SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005
OR
|_| TRANSITION REPORT UNDER SECTION 13 OF 15(d) OF THE EXCHANGE ACT OF 1934
From the transition period from ___________ to ____________.
Commission File Number 01-28911
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(Exact name of small business issuer as specified in its charter)
Colorado 91-1869677
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1660 Union Street, Suite 200, San Diego, California 92101
(Address of principal executive offices)
(619) 398-8470
(Issuer's telephone number)
Former fiscal year September 30
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) filed all reports required to
be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months
(or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days:
Yes |X| No |_|
As of January 31, 2006, 19,492,759 shares of Common Stock of the issuer were
outstanding.
PART I. FINANCIAL INFORMATION
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
ASSETS
CURRENT ASSETS:
Inventories $ 29,101
-----------
Total current assets 29,101
Property and equipment--net 35,141
Other long-term assets 2,087
-----------
TOTAL ASSETS $ 66,329
===========
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES:
Bank overdraft $ 28,211
Accounts payable 92,993
Note payable--related party 328,940
Accrued expenses and other current liabilities 160,525
-----------
Total current liabilities 610,669
-----------
Total liabilities 610,669
Commitments
STOCKHOLDERS' DEFICIT:
Preferred Stock ($.01 par value, 10,000,000 shares authorized,
none issued and outstanding) --
Common stock ($0.001 par value, 100,000,000 shares authorized;
19,182,759 shares issued and outstanding) 19,183
Additional paid-in capital 180,817
Accumulated deficit (744,340)
-----------
Total stockholders' deficit (544,340)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 66,329
===========
The accompanying notes are an integral part of these financial statements
-2-
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended September 30, 2005 and Period
from January 27, 2005 (Inception) through September 30, 2005
(Unaudited)
Period from
January 27, 2005
(inception)
Three Months Ended through
September 30, September 30,
2005 2005
------------ ------------
REVENUES $ -- $ --
COST OF GOODS SOLD -- --
Gross profit -- --
OPERATING EXPENSES:
Professional fees 209,530 402,044
Technology license royalties 137,500 160,417
Depreciation and amortization 3,811 3,811
Other general and administrative 101,915 178,068
------------ ------------
Total operating expenses 452,756 744,340
------------ ------------
NET LOSS $ (452,756) $ (744,340)
============ ============
LOSS PER COMMON SHARE, SHARE, BASIC AND DILUTED $ (0.02) $ (0.06)
============ ============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING, BASIC AND DILUTED 18,908,990 12,858,207
============ ============
The accompanying notes are an integral part of these financial statements
-3-
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF CASH FLOWS Period from January
27, 2005 (Inception) through September 30, 2005
(Unaudited)
Period from
January 27, 2005
(inception)
through
September 30, 2005
------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (744,340)
Adjustments to reconcile net loss to cash:
Depreciation 3,811
Changes in certain assets and liabilities:
Inventories (29,101)
Other long-term assets (2,087)
Bank overdraft 28,211
Accounts payable (107,007)
Accrued expenses and other current liabilities 160,525
------------
Net cash used in operating activities (689,988)
------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of equipment (38,952)
------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from convertible note - related party 400,000
Proceeds from related party advances 328,940
------------
Net cash provided by financing activities 728,940
------------
NET INCREASE (DECREASE) IN CASH --
CASH, BEGINNING OF PERIOD --
------------
CASH, END OF PERIOD $ --
============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid for interest $ --
Cash paid for income taxes $ --
NON CASH TRANSACTIONS
Net liabilities assumed with recapitalization $ 200,000
Common stock issued for debt $ 400,000
The accompanying notes are an integral part of these financial statements
-4-
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Organization And Basis Of Presentation
A. Organization
This report includes interim unaudited financial statements of National
Healthcare Technology, Inc., a Colorado corporation (the "Company") for the
three month period ended September 30, 2005 and for the period from January 27,
2005 (Inception) through September 30, 2005.
On July 19, 2005, the Company completed the acquisition of Special Stone
Surfaces, Es3, Inc., a Nevada Corporation ("Es3") pursuant to the terms of an
Exchange Agreement (the "Exchange Agreement") by and among the Company, Crown
Partners, Inc., a Nevada corporation and at such time, the largest stockholder
of the Company ("Crown Partners"), Es3, and certain stockholders of Es3 (the
"Es3 Stockholders"). Under the terms of the Exchange Agreement, the Company
acquired all of the outstanding capital stock of Es3 in exchange for the
issuance of 19,182,759 shares of the Company's common stock to the Es3
Stockholders, Crown Partners and certain consultants. The transactions effected
by the Exchange Agreement have been accounted for as a reverse merger. This
reverse merger transaction has been accounted for as a recapitalization of Es3,
as Es3 is the accounting acquirer, effective July 19, 2005. As a result, the
historical equity of the Company has been restated on a basis consistent with
the recapitalization. In addition, the Company changed its accounting year-end
from September 30 to December 31, which is Es3's accounting year-end.
