U.S. SECURITIES AND EXCHANGE
COMMISSION Washington,
D.C. 20549
FORM 10-QSB/A
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 2004
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from [____________to___________]
Commission file number 333-75044
--------------------------------------------------------------------------------
CATALYST LIGHTING GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware 84-1588927
----------------------------------------------- -----------------------
(State or other jurisdiction of incorporation (I.R.S. employer
or organization) identification number)
7700 Wyatt Drive
Forth Worth, TX 76108
----------------------------------------------- -----------------------
(Address of principal (Zip Code)
executive offices)
Issuer's telephone number, including area code: (817) 738-8181
--------------------------------------------------------------------------------
(Former name, former address and former
fiscal year, if changed since last report)
1
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: 3,880,949 shares of Common Stock, par
value $.01 per share, outstanding as of February 11, 2005.
Traditional Small Business Disclosure Format (Check one): Yes |_| No |X|.
2
CATALYST LIGHTING GROUP, INC.
TABLE OF CONTENTS
PAGE(S)
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets as of December 31, 2004
(Unaudited) and September 30, 2004 4
Condensed Consolidated Statements of Operations for the Three Months
Ended December 31, 2004 and 2003 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Three Months ended December 31, 2004 and 2003 (Unaudited) 6
Notes to Consolidated Financial Statements (Unaudited) 7 - 10
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL 11
CONDITION AND RESULTS OF OPERATION
ITEM 3. CONTROLS AND PROCEDURES 16
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 2. CHANGES IN SECURITIES 18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 5. OTHER INFORMATION 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
CERTIFICATIONS 20 - 25
3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
DECEMBER 31, SEPTEMBER 30,
2004 2004
---------------- -----------------
(Unaudited) (Restated)**
---------------- -----------------
ASSETS
CURRENT ASSETS:
Cash $ 263,390 $ 501,429
Trade receivables, less allowance for doubtful accounts of $45,746 and $42,822 2,425,927 2,676,504
Inventories, net of reserve of $34,543 and $18,343 1,496,343 1,739,803
Prepaid expenses and other 22,204 56,301
-------------- --------------
Total current assets 4,207,864 4,974,037
PROPERTY AND EQUIPMENT, net of accumulated depreciation of $107,156 and $95,653 155,884 163,138
OTHER ASSETS:
Goodwill, net of accumulated amortization of $330,151 and $330,151 2,971,362 2,971,362
Restricted Cash 1,332,459 1,927,990
Deferred Financing Cost 414,738 401,306
Other 15,793 15,793
-------------- --------------
Total other assets 4,734,352 5,316,451
-------------- --------------
TOTAL ASSETS $ 9,098,100 $ 10,453,626
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving note payable
Current maturities of long-term debt: 2,390,799 2,570,457
Related party 250,000 250,000
Other 1,041,060 1,112,289
Accounts payable 1,976,731 2,831,513
Accrued commissions 448,463 314,879
Other accrued liabilities 253,699 335,087
-------------- --------------
Total current liabilities 6,360,752 7,414,225
-------------- --------------
LONG-TERM DEBT, less current maturities:
Related party 50,000 50,000
Other 1,880,205 1,863,639
-------------- --------------
Total long-term debt 1,930,205 1,913,639
STOCKHOLDERS' EQUITY:
Preferred stock - $.01 par value; authorized 10,000,000 shares, none issued -- --
Common stock - $.01 par value; authorized 40,000,000 shares,
3,834,026 and 3,756,051 shares issued and outstanding, respectively 38,341 37,561
Additional paid-in capital 3,290,743 3,143,757
Accumulated deficit (2,521,941) (2,055,556)
-------------- --------------
Total stockholders' equity 807,143 1,125,762
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 9,098,100 $ 10,453,626
============== ==============
** Derived from the Company's audited consolidated balance sheet at September 30, 2004
The accompanying notes are an integral part of the condensed consolidated
financial statements
4
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED
DECEMBER 31,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
NET SALES $ 3,706,146 $ 4,451,910
COST OF SALES 2,558,886 3,091,392
------------ ------------
GROSS PROFIT ON SALES 1,147,260 1,360,518
GENERAL, SELLING AND ADMINISTRATIVE EXPENSES 1,395,434 1,329,664
------------ ------------
INCOME (LOSS) FROM OPERATIONS (248,174) 30,854
OTHER EXPENSE:
Interest expense 218,212 97,385
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (466,386) (66,531)
BENEFIT FROM INCOME TAXES -- 23,561
------------ ------------
NET LOSS $ (466,386) $ (42,970)
============ ============
NET LOSS PER COMMON SHARE:
Basic $ (.12) $ (.01)
============ ============
Diluted $ (.12) $ (.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Basic $ 3,759,441 $ 3,391,368
============ ============
Diluted $ 3,759,441 $ 3,391,368
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS
ENDED DECEMBER 31,
----------------------------
2004 2003
------------ ------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (466,386) $ (42,970)
Adjustments to reconcile net loss to net cash
used in operating activities:
Amortization of debt discount and deferred financing cost 60,212 --
Provision for doubtful accounts 30,633 9,370
Depreciation and amortization 11,501 7,902
Deferred taxes -- (23,561)
Change in operating assets and liabilities:
Trade receivables, related and other 219,946 479,290
Inventories 243,459 54,482
Prepaid expenses and other 34,099 21,637
Deferred financing cost (13,432) --
Accounts payable (854,782) (439,392)
Other accrued liabilities 52,196 (183,343)
------------ ------------
Net cash used in operating activities (682,554) (116,585)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (4,249) (25,405)
Restricted Cash 595,532 --
------------ ------------
Net cash provided by (used in) investing activities 591,283 (25,405)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in revolving note payable (240,635) 77,774
Proceeds from (Payments on) long-term notes payable (53,899) 3,681
Common Stock Issuance 147,766 --
------------ ------------
Net cash provided by (used in) financing activities (146,768) 81,455
------------ ------------
NET CHANGE IN CASH (238,039) (60,535)
CASH, at beginning of period 501,429 96,591
------------ ------------
CASH, at end of period $ 263,390 $ 36,056
============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 71,717 $ 59,880
============ ============
SCHEDULE OF NON-CASH FINANCING ACTIVITIES:
Common stock issued for debt extension $ 30,000 $ --
============ ============
Common stock issued for accrued interest $ 36,962 $ --
============ ============
The accompanying notes are an integral part of the condensed consolidated
financial statements
6
CATALYST LIGHTING GROUP, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The financial statements included herein have been prepared by Catalyst
Lighting Group, Inc. (the "Company") pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included
herein are effective in making the information presented not misleading. A
description of the Company's accounting policies and other financial
information is included in the audited consolidated financial statements
as filed with the Securities and Exchange Commission in the Company's
Annual Report on Form 10-KSB for the year ended September 30, 2004.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements contain all adjustments necessary to
present fairly the financial position of the Company as of December 31,
2004 and the results of operations and cash flows for the periods
presented. All such adjustments are of a normal recurring nature. The
results of operations for the quarter ended December 31, 2004 are not
necessarily indicative of the results that may be achieved for a full
fiscal year and cannot be used to indicate financial performance for the
entire year.
