Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
Amendment No.
1
QUARTERLY
REPORT UNDER SECTION 13 OR 15 (d)
OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR
THE FISCAL QUARTER ENDED JUNE 30, 2009
COMMISSION
FILE NO.: 0-52356
SEAWAY
VALLEY CAPITAL CORPORATION
(Exact
name of registrant as specified in its charter)
Delaware
|
20-5996486
|
(State
of other jurisdiction of
|
(IRS
Employer
|
incorporation
or organization
|
Identification
No.)
|
10-18
Park Street, 2nd Floor, Gouverneur, N.Y. 13642
|
13642
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(315)
287-1122
|
|
(Registrant's
telephone number including area
code)
|
Check
mark whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant as required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes
X No __.
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files.) Yes
No ____
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of "large accelerated filer,"
"accelerated filer" and "smaller reporting company" in Rule 12b-2 of the
Exchange Act. (Check One)
Large
accelerated filer
Accelerated filer
Non-accelerated filer
Smaller reporting company X
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act) Yes
No X
The
number of outstanding shares of common stock as of August 19, 2009 was: 2,453,473,602.
EXPLANATORY
NOTE
CORRECTION
of SHELL DESIGNATION
This
Amendment No. 1 on Form 10-QSB/A, which amends and restates items identified
below with respect to the Form 10-QSB, filed by Seaway Valley Capital
Corporation (“we” or “the Company”) with the Securities and Exchange Commission
(the “SEC”) on September 2, 2009 (the “Original Filing”), is being filed to
reflect an error on page one, on which a check mark was erroneously placed by
“Yes” instead of the correct designation, “No”, next to “whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange
Act).”
SEAWAY
VALLEY CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEET
AS
OF JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008
ASSETS
|
June
30, 2009
|
December
31, 2008
|
||||||
Current
assets:
|
||||||||
Cash
|
$ | 368,767 | $ | 590,859 | ||||
Accounts
receivable
|
345,758 | 401,157 | ||||||
Inventories
|
3,481,106 | 7,416,788 | ||||||
Notes
receivable
|
1,695,675 | 1,749,092 | ||||||
Prepaid
expenses and other assets
|
13,409 | 104,852 | ||||||
Refundable
income taxes
|
220,813 | 220,813 | ||||||
Total
current assets
|
6,125,528 | 10,483,561 | ||||||
Property
and equipment, net
|
10,058,242 | 10,783,578 | ||||||
Other
Assets:
|
||||||||
Deferred
financing fees
|
136,924 | 246,597 | ||||||
Investments
|
25,000 | 465,973 | ||||||
Other
assets
|
265,500 | 265,500 | ||||||
Excess
purchase price
|
2,450,742 | 3,284,193 | ||||||
Security
deposits
|
32,300 | 32,300 | ||||||
Total
other assets
|
2,910,466 | 4,294,563 | ||||||
TOTAL
ASSETS
|
$ | 19,094,236 | $ | 25,561,702 | ||||
LIABILITIES
AND STOCKHOLDER'S EQUITY
|
||||||||
Current
liabilities:
|
||||||||
Line
of credit
|
$ | 568,022 | $ | 3,065,117 | ||||
Accounts
payable
|
8,929,227 | 7,454,894 | ||||||
Accrued
expenses
|
3,571,104 | 2,922,620 | ||||||
Current
portion of long term debt
|
2,969,623 | 3,344,799 | ||||||
Convertible
debentures
|
3,360,281 | 1,735,638 | ||||||
Derivative
liability - convertible debentures
|
7,569,552 | - | ||||||
Liabilities
of discontinued operations
|
2,504,422 | - | ||||||
Total
current liabilities
|
29,472,231 | 18,523,068 | ||||||
Long
term debt, net of current
|
4,844,999 | 4,834,594 | ||||||
Convertible
debentures, net of current
|
3,184,092 | 3,785,171 | ||||||
Other
liabilities
|
119,204 | 184,719 | ||||||
Due
to related party
|
16,000 | - | ||||||
Total
liabilities
|
37,636,526 | 27,327,552 | ||||||
Commitments
and contingencies
|
- | - | ||||||
STOCKHOLDERS'
EQUITY
|
||||||||
Series
A voting preferred stock, $.0001 par value; 100,000
|
||||||||
shares
authorized; 0 and 0 shares issued and outstanding,
respectively
|
- | - | ||||||
Series
B voting preferred stock, $.0001 par value; 100,000
|
||||||||
shares
authorized; 0 and 0 shares issued and outstanding,
respectively
|
- | - | ||||||
Series
C voting preferred stock, $.0001 par value; 1,600,000
|
||||||||
shares
authorized; 353,246 and 1,407,736 shares issued and outstanding,
respectively
|
36 | 141 | ||||||
Series
D voting preferred stock, $.0001 par value; 1,250,000
|
||||||||
shares
authorized; 881,065 and 881,065 shares issued and outstanding,
respectively
|
88 | 88 | ||||||
Series
E voting preferred stock, $.0001 par value; 100,000
|
||||||||
shares
authorized; 100,000 and 100,000 shares issued and outstanding,
respectively
|
10 | 10 | ||||||
Common
stock, $0.0001 par value, 10,005,000,000 authorized;
|
||||||||
155,846,986
and 2,744,523 shares issued and outstanding, respectively
|
15,585 | 274 | ||||||
Additional
paid-in capital
|
12,230,042 | 15,265,333 | ||||||
Accumulated
deficit
|
(30,241,528 | ) | (17,034,508 | ) | ||||
Noncontrolling
interest
|
(546,523 | ) | 2,812 | |||||
Total
stockholders' deficiency
|
(18,542,290 | ) | (1,765,850 | ) | ||||
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY
|
$ | 19,094,236 | $ | 25,561,702 |
The notes
to the consolidated financial statements are an integral part of these
statements.