Accordingly the financial statements contained in report include the operations
of the Company in its new line of business. As a result of the transactions
contemplated by the Exchange Agreement, the Company has one active operating
subsidiary, Es3. Es3 was formed in January 2005 and began operations in March
2005 in the business of manufacturing and distributing a range of decorative
stone veneers and finishes based on proprietary Liquid Stone Coatings(TM) and
Authentic Stone Veneers(TM).
B. Basis of Presentation
The consolidated financial statements of the Company for the period from January
27, 2005 (Inception) through September 30, 2005 have been prepared in accordance
with generally accepted accounting principles. The consolidated financial
statements include the accounts of the Company and its wholly owned subsidiary,
Es3. All inter-company transactions have been eliminated. In the opinion of
management, the accompanying financial statements include all adjustments
(consisting of normal, recurring adjustments) necessary to summarize fairly the
Company's financial position and results of operations. The results of
operations for the interim periods are not necessarily indicative of the results
of operations for the full year or any other interim period.
2. Summary of Significant Accounting Policies
A. Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Estimates and assumptions are
reviewed periodically and the effects of revisions are reflected in the
financial statements in the period they are determined.
B. Inventories
Inventories are stated at lower of cost or market, with cost determined on a
first-in, first-out basis.
C. Property and Equipment
Property and equipment are stated at cost and depreciated or amortized using the
straight-line method over the assets' estimated useful lives. Leasehold
improvements are amortized over the shorter of the life of the related asset or
the life of the lease. Costs of maintenance and repairs are charged to expense
as incurred; significant renewals and betterments are capitalized. Long-lived
assets are assessed for impairment whenever events or changes in circumstances
indicate the assets' carrying amount may not be recoverable. The evaluation is
based on an estimate of the future undiscounted net cash flows of the related
asset or asset grouping over the assets' remaining life. Long-lived assets that
are assessed to be impaired are reduced to their estimated net fair value.
-5-
D. Technology License
The Company's principal business activity focuses on the commercialization of
distributing decorative coatings that can be used to resemble stone, which the
Company licenses from related parties. Minimum annual royalties for these
arrangements have been accrued on the Company's balance sheet.
E. Fair Value of Financial Instruments
The Company's financial instruments consist of accrued expenses. Pursuant to
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," the
Company is required to estimate the fair value of all financial instruments at
the balance sheet date. The Company considers the carrying value of its
financial instruments in the financial statements to approximate their fair
value because of their short-term maturities.
F. Stock-Based Compensation
The Company accounts for stock based awards to employees as compensatory in
accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock
Issued to Employees ("APB 25"). The Company also issues stock based awards for
services performed by consultants and other non-employees and accounts for them
in accordance with Statement of Financial Accounting Standards No. 123R,
Accounting for Stock-Based Compensation ("SFAS 123R").
Financial Accounting Standards Board Statement No. 148, Accounting for
Stock-Based Compensation - Transition and Disclosure ("SFAS 148"), requires the
Company to provide pro forma information regarding net income and earnings per
share as if compensation cost for all awards had been determined in accordance
with the fair value based method prescribed in SFAS 123R. Net income and
earnings per share for the period ended September 30, 2005 would not have been
impacted had the compensation cost for these awards been determined in
accordance with SFAS 123R.
Effective January 1, 2006, the Company will adopt SFAS No. 123R using the
"prospective method" This statement replaced SFAS-123, Accounting for
Stock-Based Compensation, supersedes APB Opinion No. 25, Accounting for Stock
Issued to Employees, and amends SFAS-95, Statement of Cash Flows. SFAS-123R
requires companies to apply a fair-value-based measurement method in accounting
for shared-based payment transactions with employees and to record compensation
cost for all stock awards granted after the required effective date and for
awards modified, repurchased or cancelled after that date. The scope of
SFAS-123R encompasses a wide range of share-based compensation arrangements,
including share options, restricted share plans, performance-based awards, share
appreciation rights, and employee share purchase plans.
G. Income Taxes
The Company accounts for its income taxes using the Financial Accounting
Standards Board Statements of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," which requires the establishment of a deferred
tax asset or liability for the recognition of future deductible or taxable
amounts and operating loss and tax credit carry forwards. Deferred tax expense
or benefit is recognized as a result of timing differences between the
recognition of assets and liabilities for book and tax purposes during the year.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Deferred tax assets are
recognized for deductible temporary differences and operating loss, and tax
credit carry forwards. A valuation allowance is established to reduce that
deferred tax asset if it is "more likely than not" that the related tax benefits
will not be realized.
H. Basic and Diluted Net Earnings (loss) per Share
The Company adopted the provisions of SFAS No. 128, "Earnings Per Share"
("EPS"). SFAS No. 128 provides for the calculation of basic and diluted earnings
per share. Basic EPS includes no dilution and is computed by dividing income or
loss available to common shareholders by the weighted average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
of securities that could share in the earnings or losses of the entity. For the
period from inception through September 30, 2005, basic and diluted loss per
share are the same since the calculation of diluted per share amounts would
result in an anti-dilutive calculation.
