SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly period ended March 31, 2009
[ ] 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: 333-146744
MACH ONE CORPORATION
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(Exact name of small business issuer as specified in its charter)
Nevada 88-0338837
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or organization)
974 Silver Beach Road, Belgium, WI 53004
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(Address of principal executive offices)
(888) 400-7179
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(Issuer's telephone number)
6430 Congress Drive, West Bend, WI 53095
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(Former name, former address and former fiscal year, if applicable)
Check whether the registrant (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 [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2) of the Exchange Act. Yes [ ] No [X]
As of May 15, 2009, 131,833,880 shares of common stock were outstanding.
MACH ONE CORPORATION
INDEX
Part I - FINANCIAL INFORMATION
Item 1 Financial Statements
Balance Sheets at March 31, 2009 (unaudited) and
December 31, 2008 (audited) 2
Statements of Operations for the three months ended
March 31, 2009 and 2008 (unaudited) 3
Statements of Cash Flows for the three months ended
March 31, 2009 and 2008 (unaudited) 4
Notes to Financial Statements (unaudited) 5
Item 2 Management's Discussion and Analysis or Plan of
Operations 16
Item 3 Qualitative and Quantitative Disclosures about
Market Risk 18
Item 4T Controls and Procedures 18
Part II OTHER INFORMATION
Item 1 Legal Proceedings 18
Item 1A Risk Factors 18
Item 2 Unregistered Sales of Equity Securities and Use of
Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters of a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 19
Signatures 20
Exhibits
MACH ONE CORPORATION
CONSOLIDATED BALANCE SHEETS (unaudited)
March 31, December 31,
2009 2008
------------ ------------
ASSETS
CURRENT ASSETS
Cash $ 533,475 $ 635,334
Accounts receivable, net 859,496 44,603
Accounts receivable pledged as collateral 301,598 --
Other receivable 560,000 --
Marketable securities 384,803 483,900
Inventory, net 2,230,557 520,020
Other current assets 55,155 13,395
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Total Current Assets 4,925,084 1,697,252
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Property and equipment, net 1,006,312 771,030
Goodwill 6,326,039 3,438,466
Brand trademark 80,000 80,000
Prepaid management fees 202,500 210,000
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TOTAL ASSETS $ 12,539,935 $ 6,196,748
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LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,637,371 $ 7,577
Accrued expenses 610,013 401,327
Short-term notes payable and other debt 2,776,810 815,000
Deferred revenue 60,725 --
Current portion of long-term debt obligations 21,050 --
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Total Current Liabilities 6,105,969 1,223,904
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Long-term debt, net of current portion 3,209,966 3,164,268
Non-controlling interest in variable interest entity (46,888) --
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred Stock, $.05 par value, 10,500,000 shares authorized ,
9,500,000 and 5,540,000 shares issued and outstanding 475,000 271,000
Common stock, $.001 par value, 239,500,000 shares authorized,
121,367,387 and 111,094,054 shares issued and outstanding 121,366 111,093
Common stock issuable $.001 par value, 2,500,000 shares 221,000 --
Treasury Stock (445,579) (143,456)
Additional paid-in capital 7,699,926 5,314,699
Accumulated deficit (4,699,291) (3,744,760)
Accumulated other comprehensive loss (101,534) --
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Total Stockholders' Equity (Deficit) 3,270,888 1,808,576
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,539,935 $ 6,196,748
============ ============
The accompanying notes are an integral part of these financial statements
2
MACH ONE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
Three Months Ended
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March 31, March 31,
2009 2008
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Sales, net $ 811,448 $ 60,407
Cost of goods sold 719,612 28,098
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Gross profit 91,836 32,309
Operating expenses 811,399 414,002
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Loss from operations (719,563) (381,693)
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Other expense:
Interest expense (281,856) (53,360)
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Total other expense (281,856) (53,360)
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Loss before provision for income taxes (1,001,419) (435,053)
Income tax provision -- --
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Net loss (1,001,419) (435,053)
Less: net loss attributable to non-controlling interest in
variable interest entities 46,888 --
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Net loss attributable to Mach One Corporation $ (954,531) $ (435,053)
============= =============
Net loss per common share (basic and diluted) $ (0.01) $ (0.01)
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Weighted average shares outstanding:
Basic and diluted 115,094,054 74,502,000
============= =============
The accompanying notes are an integral part of these financial statements
3
MACH ONE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended
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March 31, March 31,
2009 2008
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Cash flows from operating activities:
Net loss $ (954,531) $ (435,053)
Adjustments to reconcile net loss to net
cash used in operating activities:
