 1,950
shares of CARS common stock for each share of Innopump common stock outstanding
at the closing date of August 9, 2006. At the closing, there were 262,500
outstanding shares of Innopump common stock plus 28,792 shares issued on
conversion of certain debt for a total of 291,292 shares which resulted in the
issuance of 568,134,259 shares of CARS common stock and resulted in CARS
stockholders retaining approximately 6.75% (41,125,000 shares) of the
outstanding stock and Innopump stockholders receiving approximately 93.25% of
the outstanding stock on a pre-diluted basis.
The parties' completion of the transactions contemplated under the Merger
Agreement were subject to the satisfaction of certain contingencies including,
without limitation, requisite approvals and consents and that CARS shall have no
less than $7,500,000 in cash or cash equivalents and no more than $80,000 in
liabilities immediately prior to closing. On August 9, 2006, the Registrant sold
10% senior redeemable convertible debt ("Convertible Debt") in the principal
amount of $7.5 million to Mellon HBV Master U.S. Event Driven Fund, L.P. and
Mellon HBV Master Global Event Driven Fund, L.P. (collectively referred to as
the "Investor") in exchange for $7.5 million in cash. Interest accrues at 10%
per annum, payable in cash or payable in kind ("PIK") at the Registrant's
option, on the one year anniversary of the date of issuance with respect to the
first year of accrued interest and quarterly in arrears thereafter. Any interest
not paid when due will accrue and will be added to the principal in determining
the number of shares of Common Stock issuable upon conversion of the Convertible
Debt. The Convertible Debt matures 30 months after the date of issuance
("Maturity Date"). The Registrant shall not have the option to prepay the
Convertible Debt prior to the Maturity Date. The Registrant must redeem 100% of
the Convertible Debt, unless earlier converted, for an amount equal to 120% of
the outstanding principal plus accrued but unpaid interest, on the Maturity
Date. The proceeds from the Convertible Debt will be used for working capital,
capital expenditures, mandatory debt repayment, and general corporate purposes.
The Convertible Debt is convertible into shares of the Registrant's common stock
at the fully diluted, post-reverse merger valuation at Closing of $16 million.
The price per share is equal to $16 million divided by the number of outstanding
shares (611,847,827) of the post reverse-merger on a fully-diluted basis
("Original Purchase Price"). This conversion price of approximately $.02615 per
share would result in the issuance of approximately 286,803,669 shares upon
conversion of the debt and is subject to weighted-average, anti-dilution
protection on all subsequent financings by the Registrant. In addition , the
Investor received Warrants (aggregating 22% of the shares issuable on
conversion) to purchase approximately 63,096,807 shares of common stock at an
exercise price of approximately $.02615 per share. The Warrants have a five (5)
year term.
1
The following tables set forth certain historical financial information of CARS
and Innopump on an unaudited pro forma basis after giving effect to the merger
as a "reverse acquisition" (i.e., with Innopump as the acquiror of CARS for
accounting purposes).
The accompanying unaudited pro forma combined condensed balance sheet assumes
the merger took place on June 30, 2006. The unaudited pro forma combined
condensed balance sheet combines the audited balance sheet of Innopump and the
unaudited balance sheet CARS as of June 30, 2006.
CARS fiscal year ended on December 31 and was a development stage Company prior
to the merger. For purposes of the pro forma information, Xxxxxxxx's statement
of operations for the year ended June 30, 2006 has been combined with CARS
unaudited statement of operations for the twelve months ended June 30, 2006. The
unaudited pro forma combined condensed statement of operations gives effect to
the CARS merger as if it had occurred on July 1, 2005.
The unaudited pro forma combined condensed financial information is presented
for illustrative purposes only and is not necessarily indicative of the future
financial position or future results of operations of Innopump after the merger
or of the financial position or results of operations of Innopump that would
have actually occurred had the merger been effected as of the date described
above.
The pro forma statements of operations do not reflect any effect of the
contemplated operating efficiencies, cost savings and other benefits,
anticipated by Innopump's management as a result of the merger.