-6-
I. Recent Accounting Pronouncements
In June 2005, the EITF reached consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements ("EITF 05-6.") EITF 05-6 provides
guidance on determining the amortization period for leasehold improvements
acquired in a business combination or acquired subsequent to lease inception.
The guidance in EITF 05-6 will be applied prospectively and is effective for
periods beginning after June 29, 2005. EITF 05-6 is not expected to have a
material effect on its consolidated financial position or results of operations.
In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement applies to all voluntary changes in accounting
principle and requires retrospective application to prior periods' financial
statements of changes in accounting principle, unless this would be
impracticable. This statement also makes a distinction between "retrospective
application" of an accounting principle and the "restatement" of financial
statements to reflect the correction of an error. This statement is effective
for accounting changes and corrections of errors made in fiscal years beginning
after December 15, 2005.
In March 2005, the SEC released Staff Accounting Bulletin No. 107, "Share-Based
Payment" ("SAB 107"), which provides interpretive guidance related to the
interaction between SFAS 123(R) and certain SEC rules and regulations. It also
provides the SEC staff's views regarding valuation of share-based payment
arrangements. In April 2005, the SEC amended the compliance dates for SFAS
123(R), to allow companies to implement the standard at the beginning of their
next fiscal year, instead of the next reporting period beginning after June 15,
2005. Management will implement the provisions of SFAS 123(R) effective January
1, 2006.
In December 2004, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 153, "Exchanges of Nonmonetary Assets
- an amendment of APB Opinion No. 29", which amends Opinion 29 by eliminating
the exception for nonmonetary exchanges of similar productive assets and
replaces it with a general exception for exchanges of nonmonetary assets that do
not have commercial substance. A nonmonetary exchange has commercial substance
if the future cash flows of the entity are expected to change significantly as a
result of the exchange. SFAS No. 151 is effective for a fiscal year beginning
after June 15, 2005, and implementation is done prospectively. Management does
not expect the implementation of this new standard to have a material impact on
its financial position, results of operations and cash flows.
In November 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4", which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and charges regardless of whether they meet the criterion of "so
abnormal" that was originally stated in Accounting Research Bulletin No. 43,
chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
production overheads to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal years beginning after June 15, 2005. Management does not expect
the implementation of this new standard to have a material impact on its
financial position, results of operations and cash flows
In September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. The Company is currently
evaluating the effect of this proposed statement on its financial position and
results of operations.
In March 2004, the FASB approved the consensus reached on the Emerging Issues
Task Force (EITF) Issue No. 03-1, "The Meaning of Other-Than-Temporary
Impairment and Its Application to Certain Investments." The objective of this
Issue is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. In September 2004, the FASB issued a FASB Staff Position
(FSP) EITF 03-1-1 that delays the effective date of the measurement and
recognition guidance in EITF 03-1 until after further deliberations by the FASB.
The disclosure requirements are effective only for annual periods ending after
June 15, 2004. The Company has evaluated the impact of the adoption of the
disclosure requirements of EITF 03-1 and does not believe it will have an impact
to the Company's overall consolidated results of operations or consolidated
financial position. Once the FASB reaches a final decision on the measurement
and recognition provisions, the Company will evaluate the impact of the adoption
of EITF 03-1.
3. Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate the continuation of
the Company as a going concern. The Company reported a net loss for the period
from inception through September 30, 2005 in the amount of $744,340, and had a
working capital deficiency of approximately $544,340. The Company also has
deferred payment of certain accounts payable.
-7-
In view of the matters described, there is substantial doubt about the Company's
ability to continue as a going concern. The recoverability of the recorded
assets and satisfaction of the liabilities reflected in the accompanying balance
sheet is dependent upon continued operation of the Company, which is in turn
dependent upon the Company's ability to meet its cash flow requirements on a
continuing basis and to succeed in its future operations. There can be no
assurance that management will be successful in implementing its plans. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
4. Restatement of Prior Financial Information
Due to material weaknesses in our accounting systems we improperly booked a
number of transactions. The Company has determined this effect of these
corrections on its previously issued financial statements and has restated the
accompanying financial statements for the period ended September 30, 2005.