2
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE THREE AND SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
Three
Months Ended June 30,
|
Six
Months Ended June 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
Revenue
|
$ | 2,160,935 | $ | 3,467,735 | $ | 4,450,304 | $ | 5,599,740 | ||||||||
Cost
of revenue
|
1,255,084 | 1,933,027 | 3,115,997 | 3,434,615 | ||||||||||||
Gross
profit
|
905,851 | 1,534,708 | 1,334,307 | 2,165,125 | ||||||||||||
Loss
on sale of securities
|
- | (159,334 | ) | - | (106,402 | ) | ||||||||||
Operating
expenses:
|
||||||||||||||||
Selling,
general and administrative expenses (including stock based compensation of
$720,000, $494,500, $732,500 and $494,500, respectively)
|
3,094,493 | 2,553,737 | 4,723,209 | 4,027,771 | ||||||||||||
Total
operating expenses
|
3,094,493 | 2,553,737 | 4,723,209 | 4,027,771 | ||||||||||||
Operating
loss
|
(2,188,642 | ) | (1,178,363 | ) | (3,388,902 | ) | (1,969,048 | ) | ||||||||
Other
income (expense):
|
||||||||||||||||
Unrealized
loss on derivative instruments
|
(3,434,736 | ) | (391,641 | ) | (3,434,736 | ) | (1,323,710 | ) | ||||||||
Interest
expense
|
(1,323,388 | ) | (758,929 | ) | (2,249,066 | ) | (1,256,849 | ) | ||||||||
Interest
income
|
62,154 | 92,657 | 62,154 | 130,049 | ||||||||||||
Other
income (expense)
|
44,128 | (4,667 | ) | 53,050 | (71,661 | ) | ||||||||||
Total
other income (expense)
|
(4,651,842 | ) | (1,062,580 | ) | (5,568,598 | ) | (2,522,171 | ) | ||||||||
Loss
from continuing operations
|
(6,840,484 | ) | (2,240,943 | ) | (8,957,500 | ) | (4,491,219 | ) | ||||||||
Discontinued
operations
|
||||||||||||||||
Loss
on disposal of discontinued operations (net of tax)
|
(1,892,750 | ) | - | (3,007,120 | ) | - | ||||||||||
Loss
from discontinued operations (net of tax)
|
(785,558 | ) | (629,228 | ) | (1,496,101 | ) | (1,309,309 | ) | ||||||||
Total
discontinued operations
|
(2,678,308 | ) | (629,228 | ) | (4,503,221 | ) | (1,309,309 | ) | ||||||||
Loss
before provision for income taxes
|
(9,518,792 | ) | (2,870,171 | ) | (13,460,721 | ) | (5,800,528 | ) | ||||||||
Provision
for income taxes
|
5,339 | 1,196 | 12,400 | 1,196 | ||||||||||||
Net
Loss
|
(9,524,131 | ) | (2,871,367 | ) | (13,473,121 | ) | (5,801,724 | ) | ||||||||
Less:
Net loss attributable to the noncontrolling interest
|
(304,647 | ) | - | (565,361 | ) | - | ||||||||||
Net
loss attributable to Parent Company
|
$ | (9,219,484 | ) | $ | (2,871,367 | ) | (12,907,760 | ) | (5,801,724 | ) | ||||||
Loss
per share from continuing operations - basic
|
$ | (0.18 | ) | $ | (1.81 | ) | $ | (0.49 | ) | $ | (4.10 | ) | ||||
Loss
per share from discontinued operations - basic
|
(0.07 | ) | (0.51 | ) | (0.25 | ) | (1.20 | ) | ||||||||
Loss
per share - basic
|
$ | (0.25 | ) | $ | (2.31 | ) | $ | (0.74 | ) | $ | (5.30 | ) | ||||
Weighted
average shares of common stock outstanding - basic
|
38,255,303 | 1,240,431 | 18,167,661 | 1,095,405 |
The notes
to the consolidated financial statements are an integral part of these
statements.
3
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Continuing
Operations
|
||||||||
Net
loss from continuing operations
|
$ | (8,969,900 | ) | $ | (4,492,415 | ) | ||
Adjustments
to reconcile net loss
|
||||||||
to
net cash provided by continuing operating activities:
|
||||||||
Deferred
taxes
|
- | 1,196 | ||||||
Depreciation
and amortization
|
567,939 | 306,136 | ||||||
Loss
on marketable securities
|
- | 106,402 | ||||||
Unrealized
loss on derivatives
|
3,434,736 | 1,323,710 | ||||||
Amortization
of deferred financing fees
|
36,760 | 84,689 | ||||||
Stock
based compensation
|
732,500 | 494,500 | ||||||
Amortization
of debt discount
|
1,111,054 | 592,809 | ||||||
Change
in assets and liabilities:
|
||||||||
Accounts
receivable
|
55,399 | 53,822 | ||||||
Inventories
|
3,935,682 | (412,563 | ) | |||||
Prepaid
expenses and other assets
|
91,443 | (120,247 | ) | |||||
Refundable
income taxes
|
- | 114,819 | ||||||
Related
party
|
16,000 | - | ||||||
Other
assets
|
- | 360,724 | ||||||
Accounts
payable
|
1,474,333 | 294,381 | ||||||
Accrued
expenses
|
750,353 | (329,405 | ) | |||||
Other
liabilities
|
(65,515 | ) | - | |||||
Cash
Provided by (Used in) Continuing Operating Activities
|
3,170,784 | (1,621,442 | ) | |||||
Discontinued
Operations
|
||||||||
Net loss
from discontinued operations
|
(4,503,221 | ) | (1,309,309 | ) | ||||
Adjustments
to reconcile net loss to net cash
|
||||||||
provided
by continuing operating activities:
|
||||||||
Depreciation
and amortization
|
173,779 | 43,341 | ||||||
Provision
for deferred income taxes
|
- | (1,196 | ) | |||||
Loss
on disposal of discontinued operations
|
3,007,120 | - | ||||||
Cash
Used in Discontinued Operating Activities
|
(1,322,322 | ) | (1,267,164 | ) | ||||
Cash
Provided by (Used in) Operating Activities
|
1,848,462 | (2,888,606 | ) |
The notes
to the consolidated financial statements are an integral part of these
statements.
4
SEAWAY
VALLEY CAPITAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008
(UNAUDITED)
2009
|
2008
|
|||||||
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
Purchase
of property and equipment
|
$ | (16,382 | ) | $ | (209,070 | ) | ||
(Purchases)
sales of investments
|
440,973 | (175,000 | ) | |||||
Cash
Used in Investing Activities
|
424,591 | (384,070 | ) | |||||
CASH
FLOW FROM FINANCING ACTIVITIES:
|
||||||||
Net
(payments) borrowings on line of credit
|
(2,497,095 | ) | 3,344,150 | |||||
Deferred
financing fees
|
- | (260,000 | ) | |||||
Net
proceeds from issuance of common stock
|
166,721 | - | ||||||
Repayments
of long term debt
|
(314,771 | ) | (273,706 | ) | ||||
Proceeds
from convertible debentures
|
150,000 | 225,000 | ||||||
Cash
Provided by (Used in) Financing Activities
|
(2,495,145 | ) | 3,035,444 | |||||
Net
Decrease in Cash
|
(222,092 | ) | (237,232 | ) | ||||
Cash
at Beginning of Period
|
590,859 | 1,116,003 | ||||||
Cash
at End of Period
|
$ | 368,767 | $ | 878,771 | ||||
Cash
paid during the period for:
|
||||||||
Interest
|
$ | 561,967 | $ | 272,970 | ||||
Income
taxes
|
$ | - | $ | - | ||||
SUPPLEMENTAL
STATEMENT OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Conversion
of convertible debt and accrued interest into common stock
|
$ | 143,445 | $ | 838,459 | ||||
Warrants
issued with debt
|
$ | 97,627 | $ | 728,170 | ||||
Conversion
of preferred stock into common stock
|
$ | 104 | $ | 1 | ||||
Convertible
debentures issued in exchange for notes payable
|
$ | - | $ | 4,299,662 | ||||
Discount
recorded upon issuance of derivative
|
$ | 4,134,816 | $ | 2,845,438 | ||||
Preferred
stock issued for acquisition
|
$ | - | $ | 1,018,037 | ||||
Preferred
stock exchanged for convertible debenture
|
$ | 4,113,640 | $ | - |
The notes
to the consolidated financial statements are an integral part of these
statements.
5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE
30, 2009
NOTE
1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying unaudited condensed 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-Q. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. In the opinion
of management, all normal recurring adjustments considered necessary for a fair
statement of the results of operations have been included. The results of
operations for the six months ended June 30, 2009 are not necessarily indicative
of the results of operations for the full year. When reading the financial
information contained in this Quarterly Report, reference should be made to the
financial statements, schedule and notes contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2008.