The unaudited pro forma combined condensed financial information should be read
in conjunction with the audited financial statements and related notes of CARS
and the audited financial statements of Innopump included within this document.
2
UNAUDITED CONDENSED COMBINED PRO FORMA BALANCE SHEET
As of June 30, 2006
Historical Historical Pro Forma Combined
Innopump CARS Adjustments Note Pro Forma
----------- ----------- ----------- --------- -----------
Assets
Current assets:
Cash $ 917,296 $ 425 $ 1,875,440 1,4,5,6,7 $ 2,793,161
Due from affiliates 51,508 -- -- 51,508
Accounts receivable 108,379 -- -- 108,379
Inventories 113,895 -- -- 113,895
Prepaid expenses and other current assets 50,436 -- -- 50,436
----------- ----------- ----------- -----------
Total current assets 1,241,514 425 1,875,440 3,117,379
Property and equipment, net 961,716 -- -- 961,716
Other assets
Deferred financing costs 18,836 -- 1,171,164 1,4 1,190,000
Security deposit 34,155 -- -- 34,155
----------- ----------- ----------- -----------
Total other assets 52,991 -- 1,171,164 1,224,155
----------- ----------- ----------- -----------
Total assets $ 2,256,221 $ 425 $ 3,046,604 $ 5,303,250
=========== =========== =========== ===========
Liabilities and stockholders' deficit Current liabilities:
Notes and interest payable $ 3,631,695 $ -- $(3,521,339) 4 $ 110,356
Notes and interest payable, related parties 2,175,421 54,250 (787,804) 2,5 1,441,867
Convertible notes and interest payable 1,300,417 -- (1,300,417) 7 --
Common stock subject to redemption 887,403 -- -- 887,403
Due to licensor 430,074 -- (250,000) 6 180,074
Accounts payable and accrued expenses 422,971 125,214 129,786 1,3 677,971
Due to related parties 159,182 -- -- 159,182
Customer deposits 29,529 -- -- 29,529
----------- ----------- ----------- -----------
Total current liabilities 9,036,692 179,464 (5,729,774) 3,486,382
Long=term liabilities:
Note payable, net of debt discount of $635,142 -- 6,864,858 1,8 6,864,858
Due to licensor 100,000 -- -- 100,000
Sublease security deposit, affiliate 6,830 -- 6,830
----------- ----------- ----------- -----------
Total long-term liabilities 106,830 -- 6,864,858 6,971,688
----------- ----------- ----------- -----------
Stockholders' deficit:
Common stock, actual shares outstanding 31,125,000,
proforma shares outstanding 609,259,259, at June 30 2006 25 31,125 578,109 9 609,259
Additional paid-in capital -- 897,798 225,449 9 1,123,247
Accumulated deficit (6,887,326) (1,107,962) 1,107,962 9 (6,887,326)
----------- ----------- ----------- -----------
Total stockholders' deficit (6,887,301) (179,039) 1,911,520 (5,154,820)
----------- ----------- ----------- -----------
Total liabilities and stockholders' deficit $ 2,256,221 $ 425 3,046,604 $ 5,303,250
=========== =========== =========== ===========
3
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
For the year ended of June 30, 2006
Historical Historical Pro Forma Combined
Innopump CARS Adjustments Note Pro Forma
------------ ------------ ------------ -------- ------------
Net revenues 223,404 -- -- 223,404
Cost of revenues
Direct costs 170,163 -- -- 170,163
Indirect costs 509,410 -- -- 509,410
------------ ------------ ------------ ------------
679,573 -- -- 679,573
------------ ------------ ------------ ------------
Gross margin (456,169) -- -- (456,169)
Operating expenses
General and administrative 2,240,987 119,515 50,000 2 2,410,502
------------ ------------ ------------ ------------
Loss from operations (2,697,156) (119,515) (50,000) (2,866,671)
------------ ------------ ------------ ------------
Other income (expenses)
Sublease income, affiliates 28,564 -- -- 28,564
Debt discount -- -- (329,056) 2,8 (329,056)
Interest expense (268,494) -- (482,613) 1,4,7 (751,107)
Interest expense, related parties (148,809) (3,143) 52,926 5 (99,026)
Amortization of financing costs (71,279) -- (476,000) 1 (547,279)
Gain (loss) on foreign currency exchange (1,618) -- -- (1,618)
------------ ------------ ------------ ------------
(461,636) (3,143) (1,234,743) (1,699,522)
------------ ------------ ------------
