U.
S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
AMENDMENT
NO. 1 TO
FORM
10-KSB
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
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For
the
fiscal year ended December 31, 2007
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the
transition period from ___________ to _____________
Commission
File Number 000-30291
SHUMATE
INDUSTRIES, INC.
(Name
of
small business issuer as specified in its charter)
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Delaware
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03-0453686
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(State
or other jurisdiction of
incorporation
or organization)
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(I.R.S.
Employer
Identification
No.)
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12060
FM 3083
Conroe,
Texas 77301
(Address
of principal executive offices, including zip code)
Registrant’s
telephone number, including area code: (936) 539-9533
Securities
registered pursuant to Section 12(b) of the Act: None
Securities
registered pursuant to Section 12(g) of the Act: Common
Stock, $.001 par value
Check
whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act of 1934 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
o
Check
if
disclosure of delinquent filers pursuant to Item 405 of Regulation S-B is not
contained in this form, and no disclosure will be contained, to the best of
registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment
to
this Form 10-KSB. o
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act. o
The
issuer’s revenues for the most recent fiscal year were $9,033,614.
The
aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant was approximately $3,902,500 as of May 14,
2008. Shares of common stock held by each officer and director and by each
person or group who owns 10% or more of the outstanding common stock amounting
to 5,337,077 shares have been excluded in that such persons or groups may be
deemed to be affiliates. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As
of May
14, 2008, 20,947,071 shares of our common stock were issued and outstanding.
Documents
Incorporated by Reference: None.
Transitional
Small Business Disclosure Format: No.
EXPLANATORY
NOTE
This
Amendment No. 1 to annual report on Form 10-KSB is being filed to provide the
financial statements required by Item 310 of Regulation S-B; management’s
discussion and analysis required by Item 303 of Regulation S-B; disclosure
controls and procedures required by Item 307 of Regulation S-B; internal control
over financial reporting required by Item 308 of Regulation S-B; directors,
executive officer, control persons and corporate governance; compliance with
Section 16(a) of the Exchange Act required by Items 401, 405, 406 and 407(c)(3),
(d)(4) and (d)(5) of Regulation S-B; executive compensation required by Item
402
of Regulation S-B; security ownership of certain beneficial owners and
management and related stockholder matters required by Item 201(d) of Regulation
S-B and by Item 403 of Regulation S-B; certain relationships and related
transactions, and director independence required by Item 404 of Regulation
S-B
and Item 407(a) of Regulations S-B and certifications required under Rule 13a-14
of the Securities Exchange Act of 1934, as amended, and Section 1350 of the
Sarbanes-Oxley Act of 2002. These
items
were not available for filing with the annual report on Form 10-KSB filed by
us
on April 15, 2008.
PART
I
Shumate
Industries, Inc., including all its subsidiaries, are collectively referred
to
herein as “Shumate Industries,” “Shumate,” “the Company,” “us,” or
“we”.
Item
1. DESCRIPTION OF BUSINESS
Overview
Shumate
Industries, Inc. is a Texas based energy field services company. Shumate is
a
holding company that, through its subsidiaries, operates in two principal
businesses: contract machining and manufacturing and a valve product line.
Shumate seeks to leverage its existing infrastructure, expertise, and customer
channels to grow its business and introduce new technologies to the energy
markets.
We
currently employ 87 people at two plants totaling approximately 90,000 square
feet in Conroe, Texas, just north of Houston. Our executive offices are located
at 12060 FM 3083, Conroe, Texas 77301. Our telephone number is (936) 539-9533
and our Internet address is www.shumateinc.com.
Contract
Machining and Manufacturing - Shumate Machine Works, Inc.
Our
contract machining and manufacturing division, Shumate Machine Works, Inc.,
focuses in the energy field services market. We manufacture products, parts,
components, and assemblies for our customers designed to their specifications.
We provide state of the art 3-D modeling software, computer numeric-controlled,
or CNC, machinery and manufacturing expertise to our customers’ research and
development, engineering, and manufacturing departments for desired results
with
their products.
The
diverse line of products we manufacture include the following:
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Expandable
tubular products including liner hangers, launchers and sand screens
for
energy field service applications;
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Top
drive assemblies, sub-assemblies and spare service parts;
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Measurement
while drilling (MWD) products;
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Directional
drilling products;
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Completion
tools;
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Exploration
products for research and
development;
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Natural
gas measurement equipment, including fittings and
valves;
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Power
frames for centrifugal pumps and mud motors;
and
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Sub-sea
control equipment.
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Our
investment in capital equipment and software provides us capabilities to perform
close tolerance highly specialized work for oil field equipment and tools,
process controls, formation evaluation tools, and exploration and production
products. Our capabilities include producing large-diameter products and close
tolerance machined parts that range up to thirty-four feet in length using
a
myriad of materials of construction including high grade carbon steel, high
grade stainless steel, nickel, and chrome based alloys. We use state of the
art,
large part CNC equipment in the production of these parts and have developed
in-house trade secrets and processes with respect to the manufacture of certain
products. We produce complex assemblies, including expandable tubing technology
products that are used in field service operations under extreme environmental
conditions for oil and gas exploration.
Our
customers include, without limitation, Baker Hughes, BJ Services Company, Canrig
Drilling Technology, a Nabors Industries company, Enventure Global Technologies,
FMC Technologies, Halliburton Energy Services, National Oil Well Varco,
Oceaneering Intervention Engineering, Shell Development, Smith International,
and Weatherford International.
Valve
Product Technology - Hemiwedge Valve Corporation
We
formed
Hemiwedge Valve Corporation as a wholly-owned subsidiary to develop and
commercialize a new patented technology addressing what we believe to be a
significant opportunity in the global valve market.
Our
first
product line, known as the Hemiwedge® Cartridge valve, is a quarter-turn
hemispherical wedge valve engineered to provide what we believe are substantial
technological improvements compared with what is available in the marketplace
today, such as traditional butterfly, ball, and gate valve designs.
We
believe that the patented design of the Hemiwedge® Cartridge valve combines the
benefits of quarter-turn valves with the durability of gate valves. The
Hemiwedge® Cartridge valve has a non-rotating core which guides the fluid flow
through the valve to the Hemiwedge® itself. This is a hollow hemisphere where
the inner and outer walls are slightly offset, having non-concentric centers,
producing a hemispherical wedge shape - the “Hemiwedge®.” Operation of the valve
rotates the Hemiwedge®, a quarter-turn, moving it between the core and valve
seat, thus controlling the flow. We believe that these design features in the
combination of the Hemiwedge® shut off and stationary core make the Hemiwedge®
Cartridge valve unique.
We
believe that the Hemiwedge® Cartridge valve will offer substantial improvements
over currently available valve technologies offered by our competition as well
as a great value proposition to future customers as a result of the following
improvements:
New
cartridge replacement design reduces maintenance downtime and minimizes supply
disruptions
Our
new
top-entry cartridge design has all of the internal parts of the valve affixed
to
the bonnet. Therefore, once the bonnet is removed with top-entry ease for
in-field maintenance, all the internals are removed as well, including the
seals. A new pre-certified replacement cartridge can be installed without
removing the valve body from its line of service. We believe this represents
a
substantial reduction in maintenance and service downtime from a few days to
a
few hours, depending on the application, location and size. We also believe
this
is a significant cost-reduction benefit to users, especially in severe service
applications such as entrained solids, sour gas gathering, and CO2 flooding
where valves fail frequently and supply disruption from shutting down a line
during service may result in significant costs and loss of revenues.
Reduced
failure frequency rates from superior design
We
believe many times when valves “break,” it is usually due to leaks caused by
leaking seals within a valve. Most ball valves, by example (see “Figure 2”),
have more turbulent flow patterns where the fluid within the valve comes into
direct contact with the seals during modulation, actuation and service. Our
Hemiwedge® Cartridge valve seals (see “Figure 1”) are not placed within the flow
path and therefore we believe our valve is more durable, lasts longer, and
will
not encounter seal damage as frequently as currently available valve products
as
a result of its protected sealing surfaces. We believe that this product
advantage will be more evident in severe and critical service applications.
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Figure
1,
shows the transition between on and off in a Hemiwedge® Cartridge valve.
This demonstrates how the stationary core and moving Hemiwedge® guides the
flow past the seal face with a minimum of flow turbulence. This protects
the sealing surfaces when handling abrasive or corrosive
fluids.
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Figure
2,
shows the flow through a ball or plug valve. Both the inlet and the
outlet
flow pass across the sealing surfaces, with the ball moving across
the
main flow path. This highly turbulent flow action causes premature
failure
of the seals in most severe
applications.
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Hemiwedge®
Down hole Isolation valve
We
executed a two year development agreement in July 2006 with a subsidiary of
Shell Technology Ventures known as At Balance Americas. At Balance is not a
related party and the development agreement was negotiated on an arm’s length
basis. As a leading drilling services company focused in managed pressure
drilling (MPD), At Balance sought development of a totally new design and
prototype down hole valve to be used in drilling applications in connection
with
managed pressure drilling. Throughout 2007, we designed, engineered,
manufactured and performed above-ground testing on the first size of a product
line. We have determined that as of the date of this report the product in
development for At Balance is developed substantially enough to enter into
licensing discussions for purposes of commercialization.
Hemiwedge®
Sub sea high pressure valve
We
have
developed additional Hemiwedge® technology now in prototype stage, of a 20,000
PSI high pressure valve utilizing a metal-to-metal or all metal seal for
chemical injection applications sub-sea. We intend to exclusively or
non-exclusively license this technology for the specific market vertical of
sub-sea and below two inch bore size for a high pressure chemical injection
valve product line.
Fiscal
2007 and Fiscal 2008 Developments
In
2007,
we continued to experience increased revenues in our Shumate Machine Works
division. Increases in commodity prices, particularly in the energy sector,
and
in activity level in the energy field services industry resulted in increased
demand for our products from our existing customers. In particular, we received
increased orders for drilling tools, liner hangers, top-drive units and
components in 2007. As a result, we increased revenues by approximately
$525,000, or 7%.
While
we
have achieved certain milestones our results from operations in 2007, we
continue to have substantial indebtedness outstanding. As of December 31, 2007,
we had outstanding indebtedness to Stillwater National Bank of approximately
$3.8 million.
.
March
2007 Warrant Solicitation
On
March
14, 2007, we agreed that we would issue new Class B Warrants to any holders
of
Class A Warrants (issued in our December 2006 offering) who exercised all or
a
portion of their Class A Warrants by no later than 5:00 p.m. Central Daylight
Time on March 31, 2007. The Class B Warrants have a term of five years, expiring
on March 31, 2012, and an exercise price of $2.00 per share. The Class B
Warrants include piggy-back registration rights, subject to customary
underwriter cutbacks. Since the common stock underlying the Class B Warrants
was
not registered by March 31, 2008, the holders are entitled to exercise the
Class
B Warrants on a cashless basis at any time that there is not an effective
registration statement covering the resale of the common stock underlying the
Class B Warrants. As of March 31, 2007, an aggregate of 536,300 of our Class
A
warrants were exercised in connection herewith and we received gross proceeds
of
$670,375 therefrom. In addition, we issued 536,300 shares of our common stock
and 536,300 Class B Warrants in connection with the exercise of the 536,300
Class A Warrants.
2007
Bridge Notes
Between
July 10, 2007 and November 1, 2007, we sold $3,050,000 of principal amount
of
Bridge Notes with warrants to purchase 610,000 shares of our common stock to
accredited investors in a private offering pursuant to an exemption from
registration provided by Section 4(2) of the Securities Act. The Bridge Notes
have a 1 year term and bear interest at ten percent (10%); payable monthly
in
arrears, however we have the right to defer any interest payment and accrue
same
to principal. As of December 31, 2007, approximately $116,000 in interest was
accrued to principal. At the election of the holders, the Bridge Notes are
convertible into our common stock at a fixed conversion price of $1.89 or into
our next Offering. If not otherwise converted, we will be required to prepay
the
Bridge Notes upon consummation an Offering or its maturity. An NASD member
firm,
acted as primary placement agent in connection with the offering and received
$210,000 in commissions while another NASD member firm received $5,000 in
placement agents fees. Our net proceeds of this offering after the payment
of
commissions, fees and other expenses of the offering were approximately
$2,825,000.
Amended
Stillwater Credit Facility
On
January 25, 2008, we entered into an Amended and Restated Loan Agreement with
Stillwater National Bank and Trust Company (the “Amended Loan Agreement”). On
October 19, 2005 we entered into that certain Agreement (as reported in our
Current Report on Form 8-K dated October 19, 2005) with Stillwater, which
Agreement was amended by a certain First Amendment to Agreement and Guarantors’
Consent dated October 19, 2006, as amended by a certain Second Amendment to
Agreement dated effective January 19, 2007 (collectively, the “Prior
Agreement”).
The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:
1. Term
Loan.
Our
prior Term Note dated October 19, 2005 in favor of Stillwater had an outstanding
principal balance of $3,003,998 (as of January 25, 2008) and a maturity date
of
April 19, 2008. Stillwater loaned us (along with our co-borrowers Shumate
Machine Works, Inc. and Hemiwedge Valve Corporation) $3,329,000 pursuant to
a
new term note dated January 25, 2008, which funds advanced under the new term
note were used to refinance the old term note and provide working capital.
The
new term note requires us to make 26 equal monthly payments (beginning on
February 28, 2008) in an amount sufficient to fully amortize principal and
interest on the amended and restated note over 64 months. The new term note
is
due and payable on April 19, 2010. The new term note bears interest at a rate
equal to the prime rate plus two percent, and it is secured by a first priority
security interest in all of our existing and future assets as well as a security
interest in certain personal assets of Larry Shumate.
2. Revolving
Loan.
Our
prior revolving promissory note dated October 19, 2005 in favor of Stillwater,
had an outstanding principal balance of $893,676 (as of January 25, 2008) and
a
maturity date of April 19, 2008. Stillwater loaned us (and the other
co-borrowers set forth above) $1,000,000 pursuant to a new revolving promissory
note dated January 25, 2008, which funds advanced under the new revolving
promissory were used to refinance the old revolving promissory note and provide
working capital. The initial balance on the new line of credit was equal to
the
balance of our previous line of credit with Stillwater ($893,676 principal
balance as of January 25, 2008). The advances available under the new revolving
promissory note are limited to a borrowing base of the sum of (a) 85% of
eligible accounts receivable, and (b) 50% of eligible inventory. The new
revolving promissory note bears interest at a rate equal to the prime rate
plus
two percent, and it is secured by a first priority security interest in all
of
our existing and future assets as well as a security interest in certain
personal assets of Larry Shumate. On the 28th
day of
each month, beginning January 28, 2008, we will pay all interest accrued on
the
new revolving promissory note. The amount we can borrow on the line of credit
is
subject to qualifying accounts receivable and inventory. The new revolving
promissory note will mature and become fully due and payable on April 19,
2009.
The
loan
documents for the Stillwater line of credit and term loan require us to meet
certain financial ratios and tests. Stillwater issued waivers under the original
credit facility for periods tested where were not in compliance with certain
covenants thereunder. However, we have not received a waivers for the March
31,
2008 period under the Amended Stillwater Credit Facility where we were not
in
compliance with certain covenants thereunder. As of the date of this report,
we
have not received a notice of default from Stillwater. Should Stillwater decide
to declare a default, it would result in an acceleration of the related debt
and
could result in Stillwater foreclosing on our assets.
We
anticipate that increasing energy commodity prices, including prices of oil
and
natural gas, should continue to cause our customers to increase their drilling
and other exploration activities. As a result, we anticipate seeing increased
oil rig counts as well as a renewal of drilling and production activity in
previously dormant areas. We believe that such an increase in activity would
result in increased demand for our energy related field service products during
the 2008 fiscal year. In addition, we anticipate that our recent
commercialization of the Hemiwedge® Cartridge valve product line will enhance
our profitability, although there can be no assurance thereof.
Transactions
Relating to Beach Road Facility
On
May
15, 2008, our wholly owned subsidiary, Shumate Machine Works entered into a
series of simultaneous transactions pursuant to which it purchased the property
located at 1011 Beach Airport Road, Conroe, Texas 77301, underlying its lease
(the “Original Lease”) with Brewer Family Charitable Remainder Annuity Trust #1.
The terms of the Original Lease included an option to purchase the underlying
property. Shumate Machine Works purchased the property for $1,726,949 pursuant
to a warranty deed.
Concurrently
with the purchase of the property, Shumate Machine Works sold this property
to
Trader Properties LLC, which Trader Properties immediately leased to Hemiwedge
Valve Corporation. Shumate Machine Works sold the property to Trader Properties
for an aggregate purchase price of $2,180,000 pursuant to a general warranty
deed with vendor’s lien. As such, Shumate Machine Works received net cash of
$319,617. These proceeds were used to pay back certain
indebtedness.
The
terms
of the Commercial Lease Agreement between Hemiwedge Valve Corporation and Trader
Properties is for a term of 10 years with a monthly rent of $24,000 per month,
which shall be increased by 2% each year for the term of the lease. Hemiwedge
Valve Corporation is required to maintain public liability insurance of not
less
than $1,000,000 during the term of the lease. To secure performance under the
commercial lease, Hemiwedge Valve Corporation granted Trader Properties a lien
and security interest against all of its’ non-exempt personal property that is
in the leased premises.
Shumate
Industries has guaranteed payment and performance of the lease pursuant to
a
Guaranty Agreement. In addition, Shumate Industries agreed to issue Trader
Properties a five year warrant to purchase 100,000 shares of its common stock
at
an exercise price of $0.25 per share prior to June 15, 2008.
Business
Development
Organization
Our
predecessor, Global Realty Management Group, Inc., or GRMG, was incorporated
in
the State of Florida in 1997. In June 2002, GRMG reincorporated under the laws
of the State of Delaware from the State of Florida pursuant to a merger with
a
newly formed Delaware corporation. Under the terms of this reincorporation
merger, GRMG changed its name from “Global Realty Management Group, Inc.” to
“Excalibur Industries, Inc.” In October 2005, we changed our name from
“Excalibur Industries, Inc.” to “Shumate Industries, Inc.”
Acquisition
of Hemiwedge Assets
On
December 5, 2005, we acquired the intellectual property rights to the Hemiwedge®
line of products, including the Hemiwedge® valve, from Soderberg Research and
Development, Inc. and certain of its affiliates. The intellectual property
rights acquired consist of all patents, trademarks, and internet website
relating to the Hemiwedge® product line. For these intellectual property rights,
we paid $138,500 in cash and a two-year, six percent (6%) promissory note in
the
principal amount of $100,000, payable in 24 equal installments of principal
and
interest. In addition, we agreed to deposit: (a) $72,000 into an escrow account,
the property of Soderberg Research Inc., to be paid in the form of a monthly
advance in the amount of $3,000 for each month of the 24 month period beginning
with the month immediately following the closing date; and (b) three percent
(3%) of the net sales proceeds collected from customers from: (i) gross revenue
from sales of products to which the acquired intellectual property relates,
less
(ii) sales and/or use taxes, import and/or export duties, outbound
transportation costs, and amounts allowed or credited due to returns, which
payments shall begin two years after the closing date and continue until March
29, 2013. The $72,000 in monthly advances shall be credited against the three
percent (3%) of the net sales proceeds.
Reorganization
On
October 19, 2005, we completed a restructuring of our company, resulting in
a
significant reduction of our outstanding debt and providing us with a
strengthened balance sheet and reduced debt servicing requirement. The
restructuring was effected through an out-of-court restructuring, or
“recapitalization plan,” which consisted of the following:
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an
agreement to amend and restate a series of notes issued to Stillwater
National Bank, or Stillwater, into one term note;
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the
extension of our current line of credit with
Stillwater;
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the
issuance of a convertible note to
Stillwater;
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the
issuance of a note, by Stillwater, to our Chief Financial Officer
to
advance funds to purchase shares of our common stock for
$250,000;
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the
conversion of a portion of our debt to Stillwater into 20% of our
then-outstanding common stock after giving effect to the
restructuring;
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our
reacquisition of the capital stock of our operating subsidiary, Shumate
Machine Works;
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a
release from Stillwater for any indebtedness not covered
above;
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the
exchange of our outstanding unsecured notes, including principal
and
accrued interest, for our common stock; and
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the
grant of restricted stock awards to our executive officers, in return
for
their personal guarantees on new bank debt, and to our non-employee
directors.
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In
addition, in connection with the recapitalization, we changed our name to
“Shumate Industries, Inc.” and effected a 1-for-7 reverse stock split of our
then outstanding shares of common stock. The recapitalization plan, the name
change, the reverse stock split, the adoption of our 2005 Stock Incentive Plan,
and the re-election of our directors were all approved at a special meeting
of
our stockholders on October 19, 2005.