Net loss attributable to non-controlling interest
in variable interest entity (46,888) --
Depreciation and amortization 27,915 20,511
Amortization of debt discount 170,500 270,000
Amortization of prepaid management fees 7,500 --
(Increase) decrease in operating assets (net of acquisition):
Accounts receivable (641,373) (51,738)
Other receivable (560,000) --
Inventory (550,833) --
Other current assets (11,038) --
Increase decrease in operating liabilities (net of acquisition):
Accounts payable and accrued expenses 964,169 16,460
Deferred revenue 60,725 --
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Total adjustments $ (579,323) $ 255,233
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Net cash used in operating activities $(1,533,854) $ (179,820)
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Cash flows from investing activities:
Purchases of marketable securities (2,437) --
Acquisitions, net of cash acquired 30,672 --
Purchase of property and equipiment (180,653) (156,038)
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Net cash used in investing activities $ (152,418) $ (156,038)
Cash flows from financing activities:
Net proceeds from notes payable 1,883,523 363,811
Payments on long-term debt (2,185) --
Proceeds from long-term debt 5,198 --
Purchase of treasury stock (302,123) --
----------- -----------
Net cash provided by financining activities $ 1,584,413 $ 363,811
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Net (decrease) increase in cash $ (101,859) $ 27,953
Cash, beginning of period 635,334 6,928
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Cash, end of period $ 533,475 $ 34,881
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Supplemental cash and non-cash flow information
Cash paid for interest $ 630 $ --
=========== ===========
The accompanying notes are an integral part of these financial statements
4
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 1. Nature of Operations and Continuance of Business
The interim Consolidated Financial Statements of Mach One Corporation
(Mach One, the Company, we, us or our) are unaudited but, in the opinion of
management, reflect all adjustments necessary for a fair statement of financial
position, results of operations and cash flows for the periods presented. Except
as otherwise disclosed herein, these adjustments consist of normal, recurring
items. The results of operations for any interim period are not necessarily
indicative of full year results. The Consolidated Financial Statements and Notes
are presented in accordance with the requirements for Quarterly Reports on Form
10-Q and do not contain certain information included in our annual Consolidated
Financial Statements and Notes.
The preparation of the interim 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 and disclosure of contingent assets
and liabilities at the date of the interim Consolidated Financial Statements and
the reported amounts of revenue and expenses for the reporting periods. Despite
our intention to establish accurate estimates and use reasonable assumptions,
actual results may differ from our estimates.
The December 31, 2008 Consolidated Balance Sheet data was derived from the
audited Consolidated Financial Statements but does not include all disclosures
required by accounting principles generally accepted in the United States of
America. This Form 10-Q should be read in conjunction with our Consolidated
Financial Statements and Notes included in our Annual Report on Form 10-K for
the year ended December 31, 2008.
Note 2. Summary of Significant Accounting Policies
Variable Interest Entity: During the quarter ended March 31, 2009, the Company
was considered the primary beneficiary of Progressive Formulations, Inc.
("PFI"). PFI is an importer and distributor of soy-based organic food products
whose initial capitalization was provided in the form of loans and inventory by
the Company. PFI is wholly owned by a shareholder of the Company's stock. Refer
to NOTE 4. CONSOLIDATION OF VARIABLE INTEREST ENTITIES for further information
on our consolidated VIE.
Principles of Consolidation: The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The
wholly owned subsidiaries include Ceres Organic Harvest, Inc. (Ceres), Pacific
Rim Foods, Ltd. (Pacific Rim) and Modular Process Constructors, LLC (MPS). All
inter-company transactions and balances have been eliminated in the
consolidation.
The Company consolidates its financial results in accordance with Financial
Accounting Standards Board ("FASB"), Interpretation No. 46R, Consolidation of
Variable Interest Entities ("FIN 46R"), which requires a company to consolidate
entities determined to be variable interest entities (VIEs), for which the
Company is deemed to be the VIE's primary beneficiary.
Management Estimates: The preparation of consolidated financial statements in
conformity with US generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Company regularly evaluates estimates and assumptions related to
donated expenses, and deferred income tax asset valuation allowances. The
Company bases its estimates and assumptions on current facts, historical
experience and various other factors that it believes to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities and the accrual of costs and
expenses that are not readily apparent from other sources. The actual results
experienced by the Company may differ materially and adversely from the
Company's estimates. To the extent there are material differences between the
estimates and the actual results, future results of operations will be affected.
Cash and Cash Equivalents: For purposes of reporting cash flows, the Company
considers all cash accounts which are not subject to withdrawal restrictions or
penalties, and certificates of deposit with original maturities of 90 days or
less to be cash or cash equivalents.