Net loss (3,158,792) (122,658) (1,284,743) (4,566,193)
============ ============ ============ ============
Weighted average common shares outstanding
Basic 246,000 31,125,000 577,084,259
============ ============ ============ ============
Diluted 262,500 31,125,000 609,259,259
============ ============ ============ ============
Loss per common share
Basic and diluted $ (12.84) $ (.004) $ (.008)
============ ============ ============ ============
4
ProForma Adjustments Related to the Acquisition
The accompanying unaudited proforma combined condensed financial
information has been prepared as if the acquisition was completed on June 30,
2006 for balance sheet purposes and as of July 1, 2005 for statements of
operations purposes and reflect the following proforma adjustments:
(1) To record the issuance of the 10% senior redeemable convertible debt
of $7,500,000 to Investor due February 2009 in connection with the
transaction and financing fees of $1,190,000 which are payable to
the investment banker in the amount of $1,100,000 and $90,000 to the
Investor for prior bridge financing (3% of $3,000,000). Of the total
financing fees, $1,015,000 was due at closing and $175,000 was
deferred.
To record interest expense of $750,000 for the year ended June 30,
2006.
To record amortization of financing fees of $476,000 for the year
ended June 30, 2006.
(2) To record a $50,000 note payable issued by CARS to Ocean Drive, a
related party, for the payment of legal fees.
To record the conversion of $100,000 of debt due from CARS to Ocean
Drive, including $45,000 of the $50,000 note issued above and the
subsequent issuance of 10,000,000 shares of common stock for the
conversion.
To record the estimated intrinsic value of the beneficial conversion
of this debt in the amount of $75,000 in the year ended June 30,
2006.
(3) To record the reduction of CARS accounts payable to $80,000 as
required by the merger agreement prior to closing.
(4) To record the payment on closing of notes payable and accrued
interest on closing as follows:
Ocean Drive (a) $ 372,867 Repayment
Investor bridge notes 3,148,472 Repayment
------------
$ 3,521,339
============
(a) Ocean Drive is a related party of CARS. Subsequent to June 30,
2006 the note was assigned to CARS UL Holdings, an affiliate
of Ocean Drive.
To expense the remaining deferred financing costs of $18,836
associated with the prior Investor bridge loans.
To reverse interest expense of $171,339 for the year ended June 30,
2006 for debt as described above.
5
ProForma Adjustments Related to the Acquisition (Cont'd)
(5) To record the payment of Innopump shareholder debt of $737,804 upon
closing of the merger.
To reverse interest expense of $52,926 for the year ended June 30,
2006.
(6) To record payment of $250,000 due to licensor in arrears as agreed
upon per June 2006 waiver between licensor and Innopump.
(7) To record the conversion on closing of convertible notes payable and
accrued interest as follows:
Ocean Drive (a) 789,057 Repayment of $89,057 interest,
conversion of $700,000 to stock
Bridge Lenders 511,360 Repayment of $11,360 interest,
---------- conversion of $500,000 to stock
$1,300,417
==========
(a) Ocean Drive is a related party of CARS. Subsequent to June 30,
2006 the note was assigned to CARS UL Holdings, an affiliate
of Ocean Drive.
The aggregate notes of $1,200,000 were converted into 56,154,916
shares of CARS stock .
To reverse interest expense of $96,048 for the year ended June 30,
2006 for debt as described above.
(8) To record debt discount in the amount of $635,142 on the warrants
issued to the Investor in connection with the $7,500,000 debt to be
amortized over the life of the debt. The warrants (aggregating 22%
of the shares issuable on conversion) entitle the lender to purchase
approximately 63,096,807 shares of common stock at an exercise price
of approximately $.026 per share. The warrants have a five (5) year
term. The debt discount was calculated using the Black-Scholes model
assuming a volatility of 40% and a risk free interest rate of 4.91%.