The
recapitalization plan for achieving our financial goals closed on October 19,
2005 and consisted of the following transactions (the “restructuring
transactions”):
Amended
and Restated Term Note.
Stillwater has amended and restated a series of notes in the current aggregate
principal amounts of approximately $9,413,000 into an amended and restated
note
in the principal amount of approximately $5,600,000. The amended and restated
note requires interest only payments for the six months following closing,
and
thereafter, requires us to make 24 equal monthly payments in an amount
sufficient to fully amortize principal and interest on the amended and restated
note over 120 months. The amended and restated note is due and payable 30 months
after closing, at which time, we will be required to make a balloon payment
of
the entire outstanding principal balance and all accrued interest. The note
bears interest at a rate equal to the prime rate plus two percent, and it is
secured by a first priority security interest in all of our existing and future
assets. The proceeds of this note were applied as follows: $303,000 to purchase
machines from Larry C. Shumate, our President and Chief Executive Officer,
and
from A. Earl Swift, a former director; $100,000 to purchase the capital stock
of
Shumate Machine Works; and the remainder was applied to our existing
indebtedness to Stillwater.
Revised
Line of Credit.
Stillwater has extended our current revolving line of credit in an amount of
up
to $1,000,000 for one year. The initial balance on the line of credit is the
balance of our existing line of credit with Stillwater, less the excess
transferred to the amended and restated note. The advances available under
the
line of credit are limited to a borrowing base of the sum of (a) 80% of eligible
accounts receivable, and (b) 50% of eligible inventory. The line of credit
bears
interest at a rate equal to the prime rate plus two percent, and it is secured
by a first priority security interest in all of our existing and future assets.
We failed to repay the line of credit on October 19, 2006, as we were required
to do by our agreement with Stillwater. As of October 19, 2006 we and Stillwater
entered into a First Amendment to Agreement and Guarantors’ Consent pursuant to
which Stillwater agreed to redefine the line of credit maturity date to January
19, 2007, which was subsequently extended to April 19, 2008.
Convertible
Note.
We
issued a convertible note to Stillwater in the principal amount of $2,500,000.
The principal and accrued interest on the convertible note is convertible,
at
Stillwater’s option, into shares of our common stock at a conversion rate of
$1.00 per share (on a post reverse stock split basis). The convertible note
matures on the earlier of 60 months from the date of issuance or the date on
which it is fully converted into our common stock. Interest on the convertible
note shall accrue from the date of closing until the earlier of conversion
or 24
months, at which time the accrued interest was capitalized into principal.
Beginning at the end of the ninth quarter, we are obligated to make quarterly
interest payments on the convertible note. The convertible note bears interest
at a rate equal to the prime rate plus two percent, and it is secured by a
first
priority security interest in all of our assets. We have agreed to include
the
shares of common stock underlying the convertible note on any eligible
registration statement that we may file with the Securities and Exchange
Commission under the Securities Act of 1933 in the next five years.
On
April
13, 2006, we entered into a letter agreement with Stillwater pursuant to which
Stillwater agreed to accept $500,000 from us in full satisfaction of the secured
convertible promissory note, subject to certain conditions. On August 9, 2006,
the letter agreement was amended to increase the payment by $25,000 to $525,000
if payment was made between September 2, 2006 and December 1, 2006 and by
$50,000 to $550,000 if payment was made between December 2, 2006 and March
1,
2007. On December 1, 2006 we repaid the secured convertible promissory note
in
full.
CFO
Note.
Stillwater has loaned $350,000 to our Chief Financial Officer, Matthew C.
Flemming, to purchase an aggregate of 250,000 newly issued shares (post reverse
stock split) of our common stock, representing approximately 2.16% of our
outstanding common stock after giving effect to the restructuring, for a total
purchase price of $250,000. The balance was applied to the existing personal
indebtedness of Mr. Flemming to Stillwater of approximately $10,000,000 under
a
personal guarantee of our indebtedness to Stillwater. Stillwater has released
Mr. Flemming from the remainder of his personal guarantee.
Conversion
of Prior Bank Debt.
Stillwater has exchanged $2,368,000 of our outstanding indebtedness to
Stillwater for 2,368,000 newly issued shares of our common stock (on a post
reverse-split basis), representing not less than 20% of the outstanding shares
of our common stock after giving effect to the restructuring. We have agreed
to
include these shares of common stock on any eligible registration statement
that
we may file with the Securities and Exchange Commission under the Securities
Act
of 1933 in the next five years.
Releases.
Stillwater has released us and our Chief Financial Officer, Matthew C. Flemming,
from our respective obligations of the prior debt to Stillwater, except to
the
extent that such prior debt is amended and restated, issued, or guaranteed
as
set forth above.
Unsecured
Note Exchange Offer.
Our
unsecured note holders have exchanged all of our outstanding unsecured notes,
with interest rates ranging from 6% to 12% and all currently due and owing,
for
approximately 1,691,310 newly issued shares of our common stock (on a post
reverse-split basis), representing approximately 14.61% of the outstanding
shares of our common stock after giving effect to the
restructuring.
Restricted
Stock Awards.
Our
board of directors have granted restricted stock awards of approximately
3,950,000 shares of newly issued common stock (on a post reverse-split basis)
to
our executive officers and our non-employee directors, representing
approximately 34.12% of the outstanding shares of our common stock after giving
effect to the restructuring. These shares vested on the closing of the
restructuring.
As
previously reported on a current report on Form 8-K, on April 28, 2005,
Excalibur Holdings, our bankrupt subsidiary and holder of 100% of the common
stock of Shumate Machine Works, Inc., our sole operating subsidiary, received
notice from Stillwater National Bank that Stillwater intends to dispose of
the
capital stock of Shumate Machine Works in a private sale after May 9, 2005
pursuant to the Oklahoma Uniform Commercial Code. As part of the restructuring,
Stillwater transferred 100% of the capital stock of Shumate Machine Works to
us.
A
complete description of the restructuring plan is set forth in our definitive
proxy statement for the October 19, 2005 special meeting of stockholders, which
has been filed with the Securities and Exchange Commission.
Bankruptcies
On
December 31, 2003, three of our operating subsidiaries, Excalibur Steel,
Excalibur Services, and Excalibur Aerospace, each filed a voluntary petition
for
protection under Chapter 7 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court, Southern District of Texas. On July 26, 2004, the United
States Bankruptcy Court, Southern District of Texas, discharged Excalibur Steel
and Excalibur Aerospace of all of its debts and liabilities pursuant to Chapter
7 of the U.S. Bankruptcy Code, and on August 3, 2004, the United States
Bankruptcy Court, Southern District of Texas, discharged Excalibur Services
of
all of its debts and liabilities pursuant to Chapter 7 of the U.S. Bankruptcy
Code. As a result of the discharge of these liabilities, we recorded $5,218,883
in debt forgiveness income in 2004.
On
March
9, 2005, Excalibur Holdings, Inc., our wholly-owned subsidiary and the former
parent corporation of Shumate Machine Works, Inc., filed a voluntary petition
for protection under Chapter 7 of the U.S. Bankruptcy Code in the United States
Bankruptcy Court, Southern District of Texas. On November 30, 2005, the
United States Bankruptcy Court, Southern District of Texas, discharged Excalibur
Holdings of all of its debts and liabilities pursuant to Chapter 7 of the U.S.
Bankruptcy Code. As a result of the discharge of these liabilities, we recorded
$1,837,295 in debt forgiveness income in 2005.
The
Company currently has two wholly-owned subsidiaries. Each of the following
former subsidiaries of the Company has been dissolved: Excalibur Steel,
Excalibur Services, Excalibur Aerospace and Excalibur Holdings.
Our
Markets
The
energy field services market is comprised of several market segments including
oil & gas field services, pipeline and transportation, process controls,
fluid management and controls, sub-sea, refining, and maintenance services
for
these areas. We currently manufacture products, spare parts, and assemblies
for
the oil & gas field services market segment. With our new Hemiwedge®
Cartridge valve product line, we intend to expand into process controls, which
is sometimes known as the energy flow control market. We may also expand into
other areas of the energy field services market to pursue growth strategies
that
complement and/or leverage our current business and expertise.
Contract
Machining and Manufacturing - Shumate Machine Works
The
dollar size of the United States (U.S.) oil & gas field services market can
be measured by the U.S. drilling and completion activity spending and the total
U.S. well service and work-over spending. In its March
2008 Drilling
and Production Outlook report,
Spears and Associates, a leading energy market research firm, stated that U.S.
drilling and completion spending was $116.9 billion for 2007, up 12% from the
year 2006, and that U.S. well service and work-over or production spending
was
$16.2 billion in 2007, approximately equal to 2006.
Valve
Product Technology - Hemiwedge Valve Corporation
We
believe that the industrial valve market is large and growing. According to
a
recent report from The McIlvaine Company, the dollar value of industrial valve
shipments in 2007 was projected at approximately $8.5 billion in the United
States, up almost 4% from 2006, and $44.8 billion worldwide, up approximately
4%
from 2006.
Neither
the Spears and Associates report nor the McIlvaine Company report was prepared
for us nor has either company consented to the use of this information in our
report; rather, these reports are available for public use.
Our
Strategy
Strategies
to achieve our growth objectives include the following:
Commercializing
and growing our proprietary new Hemiwedge® valve technology via the Cartridge
valve product line, Down-hole isolation valve and licensing agreements for
sub-sea applications of the valve.
In late
December 2006 we launched our Hemiwedge®
technology with the Hemiwedge® Cartridge valve product line, a surface-level
engineered valve, targeting oil and gas, process and pipeline
applications.
Generating
more revenues and increasing our profit margins by expanding our contract
machining and manufacturing business and through investing in additional
state-of-the art CNC equipment which offers us the ability to make increasingly
complex tools as required by our customers. As
a
result of higher commodity prices, activity levels and pricing for our
customers, we will continue to expand our operations at Shumate Machine Works
and invest in additional computer-numeric controlled machinery that allows
us to
manufacture higher precision critical components for our customers growing
demand of energy equipment.
Developing
strategic alliances with other companies to leverage our valve technology into
market segments where we have little or no expertise. We
intend
to license and partner our Hemiwedge® technology in market verticals where we
have little or no expertise to maximize the technology’s value. For example, our
Hemiwedge® technology has been tested in severe service applications and the
company may partner with another company dominate in a particular market
vertical such as tar sands or mining utilizing their strengths to commercialize
further Hemiwedge® technology. In addition, our Hemiwedge® technology has been
tested at very high pressures and demonstrated “bubble-tight” sealing capability
and functionality for sub-sea applications, providing a proof of concept needed
to pursue licensing discussions with larger energy companies with a presence
in
those markets.
Acquiring
other technology-oriented products to leverage our asset base, manufacturing
infrastructure, market presence and experienced personnel.
We
have
extensive experience in manufacturing and machining products, and we have a
reputation for providing quality products and services in the energy field
services market. We have an existing base of customers and existing distribution
channels in this market. We intend to combine our experience, reputation,
customer base, and distribution channels with our expertise and knowledge of
the
industry to market and distribute other technology-oriented product lines for
this customer base and through these distribution channels.
Sales
and Marketing; Customers
In
our
contract machining and manufacturing division, we have developed and maintained
long-term relationships with our customers. We use a variety of methods to
identify target customers, including the utilization of databases, direct mail,
and participation in manufacturers’ trade shows. The energy field service target
market usually consists of larger, well capitalized companies as well as smaller
firms. These efforts supplement our traditional sales and marketing efforts
of
customer referrals and territory canvassing. In 2007, we expended approximately
$467,000 on sales and marketing, which included the salaries, commissions,
and
expenses of our sales department.
Nearly
all of our sales are on a negotiated price basis. In some cases, sales are
the
result of a competitive bid process where a customer sends to us and other
competitors a list of products required, and we submit a bid on each job.
Frequently, the ability to meet customer delivery schedules as well as plant
capacities and capabilities are a significant aspect of winning any bid or
purchase order.
For
our
valve division, we intend to target the severe service applications in oil
and
gas, process and pipeline markets where there is a demand for engineered valves.
These target markets seek supply disruption mitigation and rapid maintenance
benefits that our Hemiwedge® Cartridge valve system is designed to provide.
Although we believe that our valve product line provides significantly improved
functionality for higher-end or engineered severe service applications, we
intend to price our valves competitively relative to other engineered valve
manufacturers to establish market share. In addition to leveraging our existing
customer base and distribution channels to market and distribute the valve
product line, we have identified a network of established independent
representative companies to market and distribute the valves on a success fee
basis. We intend to complement this effort with direct employee salespersons,
product catalogs, web site, direct mail, trade shows and sales support
professionals that can travel to sales locations to consummate
sales.
We
have a
customer base of more than 20 customers. Two of these customers represented
approximately 71% percent of our revenues for fiscal year 2007. We continually
focus on developing more volume from secondary and tertiary customers and with
new customers to reduce customer concentration risk. We believe that long-term
relationships with many of our customers will contribute to our success. While
we intend to leverage our existing customer relationships to market the valve
product, we also will seek additional new customers for the valve product line,
which we anticipate would result in reduced revenue and account receivables
concentrations.
Raw
Materials
The
principal raw materials that we use are carbon steel, aluminum, stainless steel,
nickel, brass, titanium and various special alloys and other metals. The metals
industry as a whole is cyclical, and at times pricing and availability of raw
materials in the metals industry can be volatile due to numerous factors beyond
our control, including general, domestic and international economic conditions,
labor costs, production levels, competition, import duties and tariffs and
currency exchange rates. This volatility can significantly affect the
availability and cost of raw materials, and may, therefore, adversely affect
our
net sales, operating margin, and profitability. On average, pricing for raw
materials has fluctuated about thirty percent annually on a historical basis.
During periods of rising raw materials pricing, we have been able to pass
through the increase in cost to our customers approximately ninety percent
of
the time. The remaining ten percent reflects down-time between reviewing costs
on standardized repetitive work that is not quoted on a monthly basis.
Accordingly, the increase in the cost of raw materials has had an immaterial
effect on our operations; however, it is possible that we may not be able to
pass any portion of such increases on to our customers in the future.
Competition
Both
the
machining and manufacturing business and the valve product business are engaged
in fragmented and highly competitive industry segments. We estimate that there
are more than 100 machine shops in the metro-Houston area alone, and that there
are more than 4,000 valve product manufacturers and distributors within the
United States alone. We estimate that our share of the market, based on 2007
revenues, is less than one percent (1%). Competition is based primarily on
quality, service, price, performance timeliness and geographic proximity. We
compete with a large number of other machining and manufacturing operators
on a
national, regional and local basis, most of which have greater financial
resources than we do, and several of which are public companies. We also compete
with overseas competitors whose labor costs may be significantly lower than
our
costs. We anticipate the valve product, when launched, will compete with a
large
number of companies with international and national capabilities that will
possess greater financial resources.
We
believe that we are able to compete by defining and understanding customer
needs
and by using our equipment and machinery base to manufacture products with
difficult specifications and tolerances.
Intellectual
Property
As
part
of our ongoing research, development, and manufacturing activities, we intend
to
seek patents when appropriate on inventions involving new products and product
improvements. In December 2005, we acquired the intellectual property rights
to
the Hemiwedge® line of products, including the Hemiwedge® Cartridge valve, from
Soderberg Research and Development, Inc. and certain of its affiliates. These
intellectual property rights consisted of two (2) unexpired United States
patents, one (1) expired United States patent, several pending United States
patent applications, and one (1) registered United States trademark. We have
developed several new inventions to the technology which have been propagated
within numerous new patent applications during 2006 and 2007. We
have
also filed international patent applications for the inventions embodied in
the
pending United States patent application.
These
intellectual property rights are of considerable importance to the Hemiwedge®
Cartridge valve product line (including the development stage down-hole
isolation valve and sub sea high pressure valve), and we consider them, in
the
aggregate, to be material to our valve technology commercialization plans.
It is
possible that these intellectual property rights may later be invalidated by
a
court of competent jurisdiction, and it is also possible that our products
or
proposed products may be found to infringe upon the intellectual property rights
of others.
We
also
rely on trade secret protection for our confidential and proprietary
information. We seek to enter into confidentiality agreements with our
employees, partners, and suppliers. It is possible, however, that others will
independently obtain similar information or otherwise gain access to our trade
secrets.
Government
Regulation and Environmental Matters
Our
operations are subject to a number of federal, state and local regulations
relating to the protection of the environment and to workplace health and
safety. In particular, our operations are subject to extensive federal, state
and local laws and regulations governing waste disposal, air and water
emissions, the handling of hazardous substances, painting product on premises,
environmental protection, remediation and workplace exposure. Hazardous
materials used in our operations include lubricants and cleaning solvents.
We
believe that we are in substantial compliance with all such laws and do not
currently anticipate that we will be required to expend any substantial amounts
in the foreseeable future in order to meet current environmental or workplace
health and safety requirements.
Although
no environmental claims have been made against us and we have not been named
as
a potentially responsible party by the Environmental Protection Agency or any
other entity, it is possible that we could be identified by the EPA, a state
agency or one or more third parties as a potentially responsible party under
CERCLA or under analogous state laws. If so, we could incur substantial
litigation costs to prove that we were not responsible for the environmental
damage.
Safety
We
are
committed to emphasizing and focusing on safety in the workplace. We currently
have a variety of safety programs in place, which include periodic safety
meetings and training sessions to teach proper safety work procedures. We have
established “best practices” processes throughout most of our operations to
ensure that our employees comply with safety standards that we establish and
to
ensure full compliance with federal, state and local laws and regulations.
In
addition, we intend to continue to emphasize the need for an accident-free
workplace.
Risk
Management and Insurance
The
primary risks in our operations are property damage, workers’ compensation, and
third-party bodily injury. We maintain insurance above certain self-insured
limits for liability for bodily injury, third-party property damage, and
workers’ compensation, all of which we consider sufficient to insure against
these risks.
Employees
We
currently employ 87 people in Conroe, Texas. Of the total, approximately 22
are
in administration, 6 are in engineering and drafting, 2 are in sales, marketing
and distribution, and 57 are in machining, manufacturing and production. None
of
our employees are represented by a labor union, and we have not entered into
a
collective bargaining agreement with any union. We have not experienced any
work
stoppages and consider the relations with our employees to be good.
Item
1A. RISK FACTORS AND CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below and the other information in this
annual report, including our financial statements and the notes to those
statements, before you purchase our common stock. The risks and uncertainties
described below are those that we currently believe may materially adversely
affect our company. Additional risks and uncertainties may also impair our
business operations. If the following risks actually occur, our business,
financial condition and results of operations could be seriously harmed, the
trading price of our common stock could decline and you could lose all or part
of your investment.
Our
business might fail, even after our 2005
restructuring.
Although
we completed a restructuring of our debt in October 2005, and although we have
increased revenues in each of the last three years, we have still incurred
operating losses in each of the last three fiscal years. Our ability to become
profitable will depend upon several factors, including whether we can continue
to increase our revenues in Shumate Machine Works, Inc., and whether our
Hemiwedge® valve products are successful in the marketplace. We cannot estimate
with any certainty the long-term demand for our products and services or the
degree to which we will meet that demand. If demand for our products and
services does not increase, or if the market for our products and services
declines, we may not be able to earn enough revenue to generate profits from
operations or positive cash flow.
We
may be unable to continue as a going concern in which case our securities will
have little or no value.
Our
independent auditor has noted in its report concerning our financial statements
as of December 31, 2007 and 2006 that we have incurred recurring losses from
operations and have a working capital deficiency, which raises substantial
doubt
about our ability to continue as a going concern. We have incurred recurring
losses from operations in 2007 and 2006, respectively and, we have negative
working capital as of December 31, 2007. These conditions raise substantial
doubt as to our ability to continue as a going concern. We cannot assure you
that we will achieve operating profits in the future.
We
have substantial indebtedness outstanding, and our operations are significantly
leveraged. If we are unable to repay our debt obligations in a timely fashion,
it could have a material adverse effect on our business and
prospects.
In
order
to finance our operations we have incurred substantial indebtedness, including
the debt with Stillwater National Bank which consists of a line of credit and
a
term loan, as well as our recent 2007 bridge financing. As of December 31,
2007,
we owed total indebtedness of approximately $3.8 million (not including accrued
interest) to Stillwater National Bank, our senior lender. Additionally, we
owe
our recent bridge loan investors $3.05 million (not including accrued interest
accreted to principal) and various lenders such as a premium finance note for
the annual premium of approximately $55,000 for our directors and officers
liability policy. Our cash flows from operations are currently not sufficient
to
service our debt obligations. If we fail to pay our debt obligations in a timely
fashion, we will be in default under one or more of our loan agreements. If
we
default on our loan obligations with Stillwater National Bank, it could exercise
its rights and remedies under the loan agreement, which could include
foreclosing on all of our assets. Any such action would have a material adverse
effect on our business and prospects.