NOTE
2 - GOING CONCERN
The
Company intends to overcome the circumstances that impact its ability to remain
a going concern through an increase of revenues, with interim cash flow
deficiencies being addressed through additional equity and debt financing. The
Company's ability to obtain additional funding will determine its ability to
continue as a going concern. There can be no assurances that these plans for
additional financing will be successful. Failure to secure additional financing
in a timely manner and on favorable terms if and when needed in the future could
have a material adverse effect on the Company's financial performance, results
of operations and stock price and require the Company to implement cost
reduction initiatives and curtail operations. Furthermore, additional equity
financing may be dilutive to the holders of the Company's common stock, and debt
financing, if available, may involve restrictive covenants, and may require the
Company to relinquish valuable rights.
NOTE
3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Deferred
Financing Fees and Debt Discounts
Deferred
finance costs represent costs which may include direct costs paid to or warrants
issued to third parties in order to obtain long-term financing and have been
reflected as other assets. Costs incurred with parties who are providing the
actual long-term financing, which generally may include the value of
warrants, fair value of the derivative conversion
feature, or the intrinsic value of beneficial conversion features
associated with the underlying debt, are reflected as a debt discount.
These costs and discounts are generally amortized over the life of the
related debt. In connection with debt issued during the six months ended
June 30, 2009, the Company recorded $4,232,443 in debt discounts for the six
months ended June 30, 2009. Amortization expense related to these costs and
discounts were $1,147,814 for the six months ended June 30, 2009, including
$1,111,054 in debt discount amortization included in interest expense on the
Statement of Operations.
Derivative
Financial Instruments
Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities," as amended and EITF Issue No. 00-19,
"Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock" require all derivatives to be recorded on the
balance sheet at fair value. The beneficial conversion features of the
convertible debentures are embedded derivatives and are separately valued and
accounted for on our balance sheet with changes in fair value recognized during
the period of change as a separate component of other income/expense. Fair
values for exchange-traded securities and derivatives are based on quoted market
prices. The pricing model we use for determining fair value of our derivatives
is the Black-Scholes Pricing Model. Valuations derived from this model are
subject to ongoing internal and external verification and review. The model uses
market-sourced inputs such as interest rates and stock price volatilities.
Selection of these inputs involves management's judgment and may impact net
income.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences
attributable to differences between the financial statement carrying amounts of
existing assets and liabilities and their respective tax bases and operating
loss and tax credit carryforwards. Deferred tax assets and liabilities are
measured using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date. At
June 30, 2009, the Company had a full valuation allowance against its deferred
tax assets.
6
Estimated
Fair Value of Financial Instruments
The
Company's financial instruments include cash, accounts payable, long term debt,
line of credit, convertible debt and due to related parties. Management believes
the estimated fair value of cash, accounts payable and debt instruments at June
30, 2009 approximate their carrying value as reflected in the balance sheets due
to the short-term nature of these instruments or the use of market interest
rates for debt instruments. Fair value of due to related parties cannot be
determined due to lack of similar instruments available to the
Company.
The
preparation of financial statements in conformity with U.S. generally accepted
accounting principles 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 revenue and expenses during the reporting period. Actual
results could differ from these estimates.
Subsequent
events
Subsequent
events were evaluated by management through August 28, 2009 which is date the
financial statements were released.
Net
Income (Loss) per Common Share
In
accordance with SFAS No. 128, "Earnings Per Share," Basic income (loss) per
share is computed by dividing net income (loss) by the weighted average number
of shares of common stock outstanding during the period. Diluted earnings per
share is computed by dividing net income (loss) adjusted for income or loss that
would result from the assumed conversion of potential common shares from
contracts that may be settled in stock or cash by the weighted average number of
shares of common stock, common stock equivalents and potentially dilutive
securities outstanding during each period. The Company had 10,035,247 and 17,263
warrants outstanding at June 30, 2009 and 2008, respectively. The inclusion of
the warrants and potential common shares to be issued in connection with
convertible debt have an anti-dilutive effect on diluted loss per share because
under the treasury stock method the average market price of the Company's common
stock was less than the exercise prices of the warrants, and therefore they are
not included in the calculation.
Recently
Issued Accounting Pronouncements
In June
2009, the FASB issued SFAS No. 168, The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles-a
replacement of FASB Statement No. 162 (SFAS 168). Upon assumption, the
FASB Accounting Standards Codification ("Codification") will be the single
source of authoritative nongovernmental U.S. generally accepted accounting
principles. Rules and interpretive releases of the SEC under authority of
federal securities laws are also sources of authoritative GAAP for SEC
registrants. SFAS 168 is effective for interim and annual periods ending after
September 15, 2009. All existing accounting standards are superseded as
described in SFAS 168. All other accounting literature not included in the
Codification is nonauthoritative. The adoption of SFAS 168 will not have a
material impact on the Company's consolidated financial statements.
Reclassifications
Certain
items in the financial statements in the prior year have been reclassified to
conform with the current year presentation. Such reclassification had no effect
on net income.
NOTE
4 - SEGMENT INFORMATION
The
Company has two reportable segments in 2009: retail sales and
hospitality.
Six
Months Ended June 30, 2009
|
||||||||||||
Retail
|
Hospitality
|
Total
|
||||||||||
Revenue
|
||||||||||||
Merchandise
sales and third party income
|
$ | 3,215,308 | $ | 1,234,996 | $ | 4,450,304 | ||||||
Cost
and expenses
|
||||||||||||
Cost
of revenue
|
2,568,612 | 547,385 | 3,115,997 | |||||||||
Selling
and administrative
|
3,965,157 | 758,052 | 4,723,209 | |||||||||
Unrealized
gain on derivatives
|
3,434,736 | - | 3,434,736 | |||||||||
Interest
expense
|
1,816,211 | 432,855 | 2,249,066 | |||||||||
Other
(income) expense
|
(115,204 | ) | - | (115,204 | ) | |||||||
Total
costs and expenses
|
11,669,512 | 1,738,292 | 13,407,804 | |||||||||
Loss
from continuing operations
|
$ | (8,454,204 | ) | $ | (503,296 | ) | $ | (8,957,500 | ) | |||
Total
assets
|
$ | 12,109,046 | $ | 6,985,190 | $ | 19,094,236 | ||||||
Capital
expenditures
|
$ | 16,382 | $ | - | $ | 16,382 |
7
The
Company has three reportable segments in 2008; retail sales, hospitality and
investment portfolio management.
Six
Months Ended June 30, 2008
|
||||||||||||||||
Retail
|
Hospitality
|
Investing
|
Total
|
|||||||||||||
Revenue
|
||||||||||||||||
Merchandise
sales and third party income
|
$ | 5,099,202 | $ | 500,538 | $ | - | $ | 5,599,740 | ||||||||
Realized
and unrealized gain on securities
|
- | - | (106,402 | ) | (106,402 | ) | ||||||||||
Total
revenue
|
5,099,202 | 500,538 | (106,402 | ) | 5,493,338 | |||||||||||
Cost
and expenses
|
||||||||||||||||
Cost
of revenue
|
3,279,072 | 155,543 | - | 3,434,615 | ||||||||||||
Selling
and administrative
|
3,675,905 | 351,866 | - | 4,027,771 | ||||||||||||
Unrealized
gain on derivatives
|
1,323,710 | - | - | 1,323,710 | ||||||||||||
Interest
expense
|
1,205,596 | 51,253 | - | 1,256,849 | ||||||||||||
Other
income
|
(58,388 | ) | - | - | (58,388 | ) | ||||||||||
Total
costs and expenses
|
9,425,895 | 558,662 | - | 9,984,557 | ||||||||||||
Loss
from continuing operations
|
$ | (4,326,693 | ) | $ | (58,124 | ) | $ | (106,402 | ) | $ | (4,491,219 | ) | ||||
Total
assets
|
$ | 24,687,641 | $ | 8,236,028 | $ | 326 | $ | 32,923,995 | ||||||||
Capital
expenditures
|
$ | 209,070 | $ | - | $ | - | $ | 209,070 |
The
Company has 10,005,000,000 shares of capital stock authorized, consisting of
10,000,000,000 shares of Common Stock, par value $0.0001, 100,000 shares of
Series A Preferred Stock, par value $0.0001 per share, 100,000 shares of Series
B Preferred Stock, 1,600,000 shares of Series C Preferred Stock, 1,250,000
Shares of Series D Preferred Stock, 100,000 Shares of Series E Preferred Stock,
and 1,850,000 shares of undesignated Preferred Stock, $0.0001 par
value.