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED BALANCE SHEET
September 30, 2005
(Unaudited)
As Originally Restatement
Reported Adjustments As Adjusted
------------ ------------ ------------
ASSETS
CURRENT ASSETS:
Inventories 29,101 -- 29,101
Prepaid expenses and other current assets 200,270 (A) (200,270) --
------------ ------------ ------------
Total current assets
229,371 (200,270) 29,101
Property and equipment - net 35,358 (217) 35,141
Other long-term assets 2,087 -- 2,087
------------ ------------ ------------
TOTAL ASSETS
266,816 (200,487) 66,329
============ ============ ============
LIABILITIES AND STOCKHOLDERS DEFICIT
CURRENT LIABILITIES:
Bank overdraft 28,211 -- 28,211
Accounts payable 206,646 (113,653) 92,993
Advances - related party 50,140 (B) 278,800 328,940
Accrued Expenses and other current liabilities 220 (E) 160,305 160,525
------------ ------------ ------------
Total current liabilities
285,217 325,452 610,669
Total liabilities 285,217 325,452 610,669
STOCKHOLDERS' DEFICIT:
Common stock 19,493 (310) 19,183
Additional paid-in-capital 758,220 (A,B)(577,403) 180,817
Deferred stock compensation (89,256) 89,256 --
Accumulated deficit (706,858) (C) (37,482) (744,340)
------------ ------------ ------------
Total stockholders' deficit (18,401) (525,939) (544,340)
------------ ------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT 266,816 (200,487) 66,329
============ ============ ============
See accompanying notes for explanation of restatement adjustments
-8-
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended September 30, 2005
As Originally Restatement
Reported Adjustments As Adjusted
------------- ------------- -------------
REVENUES $ -- $ -- $ --
COST OF GOODS SOLD -- -- --
------------- ------------- -------------
Gross profit -- -- --
OPERATING EXPENSES:
Selling and marketing 25,839 (25,839) --
Technology , support and development 122,157 (122,157) --
General and administrative 240,033 (240,033) --
Professional fees -- 209,530 209,530
Technology license royalties -- 137,500 137,500
Depreciation and amortization -- 3,811 3,811
Other general and administrative -- 101,915 101,915
------------- ------------- -------------
Total operating expenses
388,029 64,727 452,756
------------- ------------- -------------
OPERATING LOSS (388,029) (D,E) (64,727) (452,756)
OTHER INCOME (EXPENSE):
Other income 270 (270) --
Interest expense - net (220) 220 --
------------- ------------- -------------
Total other income (expense) 50 (50) --
------------- ------------- -------------
NET LOSS $ (387,979) $ (64,777) $ (452,756)
============= ============= =============
LOSS PER COMMON SHARE (0.02) -- (0.02)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 19,218,999 -- 18,908,990
See accompanying notes for explanation of restatement adjustments
-9-
NATIONAL HEALTHCARE TECHNOLOGY, INC.
(A DEVELOPMENT STAGE ENTERPRISE)
CONSOLIDATED STATEMENT OF OPERATIONS Period
from January 27, 2005 (Inception) through September 30, 2005
(Unaudited)
As Originally Restatement
Reported Adjustments As Adjusted
------------- ------------- -------------
REVENUES $ -- $ -- $ --
COST OF GOODS SOLD -- -- --
------------- ------------- -------------
Gross profit -- -- --
OPERATING EXPENSES:
Selling and marketing 33,790 (33,790) --
Technology , support and development 139,464 (139,464) --
General and administrative 533,654 (533,654) --
Professional fees -- 402,044 402,044
Technology license royalties -- 160,417 160,417
Depreciation and amortization -- 3,811 3,811
Other general and administrative -- 178,068 178,068
------------- ------------- -------------
Total operating expenses 706,908 (D,E) 37,432 744,340
------------- ------------- -------------
OPERATING LOSS (706,908) (37,432) (744,340)
OTHER INCOME (EXPENSE):
Other income 270 (270) --
Interest expense - net (220) 220 --
------------- ------------- -------------
Total other income (expense) 50 (50) --
------------- ------------- -------------
NET LOSS $ (706,858) $ (37,482) $ (744,340)
============= ============= =============
LOSS PER COMMON SHARE $ (0.04) $ -- $ (0.06)
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING 16,597,011 -- 12,858,207
See accompanying notes for explanation of restatement adjustments
-10-
Restatement Adjustments
A. The Company did not correctly record the liabilities assumed in the revere
merger of $200,000 in the period ended September 30, 2005. The Company has
determined the effect of the correction on its previously issued financial
statements and has restated the accompanying financial statements for the three
months ended September 30, 2005 and for the period from January 27, 2005
(inception) through September 30, 2005.
B. The Company incorrectly record $278,800 of advances from a related party in
the period ended September 30, 2005. The Company has determined the effect of
the correction on its previously issued financial statements and has restated
the accompanying financial statements for the three months ended September 30,
2005 and for the period from January 27, 2005 (inception) through September 30,
2005.
C. The Company incorrectly recorded $98,912 of deferred stock compensation and
related amortization expense in conjunction with the issuance of stock options
and warrants in the period ended September 30, 2005. The Company has determined
the effect of the correction on its previously issued financial statements and
has restated the accompanying financial statements for the three months ended
September 30, 2005 and for the period from January 27, 2005 (inception) through
September 30, 2005.
D. The Company failed to record certain technology license royalty expenses of
$1,764 in the period ended September 30, 2005. The Company has determined the
effect of the correction on its previously issued financial statements and has
restated the accompanying financial statements for the three months ended
September 30, 2005 and for the period from January 27, 2005 (inception) through
September 30, 2005.