The Company accounts for stock options using the intrinsic value method
wherein compensation expense is recognized on stock options granted only
for the excess of the market price of our common stock over the option
exercise price on the date of grant. All options of the Company are
granted at amounts equal to or higher than the fair-value of our stock so
no compensation expense is recorded.
Some companies also recognize compensation expense for the fair value of
the option right itself. The Company has elected not to adopt this
accounting method because it requires the use of subjective valuation
models which the Company believes are not representative of the real value
of the option to either the Company or the optionees. However, we are
required to disclose the pro forma effect of accounting for stock options
using such a valuation for all options granted. The fair value of the
options was estimated at the date of grant using a Black-Scholes
option-pricing model with the following weighted average assumptions:
Three Months Ended
December 31, 2004
-------------
Risk-free interest rate 4.74%
Expected dividend yield 0%
Expected lives 10 years
Expected volatility 34.47%
7
The total fair value of options granted was computed to be approximately
$0 and $0 for the three months ended December 31, 2004 and 2003,
respectively. These amounts are amortized ratably over the vesting periods
of the options or recognized at the date of grant if no vesting period is
required. Pro forma stock-based compensation was $4,025 and $0 for the
quarters ended December 31, 2004 and 2003 respectively.
If the Company had accounted for its stock-based compensation plans in
accordance with SFAS No. 123, the Company's net income and net income per
common share would have been reported as follows:
FOR THE THREE MONTHS ENDED
DECEMBER 31
----------------------------
2004 2003
------------ ------------
Net loss, as reported $ (466,386) $ (42,970)
Stock based compensation included in net loss -- --
Fair value of stock based compensation (4,025) --
------------ ------------
Pro forma net loss $ (470,411) $ (42,970)
============ ============
Net loss per common share, basic:
As reported $ (0.12) $ (0.01)
Stock based compensation included in net loss -- --
Fair value of stock based compensation -- --
------------ ------------
Pro forma net loss per common share $ (0.12) $ (0.01)
============ ============
Net loss per common share, diluted:
As reported $ (0.12) $ (0.01)
Stock based compensation included in net loss -- --
Fair value of stock based compensation -- --
------------ ------------
Pro forma net loss per common share $ (0.12) $ (0.01)
============ ============
For the three months ended December 31, 2003 there were no differences
between net income and proforma net income.
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment,"
which is a revision of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) is effective for public companies for
interim or annual periods beginning after June 15, 2005, supersedes APB
Opinion No. 25, Accounting for Stock Issued to Employees, and amends SFAS
No. 95, Statement of Cash Flows.
8
SFAS No. 123(R) requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the income statement
based on their fair values. Pro-forma disclosure is no longer an
alternative. The new standard will be effective for the company, beginning
July 1, 2005. The company has not yet completed their evaluation but
expects the adoption to have an effect on the financial statements similar
to the pro-forma effects reported above.
In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised
ARB 43, relating to inventory costs. This revision is to clarify the
accounting for abnormal amounts of idle facility expense, freight,
handling costs and wasted material (spoilage). This Statement requires
that these items be recognized as a current period charge regardless of
whether they meet the criterion specified in ARB 43. In addition, this
Statement requires the allocation of fixed production overheads to the
costs of conversion be based on normal capacity of the production
facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not believe
the adoption of SFAS 151 will have a material impact on the Company's
financial statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes
the guidance in APB Opinion 29, Accounting for Nonmonetary Transactions.
This Statement amends Opinion 29 to eliminate the exception for
nonmonetary exchanges of similar productive assets and replaces it with a
general exception for exchanges of nonmonetary assets that do not have
commercial substance. A nonmonetary exchange has commercial substance if
the future cash flows of the entity are expected to change significantly
as a result of the exchange. SFAS 153 is effective during fiscal years
beginning after June 15, 2005. The Company does not believe the adoption
of SFAS 153 will have a material impact on the Company's financial
statements.