To record amortization of debt discount of $254,056 for the year
ended June 30, 2006.
6
ProForma Adjustments Related to the Acquisition (Cont'd)
(9) To record the following adjustments to stockholders' deficit:
Historical Adjusted
Combined (9a) (9b) (9c) (9d) (9e) Balance
----------- ------ ------ --------- ------- ---------- ----------
Common Stock 31,150 10,000 56,155 511,954 609,259
Additional paid-in-capital 897,798 40,000 45,214 1,125,009 635,142 (1,619,916) 1,123,247
Accumulated deficit (7,995,288) 1,107,962 (6,887,326)
==========
(9a) To record the conversion of $100,000 CARS debt to equity, the
beneficial conversion of $75,000 of the related debt and the payment
of $50,000 in legal fees paid from the funds received from the CARS
debt. (see note(2) above).
(9b) To record the reduction of CARS accounts payable to $80,000 as
required by the merger agreement prior to closing. (see
note(3)above).
(9c) To record the issuance of common stock for the conversion of debt of
$1,200,000 (see note (7) above and to expense the remaining deferred
financing costs of $18,836 associated with the prior Investor bridge
loans.
(9d) To record debt discount on Investor warrants (see note (8) above).
(9e) To record the recapitalization of Innopump to CARS stock pre-debt
conversion, 262,500 shares of Innopump converting at approximately
1,950 shares of CARS and to recapitalize the CARS accumulated
deficit to that of the accounting acquiror (Innopump) .
7
Critical Accounting Policies
General. Innopump's financial statements are impacted by the accounting policies
used, and the estimates and assumptions made, by management during their
preparation. A summary of the significant accounting policies can be found in
the Notes to the Financial Statements. Presented below is a description of the
accounting policies that Xxxxxxxx believes are most critical to understanding
the financial statements.
Basis of Presentation
The transaction between Innopump and Sea Change Group, LLC ("SCG"), which are
entities under common control, was accounted for in a manner similar to a
pooling of interests whereby the assets and liabilities of SCG were transferred
to Innopump at historical amounts. The financial statements were prepared as if
this transaction had occurred at the beginning of the periods presented herein,
and present the financial data of previously separate entities.
Accounts Receivable
The Company carries its accounts receivable at cost less an allowance for
doubtful accounts. On a periodic basis, the Company evaluates its accounts
receivable and establishes an allowance for doubtful accounts, based on a
history of past write-offs and collections and current credit conditions.
Accounts are written off as uncollectible at the discretion of management.
Inventories
Inventories, which consist principally of raw materials and finished goods, are
stated at cost on the first-in, first-out basis, which does not exceed market
value.
Depreciation and Amortization
Property and equipment is recorded at cost less accumulated depreciation and
amortization. Depreciation and amortization is computed using the straight-line
method over the estimated useful lives of the related assets. The Company
provides for depreciation and amortization over the following estimated useful
lives:
Machinery and equipment 7 Years
Molds 3 Years
Computer equipment 3 Years
Costs of maintenance and repairs are expensed as incurred while betterments and
improvements are capitalized.
Revenue Recognition
Revenues are generally recognized at the time of shipment. The Company requires
deposits from certain customers which are recorded as current liabilities until
the time of shipment.
8
Impairment of Long-Lived Assets
Certain long-lived assets of the Company are reviewed at least annually to
determine whether there are indications that their carrying value has become
impaired, pursuant to guidance established in SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets". Management considers assets to be
impaired if the carrying value exceeds the future projected cash flows from
related operations (undiscounted and without interest charges). If impairment is
deemed to exist, the assets will be written down to fair value. Management also
reevaluates the periods of amortization to determine whether subsequent events
and circumstances warrant revised estimates of useful lives
Shares Subject to Mandatory Redemption
The Company complies with SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity", which requires
certain financial instruments such as mandatory redeemable shares, be classified
as liabilities even though they possess certain characteristics of equity.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Recent Accounting Pronouncements
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections". SFAS No. 154 replaces Accounting Principles Board ("APB") No. 20,
"Accounting Changes" and SFAS No. 3, "Reporting Accounting Changes in Interim
Financial Statements" and establishes retrospective application as the required
method for reporting a change in accounting principle. SFAS No. 154 provides
guidance for determining whether retrospective application of a change in
accounting principle is impracticable and for reporting a change when
retrospective application is impracticable. The reporting of a correction of an
error by restating previously issued financial statements is also addressed.