We
will likely need to finance our operations and a full-scale launch of the
Hemiwedge® products through additional bank borrowings or other capital
financings. If we are unable to obtain additional capital, we may not be able
to
adequately fund our Hemiwedge Valve Corporation subsidiary or continue our
business.
We
had
working capital of $338,874 as of December 31, 2006 and we had a working capital
deficit of $4,647,597 as of December 31, 2007. Since December 31, 2006, we
have
completed a private placement of our convertible notes which resulted in net
proceeds to us of approximately $2.74 million, providing us with working capital
for the immediate future. Currently, we believe that we will not be able to
fund
our operations, working capital requirements, and debt service requirements
throughout the 2008 fiscal year with existing working capital and cash flows
generated from operations. In addition, we will need additional capital to
be
able to fund the further development of the Hemiwedge® technology and the
operations of the Hemiwedge® Cartridge valve products. In addition, we do not
believe that we will be able to conduct a full-scale expansion of the Hemiwedge®
product, including an inventory buildup or an expansion of the product line,
without obtaining additional financing.
We
currently have a $1,000,000 secured revolving line of credit facility with
Stillwater National Bank. This loan is subject to a borrowing base that is
computed on our qualifying accounts receivable and inventory. The outstanding
balance on this line of credit was approximately $526,206 at May 14, 2008,
which, at the time, $1,000,000 was the maximum allowed due to the amount of
the
qualifying accounts receivable and inventory, also referred to as our borrowing
base. The outstanding balance on the line of credit and the borrowing base
fluctuate based on our available working capital and our qualifying accounts
receivable and inventory. As such, we may not have the ability to borrow
additional funds on this line of credit.
In
the
event we seek to expand the rate of Hemiwedge® Cartridge valve’s growth and
scale up of the product line, or in the event that our cash flows from
operations are insufficient to fund our operations, working capital
requirements, and debt service requirements, we would need to raise additional
capital, either by borrowing more money, if possible, or by selling our
securities or seeking out joint venture opportunities. Any material additional
borrowing or significant capital expenditures require the written consent of
our
lender, Stillwater National Bank. We may not be successful in raising additional
financing as and when we need it. If we are unable to obtain additional
financing in sufficient amounts or on acceptable terms, our operating results
and prospects could be adversely affected.
The
majority of our revenues are generated from a small number of customers, and
our
results of operations and cash flows will be adversely affected if any of our
major customers either fail to pay on a timely basis or cease to purchase our
products.
In
2007,
two of our customers accounted for approximately 71% of our sales. At December
31, 2007, two customers accounted for approximately 30% of our trade accounts
receivable balance. These customers do not have any ongoing commitment to
purchase our products and services. We generally do not require collateral
from
our customers, although we do perform ongoing credit evaluations of our
customers and maintain allowances for potential credit losses which, when
realized, have been within the range of our expectations. If one or more of
our
major customers stops purchasing our products or defaults in its obligation
to
pay us, our results of operations as well as our cash flows will be adversely
affected.
Our
Hemiwedge Valve Corporation subsidiary is an early stage company with no
significant operating history.
One
of
our subsidiaries, Hemiwedge Valve Corporation, is an early stage company that
has not had significant operations. Its primary business purpose is to develop,
manufacture, and market applications of its new valve technology known as the
Hemiwedge® valve. The Hemiwedge® Cartridge valve, our surface-level valve
product line targeting the oil and gas, process and pipeline markets, was
launched in late December 2006. Other applications of the Hemiwedge® technology
are still in the engineering, design, and development stage. This subsidiary
only began generating product revenue in the late fourth quarter of 2006, and
has incurred losses since its formation. As an early stage company, the
prospects for Hemiwedge Valve Corporation are subject to all of the risks,
uncertainties, expenses, delays, problems, and difficulties typically
encountered in the establishment of a new business. We expect that unanticipated
expenses, problems, and technical difficulties may occur which would result
in
material delays in the development and growth of the Hemiwedge® valve. We may
not be able to successfully implement our plans for Hemiwedge Valve Corporation
and achieve a significant level of operations.
If
we do not successfully commercialize the Hemiwedge® Cartridge valve product, we
may never achieve profitability in this subsidiary.
We
have
incurred substantial expenses to acquire and fund the development of our
Hemiwedge® Cartridge valve product. We only began generating product revenue in
the late fourth quarter of 2006 in this subsidiary in connection with the
Hemiwedge® Cartridge valve launch in December 2006. Many of our research and
development programs for applications of the Hemiwedge® technology are at an
early stage. Early stage product lines are subject to inherent risks of failure.
These risks include the possibilities that the Hemiwedge® valve may not last as
long as the products of our competitors or may not reduce torque as anticipated.
Even if the Hemiwedge® valve technology operates as anticipated, it may not be
commercially successful. If we are unable to develop the Hemiwedge® product as
anticipated, or if the product is successfully developed but not accepted in
the
marketplace, Hemiwedge Valve Corporation may never be profitable.
Our
ability to achieve any significant revenue in Hemiwedge Valve Corporation may
depend on our ability to establish effective sales and marketing
capabilities.
As
a
result of the launch of the Hemiwedge® Cartridge valve in the late fourth
quarter of 2006, we need to build a sales and marketing infrastructure and
customer channels which may include independent sales representative firms,
distributors and/or employees. If we fail to establish an effective internal
marketing and sales force or to make alternative arrangements to have these
products marketed and sold by others, our ability to commercialize our valve
product line and to enter new or existing markets will be impaired.
The
line of credit and term loan with Stillwater National Bank contain numerous
restrictive covenants which limit management’s discretion to operate our
business.
In
order
to obtain the line of credit and term loan from Stillwater National Bank, we
will agree to certain covenants that place significant restrictions on, among
other things, our ability to incur additional indebtedness, to create liens
or
other encumbrances, to make certain payments and investments, and to sell or
otherwise dispose of assets and merge or consolidate with other entities. The
Stillwater line of credit and term loan also require us to meet certain
financial ratios and tests and require us to obtain consent from Stillwater
in
order to change our senior management. For the year ended December 31, 2006
and
2007 and the fiscal periods ended March 31, June 30, September 30, December
31,
2007 and March 31, 2008, we were not in compliance with certain covenants under
the credit facility. Our lender issued waivers for the periods tested, except
for the December 31, 2007 and March 31, 2008 periods. However, we have no reason
to believe that such waiver will not ultimately be granted, and on January
25,
2008, we entered into an Amended and Restated Loan Agreement with Stillwater
National Bank and Trust Company that extended both credit facilities. There
can
be no assurance that we will be in compliance with the financial covenants
in
future periods or that Stillwater will issue a waiver for the past periods
we
were not in compliance or any future periods in which we are not in compliance
with these covenants. Our failure to comply with the covenants included in
the
Stillwater National Bank loan agreements could result in an event of default,
which could trigger an acceleration of the related debt. If we were unable
to
repay the debt upon any such acceleration, Stillwater could seek to foreclose
on
our assets in an effort to seek repayment under the loans. If Stillwater were
successful, we would be unable to conduct our business as it is presently
conducted and our ability to generate revenues and fund our ongoing operations
would be materially adversely affected. We have not yet received a waiver for
the period from Stillwater National Bank.
The
interest rate on a significant portion of our indebtedness varies with the
market rate of interest. An increase in the interest rate could have a material
adverse effect on our results of operations.
The
interest on the line of credit and term loan from Stillwater National Bank
is
payable monthly at the prime rate plus two percent. The base rates on the line
of credit and term loan will fluctuate over time, and if the base rates
significantly increase, our interest expense will increase. This would have
a
material adverse affect on our results of operations. As an example, based
on
the amounts outstanding under the line of credit and term loan at December
31,
2007, a one percent increase in Stillwater’s prime rate would increase our
annual debt service by approximately $43,000.
We
may not be able to successfully increase our sales. If we do not increase our
sales, we may never become profitable.
It
is
possible that we may be unable to successfully implement any of our strategies
to increase sales, including expanding the range of processes and services
that
we offer, developing long-term partnering relationships with customers and
adding new customers. Our ability to increase our sales will be affected by
many
factors which are beyond our control, such as falling commodity prices which
will decrease demand for our products or the failure of the marketplace to
respond positively to our Hemiwedge® valve technology. We cannot assure you that
our strategies to increase our sales will be successful. If they are not, we
may
never become profitable.
We
want to develop additional new energy field services products, but we may not
have the financial ability to do so.
We
are
currently seeking opportunities to develop or acquire energy field services
products and technologies through acquisitions or licensing agreements. We
believe acquiring our own product lines would leverage our expertise in
manufacturing and marketplace knowledge and complement our current contract
machining business and customer relationships. However, the energy field
services market has numerous manufacturers that are larger than we are and
have
greater financial resources than we do. Even if we were to acquire or design
our
own products, it is possible that we may not have the financial capacity to
enter this market.
We
face significant competition in our markets. Our inability to compete
successfully could have a material adverse effect on our business and results
of
operations.
The
energy field services industry, including both the machining and manufacturing
industry and the commercial valve industry, is highly competitive. Competition
in the sale of our products is primarily based on engineering, product design,
process capability, quality, cost, delivery and responsiveness. Many of our
competitors are entities that are larger and have greater financial and
personnel resources than we do. We also compete with foreign manufacturers
that
have substantially cheaper labor costs than we do. We may not be able to compete
successfully. If we do not compete successfully, our business and results of
operations will be materially adversely affected.
Failure
to protect our proprietary technology could impair our competitive
position.
We
have
obtained or are in the process of obtaining U.S. and foreign patents and patent
applications for our Hemiwedge® technology. Our success will depend in part on
our ability to obtain patent protection for our Hemiwedge® technology, preserve
our trade secrets, and operate without infringing the proprietary rights of
third parties.
Although
we place considerable importance on obtaining patent protection for our
technologies, products and processes, the enforceability of our patents is
uncertain and involves complex legal and factual questions. The applicant or
inventors of subject matter covered by patent applications or patents owned
by
us may not have been the first to invent or the first to file patent
applications for such inventions.
Furthermore,
enforcement of patents and proprietary rights in many other countries may be
problematic or unpredictable. The issuance of a patent in one country does
not
assure the issuance of a similar patent in another country. Claim interpretation
and infringement laws vary by nation, so the extent of any patent protection
is
uncertain and may vary in different jurisdictions.
Due
to
uncertainties regarding patent law and the circumstances surrounding our patent
applications, the pending or future patent applications we own may not result
in
the issuance of any patents. Existing or future patents owned by us may be
challenged, infringed upon, invalidated, found to be unenforceable or
circumvented by others. Further, any rights we may have under any issued patents
may not provide us with sufficient protection against competitive products
or
otherwise cover commercially valuable products or processes.
Litigation
or other disputes regarding patents and other proprietary rights may be
expensive, cause delays in bringing products to market and harm our ability
to
operate.
The
manufacture, use or sale of our Hemiwedge® product candidates may infringe on
the patent rights of others. If we are unable to avoid infringement of the
patent rights of others, we may be required to seek a license, defend an
infringement action, or challenge the validity of the patents in court. Patent
litigation is costly and time consuming. We may not have sufficient resources
to
bring these actions to a successful conclusion. In addition, if we do not obtain
a license, develop or obtain non-infringing technology, or fail to successfully
defend an infringement action or have the patents we are alleged to infringe
declared invalid, we may incur substantial money damages, encounter significant
delays in bringing our Hemiwedge® products to market, be precluded from
participating in the manufacture, use, or sale of our Hemiwedge® products
without first obtaining licenses to do so, or not be able to obtain any required
license on favorable terms, if at all. In addition, if another party claims
the
same subject matter (or subject matter overlapping with the subject matter)
that
we have claimed in a U.S. patent application or patent, we may decide or be
required to participate in interference proceedings in the United States Patent
and Trademark Office in order to determine the priority of invention. Loss
of
such an interference proceeding would deprive us of patent protection sought
or
previously obtained and could prevent us from commercializing our products.
Participation in such proceedings could result in substantial costs, whether
or
not the eventual outcome is favorable. These additional costs could adversely
affect our financial results.
Confidentiality
agreements with employees and others may not adequately prevent disclosure
of
trade secrets and other proprietary information.
In
order
to protect our proprietary technology and processes, we rely in part on
confidentiality agreements with our employees, consultants, outside
collaborators, and other advisors. These agreements may not effectively prevent
disclosure of confidential information and may not provide an adequate remedy
in
the event of unauthorized disclosure of confidential information. Costly and
time-consuming litigation could be necessary to enforce and determine the scope
of our proprietary rights, and failure to obtain or maintain trade secret
protection could adversely affect our competitive business
position.
We
purchase metals in the open market, and our profitability may vary if prices
of
metals fluctuate.
The
principal raw materials that we use are carbon steel, aluminum, stainless steel,
nickel, brass, titanium and various special alloys and other metals. The metals
industry as a whole is cyclical, and at times pricing and availability of raw
materials in the metals industry can be volatile due to numerous factors beyond
our control, including general, domestic and international economic conditions,
labor costs, production levels, competition, import duties and tariffs and
currency exchange rates. This volatility can significantly affect the
availability and cost of raw materials, and may, therefore, adversely affect
our
net sales, operating margin and net income. During periods of rising raw
materials pricing, there can be no assurance that we will be able to pass any
portion of such increases on to our customers. When raw material prices decline,
customer demands for lower prices could result in lower sale prices and, as
we
use existing inventory, result in lower margins. Changing metal prices could
adversely affect our ability to attain profitably.
The
oil & gas industry is subject to fluctuations in demand, which results in
fluctuations in our results of operations.
Most
of
our products are sold to oil and gas field services companies that experience
significant fluctuations in demand based on economic conditions, energy prices,
domestic and international drilling rig counts, consumer demand, and other
factors beyond our control. In 2006 and 2007, we experienced increased activity
levels driven by increases in energy commodity prices and increased demand
for
oil field drilling products. However, the increase in demand could be temporary
as commodity prices fluctuate daily. Reduced demand for oil field drilling
products would result in lower activity levels for our company. These changes
can happen very quickly and without forecast or notice, and may have a material
adverse effect on our results of operations.
We
may need to recruit additional personnel for Hemiwedge Valve Corporation. If
we
are unable to attract qualified personnel, we may be unable to operate the
business as planned.
Our
ability to implement our business plan and develop Hemiwedge Valve Corporation
may depend on our ability to attract and retain other qualified management,
engineering, machinists, project development, and sales and marketing personnel.
We compete for such persons with other companies, some of which have
substantially greater capital resources and facilities than we have. Further,
demand for such personnel during periods of increased demand for energy products
is very strong. We may not be able to recruit or retain personnel of the
requisite caliber or in adequate numbers to enable us to conduct the Hemiwedge®
business as planned.
Our
operations are subject to a number of federal, state and local regulations
relating to the protection of the environment and to workplace health and
safety. If we were found to be responsible for significant damages related
to
such regulation, it could have a material adverse effect on our business and
results of operation.
Our
operations are subject to extensive federal, state and local laws and
regulations governing waste disposal, air and water emissions, the handling
of
hazardous substances, environmental protection, remediation, workplace exposure,
and other matters. Hazardous materials that we use in our operations primarily
include lubricants and cleaning solvents. Our leased facility is located in
an
industrial area close to properties with histories of heavy industrial use.
Although no environmental claims have been made against us and we have not
been
named as a potentially responsible party by the EPA or any other party, it
is
possible that we could be identified by the EPA, a state agency or one or more
third parties as a potentially responsible party under CERCLA or under analogous
state laws. If so, we could incur substantial litigation costs to prove we
are
not responsible for the environmental damage, or, if we were found to be a
responsible party, we could be liable for significant damages. This could have
a
material adverse effect on our business and results of operations.
INVESTMENT
RISKS
There
is a limited trading market for our shares. You may not be able to sell your
shares if you need money.
Our
common stock is traded on the Over-The-Counter Bulletin Board, an inter-dealer
automated quotation system for equity securities. During the 30 trading days
ended March 31, 2008, the average daily trading volume of our common stock
was
approximately 41,000 shares. As of March 31, 2008, we had approximately 400
record holders of our common stock (not including an indeterminate number of
stockholders whose shares are held by brokers in “street name”). There has been
limited trading activity in our stock, and when it has traded, the price has
fluctuated widely. We consider our common stock to be “thinly traded” and any
last reported sale prices may not be a true market-based valuation of the common
stock. Stockholders may experience difficulty selling their shares if they
choose to do so because of the illiquid market and limited public float for
our
common stock.
We
are subject to the penny stock rules and these rules may adversely affect
trading in our common stock.
Our
common stock is a “low-priced” security under rules promulgated under the
Securities Exchange Act of 1934. In accordance with these rules, broker-dealers
participating in transactions in low-priced securities must first deliver a
risk
disclosure document which describes the risks associated with such stocks,
the
broker-dealer’s duties in selling the stock, the customer’s rights and remedies
and certain market and other information. Furthermore, the broker-dealer must
make a suitability determination approving the customer for low-priced stock
transactions based on the customer’s financial situation, investment experience
and objectives. Broker-dealers must also disclose these restrictions in writing
to the customer, obtain specific written consent from the customer, and provide
monthly account statements to the customer. The effect of these restrictions
probably decreases the willingness of broker-dealers to make a market in our
common stock, decreases liquidity of our common stock and increases transaction
costs for sales and purchases of our common stock as compared to other
securities.
Transfers
of our securities may be restricted by virtue of state securities “blue sky”
laws which prohibit trading absent compliance with individual state laws. These
restrictions may make it difficult or impossible to sell shares in those
states.
Transfers
of our common stock may be restricted under the securities or securities
regulations laws promulgated by various states and foreign jurisdictions,
commonly referred to as “blue sky” laws. Absent compliance with such individual
state laws, our common stock may not be traded in such jurisdictions. Because
the securities registered hereunder have not been registered for resale under
the blue sky laws of any state, the holders of such shares and persons who
desire to purchase them should be aware that there may be significant state
blue
sky law restrictions upon the ability of investors to sell the securities and
of
purchasers to purchase the securities. These restrictions may prohibit the
secondary trading of our common stock. Investors should consider the secondary
market for our securities to be a limited one.
There
are options and warrants to purchase shares of our common stock currently
outstanding.
As
of
December 31, 2007, we have granted options and warrants to purchase an aggregate
of 4,636,120 shares of our common stock to various persons and entities, of
which options and warrants to purchase up to 4,350,787 shares of our common
stock are currently exercisable. The exercise prices on these options and
warrants range from $0.63 per share to $4.20 per share. If issued, the shares
underlying options and warrants would increase the number of shares of our
common stock currently outstanding and will dilute the holdings and voting
rights of our then-existing shareholders.
We
have no immediate plans to pay dividends.
We
have
not paid any cash dividends to date and do not expect to pay dividends for
the
foreseeable future. In addition, the terms of our line of credit and term loan
from Stillwater National Bank prohibit us from declaring or paying dividends
or
purchasing or redeeming any of our capital stock without the approval of
Stillwater National Bank. We intend to retain earnings, if any, as necessary
to
finance the operation and expansion of our business.
Our
officers and directors collectively own a substantial portion of our outstanding
common stock, and as long as they do, they may be able to control the outcome
of
stockholder voting.
Our
officers and directors are collectively the beneficial owners of approximately
27% of the outstanding shares of our common stock as of the date of this report.
As long as our officers and directors collectively own a significant percentage
of our common stock, our other shareholders may generally be unable to affect
or
change the management or the direction of our company without the support of
our
officers and directors. As a result, some investors may be unwilling to purchase
our common stock. If the demand for our common stock is reduced because our
officers and directors have significant influence over our company, the price
of
our common stock could be materially depressed. The officers and directors
will
be able to exert significant influence over the outcome of all corporate actions
requiring stockholder approval, including the election of directors, amendments
to our certificate of incorporation and approval of significant corporate
transactions.
We
have the ability to issue additional shares of our common stock and shares
of
preferred stock without asking for stockholder approval, which could cause
your
investment to be diluted.
Our
Certificate of Incorporation authorizes the Board of Directors to issue up
to
50,000,000 shares of common stock and up to 10,000,000 shares of preferred
stock. The power of the Board of Directors to issue shares of common stock,
preferred stock or warrants or options to purchase shares of common stock or
preferred stock is generally not subject to stockholder approval. Accordingly,
any additional issuance of our common stock, or preferred stock that may be
convertible into common stock, may have the effect of diluting your
investment.
By
issuing preferred stock, we may be able to delay, defer or prevent a change
of
control.
