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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------------
FORM 10-Q
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2009
|_| TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF
THE EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number : 0-7475
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SWORDFISH FINANCIAL, INC.
(Exact name of registrant as specified in its charter)
Minnesota 41-0831186
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
142 Wembley Way
Rockwall, Texas 75032
(Address of principal executive offices)
(972) 310-1830
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such requirements for the
past 90 days.
|X| 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
definitions of "large accelerated filer", "accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act.
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? |X| No
The number of shares of issuer's common stock, par value $0.16 per share,
outstanding as of March 1, 2010, was 13,300,000. The registrant has no other
classes of securities outstanding.
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NATURE VISION, INC.
INDEX
PART I FINANCIAL INFORMATION Page
Number
Item 1 : Financial Statements
Consolidated Balance Sheets - September 30, 2009 (Unaudited)
and December 31, 2008 1
Consolidated Statements of Operations - Three Months and
Nine Months Ended September 30, 2009 and 2008 (Unaudited) 2
Consolidated Statements of Cash Flows - Nine Months Ended
September 30, 2009 and 2008 (Unaudited) 3
Notes to Consolidated Financial Statements (Unaudited) 4
Item 2: Management's Discussion and Analysis of Financial Condition
and Results of Operations 20
Item 4T: Controls and Procedures 26
PART II OTHER INFORMATION
Item 4: Submission of Matters to a Vote of Security Holders 27
Item 6 : Exhibits 27
Signatures 28
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Part I - FINANCIAL INFORMATION
Item 1: Financial Statements
Swordfish Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008
Unaudited
------------
September 30, December 31,
2009 2008
------------ ------------
ASSETS
CURRENT ASSETS
Cash and Cash Equivalents $ 151,676 $ --
Accounts Receivable, net -- 2,962,869
Other Receivables 45,281 4,260
Note Receivable 3,500,000 --
Inventories, net -- 4,313,759
Current Portion of Prepaid Expenses -- 221,443
Current Assets Retained Relating to Discontinued Operations -- 236,927
------------ ------------
Total Current Assets 3,696,957 7,739,258
------------ ------------
PROPERTY AND EQUIPMENT, NET 7,000 1,901,650
------------ ------------
NON-CURRENT ASSETS
Prepaid Expenses, net of Current Portion -- 32,422
Intangibles, net -- 965,430
------------ ------------
Total Non-Current Assets -- 997,852
------------ ------------
TOTAL ASSETS $ 3,703,957 $ 10,638,760
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Checks Issued in Excess of Cash in Bank $ -- $ 22,236
Current Portion of Long-Term Debt 235,952 258,405
Note Payable - Related Party 450,000 700,000
Current Portion of Deferred Retirement Benefits 50,550 60,438
Line of Credit, Bank -- 3,084,956
Accounts Payable 948,984 679,673
Accrued Payroll and Payroll Taxes 2,603 107,858
Accrued Expenses 1,158,674 559,377
Accrued Sales and Warranty Reserve 200,000 450,000
------------ ------------
Total Current Liabilities 3,046,763 5,922,943
------------ ------------
LONG-TERM LIABILITIES
Long-term Debt, Net of Current Portion 367,998 525,401
Note Payable - Related Party 1,154,029 924,775
Deferred Retirement Benefits, Net of Current Portion 387,476 422,776
------------ ------------
Total Non-Current Liabilities 1,909,503 1,872,952
------------ ------------
Total Liabilities 4,956,266 7,795,895
------------ ------------
Swordfish Financial, Inc. and Subsidiaries
Consolidated Balance Sheets
September 30, 2009 and December 31, 2008
(continued)
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, $.16 Par Value per Share, 25,000,000 Shares Authorized:
13,300,000 Issued Outstanding at September 30, 2009 and 2,312,583
at December 31, 2008 2,128,002 370,013
Additional Paid-In Capital 8,889,474 7,141,368
Accumulated Deficit (12,269,785) (4,668,516)
------------ ------------
Total Stockholders' Equity (1,252,309) 2,842,865
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,703,957 $ 10,638,760
============ ============
See accompanying notes to consolidated financial statements.
1
Swordfish Financial, Inc. and Subsidiaries
Consolidated Statements of Operations (Unaudited)
Three months ended September 30, Nine months ended September 30,
--------------------------------- ----------------------------------
2009 2008 2009 2008
--------------- --------------- ---------------- ---------------
SALES, NET $ 739,556 $ 2,199,853 $ 4,640,309 $ 6,017,084
COST OF GOOD SOLD 781,804 1,882,706 4,229,949 5,053,292
--------------- --------------- ---------------- ---------------
GROSS PROFIT (42,248) 317,147 410,360 963,792
--------------- --------------- ---------------- ---------------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 354,849 1,040,954 2,251,631 3,053,862
Impairment Allowance for Inventory, Equipment
and Intangibles - - 598,434 -
--------------- --------------- ---------------- ---------------
354,849 1,040,954 2,850,065 3,053,862
--------------- --------------- ---------------- ---------------
LOSS FROM OPERATIONS (397,097) (723,807) (2,439,705) (2,090,070)
--------------- --------------- ---------------- ---------------
OTHER INCOME (EXPENSE)
Interest expense (64,209) (131,776) (331,569) (396,941)
Interest income 21,875 - 21,875 -
Loss on loan default (1,539,272) - (4,904,566) -
Other expenses 2,480 (419) (6,635) (2,078)
--------------- --------------- ---------------- ---------------
Net Other Income (Expenses) (1,579,126) (132,195) (5,220,895) (399,019)
--------------- --------------- ---------------- ---------------
LOSS FROM CONTINUING OPERATIONS BEFORE TAXES (1,976,223) (856,002) (7,660,600) (2,489,089)
PROVISION FOR INCOME TAX EXPENSE - 428,274 - 428,274
--------------- --------------- ---------------- ---------------
LOSS FROM CONTINUING OPERATIONS (1,976,223) (1,284,276) (7,660,600) (2,917,363)
GAIN (LOSS) FROM DISCONTINUED OPERATIONS, NET OF TAX - 303,804 59,332 1,418,609
--------------- --------------- ---------------- ---------------
NET LOSS $ (1,976,223) $ (980,472) $ (7,601,268) $ (1,498,754)
=============== =============== ================ ===============
Loss from continuing operations per common share
Basic $ (0.48) $ (0.56) $ (1.85) $ (1.26)
Diluted $ (0.48) $ (0.56) $ (1.85) $ (1.26)
Gain (loss) from discontinued operations per common share
Basic $ 0.00 $ 0.14 $ 0.01 $ 0.61
Diluted $ 0.00 $ 0.14 $ 0.01 $ 0.61
Net loss per common share
Basic $ (0.48) $ (0.42) $ (1.83) $ (0.65)
Diluted $ (0.48) $ (0.42) $ (1.83) $ (0.65)
Weighted average common shares
Basic 4,143,819 2,312,583 4,143,819 2,312,583
Diluted 4,143,819 2,312,583 4,143,819 2,312,583
See accompanying notes to consolidated financial statements.
2
Swordfish Financial, Inc. and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 2009 and 2008
2009 2008
---------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (7,601,268) $ (1,498,754)
Adjustments to reconcile net loss to net cash flows from operating activities
Depreciation and amortization 495,734 593,354
Gain on sale of discontinued operations (465,150)
Loss on bank default 4,904,565 -
Loss on impairment of leasehold improvements 273,666 28,180
Loss on impairment of prepaid expenses 324,768 -
Gain on sale of building, net of income taxes (998,950)
Stock based compensation 6,095 1,726
Provision for deferred income taxes 428,274
Amortization of original issue discount 33,379
Changes in operating assets and liabilities:
Accounts receivable 2,391,415 1,248,046
Inventories, net 1,246,455 (537,393)
Prepaid expenses (70,903 36,398
Accounts payable 269,311 625,090
Accrued payroll and payroll taxes (105,255) (54,178)
Accrued expenses 349,297 (151,127)
Payments on deferred retirement benefits (9,888) (58,471)
---------------- ---------------
Net Cash Flows from Operating Activities 2,473,992 (769,576)
---------------- ---------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment - (365,564)
Proceeds from sale of property and equipment 24,534 -
Purchase of assets associated with Castaic Softbait Brand - (340,641)
Purchase of assets from MarCum Technologies - (759,521)
Purchase of assets from Innovative Outdoors - (10,753)
Proceeds from sale of building - 2,294,941
Proceeds from sale of discontinued operations, net 236,927 243,345
Net proceeds from sale of working capital associated with discontinued operations - 317,461
Purchases of intangible assets - (11,796)
---------------- ---------------
Net Cash Flows from (used in) Investing Activities 261,461 1,367,472
---------------- ---------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in checks issued in excess of cash in bank (22,236) 131,119
Net receipts (payments) on line of credit, bank (2,325,639) 1,200,486
Proceeds from current note payable 14,098 -
Principal payments on long-term debt (250,000) (2,060,988)
-------------- -------------
Net Cash Flows from (used in) Financing Activities (2,583,777) (729,383)
---------------- ---------------
Net Change in Cash and Cash Equivalents 151,676 (131,487)
CASH AND CASH EQUIVALENTS - January 1, 2009 and 2008 - 131,487
---------------- ---------------
CASH AND CASH EQUIVALENTS - September 30, 2009 and 2008 $ 151,676 $ -
================ ===============
See accompanying notes to consolidated financial statements.
3
Index
NATURE VISION, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2009 (Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Swordfish Financial, Inc., (f/k/a Nature Vision, Inc. and Photo Control
Corporation) (the "Company" or "we") as Nature Vision, Inc. designed,
manufactured and marketed outdoor recreation products primarily for the sport
fishing and hunting markets. On August 14, 2009, Nature Vision, Inc. entered
into a Stock Purchase Agreement with Swordfish Financial, Inc. for 10,987,417
shares (representing approximately 80% of the outstanding shares) of its common
stock in exchange for a $3,500,000 promissory note. On August 17, 2009, the
shareholders owning a majority of the outstanding common stock voted to change
the Company's name from Nature Vision, Inc. to Swordfish Financial, Inc.
The Company did not meet the minimum net worth covenants of a line of credit
with M&I Business Credit LLC (M&I Bank) as of June 30, 2009, which put the
Company in default on the line of credit. On August 14, 2009, simultaneously
with the signing of the Swordfish Financial, Inc. stock purchase agreement, M&I
Business Credit LLC, owed approximately $1,800,000 by the Company, foreclosed on
the line of credit and forced the Company to enter into a Voluntary Surrender
Agreement. The Voluntary Surrender Agreement tendered to M&I Business Credit LLC
total possession of the Company's Premises, operations and all of the Company's
Collateral, which consisted of all of the Company's assets. M&I Business Credit
LLC liquidated basically all of the Company's assets to recover the line of
credit debt.
Based on the limited assets, product lines and resources remaining after the M&I
Business Credit LLC liquidation, Swordfish Financial, Inc. has decided that
there is not enough remaining of the Nature Vision operations to continue as an
outdoor recreations products company and will concentrate on the business on
being and asset recovery company and using the financial resources recovered to
retire the Company's debts and invest in other businesses domestically and
internationally.
Because of seasonal and other factors, the results of operations for the nine
months ended September 30, 2009 are not necessarily indicative of the results to
be expected for the Company's full 2009 fiscal year.
GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. We incurred net losses of $7,601,268 and $1,498,754,
respectively, for the nine months ended September 30, 2009 and 2008 and had an
accumulated deficit of $12,269,785 as of September 30, 2009. We have managed our
liquidity during the first nine months of 2009 through cost reduction
initiatives and the proceeds from collections on accounts receivables. The
Company is currently in default of a $450,000 note with its former CEO and is in
negotiations to extend the terms (Note 6). The Company is currently in default
on its line of credit with a bank and in August 2008 it entered into a voluntary
surrender agreement allowing the bank (as discussed in Note 8) with its superior
lien position to assume control of the Company's assets and operations until it
liquidates sufficient assets to pay off the line of credit which is $873,288 at
September 30, 2009. The Company is in default on $603,950 of others notes
payable.
The Company has historically been a seasonal business with the majority of the
Company's revenue being realized in the fourth quarter. On the August 14, 2009
foreclosure by M&I Business Credit LLC and forcing the Company to enter into a
Voluntary Surrender Agreement which tendered to M&I Business Credit LLC total
possession of the Company's Premises, operations and all of the Company's assets
to collect the approximately $1,800,000 owed by the Company. After the M&I
Business Credit LLC's liquidations of virtually all of the Company's assets at
significant discounts to book value, Swordfish has been left with virtually no
product lines to market and continue the Nature Vision outdoor recreations
products operations. At September 30, 2009, the Company has recorded a
$4,904,566 loss on the bank default and repossession by M&I Business Credit LLC
and an impairment loss of $598,434 related to leasehold improvements and prepaid
expenses.
Despite cost reduction initiatives, the Company will be unable to pay its
obligations in the normal course of business or service its debt in a timely
manner throughout 2009 without raising additional debt or equity capital. See
Note 3, for a discussion of capital acquired by the Company. There can be no
assurance that this financing arrangement will alleviate the Company's 12 month
working capital needs unless it is funded or the Company can complete a recovery
project.
4
INTERIM FINANCIAL INFORMATION
The accompanying condensed consolidated balance sheet at September 30, 2009 and
the condensed consolidated statements of operations and cash flows for the nine
months ended September 30, 2009 and 2008 are unaudited. The unaudited interim
condensed consolidated balance sheet and condensed consolidated statements of
operations and cash flows have been prepared in accordance with accounting
principles generally accepted in the United States of America and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly the Company's financial
position, results of operations and its cash flows for the nine months ended
September 30, 2009 and 2008. The financial data and other information disclosed
in these notes to the condensed consolidated financial statements related to
these periods are unaudited. Operating results for the nine months ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2009. The condensed consolidated
financial statements should be read in conjunction with the audited financial
statements for the year ended December 31, 2008 included in the Annual Report on
Form 10-K of the Company filed with the Securities and Exchange Commission.
PRINCIPLES OF CONSOLIDATION
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant inter-company
transactions and balances have been eliminated in consolidation.
FINANCIAL INSTRUMENTS
The carrying amounts for all financial instruments approximate fair value. The
carrying amounts for cash and cash equivalents, accounts receivable, accounts
payable and accrued expenses approximate fair value because of the short
maturity of these instruments. The fair value of long-term debt, notes payable,
line of credit-bank, and deferred liabilities - retirement benefits approximates
the carrying amounts based upon the Company's expected borrowing rate for debt
with similar remaining maturities and comparable risk.
ACCOUNTS RECEIVABLE
The Company reviews customers' credit history before extending unsecured credit
and establishes an allowance for uncollectible accounts based upon factors
surrounding the credit risk of specific customers and other information.
Accounts receivable are due based on agreed upon customer terms. Accounts
receivable are considered past due once they are over the due date of these
terms. The Company does not accrue interest on past due accounts receivable. If
accounts receivable in excess of the provided allowance are determined to be
uncollectible, they are charged to expense in the year that the determination is
made. Accounts receivable are written off after all collection efforts have
failed. The Company had no receivables at September 30, 2009 due to the
Company's default on its loan with M&I Business Credit LLC and its repossession
of the Company's asset (See Note 8). Accounts receivable at December 31, 2008
were reduced by an allowance for uncollectible accounts of $37,500.
INVENTORIES
Inventories consist of raw materials and finished goods and are valued at the
lower of standard cost (which approximates the first-in, first-out (FIFO)
method) or market. Market represents estimated realizable value in the case of
finished goods and replacement or reproduction cost in the case of other
inventories. Because of changing technology, our customer base, customer needs,
general economic conditions, and the level of success of certain sales programs,
and market demand, inventory is subject to obsolescence. Management periodically
reviews all inventories to determine if any obsolete, discontinued or slow
moving items are in inventory. Based on this review, inventory is disposed of or
an allowance for obsolescence established to cover any future disposals. Due to
the Company's default on its loan with M&I Business Credit LLC and its
repossession of the Company's assets, the Company's inventory at September 30,
2009 was reduced to zero (See Note 8).
GOODWILL
The Company applies SFAS No. 142, "Goodwill and Other Intangible Assets," which
sets forth financial and reporting standards for the acquisition of intangible
assets, other than those acquired in a business combination, and for goodwill
and other intangible assets subsequent to their acquisition. This accounting
standard requires that goodwill no longer be amortized but tested for impairment
on a periodic basis.
During the fourth quarter of fiscal 2008, the Company performed its annual
goodwill impairment test with the assistance of a third-party valuation firm.
Due to reduced growth expectations resulting from weakening economic conditions
and anticipated lower impact on revenues and profitability in future years, the
Company recorded a non-cash charge of $666,373 in the fourth quarter of fiscal
2008 for goodwill impairment. The balance of goodwill was $0 as of September 30,
2009 and December 31, 2008, respectively.
5
INTANGIBLE ASSETS AND OTHER ASSETS
Other intangible assets consisted primarily of patents and identifiable
intangible assets including customer lists, trademarks, other intellectual
property and non-compete agreements, which are being amortized using the
straight-line method over their estimated useful lives ranging from three to
nineteen years. Due to the Company's default on its loan with M&I Business
Credit LLC and its repossession of the Company's assets, the Company's
intangible assets was reduced to zero at September 30, 2009 (See Note 8).
The long-term portion of prepaid expenses consists of deferred financing costs
of $-0- and $32,422 at September 30, 2009 and December 31, 2008, respectively.
IMPAIRMENT OF LONG-LIVED ASSETS
We assess the impairment of long-lived assets whenever events or changes in
circumstances indicate that the carrying amount may not be recoverable, in
accordance with FASB SFAS No. 144, "Accounting for the Impairment or Disposal of
Long-Lived Assets." An asset or asset group is considered impaired if its
carrying amount exceeds the undiscounted future net cash flow the asset or asset
group is expected to generate. If an asset or asset group is considered
impaired, the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceeds its fair value. If estimated fair value is
less than the book value, the asset is written down to the estimated fair value
and an impairment loss is recognized.
If we determine that the carrying amount of long-lived assets, including
intangible assets, may not be recoverable, we measure any impairment based on a
projected discounted cash flow method using a discount rate determined by our
management to be commensurate with the risk inherent in our current business
model or another valuation technique. Considerable management judgment is
necessary in estimating future cash flows and other factors affecting the
valuation of long-lived assets, including intangible assets, including the
operating and macroeconomic factors that may affect them. We use historical
financial information, internal plans, and projections and industry information
in making such estimates.
Due to the Company's default on its loan with M&I Business Credit LLC and its
repossession of the Company's assets, the Company's property and equipment of
$967,254 at September 30, 2009 was reduced to $7,000 and included as part of the
$4,904,566 loss recorded on the bank loan default as summarized in Note 8.
We had an independent appraisal firm complete an appraisal of goodwill and other
intangibles as of November 30, 2008. Due to reduced growth expectations
resulting from weakening economic conditions and anticipated lower impact on
revenues and profitability in future years, we recognized a non-cash impairment
charge of $671,877 for our long-lived assets, including intangible assets,
during the year ended December 31, 2008. Due to the Company's default on its
loan with M&I Business Credit LLC and its repossession of the Company's assets,
the Company's intangible assets at September 30, 2009 was reduced to zero (See
Note 8) The balance of intangibles was $0 and $965,430 as of September 30, 2009
and December 31, 2008, respectively.
In particular, if we no longer believe we will achieve our long-term projected
sales or operating expenses, we may conclude in connection with any future
impairment tests that the estimated fair value of our long-lived assets,
including intangible assets, are less than the book value and recognize an
additional impairment charge. Such impairment would adversely affect our
earnings.
DISCONTINUED OPERATIONS
On February 5, 2007, the Company sold certain assets and transferred certain
liabilities related to its Vaddio division.
These assets met the requirements of SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets" as being held for sale. Operations and cash flows
were eliminated as a result of the sales and the Company did not have any
significant involvement in the operations after the sales. The results of the
Vaddio product lines are presented on a historical basis as a separate line in
the consolidated statements of operations and the consolidated balance sheets
entitled "Assets/Liabilities sold relating to discontinued operations" and
"Assets/Liabilities retained relating to discontinued operations." In accordance
with EITF 87-24, "Allocation of Interest to Discontinued Operations," the
Company elected to not allocate consolidated interest expense to the
discontinued operations where the debt is not directly attributed to or related
to the discontinued operations. All of the financial information in the
consolidated financial statements and notes to the consolidated financial
statements has been revised to reflect only the results of continuing operations
(see Note 13).
6
REVENUE RECOGNITION
The Company recognizes revenue on the date products are shipped to customers and
does not sell products with the guaranteed right of return. The Company
maintains a warranty on new products up to two years from the date of retail
purchase and therefore permits returns for defective product within the first
few months of purchase and repairs products up through the end of the warranty
period. Estimated reserves for sales / warranty returns are established by
management based on historical experience and are subject to ongoing review and
adjustment by the Company. Sales are reported net of the provision for actual
and estimated future returns in the accompanying consolidated statements of
operations. Revenues are reported net of discounts and allowances. The Company's
revenue is recognized in accordance with generally accepted accounting
principles as outlined in the SEC's Staff Accounting Bulletin No. 104 "Revenue
Recognition," which requires that four basic criteria be met before revenue can
be recognized: (i) persuasive evidence of an arrangement exists; (ii) the price
is fixed or determinable; (iii) reasonably assured it is collectible; and (iv)
product delivery has occurred. The Company recognizes revenue as products are
shipped based on FOB shipping point terms when title passes to customers.
In June 2006, the Financial Accounting Standards Board (FASB) ratified the
consensus of Emerging Issues Task Force Issue No. 06-3, " How Taxes Collected
from Customers and Remitted to Governmental Authorities Should Be Presented in
the Income Statement (That Is, Gross versus Net Presentation )" (EITF 06-3).
EITF 06-3 concluded that the presentation of taxes imposed on revenue-producing
transactions (sales, use, value added, and excise taxes) on either a gross
(included in revenues and costs) or a net (excluded from revenues) basis is an
accounting policy that should be disclosed. The Company adopted EITF 06-3 during
the year ended December 31, 2007, and it did not have any impact on our results
of operations or financial condition. The Company's policy is to present taxes
imposed on revenue-producing transactions on a gross basis.
SALES AND WARRANTY RESERVE
The Company has established a sales and warranty reserve for sales returns and
warranty costs. Reserves are estimated based on historical experience, current
product lines being sold, and management's estimates. The Company provides a
standard one or two-year warranty program for its products. The sales and
warranty reserve for sales returns and warranty costs relating to continuing
operations was $200,000 and $450,000 at September 30, 2009 and December 31,
2008, respectively. The sales and warranty reserve represents a significant
estimate and actual results could differ from the estimate. The following table
provides the activity through the returns and warranty accounts as recorded and
charged against the reserve relating to continuing operations for the nine
months ended September 30, 2009 and 2008.