SFAS No. 154 is effective for accounting changes and corrections of errors made
in fiscal years beginning after December 15, 2005. The Company does not
anticipate that the adoption of SFAS No. 154 will have a material impact on its
balance sheets and statements of operations, stockholders' equity and cash
flows.
In February 2006, the FASB issued SFAS No. 155, "Accounting for Certain Hybrid
Financial Instruments" which amends SFAS No. 133 and SFAS No. 140. SFAS No. 155
permits hybrid financial instruments that contain an embedded derivative that
would otherwise require bifurcation to irrevocably be accounted for at fair
value, with changes in fair value recognized in the statement of income. The
fair value election may be applied on an instrument-by-instrument basis. SFAS
No. 155 also eliminates a restriction on the passive derivative instruments that
a qualifying special purpose entity may hold. SFAS No. 155 is effective for
those financial instruments acquired or issued after December 1, 2006. At
adoption, any difference between the total carrying amount of the individual
components of the existing bifurcated hybrid financial instrument and the fair
value of the combined hybrid financial instrument will be recognized as a
cumulative-effect adjustment to beginning retained earnings. The Company does
not expect the new standard to have any material impact on its financial
position and results of operations.
9
In March 2006, the FASB issued SFAS No. 156, "Accounting for Servicing of
Financial Assets, an amendment of FASB Statement No. 140". SFAS No. 156 requires
all separately recognized servicing assets and servicing liabilities to be
initially measured at fair value, if practicable. The standard permits an entity
to subsequently measure each class of servicing assets or servicing liabilities
at fair value and report changes in fair value in the statement of income in the
period in which the changes occur. SFAS No. 156 is effective for the Company as
of December 1, 2006. The Company does not expect the new standard to have any
material impact on its financial position and results of operations.
In July 2006, the FASB issued FASB Interpretation ("FIN") No. 48, "Accounting
for Uncertainty in Income Taxes -- An Interpretation of FASB Statement No. 109."
FIN No. 48 clarifies the accounting for uncertainty in income taxes recognized
in an enterprise's financial statements in accordance with SFAS No. 109,
"Accounting for Income Taxes." FIN No. 48 prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement of
a tax position taken or expected to be taken in a tax return. The new standard
also provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods and disclosure. The provisions of FIN No. 48 are
effective for fiscal years beginning after December 15, 2006. The Company does
not expect the new standard to have any material impact on its financial
position and results of operations.
In September 2006, the FASB issued SFAS No. 158, Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans, an amendment of FASB
Statements No. 87, 88, 106, and 132(R). SFAS No. 158 requires an employer to:
(a) Recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for a plan's underfunded status; (b) Measure a
plan's assets and its obligations that determine its funded status as of the end
of the employer's fiscal year (with limited exceptions); (c) Recognize changes
in the funded status of a defined benefit postretirement plan in the year in
which the changes occur. Those changes will be reported in comprehensive income
of a business entity and in changes in net assets of a not-for-profit
organization. The requirement to recognize the funded status of a benefit plan
and the disclosure requirements are effective for us for the fiscal year ending
on July 31, 2007. The requirement to measure plan assets and benefit obligations
as of the date of our fiscal year-end balance sheet is effective for us for the
fiscal year ending July 31, 2009. The Company does not expect the new standard
to have any material impact on its financial position and results of operations.
