Exhibit 99.4
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 March 31, 2006. The unaudited pro forma combined
condensed balance sheet combines the unaudited balance sheets of Innopump and
CARS as of March 31, 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, 2005 and nine months ended March 31,
2006 have been combined with CARS unaudited statement of operations for the
twelve months ended June 30, 2005 and nine months ended March 31, 2006. The
unaudited pro forma combined condensed statement of operations gives effect to
the CARS merger as if it had occurred on July 1, 2004.
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 March 31, 2006
Historical Historical Pro Forma Combined
Innopump CARS Adjustments Note Pro Forma
------------------------------------------------------------------
Assets
Current assets:
Cash $ 666,801 $ 3,036 $ 3,021,214 1,4,5,6,7 $ 3,691,051
Sublease income receivable, affiliates 78,871 -- -- 78,871
Accounts receivable 75,999 -- -- 75,999
Inventories 98,097 -- -- 98,097
Due from affiliates 33,925 -- -- 33,925
Prepaid expenses and other current assets 90,596 -- -- 90,596
---------------------------------------- -------------
Total current assets 1,044,289 3,036 3,021,214 4,068,539
Property and equipment, net 817,771 -- 817,771
Other assets
Deferred financing costs 34,418 -- 1,125,582 1,4 1,160,000
Security deposit 34,155 -- -- 34,155
---------------------------------------- -------------
Total other assets 68,573 -- 1,125,582 1,194,155
---------------------------------------- -------------
Total assets $ 1,930,633 $ 3,036 $ 4,146,796 $ 6,080,465
======================================== =============
Liabilities and stockholders' deficit
Current liabilities:
Notes and interest payable $ 2,987,087 $ -- $(2,878,840) 4 $ 108,247
Notes and interest payable, related parties 2,138,945 34,250 (754,234) 2,5 1,418,961
Convertible notes and interest payable 840,712 -- (840,712) 7 --
Common stock subject to redemption 887,403 -- -- 887,403
Due to licensor 422,756 -- (250,000) 6 172,756
Accounts payable and accrued expenses 147,790 132,144 122,856 1,3 402,790
Due to related parties 180,062 -- 180,062
Customer deposits 34,786 -- -- 34,786
---------------------------------------- -------------
Total current liabilities 7,639,541 166,394 (4,600,930) 3,205,005
Long=term liabilities:
Note payable, net of debt discount of $635,142 -- 6,864,858 1,8 6,864,858
Sublease security deposit, affiliate 6,830 -- 6,830
---------------------------------------- -------------
Total long-term liabilities 6,830 -- 6,864,858 6,871,688
---------------------------------------- -------------
Stockholders' deficit:
Common stock, actual shares outstanding 31,125,000,
proforma shares outstanding 609,259,259, at March 31, 2006 25 31,125 578,109 9 609,259
Additional paid-in capital -- 888,146 222,130 9 1,110,276
Accumulated deficit (5,715,763) (1,082,629) 1,082,629 9 (5,715,763)
---------------------------------------- -------------
Total stockholders' deficit (5,715,738) (163,358) 1,882,868 (3,996,228)
---------------------------------------- -------------
Total liabilities and stockholders' deficit $ 1,930,633 $ 3,036 4,146,796 $ 6,080,465
======================================== =============
3
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
For the year ended of June 30, 2005
Historical Historical Pro Forma Combined
Innopump CARS Adjustments Note Pro Forma
-------------------------------------------------------------------
Net revenues 113,297 -- -- 113,297
Cost of revenues
Direct costs 100,347 -- -- 100,347
Indirect costs 323,552 -- -- 323,552
---------------------------------------- -------------
423,899 -- -- 423,899
---------------------------------------- -------------
Gross margin (310,602) -- -- (310,602)
Operating expenses
General and administrative 1,127,980 84,909 70,000 2 1,282,889
---------------------------------------- -------------
Loss from operations (1,438,582) (84,909) 70,000 1,593,491
---------------------------------------- -------------
Other income (expenses)
Sublease income, affiliates 82,111 -- -- 82,111
Debt discount -- -- (329,056) 2,8 (329,056)
Interest expense (84,437) -- (716,942) 1,4,7 (801,379)
Interest expense, related parties (130,989) (52,875) 33,166 5 (150,698)