2009 2008
--------------- ---------------
Accrued balance - beginning, December 31 $ 450,000 $ 300,000
Provision 85,000 201,000
Claims incurred (335,000) (291,000)
--------------- ---------------
Accrued balance - ending, September 30 $ 200,000 $ 210,000
=============== ===============
RESEARCH AND DEVELOPMENT
The Company expenses all costs related to product research and development as
incurred.
STOCK-BASED COMPENSATION
In accordance with SFAS No. 123(R), cash flows from income tax benefits
resulting from tax deductions in excess of the compensation cost recognized for
stock-based awards have been classified as financing cash flows prospectively
from January 1, 2006. Prior to adoption of SFAS No. 123(R), such excess income
tax benefits were presented as operating cash flows. There were no cash flows
from income tax benefits for the nine months ended September 30, 2009 and 2008.
7
There were no stock options granted during the nine months ended September 30,
2009.
The following assumptions were used to calculate the value of the options
granted during the nine months ended September 30, 2008: dividend yield of 0%,
risk-free interest rate of 3%, expected life equal to 3.5 years, and volatility
of 76% - 106%. The following are the assumptions used for the Black-Scholes
model:
o The Company calculates expected volatility for stock options and
awards using historical volatility.
o The Company used 0% as a forfeiture rate and the Company does not
consider forfeitures to be material.
o The Company has not, and does not intend to, issue dividends;
therefore, the dividend yield assumption is 0%.
o The expected term of options is based on the simplified method as
allowed under Staff Accounting Bulletins (SAB) No's. 107 and 110
issued by the SEC. The simplified method assumes the option will be
exercised midway between the vesting date and the contractual term of
the option. The Company is able to use the simplified method as the
options qualify as "plain vanilla" options as defined by SAB No. 107
and since the Company does not have sufficient historical exercise
data to provide a reasonable basis to estimate expected term.
o The risk-free rates for the expected terms of the stock options and
awards are based on the U.S. Treasury yield curve in effect at the
time of grant.
The Company recognizes stock-based compensation costs on a straight-line basis
over the requisite service period of the award, which is generally the option
vesting term. As of September 30, 2009, there was $-0- of total unrecognized
compensation costs as all of the outstanding options were cancelled during the
third quarter of 2009.
Stock options issued to non-employees (which no options were issued to
non-employees), are accounted for in accordance with Emerging Issues Task Force
(EITF) 96-18.
LOSS PER COMMON SHARE
Net loss per common share was based on the weighted average number of common
shares outstanding during the periods when computing the basic net loss per
share. When dilutive, stock options and warrants are included as equivalents
using the treasury stock market method when computing the diluted net loss per
share. There were no dilutive common stock equivalents, options and warrants,
for the nine months ended September 30, 2009 and 2008. Anti-dilutive options and
warrants were -0- and 219,450 at September 30, 2009 and 2008, respectively.
INCOME TAXES
The Company accounts for income taxes using the asset and liability approach,
which requires the recognition of deferred tax assets and liabilities for tax
consequences of temporary differences between the financial statement and income
tax reporting bases of assets and liabilities based on currently enacted rates
and laws. These temporary differences principally include depreciation,
amortization, net operating losses, deferred retirement benefits, paid time off
and performance benefits, contract payable, allowance for doubtful accounts,
inventory obsolescence allowance, and warranty reserves. Deferred taxes are
reduced by a valuation allowance to the extent that realization of the related
deferred tax assets is not assured. There is a full valuation allowance recorded
as of September 30, 2009 and December 31, 2008.
In June 2006, the Financial Accounting Standards Board, or FASB, issued FASB
Interpretation No. 48, or FIN 48, "Accounting for Uncertainty in Income Taxes -
an interpretation of FASB Statement No. 109," which prescribes comprehensive
guidelines for recognizing, measuring, presenting and disclosing in the
financial statements tax positions taken or expected to be taken on tax returns.
FIN 48, effective for fiscal years beginning after December 15, 2006, seeks to
reduce the diversity in practice associated with certain aspects of the
recognition and measurement related to accounting for income taxes. The Company
adopted provisions of FASB Interpretation 48, Accounting for Uncertainty in
Income Taxes: an interpretation of FASB Statement 109, Accounting for Income
Taxes ("FIN 48) on January 1, 2007. To the extent interest and penalties would
be assessed by taxing authorities on any underpayment of income taxes, such
amounts would be accrued and classified as a component of income tax expenses on
the consolidated statement of operations. The Company has no material amount of
accrued liabilities for interest or penalties recorded related to unrecognized
tax benefits.
The federal and state tax returns are open to examination for the years
2005-2008.
8
RECLASSIFICATION
Certain prior year amounts have been reclassified to conform to the 2009
presentation. The reclassification relates to the breakout of operating expenses
on the statement of operations into the following categories: sales and
marketing, research and development and engineering, and general and
administrative. The Company's opinion is that this breakout provided insight
into the different categories of operating expenses the Company incurs.
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 significantly from
those estimates. For the Company, significant estimates include the allowance
for doubtful accounts receivable, reserves for inventory valuation, impairment
of goodwill and long lived assets, reserves for sales returns, reserves for
warranty services, and the valuation allowance for deferred tax assets.
RECENT ACCOUNTING PRONOUNCEMENTS
During December 2007, the FASB issued SFAS No. 141 (Revised 2007), "Business
Combinations" ("SFAS 141 (Revised 2007)"). While this statement retains the
fundamental requirement of SFAS 141 that the acquisition method of accounting
(which SFAS 141 called the purchase method ) be used for all business
combinations, SFAS 141 (Revised 2007) now establishes the principles and
requirements for how an acquirer in a business combination: recognizes and
measures in its financial statements the identifiable assets acquired, the
liabilities assumed, and any noncontrolling interests in the acquiree;
recognizes and measures the goodwill acquired in the business combination or the
gain from a bargain purchase; and determines what information should be
disclosed in the financial statements to enable the users of the financial
statements to evaluate the nature and financial effects of the business
combination. SFAS 141 (Revised 2007) is effective for fiscal years beginning on
or after December 15, 2008. The adoption of SFAS 141 (Revised 2007) did not have
a material impact on the Company's financial statements.
During December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements an amendment of ARB No. 51" ("SFAS 160"). This
statement establishes accounting and reporting standards for noncontrolling
interests in subsidiaries and for the deconsolidation of subsidiaries and
clarifies that a noncontrolling interest in a subsidiary is an ownership
interest in the consolidated entity that should be reported as equity in the
consolidated financial statements. This statement also requires expanded
disclosures that clearly identify and distinguish between the interests of the
parent owners and the interests of the noncontrolling owners of a subsidiary.
SFAS 160 is effective for fiscal years beginning on or after December 15, 2008.
The adoption of SFAS 160 did not have a material impact on the Company's
financial statements.
In February 2008, the FASB issued FASB Staff Position ("FSP") No. 157-2,
"Effective Date of FASB Statement No. 157" ("FSP 157-2"), which delays the
effective date of SFAS 157 until January 1, 2009 for all non-financial assets
and non-financial liabilities, except for items that are recognized or disclosed
at fair value in the financial statements on a recurring basis. These
non-financial items include assets and liabilities such as reporting units
measured at fair value in a goodwill impairment test and non-financial assets
acquired and liabilities assumed in a business combination. The adoption of the
remainder of SFAS 157 did not have a material impact on the Company's financial
statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative
Instruments and Hedging Activities, an amendment of FAS 133" ("SFAS 161"). This
statement changes the disclosure requirements for derivative instruments and
hedging activities. Entities are required to provide enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments and related hedged items are accounted for under Statement 133 and
its related interpretations, and (c) how derivative instruments and related
hedged items affect an entity's financial position, financial performance, and
cash flows. SFAS 161 is effective for fiscal years beginning on or after
November 15, 2008. The adoption of SFAS 161 did not have a material impact on
the Company's financial statements.
In April 2008, the FASB issued FSP No. 142-3, "Determination of the Useful Life
of Intangible Assets" ("FSP 142-3"), which amends the factors an entity should
consider in developing renewal or extension assumptions used in determining the
useful life of recognized intangible assets under FASB Statement No. 142,
"Goodwill and Other Intangible Assets". This new guidance applies prospectively
to intangible assets that are acquired individually or with a group of other
assets in business combinations and asset acquisitions. FAS 142-3 is effective
for financial statements issued for fiscal years and interim periods beginning
after December 15, 2008. The adoption of FAS 142-3 did not have a material
impact on the Company's financial statements.
9
In September 2008, the FASB issued FSP No. 133-1 and FASB Interpretation No.
45-4 ("FSP SFAS 133-1 and FIN 45-4"), "Disclosures about Credit Derivatives and
Certain Guarantees: An Amendment of FASB Statement No. 133 and FASB
Interpretation No. 45; and Clarification of the Effective Date of FASB
Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness to
Others", to require additional disclosure about the current status of the
payment/performance risk of a guarantee. The provisions of the FSP that amend
SFAS 133 and FIN 45 and effective for reporting periods ending after November
15, 2008. FSP SFAS 133-1 and FIN 45-4 also clarifies the effective date in SFAS
161. Disclosures required by SFAS 161 are effective for financial statements
issued for fiscal years and interim periods beginning after November 15, 2008.
The adoption of FSP SFAS 133-1 and FIN 45-4 did not have a material impact on
the Company's financial statements.
In December 2008, the FASB issued FSP No. 140-4 and FIN 46R-8 ("FSP 140-4 and
FIN 46R-8"), "Disclosures by Public Entities (Enterprises) about Transfers of
Financial Assets and Interests in Variable Interest Entities." FSP 140-4 and FIN
46R-8 require additional disclosures about transfers of financial assets and
involvement with variable interest entities ("VIE's"). The requirements apply to
transferors, sponsors, servicers, primary beneficiaries and holders of
significant variable interests in a variable interest entity or qualifying
special purpose entity. Disclosures required by FSP 140-4 and FIN 46R-8 are
effective for the Company in the first quarter of fiscal 2009. Because the
Company has no VIE's, the adoption did not have a material impact the Company's
financial statements.
In January 2009, the Financial Accounting Standards Board ("FASB") approved FASB
Accounting Standards Codification (the "Codification"), which is effective July
1, 2009. Other than resolving certain minor inconsistencies in current U.S.
GAAP, the Codification is not supposed to change GAAP, but is intend to make it
easier to find and research GAAP applicable to a particular transaction or
specific accounting issue. The Codification is a new structure which takes
accounting pronouncements and organizes them by approximately 90 accounting
topics. We do not expect the Codification to have a material impact on our
financial position or results of operations.
In April 2009, the FASB issued FASB Staff Position SFAS 107-1 ("FSP SFAS 107-1")
and Accounting Principles Board Opinion 28-1, Interim Disclosures about Fair
Value of Financial Instruments ("APB 28-1"). FSP SFAS 107-1 and APB 28-1 require
disclosures about fair value of financial instruments whenever summarized
financial information for interim reporting periods is presented. Entities shall
disclose the methods and significant assumptions used to estimate the fair value
of financial instruments and shall describe changes in methods and significant
assumptions, if any, during the period. FSP SFAS 107-1 and APB 28-1 are
effective for interim reporting periods ending after June 15, 2009. The Company
does not expect the adoption of FSP SFAS 107-1 and APB 28-1 to have a material
impact on the Company's financial statements.