Marketable Securities: Marketable securities consist of equity securities, are
classified as available for sale and are expected to be redeemed within one
year.
Available for sale securities are stated at fair value, with unrealized gains
and losses reported as accumulated other comprehensive income (loss), a separate
component of stockholders' equity, until realized. These fair values are
primarily determined using quoted market prices. The carrying amount of
securities, for the purpose of computing unrealized gains and losses, are
determined by specific identification. The cost of securities sold is determined
by specific identification.
5
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Customer Concentrations and Accounts Receivable: The accounts receivable arise
in the normal course of business in selling products to customers.
Concentrations of credit risk with respect to accounts receivable arise because
the Company grants unsecured credit in the form of trade accounts receivable to
its customers.
Accounts are written off as they are deemed uncollectible based upon a periodic
review of the accounts. As of March 31, 2009 and December 31, 2008, management
has estimated that accounts receivable are fully collectible, and thus, has
established no allowance for doubtful accounts.
Inventory: The Company maintains its inventory on a perpetual basis utilizing
the first-in first-out (FIFO) method. Inventories have been valued at the lower
of cost or market. As of March 31, 2009 and December 31, 2008, management has
not established an obsolescence reserve for inventory as we believe that all
inventory is usable and that market values of all inventories exceed cost.
Property and Equipment: Property and equipment is reported at cost less
accumulated depreciation. Maintenance and repairs are charge to expense as
incurred. The cost of property and equipment is depreciated over the following
estimated useful lives of the related assets using the modified accelerated cost
recovery basis:
Building 39 years
Furniture & Fixtures 7 years
Machinery & Equipment 5 years
Long-Lived Assets: The Company periodically evaluates the carrying value of
long-lived assets to be held and used, including but not limited to, capital
assets, when events and circumstances warrant such a review. The carrying value
of a long-lived asset is considered impaired when the anticipated undiscounted
cash flow from such asset is less than its carrying value. In that event, a loss
is recognized based on the amount by which the carrying value exceeds the fair
value of the long-lived asset. Fair value is determined primarily using the
anticipated cash flows discounted at a rate commensurate with the risk involved.
Losses on long-lived assets to be disposed of are determined in a similar
manner, except that fair values are reduced for the cost to dispose. The Company
has reviewed long-lived assets and certain intangible assets with estimable
useful lives and determined that the carrying value is recoverable in future
periods.
Revenue Recognition: The Company recognizes revenue when persuasive evidence of
an arrangement exists, transfer of title has occurred, the selling price is
fixed or determinable, collectability is reasonably assured and delivery has
occurred per the contract terms. For certain contracts of MPS, the Company
recognizes revenue based on the percentage of completion method. Revenue is
deferred when customer billings exceed revenue earned.
Segment Reporting: The Company operates and manages the business under one
reporting segment.
Goodwill: Goodwill is the excess of cost of an acquired entity over the amounts
assigned to assets acquired and liabilities assumed in a business combination.
Goodwill is not amortized. In accordance with SFAS No. 142, Goodwill and Other
Intangible Assets (SFAS 142), we evaluate the carrying value of goodwill once
each fiscal year and between such annual evaluations if events occur or
circumstances change that would indicate a possible impairment.
Fair Value of Financial Instruments: The respective carrying value of certain
on-balance sheet financial instruments approximates their fair values. These
financial instruments include cash, accounts receivable, accounts payable and
accrued liabilities, and notes payable. Fair values were assumed to approximate
cost or carrying values as most of the debt was incurred recently and the assets
were acquired within one year. Management is of the opinion that the Company is
not exposed to significant interest, credit or currency risks arising from these
financial instruments.
Income Taxes: The Company provides for income taxes under Statement of Financial
Accounting Standards No. 109, Accounting for Income Taxes ("SFAS No. 109") as
clarified by FIN No. 48 which requires the use of an asset and liability
approach in accounting for income taxes. Deferred tax assets and liabilities are
recorded based on the differences between the financial statement and tax bases
of assets and liabilities and the tax rates in effect when these differences are
expected to reverse. SFAS No. 109 requires the reduction of deferred tax assets
by a valuation allowance if, based on the weight of the available evidence, it
is more likely than not that some or all of the deferred tax assets will not be
realized. For all periods presented, the Company has recorded a full valuation
allowance against its deferred tax assets.
FIN No. 48 requires the recognition of a financial statement benefit of a tax
position only after determining that the relevant tax authority would more
likely than not sustain the position following an audit. For tax positions
meeting the more-likely-than-not threshold, the amount recognized in the
financial statements is the largest benefit that has a greater than fifty
percent likelihood of being realized upon ultimate settlement with the relevant
tax authority.