Our
Certificate of Incorporation permits us to issue, without approval from our
shareholders, a total of 10,000,000 shares of preferred stock. Our Board of
Directors can determine the rights, preferences, privileges and restrictions
granted to, or imposed upon, the shares of preferred stock and to fix the number
of shares constituting any series and the designation of such series. It is
possible that our Board of Directors, in determining the rights, preferences
and
privileges to be granted when the preferred stock is issued, may include
provisions that have the effect of delaying, deferring or preventing a change
in
control, discouraging bids for our common stock at a premium over the market
price, or that adversely affect the market price of and the voting and other
rights of the holders of our common stock.
Our
stock price is volatile.
The
trading price of our common stock has been and continues to be subject to
fluctuations. The stock price may fluctuate in response to a number of events
and factors, such as quarterly variations in operating results, the operating
and stock performance of other companies that investors may deem as comparable
and news reports relating to trends in the marketplace, among other factors.
Significant volatility in the market price of our common stock may arise due
to
factors such as:
| |
·
|
our
developing business;
|
| |
·
|
a
continued negative cash flow;
|
| |
·
|
relatively
low price per share;
|
| |
·
|
relatively
low public float;
|
| |
·
|
variations
in quarterly operating results;
|
| |
·
|
general
trends in the industries in which we do
business;
|
| |
·
|
the
number of holders of our common stock;
and
|
| |
·
|
the
interest of securities dealers in maintaining a market for our common
stock.
|
As
long
as there is only a limited public market for our common stock, the sale of
a
significant number of shares of our common stock at any particular time could
be
difficult to achieve at the market prices prevailing immediately before such
shares are offered, and could cause a severe decline in the price of our common
stock.
There
are limitations in connection with the availability of quotes and order
information on the OTCBB.
Trades
and quotations on the OTCBB involve a manual process and the market information
for such securities cannot be guaranteed. In addition, quote information, or
even firm quotes, may not be available. The manual execution process may delay
order processing and intervening price fluctuations may result in the failure
of
a limit order to execute or the execution of a market order at a significantly
different price. Execution of trades, execution reporting and the delivery
of
legal trade confirmation may be delayed significantly. Consequently, one may
not
be able to sell shares of our Common Stock at the optimum trading
prices.
There
are delays in order communication on the OTCBB.
Electronic
processing of orders is not available for securities traded on the OTCBB and
high order volume and communication risks may prevent or delay the execution
of
one's OTCBB trading orders. This lack of automated order processing may affect
the timeliness of order execution reporting and the availability of firm quotes
for shares of our Common Stock. Heavy market volume may lead to a delay in
the
processing of OTCBB security orders for shares of our Common Stock, due to
the
manual nature of the market. Consequently, one may not able to sell shares
of
our Common Stock at the optimum trading prices.
There
is a risk of market fraud on the OTCBB.
OTCBB
securities are frequent targets of fraud or market manipulation. Not only
because of their generally low price, but also because the OTCBB reporting
requirements for these securities are less stringent than for listed or NASDAQ
traded securities, and no exchange requirements are imposed. Dealers may
dominate the market and set prices that are not based on competitive forces.
Individuals or groups may create fraudulent markets and control the sudden,
sharp increase of price and trading volume and the equally sudden collapse
of
the market price for shares of our Common Stock.
There
is a limitation in connection with the editing and canceling of orders on the
OTCBB.
Orders
for OTCBB securities may be canceled or edited like orders for other securities.
All requests to change or cancel an order must be submitted to, received and
processed by the OTCBB. Due to the manual order processing involved in handling
OTCBB trades, order processing and reporting may be delayed, and one may not
be
able to cancel or edit one's order. Consequently, one may not able to sell
its
shares of our Common Stock at the optimum trading prices.
Increased
dealer compensation could adversely affect our stock
price.
The
dealer's spread (the difference between the bid and ask prices) may be large
and
may result in substantial losses to the seller of shares of our Common Stock
on
the OTCBB if the stock must be sold immediately. Further, purchasers of shares
of our Common Stock may incur an immediate "paper" loss due to the price spread.
Moreover, dealers trading on the OTCBB may not have a bid price for shares
of
our Common Stock on the OTCBB. Due to the foregoing, demand for shares of our
Common Stock on the OTCBB may be decreased or eliminated.
Cautionary
Statement Concerning
Forward-Looking
Information
This
annual report and the documents to which we refer you and incorporate into
this
annual report by reference contain forward-looking statements. In addition,
from
time to time, we, or our representatives, may make forward-looking statements
orally or in writing. These are statements that relate to future periods and
include statements regarding our future strategic, operational and financial
plans, potential acquisitions, anticipated or projected revenues, expenses
and
operational growth, markets and potential customers for our products and
services, plans related to sales strategies and efforts, the anticipated
benefits of our relationships with strategic partners, growth of our
competition, our ability to compete, the adequacy of our current facilities
and
our ability to obtain additional space, use of future earnings, and the feature,
benefits and performance of our current and future products and
services.
You
can
identify forward-looking statements by those that are not historical in nature,
particularly those that use terminology such as “may,” “should,” “expects,”
“anticipates,” “contemplates,” “estimates,” “believes,” “plans,” “projected,”
“predicts,” “potential,” “seek” or “continue” or the negative of these or
similar terms. In evaluating these forward-looking statements, you should
consider various factors, including those described in this annual report under
the heading “Risk Factors.” These and other factors may cause our actual results
to differ materially from any forward-looking statement. We caution you not
to
place undue reliance on these forward-looking statements.
We
base
these forward-looking statements on our expectations and projections about
future events, which we derive from the information currently available to
us.
Such forward-looking statements relate to future events or our future
performance. Forward-looking statements are only predictions. The
forward-looking events discussed in this annual report, the documents to which
we refer you and other statements made from time to time by us or our
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about us.
For
these statements, we claim the protection of the “bespeaks caution” doctrine.
The forward-looking statements speak only as of the date hereof, and we
expressly disclaim any obligation to publicly release the results of any
revisions to these forward-looking statements to reflect events or circumstances
after the date of this filing.
Item
2. PROPERTIES
We
lease
approximately 90,000 square feet of manufacturing space in Conroe,
Texas.
Approximately
30,000 square feet is used by Shumate Machine Works for its operations. On
April
1, 2006, Shumate Machine Works and the lessor terminated the existing lease
for
these premises and entered into a new lease. The lease term ends on March 31,
2011. The base rent is $18,600 per month, representing a reduction of rent
of
$4,000 per month. The new lease grants to Shumate Machine Works an option to
purchase the premises at the end of the lease term for an agreed-upon purchase
price or current appraised price. If it exercises this option, Shumate Machine
Works is entitled to a credit in an amount equal to 5% of all lease payments
paid during the term. Effective February 1, 2007, our rent increased to $22,100
in connection with a 5,000 square foot expansion.
In
December 2005, Shumate Machine Works entered into a lease agreement for a
manufacturing facility of approximately 60,000 square feet to be used by
Hemiwedge Valve Corporation. The term of the lease is three years and the rent
is approximately $14,000 per month. The lease agreement grants to Shumate
Machine Works an option to purchase the premises covered under the lease for
a
purchase price of approximately $1,825,000 before lease. Shumate Machine Works
will be entitled to a credit against the purchase price in an amount equal
to
the amount necessary to amortize the purchase price at 7% over a period of
240
months. The option to purchase expires on September 1, 2009. On May 15, 2008,
Shumate Machine Works exercised the aforementioned option and purchased the
property for $1,726,949 pursuant to a warranty deed. Concurrently with the
purchase, the property was sold to Trader Properties LLC and immediately leased
to Hemiwedge Valve Corporation. The Commercial Lease Agreement between Hemiwedge
Valve Corporation and Trader Properties is for a term of 10 years with a monthly
rent of $24,000 per month, which rent is increased by 2% each year for the
term
of the lease. Hemiwedge Valve Corporation is required to maintain public
liability insurance of not less than $1,000,000 during the term of the lease.
To
secure performance under this lease, Hemiwedge Valve Corporation granted Trader
Properties a lien and security interest against all of its’ non-exempt personal
property that is in the leased premises Shumate Industries guaranteed payment
and performance of the lease pursuant to a Guaranty Agreement. In addition,
Shumate Industries agreed to issue Trader Properties a warrant to purchase
100,000 shares of its common stock at an exercise price of $0.25 per share
prior
to June 15, 2008.
The
existing facilities are adequate for our current operations. We anticipate
that
additional facilities may be leased or purchased as needed and that facilities
that are adequate for our needs are readily available.
Item
3. LEGAL PROCEEDINGS
We
are
not a party to material legal proceedings as of the date of this report. In
April 2008, Sunbelt Machine Works threatened litigation against us relating
to
the to the $150,000 termination payment due under (and in connection with the
termination of) that certain Stock Purchase Agreement dated August 17,
2007. We have failed to make the first 2 installment payments of $37,500
as required under the Stock Purchase Agreement. The parties are currently
in settlement discussions regarding this matter and no lawsuit has been formally
filed. We have recorded $178,995 in accrued expenses in our financial statements
to reflect this contingency.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART
II
Item
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Our
common stock has traded on the OTC Bulletin Board under the symbol “SHMT.OB”
since October 20, 2005. Before that date, our common stock traded on the OTC
Bulletin Board under the symbol “EXCB.OB” since June 10, 2002. Before that date,
our common stock traded on the OTC Bulletin Board under the symbol “GRMA.OB,”
and before that, it traded on the OTC Bulletin Board under the symbol “GRMG.OB.”
The following table shows the high and low bid prices for our common stock
for
each quarter since January 1, 2006 as reported by the OTC Bulletin Board. All
share prices have been adjusted to provide for the one for seven reverse split
which was effected on October 19, 2005 (i.e. they have been increased seven
times to compare them to current prices).
We
consider our stock to be “thinly traded” and any reported sale prices may not be
a true market-based valuation of our stock. Some of the bid quotations from
the
OTC Bulletin Board set forth below may reflect inter-dealer prices, without
retail mark-up, mark-down or commission and may not represent actual
transactions.
|
2006
(OTC Bulletin Board)
|
|
High
Bid
|
|
Low
Bid
|
|
|
First
quarter
|
|
$
|
1.30
|
|
$
|
0.65
|
|
|
Second
quarter
|
|
|
1.60
|
|
|
0.71
|
|
|
Third
quarter
|
|
|
1.65
|
|
|
1.00
|
|
|
Fourth
quarter
|
|
|
1.53
|
|
|
0.90
|
|
| |
|
|
|
|
|
|
|
|
2007
(OTC Bulletin Board)
|
|
|
High
Bid
|
|
|
Low
Bid
|
|
|
First
quarter
|
|
$
|
2.30
|
|
$
|
1.17
|
|
|
Second
quarter
|
|
|
2.14
|
|
|
1.30
|
|
|
Third
quarter
|
|
|
2.03
|
|
|
1.37
|
|
|
Fourth
quarter
|
|
|
1.64
|
|
|
0.60
|
|
As
of May
14, 2008 there were 379 record holders of our common stock. This does not
include an indeterminate number of shareholders whose shares are held by brokers
in street name.
We
have
not paid cash dividends since our inception and we do not contemplate paying
dividends in the foreseeable future. Furthermore, the terms of our line of
credit and term loan with Stillwater National Bank prohibit us from declaring
or
paying dividends or purchasing or redeeming any of our capital stock without
the
approval of Stillwater National Bank. We anticipate that earnings, if any,
will
be retained to retire debt and for the operation of our business.
Shares
eligible for future sale could depress the price of our common stock and lower
the value of your investment. Sales of substantial amounts of our common stock,
or the perception that such sales could occur, could adversely affect prevailing
market prices for shares of our common stock.
Securities
Authorized for Issuance Under Equity Compensation Plans. The
following provides information concerning compensation plans under which our
equity securities are authorized for issuance as of December 31,
2007:
| |
|
(a)
|
|
(b)
|
|
(c)
|
|
|
Plan
Category
|
|
Number of
securities to be
issued upon
exercise of
outstanding
options, warrants
and rights
|
|
Weighted-average
exercise price of
outstanding
options, warrants
and rights
|
|
Number of securities
remaining available
for future issuance
under equity
compensation plans
(excluding securities
reflected in column
(a))
|
|
|
Equity
compensation plans approved by security holders (1)(2)
|
|
|
1,535,810
|
|
$
|
1.42
|
|
|
3,683,643
|
|
|
Equity
compensation plans not approved by security holders
(3)(4)(5)(6)
|
|
|
120,000
|
|
$
|
1.50
|
|
|
—
|
|
|
Total
|
|
|
1,547,810
|
|
$
|
1.43
|
|
|
3,683,643
|
|
|
(1)
|
2005
Stock Incentive Plan.
On
April 29, 2005, our board of directors adopted, and on October 19,
2005,
our stockholders approved, our 2005 Stock Incentive Plan. The purpose
of
the plan is to further align the interests of employees, directors
and
non-employee consultants with those of the stockholders by providing
incentive compensation opportunities tied to the performance of the
common
stock and by promoting increased ownership of the common stock by
such
individuals. The plan is also intended to advance the interests of
the
company and its shareholders by attracting, retaining and motivating
key
personnel upon whose judgment, initiative and effort the successful
conduct of the company’s business is largely dependent. We are permitted
to grant awards of stock options, stock awards, and restricted stock
awards under the plan. The maximum aggregate number of shares of
common
stock that may be issued and sold under all awards granted under
the plan
is 10,000,000 shares, and as of December 31, 2007, we have issued
4,783,690 shares under the plan, and there are options to purchase
1,532,667 shares outstanding under this plan.
|
|
(2)
|
2001
Stock Option Plan.
On
April 8, 2002, we assumed the 2001 Excalibur Holdings, Inc. Stock
Option
Plan, which was approved by the securities holders of Excalibur Holdings
prior to our assumption of the plan. We are authorized to issue options
to
purchase up to 285,714 shares under this plan. As of December 31,
2007,
there were options to purchase 3,143 shares outstanding under this
plan.
|
|
(3)
|
Individual
Option and Warrant Grants.
We
have granted warrants on an individual basis. We have granted no
options
on an individual basis. Of the warrants we have granted on an individual
basis for compensatory services, there are currently warrants to
purchase
in the aggregate up to 12,000 shares of our common stock at a weighted
average price of $1.50 per share.
|
|
(4)
|
Stock
Grant Plan. Our
board of directors adopted our 2003 Stock Grant Plan on June 25,
2003. The
purpose of this plan was to encourage and enable our officers, employees,
directors, consultants, advisors, and other key persons upon whose
judgment, initiative and efforts we largely depends for the successful
conduct of our business to acquire a proprietary interest in us.
We were
permitted to issue up to 428,157 shares of common stock under this
plan,
and to date, we had issued 232,063 shares. On April 20, 2006, our
board of
directors terminated this plan.
|
|
(5)
|
Employee
Stock Incentive Plan.
Our board of directors adopted our 2003 Employee Stock Incentive
Plan on
July 17, 2003. The purpose of this plan was to allow designated officers
and employees of us and our subsidiaries to receive options to purchase
our common stock and to receive grants of common stock subject to
certain
restrictions. We were permitted to issue up to 1,071,429 shares of
common
stock under this plan, and to date, we issued no shares or options
to
purchase shares under this plan. On April 20, 2006, our board of
directors
terminated this plan.
|
|
(6)
|
Non-Employee
Directors and Consultants Retainer Stock Plan.
Our board of directors adopted our 2003 Non-Employee Directors and
Consultants Retainer Stock Plan on July 17, 2003. The purposes of
this
plan was to enable us to promote the interests of us and our stockholders
by attracting and retaining non-employee directors and consultants
capable
of furthering our future success and by aligning their economic interests
more closely with those of our stockholders, by paying their retainer
or
fees in the form of shares of our common stock. We were permitted
to issue
up to 357,143 shares of common stock under this plan, and to date,
we
issued no shares under this plan. On April 20, 2006, our board of
directors terminated this plan.
|
Recent
Sales of Unregistered Securities
| 1. |
On
November 1, 2007, we entered into a Note Purchase Agreement with
a single
accredited investor pursuant to which we issued a $1,000,000 of principal
amount of convertible promissory note and a warrant to purchase 200,000
shares of our common stock (the “Purchase Agreement”). The note has a 1
year term and bears interest at ten percent (10%); provided, however,
that
we are required to prepay the note if we consummate of a subsequent
equity
financing (as defined) within the next 12 months. Interest is payable
monthly in arrears, however we have right to defer any interest payment
and accrue same to principal. The note is convertible into our common
stock at a fixed conversion price of $1.89. In addition, if we close
a
subsequent equity financing within the next 12 months, the note holder
has
the option to convert the outstanding balance of the note into such
financing on the same terms as the other investors in such
financing.
|
Under
the
terms of this note and the related warrant, the note and the warrant are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of
the
Securities Exchange Act of 1934, as amended
The
note
was issued with a warrant to purchase up to 200,000 shares of our common stock
at an exercise price of $1.89 per share, subject to adjustment. The warrant
holder may designate a "cashless exercise option." This option entitles the
warrant holders to elect to receive fewer shares of common stock without paying
the cash exercise price. The number of shares to be determined by a formula
based on the total number of shares to which the warrant holder is entitled,
the
current market value of the common stock and the applicable exercise price
of
the warrant.
We
granted the investor in the offering “piggyback” registration rights for the
resale of the shares issuable upon conversion of the note and upon exercise
of
the warrant.
We
relied
on the exemption from registration provided by Regulation D and/or Section
4(2)
of the Securities Act of 1933, as amended, for the offer and sale of the note
and the warrant.
The
net
proceeds from the financing for working capital and general corporate purposes.
An NASD member firm, acted as placement agent in connection with the offering
and received $140,000 in commissions. Our net proceeds of this offering after
the payment of commissions, fees and other expenses of the offering were
approximately $850,000.
| 2. |
In
March 2008, we issued $150,000 in 12% demand promissory notes to
three
accredited investors in equal $50,000 notes. The proceeds were used
for
working capital and general corporate purposes. The issuance was
exempt
under Section 4(2) of the Securities Act of 1933, as
amended.
|
| 3. |
In
March and April, 2008, we issued $25,000 and $75,000, respectively,
12%
demand promissory note to a single investor. The proceeds were used
for
working capital and general corporate purposes. The issuance was
exempt
under Section 4(2) of the Securities Act of 1933, as
amended.
|
Item
6. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATIONS
The
following discussion and analysis should be read in conjunction with our audited
consolidated financial statements and related notes included in this report.
This report contains “forward-looking statements” within the meaning of the
Private Securities Litigation Reform Act of 1995. The statements contained
in
this report that are not historic in nature, particularly those that utilize
terminology such as “may,” “will,” “should,” “expects,” “anticipates,”
“estimates,” “believes,” or “plans” or comparable terminology are
forward-looking statements based on current expectations and
assumptions.
Various
risks and uncertainties could cause actual results to differ materially from
those expressed in forward-looking statements. Factors that could cause actual
results to differ from expectations include, but are not limited to, those
set
forth under the section “Risk Factors” set forth in this report.
The
forward-looking events discussed in this annual report, the documents to which
we refer you and other statements made from time to time by us or our
representatives, may not occur, and actual events and results may differ
materially and are subject to risks, uncertainties and assumptions about us.
For
these statements, we claim the protection of the “bespeaks caution” doctrine.
All forward-looking statements in this document are based on information
currently available to us as of the date of this report, and we assume no
obligation to update any forward-looking statements. Forward-looking statements
involve known and unknown risks, uncertainties and other factors that may cause
the actual results to differ materially from any future results, performance
or
achievements expressed or implied by such forward-looking
statements.
General
Shumate
Industries is a Texas based energy field services company. Shumate is a holding
company that, through its subsidiaries, operates in two principal businesses:
contract machining and manufacturing and a valve product line. Shumate seeks
to
leverage its existing infrastructure, expertise, and customer channels to grow
its business and introduce new technologies to the energy markets.
We
currently employ 87 people at two plants totaling approximately 90,000 square
feet in Conroe, Texas, north of Houston. Our executive offices are located
at
12060 FM 3083, Conroe, Texas 77301. Our telephone number is (936) 539-9533
and
our Internet address is www.shumateinc.com.
Contract
Machining and Manufacturing - Shumate Machine Works, Inc.
Our
contract machining and manufacturing division, Shumate Machine Works, Inc.,
focuses in the energy field services market. We manufacture products, parts,
components, and assemblies for our customers designed to their specifications.
We provide state of the art 3-D modeling software, computer numeric-controlled,
or CNC, machinery and manufacturing expertise to our customers’ research and
development, engineering, and manufacturing departments for desired results
with
their products.