E. The Company failed to accrue $45,000 of professional fees in the period ended
September 30, 2005. The Company has determined this effect of the correction on
its previously issued financial statements and has restated the accompanying
financial statements for the three months ended September 30, 2005 and for the
period from January 27, 2005 (inception) through September 30, 2005.
F. The Company reclassified certain operating expenses for financial statement
presentation. The Company has determined this effect of the reclassification on
its previously issued financial statements and has restated the accompanying
financial statements for the three months ended September 30, 2005 and for the
period from January 27, 2005 (inception) through September 30, 2005.
5. Advances - related party
From inception through September 30, 2005, the Company advances from Boston
Equities Corporation ("BEC"), owner of approximately 25% of the outstanding and
issued common stock of the Company at September 30, 2005. At September 30, 2005,
the advances outstanding were $328,940.
6. Equity Transactions
A. Issuance of Common Stock
In February 2005, the Company issued 8,380,000 shares of unregistered common
stock at par value of $0.001 to founding stockholders without consideration,
including 6,250,000 shares to Boston Equities Corporation (a related party).
In June 2005, the Company issued 800,000 shares of unregistered common stock at
par value of $0.001 in exchange for the debt arising out of monies advanced to
the Company in the amount of $400,000 by BEC pursuant to a convertible debt
agreement dated March 1, 2005. The terms of the convertible debt agreement
allowed Boston Equities Corporation to convert its debt to shares of common
stock at $.50 per share.
In June 2005, the Company's issued an aggregate of 8,618,750 shares of
unregistered common at par value of $0.001 stock to the shareholders of Aronite
Industries, Inc. ("Aronite") in connection with the license of certain
trademarks from Aronite.
In July 2005, in accordance with the terms of the Exchange Agreement, the
Company issued 400,000 shares of registered common stock to two consultants,
d.b.a. WB International, Inc. in accordance with the terms of the Exchange
Agreement.
-11-
In July 2005, the Company issued for no consideration 78,571 shares of its
unregistered common stock at par value of $0.001 to the former shareholders of
National Healthcare Technologies, Inc. and an additional 905,438 shares of its
unregistered common stock at par value of $0.001 to Crown Partners, a former
major shareholder of National Healthcare Technologies, Inc. in accordance with
the terms of the Exchange Agreement.
B. Issuance of Warrants
In February 2005, the Company issued a warrant to acquire up to 600,000 shares
of unregistered common stock at an exercise price of $0.60 per share to W.B.
International, Inc., in exchange for consulting services. All shares vested upon
grant. The warrant expires 5 years from the date of issuance.
In June 2005, the Company issued a warrant to acquire up to 600,000 shares of
unregistered common stock at an exercise price of $0.70 per share to each of
Liquid Stone Manufacturing, Inc. and Stone Mountain Finishes, Inc. in
consideration of certain license agreements. All shares vested upon grant. The
warrants expire 5 years from the date of issuance.
A summary of the warrant activity for the period ended September 30, 2005 is as
follows:
------------------------------------------------------ --------------------- --------------------
Number of Shares Weighted Average
Exercise Price
------------------------------------------------------ --------------------- --------------------
Outstanding at beginning of the period -- --
------------------------------------------------------ --------------------- --------------------
Issued 1,800,000 $0.67
------------------------------------------------------ --------------------- --------------------
Cancelled, Forfeited or expired -- --
------------------------------------------------------ --------------------- --------------------
Outstanding at September30, 2005 1,800,000 $0.67
------------------------------------------------------ --------------------- --------------------
Exercisable at September 30, 2005 1,800,000 $0.67
------------------------------------------------------ --------------------- --------------------
Additional information regarding the warrants outstanding as of September 30,
2005 is as follows:
---------------- --------------------------------------------- -------------------------------------------------
Outstanding Exercisable
---------------- --------------------------------------------- -------------------------------------------------
Exercise Price Number of Warrants Weighted Average Number Exercisable Weighted Average
Remaining Exercise Price
Contractual life
(Years)
---------------- ---------------------- ---------------------- ------------------------ ------------------------
$0.70 1,200,000 4.5 1,200,000 $0.70
---------------- ---------------------- ---------------------- ------------------------ ------------------------
$0.60 600,000 4.0 600,000 $0.60
---------------- ---------------------- ---------------------- ------------------------ ------------------------
The Company estimates the fair value of each stock warrant at the grant date by
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants for nine months ended September 30, 2005: no
dividend yield for each year; expected volatility of for the warrant shares
exercisable 0.1%; weighted-average risk-free interest rates for the warrant
shares exercisable at $0.60 and $0.70 were 3.38% and 3.64%, respectively; and
weighted-average expected option life of 5 years. The weighted average fair
value of the stock warrants granted during the nine months ended September 30,
2005 was $0.00.
C. Employee Options
In June 2005, the Company issued a warrant to an employee to purchase up to
100,000 shares of the Company's restricted common stock at an exercise price of
$0.70 per share. The shares vested monthly over three years and have a 10 year
option period.