6
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Comprehensive Income (Loss): Comprehensive Income (Loss) includes net loss and
items defined as other comprehensive income. Items defined as other
comprehensive income include unrealized gains (losses) on marketable securities.
The Company had $(101,534) of other comprehensive income(loss) for the three
months ended March 31, 2009. There was no other comprehensive income(loss) for
the three months ended March 31, 2008.
Basic and Diluted Earnings per Common Share: Basic net income per common share
is computed by dividing net loss applicable to common shareholders by the
weighted average number of common shares outstanding during the periods
presented. Diluted net income per common share is determined using the weighted
average number of common shares outstanding during the periods presented,
adjusted for the dilutive effect of any common stock equivalents, consisting of
shares that might be issued upon exercise of options, warrants, and conversion
of convertible debt.
Recent Accounting Developments: In April 2008, the FASB issued FASB Staff
Position (FSP) No. FAS 142-3, Determination of the Useful Life of Intangible
Assets. This guidance addresses the determination of the useful life of
intangible assets which have legal, regulatory, or contractual provisions that
potentially limit a company's use of an asset. Under the new guidance, a company
should consider its own historical experience in renewing or extending similar
arrangements. The Company is required to apply the new guidance to intangible
assets acquired after December 31, 2008. The adoption of this statement did not
have an effect on the Company's reported financial position or results of
operations.
In June 2008, the FASB issued FSP No. EITF 03-6-1, Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities. This guidance states that unvested share-based payment awards that
contain nonforfeitable rights to dividends or dividend equivalents are
participating securities and should be included in the computation of earnings
per share using the two-class method outlined in SFAS No. 128, Earnings per
Share. The two-class method is an earnings allocation formula that determines
earnings per share for each class of common stock and participating security
according to dividends declared and participation rights in undistributed
earnings. The terms of the Company's restricted stock unit and restricted stock
awards do provide a nonforfeitable right to receive dividend equivalent payments
on unvested awards. As such, these awards are considered participating
securities under the new guidance. Effective January 1, 2009, the Company will
begin reporting earnings per share under the two-class method. The adoption of
this statement did not have an effect on the Company's reported financial
position or results of operations.
In February 2008, the FASB issued FASB Staff Position FAS 157-2 ("FSP FAS
157-2"). Effective Date of FASB Statement No. 157 which delays the effective
date of SFAS No. 157 for non-financial assets and non-financial liabilities that
are recognized or disclosed in the financial statements on a nonrecurring basis
to fiscal years beginning after November 15, 2008. These non-financial items
include assets and liabilities such as reporting units measured at fair value in
a goodwill impairment test and non-financial assets acquired and non-financial
liabilities assumed in a business combination. The adoption of the provisions of
SFAS No. 157 related to non-financial assets and non-financial liabilities on
January 1, 2009 did not have a material impact in the consolidated financial
statements. See Note 16. Fair Value Measurements for SFAS No. 157 disclosures.
In December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements-an amendment of ARB No. 51. SFAS No. 160
establishes accounting and reporting standards for the noncontrolling interest
in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. The adoption of this statement did not
have an effect on the Company's future reported financial position or results of
operations.
In December 2007, the FASB issued SFAS No. 141(R), "Business Combinations,"
which became effective January 1, 2009 via prospective application to business
combinations. This Statement requires that the acquisition method of accounting
be applied to a broader set of business combinations, amends the definition of a
business combination, provides a definition of a business, requires an acquirer
to recognize an acquired business at its fair value at the acquisition date and
requires the assets and liabilities assumed in a business combination to be
measured and recognized at their fair values as of the acquisition date (with
limited exceptions). We adopted this Statement on January 1, 2009 and applied
this Statement to business combinations consummated in the three months ended
March 31, 2009.
In April 2009, the FASB issued FSP FAS 141(R)-1, "Accounting for Assets Acquired
and Liabilities Assumed in a Business Combination That Arise from
Contingencies." This FSP requires that assets acquired and liabilities assumed
in a business combination that arise from contingencies be recognized at fair
value if fair value can be reasonably estimated. If fair value cannot be
reasonably estimated, the asset or liability would generally be recognized in
accordance with SFAS No. 5, "Accounting for Contingencies" and FASB
Interpretation No. 14, "Reasonable Estimation of the Amount of a Loss". Further,
the FASB removed the subsequent accounting guidance for assets and liabilities
arising from contingencies from SFAS No. 141(R).
In April 2009, the Financial Accounting Standards Board (FASB) issued FASB Staff
Position (FSP) Financial Accounting Standard (FAS) 157-4 "Determining Fair Value
When the Volume and Level of Activity for the Asset or Liability Have
Significantly Decreased and Identifying Transactions That Are Not Orderly."