In April 2009, the FASB issued FSP SFAS 157-4, which provides additional
guidance for estimating fair value in accordance with SFAS No. 157, Fair Value
Measurements ("SFAS 157"), when the volume and level of market activity for the
asset or liability have significantly decreased. FSP SFAS 157-4 emphasizes that
even if there has been a significant decrease in the volume and level of market
activity for the asset or liability and regardless of the valuation techniques
used, the objective of a fair value measurement remains the same. In addition,
the statement provides guidance on identifying circumstances that indicate a
transaction is not orderly. FSP SFAS 157-4 is effective for interim and annual
periods ending after June 15, 2009. The Company does not expect the
implementation of FSP SFAS 157-4 to have a material impact on our financial
statements.
NOTE 2 - ACQUISITIONS
Innovative Outdoors asset acquisition
On June 27, 2008, the Company closed on the acquisition of certain assets of
Innovative Outdoors, Inc. (Innovative Outdoors) a manufacturer and distributor
of ice fishing hole covers and other related devices, pursuant to the terms of
an asset purchase agreement. The transaction involved the acquisition by the
Company of tooling, intellectual property, and general intangibles of Innovative
Outdoors for a purchase price of $188,572. The purchase price was paid as
follows: (i) $6,000 cash was paid at closing, (ii) $32,572 by a two year
unsecured promissory note payable in monthly installments of $1,458 including
imputed interest at 7%, and (iii) $150,000 by a three year unsecured promissory
note payable in monthly installments of $4,632 including interest at 7%. In
connection with the acquisition, the Company incurred transaction costs of
$4,753.This purchase allowed the Company to become vertically integrated by
purchasing the intellectual property of an existing sales product line. The
assets acquired and liabilities assumed in the acquisition were based on their
value estimated at the date of acquisition. Additional pro forma disclosures
required under SFAS No. 141 "Business Combinations", related to this
acquisition, were not considered material.
10
MarCum Technologies asset acquisition
On April 30, 2008, the Company closed on the acquisition of certain assets of
MarCum Technologies, Inc. (Marcum), a manufacturer and distributor of electronic
sonar and underwater camera devices, pursuant to the terms of an asset purchase
agreement. The transaction involved the acquisition by the Company of select
equipment, inventories, intellectual property, and general intangibles of Marcum
for a purchase price of $721,080, of which $650,000 was paid at closing and the
remaining $71,080 was paid in June 2008 as part of the inventory adjustment. In
connection with the acquisition, the Company incurred transaction costs of
$38,441. The assets acquired in the acquisition were based on the fair value
estimates at the date of the acquisition. . The purchase provided the Company
with an expanded fishing platform and a strong intellectual property platform to
develop new products.
Castaic Softbait brand acquisition
On January 21, 2008, the Company acquired substantially all of the assets
associated with the Castaic Softbait brand under an asset purchase agreement.
The amount of $323,100 was paid at closing, $81,750 is payable pursuant to three
year promissory notes, and $82,860 of liabilities were assumed. The Company
incurred transaction costs of $17,541 in connection with the acquisition. The
purchase provided the Company with a proven fishing tackle product platform. The
assets acquired and liabilities assumed in the acquisition were based on their
value estimated at the date of acquisition. Additional pro forma disclosures
required under SFAS No. 141 "Business Combinations", related to this
acquisition, were not considered material.
Pro forma Information for Material Acquisitions
The results of MarCum, Innovative Outdoors, and Castaic Softbait brand have been
included in the condensed consolidated financial statements since the date of
the acquisitions. The following unaudited pro forma condensed results of
operations for the three months ended give effect to the acquisition of MarCum
as if such transaction had occurred on January 1, 2008. The unaudited pro forma
information does not purport to represent what the Company's results of
operations would actually have been if such transaction in fact had occurred at
such date or to project the Company's results of future operations.
For the nine months ended September 30, 2008:
September 30, 2008
---------------------------------
As reported Pro forma
----------- ---------
Net sales $ 6,017,84 $ 6,261,373
Loss from continuing operations (2,917,363) (3,217,912)
Gain from discontinued operations 1,418,609 1,418,609
Net loss $ (1,498,754) $ (1,799,303)
Loss per common share:
Basic $ (0.65) $ (0.78)
Diluted $ (0.65) $ (0.78)
For the three months ended September 30, 2008:
September 30, 2008
---------------------------------
As reported Pro forma
----------- ---------
Net sales $ 2,199,853 $ 2,199,853
Loss from continuing operations (1,284,276) (1,284,276)
Gain from discontinued operations 303,804 303,804
Net income $ (980,472) $ (980,472)
Income per common share:
Basic $ (0.42) $ (0.42)
Diluted $ (0.42) $ (0.42)
11
NOTE 3 - RELATED PARTY NOTE RECEIVABLE
On August 14, 2009, the Company closed a Stock Purchase Agreement with Swordfish
Financial, Inc. (which is controlled by the Company's Chairman of the Board,
President, Chief Executive Officer and majority shareholder) pursuant to which
the Company sold an aggregate of 10,987,417 shares of its common stock in
exchange for a $3,500,000 promissory note, payable in two installments of
$1,750,000 each with the first installment being forty-five (45) days from the
date of the note and the second installment being one-hundred twenty (120) days
from the date of the note.
NOTE 4 - INVENTORIES
Inventories consisted of the following at:
September 30, December 31,
2009 * 2008
------------ -----------
Raw Materials $ 0 $ 2,200,836
Finished Goods 0 2,267,923
----------- -----------
Total 0 4,468,759
Less: Valuation allowance (0) (155,000)
----------- -----------
Inventories, net $ 0 $ 4,313,759
=========== ===========
*See note 8 for amount of inventory involved in the M&I Business Credit
repossession of the Company's assets.
NOTE 5 - PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at:
September 30, December 31,
2009 * 2008
------------ -----------
Tooling $ 0 $ 1,603,236
Office furniture and equipment 0 560,257
Warehouse equipment 7,000 437,952
Vehicles 0 7,418
Leasehold improvements 0 359,729
Construction in progress 0 77,845
----------- -----------
Total 7,000 3,046,437
Less: Accumulated depreciation (0) (1,144,787)
----------- -----------
Net $ 7,000 $ 1,901,650
=========== ===========
Depreciation expense of $495,734 and $593,354 was recorded for the nine months
ended September 30, 2009 and 2008, respectively.
*See note 8 for amount of property and equipment involved in the M&I
Business Credit repossession of the Company's assets.
12
NOTE 6 - INTANGIBLES
Schedule of Intangible Assets at September 30:
2009 *
----------------------------------------------------------------------------
Gross Carrying Loss on Bank Accumulated Net Carrying
Amount at June
Amount Default Amortization 30, 2009
------------------ ------------------ ------------------- -----------------
Intangible assets subject to amortization:
Trademarks $ 49,235 $ 27,385 $ 21,850 $ 0
Non-compete 197,104 103,667 93,437 0
Customer lists 0 0 0 0
Intellectual property and related patents 266,683 190,254 76,429 0
Other 0 0 0 0
------------------ ------------------ ------------------- -----------------
Totals $ 513,022 $ 321,306 $ 191,716 $ 0
================== ================== =================== =================
*See note 8 for amount of inventory involved in the M&I Business Credit
repossession of the Company's assets.
Schedule of Intangible Assets at December 31:
2008
---------------------------------------------------------------------------------
Gross Carrying Impairment Accumulated Net Carrying
Amount at
Amount Amortization December 31, 2008
------------------------------------------------------------- -------------------
Intangible assets subject to amortization:
Trademarks $ 404,235 $ - $ 59,455 $ 344,780
Non-compete 315,361 544 90,069 224,748
Customer lists 438,667 398,667 9,389 30,611
Intellectual property and related patents 678,916 272,666 64,826 341,424
Other 24,684 - 817 23,867
---------------- ---------------- ---------------- ---------------
Totals $ 1,861,863 $ 671,877 $ 224,556 $ 965,430
================ ================ ================ ===============
NOTE 7 - RELATED PARTY NOTE PAYABLE AND WARRANTS
Board of Director Member Notes Payable
On October 19, 2007, the Company borrowed $1,000,000 from a member of its Board
of Directors in order to meet its short-term cash flow requirement. This demand
promissory note was unsecured and had an interest rate of 15% (55.8% effective
rate by including fair value of warrants amortized over a three month term).
Interest was payable on the first day of each month, commencing on December 1,
2007. The entire principal and accrued interest was payable upon demand anytime
after January 19, 2008. In connection with the loan, the Company issued warrants
to the Director to purchase 100,000 shares of common stock at an exercise price
of $2.21. The warrants were exercisable from October 19, 2007 through October
19, 2009 (the lender agreed to the cancellation of these warrants on August 14,
2009). The fair value of the warrants was calculated at $102,010 using the Black
Scholes model. The following assumptions were used to calculate the value of the
warrants: dividend yield of 0%, risk free interest of 5%, expected life to two
years, and volatility of 81%. The resulting original issue discount, the fair
value of the warrants, was amortized over the life of the debenture using the
straight-line method. Amortization expense on the original issue discount was $0
and $20,841 for the nine months ended September 30, 2009 and 2008, respectively,
and is included in interest expense.
13
On July 8, 2008, the Company amended the terms and replaced the original demand
note issued to the member of its Board of Directors on October 19, 2007. The
amended demand note is held by the same member of the Company's Board of
Directors. The demand promissory note is unsecured and bears an interest rate of
15% (20% effective rate including new warrants issued to the Director and
amortized over a two year term). Interest is payable on the first day of each
month commencing on August 1, 2008. The Company incurred approximately $110,500
of interest for the nine months ended September 30, 2009. The entire principal
and interest is payable upon demand anytime after June 30, 2010. In connection
with the new loan, the Company issued additional warrants to the Director to
purchase 100,000 shares of common stock at an exercise price of $1.31. The
warrants were exercisable from July 8, 2008 to June 30, 2013 (the Board Member
agreed to the cancellation of the warrants on August 14, 2009 as part of the
transaction with Swordfish Financial, Inc.). The fair value of the warrants was
calculated at $100,300 using the Black Scholes model. The following assumptions
were used to calculate the value of the warrants: (i) dividend yield of 0%, risk
free interest of 3.34%, expected life of 5 years, and volatility of 103%. The
resulting original issue discount, the fair value of the warrants, will be
amortized over the life of the debenture using the straight-line method.
Amortization expense on the original issue discount was $25,149 for the nine
months ended September 30, 2009 and is included in interest expense.
On August 17, 2009, the Company borrowed $200,000 from a member of its Board of
Directors in order to meet its short-term cash flow requirement. This demand
promissory note is secured by a second lien on the Company's assets and has an
interest rate of 15%. the entire principal and accrued interest is payable upon
demand anytime after February 17, 2010.