A summary of the option activity from January 27, 2005 (inception) to September
30, 2005 is as follows:
---------------------------------------------------- --------------------- --------------------
Number of Shares Weighted Average
Exercise Price
---------------------------------------------------- --------------------- --------------------
Outstanding at beginning of the period -- --
---------------------------------------------------- --------------------- --------------------
Issued 100,000 $0.70
---------------------------------------------------- --------------------- --------------------
Cancelled, Forfeited or expired -- --
---------------------------------------------------- --------------------- --------------------
Outstanding at September 30, 2005 100,000 $0.70
---------------------------------------------------- --------------------- --------------------
Exercisable at September 30, 2005 8,333 $0.70
---------------------------------------------------- --------------------- --------------------
Additional information regarding the options outstanding as of September 30,
2005 is as follows
--------------- --------------------------------------------- -------------------------------------------------
Outstanding Exercisable
--------------- --------------------------------------------- -------------------------------------------------
Exercise Price Number of Options Weighted Average Number Exercisable Weighted Average
Remaining Exercise Price
Contractual life
(Years)
--------------- ---------------------- ---------------------- ------------------------ ------------------------
$0.70 100,000 9.5 8,333 $0.70
--------------- ---------------------- ---------------------- ------------------------ ------------------------
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The Company estimates the fair value of each stock option at the grant date by
using the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants for the three months ended September 30, 2005: no
dividend yield for each year; expected volatility of 0.1%; weighted-average
risk-free interest rate of 3.64% and weighted-average expected option life of 10
years. The weighted average fair value of the stock warrants granted during the
period ended September 30, 2005 was $0.00.
7. Income Taxes
There is no provision for income taxes in these financial statements because the
Company has incurred operating losses since inception and no recoverable taxes
have been paid.
8. Related Party Transactions
The following transactions occurred between the Company and certain related
parties:
A. Boston Equities Corporation, William Courtney, Ross Lyndon James, Brian
Harcourt
The following transactions took place between the Company and BEC, a shareholder
holding greater than 10% of the outstanding common stock of the Company, William
Courtney, a former shareholder and director of Es3 and a current member on the
Company's board of directors, and Ross Lyndon James and Brian Harcourt who
served as officers and directors in BEC during the year 2005.
On June 15, 2005, the Company acquired an exclusive license to manufacture, use
and distribute Liquid Stone(TM) coatings in North America, Central America and
South America, under an OEM License Agreement with Liquid Stone Manufacturing,
Inc. a Nevada corporation. Liquid Stone Manufacturing, Inc. is controlled by BEC
and William Courtney. Under the terms of the OEM License Agreement, the Company
granted Liquid Stone Manufacturing, Inc. a five year warrant to purchase 600,000
shares of its common stock at $0.70 per share. Minimum annual royalties payable
by the Company to Liquid Stone Manufacturing, Inc. under the agreement are
$200,000. Expenses under the agreement through September 30, 2005 were $58,333.
On June 15, 2005, the Company acquired an exclusive license to manufacture, use
and distribute Authentic Stone Veneers(TM) in North America, Central America and
South America, under an OEM License Agreement with Stone Mountain Finishes, Inc.
a Nevada corporation. Stone Mountain Finishes, Inc. is controlled by BEC and
William Courtney. Under the terms of the OEM License Agreement, the Company
granted Liquid Stone Manufacturing, Inc. a five year warrant to purchase 600,000
shares of its common stock at $0.70 per share. Minimum annual fees payable by
the Company to Stone Mountain Finishes, Inc. under the agreement are $250,000.
Expenses under the agreement through September 30, 2005 were $72,917.
B. Boston Equities Corporation, Ross Lyndon James and Brian Harcourt
The following transaction took place between the Company and BEC:
In June 2005, the Company issued 800,000 shares of unregistered common stock in
exchange for debt arising out of monies advanced to the Company in the amount of
$400,000 by BEC under the terms of a convertible financing agreement.
In 2005 the Company entered into a financial advisory representation agreement
with BEC. For the period ended September 30, 2005 the Company paid BEC $90,000
for the services provided under the agreement.
C. William Courtney
The following transactions took place between the Company and William Courtney.
On June 15, 2005, the Company issued 8,618,750 shares of common stock to the
shareholders of Aronite Industries, Inc. ("Aronite") as well as agreeing to pay
a royalty in connection with the license of certain trademarks from Aronite.
Minimum annual fees payable by the Company to Aromite. under the agreement are
$200,000. Expenses under the agreement through September 30, 2005 were $29,167.
BEC holds approximately 20% of Aronite's voting stock, and Ross Lyndon James,
Brian Harcourt and William Courtney were directors of Aronite during 2005.
In 2005 the Company entered into a business consulting agreement with William
Courtney. Through September 30, 2005 the Company paid William Courtney
approximately $27,000 for the services provided under the agreement.
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9. Commitments and Contingencies
A. Legal Actions
The Company is not currently aware of any formal legal proceedings or claims
that the Company believes will have, individually or in the aggregate, a
material adverse effect on the Company's financial position or results of
operations.