Based on the guidance, if an entity determines that the level of activity for an
asset or liability has significantly decreased and that a transaction is not
orderly, further analysis of transactions or quoted prices is needed, and a
significant adjustment to the transaction or quoted prices may be necessary to
estimate fair value in accordance with Statement of Financial Accounting
Standards (SFAS) No. 157 "Fair Value Measurements". This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
We will adopt this FSP for our quarter ending June 30, 2009. There is no
expected impact on our consolidated financial statements.
7
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
In April 2009, the FASB issued FSP FAS 115-2 and FAS 124-2 "Recognition and
Presentation of Other-Than-Temporary Impairments." The guidance applies to
investments in debt securities for which other-than-temporary impairments may be
recorded. If an entity's management asserts that it does not have the intent to
sell a debt security and it is more likely than not that it will not have to
sell the security before recovery of its cost basis, then an entity may separate
other-than-temporary impairments into two components: 1) the amount related to
credit losses (recorded in earnings), and 2) all other amounts (recorded in
other comprehensive income). This FSP is to be applied prospectively and is
effective for interim and annual periods ending after June 15, 2009 with early
adoption permitted for periods ending after March 15, 2009. We will adopt this
FSP for our quarter ending June 30, 2009. There is no expected impact on our
consolidated financial statements.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board
(APB) 28-1 "Interim Disclosures about Fair Value of Financial Instruments." The
FSP amends SFAS No. 107 "Disclosures about Fair Value of Financial Instruments"
to require an entity to provide disclosures about fair value of financial
instruments in interim financial information. This FSP is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009 with early adoption permitted for periods ending after March 15, 2009.
We will include the required disclosures in our financial statements for the
quarter ending June 30, 2009.
Note 3. Going Concern Uncertainty
The accompanying financial statements have been prepared on the basis that the
Company will continue as a going concern, which assumes the realization of
assets and the satisfaction of liabilities in the normal course of business.
Since inception, the Company has primarily been engaged in product development
and pre-operational activities. Minimal revenue has been generated to date and
the Company has accumulated losses totaling $4,699,291 from inception through
March 31, 2009, and a net working capital deficit of $1,180,885. The uncertainty
related to these conditions raises substantial doubt about the Company's ability
to continue as a going concern. The accompanying financial statements do not
include any adjustments that might result from the outcome of this uncertainty
Although we recently completed a convertible debt financing with gross proceeds
of approximately $2,250,000 in November 2008 and January 2009, we will
eventually require significant additional funding in order to achieve our
business plan. We believe that our current cash position will be able to sustain
our proposed operations for 3-4 months. Over the next 18 months, in order to
have the capability of achieving our business plan, we believe that we will
require at least $3,000,000 in additional funding. We will attempt to raise
these funds by means of one or more public or private offerings of debt or
equity securities or both. We believe that some, if not all, of the required
funds could be generated from the increased cash flows of our divisions as they
become fully integrated.
However, at this point, we have not specifically identified the type or sources
of this funding. We are exploring commercial and joint venture financing
opportunities.
Note 4. Consolidation of Variable Interest Entities
FASB Interpretation No. 46R ("FIN46R") provides a framework for identifying
variable interest entities and determining when a company should include the
assets, liabilities, non-controlling interests and results of activities of a
VIE in its consolidated financial statement.
In general, a VIE is a corporation, partnership, limited liability company,
trust, or any other legal structure used to conduct activities or hold assets
that either (1) has an insufficient amount of equity to carry out its principal
activities without additional subordinated financial support, (2) has a group of
equity owners that are unable to make significant decisions about its
activities, or (3) has a group of equity owners that do not have the obligation
to absorb losses or the right to receive returns generated by its operations.
FIN 46R requires a VIE to be consolidated if a party with an ownership,
contractual or other financial interest in the VIE ("a variable interest
holder") is obligated to absorb a majority of the risk of loss from the VIE's
activities, is entitled to receive a majority of the VIE's residual returns (if
no party absorbs a majority of the VIE's losses), or both. A variable interest
holder that consolidates the VIE is called the primary beneficiary of the VIE.
Upon consolidation, the primary beneficiary generally must initially record all
of the VIE's assets, liabilities and non-controlling interests at fair value and
subsequently account for the VIE as if it were consolidated based on majority
voting interest. FIN 46R also requires disclosures about VIEs that the variable
interest holder is not required to consolidate but in which it has a significant
variable interest.