On March
14, 2008 the Company established the 2008 Stock and Stock Option Plan. The
number of Shares available for grant under the Plan shall not exceed three
thousand two hundred (3,200) Shares. The Shares granted under this Plan may be
either authorized but unissued or reacquired Shares. A total of 3,200 shares
were outstanding at June 30, 2009 under the plan. On July 16, 2008, the Company
established the 2008 Equity Incentive Plan. The number of shares
available for issuance under the 2008 Equity Incentive Plan is
10,000. A total of 10,000 shares were outstanding at June 30, 2009
under the 2008 Equity Incentive Plan. On September 26, 2008, the
Company established the 2008 Employee Equity Plan. The number of
shares available for issuance under the 2008 Employee Equity Plan is
200,000. A total of 135,000 shares were outstanding at June 30, 2009
under the 2008 Employee Equity Plan.
During
the six months ended June 30, 2009 holders of Series C Preferred Stock converted
15,990 shares into 589,600 shares of common stock.
On May
20, 2009 certain related shareholders exchanged 1,028,500 shares of Series C
Preferred Stock for a convertible debenture totaling $4,113,640. The
debenture bears interest at 12% and is convertible at the lesser of: (a) $0.01
or (b) 50% of the lowest volume weighted average price during the five (5)
trading days immediately preceding the conversion date (see Note
8).
During
the six months ended June 30, 2009, holders of convertible debentures converted
$145,945 into 64,059,530 shares of common stock. Included in these
amounts were related shareholders conversions of $62,500 into 31,166,667 shares
of common stock.
During
the six months ended June 30, 2009, the Company issued 1,010,838 shares of its
majority owned subsidiary, Hackett's Stores, for net proceeds of
$166,721.
During
the six months ended June 30, 2009, the Company's subsidiary assumed convertible
debentures of $50,000 purchased by a related party in exchange for a reduction
in the balance due to the previous noteholders from the ALRN acquisition for the
same amount. The debentures were then converted into 400,000 shares
of Hackett's Stores, Inc. common stock.
8
NOTE
6 - STOCK BASED COMPENSATION
During
the six months ended June 30, 2009, the Company issued 88,333,333 shares of
common stock to a related party consultant in exchange for services. The shares
were valued at $720,500 based on the value of the shares on the date of the
grant, which is included in the statement of operations as stock based
compensation for the period.
NOTE
7 - DISCONTINUED OPERATIONS
In the
six months ended June 30, 2009, the Company closed four of its retail
stores. These reporting units and their operating results have been
shown as discontinued operations. The loss or disposal of
discontinued operations represents the accrual of the remaining lease liability
related to these stores.
On April
19, 2009 the Company sold to NCH Partners, LLC the restaurant operations of Good
Fello's Brick Oven Pizza and Wine Bar and Sackets Harbor Brewing Company for the
assumption a certain debts and agreements to lease the respective facilities for
a minimum of five years. The Company retained ownership of the
respective real properties and business assets, and NCH Partners, LLC has the
right to acquire the business assets at the end of the tenth year for nominal
consideration after exercising an initial five year extension. NCH
Partners, LLC does not have an option to acquire the real property of either
business. Additionally, Seaway Valley Capital Corporation retained
ownership of the intellectual property (name, recipes, trademarks, etc) of
Sackets Harbor Brewing Company, Inc., and agreed to license these assets to NCH
Partners, LLC for a minimal annual fee for use in restaurant operations
only. The beer production and third-party beer marketing business was
not part of the transaction. The businesses sold have been reported
as discontinued operations. The loss on disposal of discontinued
operations represents the portion of goodwill arising from the 2008 purchase of
North Country Hospitality allocated to the businesses sold.
For the
six months ended June 30, 2009 loss from discontinued operations consisted of
the following:
2009
|
2008
|
|||||||||||||||||||||||
Retail
|
Hospitality
|
Total
|
Retail
|
Hospitality
|
Total
|
|||||||||||||||||||
Revenue
|
$ | 2,500,140 | $ | 235,232 | $ | 2,735,372 | $ | 2,218,927 | $ | - | $ | 2,218,927 | ||||||||||||
Cost
of revenue
|
2,238,910 | 75,868 | 2,314,778 | 1,894,236 | 44,180 | 1,938,416 | ||||||||||||||||||
SG&A
expenses
|
1,670,488 | 270,764 | 1,941,252 | 1,610,714 | 16,236 | 1,626,950 | ||||||||||||||||||
Interest
expense
|
- | 16,821 | 16,821 | - | 1,907 | 1,907 | ||||||||||||||||||
Other
income (expense)
|
41,378 | - | 41,378 | 39,037 | - | 39,037 | ||||||||||||||||||
Net
loss on discontinued operations
|
$ | (1,367,880 | ) | $ | (128,221 | ) | $ | (1,496,101 | ) | $ | (1,246,986 | ) | $ | (62,323 | ) | $ | (1,309,309 | ) | ||||||
Loss
on disposal of discontinued operations
|
$ | (2,477,612 | ) | $ | (529,508 | ) | $ | (3,007,120 | ) | $ | - | $ | - | $ | - |
NOTE
8 - LINE OF CREDIT
On March 4, 2008, Seaway Valley Capital
Corporation and its wholly owned subsidiaries, WiseBuys Stores, Inc. and Patrick
Hackett Hardware Company, consummated a five million dollar ($5,000,000) credit
and security agreement with Wells Fargo Bank, National Association, acting
through its Wells Fargo Business Credit operating division (the "Line of
Credit"). The funds available under Line of Credit were based on an advance rate
of 55% of the Company's current inventory. The initial term of the Line of
Credit was three years. These funds were used for general working
capital at the Company. Because the Company failed to meet certain
covenants the debt was in default in 2008. In early January 2009,
Wells Fargo initiated an advance rate reduction (from the original 55% of
inventory) by 1% per week. In mid-January, Wells Fargo agreed to
temporarily suspend the rate reduction in the event that Patrick Hackett
Hardware Company raise an additional $2 million in equity capital or
subordinated debt. The Company was not successful in these capital
raising efforts, and in February 2009 Wells Fargo again commenced the reduction
of the advance rate. On March 9th,
March 18th and
April 2nd,
Wells Fargo issued default notices under the credit agreement, citing various
default events such as failure to reach Tangible Net Worth, Net Cash Flow and
Net Income milestones, as well as citing a change of control event as it related
to the ALRN transaction. Additionally, Wells Fargo continued to
reduce the advance rate, and the loan balance had been reduced from a peak of
$4.7 million in December 2008 to approximately $568,000 at June 30, 2009.