B. License Agreements
Future minimum annual license payments under the OEM and trademark license
agreements for the next five years ending December 31 are as follows:
2006 $ 650,000
2007 780,000
2008 936,000
2009 1,123,200
2010 1,347,840
------------
$ 4,837,040
============
C. Operating Lease
On March 1, 2005, the Company' entered into a lease commitment for office and
warehouse space in San Diego, California which expires February 1, 2009. The
terms of the lease provide for monthly rental payments of $3,367 through January
2006 and increasing 3% each year beginning February 1, 2007.
The Company currently has an office at 1660 Union Street, Suite 200, San Diego,
CA 92101, which it maintains under arrangement with the landlord at no cost. The
Company also shares an office space with a shareholder at 9595 Wilshire Blvd.,
Suite 510, Beverly Hills, CA 90212 without cost to the Company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
This report contains forward looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended and Section 21E of the Securities
Exchange Act of 1934, as amended. When used in this Form 10-QSB, the words
"anticipate", "estimate", "expect", "project" and similar expressions are
intended to identify forward-looking statements. Such statements are subject to
certain risks, uncertainties and assumptions including the possibility that the
Company's proposed plan of operation will fail to generate projected revenues.
Should one or more of these risks or uncertainties materialize, or should
underlying assumptions prove incorrect, actual results may vary materially from
those anticipated, estimated or projected. The Company's actual results could
differ materially from those set forth on the forward looking statements as a
result of the risks set forth in the Company's filings with the Securities and
Exchange Commission, general economic conditions, and changes in the assumptions
used in making such forward looking statements.
GENERAL
On July 19, 2005, the Company completed the acquisition of Special
Stone Surfaces, Es3, Inc., a Nevada Corporation ("Es3") pursuant to the terms of
an Exchange Agreement (the "Exchange Agreement") by and among the Company, Crown
Partners, Inc., a Nevada corporation and at such time, the largest stockholder
of the Company ("Crown Partners"), Es3, and certain stockholders of Es3 (the
"Es3 Stockholders"). Under the terms of the Exchange Agreement, the Company
acquired all of the outstanding capital stock of Es3 in exchange for the
issuance of 19,414,188 shares of the Company's common stock to the Es3
Stockholders, Crown Partners and certain consultants. The transactions effected
by the Exchange Agreement have been accounted for as a reverse merger.
Accordingly the financial statements contained in report include the
operations of the Company in its new line of business. As a result of the
transactions contemplated by the Exchange Agreement, the Company has one active
operating subsidiary--Es3. Es3 was formed in January 2005 and began operations
in March 2005 in the business of manufacturing and distributing a range of
decorative stone veneers and finishes based on proprietary Liquid Stone
Coatings(TM) and Authentic Stone Veneers(TM).
The Company has determined that Aronite Industries, Inc., a Nevada corporation
("Aronite"), is a predecessor entity because the Company and Aronite are under
common control, share significant equity ownership interests, and the Company
operates in substantially the same line of business that Aronite operated in.
Aronite was formed in June 2002. It ceased operations in January 2005. Audited
Financial Statements for Aronite for the fiscal years ended December 31, 2004
and 2003 are included in the Company's 8-K/A filed with the Securities and
Exchange Commission on January 24, 2006.
-15-
PLAN OF OPERATIONS
The Company plans to market its coatings and veneers to both commercial
and residential markets. The Company intends to use the public markets to secure
additional working capital and to make acquisitions using either Common Stock or
cash. A significant component of the Company's intermediate term growth strategy
is the acquisition and integration of companies in related building materials
fields. The Company expects to take advantage of synergies among related
businesses to increase revenues and take advantage of economies of scale to
reduce operating costs.
The Company was formed in January 2005 and began operations in March
2005. It has not generated any revenues from operations and has incurred
$706,858 in expenses from inception through September 30, 2005 in connection
with its formation and initial operations. All of the Company's operations to
date have been funded by the sale of its common stock. As of September 30, 2005,
Es3 had a working capital deficiency of approximately $56,000.
The Company anticipates that it will have to raise additional capital
to fund operations in the next 12 months. To the extent that the Company is
required to raise additional funds to cover the costs of operations, it intends
to do so through additional public or private offerings of debt or equity
securities. There are no commitments or arrangements for other offerings in
place and no guaranties that any such financings would be forthcoming, or as to
the terms of any such financings. Any future financing may involve substantial
dilution to existing investors.
A significant component of the the Company's intermediate term growth
strategy is the acquisition and integration of companies in related building
materials fields. The Company expects to take advantage of synergies among
related businesses to increase revenues and take advantage of economies of scale
to reduce operating costs. The execution of this strategy depends upon the
development of an active trading market for the Company's common stock. The
Company intends to make acquisitions with common stock and anticipates that the
sellers of those entities will demand an active market as a condition of the
transaction.