The Company determined they are required to consolidate PFI as a VIE during
three months ended March 31, 2009, as defined by FIN46R. As of and for the three
months ended March 31, 2009, the consolidated balance sheet, consolidated
statements of operations and cash flows, and the related footnotes of the
Company have been presented on a consolidated basis to include its variable
interests in PFI. As of and for the three months ended March 31, 2009, total
assets of $89,109 total liabilities of $17,260, and selling, general and
administrative expenses of $18,997 are included in the consolidated financial
statements of the Company. PFI had no sales during this period. All significant
intercompany accounts and transactions have been eliminated in consolidation. No
amounts from PFI are included in the consolidated balance sheet as of December
31, 2008 or the consolidated statements of operations and cash flows for the
three months ended March 31, 2008 as PFI is a VIE of Ceres, which was not then
acquired by the Company.
8
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 5. Acquisitions
On December 31, 2008, pursuant to a Plan and Agreement of Reorganization between
the Company and Pacific Rim Foods, Ltd. (Pacific Rim) and Certain Shareholders
of Pacific Rim the Company issued 28,000,000 shares of its common stock and Five
Year Zero Coupon Convertible Promissory Notes in the aggregate amount of
$1,500,000 (collectively the "Exchange Securities") in exchange for of all of
the issued and outstanding capital stock of Pacific Rim.
On February 18, 2009, the Company consummated the acquisition and purchase from
Thomsen Group, LLC (Thomsen) of all of the assets of Modular Process
Constructors, LLC (MPS). Pursuant to the Agreement for Purchase and Sale of
Business, in exchange for the MPS assets the Company issued to Thomsen 500,000
shares of restricted Series B Convertible Preferred Stock (Series B Preferred
Stock). Each share of Series B Preferred Stock is convertible into two shares of
the Company's common stock. In addition to the issuance of the Series B
Preferred Stock, the Company executed an Earn-Out Agreement with Thomsen,
providing for Thomsen to acquire up to an additional 35% of issued and
outstanding common stock of Mach One on December 31, 2011, based upon the
combined net income of MPS for the years ending December 31, 2009, 2010, and
2011.
On February 20, 2009, pursuant to a Plan and Agreement of Reorganization between
the Company and Ceres Organic Harvest, Inc. (Ceres), the Company completed the
acquisition of all of the issued and outstanding capital stock of Ceres in
exchange for 8,000,000 shares of the Company's common stock and 8,000,000 shares
of Series C Convertible Preferred Stock (Series C Preferred Stock). Each share
of Series C Preferred Stock is convertible into one share of Mach One common
stock.
Due to the nature of these transactions and the timing in relation to the
reporting period, the Company has made a good-faith estimate as to the value of
the consideration paid for Pacific Rim, MPS and Ceres. This estimate is
$5,000,000, $150,000 and $2,500,000 for Pacific Rim, MPS and Ceres,
respectively, and will be adjusted during the quarter ending June 30, 2009,
based on expanded information and analyses of the transactions.
In addition, due to the late timing of these acquisitions within the current
reporting period close, the Company has recorded a preliminary purchase price
allocation as of March 31, 2009. The Company anticipates finalizing the purchase
price allocation, including the initial valuation of any potential liability in
connection with the earn-out agreement relating to the MPS acquisition, the
valuation of acquired assets and assumed liabilities and identifiable intangible
assets, in the quarter ended June 30, 2009.
The following tables summarize the preliminary allocation of the purchase price
to the fair values of the assets acquired and liabilities assumed at the date of
acquisition, in accordance with the purchase method of accounting, as of March
31, 2009:
CERES MPS PACIFIC RIM TOTAL
Current assets $ 1,693,199 $ 3,015 $ 964,814 $ 2,661,028
Intangible assets - - 80,000 80,000
Goodwill 2,685,389 202,184 3,438,466 6,326,039
Other long-term assets 82,544 - 730,020 812,564
----------- --------- ----------- -----------
Total assets acquired 4,461,132 205,199 5,213,300 9,879,631
----------- --------- ----------- -----------
Current liabilities 1,897,398 55,199 213,300 2,165,897
Long-term liabilities 63,734 - - 63,734
----------- --------- ----------- -----------
Total liabilities assumed 1,961,132 55,199 213,300 2,229,631
----------- --------- ----------- -----------
Total purchase consideration $ 2,500,000 $ 150,000 $ 5,000,000 $ 7,650,000
----------- --------- ----------- -----------
Tentatively, the Company has recorded goodwill of $2,887,573 in connection with
the acquisitions of Ceres and MPS in the quarter ended March 31, 2009,
representing the estimated fair value of the consideration provided by the
Company in excess of the estimated fair value of the assets acquired and
liabilities assumed. The Company tentatively recorded goodwill of $3,438,466 in
connection with the acquisition of Pacific Rim, representing the estimated fair
value of the consideration provided by the Company in excess of the estimated
fair value of the assets acquired and liabilities assumed.