On April
13, 2009, The Company and Wells Fargo had substantially agreed on a Forbearance
Agreement whereby the Company would pursue business activities in an effort to
eliminate the Wells Fargo line of credit within 13 weeks. These
measures included, among others, the closure of certain Hackett's
stores. This agreement was signed on May 18, 2009. As of
the date of this filing, the Wells Fargo loan had been repaid in
full.
9
NOTE
9 - CONVERTIBLE DEBENTURES
2009
|
||||
Convertible
debentures
|
$ | 13,535,977 | ||
Less
note discounts
|
(6,991,604 | ) | ||
Total
convertible debentures, net of discounts
|
$ | 6,544,373 | ||
Convertible
debentures, current portion
|
$ | 4,089,440 | ||
Less
note discounts
|
(729,159 | ) | ||
Total
current portion of convertible debentures
|
3,360,281 | |||
Convertible
debentures, net of current portion
|
9,446,537 | |||
Less
note discounts
|
(6,262,445 | ) | ||
Total
convertible debentures, net of current maturities
|
3,184,092 | |||
Total
convertible debentures, net of discounts
|
$ | 6,544,373 |
On April 1, 2009, the Company issued Clark E. Collins
a $100,000 13 1/3% Convertible Promissory Note for proceeds of
$100,000. The Note, which is due January 1, 2010, is convertible into
shares of the Company at a 15% discount to the market price of the share price
for the preceding 10 day average and is personally guaranteed by Thomas W.
Scozzafava and secured with real property owned by Mr. Scozzafava.
The
Company determined that the conversion feature of the assumed convertible
debentures represent an embedded derivative since the debentures is convertible
into a variable number of shares upon conversion. Accordingly, the assumed
convertible debentures are not considered to be conventional debt under EITF
00-19 and the embedded conversion feature must be bifurcated from the debt host
and accounted for as a derivative liability. The embedded derivative feature
created by the variable conversion meets the criteria of SFAS 133 and EITF
00-19, and should be accounted for as a separate derivative. At June 30, 2009
the fair value of the conversion derivative liability created by the assumed
debentures calculated using the Black-Scholes model was $0. For the six months
ended June 30, 2009 the unrealized gain on the derivative instrument created by
this debenture was $21,176.
On May
20, 2009 certain related shareholders exchanged 1,028,500 shares of Series C
Preferred Stock for a convertible debenture totaling $4,113,640. The
debenture bears interest at 12% and is convertible at the lesser of: (a) $0.01
or (b) 50% of the lowest volume weighted average price during the five (5)
trading days immediately preceding the conversion date.
The
Company determined that the conversion feature of the assumed convertible
debentures represent an embedded derivative since the debentures is convertible
into a variable number of shares upon conversion. Accordingly, the assumed
convertible debentures are not considered to be conventional debt under EITF
00-19 and the embedded conversion feature must be bifurcated from the debt host
and accounted for as a derivative liability. The embedded derivative feature
created by the variable conversion meets the criteria of SFAS 133 and EITF
00-19, and should be accounted for as a separate derivative. At June 30, 2009
the fair value of the conversion derivative liability created by the assumed
debentures calculated using the Black-Scholes model was $4,051,140. For the six
months ended June 30, 2009 the unrealized gain on the derivative instrument
created by this debenture was $62,500.
In
connection with this Agreement, the Company issued to the Buyer warrants to
purchase 10,000,000 shares of the Company's Common Stock (the "Warrants") at an
exercise price of $.01, which had an implicit fair value of $100,000 at grant
date. After allocation of proceeds between the convertible
debt and warrants, the relative fair value of the warrants was determined
to be $97,627. This is reflected as an additional discount on the debt in
the accompanying financial statements.
During
the six months ended June 30, 2009 holders of convertible debentures converted
$145,945 into 64,059,530 shares of common stock. Related parties
received 31,166, 667 of these shares in exchange for $62,500.
NOTE
10 - FAIR VALUE MEASUREMENTS
Effective
January 1, 2008, we adopted Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157), which provides a framework for measuring fair value under GAAP. SFAS
157 defines fair value as the exchange price that would be received for an asset
or paid to transfer a liability (an exit price) in the principal or most
advantageous market for the asset or liability in an orderly transaction between
market participants on the measurement date. SFAS 157 requires that valuation
techniques maximize the use of observable inputs and minimize the use of
unobservable inputs. SFAS 157 also establishes a fair value hierarchy, which
prioritizes the valuation inputs into three broad levels.
Financial
assets and liabilities valued using level 1 inputs are based on unadjusted
quoted market prices within active markets. Financial assets and liabilities
valued using level 2 inputs are based primarily on quoted prices for similar
assets or liabilities in active or inactive markets. For certain
long-term debt, the fair value was based on present value techniques using
inputs derived principally or corroborated from market data. Financial assets
and liabilities using level 3 inputs were primarily valued using management's
assumptions about the assumptions market participants would utilize in pricing
the asset or liability. Valuation techniques utilized to determine fair value
are consistently applied.
10
The table
below presents a reconciliation for liabilities measured at fair value on a
recurring basis:
Fair
Value Measurements Using Significant
|
||||||||
Unobservable
Inputs (Level 3)
|
||||||||
Derivative
Liability
|
||||||||
2009
|
2008 | |||||||
Balance
at January 1,
|
$ | - | $ | 878,499 | ||||
Total
unrealized (gains) losses included in earnings
|
3,434,736 | 1,323,710 | ||||||
Debt
discounts
|
4,134,816 | 2,223,699 | ||||||
Balance
at June
30,
|
$ | 7,569,552 | $ | 4,425,908 |
Financial
instruments are considered Level 3 when their values are determined using
pricing models, discounted cash flow methodologies or similar techniques and at
least one significant model assumption or input is input is
unobservable. Level 3 financial instruments also include those for
which the determination of fair value requires significant management judgment
or estimation.
NOTE
11 - NONCONTROLLING INTEREST
The
Company has a noncontrolling interest related to its ownership of 91.3% as of
June 30, 2009 of Hackett's Stores, Inc., which was acquired in December
2008. In accordance with Financial Accounting Standards No. 160
"Noncontrolling Interests in Consolidated Financial Statements" the following
represents the amounts attributable to the noncontrolling interest for the
results of operations and changes in equity for the six months ended June 30,
2009.
Amounts
attributable to:
|
||||||||||||
Noncontrolling
|
||||||||||||
Company
|
Interest
|
Total
|
||||||||||
Loss
from continuing operations
|
$ | (8,751,287 | ) | $ | (218,613 | ) | $ | (8,969,900 | ) | |||
Loss
from discontinued operations
|
(4,156,473 | ) | (346,748 | ) | (4,503,221 | ) | ||||||
Net
loss
|
$ | (12,907,760 | ) | $ | (565,361 | ) | $ | (13,473,121 | ) | |||
Noncontrolling
|
||||||||||||
Company
|
Interest
|
Total
|
||||||||||
Stockholders'
Deficit at January 1, 2009
|
$ | (1,768,662 | ) | $ | 2,812 | $ | (1,765,850 | ) | ||||
Net
loss for the six months ended June 30, 2009
|
(12,907,760 | ) | (565,361 | ) | (13,473,121 | ) | ||||||
Equity
transactions, net
|
(3,319,345 | ) | 16,026 | (3,303,319 | ) | |||||||
Stockholders'
Deficit at June 30, 2009
|
$ | (17,995,767 | ) | $ | (546,523 | ) | $ | (18,542,290 | ) |
NOTE
12 - SUBSEQUENT EVENTS
Since
June 30, 2009 the debt owed to the sellers of ALRN has been reduced by
$75,000. In August of 2009, the HCKE common and preferred shares and
warrant held in escrow and formerly owned by the selling majority shareholders
of HCKE were released from escrow for the benefit of the Company.