Chief Executive Officer Note Payable
On October 27, 2008, the Company borrowed $700,000 from its Chief Executive
Officer (CEO) in order to meet its short-term cash flow requirements. This
promissory note was unsecured and had an interest rate of 15%. The entire
principal and accrued interest was payable on January 1, 2009. The Company
incurred approximately $78,500 of interest for the nine months ended September
30, 2009. In connection with the loan, the Company issued warrants to the CEO to
purchase 50,555 shares of common stock at an exercise price of $.90. The
warrants were exercisable from October 28, 2008 through October 27, 2010 (the
CEO agreed to the cancellation of the warrants on August 14, 2009 as part of the
Swordfish Financial, Inc.). The fair value of the warrants was calculated at
$31,071 using the Black Scholes model. The following assumptions were used to
calculate the value of the warrants: dividend yield of 0%, risk free interest of
1.49%, expected life to two years, and volatility of 140%. The resulting
original issue discount, the fair value of the warrants, was amortized over the
life of the debenture using the straight-line method. Amortization expense on
the original issue discount was $31,071 and was included in interest expense
during the fourth quarter of fiscal 2008. The Company paid $250,000 of the note
in January 2009. The Company is currently in default on the remaining $450,000
of the note and is in negotiations with its CEO to extend the remaining
principal balance of $450,000 in a new note that was outstanding as of September
30, 2009.
NOTE 8 - LINE OF CREDIT, BANK
On November 8, 2007, the Company entered into a line of credit agreement, a
demand note, with M&I Bank for up to a maximum amount of $6,000,000. Interest is
payable monthly at the greater of one month LIBOR plus 3.75% or a floor of 5.25%
(5.25% at March 31, 2009). The line of credit is collateralized by accounts
receivable, inventories, property and equipment, intangible assets and other
assets of the Company. The facility is based on the following borrowing base
restrictions, 75% of eligible accounts receivable and 50% of eligible
inventories. In connection with this agreement, the Company is required to pay
an annual line fee of $45,000 and minimum interest of $120,000 on an annual
basis. The balance outstanding on the line of credit was $873,288 at September
30, 2009 and $3,084,956 at December 31, 2008.
The Company did not meet the minimum net worth covenants as of June 30, 2009,
which put the Company in default on its line of credit with the bank and on
August 14, 2009, simultaneously with the signing of the Swordfish Financial,
Inc. stock purchase agreement, the Company entered into a Voluntary Surrender
Agreement with M&I Business Credit LLC (the `Creditor"), who as of August 14,
2009 was owed approximately $1,800,000 by the Company relating the Credit and
Security Agreement dated November 8, 2007 (as amended or supplemented, the
"Credit Agreement"). In accordance with the Voluntary Surrender Agreement, the
Company agreed to tender to M&I Business Credit LLC total possession of the
Company's Premises, operations and all of the Company's Collateral, which was
basically all of the Company's assets, until M&I Business Credit LLC liquidates
sufficient assets to pay off the line of credit owed by the Company. See the
calculation below for the Company's loss on the bank loan default.
14
The Company recorded a loss of $4,905,566 against the M&I Business Credit LLC
$873,288 loan default as set forth in the following summary;
Company assets repossessed by M&I Business Credit LLC
Cash accounts $ 113,971
Accounts receivable 530,432
Inventory 3,067,304
Property and equipment 1,231,899
Intangible assets 834,247
-----------
Total assets repossessed by Bank 5,777,853
Bank loan at September 30, 2009 (873,288)
-----------
Loss recorded on bank loan default $ 4,904,565
===========
NOTE 9 - LONG-TERM DEBT
Long-term debt consisted of the following at:
September 30, December 31,
2009 2008
---------------- ----------------
Unsecured Promissory Note - Cass Creek - monthly installments of approximately $11,000 from $ 386,538 $ 493,932
September 2008 through March 2010, then annual installments ranging from $108,000 to
$124,000 beginning September 2010 through September 2012, all payments include interest
at 8%, guaranteed by the CEO of the Company.
Unsecured Note Payable - Fish Hawk - annual installments of $33,333 plus interest at 8%
from July 2008 through July 2010 66,666 66,667
Unsecured Note Payable - Castaic - annual installments of $17,171, including interest at
8%, from January 2009 through January 2011 30,620 44,250
Unsecured Note Payable - Castaic - monthly installments of $1,175, including interest at
8%, from February 2008 through January 2011 20,128 26,978
Unsecured Note Payable - monthly installments of $1,458, including interest at 7%, from
August 2008 through July 2010 0 24,850
Unsecured Note Payable - Innovative Outdoors - monthly installments of $4,632, including
interest at 7% from August 2008 through July 2011 99,998 127,129
---------------- ----------------
Totals 603,950 783,806
Less: Current portion 235,952 258,405
---------------- ----------------
Net Long-Term Debt $ 367,998 $ 525,401
================ ================
The Company is in default on all the above note payable at September 30, 2009.
Future maturities of long-term debt for years ending after September 30, 2009
are as follows:
Total
-----------
Year ending September 30:
2010 $ 235,952
2011 209,480
2012 117,462
2013 41,056
2014 and forward -
-----------
Total Long-Term Debt $ 603,950
===========
15
NOTE 10 - INCOME TAXES
The provision for income taxes for continuing operations consists of the
following components for the nine months ended September 30:
2009 2008
----------- -----------
Current $ - $ -
Deferred - -
----------- -----------
Total Benefit from Income Taxes $ - $ -
=========== ===========
A comparison of the provision for income tax expense at the federal statutory
rate of 34% for the nine months ended September 30 to the Company's effective
rate is as follows:
2009 2008
--------- ---------
Federal statutory rate (34.0) % (34.0) %
State tax, net of federal benefit (3.3) (3.3)
Permanent differences and other including
surtax exemption 0.1 0.1
Valuation allowance 37.2 37.2
--------- ---------
Effective Tax Rate -% -%
========= =========
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Lease Commitment
The Company entered into a lease agreement for its assembly and distribution
facility and corporate headquarters in Brainerd, Minnesota. The lease commenced
on September 1, 2006 and expires on August 31, 2016. The lease was amended in
May 2008 for additional space, a sprinkler system improvement addition, and the
term extended through August 31, 2018. The lease was further amended by a second
amendment as of July 1, 2009 giving the Company and the Landlord the right to
terminate the lease effective as of December 31, 2009 by giving notice of
termination 30 days prior to the effective date of termination. This second
amendment also reduces the monthly rent from $21,801 to $15,000 with the $6,801
being deferred and waived by the Landlord if the Company timely pays the
Adjusted Monthly Charge through December 31, 2009. The Company will record
monthly rent expense equal to the total of the payments due over the lease term,
divided by the number of months of the lease term. The difference between rent
expense recorded and the amount paid will be credited or charged to deferred
rent. The Company is also required to pay its portion of operating expenses.
Based on the terms of the second amendment the Company will have the right to
terminate the lease on December 31, 2009 by giving the Landlord notice 30 days
prior to December 31, 2009. The future minimum lease payments through December
31, 2009 are $45,000 as of September 30, 2009.
Other Commitments
On May 1, 2008, the Company entered into a research and development consulting
agreement with an entity that had common ownership with MarCum. The agreement
requires the Company to pay the entity as follows: (i) $525,000 in 36 monthly
installments of $14,583 for research and development services beginning June 1,
2008, (ii) $200,000 in 24 monthly installments of $8,333 for product support
services beginning June 1, 2008. In addition, the Company will pay this entity a
royalty of 5% of net sales (for a period of three years following the first
sale) on any new product that meets certain requirements as defined in the
agreement. The Company has recognized approximately $207,000 of expense relating
to this agreement for the nine months ended September 30, 2009, which is
included in research and development and engineering expense.
16
On May 1, 2008, the Company entered into a research and development consulting
agreement with an entity that had common ownership with MarCum. The agreement
requires the Company to pay the entity as follows: (i) $180,000 in 36 monthly
installments of $5,000 for research and development services beginning June 1,
2008, (ii) $100,000 in 24 monthly installments of $4,166 for product support
services beginning June 1, 2008. In addition, the Company will pay this entity a
royalty of 5% of net sales (for a period of three years following the first
sale) on any new product that meets certain requirements as defined in the
agreement. The Company has recognized approximately $84,000 of expense relating
to this agreement for the nine months ended September 30, 2009, which is
included in research and development and engineering expense.
The Company is under a technology purchase agreement requiring payment of
$50,000 by September 30, 2009.
NOTE 12 - CONCENTRATIONS
Major Customers
The Company derived more than 10% of its revenues from the following
unaffiliated customers in the following amounts for the nine months ended
September 30, 2009 and 2008:
2009 2008
----------------- ----------------
Customer A $ * $ 407,879
The Company had no receivables at September 30, 2009 due to the Company's
default on its loan with M&I Business Credit LLC and its repossession of the
Company's asset (See Note 8). The Company had receivable balances greater than
10% of its accounts receivable from the following unaffiliated customers at
December 31, 2008:
September 30, 2009 ** December 31, 2008
----------------- -------------------
Customer A $ * $ *
Customer B * 485,908
Customer C * 309,721
*Did not represent more than 10% of the Company's revenues or accounts
receivable for the period indicated. ** See note 8 for amount of receivables
involved in the M&I Business Credit repossession of the Company's assets.
Foreign Inventory
Included in the consolidated balance sheets are international inventories of $
-0- at September 30, 2009 (due to the Company's default on its loan with M&I
Business Credit LLC and its repossession of the Company's asset (See Note 8),
and $351,690 at December 31, 2008. Foreign inventories consist of raw material
goods held in Asia and Mexico and used in the production of the Company's
products.
Foreign Sales and Long-Lived Assets
The following table presents net sales by geographic area for the nine months
ended September 30:
Geographic Data 2009 2008
----------------------------- ---------------- ----------------
Net Sales
United States $ 4,144,211 $ 1,933,567
International 496,098 433,498
---------------- ----------------
Total net sales $ 4,640,309 $ 2,367,065
================ ================
17
The following table presents property, plant, and equipment by geographic area
as of September 30, 2009 and December 31, 2008:
Geographic Data September 30, December 31,
2009 2008
----------------------------------------- ----------------- -----------------
Property, plant, and equipment
United States $ 7,000 $ 1,023,517
International 0 878,133
----------------- -----------------
Total property, plant, and equipment $ 7,000 $ 1,901,650
================= =================
NOTE 13 - DISCONTINUED OPERATIONS
Vaddio product line sale
The sale of Nature Vision's Vaddio product line to New Vad, LLC (New Vad) closed
on February 5, 2007 pursuant to the terms of the asset purchase agreement. The
transaction involved the sale of fixed assets, equipment, licenses, intellectual
property and certain other assets relating to Nature Vision's Vaddio product
line. The original purchase price paid by the Buyer was $757,372, which
consisted of $710,694 in cash at closing and $46,678 in assumed paid time off.
In addition, Nature Vision receives 2% of receipts from the gross sale of all
Vaddio products sold by New Vad after March 1, 2007, paid on a monthly basis
with a six month deferral, until a total payment of $750,000 is received. The
potential deferral proceeds of up to $750,000 have been recorded when earned and
collection is deemed probable. Based on the past history of collections, the
Company elected to record the deferred sale proceeds as earned rather than
collected. The Company had $236,927 included in current assets retained relating
to discontinued operations as of December 31, 2008 relating to the deferred
sales proceeds. In addition, there were $97,885 remaining of the deferred sale
proceeds to be recorded at December 31, 2008. In March 2009, the Company had a
$215,206 receivable related to the deferred sale proceeds that was to be paid to
the Company over the next six months. The Company gave New Vad, LLC a $32,281
discount in exchange for paying the receivable balance in March 2009. As of
March 31, 2009 there were no remaining deferred sale proceeds to be earned or
collected.