Intangible assets includes a trademark that the Company estimates has a useful
life of 15 years and is being amortized accordingly.
9
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
The Company has recorded the results of the operations of Pacific Rim, Ceres and
MPS in the Company's statement of operations beginning with the effective date
of each respective acquisition.
Note 6. Inventories
Inventory at March 31, 2009 and December 31, 2008 consisted of the following:
March 31, December 31,
2009 2008
----------- ------------
Raw materials $ 100,557 -
Finished goods 2,130,000 520,020
----------- ------------
$ 2,230,557 $ 520,020
=========== ============
The Company has entered into inventory financing arrangements where Ceres'
wholly-owned subsidiary, Organic Grain and Milling, Inc. (OGM) sells grain that
is reserved for use by Ceres to third-party grain processors (the "Mills"). The
Mills have generally agreed to segregate the grain held for Ceres and to process
the grain solely for Ceres' use. These sales have been recorded in the financial
statements as a product financing arrangement under SFAS No. 49, "Accounting for
Product Financing Arrangements." Pursuant to SFAS No. 49, as of March 31, 2009,
$68,464 remained in raw materials inventory with a corresponding amount included
in short-term notes payable and other debt, representing the Company's
non-contractual obligation to repurchase milled products produced from such
inventory.
Note 7. Composition of Certain Financial Statement Captions
Other current assets at March 31, 2009 and December 31, 2008 consisted of the
following:
March 31, December 31,
2009 2008
----------- ------------
Loans receivable $ 8,656 $ 4,000
Prepaid expenses and other 46,499 9,395
----------- ------------
$ 55,155 $ 13,395
=========== ============
Note 8. Property and Equipment
Property and equipment at March 31, 2009 and December 31, 2008 consisted of the
following:
March 31, December 31,
2009 2008
----------- ------------
Machinery & equipment $ 967,554 $ 821,879
Building 38,724 -
Leasehold improvements 54,006 21,790
Computer equipment 49,587 10,322
Furniture & fixtures 10,095 5,287
Vehicles 3,606 -
Land 1,536 -
Livestock 52,607 55,240
----------- ------------
1,177,715 914,518
Less: accumulated depreciation (171,403) ((143,488)
----------- ------------
$ 1,006,312 $ 771,030
=========== ============
Depreciation expense related to property and equipment was $27,915 and $20,511
for the three months ended March 31, 2009 and 2008, respectively.
Note 9. Purchase Agreement and Purchase Escrows
On February 6, 2009, the Company entered into an agreement to purchase land and
buildings for the purpose of establishing operations for the Company's Animal
Wellness group. Total purchase price was $1,600,000. In relation to this
purchase, the Company initially established a $560,000 escrow.
10
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
In May 2009, the Company canceled the purchase agreement for property.
Consequently, the related purchase escrow in the amount of $560,000 has been
recorded as a current asset as it is expected to be refunded back to the Company
during the quarter ended June 30, 2009.
Note 10. Short-term Notes Payable and Other Debt
Short-term notes payable and other debt at March 31, 2009 and December 31, 2008
consisted of the following:
March 31, December 31,
2009 2008
----------- ------------
Short-term convertible notes payable $ 2,352,984 $ 715,000
Transfac Financing Agreement 232,274 -
Note payable at 10%, due 12/31/2009 100,000 100,000
Liability under product financing arrangement 68,464 -
Short-term loans and lines of credit 23,088 -
----------- ------------
$ 2,776,810 $ 815,000
=========== ============
Transfac Financing Agreement
The Company has an accounts receivable financing agreement (the "Agreement")
with Transfac Capital, LLC ("Transfac"). The Agreement term is one year from the
effective date of June 2, 2008 and is cancelable immediately upon notice by
Transfac, or within ten days of notice by the Company if the Company secures
financing from an FDIC insured institution. Under the terms of the Agreement,
the Company may offer to sell its accounts receivable to Transfac each month
during the term of the Agreement, up to a maximum amount outstanding at any time
of $1.5 million in gross receivables submitted, or $1.2 million in net amounts
funded based upon an 80.0% advance rate. The Company is obligated to offer
accounts totaling a minimum of $300,000 in each month, and Transfac has the
right to decline to purchase any offered accounts (invoices).