10
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CARS was originally incorporated in Nevada (the "Company"), on March 7, 2000,
with a principal business objective to operate an Internet database business
involving the automobile industry. On August 9, 2006, certain of Innopump's
shareholders executed and closed on an Agreement and Plan of Merger ("Merger
Agreement") by and among, CARS and its subsidiary, Pump Acquisition Corp.,
("PAC"). Pursuant to the Merger Agreement, CARS issued 568,134,259 shares of its
common stock to Innopump's shareholders in consideration of Innopump merging
with and into PAC and becoming a wholly-owned subsidiary of CARS ("Merger"). The
Merger was accounted for as a reverse merger (recapitalization) with Innopump
deemed to be the accounting acquirer, and CARS as the legal acquirer.
Accordingly, the historical financial information presented in future financial
statements will be that of Innopump as adjusted to give effect to any difference
in the par value of ours and Innopump's stock with an offset to capital in
excess of par value. The basis of the assets, liabilities and retained earnings
of Innopump, the accounting acquirer, have been carried over in the
recapitalization. Upon the closing of the Merger, we became a manufacturer,
developer and seller of proprietary, variable blend pump dispensers.
In addition, Innopump's purchase of substantially all assets of SCG has been
accounted for in a manner similar to a pooling of interests. Therefore the
financial information of Innopump and SCG is presented on a combined basis.
We are engaged in the manufacture of a dual dispenser that enables the user to
blend two liquids in varying proportions. Substantially all of our revenues come
from wholesale sales and our customers are located in both the continental
United States and in Europe. The dual dispensers are manufactured in Germany and
are currently being utilized in the food and cosmetic industries.
The following discussion and analysis pertains to the operations of
Innopump for the two years ended June 30, 2006.
Liquidity, Capital Resources, and Going Concern
-----------------------------------------------
The following table sets forth the working capital (deficiency) position
of Innopump as at June 30, 2006:
At June 30,
2006
Current assets $ 1,241,514
Current liabilities 9,036,692
Working capital (deficiency) $(7,795,178)
===========
At June 30, 2006, Innopump had incurred cumulative losses of approximately $6.9
million since inception and utilized cash of approximately $3.1 million for
operating activities during the two years ended June 30, 2006. Innopump has a
working capital deficit of approximately $7.8 million and a stockholders'
deficit of approximately $6.9 million as of June 30, 2006.
On August 9, 2006, as a result of the merger, CARS sold 10% senior redeemable
convertible debt ("Convertible Debt") in the principal amount of $7.5 million to
Mellon HBV Master U.S. Event Driven Fund, L.P. and Mellon HBV Master Global
Event Driven Fund, L.P. (collectively referred to as the "Investor"). The note
bears interest at 10% per annum and is due on February 9, 2009. The proceeds
were first used to pay approximately $1.1 million in financing and legal fees,
$4.4 million in current notes payable and accrued interest and $400,000 in other
current obligations which became due on the date of the merger. Innopump
received net proceeds of approximately $1.6 million, which management plans to
use for future working capital needs.
11
At June 30, 2006, Innopump had approximately $7.1 million in current notes
payable and accrued interest. On August 9, 2006, subsequent to the reverse
merger with CARS, Innopump converted $1.2 million of these notes into common
stock. As noted above, Innopump repaid approximately $4.4 million with the
proceeds from the $7.5 million financing. The remaining current notes payable of
approximately $1.5 million are primarily due to shareholders which management
believes will be extended prior to maturity.
On September 29, 2006, Innopump received $700,000 from a consumer products
company in exchange for the Company's undertaking to deliver pre-production
samples of a specially designed dual chamber dispensing pump and to fund
pre-production tooling and mold expenses. If the samples do not satisfy the
consumer product's company's requirements, there is no obligation to repay the
advance. If the samples satisfy the consumer product's company's requirements,
Innopump anticipates that it will enter into an exclusive supply relationship
with the consumer products company having a term in excess of one year and that
the advance will be applied against future revenues.
Management recognizes that Innopump must generate additional revenue and
sufficient gross profits to achieve profitable operations. Management's plans to
increase revenues include the continued building of its customer base and
product line, especially in the food and cosmetic industries. Management
believes that the capital received as a result of the above transactions will
enable Innopump to begin to build its product line with the necessary equipment
expenditures required, but that additional financing will be required within the
next 12 months.