Amortization of financing costs (27,615) -- (464,000) 1 (491,615)
Gain (loss) on foreign currency exchange (3,206) -- -- (3,206)
----------------------------------------- -------------
(164,136) (52,875) (1,476,832) (1,693,843)
----------------------------------------- -------------
Net loss (1,602,718) (137,784) (1,546,832) (3,287,334)
========================================= =============
Weighted average common shares outstanding
Basic 246,000 30,375,000 576,334,259
========================================= =============
Diluted 262,500 30,375,000 608,509,259
========================================= =============
Loss per common share
Basic $ (6.52) $ (.005) $ (.006)
========================================= =============
Diluted $ (6.11) (.005) (.005)
========================================= =============
4
UNAUDITED CONDENSED COMBINED PRO FORMA STATEMENT OF OPERATIONS
For the nine months ended March 31, 2006
Historical Historical Pro Forma Combined
Innopump CARS Adjustments Note Pro Forma
-------------------------------------------------------------------
Net revenues 182,115 -- -- 182,115
Cost of revenues
Direct costs 143,865 -- -- 143,865
Indirect costs 330,662 -- -- 330,662
---------------------------------------- -------------
474,527 -- -- 474,527
---------------------------------------- -------------
Gross margin (292,412) -- -- (292,412)
Operating expenses
General and administrative 1,435,917 95,003 1,530,920
---------------------------------------- -------------
Loss from operations (1,728,329) (95,003) (1,823,332)
---------------------------------------- -------------
Other income (expenses)
Sublease income, affiliates 73,440 -- -- 73,440
Debt discount -- -- (190,543) 8 (190,543)
Interest expense (166,064) -- (397,317) 1,4,7 (563,381)
Interest expense, related parties (112,333) (2,321) 39,356 5 ( 75,298)
Amortization of financing costs (55,697) -- (382,418) 1,4 (438,115)
Gain (loss) on foreign currency exchange 1,754 -- -- 1,754
---------------------------------------- -------------
(258,900) (2,321) (930,922) (1,192,143)
---------------------------------------- -------------
Net loss (1,987,229) (97,324) (930,922) (3,015,475)
======================================== =============
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 $ (8.08) $ (.003) $ (.005)
======================================== =============
Diluted $ (7.57) (.003) (.005)
======================================== =============
5
ProForma Adjustments Related to the Acquisition
The accompanying unaudited proforma combined condensed financial
information has been prepared as if the acquisition was completed on March 31,
2006 for balance sheet purposes and as of July 1, 2004 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 $1,160,000 which are payable to
the investment banker in the amount of $1,100,000 and $60,000 to the
Investor for prior bridge financing (3% of $2,000,000). Of the total
financing fees, $985,000 was due at closing and $175,000 was
deferred.
To record interest expense of $750,000 and $562,500 for the year
ended June 30, 2005 and the nine months ended March 31, 2006,
respectively.
To record amortization of financing fees of $464,000 and $348,000
for the year ended June 30, 2005 and the nine months ended March 31,
2006, respectively.
(2) To record a $70,000 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 $65,000 of the $70,000 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,
2005.
(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 and the conversion of certain notes on closing as follows:
Ocean Drive $ 365,789 Repayment
Investor bridge notes 2,078,333 Repayment
Ocean Drive (a) 334,718 Repayment of $34,718 interest,
conversion of $300,000 to stock
Bridge Lenders 100,000 Converted to stock
----------
$2,878,840
==========
(a) Ocean Drive is a related party of CARS.
The aggregate notes of $400,000 were converted into 18,528,683
shares of CARS stock .
To expense the remaining deferred financing costs of $34,418
associated with the prior Investor bridge loans.
To reverse interest expense of $33,058 and $165,183 for the year
ended June 30, 2005 and the nine months ended March 31, 2006,
respectively for debt as described above and in adjustment (7)
below.