The following are condensed statements of the discontinued operations (Vaddio)
for the nine months ended September 30:
2009 2008
-------- --------
Sales, Net $ -- $ --
Cost of goods sold -- --
-------- --------
Gross profit -- --
Selling, general, and administrative -- 37,070
-------- --------
Income (loss) from operations -- (37,070)
Other income (expense) -- --
Gain on sale of building -- --
Gain on sale of equipment -- --
Gain on sale of Vaddio product line 59,332 81,647
-------- --------
Income and gain from discontinued
operations before income taxes 59,332 44,577
-------- --------
Provision for income taxes -- --
-------- --------
Gain from discontinued operations $ 59,332 $ 44,577
======== ========
18
Assets and liabilities retained relating to the discontinued operations (Vaddio)
consisted of the following at September 30, 2009 and December 31, 2008.
2009 2008
---------- ----------
Current assets retained relating
to discontinued operations:
Accounts receivable $ - $ -
Other Receivables - 236,927
Inventory - -
---------- ----------
Total $ - $ 236,927
========== ==========
NOTE 14 - SUPPLEMENTAL CASH FLOWS
2009 2008
---------- ----------
Supplemental Cash Flow Disclosures
Cash paid for interest $ 191,167 $ 112,896
Cash paid for income taxes - -
Supplemental cash flow information regarding the Company's acquisition of assets
associated with Castaic Softbait brand
Fair value of assets acquired $ 505,251
Less liabilities assumed (82,860)
Net assets acquired 422,391
Less note payable issued (81,750)
----------
Less cash acquired -
Net $ 340,641
==========
NOTE 14 - SUBSEQUENT EVENTS
The Company was party to legal action pending in the Ninth Judicial District
Court, Crow Wing County, State of Minnesota styled Esox Designs, Inc. vs. Nature
Vision, Inc. The Plaintiff filed complaint against the defendants to recover
amounts Plaintiff claims under a consulting agreement entered into in 2008. In
October 2009, Court issued a default judgment against Nature Vision, Inc. in the
amount of $179,166.63, which Swordfish Financial, Inc. will accrue as a
liability.
19
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
Forward Looking Statements
Some of the statements made in this Form 10-Q constitute forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements are subject to the safe harbor provisions of the reform
act. Forward-looking statements may be identified by the use of the terminology
such as may, will, expect, anticipate, intend, believe, estimate, should or
continue or the negatives of these terms or other variations on these words or
comparable terminology. To the extent that this report contains forward-looking
statements regarding the financial condition, operating results, business
prospects or any other aspect of our business, you should be aware that our
actual financial condition, operating results and business performance may
differ materially from that projected or estimated by us in the forward-looking
statements. We have attempted to identify, in context, some of the factors that
we currently believe may cause actual future experience and results to differ
from their current expectations. These differences may be caused by a variety of
factors including, but not limited to, adverse economic conditions, intense
competition, including entry of new competitors, inability to obtain sufficient
financing to support our operations, progress in research and development
activities, variations in costs, fluctuations in foreign currencies against the
U.S. dollar in countries where we source products, adverse federal, state and
local government regulation, unexpected costs, lower sales and net income (or
higher net losses, than forecasted), price increases for equipment, inability to
raise prices, failure to obtain new customers, the possible fluctuation and
volatility of our operating results and financial condition, inability to carry
out marketing and sales plans, loss of key executives and other specific risks
that may be alluded to in this report.
The following discussion and analysis of financial condition, results of
operations, liquidity and capital resources should be read in conjunction with
our audited consolidated financial statements and notes thereto appearing
elsewhere in this report, which have been prepared assuming that we will
continue as a going concern, and in conjunction with our Annual Report on Form
10-K for the year ended December 31, 2008. As discussed in Note 1 to the
condensed consolidated financial statements, our recurring net losses and
inability to generate sufficient cash flows to meet our obligations and sustain
our operations raise substantial doubt about our ability to continue as a going
concern. Management's plans concerning these matters are also discussed in Note
1 to the condensed consolidated financial statements. This discussion contains
forward-looking statements that involve risks and uncertainties, including
information with respect to our plans, intentions and strategies for our
businesses. Our actual results may differ materially from those estimated or
projected in any of these forward-looking statements.
Overview
Swordfish Financial, Inc., (f/k/a Nature Vision, Inc. and Photo Control
Corporation) (the "Company" or "we") was incorporated as a Minnesota corporation
in 1959. On August 31, 2004, the Company changed its name to Nature Vision, Inc.
in connection with a merger transaction with Nature Vision Operating Inc. (f/k/a
Nature Vision, Inc.) a Minnesota corporation that was incorporated in 1998. As a
part of the merger, Nature Vision Operating Inc. became a wholly-owned
subsidiary of the Company. On August 17, 2009, the shareholders of the Company
owning a majority of the outstanding common stock voted to change its name to
Swordfish Financial, Inc. The shares of the Company trade on the Over The
Counter (OTC) Pinksheets under the symbol, "SWRF."
Nature Vision designed, manufactured and marketed outdoor recreation products
primarily for the sport fishing and hunting markets.
The Company did not meet the minimum net worth covenants of a line of credit
with M&I Business Credit LLC (M&I Bank) as of June 30, 2009, which put the
Company in default on the line of credit. On August 14, 2009, simultaneously
with the signing of the Swordfish Financial, Inc. stock purchase agreement, M&I
Business Credit LLC, owed approximately $1,800,000 by the Company, foreclosed on
the line of credit and forced the Company to enter into a Voluntary Surrender.
The Voluntary Surrender Agreement tendered to M&I Business Credit LLC total
possession of the Company's Premises, operations and all of the Company's
Collateral, which consisted of all of the Company's assets. M&I Business Credit
LLC liquidated basically all of the Company's assets to recover the line of
credit debt.
Based on the limited assets, product lines and resources remaining after the M&I
Business Credit LLC liquidation, Swordfish Financial, Inc. has made the decided
that there is not enough remaining of the Nature Vision operations to continue
as an outdoor recreations products company and will concentrate on the business
on being and asset recovery company and using the financial resources recovered
to retire the Company's debts and invest in other businesses domestically and
internationally.
Despite cost reduction initiatives, the Company will be unable to pay its
obligations in the normal course of business or service its debt in a timely
manner throughout 2009 without completing a recovery project, raising additional
debt or equity capital. There can be no assurance that the Company will complete
a recovery project, raise additional debt or equity capital.
20
Revenue
Revenue consists of sales of our products net of returns and allowances.
Revenue includes sales via orders from distributors, dealers and direct
consumers and includes customer service and shipping charges. New product
innovation through the use of technology will continue to be the basis of our
organic growth. Demand for our outdoor recreation products is seasonal, with the
majority of sales occurring in the fourth and first quarters. We will
continually look to strategic acquisitions to provide penetration into new
product categories and distribution channels as well as level seasonality.
Cost of Goods Sold
Cost of goods sold for our products consists of the cost of direct
materials, labor to produce the products, freight in, import duty, depreciation
of production equipment, amortization of molds and patents, warehousing,
associated management, occupancy costs, customer service and warranty, shipping
and receiving costs, quality assurance and other indirect manufacturing costs.
Cost of goods sold can fluctuate based on the product mix sold for a given
period. Increasing oil costs continue to drive up the cost of components and
freight to receive and ship products. In addition, currency fluctuations can
impact our landed costs in the U.S.A. We continue to evaluate make in-house
versus outsource opportunities to minimize product costs. We look to increase
our purchasing capacities and distribution abilities in order to achieve
efficiencies in certain operating costs.
Gross Profit
We define gross profit as the difference between revenue and cost of
goods sold. We believe that gross profit is our best metric to manage the
business on a product line basis.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include directly
identifiable operating costs and other expenses. The majority of these costs are
fairly consistent from month to month, with the exception of advertising and
sales commissions. Selling expenses consist of payroll, commissions, product
management, marketing, advertising and customer relationship costs. General and
administrative expenses include payroll, product design, product development,
engineering, order processing, management information systems, accounting and
administrative costs.
Income (Loss) from Operations
Income (Loss) from Operations is defined as revenue less cost of goods
sold and selling, general and administrative expenses.
Other Income (Expense)
Other expense consists primarily of interest on the existing line of
credit. The interest rate is at the greater of 6% or prime plus .75%.
Gain (Loss) from Discontinued Operations
On October 20, 2006, Nature Vision, Inc. sold the Norman product line of
its Photo Control division (Norman) and renamed the division the Vaddio
Division. On February 5, 2007, the Company sold certain assets and transferred
certain liabilities related to its Vaddio division (Vaddio). In accordance with
Statement of Financial Accounting Standards No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," this operating segment was
classified as discontinued operations and the financial results are reported
separately as discontinued operations for all periods presented.
21
Results of Operations
The following table provides the percentage change in our net sales,
gross profit, loss from operations, and net (loss) for the three months and nine
months ended September 30, 2009 and September 30, 2008:
(in thousands) Three months ended Increase Nine months ended Increase
September 30 (Decrease) September 30 (Decrease)
------------------------ ----------- ------------------------ -----------
2009 2008 2009 2008
NET SALES $ 740 $ 2,200 (66.4%) $ 4,460 $ 6,017 (22.88%)
GROSS PROFIT/ LOSS (42) 317 (113.25%) 410 964 (57.47%)
LOSS FROM OPERATIONS (397) (724) (45.17%) (2,440) (2,090) 16.75%
NET LOSS $(1,976) $ (980) 101.63% $(7,601) $(1,499) 407.07%
The following table presents our gross profit, loss from operations and
net loss as a percentage of net sales for the three months and nine months ended
September 30, 2009 and September 30, 2008:
Three months ended Nine months ended
September 30 September 30
------------------------- -------------------------
2009 2008 2009 2008
GROSS PROFIT/LOSS 5.7% 14.4% 8.8% 16.0%
LOSS FROM OPERATIONS 53.65% 32.9% 52.6% 35.7%
NET LOSS 267.02% 44.6% 163.8% 24.9%
Net Sales
Net sales for the quarter ending September 30, 2009 of $739,556 were
down by $1,463,297, or 66.4% compared to net sales of $2,199,853 during the same
period last year. Year to date net sales for the nine months ending September
30, 2009 of $4,460,309 were down by $1,376,775, or 22.9% compared to net sales
of $6,017,084 during the same period last year.
Net sales decrease for the third quarter was primarily the result of
M&I Business Credit LLC foreclosing on it line of credit loan to the Company and
taking total possession of the Company's Premises, operations and all of the
Company's Collateral, which consisted of all of the Company's assets. After the
foreclosure process, M&I Business Credit LLC disregarded the Company's
operations and concentrated on liquidating the Company's assets to recover the
line of credit debt as quickly as possible.
Net sales decrease for the nine months ending September 30, 2009 was
primarily the result of M&I Business Credit LLC foreclosing on it line of credit
loan to the Company and taking total possession of the Company's Premises,
operations and all of the Company's Collateral, which consisted of all of the
Company's assets. After the foreclosure process, M&I Business Credit LLC
disregarded the Company's operations and concentrated on liquidating the
Company's assets at substantially low values to recover the line of credit debt
as quickly as possible.
Gross Profit
Gross profit (loss) of $(42,248) was 5.7% of net sales for the three
months ended September 30, 2009 compared to $317,147 or (14.4)% of net sales for
the prior year three months ended. The primary reasons for the increase in the
gross margin as compared to the prior year was the result of M&I Business Credit
LLC foreclosing on it line of credit loan to the Company and taking total
possession of the Company's Premises, operations and all of the Company's
Collateral, which consisted of all of the Company's assets. After the
foreclosure process, M&I Business Credit LLC disregarded the Company's
operations and concentrated on liquidating the Company's assets at substantially
low values to recover the line of credit debt as quickly as possible.