Based on our current operating plan and our available cash and cash equivalents,
we expect that we will need to obtain additional financing through the sale of
equity securities, private placements, and/or bridge loans within 12 months.
Additional financing, whether through public or private equity or debt
financing, arrangements with stockholders or other sources to fund operations,
may not be available, or if available, may be on terms unacceptable to us. Our
ability to maintain sufficient liquidity is dependent on our ability to raise
additional capital. If we issue additional equity securities to raise funds, the
ownership percentage of our existing stockholders would be reduced. New
investors may demand rights, preferences or privileges senior to those of
existing holders of our common stock. Debt incurred by us would be senior to
equity in the ability of debt holders to make claims on our assets. The terms of
any debt issued could impose restrictions on our operations.
There can be no assurance that we will be able to obtain sufficient debt or
equity financing on favorable terms if at all, or that we will be successful in
building our customer base and product line. If Innopump is unsuccessful in
building its customer base and obtaining financing for its capital equipment
requirements or is unable to obtain additional financing on favorable terms
there could be a material adverse effect on the financial position, results of
operations and cash flows of Innopump. The accompanying financial statements do
not include any adjustments that might be necessary if Innopump is unable to
continue as a going concern.
12
Results of Operations
Fiscal years ended June 30, 2006 and 2005
REVENUES. During the year ended June 30, 2006, Innopump had revenues of $223,404
as compared to revenues of $113,297 during the year ended June 30, 2005, an
increase of approximately 97%. In 2005, the revenue was primarily attributable
to one customer in the food industry. In 2006, approximately 42% of the revenue
was attributable to two customers in the food industry and approximately 58% was
attributable to three customers in the cosmetic and beauty industries. We
believe that our sales will continue to grow as we strengthen our sales force
and are able to introduce new products and our customer base will be
diversified.
GROSS MARGIN. Cost of revenues - direct costs, which consist of direct labor,
overhead and product costs, were $170,163 (76% of revenues) for the year ended
June 30, 2006 as compared to $100,347 (89% of revenues) for the year ended June
30, 2005. The increase for 2006 is a result of the increase in revenues. The
decrease as a percent of revenues is related to lower production labor costs.
The labor for the one product manufactured in 2005 for one customer required
more processes and manual labor than the products manufactured in 2006. Cost of
revenues - indirect costs, which consist of indirect labor, quality control
costs, factory maintenance, product development and depreciation, were $509,410
for the year ended June 30, 2006 as compared to $323,552 for the year ended June
30, 2005. The increase was due primarily to increased depreciation of
approximately $63,000 due to the purchase of more manufacturing equipment and
approximately $216,000 in product design including samples and prototype parts,
and additional labor for testing and development in 2006 as compared to $93,000
in 2005. Gross margin was a deficit of $(456,169) for the year ended June 30,
2006 as compared to a deficit of $(310,602) for the year ended June 30, 2005,
representing gross margins of approximately (204)% and (274)% of revenues,
respectively. The improvement in our gross margin percentage is attributable to
increased revenues, decreased direct costs as a percentage of revenues, which
are offset by an increase in indirect costs of revenues as described. Management
believes that these indirect costs, which are primarily related to the
development of a new smaller dispenser, will decrease as products become
introduced into the marketplace and as revenues increase to cover these costs.
Management also believes direct costs will decrease on a percentage of revenue
basis as labor becomes streamlined with the addition of new assembly equipment
and that production capacity will increase with the purchase of additional molds
with higher cavity production capabilities.
OPERATING EXPENSES. General and administrative expenses totaled $2,240,987 for
the year ended June 30, 2006, as compared to $1,127,980 for the year ended June
30, 2005, an increase of approximately 99%. This increase of approximately
$1,113,000 is primarily attributable to an increase in the technical consultant
fee and royalties due the licensor under contract of $100,000, an increase in
consulting fees of $92,000 as more general consultants were used in 2006 for
sales and other administrative functions, an increase in salaries of $463,000 as
the Company established a financial and sales staff which did not exist in 2005,
an increase in legal and professional fees of $278,000 as there became a greater
need for these services in conjunction with financing and the merger, and an
increase in travel expenses of approximately $40,000 as more overseas travel was
required in 2006 as manufacturing procedures and processes were being developed.