The
diverse line of products we manufacture include the following:
|
·
|
Expandable
tubular products including liner hangers, launchers and sand screens
for
energy field service applications;
|
|
·
|
Top
drive assemblies, sub-assemblies and spare service parts;
|
|
·
|
Measurement
while drilling (MWD) products;
|
|
·
|
Directional
drilling products;
|
|
·
|
Completion
tools;
|
|
·
|
Exploration
products for research and
development;
|
|
·
|
Natural
gas measurement equipment, including fittings and
valves;
|
|
·
|
Power
frames for centrifugal pumps and mud motors;
and
|
|
·
|
Sub-sea
control equipment.
|
Our
investment in capital equipment and software provides us capabilities to perform
close tolerance highly specialized work for oil field equipment and tools,
process controls, formation evaluation tools, and exploration and production
products. Our capabilities include producing large-diameter products and close
tolerance machined parts that range up to thirty-four feet in length using
a
myriad of materials of construction including high grade carbon steel, high
grade stainless steel, nickel, and chrome based alloys. We use state of the
art,
large part CNC equipment in the production of these parts and have developed
in-house trade secrets and processes with respect to the manufacture of certain
products. We produce complex assemblies, including expandable tubing technology
products that are used in field service operations under extreme environmental
conditions for oil and gas exploration.
Our
customers include, without limitation, Baker Hughes, BJ Services Company, Canrig
Drilling Technology, a Nabors Industries company, Enventure Global Technologies,
FMC Technologies, Halliburton Energy Services, National Oil Well Varco,
Oceaneering Intervention Engineering, Shell Development, Smith International,
and Weatherford International.
Valve
Product Technology - Hemiwedge Valve Corporation
We
formed
Hemiwedge Valve Corporation as a wholly-owned subsidiary to develop and
commercialize a new patented technology addressing what we believe to be a
significant opportunity in the global valve market.
Our
first
product line, known as the Hemiwedge® Cartridge valve, is a quarter-turn
hemispherical wedge valve engineered to provide what we believe are substantial
technological improvements compared with what is available in the marketplace
today, such as traditional butterfly, ball, and gate valve designs.
We
believe that the patented design of the Hemiwedge® Cartridge valve combines the
benefits of quarter-turn valves with the durability of gate valves. The
Hemiwedge® Cartridge valve has a non-rotating core which guides the fluid flow
through the valve to the Hemiwedge® itself. This is a hollow hemisphere where
the inner and outer walls are slightly offset, having non-concentric centers,
producing a hemispherical wedge shape - the “Hemiwedge®.” Operation of the valve
rotates the Hemiwedge®, a quarter-turn, moving it between the core and valve
seat, thus controlling the flow. We believe that these design features in the
combination of the Hemiwedge® shut off and stationary core make the Hemiwedge®
Cartridge valve unique.
Reorganization/Debt
Forgiveness
On
October 19, 2005, we completed a restructuring of our company, resulting in
a
significant reduction of our outstanding debt and providing us with a
strengthened balance sheet and reduced debt servicing requirement. The
restructuring was effected through an out-of-court restructuring, or
“recapitalization plan,” which consisted of, among other things, a restructuring
of debt we owed to Stillwater National Bank, or Stillwater, the issuance of
stock in exchange for the cancellation and conversion of debt, the issuance
of
restricted stock awards, the change of our name to “Shumate Industries, Inc.”,
and a 1-for-7 reverse stock split. A detailed description of the restructuring
plan is set forth in the Description of Business in our Annual Report on Form
10-KSB as filed with the Securities and Exchange Commission for the year ended
December 31, 2005.
As
a
result of the reorganization, in 2005, we recognized $4,222,743 in debt
forgiveness income from Stillwater and $204,414 in debt forgiveness income
related to the exchange of the unsecured notes for common stock.
On
March
31, 2006, we entered into a First Amendment to Loan Agreement and Guarantor’s
Consent with Stillwater National Bank, or Stillwater, pursuant to which
Stillwater agreed to forgive $2,000,000 of indebtedness under an amended and
restated term promissory note which we had previously delivered to Stillwater
in
connection with our October 19, 2005 reorganization. In connection with this
first amendment, we executed and delivered a new amended and restated term
promissory note in the principal face amount of $3,633,053.
The
new
amended and restated note requires one interest only payment on March 31, 2006,
and thereafter, requires us to make 24 equal monthly payments in an amount
sufficient to fully amortize principal and interest on the amended and restated
note over 84 months. The amended and restated note is due and payable on April
19, 2008, at which time we will be required to make a balloon payment of the
entire outstanding principal balance and all accrued interest. The note bears
interest at a rate equal to the prime rate plus two percent, and it is secured
by a first priority security interest in all of our existing and future
assets.
As
a
result of this amendment, we recorded debt forgiveness income in the amount
of
$2,000,000 in the first quarter of 2006.
On
April
13, 2006, we entered into a letter agreement with Stillwater National Bank,
or
Stillwater, pursuant to which Stillwater agreed to accept $500,000 from us
in
full satisfaction of a secured convertible promissory note in the principal
amount of $2,500,000 that we had previously issued to Stillwater in connection
with our October 19, 2005 reorganization. Stillwater’s agreement to accept this
reduced amount was subject to the following conditions: (i) the $500,000 payment
must come from new equity funds and cannot be borrowed or in any way become
our
obligation or an obligation of our related concerns, (ii) Stillwater will not
assign the rights in the note to another party and the terms of the new equity
investment must contain no terms which allow the investor(s) of the new equity
funds to gain any special benefit resulting from the spread between the $500,000
and the face amount of the note, (iii) the new equity funds must be raised
upon
terms to the investors no better than those recently approved by Stillwater
for
dilution of its equity interest, (iv) a breach of (i)-(iii) above will
constitute a breach of the reorganization agreement dated October 19, 2005
between us, Stillwater, and other parties, and (iv) payment of the full $500,000
must be made on or before September 1, 2006. On August 9, 2006, the letter
agreement was amended to increase the payment by $25,000 to $525,000 if payment
is made between September 2, 2006 and December 1, 2006 and by $50,000 to
$550,000 if payment is made between December 2, 2006 and March 1, 2007. All
other conditions as set forth above remain the same. On December 1, 2006, we
delivered $525,000 to Stillwater as full payment of the $2.5 million debenture.
In connection with this payment, Stillwater agreed to the cancellation of the
entire remaining outstanding principal and approximately $272,000 of accrued
interest due and owing under the terms of the debenture at December 1,
2006.
Critical
Accounting Policies
Our
discussion and analysis of our financial conditions and results of operations
is
based upon our consolidated financial statements, which have been prepared
in
accordance with generally accepted accounting principles in the United States.
The preparation of financial statements requires managers to make estimates
and
disclosures on the date of the financial statements. On an on-going basis,
we
evaluate our estimates, including, but not limited to, those related to revenue
recognition. We use authoritative pronouncements, historical experience, and
other assumptions as the basis for making judgments. Actual results could differ
from those estimates. We believe the following critical accounting policies
affect our more significant judgments and estimates in the preparation of our
consolidated financial statements.
Revenue
Recognition
Revenues
of Shumate Machine Works are derived primarily from machining of oil field
drilling parts, components, and tools for our customers. Shumate Machine Works’
revenue is recognized when persuasive evidence of an arrangement exists, the
service or sale is complete, the price is fixed or determinable, and
collectibility is reasonably assured. This typically occurs when the order
is
shipped. Shipping terms are FOB shipping and title passes to the customer at
the
time the product is shipped. Customers have the right to inspection and
acceptance for generally up to five days after taking delivery. Orders may
not
be returned by customers due to the custom specifications of each product,
but
rework on items is sometimes necessary if the product was not within the
original order specifications. We test all orders against the customer’s order
specifications prior to shipment. Customer requests for rework and customer
rejection of shipments have been historically low.
Revenues
of Hemiwedge Valve Corporation are derived from Hemiwedge® Cartridge valve
product sales and an agreement to perform contractual research and development
services. The research and development services revenue is recognized as the
services are performed and related costs are incurred and recorded. The valve
product sales revenue is recognized when persuasive evidence of an arrangement
exists, the sale is complete, the price is fixed or determinable, and
collectibility is reasonably assured. This typically occurs when the order
is
shipped. Shipping terms are FOB shipping and title passes to the customer at
the
time the product is shipped. Customers have the right to inspection and
acceptance for generally up to five days after taking delivery.
Accounts
Receivable
Trade
accounts receivable are recorded at the invoiced amount and do not bear
interest. The allowance for doubtful accounts represents our estimate of the
amount of possible credit losses existing in our accounts receivable. We
determine the allowance based on management’s estimate of likely losses based on
a review of current open receivables and our historical write-off experience.
We
review the adequacy of our allowance for doubtful accounts quarterly.
Significant individual accounts receivable balances and balances which have
been
outstanding greater than 90 days are reviewed individually for collectibility.
Account balances, when determined to be uncollectible, are charged against
the
allowance.
Concentration
of credit risk
At
December 31, 2007, two customers accounted for 30% of our trade accounts
receivable balance. Because management believes that all such amounts are
collectible due to the nature of the customers and our collection experience
with the payers, we have not recorded an allowance for doubtful accounts for
these receivables.
Inventory
Inventory
is stated at the lower of cost (first-in, first-out for raw materials and
specific job cost for work-in-process and finished goods) or market. Slow-moving
inventories are periodically reviewed for impairment in value. Work-in-process
and finished goods include labor, materials and production
overhead.
Results
of Continuing Operations
Basis
of Presentation
The
results of operations set forth below for the years ended December 31, 2007
and
2006 are those of the continuing operations of Shumate Industries, which include
Shumate Machine Works and Hemiwedge Valve Corporation on a consolidated
basis.
The
following table sets forth, for the periods indicated, certain selected
financial data expressed as a percentage of net sales from continuing
operations:
| |
|
Year
Ended
|
|
| |
|
December
31,
|
|
| |
|
2007
|
|
2006
|
|
|
Net
sales
|
|
|
100.0
|
%
|
|
100.0
|
%
|
|
Cost
of sales
|
|
|
(77.7
|
)
|
|
(78.2
|
)
|
|
Gross
profit
|
|
|
22.3
|
|
|
21.8
|
|
| |
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
(70.8
|
)
|
|
(44.4
|
)
|
|
Depreciation
|
|
|
(2.1
|
)
|
|
(1.1
|
)
|
|
Bad
debt recovery (expense)
|
|
|
-
|
|
|
0.3
|
|
|
Research
and development
|
|
|
(19.3
|
)
|
|
(9.7
|
)
|
|
Operating
loss
|
|
|
(69.9
|
)%
|
|
(33.1
|
)%
|
Comparison
of the Years ended December 31, 2007 and 2006
Net
sales.
Net
sales increased by $1,313,732 or an increase of 17% to $9,033,614 for the year
ended December 31, 2007 from $7,719,882 for the year ended December 31,
2006.
On
a
segmental reporting basis, Shumate Machine Works sales increased by $524,961,
or
an increase of 7%, to $7,928,763 for the year ended December 31, 2007, compared
to $7,403,802 for the year ended December 31, 2006. Continued increases in
commodity prices, particularly in the energy sector, and activity levels in
the
energy field services industry resulted in a 30% increase in volume for the
products we manufacture. As a result of this increased demand, volumes have
increased for Shumate products and components including expandable liner hangers
and top drive assemblies. Our customers and market trends such as current rig
count and commodities futures prices indicate that this activity level in the
energy field services industry will remain in fiscal year 2008.
Hemiwedge
Valve Corporation sales increased by $788,771, or an increase of 250%, to
$1,104,851 for the year ended December 31, 2007, compared to $316,080 for the
year ended December 31, 2006. These revenues reflect amounts earned for services
completed under the development agreement with At Balance Americas, LLC. as
well
as Hemiwedge® Cartridge valve sales. Many of our customers entered into trial
test programs for our Hemiwedge® Cartridge valve during 2007 and as such, we
believe will become larger purchasing customers in 2008 and thereafter. We
believe the industrial valve market to continue to grow in 2008 based on peer
company announcements and industry forecasts.
Cost
of Sales.
Consolidated cost of sales increased by $985,524 or 16%, to $7,021,894, for
the
year ended December 31, 2007, from $6,033,370 for the year ended December 31,
2006. As a percentage of net sales, cost of sales decreased to 77.7% of net
sales for the year ended December 31, 2007 versus 78.2% of sales for the year
ended December 31, 2006. Cost of sales for Shumate Machine Works increased
by
$1,011,377, while cost of sales for Hemiwedge Valve Corporation increased by
$345,274. Cost of sales includes various allocated overhead items such as
facility lease, utilities, and indirect labor costs with related payroll tax
and
employee benefits expense. The decrease in cost of sales as a percentage of
net
sales resulted primarily from higher volumes of our products covering more
of
our fixed costs within cost of sales, partially offset by wage inflation of
our
direct labor. In 2007, our 30% increase in sales volume covered a 3% increase
in
our fixed costs and a 29% increase in wage inflation for our direct labor.
As a
result, we generated a gross profit of $2,011,720, with a gross profit margin
of
22.3%, for fiscal 2007. We are focused on increasing revenues and seeking to
improve gross margins by generating more sales with higher pricing for Shumate
products and components. We believe that continued improvement in the energy
markets resulting from higher commodity prices will continue to lead to better
pricing, volumes and gross margins.
Selling,
general, and administrative.
Selling,
general and administrative expenses increased by $2,969,061 to $6,396,410 for
the year ended December 31, 2007, from $3,427,349 for the year ended December
31, 2006. As a percentage of net sales, selling, general and administrative
expenses were 70.8% for the year ended December 31, 2007, as compared to 44.4%
for the comparable period in 2006. Our selling, general, and administrative
expenses have increased from professional accounting, lawyer and consulting
fees
associated with public company costs and Sarbanes-Oxley requirements which
increased by $369,000 in 2007. Additionally, expenses have increased by $554,000
from higher wage expense relating to executives and sales and marketing
personnel hired at Hemiwedge Valve Corporation in connection with the increased
operations and activities during 2007. Other increases were related to product
advertising, travel and marketing expenses of $247,000 at Hemiwedge Valve
Corporation. We also incurred approximately $662,872 in non-cash stock and
option awards associated with FASB 123R in the fiscal year ended December 31,
2007. Additionally, we
recorded an expense of $333,575 in the quarter ending September 30, 2007 for
acquisition related costs associated with the failed acquisition of Sunbelt
Machine Works, Inc. Our firm also expensed approximately $374,000 from the
cost
of our shares issued in connection with the hiring of our investment relations
firm. The Board also agreed to indemnify an officer of the Company, and record
an accrued expense of approximately $580,000 in connection with a judgment
personally assessed on our officer from a previously discharged corporate
liability.
Depreciation.
Depreciation
expense increased by $157.961 to $608,448 for the year ended December 31, 2007
from $450,487 for the year ended December 31, 2006, primarily due to $564,000
of
new equipment purchases and $57,000 in leasehold improvements to our Hemiwedge
Valve Corporation facility.
Bad
debt expense.
During
the year ended December 31, 2006, we reduced our allowance for bad debts by
$20,000, to $40,000. We did not charge off any accounts receivable in the fiscal
year ended December 31, 2007.
Research
and development. Research
and development expense increased by $990,795 to $1,741,434 for the year ended
December 31, 2007 from $750,639 for the year ended December 31, 2006. We
anticipate that we will continue to incur research and development expenses
as
we continue the development of the Hemiwedge® valve technology and implement
additional product forms and applications of the valve technology. We expect
that these expenses will include consulting fees, engineering fees, design
fees
and costs, development fees and costs, third party testing costs, patent and
other intellectual property filing costs, legal fees, prototyping costs, costs
of new materials, and other research and development costs.
Operating
loss.
We
incurred an operating loss of $6,318,036 for the year ended December 31, 2007,
a
increase of $3,764,200 as compared to an operating loss of $2,553,836 for the
year ended December 31, 2006.
On
a
segmental reporting basis, Shumate Machine Works recorded $571,263 in operating
income for the year ended December 31, 2007. This operating income resulted
from
increased revenues at Shumate Machine Works.
Hemiwedge
Valve Corporation recorded an operating loss of $3,525,693 for the year ended
December 31, 2007. This operating loss was primarily due to the scale -up of
the
Hemiwedge Valve Corporation operations, including significant expenses of
$380,000 for new executives and sales and marketing personnel additions and
$38,000 related to recruiting costs. Additionally, we incurred $1,741,434 in
research and development expenses.
In
addition, we incurred general corporate overhead expenses of $3,363,606 for
the
year ended December 31, 2007 resulting from the costs of operating a publicly
reporting company including $733,000 for accounting, legal and professional
fees, for Sarbanes-Oxley consulting costs, filing costs, $530,000 for investor
relations and shareholder meeting costs.
We
have
not reduced our fixed costs or our research and development costs significantly
enough to bring them below the revenues we generated in the period. In the
event
that we successfully commercialize our Hemiwedge® products, we anticipate that
increased revenues from the sales of our Hemiwedge® products will improve our
results of operations.
Debt
forgiveness income.
We
recognized $2,000,000 in debt forgiveness income during the year ended December
31, 2006 as a result of the amendment of our loan agreement with Stillwater
National Bank.
Interest
expense.
Interest
expense increased by $137,453 to $892,748 for the year ended December 31, 2007,
from $755,295 for the year ended December 31, 2006. Our interest expense
increased due to increased amount of debt from the convertible notes issued
in
2007 along with our senior credit facility costs.
Provision
for income taxes.
We
generated a net loss of $7,210,784 for the year ended December 31, 2007 compared
to a net loss of $1,309,131 for the year ended December 31, 2006. We have made
no provision for income taxes due to our tax loss carry-forward from previous
years.
Liquidity
and Capital Resources
We
have
financed our operations, acquisitions, debt service, and capital requirements
through cash flows generated from operations, debt financing, capital leases,
and issuance of equity securities. We had a working capital deficit of
$4,647,597 at December 31, 2007. We had cash of $83,591 as of December 31,
2007,
compared to having cash of $1,547,326 at December 31, 2006.
We
used
$4,475,529 of
net
cash in operating activities for the year
ended December
31,
2007, compared to using $1,885,632 in the year ended December
31,
2006. Cash used in operating activities is primarily due to an increase in
inventory of $365,000 and $220,000 in other assets This was offset by non-cash
charges of $608,000 for amortization and depreciation and $1,346,000
for issuances
of stock, stock options and warrants.
Net
cash
flows used in investing activities was $450,849 for the year ended December
31,
2007, compared to $895,087 in the year ended December
31,
2006. Cash of $388,773 was used for the purchase of property and equipment
and
$62,076 was used for patent investments.
Net
cash
flows provided by financing activities were $3,462,643 for the year ended
December
31,
2007, compared to net cash provided by financing activities of $4,113,827 in
the
year ended
December
31,
2006. Cash provided by financing activities is primarily due to proceeds from
notes payable of $3,300,000, offset by payments on notes payable of $460,473
and
net decrease in draws on bank credit line of $14,310.
Bank
Credit Facility
The
primary source of our financing has been our credit facility with Stillwater
National Bank. Our credit facility with Stillwater National Bank was
restructured on October 19, 2005 and further amended as set forth
below.
On
February 8, 2007 and effective January 19, 2007, we renewed our $1,000,000
secured revolving line of credit facility with Stillwater. The amount we can
borrow on the line of credit subject to qualifying accounts receivable and
inventory. The advances available under the line of credit are limited to a
borrowing base of the sum of (a) 85% of eligible accounts receivable, and (b)
50% of eligible inventory. The line of credit bears interest at a rate equal
to
the prime rate plus two percent, and it is secured by a first priority security
interest in all of our existing and future assets. The line of credit expires
on
April 19, 2008.
On
January 25, 2008, we entered into an Amended and Restated Loan Agreement with
Stillwater National Bank and Trust Company (the “Amended Loan Agreement”.). On
October 19, 2005 we entered into that certain Agreement (as reported in our
Current Report on Form 8-K dated October 19, 2005) with Stillwater, which
Agreement was amended by a certain First Amendment to Agreement and Guarantors’
Consent dated October 19, 2006, as amended by a certain Second Amendment to
Agreement dated effective January 19, 2007 (collectively, the “Prior
Agreement”).
The
Amended Loan Agreement amends and restates the Prior Agreement as
follows:
1. Term
Loan.
Our
prior Term Note dated October 19, 2005 in favor of Stillwater had an outstanding
principal balance of $3,003,998 (as of January 25, 2008) and a maturity date
of
April 19, 2008. Stillwater loaned us (along with our co-borrowers Shumate
Machine Works, Inc. and Hemiwedge Valve Corporation) $3,329,000 pursuant to
a
new term note dated January 25, 2008, which funds advanced under the new term
note were used to refinance the old term note and provide working capital.