Subsequent
to June 30, 2009, holders of the Company's convertible debentures converted
$493,450 into 2,297,626,616 shares of common stock.
Subsequent
to June 30, 2009, the Company issued 373,000 shares of its majority owned
subsidiary Hackett's Stores, Inc. for net proceeds of approximately
$106,250.
11
On May
19, 2009 Seaway Capital, Inc., a holding company 100% owned by Thomas W.
Scozzafava, the Company's CEO and Chairman, was issued 350,000,000 shares of
restricted stock for an agreement to exchange its 100,000 Series E Convertible
Preferred shares for a $1,500,000 Series F Redeemable Preferred Stock that is
non-convertible into common stock of the Company. In July and August 2009
the transaction was rescinded. Since the rescission occurred prior to the
issuance of the financial statements, the Company reflected it in the
accompanying financial statements as if it had occurred prior to June 30,
2009.
On July
15th,
August 5th,
August 7th,
August 13th ,
August 17th, and
August 24th, SC
Partners, LLC, a related party was issued convertible debentures for proceeds
loaned to the Company in the amounts of $150,000, $62,000, $99,000, $35,000,
$27,500 and $27,500, respectively. The debentures each bear interest
at 12% and are convertible at the lesser of: (a) $0.01 or (b) 50% of the lowest
volume weighted average price during the five (5) trading days immediately
preceding the conversion date.
Subsequent
to June 30, 2009, the Company's subsidiary assumed convertible debentures of
$295,559 in exchange for forgiveness of debt of $75,000. The difference of
$220,559 was considered an increase in the ALRN purchase price, resulting in
goodwill which was subsequently written off. The related party then converted
$3,000 into 8,383,000 shares of Hackett's Stores common stock.
On August
25, 2009, Seaway Valley Capital Corp. (SVCC) transferred ownership of its
subsidiary, Sackets Harbor Brewing Company, Inc. (SHBC), to a public
company named "Airborne Security & Protective Services, Inc."
("ASPV"). The transfer was affected by the following
procedures:
|
●
|
SVCC
transferred 100% of the capital stock of SHBC
to ASPV.
|
|
●
|
SVCC
agreed to pay the selling shareholders $110,000 in equal monthly
installments of $10,000.
|
|
●
|
The
majority shareholders of ASPV transferred to SVCC common and
preferred stock in ASPV that collectively represents
approximately 91% of the equity in
ASPV.
|
|
●
|
A
noteholder of ASPV placed into escrow convertible debt
instruments issued by ASPV in the principal amount of $75,000, of
which $25,000 was acquired by a non-affiliated third
party.
|
|
●
|
ASPV
issued to SVCC 60,000,000 shares of common stock and 100,000 shares of
Series B Convertible Preferred
Stock.
|
|
●
|
Tom
Scozzafava, the CEO of SVCC, was appointed CEO and Chairman of the Board
of ASPV.
|
All of
the securities delivered at closing were placed in escrow except for the
newly issued Series B Preferred Stock and 60,000,000 shares of restricted
common stock. The Escrow Agreement provides that if ASPV
satisfies its obligations under the notes issued to its majority shareholders,
then the escrow agent will deliver the securities as described
above. If, however, there is a default under the promissory notes,
then all of the assets described above will be returned to their owners prior to
the closing, except that none of the funds contributed by SVCC will be
reimbursed to it. The Company is in the process of changing its name and
symbol change to reflect its new brewing operations.
12
ITEM
2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD
LOOKING STATEMENTS
In
addition to historical information, this Quarterly Report contains
forward-looking statements, which are generally identifiable by use of the words
"believes," "expects," "intends," "anticipates," "plans to," "estimates,"
"projects," or similar expressions. These forward-looking statements are subject
to certain risks and uncertainties that could cause actual results to differ
materially from those reflected in these forward-looking statements. Factors
that might cause such a difference include, but are not limited to, those
discussed in the section entitled "Business Risk Factors." Readers are cautioned
not to place undue reliance on these forward-looking statements, which reflect
management's opinions only as of the date hereof. We undertake no obligation to
revise or publicly release the results of any revision to these forward-looking
statements.
OVERVIEW
Seaway
Valley Capital Corporation ("Seaway Valley" or the "Company") is a venture
capital and investment company. Seaway Valley focuses on equity and
equity-related investments in companies that require expansion capital and in
companies pursuing acquisition strategies. Seaway Valley will consider
investment opportunities in a number of different industries, including retail,
consumer products, restaurants, media, business services, and manufacturing. The
Company will also consider select technology investments. Returns are
intended to be in the form of the eventual share appreciation and dispossession
of those equity stakes and income from loans made to businesses.
RETAIL
HOLDINGS
On
October 23, 2007, Seaway Valley acquired all of the capital stock of WiseBuys
Stores, Inc. ("WiseBuys"). WiseBuys Stores, Inc. was formed and began
operations in 2003 as a direct result of the closing of small-town retailer,
Ames Department Stores. Founded primarily by lifelong "north country"
residents, WiseBuys initially focused its efforts on serving the "discount"
retail needs of rural communities throughout northern and central New York.
On November 7, 2007, Seaway Valley purchased all of the outstanding
capital stock of Patrick Hackett Hardware Company, a New York corporation
("Hackett's"). Hackett's, one of the nation's oldest retailers, with roots
dating back to 1830, is a full line department store specializing in name brand
merchandise and full service hardware. At the time of the acquisition,
Hackett's had locations in five towns in upstate New York. Each store
features brand name clothing for men, women, and children, and a large selection
of athletic, casual, and work footwear. Hackett's also carries domestics,
home décor,
gifts, seasonal merchandise and sporting goods. Hackett's full service
hardware department features traditional hardware, tool, plumbing, paint and
electrical departments. Subsequent to the acquisition, WiseBuys had contributed
its retail assets to Hackett's. In 2009 Hackett's closed four of its
retail locations and presently operates four locations.
HOSPITALITY
HOLDINGS
On June
1, 2008, Seaway Valley acquired the assets and companies of North Country
Hospitality, Inc. "North Country" was formed in 2005 and acquired and
developed hospitality assets such as restaurants, lodging and other consumer
product companies in northern New York. At June 30, 2009 businesses
purchased from North Country consisted of the following:
Alteri
Bakery, Inc.
Alteri
Bakery has serviced the North Country region with quality baked goods since
1971. Alteri's is located in a state of the art baking facility in
the heart of Watertown's business district, and is one of the last traditional
Italian bakeries in the area. Alteri's produces the area's only
"true" Italian breads and specialty pastry items, such as cakes, cookies,
muffins, bagels, and specialty gift baskets. Alteri's products can be
found at local restaurants, grocery stores, schools, and its own
store. In addition, Alteri's recently assumed the production of sub
rolls for the entire Jreck Subs franchise chain of 47 locations, which alone
includes approximately two million five hundred thousand rolls baked and shipped
annually.
Sackets
Harbor Brewing Company, Inc.