2. RELATED PARTY TRANSACTIONS:
During the three months ended December 31, 2004 and 2003, the Company paid
$0 and $3,600, respectively, for accounting and administrative services to
an entity related through common ownership.
During the three months ended December 31, 2004 and 2003, the Company had
sales of $0 and $104,323, respectively, to an entity whose principal owner
is the brother of an employee of the Company. Accounts receivable from
this related entity were $0 and $83,304 at December 31, 2004 and 2003,
respectively.
3. LONG-TERM DEBT
On September 30, 2004, the Company entered into a financing arrangement
with Laurus Master Fund, Ltd. ("Laurus") which included (1) a Secured
Convertible Term Note in the principal amount of two million dollars
($2,000,000), (the "Term Note") and (2) a Secured Revolving Note (the
"Revolving Note") and a Secured Convertible Minimum Borrowing Note
9
(together with the Revolving Note, the "AR Notes") in the aggregate
principal amount of up to three million dollars ($3,000,000). The
Company's customers are required to remit payments directly to a lock box
and amounts received are applied to reduce the AR Note outstanding. The
Term Note and AR Notes are convertible into the Company's common stock at
an initial fixed conversion price of $2.66 per share. In connection with
the Term Note and AR Notes, the Company issued Laurus a Common Stock
Purchase Warrant for the purchase of up to 472,000 shares of our common
stock, exercisable until September 30, 2009 at a price of $3.00 per share
(the "Warrant"). On December 3, 2004, the terms of the Term Note and AR
Notes were amended such that Catalyst received an advance on $600,000 of
the funds agreed to be advanced in exchange for lowering the fixed
conversion price of the Term Note and AR Notes from $2.66 per share to
$1.50 per share (the fair value of the Company's stock on that date).
Additionally, Laurus also acquired an additional Common Stock Purchase
Warrant (together with the Warrant, the "Warrants") for the purchase of up
to 100,000 shares of Common Stock, exercisable until December 3, 2009 at a
price of $3.00 per share. The fair value of these warrants was stated at
approximately $27,000 using the Black-Scholes pricing model.
The Term Note and AR Notes (collectively, the "Notes") mature on September
30, 2007 and are collateralized by a first priority lien on inventory,
accounts receivable, raw materials and all of its ownership interests in
Whitco. The Notes accrue interest at a rate per annum equal to the "prime
rate" published in The Wall Street Journal from time to time, plus two
percent (2%), but shall in no event be less than six percent (6%) per
annum. The Company also granted registration rights with respect to all
shares of Common Stock underlying the Notes and Warrants.
The Term Note was placed into an escrow account solely controlled by
Laurus (the "Escrow Account"). The Company may request that Laurus release
all or any portion of the amounts contained in the Escrow Account
following, or in connection with, the consummation of an acquisition,
joint venture or capital investment (a "Transaction") by the Company. Such
a release is subject to Laurus' evaluation of all factors it considers, in
its sole discretion, relevant at the time of such requested release.
Laurus is under no obligation to release any amounts and the release of
such amounts is in Laurus' sole and absolute discretion.
On August 6, 2003, the Company received a bridge loan of $250,000 from
Keating Reverse Merger Fund ("Lender"). In consideration for the note, the
Company agreed to issue warrants for the purchase of up to 125,000 shares
(the "Warrant Shares") of the common stock of the Company upon
consummation of the Merger at a price of $2.00 per Warrant Share. On
August 22, 2004, in consideration for extending the due date on the note
to December 31, 2004, we issued an additional 40,000 warrants for purchase
of our common stock at a price of $4.00 per share. On December 29, 2004 in
consideration for extending the due date on the note to December 31, 2005,
we issued 20,000 shares of our common stock valued at $1.50 per share. The
Company also issued an additional 24,642 shares of our common stock as
payment for accrued interest on the original note. The total value of the
accrued interest was $36,962.
10
4. STOCKHOLDER'S EQUITY
On October 12, 2004, the Company commenced a private placement offering of
up to 2,666,667 units at $1.50 per unit, each unit consisting of one share
of Catalyst common stock and one five year warrant to purchase Catalyst
common stock at an exercise price of $3.00 per share. This offering
terminated on January 24, 2005, having sold units worth $50,000.
5. RESTATED YEAR-END BALANCE SHEET
The Company intends to file a restated balance sheet as of September 30th,
2004, which was included in the Company's Form 10-KSB. This restatement
relates to the reclassification of $3,000,000 debt to a short term
liability which was previously recorded as long term. Even though the note
is due September 30th, 2007 and the Company does not believe the note
holder will call the note, the fact that the note has a "lock box"
arrangements whereby customer remittances are deposited directly into the
lock box, and utilized by the bank to reduce the $3,000,000 note.
Generally accepted accounting principles require such notes to be
reflected as short term.
ITEM 2. Management's Discussion and Analysis or Plan of Operation.
FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-QSB contains forward looking statements.
Forward looking statements are statements not based on historical information
and that relate to future operations, strategies, financial results or other
developments. Forward looking statements are necessarily based upon estimates
and assumptions that are inherently subject to significant business, economic
and competitive uncertainties and contingencies, many of which are beyond our
control and many of which, with respect to future business decisions, are
subject to change. These uncertainties and contingencies can affect actual
results and could cause actual results to differ materially from those expressed
in any forward looking statements made by us or on our behalf. We disclaim any
obligation to update forward looking statements.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our condensed financial statements have been prepared in accordance with
accounting principles generally accepted in the United States, which require us
to make estimates and judgments that affect the reported amount of assets,
liabilities, revenues and expenses, and the related disclosures. A description
of the Company's accounting policies and other financial information is included
in the audited consolidated financial statements as filed with the Securities
and Exchange Commission in the Company's Annual Report on Form 10-KSB for the
year ended September 30, 2004. The estimates used by management are based upon
their historical experiences combined with management's understanding of current
facts and circumstances. Certain of our accounting policies are considered
11
critical as they are both important to the portrayal of our financial condition
and the results of our operations and require significant judgments on the part
of management. Management believes the following represent the critical
accounting policies of Whitco as described in Financial Reporting Release No.