The balance of the increase was comprised of increases in various costs due to
the growth of the operations of Innopump.
NET LOSS. Innopump had a net loss of $3,158,792 for the year ended June 30, 2006
as compared to $1,602,718 for the year ended June 30, 2005, an increase of
approximately $1,556,000. The increase in net loss is attributable to the
increases in general and administrative and cost of revenues as described above.
In addition, interest expense increased by approximately $202,000 in 2006 due to
increased debt obligations. Innopump management believes that revenues will
continue to increase as Innopump introduces new products and is able to grow its
customer base, and direct costs will decrease as production becomes more
automated, allowing operating expenses and indirect costs to be covered and an
improvement in the gross margin.
Fiscal years ended June 30, 2005 and 2004
REVENUES. During the year ended June 30, 2005, Innopump had revenues of $113,297
as compared to revenues of $88,414 during the year ended June 30, 2004, an
increase of approximately 28%. In 2004, the revenue was attributable to one
customer in the cosmetic industry and in 2005 the revenue was primarily
attributable to one customer in the food industry. We believe that our sales
will continue to grow as we strengthen our sales force and are able to introduce
new products and our customer base will be diversified.
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GROSS MARGIN. Cost of revenues - direct costs, which consist of direct labor,
overhead and product costs, were $100,347 for the year ended June 30, 2005 as
compared to $63,121 for the year ended June 30, 2004. The increase for 2005 is a
result of both the increase in revenues and the increase in production labor
costs. The labor for the product manufactured in 2005 required more processes
and manual labor than the product manufactured in 2004. Cost of revenues -
indirect costs, which consist of indirect labor, quality control costs, factory
maintenance, product development and depreciation, were $323,552 for the year
ended June 30, 2005 as compared to $146,807 for the year ended June 30, 2004.
The increase was due primarily to increased depreciation of approximately
$68,000 due to the purchase or more manufacturing equipment and approximately
$91,000 in product design and additional labor for testing and development in
2005 as compared to $23,000 in 2004. Gross margin was a deficit of $(310,602)
for the year ended June 30, 2005 as compared to a deficit of $(121,514) for the
year ended June 30, 2004, representing gross margins of approximately (274)% and
(137)% of revenues, respectively. The decline in our gross margin percentage is
attributable to increased direct and indirect cost of revenues as described.
Management believes that these indirect costs will decrease as products become
introduced into the marketplace and as revenues increase to cover these costs.
Management also believes direct costs will decrease on a percentage of revenue
basis as labor becomes streamlined with the addition of new equipment.
OPERATING EXPENSES. General and administrative expenses totaled $1,127,980 for
the year ended June 30, 2005, as compared to $573,057 for the year ended June
30, 2004, an increase of approximately 97%. This increase of approximately
$555,000 is primarily attributable to an increase in the technical consultant
fee and royalties due the licensor under contract of $130,000, an increase in
consulting fees of $42,000 as more general consultants were used in 2005 for
sales and other administrative functions, the inception of the payment of
salaries of $100,000 which did not exist in 2004, an increase in legal and
professional fees of $156,000 as there became a greater need for these services,
and an increase in travel expenses of approximately $40,000 as more overseas
travel was required in 2005 as manufacturing procedures and processes were being
developed.
NET LOSS. Innopump had a net loss of $1,602,718 for the year ended June 30, 2005
as compared to $838,848 for the year ended June 30, 2004, an increase of
approximately $765,000. The increase in net loss is attributable to the
increases in general and administrative and cost of revenues as described above.
In addition, interest expense increased by approximately $69,000 in 2005 due to
increased debt obligations. Innopump management believes that revenues will
continue to increase as Innopump introduces new products and automates
production which will cover operating expenses and indirect costs and improve
the gross margin.
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