Sackets
Harbor Brewing Company ("SHBC") develops, produces, and markets micro brewed
beers such as the award winning "War of 1812 Amber Ale" and "Railroad Red Ale"
as well as "Thousand Island Pale Ale", "1812 Amber Ale Light" and "Harbor Wheat"
premium craft beers. Its "1812 Amber Ale" is the company's flagship
brand and was the winner of a Silver Award at the 1998 World Beer Championship
and has been aggressively marketed to command a significant retail presence in
the regional market place. Management estimates 1812 Ale is
distributed to over 3,000 retail locations in New York and
Florida. The company has also developed complementary products such
Sackets Harbor Coffee and Sackets Harbor Brewing Co. Root Beer.
13
INVESTMENT
FUND
On July
1, 2007, Seaway Valley Capital Corporation assumed the role of Fund Manager of
the Seaway Valley Fund, LLC, which is a wholly owned subsidiary of WiseBuys
Stores, Inc. As the sole investment manager of the Fund, the Company makes
exclusive investment decisions regarding acquisition and dispossession of
various securities in the Fund. At the time the Company assumed the
management of the Fund on July 1, 2007, its assets totaled approximately $1.83
million. There was no material activity or assets in the Fund during 2008
or 2009.
Results
of Operations
Three Months Ended June 30,
2009 Compared with Three Months Ended June 30, 2008
The
Company's net sales decreased to $2,160,935 for the three month period ended
June 30, 2009 from $3,467,735 for the three month period ended June 30, 2008, a
decrease of $1,306,800. The decrease in sales was the result of a number
of factors, including a lower than usual inventory level at the remaining
Hackett's retail stores and a generally weaker economy versus last year.
The
Company's cost of goods sold also decreased from $1,933,027 for the three months
ended June 30, 2008 to $1,255,084 during the same period in 2009. This led to a
$628,857 decrease in our gross margin to $905,851 for the three month period
ended June 30, 2009 from $1,534,708 for the three month period ended June 30,
2008.
Net
realized and unrealized loss on the sale of securities was $0 during the three
month period ended June 30, 2009 versus $159,334 for the same period ended June
30, 2008.
General
and administrative expenses during the three months ended June 30, 2009 were
$3,094,493 versus $2,553,737 for the same period in 2008. The
increase of $540,756 was driven by the issuance of stock based compensation of
$720,500
Seaway
Valley Capital Corporation had a loss from continuing operations of $6,840,484
for the three months ended June 30, 2009 versus $2,240,943 for the same period
ended June 30, 2008. The increase in the loss from operations of $4,599,541 is
primarily due to the change in fair value of derivative instruments of
$3,434,736 and increased interest expense of $564,459.
Recognized loss
from discontinued operations was $2,678,308 for the three months ended June
30, 2009 as compared to a loss of $629,228 for the same period in the previous
year. The primary driver of the losses was the recognition of the totality of
lease obligations remaining on the life of closed Hackett's stores and the
closing of the certain retail stores and sales of restaurants operations in the
second quarter.
Net
losses for the three month periods ended June 30, 2009 and June 30, 2008 were
$9,524,131 and $2,871,367, respectively. The primary drivers for the
losses were losses from discontinued operations, increased SG&A expenses,
increased interest and loss on derivative instruments, a weakening in our
hospitality holdings, and margin compression at Hackett's.
Six Months Ended June 30,
2009 Compared with Six Months Ended June 30, 2008
The
Company's net sales decreased to $4,450,304 for the six month period ended June
30, 2009 from $5,599,740 for the six month period ended June 30, 2008, a
decrease of $1,149,436. The decrease in sales was the result of a number
of factors, including a lower than usual inventory level at the remaining
Hackett's retail stores and a generally weaker economy versus last
year.
The
Company's cost of goods sold also decreased from $3,434,615 for the six months
ended June 30, 2008 to $3,115,997 for the six month period ended June 30, 2009.
This led to a $830,818 decrease in our gross margin to $1,334,307 for the six
month period ended June 30, 2009 from $2,165,125 for the six month period ended
June 30, 2008.
Net
realized and unrealized loss on the sale of securities was $0 during the six
month period ended June 30, 2009 versus $106,402 for the same period ended June
30, 2008.
General
and administrative expenses during the six months ended June 30, 2009 were
$4,723,209 versus $4,027,771 for the same period in 2008. The increase of
$695,438 was driven by the issuance of stock based compensation of
$732,500.
Seaway
Valley Capital Corporation had a loss from continuing operations of $8,957,500
for the six months ended June 30, 2009 versus $4,491,219 for the same period
ended June 30, 2008.
Recognized loss
from discontinued operations was $4,503,221 for the six months ended June
30, 2009 as compared to a loss of $1,309,309 for the same period in the previous
year. The primary driver of the losses was the recognition of the totality of
lease obligations remaining on the life of closed Hackett's stores and the
closing of the certain retail stores and loss on the sale of restaurants in the
second quarter.
Net
losses for the six month periods ended June 30, 2009 and June 30, 2008 were
$13,473,121 and $5,801,724, respectively. The primary drivers for the
losses were losses from discontinued operations, increased SG&A expenses, a
weakening in our hospitality holdings, and margin compression at
Hackett's.
14
Liquidity
and Capital Resources
Our
operations have been funded to date primarily by loans (both bank loans and more
recently convertible debentures) and contributions by our founders and their
associates. The net amount of the bank loans is reflected on our June 30,
2009 balance sheet in the aggregate amount of $3,287,617, the net amount of
loans to individuals at June 30, 2009 was $5,095,027. The net amount of the
convertible debentures is reflected on our June 30, 2009 balance sheet in the
aggregate amount of $6,544,373.
On March
4, 2008, Seaway Valley Capital Corporation and its wholly owned subsidiaries,
WiseBuys Stores, Inc. and Patrick Hackett Hardware Company (collectively
"Seaway" or the "Company"), consummated a five million dollar ($5,000,000)
credit and security agreement with Wells Fargo Bank, National Association,
acting through its Wells Fargo Business Credit operating division (the "Line of
Credit"). The funds available under Line of Credit are based on the Company's
current inventory with adjustments based on items such as accounts payable. The
term of the Line of Credit is three years. The interest rate on the Line of
Credit is equal to the sum of the Wells Fargo prime rate plus one and
one-quarter percent (1.25%), which interest rate shall change when and as the
Wells Fargo prime rate changes. These funds were to be used for general working
capital at the Company. Under the terms of the agreement, the subsidiaries were
required to maintain certain financial covenants including tangible net worth,
net income and net cash flow amounts. At December 31, 2008 these covenants were
not met and Wells Fargo declared multiple defaults in 2009. By April
13, 2009, The Company and Wells Fargo had substantially agreed on a Forbearance
Agreement whereby the Company would pursue business activities in an effort to
eliminate the Wells Fargo line of credit within 13 weeks. These
measures included, among others, the closure of certain Hackett's
stores. This agreement was executed on May 18, 2009. The
balance outstanding on the line of credit was $501,490 and $3,023,864 at June
30, 2009 and December 31, 2008, respectively. Due to the default,
certain other long term obligations that may be callable by the holders have
been classified as current in the accompanying financial
statements. The Wells Fargo line of credit was paid off subsequent to
June 30, 2009 and the Company is seeking alternative funding or another line of
credit to finance daily operations.
On June
5, 2009 the Company entered into a draw down equity financing
arrangement. Under the agreement the Company can draw down funds in
exchange for the investor purchasing shares based on the market price of the
stock. This agreement will not be effective until a registration
statement is filed and declared effective.