60, "Cautionary Advice Regarding Disclosure About Critical Accounting Policies,"
which was issued by the Securities and Exchange Commission: inventory, goodwill,
allowance for doubtful accounts, and warranty policy.
The Company states inventory at the lower of cost or market, determined under
the first-in, first-out method. We maintain a significant amount of raw material
inventory to serve future order demand of customers. While management believes
its processes for ordering and controlling inventory are effective, changes in
economic or industry conditions may require us to hold inventory longer than
expected or write outdated inventory off as the result of obsolescence.
During fiscal 2001, we amortized goodwill using a fifteen-year life. Beginning
January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142
(SFAS 142) "Goodwill and Other Intangible Assets," and as a result ceased
amortizing goodwill. We test goodwill for impairment annually or on an interim
basis if an event or circumstance occurs between the annual tests that may
indicate impairment of goodwill. Impairment of goodwill will be recognized in
operating results in the period it is identified.
We utilize our best estimate for allowance for doubtful accounts based on past
history and accruing the expense as a percentage of sales. We grant credit to
distributors of sports and area lighting poles located throughout the United
States of America. Collateral is generally not required for trade receivables.
While we consider our process to effectively quantify its exposure to doubtful
accounts, changes in economic, industry or specific customer conditions may
require an adjustment of the allowance for doubtful accounts.
Our customers receive a one year product warranty for defects in material and
workmanship, providing repair or replacement or refund of the purchase price. We
provide an accrual as a reserve for potential warranty costs based on historical
experience and accruing as a percentage of sales. While management considers our
process to be effective to quantify exposure to warranty claims based on
historical performance, changes in warranty claims on a specific or cumulative
basis may require us to adjust its reserve for potential warranty costs.
Impact of Recently Issued Accounting Pronouncements
In December 2004, the FASB issued SFAS No. 123(R), "Share-Based Payment," which
is a revision of SFAS No. 123, Accounting for Stock-Based Compensation. SFAS No.
123(R) is effective for public companies for interim or annual periods beginning
after June 15, 2005, supersedes APB Opinion No. 25, Accounting for Stock Issued
to Employees, and amends SFAS No. 95, Statement of Cash Flows.
SFAS No. 123(R) requires all share-based payments to employees, including grants
of employee stock options, to be recognized in the income statement based on
their fair values. Pro-forma disclosure is no longer an alternative. The new
12
standard will be effective for the company, beginning July 1, 2005. The company
has not yet completed their evaluation but expects the adoption to have an
effect on the financial statements similar to the pro-forma effects reported
above.
In November 2004, the FASB issued SFAS 151, Inventory Costs, which revised ARB
43, relating to inventory costs. This revision is to clarify the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material (spoilage). This Statement requires that these items be recognized as a
current period charge regardless of whether they meet the criterion specified in
ARB 43. In addition, this Statement requires the allocation of fixed production
overheads to the costs of conversion be based on normal capacity of the
production facilities. SFAS 151 is effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The Company does not believe the
adoption of SFAS 151 will have a material impact on the Company's financial
statements.
The FASB issued SFAS 153, Exchanges of Nonmonetary Assets, which changes the
guidance in APB Opinion 29, Accounting for Nonmonetary Transactions. This
Statement amends Opinion 29 to eliminate the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
153 is effective during fiscal years beginning after June 15, 2005. The Company
does not believe the adoption of SFAS 153 will have a material impact on the
Company's financial statements.
OVERVIEW
This amended Form 10-QSB is being filed to restate a portion of Management's
Discussion and Analysis as it relates to the transaction with Laurus in
accordance with comments received from the Securities and Exchange Commission
and to respond to certain other comments received from the staff of the
Securities and Exchange Commission. The financial statements and notes thereto,
as well as all other disclosures herein unrelated to Laurus, remain unchanged.
We are now at a critical inflection point in our business development. First, we
are poised to benefit from the investments we have made in our organic business.
Secondly, we now have publicly traded stock, which we hope to use to partially
fund a series of acquisitions in order to realize our final primary strategic
objective. Because of the significant investments we have made in our
distribution network, we believe we can now leverage that network by acquiring
small niche-technology fixture and accessory businesses and introducing those
products into our existing distribution channel. This would be expected to
benefit the Company immediately in two ways. First, we will be able to increase
sales of new products by virtue of the fact that we believe our distribution
network appears to be better developed (both in scale as well as technology)
than the ones used by the companies we seek to acquire. Secondly, the added
product offerings may help us gain additional consideration with our lighting
13
agency and OEM customers. We believe having specialty products on our Web site
and catalogue not only differentiates us from competitors, but also increases
the likelihood that customers will place additional orders for more commodity
product at the time of purchase of the specialty product.
We have been reviewing business acquisition and alliance opportunities, which is
intended to be our primary vehicle for creating long-term growth for investors.