22
Gross profit of $410,360 was 8.8% of net sales for the nine months
ended September 30, 2009 compared to $963,792 or 16.0% of net sales for the
prior year nine months ended. The primary reasons for the decrease in the gross
margin as compared to the prior year was the result of M&I Business Credit LLC
foreclosing on it line of credit loan to the Company and taking total possession
of the Company's Premises, operations and all of the Company's Collateral, which
consisted of all of the Company's assets. After the foreclosure process, M&I
Business Credit LLC disregarded the Company's operations and concentrated on
liquidating the Company's assets at substantially low values to recover the line
of credit debt as quickly as possible.
Selling, General and Administrative Expenses
Total selling, general and administrative expenses for the quarter
ending September 30, 2009 of $354,849, or 48% of sales, were down compared to
spending of $1,040,954, or 47.3% of sales during the comparative period in 2008.
Selling, general and administrative costs decreased due to the termination of
all of the Company's employees on August 14, 2009 and the lack of concentration
on sales by M&I Business Credit LLC after its August 14, 2009 foreclosure on it
line of credit loan to the Company. After the foreclosure process, M&I Business
Credit LLC disregarded the Company's operations and concentrated on liquidating
the Company's assets at substantially low values to recover the line of credit
debt as quickly as possible.
Total selling, general and administrative expenses for the nine months
ending September 30, 2009 of $2,251,631, or 48.5% of sales, were level
percentage wise with spending of $3,053,862, or 50.8% of sales during the
comparative period in fiscal 2008. Selling, general and administrative costs
decreased due to the termination of all of the Company's employees on August 14,
2009 and the lack of concentration on sales by M&I Business Credit LLC after its
August 14, 2009 foreclosure on it line of credit loan to the Company. After the
foreclosure process, M&I Business Credit LLC disregarded the Company's
operations and concentrated on liquidating the Company's assets at substantially
low values to recover the line of credit debt as quickly as possible.
Operating Expenses
Total operating expenses for the three months ending September 30, 2009
of $354,849, or 48% of sales, down from spending of $1,040,954, or 47.3% of
sales during the comparative period in fiscal 2008. Selling, general and
administrative costs have decreased for the three months ended June 30, 2009
primarily due to the termination of all of the Company's employees on August 14,
2009 and the lack of concentration on sales by M&I Business Credit LLC after its
August 14, 2009 foreclosure on it line of credit loan to the Company. After the
foreclosure process, M&I Business Credit LLC disregarded the Company's
operations and concentrated on liquidating the Company's assets at substantially
low values to recover the line of credit debt as quickly as possible.
Total operating expenses for the nine months ending September 30, 2009
of $2,850,065 or 61.4% of sales, were down from spending of $3,053,862, or 50.8%
of sales during the comparative period in fiscal 2008. Selling, general and
administrative costs decreased by $$203,797 for the nine months ended September
30, 2009 as the result of a decrease of $802,231 in selling, general and
administrative expenses resulting from the termination of all of the Company's
employees on August 14, 2009 and the lack of concentration on sales by M&I
Business Credit LLC after its August 14, 2009 foreclosure on it line of credit
loan to the Company. After the foreclosure process, M&I Business Credit LLC
disregarded the Company's operations and concentrated on liquidating the
Company's assets at substantially low values to recover the line of credit debt
as quickly as possible plus an impairment provision of $598,434 against assets.
Other Income and Expenses
Other expenses increased by $1,446,931 for the three months ended
September 30, 2009 as compared to the prior year three months ended September
30, 2008. The increase is due to a loss of $1,539,272 recorded during the
quarter relating to the M&I Business Credit LLC foreclosure discussed above
offset by a decrease of $66,547 in interest expense and an increase of $21,875
in interest income.
Other expense increased by approximately $4,821,876 for the nine months
ended September 30, 2009 as compared to the prior year nine months ended
September 30, 2008. The increase is due to a loss of $4,904,566 recorded during
the nine month period as the result of the M&I Business Credit LLC foreclosure
discussed above offset by a decrease of $65,372 in interest expense and an
increase of $21,875 in interest income.
Loss from Continuing Operations
The Company recognized a pretax loss of $1,976,223 for the three months
ended September 30, 2009, compared to a pretax loss of $856,002 for the three
months ended September 30, 2008. The increase in the pretax loss is as a result
of the fluctuations discussed above and $1,539,272 increase during the quarter
ended September 30, 2009 in the loss on bank default due to the M&I Bank's
taking over the Company's assets and operations on August 14, 2009 and
liquidating the assets at substantially low values to recover approximately
$1,800,000 owed by the Company as quickly as possible.
23
The Company recognized a pretax loss of $7,660,600 for the nine months
ended September 30, 2009, compared to a pretax loss of $2,917,363 for the nine
months ended September 30, 2008. The increase in the pretax loss is as a result
of the fluctuations discussed above and $4,904,566 loss on bank default and
$598,434 in the impairment allowances against the Company's assets due to the
M&I Bank's taking over the Company's assets and operations on August 14, 2009
and liquidating the assets at substantially low values to recover approximately
$1,800,000 owed by the Company on the repossession date as quickly as possible.
Gain from Discontinued Operations
In the three months ended September 30, 2009, the Company had no gain
from discontinued operations, while in the three months ended September 30,
2008, the Company recognized a gain of $303,804 resulting primarily from the
sale of its facilities in New Hope, MN.
In the nine months ended September 30, 2009, the Company recognized a
$59,332 gain from discontinued operations on the sale of the Vaddio product
line, while in the nine months ended September 30, 2008, the Company recognized
a gain of $1,418,609 resulting primarily from the sale of its facilities in New
Hope, MN. and from the sale of the Vaddio product line.
Net Loss
The Company recognized a net loss of approximately $1,976,223 for the
three months ended September 30, 2009 compared to a net loss of $980,472 for the
three months ended September 30, 2008. . The increase in the pretax loss is as a
result of the fluctuations discussed above and $1,539,272 increase during the
quarter ended September 30, 2009 in the loss on bank default due to the M&I
Bank's taking over the Company's assets and operations on August 14, 2009 and
liquidating the assets at substantially low values to recover approximately
$1,800,000 owed by the Company on the date of repossession as quickly as
possible.
The Company recognized a net loss of approximately $7,601,268 for the
nine months ended September 30, 2009 compared to a net loss of $1,498,754 for
the nine months ended September 30, 2008. The increase in the pretax loss is as
a result of the fluctuations discussed above and $4,904,566 loss on bank default
and $598,434 in the impairment allowances against the Company's assets due to
the M&I Bank's taking over the Company's assets and operations on August 14,
2009 and liquidating the assets at substantially low values to recover
approximately $1,800,000 owed by the Company on the repossession date as quickly
as possible.
Liquidity and Capital Resources
The Company's cash flow from operating, investing and financing activities, as
reflected in the consolidated statements of cash flows, is summarized in the
following table for the nine months ended September 30:
(thousands) 2009 2008
------------ ------------
Cash provided by (used for):
Operating activities $ 2,473,992 $ (769,576)
Investing activities 261,461 1,367,472
Financing activities (2,583,777) (729,383)
------------ ------------
Increase (decrease) in cash and cash equivalents $ 151,676 $ (131,487)
============ ============
Operating Activities
Cash flows from operations totaled $2,473,992 and $(769,675) for the
nine months ended September 30, 2009 and 2008, respectively. The primary reasons
for the cash flow from operations for the nine months ended September 30, 2009
was $5,502,999 of non cash charges for loss on bank default and provisions for
impairments and $3,637,870 in liquidation of accounts receivable and inventory
which collectively total $9,140,869 compared to the net loss of $7,601,268.
Investing Activities
Cash flows provided from (used in) investing activities totaled $261,461
and $1,367,472 for the nine months ended September 30, 2009 and 2008,
respectively. The proceeds related to the sale of Vaddio generated $236,927 for
the nine months ended September 30, 2009.
Financing Activities
Cash flows provided by (used for) financing activities totaled
($2,583,777) and ($729,383) for the nine months ended September 30, 2009 and
2008, respectively. Payments during the nine months ended September 30, 2009
were $2,325,639 on the bank line of credit and $250,000 on the note payable -
related party.
24
On November 8, 2007, the Company entered into a line of credit
agreement, a demand note, with M&I Bank for up to a maximum amount of
$6,000,000. Interest is payable monthly at the greater of one month LIBOR plus
3.75% or 5.25% (5.25% at March 31, 2009). The line of credit is collateralized
by accounts receivable, inventories, property and equipment, and other assets of
the Company. The facility is based on the following borrowing base restrictions,
75% of eligible accounts receivable and 50% of eligible inventories. In
connection with this agreement, the Company is required to pay an annual line
fee of $45,000 and minimum interest of $120,000 on an annual basis. The balance
outstanding on the line of credit was $1,698,995 and $3,084,956 at June 30, 2009
and December 31, 2008, respectively. The terms of the credit agreement are
written such that the line will stay in place for up to three years if the
Company can satisfactorily perform within certain covenants outlined by the
bank. The agreement required the Company to be in compliance with the following
affirmative covenants as of March 31, 2009: minimum net worth (including
subordinated debt) of $5,500,000 and minimum tangible net worth of $2,200,000
and annual capital expenditures not to exceed $500,000. The Company did not meet
the minimum net worth covenants as of June 30, 2009. In August 2009, the Company
agreed to a Voluntary Surrender Agreement with M&I Bank, which allows the bank
to sell Company assets until the line of credit returns to a compliant status.
In October 2008, the Company borrowed $700,000 from its Chief Executive
Officer (CEO) in order to meet its short-term cash flow requirements. This
promissory note was unsecured and had an interest rate of 15%. The entire
principal and accrued interest was payable on January 1, 2009, of which the
Company paid $250,000 in January 2009. In connection with the loan, the Company
issued warrants to the Chief Executive Officer to purchase 50,555 shares of
common stock at an exercise price of $.90. The warrants are exercisable from
October 28, 2008 through October 27, 2010. The CEO agreed to the cancellation of
the warrants in August 2009. The Company is currently in default on the
remaining $450,000 of the note and is in negotiations to extend the remaining
$450,000 of the CEO's note. The CEO agreed to extend the note for twelve months
from August 14, 2009 per the Stock Purchase Agreement with Swordfish Financial,
Inc.
In July 2008, the Company amended the terms and replaced the original
$1,000,000 demand note issued to the member of its Board of Directors in October
2007. The amended $1,000,000 demand note is held by the same member of the
Company's Board of Directors. The demand promissory note is unsecured and bears
an interest rate of 15%. Interest is payable on the first day of each month
commencing on August 1, 2008. The entire principal and interest is payable upon
demand anytime after June 30, 2010. The Board of Director agreed to extend the
note for twelve months from August 14, 2009 per the Stock Purchase Agreement
with Swordfish Financial, Inc. In connection with the new loan, the Company
issued additional warrants to the Director to purchase 100,000 shares of common
stock at an exercise price of $1.31. The Director agreed to the cancellation of
the warrants in August 2009.
In May 2008, the Company entered into a research and development
consulting agreement with an entity that had common ownership with MarCum. The
agreement requires the Company to pay the entity as follows: (i) $525,000 in 36
monthly installments of $14,583 for research and development services beginning
June 1, 2008, (ii) $200,000 in 24 monthly installments of $8,333 for product
support services beginning June 1, 2008. The Company has recognized
approximately $134,000 of expense relating to this agreement for the nine months
ended September 30, 2009, which is included in research and development and
engineering expense.