The
new term note requires us to make 26 equal monthly payments (beginning on
February 28, 2008) in an amount sufficient to fully amortize principal and
interest on the amended and restated note over 64 months. The new term note
is
due and payable on April 19, 2010. The new term note bears interest at a rate
equal to the prime rate plus two percent, and it is secured by a first priority
security interest in all of our existing and future assets as well as a security
interest in certain personal assets of Larry Shumate.
2. Revolving
Loan.
Our
prior revolving promissory note dated October 19, 2005 in favor of Stillwater,
had an outstanding principal balance of $893,676 (as of January 25, 2008) and
a
maturity date of April 19, 2008. Stillwater loaned us (and the other
co-borrowers set forth above) $1,000,000 pursuant to a new revolving promissory
note dated January 25, 2008, which funds advanced under the new revolving
promissory were used to refinance the old revolving promissory note and provide
working capital. The initial balance on the line of credit was equal to the
balance of our prior line of credit with Stillwater ($893,676 principal balance
as of January 25, 2008). The advances available under the new revolving
promissory note are limited to a borrowing base of the sum of (a) 85% of
eligible accounts receivable, and (b) 50% of eligible inventory. The new
revolving promissory note bears interest at a rate equal to the prime rate
plus
two percent, and it is secured by a first priority security interest in all
of
our existing and future assets as well as a security interest in certain
personal assets of Larry Shumate. On the 28th
day of
each month, beginning January 28, 2008, we will pay all interest accrued on
the
new revolving promissory note. The amount we can borrow on the line of credit
is
subject to qualifying accounts receivable and inventory. The new revolving
promissory note will mature and become fully due and payable on April 19,
2009.
The
loan
documents for the Stillwater line of credit and term loan require us to meet
certain financial ratios and tests. Stillwater issued waivers under the original
credit facility for periods tested where were not in compliance with certain
covenants thereunder. However, we have not received a waivers for the March
31,
2008 period under the Amended Stillwater Credit Facility where we were not
in
compliance with certain covenants thereunder. As of the date of this report,
we
have not received a notice of default from Stillwater. Should Stillwater decide
to declare a default, it would result in an acceleration of the related debt
and
could result in Stillwater foreclosing on our assets.
Convertible
Promissory Notes
Since
July 1, 2007, we have sold $3,050,000 of principal amount of convertible
promissory notes with warrants to purchase 610,000 shares of its common stock
to
accredited investors. The notes have a 1 year term and bear interest at ten
percent (10%); provided, however, that we are required to prepay the note if
we
consummate a subsequent equity financing (as defined) within the next 12 months.
Interest is payable monthly in arrears; however, we have the right to defer
any
interest payment and accrue same to principal. The notes are convertible into
our common stock at a fixed conversion price of $1.89. In addition, if we close
a subsequent equity financing within the next 12 months, the note holders have
the option to convert the outstanding balance of such note into such financing
on the same terms as the other investors in such financing.
Under
the
terms of the notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of our then
outstanding common stock as determined in accordance with Section 13(d) of
the
Securities Exchange Act of 1934, as amended.
The
notes
were issued with warrants to purchase up to 610,000 shares of our common stock
at an exercise price of $1.89 per share, subject to adjustment. The warrant
holders may designate a “cashless exercise option.” This option entitles the
warrant holders to elect to receive fewer shares of common stock without paying
the cash exercise price. The number of shares to be determined by a formula
based on the total number of shares to which the warrant holder is entitled, the
current market value of the common stock and the applicable exercise price
of
the warrant.
Shumate determined
that the conversion feature of the note and the warrants issued were not
derivative instruments pursuant to SFAS No. 133, Accounting for Derivatives,
as
amended. Under the provisions of EITF Issue 98-5, Shumate estimated that
fair value of the beneficial conversion feature and warrants at the issuances
of
the notes using Black-Scholes option pricing model to exceed the principal
vale
of the note. The resulting discount of $552,495 is being amortized over the
life
of the notes using the effective interest method. The amortized amount for
the
year ended December 31, 2007 is $187,589.
We
granted the investors in the offering registration rights for the resale of
the
shares issuable upon conversion of the note and upon exercise of the warrant.
To
the extent that all such shares are not registered pursuant to the granted
piggyback registration rights, Shumate agreed to register the remaining
underlying shares, if any, by January 6, 2008. We accrued approximately $26,000
at December 31, 2007 for estimated liquidated damages penalties expected to
be
due such investors for failure to timely register their shares as required
under
the registration rights agreement.
We
used
the net proceeds from the financing for working capital and general corporate
purposes. An NASD member firm acted as primary placement agent in connection
with the offering and received $210,000 in commissions while another NASD member
firm received $5,000 in placement agent fees. . In addition, another $10,000
in
legal fees were incurred. The net proceeds of this offering after the payment
of
commissions, fees and other expenses of the offering were approximately
$2,825,000.
Liquidity
and Capital Requirements
In
2005,
we successfully restructured our outstanding indebtedness with Stillwater
National Bank and our unsecured creditors. In addition, we have seen an increase
in pricing for our oil and gas drilling products and components, which allowed
us to generate gross profits since the third quarter of 2005, as discussed
within this report. Even with these improvements in our capital structure and
results of operations, we are still operating on a net loss basis, and we will
need to continue to service our debt obligations from our continuing operations.
In
addition, we have a $1,000,000 secured revolving line of credit facility,
subject to qualifying accounts receivable and inventory, with Stillwater
National Bank. The outstanding balance on this line of credit was approximately
$526,206 at May 14, 2008, and at the time, $1,000,000 was the maximum allowed
due to the amount of the qualifying accounts receivable and inventory, also
referred to as our borrowing base. The outstanding balance on the line of credit
and the borrowing base fluctuate based on our available working capital, our
qualifying accounts receivable and inventory, and at various points in time
we
may have the ability to borrow additional funds on this line of
credit.
As
of the
date of this report, we do not believe that we will be able to fund our
operations, working capital requirements, and debt service requirements in
Shumate Machine Works through fiscal year 2008 through existing working capital
and cash flows generated from operations, although our working capital position
may fluctuate depending on the timing of our receipt of research and development
milestone payments under the Hemiwedge Valve Corporation’s development agreement
with At Balance Americas, LLC. It is possible that we may not achieve any
further milestones set forth in the development agreement, in which case our
working capital will be materially compromised.
In
addition, we have completed the beta development of the Hemiwedge® Cartridge
valve technology and have commenced the commercialization of the Hemiwedge®
Cartridge valve product. We have funded the initial launch of the Hemiwedge®
valve products through existing working capital, cash flows generated from
operations, the equity raises completed in 2006, the proceeds from the exercise
of warrants in March 2007, and the convertible debt raise referenced above.
Our
revolving line of credit does not allow permit us to borrow against inventory
and accounts receivable of Hemiwedge Valve Corporation. Additionally, our
existing working capital and cash flows generated from operations will not
be
sufficient to conduct full implementation of the Hemiwedge® Cartridge valve
product line.
Accordingly,
we will need to finance our operations through additional bank borrowings under
our Stillwater line of credit or other capital financings. Since our collateral
may not be sufficient to borrow additional amounts under the Stillwater line
of
credit at such time, particularly since we may not borrow against Hemiwedge
accounts receivable or inventory under our current line of credit, we will
need
to seek additional debt or equity financing, in the form of a private placement
or a public offering, a strategic alliance, or a joint venture. Such additional
financing, alliances, or joint venture opportunities might not be available
to
us, when and if needed, on acceptable terms or at all. If we are unable to
obtain additional financing in sufficient amounts or on acceptable terms under
such circumstances, our operating results and prospects could be adversely
affected. In addition, any debt financings or significant capital expenditures
require the written consent of our lender, Stillwater National Bank.
Our
management has also contemplated monetizing certain assets to address our
capital needs. Presently, the assets held by our Shumate Machine Works
subsidiary are one opportunity available for sale which we are considering
to
address our capital needs. As such, our management is currently searching for
suitable acquisition partners to purchase all, or substantially all of the
assets of Shumate Machine Works on an informal basis. Such a sale, if
consummated, could enable us to retire our senior debt. This, coupled with
the
continued growth of our Hemiwedge® valve product lines, could result in the
remaining company being a more attractive candidate for additional future debt
and/or equity financing.
In
addition, we have initiated a formal search program for other
technology-oriented products or companies, targeting complementary market
segments. The acquisition of such products may also require us to obtain
additional debt or equity financing, and we may issue our common stock as all
or
part of the purchase price for any such acquisition.
We
may
continue to incur operating losses if the energy field services market
deteriorates or softens. Such losses could require us to renegotiate our
affirmative covenants with our lender, including the liquidity ratio and debt
service ratios. Our ability to comply with these covenants in the future will
depend on whether we can obtain additional capital financing or increase our
cash flows from operations.
In
addition to the 2005 recapitalization and fiscal 2006 and 2007 equity and
convertible debt financings, we anticipate that, due in part to increasing
energy prices, demand for our energy related field service products will
continue to increase in the coming fiscal year. The fiscal 2005 reorganization,
debt restructuring during 2005 and 2006, equity and convertible debt financings
during 2006 and 2007, operating expense reductions, and our intent to capitalize
on anticipated increase in demand are the steps that we have been taking to
try
to return to profitability. However, it is possible that none of these
steps will be completed and that we may never return to
profitability.
We
intend
to retain any future earnings to retire debt, finance the expansion of our
business and any necessary capital expenditures, and for general corporate
purposes. All of our bank debt contains restrictions as to the payment of
dividends.
Off-Balance
Sheet Arrangements
None.
Item
7. FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Board of Directors
Shumate
Industries, Inc.
Conroe,
Texas
We
have
audited the accompanying consolidated balance sheets of Shumate Industries,
Inc., as of December 31, 2007 and 2006 and the related consolidated statements
of operations, changes in stockholders’ equity (deficit) and cash flows for the
years ended December 31, 2007and 2006. These consolidated financial statements
are the responsibility of Shumate’s management. Our responsibility is to express
an opinion on these consolidated financial statements based on our
audits.
We
conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audits to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatements. The
Company is not required to have, nor were we engaged to perform, an audit of
its
internal control over financial reporting. Our audits included consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall consolidated financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In
our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Shumate as
of
December 31, 2007 and 2006 and the results of its consolidated operations and
its consolidated cash flows for the periods described in conformity with
accounting principles generally accepted in the United States of
America.
As
discussed in Note 2 to the consolidated financial statements, the accompanying
consolidated financial statements have been prepared assuming that Shumate
will
continue as a going concern. Shumate requires significant amount of cash in
its
operations and does not have sufficient cash to fund its operations for the
next
twelve months, which raises substantial doubt about its ability to continue
as a
going concern. Management’s plans regarding those matters are also described in
Note 2. The consolidated financial statements do not include any adjustments
that might result from the outcome of this uncertainty.
MALONE
& BAILEY, PC
www.malone-bailey.com
Houston,
Texas
June
2,
2008
SHUMATE
INDUSTRIES, INC.
CONSOLIDATED
BALANCE SHEETS
| |
|
December
31,
|
|
December
31,
|
|
| |
|
2007
|
|
2006
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
83,591
|
|
$
|
1,547,326
|
|
|
Accounts
receivable, net of allowance for doubtful accounts of $40,000 and
$40,000
|
|
|
502,383
|
|
|
554,134
|
|
|
Inventory
|
|
|
1,259,166
|
|
|
893,650
|
|
|
Prepaid
expense and other current assets
|
|
|
497,245
|
|
|
198,753
|
|
| |
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
2,342,385
|
|
|
3,193,863
|
|
| |
|
|
|
|
|
|
|
|
Fixed
assets, net of accumulated depreciation of $2,502,132 and
$1,922,242
|
|
|
2,376,061
|
|
|
2,303,372
|
|
|
Patents,
net of accumulated amortization of $58,078 and $29,038
|
|
|
340,366
|
|
|
307,331
|
|
|
Deposits
|
|
|
84,320
|
|
|
104,140
|
|
| |
|
|
|
|
|
|
|
|
Total
assets
|
|
$
|
5,143,132
|
|
$
|
5,908,706
|
|
| |
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
1,065,656
|
|
$
|
652,980
|
|
|
Accounts
payable - related party
|
|
|
105,000
|
|
|
-
|
|
|
Accrued
expenses
|
|
|
1,548,504
|
|
|
435,234
|
|
|
Deferred
revenue
|
|
|
-
|
|
|
400,000
|
|
|
Current
portion of notes payable - other
|
|
|
8,798
|
|
|
75,370
|
|
|
Current
portion of capital lease obligation
|
|
|
51,586
|
|
|
31,924
|
|
|
Current
portion of equipment notes payable
|
|
|
5,578
|
|
|
-
|
|
|
Current
portion of convertible notes payable, net of discount of
$364,290
|
|
|
2,800,535
|
|
|
-
|
|
|
Current
portion of term note payable - T Swift
|
|
|
250,000
|
|
|
-
|
|
|
Current
portion of term note payable - Stillwater National Bank
|
|
|
389,719
|
|
|
480,565
|
|
|
Line
of credit - Stillwater National Bank
|
|
|
764,606
|
|
|
778,916
|
|
| |
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,989,982
|
|
|
2,854,989
|
|
| |
|
|
|
|
|
|
|
|
Long
term liabilities:
|
|
|
|
|
|
|
|
|
Long
term portion of capital lease obligation
|
|
|
-
|
|
|
51,838
|
|
|
Long
term portion of equipment notes payable
|
|
|
24,479
|
|
|
-
|
|
|
Term
note payable - Stillwater National Bank
|
|
|
2,614,279
|
|
|
2,883,392
|
|
| |
|
|
|
|
|
|
|
|
Total
long term liabilities
|
|
|
2,638,758
|
|
|
2,935,230
|
|
| |
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
9,628,740
|
|
|
5,790,219
|
|
| |
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Stockholders'
equity (deficit)
|
|
|
|
|
|
|
|
|
Preferred
stock, $.001 par value, 10,000,000 shares authorized, no shares issued
or
outstanding
|
|
|
-
|
|
|
-
|
|
|
Common
stock, $.001 par value, 50,000,000 shares authorized, 20,578,071
and
19,322,277 shares issued and outstanding
|
|
|
20,578
|
|
|
19,322
|
|
|
Additional
paid-in-capital
|
|
|
22,581,595
|
|
|
20,015,762
|
|
|
Deferred
compensation
|
|
|
-
|
|
|
(39,600
|
)
|
|
Accumulated
deficit
|
|
|
(27,087,781
|
)
|
|
(19,876,997
|
)
|
| |
|
|
|
|
|
|
|
|
Total
stockholders' equity (deficit)
|
|
|
(4,485,608
|
)
|
|
118,487
|
|
| |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders' equity (deficit)
|
|
$
|
5,143,132
|
|
$
|
5,908,706
|
|
See
summary of accounting policies and accompanying notes to consolidated financial
statements
SHUMATE
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF OPERATIONS
| |
|
For
the Years
|
|
| |
|
ended
December 31,
|
|
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
REVENUES
|
|
$
|
9,033,614
|
|
$
|
7,719,882
|
|
| |
|
|
|
|
|
|
|
|
COST
OF REVENUES
|
|
|
|
|
|
|
|
|
Cost
of revenues
|
|
|
6,605,358
|
|
|
5,665,243
|
|
|
Depreciation
expense
|
|
|
416,536
|
|
|
368,127
|
|
| |
|
|
|
|
|
|
|
|
Total
cost of revenues
|
|
|
7,021,894
|
|
|
6,033,370
|
|
| |
|
|
|
|
|
|
|
|
GROSS
PROFIT
|
|
|
2,011,720
|
|
|
1,686,512
|
|
| |
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
|
|
6,396,410
|
|
|
3,427,349
|
|
|
Depreciation
expense
|
|
|
191,912
|
|
|
82,360
|
|
|
Bad
debt expense (recovery)
|
|
|
-
|
|
|
(20,000
|
)
|
|
Research
and development
|
|
|
1,741,434
|
|
|
750,639
|
|
| |
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
8,329,756
|
|
|
4,240,348
|
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(6,318,036
|
)
|
|
(2,553,836
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
2,000,000
|
|
|
Interest
expense
|
|
|
(892,748
|
)
|
|
(755,295
|
)
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(7,210,784
|
)
|
$
|
(1,309,131
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
net income (loss) per share
|
|
$
|
(0.36
|
)
|
$
|
(0.09
|
)
|
|
Diluted
net income (loss) per share
|
|
|
(0.36
|
)
|
|
(0.09
|
)
|
| |
|
|
|
|
|
|
|
|
Weighted
average shares outstanding-Basic
|
|
|
20,061,282
|
|
|
15,367,674
|
|
|
Weighted
average shares outstanding-Diluted
|
|
|
20,061,282
|
|
|
15,367,674
|
|
See
summary of accounting policies and accompanying notes to consolidated financial
statements
SHUMATE
INDUSTRIES, INC.
CONSOLIDATED
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
For
the Years Ended December 31, 2007 and 2006
| |
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
| |
|
Common
Stock
|
|
Paid-In
|
|
Deferred
|
|
Accumulated
|
|
|
|
| |
|
Shares
|
|
Par
|
|
Capital
|
|
Compensation
|
|
Deficit
|
|
Total
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2005
|
|
|
12,116,394
|
|
$
|
12,116
|
|
$
|
12,278,742
|
|
$
|
-
|
|
$
|
(18,567,866
|
)
|
$
|
(6,277,008
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
|
|
85,000
|
|
|
85
|
|
|
99,415
|
|
|
-
|
|
|
-
|
|
|
99,500
|
|
|
Common
stock issued for cash
|
|
|
7,120,883
|
|
|
7,121
|
|
|
5,590,429
|
|
|
-
|
|
|
-
|
|
|
5,597,550
|
|
|
Costs
of raising capital
|
|
|
-
|
|
|
-
|
|
|
(537,538
|
)
|
|
-
|
|
|
-
|
|
|
(537,538
|
)
|
|
Options
and warrants issued
|
|
|
-
|
|
|
-
|
|
|
337,075
|
|
|
-
|
|
|
-
|
|
|
337,075
|
|
|
Related
party debt forgiveness
|
|
|
-
|
|
|
-
|
|
|
2,247,639
|
|
|
-
|
|
|
-
|
|
|
2,247,639
|
|
|
Deferred
compensation
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(39,600
|
)
|
|
-
|
|
|
(39,600
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,309,131
|
)
|
|
(1,309,131
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2006
|
|
|
19,322,277
|
|
|
19,322
|
|
|
20,015,762
|
|
|
(39,600
|
)
|
$
|
(19,876,997
|
)
|
|
118,487
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for cash
|
|
|
680,520
|
|
|
681
|
|
|
769,079
|
|
|
|
|
|
|
|
|
769,760
|
|
|
Common
stock issued for services
|
|
|
480,050
|
|
|
480
|
|
|
643,377
|
|
|
|
|
|
|
|
|
643,857
|
|
|
Costs
of raising capital
|
|
|
|
|
|
|
|
|
(132,333
|
)
|
|
|
|
|
|
|
|
(132,333
|
)
|
|
Cashless
exercise of warrants
|
|
|
95,224
|
|
|
95
|
|
|
(95
|
)
|
|
|
|
|
|
|
|
-
|
|
|
Options
and warrants issued
|
|
|
|
|
|
|
|
|
733,310
|
|
|
|
|
|
|
|
|
733,310
|
|
|
Discount
on beneficial conversion feature related to convertible notes
payable
|
|
|
|
|
|
|
|
|
552,495
|
|
|
|
|
|
|
|
|
552,495
|
|
|
Deferred
compensation
|
|
|
|
|
|
|
|
|
|
|
|
39,600
|
|
|
|
|
|
39,600
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,210,784
|
)
|
|
(7,210,784
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances
at December 31, 2007
|
|
|
20,578,071
|
|
$
|
20,578
|
|
$
|
22,581,595
|
|
$
|
-
|
|
$
|
(27,087,781
|
)
|
$
|
(4,485,608
|
)
|
See
summary of accounting policies and accompanying notes to consolidated financial
statements
SHUMATE
INDUSTRIES, INC.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2007 and 2006
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(7,210,784
|
)
|
$
|
(1,309,131
|
)
|
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
Debt
forgiveness income
|
|
|
-
|
|
|
(2,000,000
|
)
|
|
Depreciation
and amortization expense
|
|
|
608,448
|
|
|
450,487
|
|
|
Bad
debt expense (recovery)
|
|
|
-
|
|
|
(20,000
|
)
|
|
Amortization
of beneficial conversion feature discount
|
|
|
187,589
|
|
|
-
|
|
|
Stock-based
compensation
|
|
|
1,346,332
|
|
|
396,975
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
51,751
|
|
|
425,782
|
|
|
Inventory
|
|
|
(365,516
|
)
|
|
(611,550
|
)
|
|
Other
assets
|
|
|
(220,133
|
)
|
|
(107,111
|
)
|
|
Accounts
payable
|
|
|
412,673
|
|
|
189,839
|
|
|
Accounts
payable - related party
|
|
|
105,000
|
|
|
-
|
|
|
Accrued
expenses
|
|
|
1,009,111
|
|
|
299,077
|
|
|
Deferred
revenue
|
|
|
(400,000
|
)
|
|
400,000
|
|
|
Net
cash used in operating activities
|
|
|
(4,475,529
|
)
|
|
(1,885,632
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of fixed assets
|
|
|
(388,773
|
)
|
|
(916,735
|
)
|
|
Proceeds
from sale of fixed assets
|
|
|
-
|
|
|
75,000
|
|
|
Purchase
of patents
|
|
|
(62,076
|
)
|
|
(53,352
|
)
|
|
Net
cash used in investing activities
|
|
|
(450,849
|
)
|
|
(895,087
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
change in bank credit line
|
|
|
(14,310
|
)
|
|
(58,699
|
)
|
|
Payments
on notes payable
|
|
|
(100,514
|
)
|
|
(887,486
|
)
|
|
Payments
on notes payable - related party
|
|
|
(359,959
|
)
|
|
-
|
|
|
Proceeds
from notes payable
|
|
|
3,300,000
|
|
|
-
|
|
|
Proceeds
from sales of common stock, net of offering cost
|
|
|
637,426
|
|
|
5,060,012
|
|
|
Net
cash provided by financing activities
|
|
|
3,462,643
|
|
|
4,113,827
|
|
| |
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
(1,463,735
|
)
|
|
1,333,108
|
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
1,547,326
|
|
|
214,218
|
|
| |
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
83,591
|
|
$
|
1,547,326
|
|
| |
|
|
|
|
|
|
|
|
Supplemental
disclosures:
|
|
|
|
|
|
|
|
|
Cash
paid for income taxes
|
|
$
|
-
|
|
$
|
-
|
|
|
Cash
paid for interest
|
|
|
422,712
|
|
|
500,302
|
|
| |
|
|
|
|
|
|
|
|
Non-cash
investing and financing transactions:
|
|
|
|
|
|
|
|
|
Cashless
exercise of options
|
|
|
97,500
|
|
|
-
|
|
|
Note
payable for purchase of fixed assets
|
|
|
31,823
|
|
|
-
|
|
|
Accrued
interest on bridge loan
|
|
|
115,441
|
|
|
-
|
|
|
Discount
on warrants
|
|
|
413,571
|
|
|
|
|
|
Discount
for beneficial conversion feature related to convertible notes
payable
|
|
|
138,924
|
|
|
-
|
|
|
Amount
accrued for purchase of fixed assets
|
|
|
231,500
|
|
|
-
|
|
|
Related
party debt foregiveness income
|
|
|
-
|
|
|
2,247,639
|
|
See
summary of accounting policies and accompanying notes to consolidated financial
statements
SHUMATE
INDUSTRIES, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE
1 - DESCRIPTION OF BUSINESS AND SUMMARY OF ACCOUNTING
POLICIES
Description
of Business. Shumate Industries, Inc. (“Shumate”) is a Texas based energy field
services company. Shumate is a holding company that, through its subsidiaries,
operates in two principal businesses: Shumate Machine Works, Inc. (“Shumate
Machine”), a contract machining and manufacturing company, and Hemiwedge Valve
Corporation (“Hemiwedge”), a company formed to launch a proprietary valve
product line. Shumate seeks to leverage its existing infrastructure, expertise,
and customer channels to grow its business and introduce new technologies to
the
energy markets.