Our "opportunistic" growth strategy is targeted to specific candidates in the
outdoor lighting (primarily fixtures and accessories) or pole structure
industry. More specifically, we intend to focus initially on small, privately
owned companies with positive earnings on a stand alone basis or with the
ability to be positive immediately after acquisition through operating
efficiencies. Without significant incremental expenditure, it is anticipated
that annual revenue of the target companies can be increased in the near future
by introducing the new products into our existing distribution channels.
We believe we have benefited from initiating our own manufacturing operations
beginning in December 2004. We have been able to control our production
deliveries and quality more closely. Further, we are beginning to see
manufacturing efficiencies enhance our gross margin percentage earned on sales.
Our strategy has been further enhanced by the commitment of approximately $2
million restricted cash investment by Laurus Master Fund Ltd. to finance
mergers, joint ventures or other strategic business alliances as the need
arises. Laurus has also provided an additional $3 million revolving line of
credit at a floor rate of 6%.
On September 30, 2004, the Company entered into a financing arrangement with
Laurus which included (1) a Secured Convertible Term Note in the principal
amount of two million dollars ($2,000,000), (the "Term Note") and (2) a Secured
Revolving Note (the "Revolving Note") and a Secured Convertible Minimum
Borrowing Note (together with the Revolving Note, the "AR Notes") in the
aggregate principal amount of up to three million dollars ($3,000,000). The Term
Note and AR Notes are convertible into the Company's common stock at an initial
fixed conversion price of $2.66 per share. In connection with the Term Note and
AR Notes, the Company issued Laurus a Common Stock Purchase Warrant for the
purchase of up to 472,000 shares of our common stock, exercisable until
September 30, 2009 at a price of $3.00 per share (the "Warrant"). On December 3,
2004, the terms of the Term Note and AR Notes were amended such that Catalyst
received an advance on $600,000 of the funds agreed to be advanced in exchange
for lowering the fixed conversion price of the Term Note and AR Notes from $2.66
per share to $1.50 per share. Additionally, Laurus also acquired an additional
Common Stock Purchase Warrant (together with the Warrant, the "Warrants") for
the purchase of up to 100,000 shares of Common Stock, exercisable until December
3, 2009 at a price of $3.00 per share.
We were advised on February 11, 2005 by our independent registered public
accounting firm that the financial statements contained in our Form 10-KSB filed
on December 16, 2004 for our fiscal year ended September 30, 2004 must be
restated to reclassify certain of the Company's debt from long term to current.
The nature and purpose of the restatement of the financial statements concerned
the concept of subjective acceleration as it relates to a portion of the
Company's financial arrangements with Laurus, as set forth above.
14
To borrow money from Laurus pursuant to the AR Notes, once Catalyst is entitled
to payment from the sale of goods, it submits a copy of such receivable to
Laurus, and, if such receivable falls within Laurus' definition of an "eligible"
accounts receivable, Laurus will advance Catalyst up to 90% of the net face
amount of such eligible account receivable. The account debtor is notified to
make payment to a lockbox controlled, and periodically swept, by Laurus. Once
payment is received into this lockbox pursuant to an eligible account
receivable, such proceeds are used to repay sums advanced against, and interest
earned on, such eligible account receivable. The remainder of the payment from
such account debtor is, in Laurus' discretion, either remitted to the Company or
credited against other costs, fees and expenses then outstanding under the AR
Notes.
The specific change reclassifies certain debt associated with Laurus to Current
Liabilities from Long Term Debt, in accordance with the accounting
pronouncements guiding the change. Although $2,570,457 of debt was reclassified,
this adjustment did not affect Total Assets, Total Liabilities or Stockholders
Equity on the Balance Sheet, nor create any change on the Consolidated Statement
of Operations. The change also did not affect our borrowing ability with Laurus.
Management believes this reclassification could possibly impact the Company by
impairing our ability to secure future third party financing, but management
also believes this is the only impact on the Company as a result of the
reclassification itself.
In accordance with generally accepted accounting principles, such an arrangement
requires classification as current debt instead of the long term debt
classification as it was originally recorded in the Company's Form 10-KSB
financial statements. Accordingly, on February 17, 2005, we filed an amended
Form 10-KSB for the fiscal year ended September 30, 2004.
THREE MONTHS ENDED DECEMBER 31, 2004 COMPARED TO THE THREE MONTHS ENDED DECEMBER
31, 2003
RESULTS OF OPERATIONS
Revenue. For the three months ended December 31, 2004, the recognized revenue
was $3,706,146. For the three months ended December 31, 2003, the recognized
revenue was $4,451,910. Cost of goods sold for the three months ended December
31, 2004 was $2,558,886, which generated a gross margin of 31.0%, versus 30.6%
for the three months ended December 31, 2003. Excluding commissions from sales
(See table below), the decrease in revenue can be attributed to an $163,606
(11.7%) decrease in steel area lighting poles, a $731,540 (97.9%) decrease in
sales to an OEM customer, and a $106,150 (10.8%) decrease in sports lighting
pole sales. The OEM customer listed previously held a lighting contract with
Wal-Mart that expired in March 2003. These decreases were partially offset by a
$36,778 (17.5%) increase in aluminum area lighting pole sales and a $294,212
(129.7%) increase in highmast lighting pole sales.
Our agents have the ability to sell our products at or above the base price of
our products, and our commission structure pays agents 100% of the overage above
15
our base price. The table below itemizes commission revenue generated from the
100% overage and revenue generated from our base price.