6
ProForma Adjustments Related to the Acquisition (Cont'd)
(5) To record the payment of Innopump shareholder debt of $724,234 upon
closing of the merger.
To reverse interest expense of $33,166 and $39,356 for the year
ended June 30, 2005 and the nine months ended March 31, 2006,
respectively.
(6) To record payment of $250,000 due to licensor in arrears as agreed
upon per June 06 waiver between licensor and Innopump.
(7) To record the conversion on closing of convertible notes payable and
accrued interest as follows:
Bridge note 400,000 Converted to stock
Ocean Drive 440,712 Repayment of $40,712 interest,
---------- conversion of $400,000 to stock
$ 840,712
==========
The aggregate notes of $800,000 were converted into 37,626,233
shares of CARS stock.
(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 and $190,543 for
the year ended June 30, 2005 and the nine months ended March 31,
2006, respectively.
7
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 888,146 20,000 52,144 1,109,427 635,142 (1,594,583) 1,110,276
=========
Accumulated deficit (6,798,392) 1,082,629 (5,715,763)
(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 $70,000 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 notes (4) and (7) above and to expense the remaining
deferred financing costs of $34,418 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) .
8
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 10 Years
Molds 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.
9
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 December 2004, the FASB issued SFAS No. 123(R), "Share Based Payment". SFAS
No. 123(R) revises SFAS No. 123 and is effective for non-public companies as of
the beginning of the first annual reporting period after December 31, 2005. SFAS
No. 123(R) requires public entities to measure the cost of employment services
received in exchange for an award of equity instruments on the grant date based
on the fair value of the award. The cost will be 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. Employee share purchase plans will not result
in recognition of compensation cost if certain conditions are met; those
conditions are much the same as the related conditions in SFAS No. 123. The
Company does not anticipate that the adoption of SFAS No. 123(R) will have a
material impact on its balance sheets and statements of operations,
stockholders' equity and cash flows.
10
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.
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.
11
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, 2005 and the nine months ended March
31, 2006 and March 31, 2005.
Liquidity, Capital Resources, and Going Concern
The following table sets forth the working capital (deficiency) position
of Innopump as at March 31, 2006:
At March 31,
2006
-------------
Current assets $ 1,044,289
Current liabilities 7,639,541
Working capital (deficiency) $(6,595,252)
============
At March 31, 2006, Innopump had incurred cumulative losses of approximately $5.7
million since inception and utilized cash of approximately $1.6 million for
operating activities during the nine months ended March 31, 2006. Innopump has a
working capital deficit of approximately $6.6 million and a stockholders'
deficit of approximately $5.7 million as of March 31, 2006.
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. In addition,
management recognizes that additional capital must be raised to meet its debt
obligations and to finance capital expenditures which are required to meet
customer specifications.
12
On June 9, 2005, Xxxxxxxx entered into an Agreement and Plan of Merger with
Xxxxxxxxxxxxx.xxx ("CARS"), a publicly traded entity. As a result of this
transaction, during the year ended June 30, 2005, the Company was able to obtain
approximately $1 million in bridge financing, of which $300,000 was received
from private investors and approximately $700,000 was received from Ocean Drive
Opportunities Fund, LLC, an affiliate of CARS.
On September 22, 2005, CARS entered into a non-binding term sheet with the
Investor whereby Investor would purchase $7.5 million of senior redeemable
convertible debt from CARS upon the completion of a reverse merger with the
Innopump. The senior redeemable convertible debt will bear interest at a fixed
rate of 10%. The debt will mature 30 months from the date of closing. The
convertible debt will be convertible into shares of the Company's common stock
at a price per share equal to $16 million divided by the number of outstanding
shares of the Company after it is acquired. In addition, the lender will receive
5-year term warrants which aggregate 22% coverage on an as-if-converted basis on
the investment. The term sheet includes a penalty whereby warrants will be
issued should the acquired Company's rolling EBITDA fall short of certain
targets during the term of the notes. The warrants are exercisable upon the
maturity of the notes and will expire three years from the date of maturity.
As of August 9, 2006, Xxxxxxxx has received an aggregate of $3 million from
Investor in bridge loans in connection with this transaction.