Basis
of Presentation. The
consolidated financial statements include the accounts of Shumate and its
wholly-owned subsidiaries, Shumate Machine and Hemiwedge. Significant
inter-company accounts and transactions have been eliminated.
Reclassifications. Certain
amounts in the consolidated financial statements of the prior year have been
reclassified to conform to the presentation of the current year for comparative
purposes.
Use
of Estimates in Financial Statement Preparation.
The
preparation of consolidated 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, the disclosure of contingent assets and liabilities
at
the date of the consolidated financial statements, and the reported amounts
of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue
Recognition.
Revenues
of Shumate Machine are derived primarily from machining of oil field drilling
parts, components and tools. All revenue is recognized when persuasive evidence
of an arrangement exists, the service or sale is complete, the price is fixed
or
determinable and collectibility is reasonably assured. This typically occurs
when the order is shipped. Shipping terms are FOB shipping and title passes
to
the customer at the time the product is shipped. Customers have the right to
inspection and acceptance for generally up to five days after taking delivery.
Returns are not accepted due to the custom specifications of each product,
but
rework on items is necessary if the product was not within the original order
specifications. Customer requests for rework and customer rejection of shipments
has been historically low.
Revenues
of Hemiwedge Valve Corporation are derived from Hemiwedge® Cartridge valve
product sales and an agreement to perform contractual research and development
services. The research and development services revenue is recognized as the
services are performed and related costs are incurred and recorded. The valve
product sales revenue is recognized when persuasive evidence of an arrangement
exists, the sale is complete, the price is fixed or determinable, and
collectibility is reasonably assured. This typically occurs when the order
is
shipped. Shipping terms are FOB shipping and title passes to the customer at
the
time the product is shipped. Customers have the right to inspection and
acceptance for generally up to five days after taking delivery.
Cash
and Cash Equivalents.
For
purposes of the statements of cash flows, cash equivalents include all highly
liquid investments with original maturities of three months or
less.
Allowance
for Doubtful Accounts.
Bad
debt expense is recognized based on management’s estimate of likely losses per
year, based on past experience and an estimate of current year uncollectible
amounts. The allowance was $40,000 and $40,000 as of December 31, 2007 and
December 31, 2006, respectively.
Inventory.
Inventory is stated at the lower of cost (first-in, first-out for raw materials
and specific job cost for work-in-process and finished goods) or market.
Slow-moving inventories are periodically reviewed for impairment in value.
Work-in-process and finished goods include labor, materials and production
overhead.
Property
and Equipment.
Property and equipment is valued at cost. Additions are capitalized and
maintenance and repairs are charged to expense as incurred. Gains and losses
on
dispositions of equipment are reflected in operations.
Depreciation
is provided using the straight-line method over the estimated useful lives
of
the assets, which are three to twelve years.
Patents.
Patents
are initially measured based on their fair values. Patents are being amortized
on a straight-line basis over a period of 8 to 10 years and are stated net
of
accumulated amortization at $58,078 and $29,038 at December 31, 2007 and 2006,
respectively. Amortization expense of $29,041 and $29,041 was charged to
operations during 2007 and 2006, respectively.
Impairment
of Long-Lived Assets.
Shumate
reviews the carrying value of its long-lived assets annually or whenever events
or changes in circumstances indicate that the historical cost-carrying value
of
an asset may no longer be appropriate. Shumate assesses recoverability of the
carrying value of the asset by estimating the future net cash flows expected
to
result from the asset, including eventual disposition. If the future net cash
flows are less than the carrying value of the asset, an impairment loss is
recorded equal to the difference between the asset’s carrying value and fair
value.
Income
Taxes.
Income
tax expense is based on reported earnings before income taxes. Deferred income
taxes reflect the impact of temporary differences between assets and liabilities
recognized for consolidated financial reporting purposes and such amounts
recognized for tax purposes, and are measured by applying enacted tax rates
in
effect in years in which the differences are expected to reverse.
Stock-Based
Compensation.
Effective January 1, 2006, Shumate began recording compensation expense
associated with stock options and other forms of equity compensation in
accordance with Statement of Financial Accounting Standards (“SFAS”)
No. 123R,
Share-Based Payment,
as
interpreted by SEC Staff Accounting Bulletin No. 107. Prior to
January 1, 2006, Shumate had accounted for stock options according to
the provisions of Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees,
and
related interpretations, and therefore no related compensation expense was
recorded for awards granted with no intrinsic value. Shumate adopted the
modified prospective transition method provided for under SFAS No. 123R, and,
consequently, have not retroactively adjusted results from prior
periods.
There
were 991,000 and 805,000 options issued to employees and non-employee directors
during the year ending December 31, 2007 and 2006, respectively. See Note 13
for
details.
Accounting
for Derivative Instruments.
Shumate
does not use derivative instruments to hedge exposures to cash flow, market,
or
foreign currency risks. Shumate evaluates all of it financial instruments under
the application of SFAS 133 and EITF 00-19 to determine if such the financial
instruments are derivatives or contain features that qualify as embedded
derivatives. There are no derivative instruments outstanding as of December
31,
2007 and 2006.
Basic
and Diluted Net Income per Share.
Basic
loss per share is computed using the weighted average number of shares of common
stock outstanding during each period. Diluted loss per share includes the
dilutive effects of common stock equivalents on an “as if converted” basis. For
the years ended 2007 and 2006, potential dilutive securities had an
anti-dilutive effect and were not included in the calculation of diluted net
loss per common share.
Research
and Development.
All
costs for research and development activities are expensed as
incurred.
Recently
Issued Accounting Pronouncements.
In
September 2006, the FASB issued FASB Statement No. 157, which defines fair
value, establishes a framework for measuring fair value in generally accepted
accounting principles, and expands disclosures about fair value measurements.
This Statement applies under other accounting pronouncements that require or
permit fair value measurements, and is effective for fiscal years beginning
after November 15, 2007.
Shumate
does not expect the adoption of this or any other recently issued accounting
pronouncements to have a significant impact on their consolidated financial
position, results of operations, or cash flows.
NOTE
2 - GOING CONCERN
As
shown
in the accompanying consolidated financial statements, Shumate incurred
recurring losses from operations of $5,711,806 and $2,553,836 in 2007 and 2006,
respectively, and has an accumulated deficit of $27,087,780. These conditions
raise substantial doubt as to Shumate’s ability to continue as a going concern.
To address these concerns, Shumate has raised proceeds of approximately
$3,050,000 through a convertible note private offering in 2007. Additionally,
Shumate has sought recapitalization in debt or equity during 2008, however
there
can be no assurance that it will successfully recapitalize. In addition,
management is trying to continue to increase Shumate’s revenues and improve its
results of operations to a level of profitability including revenues and cash
flow from the Hemiwedge Valve Corporation subsidiary. New sales representative
agreements have been executed during 2008 to assist in the sales and marketing
efforts to improve our results of operations. As of the date of this report,
Shumate believes that it will not be able to fund its operations, working
capital requirements, and debt service requirements through fiscal year 2008
through cash flows generated by operations. Management may also seek to raise
additional capital in the future if Shumate’s results of operations do not
continue to improve or if the need otherwise arises. The financial statements
do
not include any adjustments that might be necessary if Shumate is unable to
continue as a going concern.
NOTE
3 - SEGMENT INFORMATION
Shumate’s
reportable segments consist of its contract machining and manufacturing entity,
Shumate Machine Works, and its valve product technology entity, Hemiwedge Valve
Corporation. Segment financial information is summarized as
follows:
| |
|
Shumate
|
|
Hemiwedge
|
|
Corporate
|
|
|
|
|
Year
Ended December 31, 2007
|
|
Machine Works
|
|
Valve Corp.
|
|
Allocation
|
|
Total
|
|
|
Revenues
|
|
$
|
7,928,763
|
|
$
|
1,104,851
|
|
$
|
-
|
|
$
|
9,033,614
|
|
|
Cost
of revenues
|
|
|
6,456,678
|
|
|
565,216
|
|
|
-
|
|
|
7,021,894
|
|
|
Gross
profit
|
|
|
1,472,085
|
|
|
539,635
|
|
|
-
|
|
|
2,011,720
|
|
|
Interest
expense
|
|
|
547,845
|
|
|
7,841
|
|
|
337,062
|
|
|
892,748
|
|
|
Depreciation
and amortization
|
|
|
373,909
|
|
|
234,539
|
|
|
-
|
|
|
608,448
|
|
|
Net
income (loss)
|
|
|
23,419
|
|
|
(3,533,534
|
)
|
|
(3,700,669
|
)
|
|
(7,210,784
|
)
|
|
Total
assets
|
|
|
2,736,478
|
|
|
2,177,155
|
|
|
229,499
|
|
|
5,143,132
|
|
|
Expenditures
for long-lived assets
|
|
|
495,029
|
|
|
219,625
|
|
|
-
|
|
|
714,654
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hemiwedge
|
|
|
Corporate
|
|
|
|
|
|
Year Ended December 31, 2006
|
|
|
Machine Works
|
|
|
Valve Corp.
|
|
|
Allocation
|
|
|
Total
|
|
|
Revenues
|
|
$
|
7,403,802
|
|
$
|
316,080
|
|
$
|
-
|
|
$
|
7,719,882
|
|
|
Cost
of revenues
|
|
|
5,813,428
|
|
|
219,942
|
|
|
-
|
|
|
6,033,370
|
|
|
Gross
profit
|
|
|
1,597,217
|
|
|
89,295
|
|
|
-
|
|
|
1,686,512
|
|
|
Interest
expense
|
|
|
501,271
|
|
|
4,681
|
|
|
249,343
|
|
|
755,295
|
|
|
Depreciation
and amortization
|
|
|
369,557
|
|
|
80,930
|
|
|
-
|
|
|
450,487
|
|
|
Debt
forgiveness income
|
|
|
2,000,000
|
|
|
-
|
|
|
-
|
|
|
2,000,000
|
|
|
Net
income (loss)
|
|
|
2,052,936
|
|
|
(1,984,776
|
)
|
|
(1,377,291
|
)
|
|
(1,309,131
|
)
|
|
Total
assets
|
|
|
3,181,994
|
|
|
1,873,883
|
|
|
852,829
|
|
|
5,908,706
|
|
|
Expenditures
for long-lived assets
|
|
|
284,173
|
|
|
685,914
|
|
|
-
|
|
|
970,087
|
|
NOTE
4 - RESEARCH AND DEVELOPMENT CONTRACT
In
July
2006, Hemiwedge Valve Corporation entered into an agreement with At Balance
Americas, LLC, a Houston-based Managed Pressure Drilling, or MPD, services
company. At Balance Americas, LLC is an affiliate of Shell Technology Ventures,
a leading energy-focused venture capital firm with offices in Houston, Texas.
At
Balance is not a related party and the development agreement was negotiated
on
an arm’s length basis. The
agreement provides Hemiwedge
Valve Corporation with funding of up to $1.4 million and expertise to develop
a
down-hole isolation valve, or DIV, using our Hemiwedge® valve technology. The
contract includes three major phases with partial funding in advance of each
phase, and progress payments throughout each phase. The table below includes
revenue and expenses recognized by Hemiwedge Valve Corporation during the
respective years ended December 31.
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Contractual
Research and Development Revenue
|
|
$
|
1,084,629
|
|
$
|
-
|
|
| |
|
|
|
|
|
|
|
|
Contractual
Research and Development Expense
|
|
|
347,727
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
Payments
Received
|
|
|
495,219
|
|
|
400,000
|
|
NOTE
5 - PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following at December 31, 2007 and
2006:
|
Description
|
|
Life
|
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
|
|
Shop
equipment
|
|
|
5-12 years
|
|
$
|
4,281,177
|
|
$
|
3,786,624
|
|
|
Other
equipment and furniture
|
|
|
3 years
|
|
|
317,912
|
|
|
224,823
|
|
|
Leasehold
improvements
|
|
|
5 years
|
|
|
279,104
|
|
|
214,167
|
|
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
4,878,193
|
|
|
4,225,614
|
|
|
Less:
accumulated depreciation
|
|
|
|
|
|
(2,502,132
|
)
|
|
(1,922,242
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
|
|
$
|
2,376,061
|
|
$
|
2,303,372
|
|
Depreciation
expense in continuing operations totaled $608,448 and $450,487 in 2007 and
2006,
respectively.
NOTE
6 - INTELLECTUAL PROPERTY
On
December 5, 2005, Shumate acquired $238,500 the intellectual property rights
to
the HemiwedgeÒ
line of
products, including the HemiwedgeÒ
valve,
from Soderberg Research and Development, Inc. and certain of its affiliates.
Shumate contributed these intellectual property rights to Hemiwedge as a capital
contribution. The intellectual property rights acquired consist of all patents,
trademarks, and the internet website relating to the HemiwedgeÒ
product
line. The aggregate consideration paid for the intellectual property rights
consisted of $138,500 in cash and a two-year six percent promissory note in
the
principal amount of $100,000, payable in 24 equal installments of principal
and
interest. In addition, Shumate agreed to deposit (a) $72,000 into an escrow
account, the property of Soderberg Research Inc., to be paid in the form of
a
monthly advance in the amount of $3,000 for each month of the 24 month period
beginning in January 2006 and (b) three percent of the net sales proceeds
collected from customers from (i) gross revenue from sales of products to which
the acquired intellectual property relates, less (ii) sales and/or use taxes,
import and/or export duties, outbound transportation costs, and amounts allowed
or credited due to returns, which payments shall begin two years after December
2005 and continue until March 29, 2013. The $72,000 in monthly advances shall
be
credited against the three percent of the net sales proceeds. Amortization
expense in continuing operations totaled $29,042 and $29,038 in 2007 and 2006,
respectively.
NOTE
7 - NOTES PAYABLE - STILLWATER NATIONAL BANK
| |
|
2007
|
|
2006
|
|
|
$1,000,000
line of credit with Stillwater National Bank secured by a first priority
security interest in all of Shumate’s existing and future assets. The line
of credit bears interest at a rate equal to the prime rate plus two
percent. The advances available under the line of credit are limited
to a
borrowing base of the sum of (a) 80% of eligible accounts receivable,
and
(b) 50% of eligible inventory. This line of credit is secured by
a first
priority security interest in all of Shumate’s existing and future assets.
The line of credit was amended January 25, 2008.
|
|
$
|
764,606
|
|
$
|
778,916
|
|
| |
|
|
|
|
|
|
|
|
$3,633,053
term note dated March 31, 2006 with Stillwater National Bank. The
note is
an amendment and restatement of a promissory note in the original
amount
of $5,633,053 delivered to Stillwater in connection with the October
19,
2005 reorganization (at which time Stillwater was not considered
a related
party), and reflects $2,000,000 of debt forgiveness by Stillwater
agreed
to at the time of the October 2005 reorganization. The note requires
one
interest only payment on March 31, 2006, and thereafter requires
Shumate
to make 24 equal monthly payments in an amount sufficient to fully
amortize principal and interest on the note over 84 months. The note
is
due and payable on April 19, 2008, at which time Shumate will be
required
to make a balloon payment of the entire outstanding principal balance
and
all accrued interest. The note bears interest at a rate equal to
the prime
rate plus two percent, and it is secured by a first priority security
interest in all of Shumate’s existing and future assets. The term note was
amended January 25, 2008.
|
|
|
3,003,998
|
|
|
3,363,957
|
|
| |
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,768,604
|
|
$
|
4,142,873
|
|
NOTE
8 - ACCRUED EXPENSES
Accrued
expenses as of December 31, 2007 and 2006 included the following:
| |
|
2007
|
|
2006
|
|
| |
|
|
|
|
|
|
Accrued
interest on notes payable
|
|
$
|
30,800
|
|
$
|
-
|
|
|
Payroll
taxes and estimated penalties
|
|
|
216,288
|
|
|
190,349
|
|
|
Accrued
vacation
|
|
|
-
|
|
|
75,048
|
|
|
Accrued
salaries and commissions
|
|
|
64,435
|
|
|
44,726
|
|
|
Rebates
|
|
|
66,541
|
|
|
60,105
|
|
|
Failed
Acquisition Contingency
|
|
|
178,995
|
|
|
-
|
|
|
Officer
Indemnification
|
|
|
580,000
|
|
|
|
|
|
Accrued
capital expenditure
|
|
|
219,600
|
|
|
-
|
|
|
Other
|
|
|
191,845
|
|
|
65,006
|
|
| |
|
|
|
|
|
|
|
| |
|
$
|
1,548,504
|
|
$
|
435,234
|
|
On
November 5, 2007, Sunbelt Machine Works Corporation terminated that certain
Stock Purchase Agreement dated as of August 17, 2007 by and among Shumate
Industries, Inc., Sunbelt Machine Works Corporation and each of the stockholders
of Sunbelt. In connection therewith, Shumate was required to pay Sunbelt a
termination fee of $150,000 for which we have recorded an accrued expense of
$178,995 for such contingency.
During
the year ended December 31, 2007, Shumate agreed to indemnify one of its
officers in connection with a judgment assessed against him personally resulting
from a previously discharged corporate tax liability. This resulted in an
accrued expense of $580,000 in the 4th
quarter
of 2007.