For the Three Months Ended December 31,
2004 2003
------------ ------------
Base Price Revenue $ 3,046,409 $ 3,740,799
Commission Revenue 659,738 711,111
------------ ------------
Gross Sales $ 3,706,147 $ 4,451,910
============ ============
General, selling, and administrative expense (GSA expense). For the three months
ended December 31, 2004, GSA expense totaled $1,395,434, compared to $1,329,664
for the three months ended December 31, 2003. The increase in GSA expense
resulted from an increase in bad debt expense, property taxes, legal and
professional fees, warranty expense, and consideration for extension of
subordinated debt. This was partially offset by a decrease in commission
expense.
Bad debt expense. For the three months ended December 31, 2004, bad debt expense
totaled $30,633, compared to $9,370 for the three months ended December 31,
2003. The increase in bad debt expense is the result of an increase in actual
uncollectible accounts during the period as well as an increase in the
percentage of sales used to record bad debt expense.
Property tax expense. For the three months ended December 31, 2004, property tax
expense totaled $37,773, compared to $4,500 for the three months ended December
31, 2003. The increase in property tax expense is the result of taxes on
property and equipment associated with the Company's manufacturing facility. The
manufacturing facility was opened in late December 2003.
Legal and professional fees. For the three months ended December 31, 2004, legal
and professional fees totaled $39,420, compared to $23,329 for the three months
ended December 31, 2003. The increase in legal and professional fees is the
result of outside counsel's review of the restructuring of our AR and Term Notes
and services provided in connection with legal proceedings against the company.
Warranty Expense. For the three months ended December 31, 2004, warranty expense
totaled $37,042, compared to $18,787 for the three months ended December 31,
2003. The increase in warranty expense is related to the actual charges received
from various customers to correct field issues.
Consideration for extension of subordinated debt. For the three months ended
December 31, 2004, consideration for extension of subordinated debt was $30,000,
compared with $0 for the three months ended December 31, 2003. The increases in
16
consideration for extension of subordinated debt for the comparative periods
reflects charges associated with the extension of a $250,000 subordinated note
due on December 31, 2004 to December 31, 2005. The consideration paid was
non-cash as it was paid in common equity securities to the lender.
Commission expense. For the three months ended December 31, 2004, commission
expense totaled $659,738, compared to $711,111 for the three months ended
December 31, 2003. The decrease in commissions is the result of a decrease in
total revenues as compared to the previous comparative periods.
Interest expense. Interest expense for the three months ended December 31, 2004
was $218,212, compared with $97,384 for the three months ended December 31,
2003. The increase in interest expense for the comparative periods reflect the
increase in the operating credit line, the addition of the $2,000,000 Term Note,
as well as amortization of debt discount that was associated with the issue of
common stock warrants. The Company also issued stock as payment for $36,962 in
accrued interest.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2004, we had a working capital deficit of $2,152,888. We also
incurred a net loss for the three month period ending December 31, 2004 of
$466,386. We believe the loss is due to the seasonality of the sports and area
lighting pole business and the impact of the loss of Wal-Mart business through
an OEM customer.
We are also seeking to increase both cash flow and profitability by growing
sales internally as well as through acquisitions. If we do not raise additional
equity capital sufficient to provide for positive working capital and are unable
to return in the near term to profitability, we may be required to curtail
future operations and/or liquidate assets or enter into credit arrangements on
less than favorable terms than would normally be expected, to provide for future
liquidity.
Cash used in operations for the three months ended December 31, 2004 and 2003
was ($682,554) and ($116,585), respectively. The cash used by operations for the
three months ended December 31, 2004 resulted primarily from a loss of $466,386
and a decrease in accounts payable of $854,782. This was partially offset by a
decrease in trade receivables of $219,946, and a decrease in inventory of
$243,459.
Cash provided by (used in) investing activities for three months ended December
31, 2004 and 2003, was $591,283 and ($25,405), respectively. This was primarily
a result of the release of $600,000 of restricted cash from the Term Note for
the three month period ending December 31, 2004.
Cash provided by (used in) financing activities for the three months ended
December 31, 2004 and 2003 was ($146,768) and $81,455, respectively. For the
three months ended December 31, 2004 there was a decrease in revolving notes
payable of $240,635, proceeds from issuance of long-term debt of ($53,899), and
common stock issuance of $147,766.
17
Material cash requirements for the next twelve months not in the ordinary course
of business relate to the soliciting and closing of possible acquisition targets
or other strategic opportunities. Regarding repayment of debt, over the next 12
months our current maturities of long term debt as of December 31, 2004 is
$1,291,060, consisting of subordinated debt. For the next 12 months, one
$250,000 payment is due on December 31, 2005, one $92,850 was due on June 30,
2004, one $217,850 payment is due on June 30, 2005, and one $700,000 payment is
due on July 31, 2005, while the rest is spread evenly over the entire year. We
intend to fund future payments on these obligations through operational cash
flow, further utilization of our existing credit facility with Laurus, and
adding additional subordinated debt.
On September 30, 2004, the Company entered into the financing arrangements with
Laurus, as set forth above, in the aggregate principal amount of up to three
million dollars ($3,000,000). Laurus also received a common stock purchase
warrant to purchase up to 472,000 shares of Common Stock at an exercise price of
$3.00 per share.
On December 3, 2004, the terms of the Notes were amended such that Catalyst
received an advance on $600,000 of the funds agreed to be advanced pursuant to
the Term Note in exchange for lowering the fixed conversion price of the Notes
from $2.66 per share to $1.50 per share. Laurus also acquired an additional
Common Stock Purchase Warrant for the purchase of up to 100,000 shares of Common
Stock, exercisable until December 3, 2009 at a price of $3.00 per share.