In May 2008, the Company entered into a research and development consulting
agreement with an entity that had common ownership with MarCum. The agreement
requires the Company to pay the entity as follows: (i) $180,000 in 36 monthly
installments of $5,000 for research and development services beginning June 1,
2008, (ii) $100,000 in 24 monthly installments of $4,166 for product support
services beginning June 1, 2008. The Company has recognized approximately
$83,000 of expense relating to this agreement for the nine months ended
September 30, 2009, which is included in research and development and
engineering expense.
The Company entered into a lease agreement for its assembly and
distribution facility and corporate headquarters in Brainerd, Minnesota. The
lease commenced on September 1, 2006 and expires on August 31, 2016. The lease
was amended in May 2008 for additional space, a sprinkler system improvement
addition, and the term extended through August 31, 2018. The lease was further
amended by a second amendment as of July 1, 2009 giving the Company and the
Landlord the right to terminate the lease effective as of December 31, 2009 by
giving the notice 30 days prior to the effective date of termination. This
second amendment also reduces the monthly rent from $21,801 to $15,000 with the
$6,801 being deferred and waived by the Landlord if the Company timely pays the
Adjusted Monthly Charge through December 31, 2009. The Company will record
monthly rent expense equal to the total of the payments due over the lease term,
divided by the number of months of the lease term. The difference between rent
expense recorded and the amount paid will be credited or charged to deferred
rent. The Company is also required to pay its portion of operating expenses.
Based on the terms of the second amendment the Company will have the
right to terminate the lease on December 31, 2009 by giving the Landlord notice
on or before November 30, 2009. The future minimum lease payments through
December 31, 2009 are $45,000.
The Company is under a technology purchase agreement requiring payment
of $50,000 by September 30, 2009.
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The accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal
course of business. We incurred net losses of $7,601,268 and $1,498,754,
respectively, for the nine months ended September 30, 2009 and 2008 and had an
accumulated deficit of $12,269,785 as of September 30, 2009. We have managed our
liquidity during the first nine months of 2009 through cost reduction
initiatives and the proceeds from liquidation of accounts receivable and
inventory. The Company is currently in default of the remaining $450,000 of the
note payable - related party. The related party agreed in August 2008 to extend
the note for twelve months as part of the Swordfish Financial, Inc. stock
purchase agreement. The Company is also not in compliance with the terms of its
line of credit loan from the bank and in August 2008 voluntarily agreed to
surrender the Company's assets and operations to the bank on August 14, 2009
until the bank liquidates enough assets to cover its loan. The Company is also
in default on $603,950 of other notes payable.
The Company has historically been a seasonal business with the majority
of the Company's revenue being realized in the fourth quarter. On the August 14,
2009 foreclosure by M&I Business Credit LLC and forcing the Company to enter
into a Voluntary Surrender Agreement which tendered to M&I Business Credit LLC
total possession of the Company's Premises, operations and all of the Company's
assets to collect the approximately $1,800,000 owed by the Company. After the
M&I Business Credit LLC's liquidations of virtually all of the Company's assets
at significant discounts to book value, Swordfish has been left with virtually
no product lines to market and continue the Nature Vision outdoor recreations
products operations.
Despite cost reduction initiatives, the Company will be unable to pay
its obligations in the normal course of business or service its debt in a timely
manner throughout 2009 without raising additional debt or equity capital. See
Note 3, for a discussion of capital acquired by the Company. There can be no
assurance that this financing arrangement will alleviate the Company's 12 month
working capital needs unless it is funded or the Company can complete a recovery
project.
The Company is currently evaluating strategic alternatives that include
the following: (i) raising of capital, or (ii) the sale of the Company's assets
to pay off its debts. This process is ongoing and may be lengthy and has
inherent costs. There can be no assurance that the this process will result in
any specific action to alleviate the Company's 12 month working capital needs or
result in any other transaction.
In the event future cash flows and borrowing capacities are not
sufficient to fund operations at the present level, additional measures will be
taken including a reduction in operating and capital expenditures. In addition,
we believe that other sources of liquidity are available which may include
additional subordinated debt, and raising additional capital. However, there is
no assurance that these other sources of liquidity will be available or on terms
acceptable to the Company.
The Company believes that the effect of inflation has not been material
during the nine months ended September 30, 2009.
Off-Balance Sheet Financing Arrangements
As of September 30, 2009, there were no off-balance sheet arrangements,
unconsolidated subsidiaries and commitments or guaranties of other parties.
Critical Accounting Policies
The Company's critical accounting policies are identified in the
Company's Annual Report on Form 10-K for the fiscal year ending December 31,
2008 in Management's Discussion and Analysis of Financial Condition and Results
of Operations under the heading "Critical Accounting Policies." There were no
significant changes to the Company's critical accounting policies during the
nine months ended September 30, 2009.
Item 3: Quantitative and Qualitative Disclosures About Market Risk.
Not Applicable
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Item 4T: Controls and Procedures.
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal control over
financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under
the Exchange Act as a process designed by, or under the supervision of, the
company's principal executive officer and principal financial officer and
effected by our board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles and includes those policies and
procedures that:
o pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the
assets of the company;
o provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
o provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.
In September 2009, we conducted an evaluation, under the supervision
and with the participation of our principal executive officer and principal
financial officer, of the effectiveness of our internal control over financial
reporting based on the criteria for effective internal control over financial
reporting established in "Internal Control -- Integrated Framework," issued by
the Committee of Sponsoring Organizations (COSO) of the Treadway Commission.
Based upon this assessment, we determined that there are material weaknesses
affecting our internal control over financial reporting.
The matters involving internal controls and procedures that our
management considers to be material weaknesses under COSO and SEC rules are: (1)
lack of a functioning audit committee and lack of independent directors on our
board of directors, resulting in potentially ineffective oversight in the
establishment and monitoring of required internal controls and procedures; (2)
inadequate segregation of duties consistent with control objectives; (3)
insufficient written policies and procedures for accounting and financial
reporting with respect to the requirements and application of US GAAP and SEC
disclosure requirements; and (4) ineffective controls over period end financial
disclosure and reporting processes. The aforementioned potential material
weaknesses were identified by our Chief Financial Officer in connection with the
preparation of our financial statements as of September 30, 2009 who
communicated the matters to our management and board of directors.
Management believes that the material weaknesses set forth in items
(2), (3) and (4) above did not have an affect on our financial results. However,
the lack of a functioning audit committee and lack of a majority of independent
directors on our board of directors, resulting in potentially ineffective
oversight in the establishment and monitoring of required internal controls and
procedures, can impact our financial statements.
Management's Remediation Initiatives
------------------------------------
Although we are unable to meet the standards under COSO because of the
limited funds available to a company of our size, we are committed to improving
our financial organization. As funds become available, we will undertake to: (1)
create a position to segregate duties consistent with control objectives, (2)
increase our personnel resources and technical accounting expertise within the
accounting function (3) appoint one or more outside directors to our board of
directors who shall be appointed to a Company audit committee resulting in a
fully functioning audit committee who will undertake the oversight in the
establishment and monitoring of required internal controls and procedures; and
(4) prepare and implement sufficient written policies and checklists which will
set forth procedures for accounting and financial reporting with respect to the
requirements and application of US GAAP and SEC disclosure requirements.
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We will continue to monitor and evaluate the effectiveness of our
internal controls and procedures and our internal control over financial
reporting on an ongoing basis and are committed to taking further action and
implementing additional enhancements or improvements, as necessary and as funds
allow. However, because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that misstatements due to
error or fraud will not occur or that all control issues and instances of fraud,
if any, within the Company have been detected. These inherent limitations
include the realities that judgments in decision making can be faulty and that
breakdowns can occur because of simple error or mistake. The design of any
system of controls is based in part on certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in
achieving its stated goals under all potential future conditions. Projections of
any evaluation of controls effectiveness to future periods are subject to risks.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings.
Breach of Contract Action
On August 14, 2009, M&I Business Credit LLC, owed approximately
$1,800,000 by the Company, foreclosed on the Company's assets under a Credit and
Security Agreement dated November 8, 2007 (as amended or supplemented, the
"Credit Agreement") and the Company entered into a Voluntary Surrender Agreement
which tendered to M&I Business Credit LLC total possession of the Company's
Premises, operations and all of the Company's Collateral, which was basically
all of the Company's assets, until M&I Business Credit LLC liquidates sufficient
assets to pay off the line of credit owed by the Company. On October 30, 2009,
M&I Business Credit LLC notified the Company that it had converted sufficient
Company assets to recover the Company's debt and was turning back to the Company
possession of the Company's Premises, operations and remaining assets.
The Company was party to legal action pending in the Ninth Judicial
District Court, Crow Wing County, State of Minnesota styled Esox Designs, Inc.
vs. Nature Vision, Inc. The Plaintiff filed complaint against the defendants to
recover amounts Plaintiff claims under a consulting agreement entered into in
2008. In October 2009, Court Issued a default judgment against Nature Vision,
Inc. in the Amount of $179,166.63, which Swordfish Financial, Inc. will accrue
as an expense.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
On August 14, 2009, the Company entered into a Stock Purchase Agreement
with Swordfish Financial, Inc. pursuant to which the Company sold an aggregate
of 10,987,417 shares of its common stock in exchange for a $3,500,000 promissory
note, payable in two installments of $1,750,000 each with the first installment
being forty-five (45) days from the date of the note and the second installment
being one-hundred twenty (120) days from the date of the note.
The issuance of these shares was exempt from the registration
requirements of the Securities Act of 1933 under Section 4 (2) thereof.
Item 3. Defaults Upon Senior Securities. Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders. Not applicable.
Item 5. Other Information.
As a result of the Swordfish Financial, Inc. stock purchase described
in Note 3 to the financial statements, a change in control occurred with respect
to the Company's capital stock ownership. Mssrs Richard P. Kiphart, Jeffery P.
Zernov, Scott S. Meyers and Curtis A. Sampson served as the members of the Board
of Directors. Pursuant to the terms and conditions set forth in the Stock
Purchase Agreement, immediately following the closing of the Transaction, (1) On
August 13, 2009, Michael D. Alexander and Randy J. Moseley were appointed as a
members to the Board of Directors effective August 14, 2009 and (2) Richard P.
Kiphart, Jeffery P. Zernov, Scott S. Meyers and Curtis A. Sampson voluntarily
tendered their resignations, effective August 14, 2009, as members of the
Company's Board of Directors.
On August 13, 2009, the Company received from each of Jeffrey P.
Zernov, President and Chief Executive Officer and Robert P. King, Chief
Financial Officer and Secretary a letter voluntarily resigning their respective
officer positions with the Company.
On August 17, 2009, the board of directors appointed Michael D.
Alexander as the President and Chief Executive Officer of the Company and Randy
Moseley as Chief Financial Officer of the Company.
On August 17, 2009, the board of directors voted to amend the Company's
Articles of Incorporation to change the name of the Company to Swordfish
Financial, Inc.
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Item 6. Exhibits.
Listing of Exhibits:
31.1 Certification of Chief Executive Officer.
31.2 Certification of Chief Financial Officer.
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Signatures
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
SWORDFISH FINANCIAL, INC.
Date: March 5, 2010 By: /s/ Michael Alexander
-----------------------------
Its: Chief Executive Officer
and President
Date: March 5, 2010 By: /s/ Randy Moseley
-----------------------------
Its: Chief Financial Officer
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