NOTE
9 - NOTES PAYABLE AND CAPITAL LEASE
During
the year ended December 31, 2007, Shumate sold $3,050,000 of principal amount
of
convertible promissory notes with warrants to purchase 610,000 shares of its
common stock to two accredited investors. The notes have a 1 year term and
bear
interest at ten percent (10%); provided, however, that Shumate is required
to
prepay the note if Shumate consummates a subsequent equity financing (as
defined) within the next 12 months. Interest is payable monthly in arrears,
however Shumate has the right to defer any interest payment and accrue same
to
principal. The notes are convertible into Shumate common stock at a fixed
conversion price of $1.89. In addition, if Shumate closes a subsequent equity
financing within the next 12 months, the note holders have the option to convert
the outstanding balance of such note into such financing on the same terms
as
the other investors in such financing.
Under
the
terms of the notes and the related warrants, the notes and the warrants are
convertible/exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with
the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted shares of the note
or unexercised portions of the warrants) would not exceed 4.99% of Shumate’s
then outstanding common stock as determined in accordance with Section 13(d)
of
the Securities Exchange Act of 1934, as amended.
The
notes
were issued with a warrant to purchase up to 610,000 shares of Shumate’s common
stock at an exercise price of $1.89 per share, subject to adjustment. The
warrant holders may designate a “cashless exercise option.” This option entitles
the warrant holders to elect to receive fewer shares of common stock without
paying the cash exercise price. The number of shares to be determined by a
formula based on the total number of shares to which the warrant holder is
entitled, the current market value of the common stock and the applicable
exercise price of the warrant.
Shumate determined
that the conversion feature of the note and the warrants issued were not
derivative instruments pursuant to SFAS No. 133, Accounting for Derivatives,
as
amended. Under the provisions of EITF Issue 98-5 and 00-27, Shumate
discounted the fair value of warrants attached to the notes and calculated
the
intrinsic value of the beneficial conversion feature using the Black-Scholes
Option Pricing Model to exceed the principal value of the note. The resulting
discount of $552,495 is being amortized over the life of the notes using the
effective interest method. The amortized amount for the year ended December
31,
2007 is $187,589. A summary of these convertible notes is as
follows:
|
Gross
proceeds from the notes
|
|
$
|
3,050,000
|
|
|
Less:
discount on the warrants
|
|
|
(413,571
|
)
|
|
Less:
beneficial conversion feature of the notes
|
|
|
(138,924
|
)
|
|
Add:
amortization of discounts
|
|
|
187,589
|
|
|
Add:
accrued interest
|
|
|
115,441
|
|
| |
|
|
|
|
|
Carrying
amount of notes as of December 31, 2007
|
|
$
|
2,800,535
|
|
Shumate
granted the investors in the offering registration rights for the resale of
the
shares issuable upon conversion of the note and upon exercise of the warrant.
To
the extent that all such shares are not registered pursuant to the granted
piggyback registration rights, Shumate agreed to register the remaining
underlying shares, if any, by January 6, 2008.
In
connection with the offering, the placement agents received $215,000 in fees.
In
addition, another $10,000 in legal fees were incurred. The net proceeds of
this
offering after the payment of commissions, fees and other expenses of the
offering were approximately $2,825,000.
In
October 2007, Shumate sold $250,000 of principal amount of a promissory note.
The note was due and payable as of December 31, 2007, and bears interest at
twelve percent (12%). The note has been extended as a demand loan.
In
June
2006, Shumate entered into a financing agreement with an independent third
party
to sell and leaseback certain machinery and equipment, which is accounted for
as
a capital lease. This lease agreement contains a residual value guarantee at
the
end of the lease term. The cost of equipment under the capital lease is included
in the balance sheet as shop equipment of approximately $100,000 at December
31,
2007. Amortization of the assets under the capital lease were included in the
depreciation expense. Remaining payments under the capital lease equal $51,586
at December 31, 2007.
Future
minimum lease payments under the capital lease are as follows:
|
Year
Ending
|
|
|
|
|
|
December
31, 2008
|
|
$
|
51,586
|
|
|
Less
amount representing interest
|
|
|
(11,841
|
)
|
|
Present
value of minimum lease payments
|
|
$
|
39,745
|
|
On
December 5, 2005, Hemiwedge executed a promissory note to Soderberg Research
and
Development, Inc. and certain of its affiliates in the amount of $100,000 in
connection with the purchase of intellectual property (See Note 6). The note
bears interest at the rate of six percent and is payable in twenty-four equal
installments of principal and interest beginning January 1, 2006 and ending
December 1, 2007. The balance as of December 31, 2007 was $8,798.
NOTE
10 - INCOME TAXES
Shumate
uses the liability method, where deferred tax assets and liabilities are
determined based on the expected future tax consequences of temporary
differences between the carrying amounts of assets and liabilities for financial
and income tax reporting purposes. Shumate has incurred significant net losses
in past years and, therefore, has no tax liability. The net deferred tax asset
generated by the loss carry-forward has been fully reserved. The cumulative
net
operating loss carry-forward is approximately $27,000,000 at December 31, 2007,
and will expire in the years 2022 through 2027.
At
December 31, 2007, deferred tax assets consisted of the following:
|
|
|
$
|
9,445,000
|
|
|
Valuation
allowance
|
|
|
(9,445,000
|
)
|
| |
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
Internal
Revenue Section 382 restricts the ability to use these carryforwards whenever
an
ownership change as defined occurs. Shumate incurred such an ownership change
both 2006 and 2005. As the result of the ownership change, Shumate’s use of net
operating losses through the date of change is restricted. Losses subsequent
to
the date of change are not restricted.
NOTE
11 - COMMON STOCK
On
February 22, 2006, Shumate sold 3,333,333 shares of its common stock to several
investors in a private offering for $0.60 per share. The placement agent
received $160,000 in commissions and 250,000 warrants to purchase shares of
common stock at an exercise price of $0.63 per share. The net proceeds of this
offering to Shumate after the payment of commissions, fees, and other expenses
totaling $115,817 of the offering were approximately $1,725,000.
Shumate
evaluated the freestanding warrants to determine if they were within the scope
of SFAS 133 and EITF 00-19. Part of this evaluation considered the ‘Liquidated
Damages’ provision in the ‘Registration Rights Agreement’ that covers both the
warrants and the common stock. Shumate concluded the freestanding warrants
should not be classified as a liability and therefore are not subject to SFAS
133.
Subject
to certain conditions, Shumate has granted these February investors a right
of
first refusal, for a period of one year from June 30, 2006 to participate in
any
subsequent financing that Shumate conducts. As of the date of this report,
these
rights have expired.
In
May
and August 2006, Shumate issued 5,000 shares of its common stock to a consultant
for marketing services, 5,000 shares to an employee and another 5,000 shares
to
an officer of a subsidiary. These shares were valued at their combined fair
value of $15,500, and stock-based compensation expense was recorded as a result
of this grant.
On
August
8, 2006, Shumate issued 70,000 shares of its common stock to a consultant for
investor relations services. These shares were valued at their fair value of
$84,000. Under the terms of the consulting agreement, 4,000 shares are
guaranteed while 66,000 shares are earned pro-rata over a twelve-month period
commencing July 2006. Accordingly, $44,400 was recorded as consulting expense
for the year ended December 31, 2006 and $39,600 is recorded as deferred
compensation expense to be amortized monthly through June 2007.
Between
October 30, 2006 and December 14, 2006, Shumate sold 3,787,550 shares of its
common stock to several investors in a private offering for $1.00 per share.
Shumate is also obligated to issue the investors 1,893,775 Class A Warrants,
each exercisable at $1.25 per share. The placement agent received a 7% cash
commission, a 3% non-accountable expense allowance, a 1% management fee, and
378,755 warrants to purchase shares of common stock at an exercise price of
$1.25 per share. Shumate also paid legal fees of an aggregate $22,500 to counsel
for the placement agent. The net proceeds of this offering to Shumate after
the
payment of commissions, fees and other expenses of the offering totaling
$612,511 were approximately $3,350,000.
Shumate
evaluated the freestanding warrants to determine if they were within the scope
of SFAS 133 and EITF 00-19. Part of this evaluation considered the ‘Liquidated
Damages’ provision in the ‘Registration Rights Agreement’ that covers both the
warrants and the common stock. Shumate concluded the freestanding warrants
should not be classified as a liability and therefore are not subject to SFAS
133.
Subject
to certain conditions, Shumate has granted these investors a right of first
refusal, for a period of one year from the final closing of the offering filed
in connection with this transaction, to participate in any subsequent financing
that Shumate conducts, subject to rights granted to previous investors. As
of
the dated of this report, these rights have expired.
In
the
event that during the period commencing on December 14, 2006 and ending on
the
earlier to occur of: (i) March 14, 2008; or (ii) the Company and At Balance
Americas, a Shell Technology Ventures company, entering into a definitive
distribution agreement for the Company’s Hemiwedge® DIV product, the Company
sells any shares of its Common Stock or securities convertible into Common
Stock
or exercisable for shares of Common Stock at less than $1.00 per share, the
Company shall be obligated to adjust, on a full-ratchet basis, the number of
shares of Common Stock issued to Investors in this Offering as if the shares
of
Common Stock purchased in this Offering were purchased at such lower price.
As
of the date of this report, these rights have expired.
In
the
event that, during the period commencing on December 14, 2006 and ending on
the
earlier to occur of: (i) March 14, 2008; or (ii) the Company and At Balance
Americas, a Shell Technology Ventures company entering into a definitive
distribution agreement for the Company’s Hemiwedge® DIV product, the Company
sells any shares of its Common Stock or securities convertible into Common
Stock
or exercisable for shares of Common Stock at less than the exercise price of
the
Class A Warrants, the Company shall be obligated to adjust, on a full-ratchet
basis, the exercise prices thereof, as applicable. As of the date of this
report, these rights have expired.
The
Class
A Warrants are subject to redemption by the Company upon 20 days prior written
notice provided: (i) the Common Stock has traded at or above $2.50 per share
during the 15 consecutive trading days prior to a written notice of redemption
by the Company; (ii) there is an effective registration statement covering
the
resale of the shares of Common Stock underlying the Warrants at the time of
redemption; and (iii) the Common Stock has traded an average of 100,000 shares
per day. The redemption price shall be $0.01 per Warrant. All holders of
Warrants will have the opportunity to exercise any such Warrant prior to the
date of redemption.
Between
March 1, 2007 and March 31, 2007, Shumate issued an aggregate of 666,768 shares
of common stock for the exercise of outstanding warrants. The net proceeds
of
these warrant exercises to Shumate after the payment of commissions, fees,
and
other expenses of the offering were $735,560. Of the 666,768 warrants exercised,
536,300 were Class A Warrants. The Class A Warrants were exercised at a price
of
$1.25 per share and resulted in approximately $653,366 in net proceeds to
Shumate after the payment of commissions, fees, and other expenses. All of
the
holders of the Class A Warrants that were exercised received one share of
Shumate's common stock and one Class B Warrant as a result of such exercise.
The
Class B Warrants have a term of five years and an exercise price of $2.00 per
share. The Class B Warrants include piggy-back registration rights, subject
to
customary underwriter cutbacks. If the common stock underlying the Class B
Warrants is not registered by March 31, 2008, the holders will be entitled
to
exercise the Class B Warrants on a cashless basis at any time that there is
not
an effective registration statement covering the resale of the common stock
underlying the Class B Warrants. During the nine months ended September 30,
2007, Shumate incurred $81,019 costs of raising capital that were related to
the
offering.
Shumate
evaluated the Class B Warrants to determine if they were within the scope of
SFAS 133 and EITF 00-19. Shumate concluded the Class B Warrants should not
be
classified as a liability and therefore are not subject to SFAS
133.
Between
April 1, 2007 and December 31, 2007, Shumate issued an aggregate of 420,050
shares of common stock valued at $660,912 for consulting services, professional
fees, and hiring incentives.
Between
July 1, 2007 and September 30, 2007, Shumate issued an aggregate of 13,752
shares of common stock for the exercise of outstanding Class A Warrants at
an
exercise price of $1.25 per share, resulting in net proceeds of $17,190.
Between
July 1, 2007 and September 30, 2007, Shumate issued an aggregate of 150,000
shares of common stock for the exercise of non-qualified stock options at an
exercise price of $0.65 per share. The stock options were exercised by payment
by the option holder of 54,776 shares of outstanding common stock valued at
$97,500 on the date of exercise.
Between
July 1, 2007 and September 30, 2007, Shumate incurred $24,454 in offering
costs.
In
December, 2007, the company issued 60,000 shares of restricted stock as a hiring
incentive. 5,000 shares vest each quarter beginning in the first quarter of
2008, for a three year vesting schedule.
NOTE
12 - DISCONTINUED OPERATIONS / DEBT FORGIVENESS
INCOME
On
March
9, 2005, Excalibur Holdings, Inc., a wholly-owned subsidiary of Shumate and
the
parent corporation of Shumate Machine, filed a voluntary petition for protection
under Chapter 7 of the U.S. Bankruptcy Code in the United States Bankruptcy
Court, Southern District of Texas. As a result of this bankruptcy filing, 100%
of the capital stock of Shumate Machine became the sole asset of the bankruptcy
estate. The capital stock of Shumate Machine was pledged to secure the
obligations of Excalibur Holdings to its senior lender, Stillwater. On October
19, 2005, Stillwater transferred the capital stock of Shumate Machine to Shumate
as part of the reorganization of Shumate. In November 2005, the court discharged
Excalibur Holdings of all of its debts and liabilities.
Under
the
terms of an amended and restated promissory note payable, Shumate recognized
$2,000,000 in debt forgiveness income from Stillwater in 2006. See Note 7 for
details.
NOTE
13 - STOCK OPTIONS AND WARRANTS
Shumate
currently has two stock option plans: (a) the 2001 Stock Option Plan reserved
285,714 common shares and 300,571 stock options have been granted through
December 31, 2007 of which 296,429 options have expired unexercised, and (b)
the
2005 Stock Incentive Plan reserved 10,000,000 shares, of which 4,783,690 shares
have been issued to date and 1,796,000 options have been granted through
December 31, 2007. In addition, there were 48,571 non-plan options outstanding
as of December 31, 2006.
During
the year ended December 31, 2006,
Shumate
granted 805,000 options at exercise prices ranging from $0.65 to $1.35 per
share
for services rendered and valued at the options’ fair value totaling $772,734.
Of this amount, $322,793 and $146,227 was recorded as compensation expense
in
the years ended December 31, 2006 and 2007 respectively. $142,006 of the fair
value will not be recognized based on non-vested options for employees that
were
no longer employed as of December 31, 2007. The remaining $161,708 was deferred
to recognize over the future periods in which the options vest and the services
are being performed. The weighted average term in which the unrecognized expense
will be amortized is 1.5 years.
During
the year ended December 31, 2006, Shumate granted 12,000 warrants to consultants
at the exercise price at $1.50 per share for services. These warrants have
a
life of seven years and vest immediately. Shumate valued and recorded these
warrants at their fair value of $14,282 during the year.
During
the year ended December 31, 2006, Shumate granted 250,000 warrants at the
exercise prices of $0.63 per share to brokers for financing costs and services
and granted 2,272,530 warrants at the exercise prices of $1.25 per share to
investors associated with the private offering. These warrants vest immediately
and have a life of five years. These warrants have a relative fair value of
$1,984,361.
Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2006 include (1) 4.19% - 4.99% risk-free interest rate, (2) 3 year option
life is the expected remaining life of the options, (3) expected volatility
ranged from 195% to 206%, and (4) zero expected dividends.
During
2006, 87,857 warrants were expired unexercised.
During
the year ended December 31, 2007, Shumate granted 991,000 options to its
employees and non-employee directors at exercise prices ranging from $1.00
to
$2.25 per share for services rendered and valued at the options' fair value
totaling $728,170. Of this amount, $516,645 was recorded as compensation expense
during the year ended December 31, 2007 and $211,525 was deferred to recognize
over the future periods in which the options vest and the services will be
performed. The weighted average term in which the unrecognized expense will
be
amortized is 2.4 years.
During
the first quarter of 2007, Shumate determined that additional working capital
was needed to fund its continuing operations. Shumate decided to initiate a
capital raising effort via a private offering to a limited number of accredited
investors during a limited period of time. In exchange for the exercise of
any
or all of the investors' Class A warrants, the investors would receive the
applicable shares of common stock and Class B warrants. In connection therewith,
Shumate granted 536,300 warrants at an exercise prices of $2.00 per share to
investors associated with the exercise of Class A Warrants. These warrants
vested immediately and have a life of five years. These warrants have a fair
value of $890,571.
Variables
used in the Black-Scholes option-pricing model during the year ended December
31, 2007, include (1) 2.85% - 5.00% risk-free interest rate, (2) 2.5 to 3.5
year
option life is the expected remaining life of the options, (3) expected
volatility of 81% - 182%, and (4) zero expected dividends.
During
the year ended December 31, 2007, Shumate also recognized $146,227 option
expense for options granted in the prior year that vested in the current
year.
During
2007, 150,000 options were exercised and 163,047 expired unexercised. In the
same period 680,520 warrants were exercised and 891,045 expired
unexercised.
Summary
information regarding options and warrants is as follows:
|
Share
Price
|
|
Options
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
Warrants
|
|
Weighted
Average
Exercise Price
|
|
Aggregate
Intrinsic
Value
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
53,857
|
|
$
|
8.95
|
|
|
|
|
|
201,712
|
|
$
|
7.94
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
805,000
|
|
|
1.06
|
|
|
|
|
|
2,534,530
|
|
|
1.19
|
|
|
|
|
|
Forfeited
|
|
|
(1,000
|
)
|
|
4.20
|
|
|
|
|
|
(87,857
|
)
|
|
6.99
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
857,857
|
|
|
1.55
|
|
$
|
222,900
|
|
|
2,648,385
|
|
|
1.51
|
|
$
|
356,802
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
ended December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
991,000
|
|
|
1.57
|
|
|
|
|
|
2,023,490
|
|
|
1.69
|
|
|
|
|
|
Exercised
|
|
|
(150,000
|
)
|
|
0.65
|
|
|
|
|
|
(680,520
|
)
|
|
1.13
|
|
|
|
|
|
Forfeited
|
|
|
(163,047
|
)
|
|
3.66
|
|
|
|
|
|
(891,045
|
)
|
|
2.29
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2007
|
|
|
1,535,810
|
|
$
|
1.42
|
|
$
|
5,000
|
|
|
3,100,310
|
|
$
|
1.49
|
|
$
|
20,320
|
|
Options
outstanding and exercisable as of December 31, 2007:
| |
|
|
Outstanding
|
|
Exercisable
|
|
| |
Exercise
|
|
Number
|
|
Remaining
|
|
Number
|
|
| |
Price
|
|
of
Shares
|
|
Life
(years)
|
|
of
Shares
|
|
| |
|
|
|
|
|
|
|
|
| $ |
4.20
|
|
|
3,143
|
|
|
0.41
|
|
|
3,143
|
|
| |
0.75
|
|
|
100,000
|
|
|
3.04
|
|
|
33,334
|
|
| |
1.00
|
|
|
100,000
|
|
|
3.22
|
|
|
100,000
|
|
| |
1.20
|
|
|
50,000
|
|
|
0.09
|
|
|
50,000
|
|
| |
1.35
|
|
|
150,000
|
|
|
3.45
|
|
|
50,000
|
|
| |
1.33
|
|
|
75,000
|
|
|
3.62
|
|
|
25,000
|
|
| |
1.20
|
|
|
6,667
|
|
|
0.08
|
|
|
6,667
|
|
| |
1.21
|
|
|
50,000
|
|
|
3.70
|
|
|
50,000
|
|
| |
1.15
|
|
|
10,000
|
|
|
3.79
|
|
|
3,333
|
|
| |
1.75
|
|
|
20,000
|
|
|
3.95
|
|
|
-
|
|
| |
1.75
|
|
|
75,000
|
|
|
4.02
|
|
|
75,000
|
|
| |
1.90
|
|
|
32,000
|
|
|
4.02
|
|
|
-
|
|
| |
2.25
|
|
|
10,000
|
|
|
4.07
|
|
|
-
|
|
| |
1.90
|
|
|
60,000
|
|
|
4.36
|
|
|
60,000
|
|
| |
1.80
|
|
|
500,000
|
|
|
4.61
|
|
|
500,000
|
|
| |
1.00
|
|
|
294,000
|
|
|
4.98
|
|
|
294,000
|
|
| |
|
|
|
1,535,810
|
|
|
4.05
|
|
|
1,250,477
|
|
Warrants
outstanding and exercisable as of December 31, 2007:
| |
|
|
Outstanding
|
|
Exercisable
|
|
| |
Exercise
|
|
|