Pursuant to our registration statement filed on Form SB-2 on March 24, 2005 (the
"Registration Statement"), we are registering the Common Stock issuable to
Laurus underlying the AR Notes, assuming conversion of the maximum amounts
thereunder and conversion of all Warrants, plus an additional 250,000 shares of
Common Stock to cover any future anti-dilution protection Laurus may receive
pursuant to the AR Notes and Warrants. None of the Common Stock underlying the
Term Note is being registered in the Registration Statement.
The Notes currently bear interest at "prime" (currently 5.25%) plus 2%, or a
current aggregate of 7.25%. Laurus is prohibited from converting money owed
under the Notes, in the aggregate, into more than 4.99% percent of the Common
Stock. The Term Note and the Borrowing Note also each prohibit conversion into
Common Stock until (a) money has been advanced pursuant to any of such notes and
(b) the shares of Common Stock underlying the respective Notes have been
registered for re-sale or are exempt from the registration requirements. Since
the Common Stock underlying the Term Note is not being registered in the
Registration Staement, the Term Note cannot currently be converted. However,
sums advanced pursuant to the AR Notes may be converted into shares of Common
Stock being registered hereunder at $1.50 per share.
The Company's outstanding balance at December 31, 2003 was $2,795,492.
Currently, $2,821,949 has been advanced pursuant to the AR Notes and $672,000
(including the $600,000 referenced above) has been advanced pursuant to the Term
Note. Catalyst has the option of prepaying the Term Note and Borrowing Note by
paying 120% of all amounts then due and owing to Laurus. The AR Notes,
aggregating $3,000,000, are for accounts receivable financing provided by Laurus
and, once received, there is no restriction on the use of such funds. The Term
Note provides up to $2,000,000 for acquisitions and/or general working capital,
with its use subject to the approval of Laurus. The Securities Purchase
Agreement pursuant to which the Term Note was issued (the "SPA") also contains
18
restrictions for so long as at least 25% of the Term Note is still outstanding.
During such time, Catalyst is prohibited from, among other things, (i) declaring
or paying any dividends, (ii) issuing any preferred stock that is mandatorily
redeemable prior to payment in full of all indebtedness and liabilities of the
Company to Laurus, (iii) redeeming any of its preferred stock or other equity
interests, (iv) liquidating, dissolving or effecting a material reorganization
(it being understood that in no event shall the Company dissolve, liquidate or
merge with any other person or entity unless the Company is the surviving
entity) and (v) materially altering or changing the scope of the business of the
Company.
The existence of the AR and Term Notes could impact our ability to obtain future
financing, as Laurus holds a $5,000,000 first priority security interest in all
of our accounts receivable and other assets. Additionally, until the Term Note
is paid in full, Laurus holds a right of first refusal to provide any additional
debt or equity financing the Company may seek. The further leveraging of our
balance sheet and dilution of our Common Stock could prevent future financing
arrangements for the Company.
If (i) Catalyst shall have registered all Common Stock underlying the Notes and
Warrants and (ii) the market price of the Common Stock for the five trading days
immediately preceding the last day of the most recent month exceeds the then
applicable fixed conversion price by at least twenty five percent (25%), the
interest rate for the succeeding calendar month shall automatically be reduced
by 200 basis points, or 2%, for each incremental twenty five percent (25%)
increase in the market price of the Common Stock above the then applicable fixed
conversion price. If (i) the Company shall not have registered the shares of
Common Stock underlying the Notes and Warrants and (ii) the market price of the
Common Stock as reported by Bloomberg, L.P. on the principal market for the five
trading days immediately preceding the last day of the most recent month exceeds
the then applicable fixed conversion price by at least twenty five percent
(25%), the interest rate for the succeeding calendar month shall automatically
be decreased by 100 basis points, or 1%, for each incremental twenty five
percent (25%) increase in the market price of the Common Stock above the then
applicable fixed conversion price. As the Common Stock underlying the Term Note
is not being registered pursuant to the Registration Statement, we anticipate
that we may only be able to reduce the interest rate under the Notes at the 1%
rate set forth in the immediately preceding sentence. Failure to decrease the
interest rate by 2%, as set forth above, is not expected to affect the Company
in a material way as the aggregate annual difference, even if all $5,000,000
under the Notes were currently outstanding, is only $50,000. Currently, there is
only $3,493,949 outstanding under all Notes, $2,821,949 having been advanced
pursuant to the AR Notes and $672,000 (including the $600,000 referenced above)
having been advanced pursuant to the Term Note. Interest under the Notes is not
payable in shares of Common Stock.
The AR Notes, aggregating $3,000,000, are for accounts receivable financing
provided by Laurus and there is no restriction on the use of such funds.
However, the Term Note was to provide up to $2,000,000 for acquisitions approved
by Laurus and general working capital purposes only.