On August 9th, 2006, this transaction, was completed. After paying current debt
obligations and as a result of a portion of current debt converting to stock,
Innopump has approximately $2.2 million of cash to be utilized for working
capital, current liabilities and to finance operations. Management believes that
this capital will enable Innopump to begin to build its product line with the
necessary equipment expenditures required, but that additional financing will be
required. Management also believes that it will be able to extend certain
remaining debt obligations and convert certain debt to equity as a result of
this transaction.
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.
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.
13
Results of Operations
Nine months ended March 31, 2006 and 2005
REVENUES. During the nine months ended March 31, 2006, Innopump had revenues of
$182,115 as compared to revenues of $93,809 during the nine months ended March
31, 2005, an increase of approximately 94%. In 2006, the revenue was
attributable to four customers, one in the cosmetic industry which accounted for
approximately 39% of revenues and one in the food industry which accounted for
approximately 26% of revenues. In 2005 the revenue was attributable to one
customer in the food industry. The increase is attributable to the business
starting to grow and beginning to diversify as to customer base and product
availability. 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 continue to grow as we are able to introduce new product concepts and
automate production further.
GROSS MARGIN. Cost of revenues - direct costs, which consist of direct labor,
overhead and product costs, were $143,865 for the nine months March 31, 2006 as
compared to $85,994 for the nine months ended March 31, 2005. The increase for
2006 is a result of the increase in revenues. The labor for the sole product
produced in 2005 required more processes and manual labor than the various
products manufactured in 2006 resulting in a higher cost as a percent of
revenues in 2005. Cost of revenues - indirect costs, which consist of indirect
labor, quality control costs, factory maintenance, product development and
depreciation, were $330,662 for the nine months ended March 31, 2006 as compared
to $224,028 for the nine months ended March 31, 2005. The increase was due
primarily to increased depreciation of approximately $48,000 due to the purchase
of additional manufacturing equipment and approximately $113,000 in product
design and additional labor for testing and development in 2006 as compared to
$55,000 in 2005. Gross margin was a deficit of $(292,412) for the nine months
ended March 31, 2006 as compared to a deficit of $(216,213) for the nine months
ended March 31, 2005, representing gross margins of approximately (161)% and
(230)% of net revenues, respectively. The improvement in our gross margin
percentage is attributable to increased revenue in 2006 and lower direct costs
as a percent of revenue. Management believes that 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 continue to
decrease on a percentage of revenue basis as labor becomes streamlined with the
addition of new equipment.
OPERATING EXPENSES. General and administrative expenses totaled $1,435,917 for
the nine months ended March 31, 2006, as compared to $721,558 for the nine
months ended March 31, 2005, an increase of approximately 99%. This increase of
approximately $714,000 is primarily attributable to an increase in the royalties
due the licensor under contract of $70,000, an increase in consulting fees of
$71,000 as more general consultants were used in 2006 for sales and other
administrative functions, increase of $275,000 in salaries and related benefits
as needed to start developing the business, an increase in legal and
professional fees of $208,000 as there became a greater need for these services,
and an increase in travel expenses of approximately $24,000 as more overseas
travel was required in 2006 as manufacturing procedures and processes were being
developed.
NET LOSS. Innopump had a net loss of $1,987,229 for the nine months ended March
31, 2006 as compared to $1,053,089 for the nine months ended March 31, 2005, an
increase of approximately $935,000. The increase in net loss is attributable to
the increases in general and administrative expenses and cost of revenues as
described above. In addition, interest expense increased by approximately
$119,000 in 2006 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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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.
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.
Fiscal years ended June 30, 2004 and 2003
Innopump had no revenues in 2003 as related to the dual dispenser. SCG had
started to commence operations and had a loss of approximately $1,020,000 in
2003which was due to approximately $340,000 in losses related to a prior
business (manufacturing of cosmetics), approximately $185,000 in interest
expense on debt and approximately $495,000 in general and administrative
expenses relating primarily to technical consultant and royalty fees and the
establishment of a sales force and general operating expenses as related to
Innopump's current operations.
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