The Company's Es3 subsidiary holds the exclusive rights to manufacture,
use and distribute Liquid Stone(TM) coatings in North America, Central America
and South America, under an OEM License Agreement with Liquid Stone
Manufacturing, Inc. a Nevada corporation and an affiliate of Es3. Liquid
Stone(TM) is a water-based polymeric stone coating that can be applied to a
variety of surfaces including wood, stucco, metal, concrete or asphalt. It is a
flexible, durable all weather surface coating.
Es3 also holds the excusive rights to manufacture, use and distribute
Authentic Stone Veneer(TM) panels in North America, Central America and South
America, under an OEM License Agreement with Stone Mountain Manufacturing, Inc.
a Nevada corporation and an affiliate of Es3. Authentic Stone Veneer(TM) panels
can be formulated in rough stone or smooth stone finishes. Authentic Stone
Veneer(TM) panels are made from proprietary materials and are molded to form the
detailed contours and profiles of natural stone surfaces. The rough stone
veneers are approximately 1/10 th the weight of concrete, while the smooth stone
are approximately 1/7 th the weight of concrete.
Es3 will conduct research and development on both the Liquid Stone
Coatings and Authentic Stone Veneer panels over the next 12 months. It also
plans to understake product testing and certification as it prepares for
commercial launch. Es3 currently operates out of leased facilities in San Diego,
and presently has two full time employees. Any additional plant or equipment
expenditures, and any significant increase in employees will be dependent upon
the company's capital resources and the development of channel and market
activity for its products.
-16-
Item 3. Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as such term is defined
in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended
(the "Exchange Act")) as of the end of the period ended September 30, 2005 (the
"Evaluation Date"). During the course of the audit for our year end December 31,
2005 we discovered, among other matters, that an error in transfer of common
stock of the Company resulted in overstatement of the outstanding shares of Es3
prior to the Exchange Agreement of 310,000 shares, and that we under reported
approximately $278,000 in accounts payable to a related party. As a result of
these errors, and others, we restated our form 10-QSB for the quarter ended
September 30, 2005, and will restate the financial statements for the period
ended June 30, 2005, in our Form 8-K/A filed on January 24, 2006. Our conclusion
to restate our form 10-QSB for the quarter ended September 30, 2005 and Form
8-K/A filed on January 24, 2006, resulted in the Company recognizing that its
controls and procedures were not effective as of the year ended December 31,
2005 nor during the period ended September 30, 2005 and constituted material
weaknesses which began after the close of the Exchange Agreement on or about
July 19, 2005. The material weaknesses were primarily the result of our having
no controller and no qualified personnel and as a result, transactions were
omitted, recorded incorrectly, or recorded without support.
Limitations on the Effectiveness of Internal Controls
Disclosure controls and procedures are designed to provide reasonable assurance
of any entity achieving its disclosure objectives. Our chief executive officer
and chief financial officer have concluded that our disclosure controls and
procedures were not effective as the fiscal year ended December 31, 2005 and the
Company has since implemented disclosure controls and procedures to ensure that
the Company has the proper disclosure controls and procedures to keep this from
happening again. The likelihood of achieving such objectives is affected by
limitations inherent in disclosure controls and procedures. These include the
fact that human judgment in decision-making can be faulty and that breakdowns in
internal control can occur because of human failures such as simple errors or
mistakes or intentional circumvention of the established process.
There were no changes in the Company's internal controls over financial
reporting, known to the Chief Executive Officer and Chief Financial Officer,
which occurred during the most recent fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
In May, 2006, we remediated the material weakness in internal control over
financial reporting by having our Chief Executive Officer and Chief Financial
Officer review in detail all adjustments affecting the issuances of our
securities and we retained an outside consultant to make accounting entries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS
In connection with the Exchange, on July 19, 2005, the Company acquired
all of the outstanding capital stock of Es3 in exchange for the Company's
issuance to Es3 Stockholders of 18,108,750 shares of the Company's common stock,
(iii) issue to Crown Partners 905,438 shares of common stock, and (iii) issue to
the Consultants 400,000 shares of common stock. The issuance of the Company's
common stock to Es3 Stockholders and Crown Partners is intended to be exempt
from registration under the Securities Act, pursuant to Section 4(2) thereof.
The Company has agreed to register the common stock being issued to the
Consultants on a Registration Statement on Form S-8.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
-17-
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits - None.
b) Reports on Form 8-K
On July 5, 2005, the Company filed a report on Form 8-K with respect to
the entry into the Exchange Agreement, the issuance of securities in connection
with the Exchange Agreement and the Change of Control resulting from the
transactions under the Exchange Agreement.
On July 25, 2005, the Company filed a report on Form 8-K with respect
to the closing of the transactions contemplated by the Exchange Agreement, the
issuance of securities in connection with the Exchange Agreement and the Change
of Control resulting from the transactions under the Exchange Agreement.
-18-
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NATIONAL HEALTHCARE TECHNOLOGY, INC.
Date: February 20, 2007
By: /s/ JON CARLSON
---------------------------------
Jon Carlson, CEO, CFO
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