The Security Agreement pursuant to which the AR Notes were issued contains
restrictions requiring Laurus' consent in order to (i) create, incur, assume or
suffer to exist any indebtedness (exclusive of trade debt) whether secured or
19
unsecured, (ii) cancel any debt owing to it in excess of $50,000 in the
aggregate during any 12 month period, (iii) assume, guarantee, endorse or
otherwise become directly or contingently liable in connection with any
obligations of any other Person, except for transactions in the ordinary course
of business, (iv) directly or indirectly declare, pay or make any dividend or
distribution on any class of its stock or assets, (v) purchase, redeem or retire
any Company stock, (vi) directly or indirectly prepay any indebtedness (other
than to Laurus and in the ordinary course of business), or repurchase, redeem,
retire or otherwise acquire any indebtedness (other than to Laurus and in the
ordinary course of business) except to make scheduled payments of principal and
interest thereof, (vii) enter into any merger, consolidation or other
reorganization with or into any other person or acquire all or a portion of the
assets or stock of any person or permit any other person to consolidate or merge
with it, unless (1) Company is the surviving entity of such merger or
consolidation, (2) no event of default shall exist immediately prior to and
after giving effect to such merger or consolidation, (3) Company shall have
provided Laurus copies of all documentation relating to such merger or
consolidation and (4) Company shall have provided Laurus with at least thirty
(30) days' prior written notice of such merger or consolidation, (viii)
materially change the nature of the business in which it is presently engaged,
(ix) change its fiscal year or make any changes in accounting treatment and
reporting practices, except as required by GAAP or in the tax reporting
treatment or except as required by law or (x) enter into any transaction with
any employee, director or affiliate of Catalyst, except in the ordinary course
on arms-length terms.
ITEM 3. Controls and Procedures.
(a) Evaluation of Disclosure Controls and Procedures. Our chief executive
officer and our chief financial officer, after evaluating the
effectiveness of the Company's "disclosure controls and procedures" (as
defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and
15d-15(e)) as of a date (the "Evaluation Date") as of the end of the
period covered by this quarterly report, have each independently concluded
that, as of the Evaluation Date, our disclosure controls and procedures
were effective and designed to ensure that material information relating
to us and our consolidated subsidiaries would be made known to them by
others within those entities.
Internal Control over Financial Reporting. Under Rules 13a-15 and 15d-15
of the Exchange Act, companies are required to maintain internal control
over financial reporting, as defined, and company management is required
to evaluate and report on internal control over financial reporting. Under
an extended compliance period for these rules, the Company must begin to
comply with the evaluation and disclosure requirements with its annual
report for the fiscal year ending September 30, 2005, and the Company must
begin to comply with a requirement to perform a quarterly evaluation of
changes to internal control over financial reporting that occur
thereafter.
We are in the process of performing a detailed assessment of our internal
controls as required by the Sarbanes-Oxley Act of 2002. We are in the
scoping phase and have identified potential control deficiencies in our
system of internal controls and will implement policies and procedures to
remediate these deficiencies during the testing and remediation phase. To
20
ensure that we address these issues thoroughly, effectively and timely, we
have supplemented our internal project team with the services of an
outside specialist.
(b) Changes in Internal Controls. There were no changes in our internal
controls or to our knowledge, in any other factors that could materially
affect, or would be reasonably likely to materially affect, our disclosure
controls and procedures, or our internal control over financial reporting,
subsequent to December 31, 2004.
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings. On April 28, 2004, FWT, Inc. sued the Company for
breach of contract and attorney's fees. The lawsuit relates to an unpaid
purchase order in the amount of $30,609.00 which is disputed by the Company. The
Company filed an answer on June 8, 2004 and in addition to denying liability to
FWT, the Company asserted claims for breach of contract and negligence against a
third party, Double R Transport and Farms, Inc. The Company has reached an
agreement in principle to settle its claims against Double R and it intends to
vigorously defend itself against FWT's claims if that settlement is not
finalized.
An Application for Mechanic's and Materialman's Lien; Demand for Payment; Notice
of Mechanic's and Materialman's Lien and Demand for Payment was filed in the
Circuit Court of the Third Circuit, State of Hawaii filed June 4, 2004 (the
"Application"). This application was filed by GE Sports Lighting Systems, LLP
("GE") against Whitco and Kamehameha Schools/Bernice Pauahi Bishop Estate (the
"Estate"), Hawaiian Dredging/Kajima and Does 1-50. GE is a contractor of a
project to build sports complexes at two different schools on property owned by
the Estate and hired us to provide lighting poles for the project. GE claims it
is owed $313,385. Although it is not expressly stated in the Application, based
on subsequent discussions with all parties, it appears the Estate withheld
payment from GE due to the installation of the lighting poles using bolts that
were different from those originally ordered. We proposed a fix which was
approved in writing by both GE and the Estate. We then implemented this fix and
have received verbal approval of such fix from all parties, including an
independent architect hired by the Estate. Although the next appearance before
the court on the Application is currently scheduled for April 13, 2005, we have
been notified verbally that once all written approvals have been received by GE,
the Application is expected to be withdrawn.
On September 27, 2004, the Trustee for the Warren Electric Group, Ltd.
bankruptcy estate sued the Company for recovery of $17,250.00 allegedly paid to
the Company in the 90 days prior to Warren Electric's bankruptcy. The Company
reached a settlement on December 20, 2004 by which we paid the Warren
Liquidating Trust $8,625 and the suit was dismissed.
ITEM 2. Changes in Securities.
None
ITEM 3. Defaults Upon Senior Securities.
None
21
ITEM 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
ITEM 5. Other Information.
None
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004.
31.2 Certification of Principal Financial Officer pursuant to Section 302 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004.
32.1 Certification of Principal Executive Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004.
32.2 Certification of Principal Financial Officer pursuant to Section 906 of
the Sarbanes- Oxley Act of 2002, with respect to the registrant's
Quarterly Report on Form 10-QSB for the quarter ended December 31, 2004.
(b) Reports on Form 8-K.
Form 8-K filed October 5, 2004
Amendment to Form 8-K filed December 3, 2004
22
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Registrant: CATALYST LIGHTING GROUP, INC.
Date: April 6, 2005 /s/ Dennis H. Depenbusch
---------------------------------------
Dennis H. Depenbusch
Chief Executive Officer, Chairman of
the Board of Directors, Chief Financial
Officer and Secretary
23