Not
Applicable
ITEM
4T. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
Our chief
executive officer and chief financial officer participated in and supervised the
evaluation of our disclosure controls and procedures (as defined in Rules
13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934, as
amended (the "Exchange Act")) that are designed to ensure that information
required to be disclosed by us in the reports that we file 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 the information required to be disclosed by us in the reports that
we file or submit under the Act is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
to allow timely decisions regarding required disclosure. The Company's chief
executive officer and chief financial officer determined that, as of the end of
the period covered by this report, these controls and procedures are not
adequate and or effective in alerting him in a timely manner to material
information relating to the Company that are required to be included in the
Company's periodic SEC filings.
Changes
in Internal Controls
There was
no change in internal controls over financial reporting (as defined in Rule
13a-15(f) promulgated under the Securities Exchange Act or 1934) identified in
connection with the evaluation described in the preceding paragraph that
occurred during the Company's first fiscal quarter that has materially affected
or is reasonably likely to materially affect the Company's internal control over
financial reporting.
PART
II - OTHER INFORMATION
ITEM
1. LEGAL PROCEEDINGS
The
Company's WiseBuys subsidiary is party to the matter entitled Einar J. Sjuve vs.
WiseBuys Stores, Inc. et al, which action was filed in the Supreme Court of
Oswego County, New York in January 2008. The complaint involves an alleged slip
and fall that occurred at WiseBuys' Pulaski, NY store in 2005. The
Plaintiff is alleging damages in the amount of $125,000. WiseBuys has
answered the complaint denying the majority of the claims. WiseBuys
believes that it has adequate insurance coverage to protect it against any
potential liability for the claim. This matter is still pending.
On
January 21, 2009 the Company received the complaint "Golden Gate Equity
Investors, Inc. v Seaway Valley Capital Corporation." for monetary damages from
an alleged breach of contract. The complaint was filed in the
Superior Court of California in San Diego County. On March 2, 2009,
Paul and Anaflor Graham acquired from Golden Gate the Company's $1,132,000
Convertible Debenture issued to Golden Gate and Paul & Anaflor Graham
assumed Golden Gate's $912,500 Secured Promissory Note issued to the
Company. Golden Gate is no longer a debenture holder of the
Company. On March 20, 2009 the case was dismissed.
On April
13, 2009, six of the vendors of Patrick Hackett Hardware Company filed a
petition with the United States Bankruptcy Court of the Northern District of New
York for relief under Chapter 7 of the US Bankruptcy Code. On April
15th, the
petitioning creditors agreed to file a request for a motion to dismiss the case
as a result of a Letter Agreement and a Security Agreement between Hackett's and
the trade vendors. On May 2, 2009 the United States Bankruptcy Court
of the Northern District of New York dismissed the involuntary petition filed
against Hackett's.
Johnson
Newspaper Corporation v. Patrick Hackett Hardware Co., State of New York Supreme
Court, County of Jefferson. This is a money judgment action in the
total amount of $30,524 plus interest, cost and expenses. The action
has just been commenced and the Company has an extension of time to
answer. The companies have agreed to an out of court settlement in an
amount close to the relief sought.
15
Falso
Service Experts LLC v. Hacketts Hardware, Oswego City Court, Oswego, New
York. This is a small claims case for HVAC services in the amount of
$3,295.88. This case has just been filed and scheduled for hearing
June 3, 2009. The Company intends to seek an out of court settlement
in an amount close to the relief sought.
GBR
Market Street LLC and Potsdam Holdings, LP - Lessor of the leased premises
at Potsdam, New York. The Lessor has declared a default and made
demand for past due rent in the total amount of $40,800 through April 30,
2009. Additionally, litigation commenced and subsequently the
companies settled the dispute for an amount close to the relief
sought.
On June
18, 2009, Renzi Bros, Inc. filed a complaint against. Seaway Valley Capital
Corporation. The Company is indebted on the balance of an unpaid
promissory note in the amount of $205,667, plus interest, legal and other
fees. The Company has entered into a settlement agreement whereby the
debt will be repaid in 21 equal monthly installments and a 22nd
installment of the remaining unpaid balance.
On July
8, 2009, True Value Company filed a lawsuit against the Company, our subsidiary,
Patrick Hackett Hardware Company, and our CEO, Thomas Scozzafava in the United
States District Court for the Northern District of New York. The complaint
alleges trademark infringement, breach of contract, Quantum Meruit, Breach of
Corporate Guaranty by the Company, Breach of Personal Guaranty by Thomas
Scozzafava and claims against Seaway for Actual and/or Constructive
Fraud. True Value seeks (i) that the defendants be permanently
enjoined and restrained from infringing on True Value's trademarks; and (ii)
$1,772,945, plus interest, costs, disbursements and True Value's attorney's
fees. True Value has agreed to postpone the hearings on said matters
until mid-October 2009.
On August
5, 2009 Juliann Hackett Cliff, Patrick Hackett, Jr. and Norman V. Garrelts filed
suit against Seaway Valley Capital Corporation, WiseBuys Stores, Inc. and Thomas
W. Scozzafava. The plaintiffs allege that the Company is the obligor
to the plaintiffs of certain promissory notes of in aggregate amount of
$2,352,761 plus interest, legal costs and court fees. The Company
denies any liability in this matter, intends to vigorously defend itself, and
intends to assert affirmative defenses and counterclaims against the claimants
for monetary damages.
Miscellaneous
Trade Vendors - In addition to True Value Company, the Company owes trade
vendors over $3,000,000. A representative group of trade vendors has
made demand for payment. No litigation is pending. It is
the Company's intention to enter into a forbearance agreement and payment plan
with the trade vendors.
ITEM
1A. RISK FACTORS
There has
been no material change to the risk factors set forth in Item 1A of the Annual
Report on Form 10-K for the year ended December 31, 2008.
ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None
during the six months ended June 30, 2009.
ITEM
3. DEFAULTS UPON SENIOR SECURITIES
On March
9th,
March 18th and
April 2nd,
Wells Fargo issued default notices under the credit agreement, citing various
default events such as failure to reach Tangible Net Worth, Net Cash Flow and
Net Income milestones, as well as citing a change of control event as it related
to the ALRN transaction. Additionally, Wells Fargo continued to
reduce the advance rate, and the loan balance had been reduced from a peak of
$4.7 million in December 2008 to approximately $0.00 at the time of this
filing.
On August
5, 2009 Juliann Hackett Cliff, Patrick Hackett, Jr. and Norman V. Garrelts filed
suit against Seaway Valley Capital Corporation, WiseBuys Stores, Inc. and Thomas
W. Scozzafava. The plaintiffs allege that the Company is the obligor
to the plaintiffs of certain promissory notes of in aggregate amount of
$2,352,761 plus interest, legal costs and court fees.
16
ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM
5. OTHER INFORMATION
None.
ITEM
6. EXHIBITS
The
following are exhibits filed as part of the Company's Form 10-Q for the period
ended June 30, 2009:
Exhibit
Number Description
31.
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
Rule 13a-14(a)/15d-14(a), as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. Section 1350, as adopted pursuant to the Sarbanes-Oxley Act of
2002.
17
SIGNATURES
Pursuant
to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized on the date indicated.
SEAWAY
VALLEY CAPITAL CORPORATION
By:
|
/S/
|
THOMAS
SCOZZAFAVA
|
|
THOMAS
SCOZZAFAVA
|
|||
Chairman,
Chief Executive Officer
|
|||
and
Chief Financial Officer
|
|||
Date:
|
February
4, 2010
|
18