The Agreement provides for the sale, on a revolving basis, of accounts
receivable generated by specified debtors. The purchase price paid by Transfac
reflects a discount that is generally 0.7% for the first twenty days, plus an
aging fee of 0.034% for each day after the first twenty days. The Company
continues to be responsible for the servicing and administration of the
receivables purchased.
The Company accounts for the sale of receivables under the Agreement as a
secured borrowing with a pledge of the subject receivables as collateral, in
accordance with SFAS No. 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities. Accounts Receivable pledged
as collateral on the accompanying consolidated balance sheets in the amount of
$301,598 as of March 31, 2009, represents the gross receivables that have been
designated as "sold" and serve as collateral for short-term debt in the amount
of $232,274 as of March 31, 2009.
Short-term Convertible Notes Payable
The Company entered into two rounds of financing through Commonwealth Capital
during the quarters ended December 31, 2008 and March 31, 2009.
The first round (Commonwealth One) was closed in the quarter ended December 31,
2008. Proceeds from the notes were $550,000. Interest at 12.0% is due with the
principal on various dates in June 2009. The notes are unsecured and are
convertible into shares of the Company's common stock at $0.045 per share at any
time during the term of the notes.
The second round (Commonwealth Two) was closed partially in December 2008, and
the remainder in the quarter ended March 31, 2009. Proceeds from the notes were
$95,000 and $1,602,984 during the quarters ended December 31, 2008 and March 31,
2009, respectively. Interest at 12.0% is due with the principal on various dates
in June 2009. The notes are unsecured and are convertible into shares of the
Company's common stock at $0.075 per share at any time during the term of the
notes.
The Company also entered into loan agreements with an individual (Plant Notes).
Proceeds from the agreements were $70,000 and $35,000 during the quarters ended
December 31, 2008 and March 31, 2009, respectively. Interest at 5.0% is due with
the principal on various dates in July 2009. The notes are unsecured and are
convertible into shares of the Company's common stock at $0.50 per share at any
time during the term of the notes.
The conversion prices of these convertible notes were established at, or above,
the then current market price of the Company's common stock and therefore, no
beneficial conversion feature discount has been recorded.
A summary table of short-term convertible notes payable follows:
11
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
March 31, December 31,
2009 2008
----------- ------------
Commonwealth One $ 550,000 $ 550,000
Commonwealth Two 1,697,984 95,000
Plant Notes 105,000 70,000
----------- ------------
Total $ 2,352,984 $ 715,000
=========== ============
Liability Under Product Financing Arrangement
The Company has entered into inventory financing arrangements with mills in
regards to grain held at these mills for future use and sales of the Company.
Refer to NOTE 5. INVENTORIES herein for further information regarding these
arrangements.
Note 11. Long-term Debt
Long-term debt at March 31, 2009 and December 31, 2008 consisted of the
following:
March 31, December 31,
2009 2008
----------- ------------
Zero Coupon Convertible Subordinated Note
Payable, interest at 5.0%, principal
and interest due December 12, 2013,
convertible to shares of common stock of the
Company at $0.125 per share at any time $ 1,535,000 $ 1,535,000
Zero Coupon Convertible Subordinated Note
Payable, interest at 5.0%, principal
and interest due December 12, 2013,
convertible to shares of common stock of the
Company at $0.125 per share at any time 1,500,000 1,500,000
Notes payable, related parties 105,801 105,801
Variable interest bank note at prime plus 2.75%,
6.0% at March 31, 2009, due January 31, 2012,
principal and interest due monthly, secured
by the assets of Ceres 61,550 -
Other 28,665 23,467
----------- ------------
3,231,016 3,164,268
Less current portion: (21,050) -
----------- ------------
Total long-term debt $ 3,209,966 $ 3,164,268
=========== ============
The conversion prices of the Zero Coupon Convertible notes were established at,
or above, the then current market price of the Company's common stock and
therefore, no beneficial conversion feature discount has been recorded.
Additionally, the conversion price is subject to weighted-average anti-dilution
adjustments in the event we issue common stock at a price below the
then-applicable conversion price other than common stock issuances or option
grants to the Company's employees, directors or officers.
Future minimum payments on long-term debt at March 31, 2009 are as follows:
Year ending December 31,
2009, remaining $ 16,693
2010 21,050
2011 21,050
2012 2,757
2013 3,169,466
------------
$ 3,231,016
============
12
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 12. Basic and Diluted Earning Per Share
The Company computes earnings per share in accordance with FASB Statement of
Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS
128 requires companies to compute earnings per share under two different
methods, basic and diluted, and present per share data for all periods in which
statements of operations are presented. Basic earnings per share are computed by
dividing net income by the weighted average number of shares of common stock
outstanding. Diluted earnings per share are computed by dividing net income by
the weighted average number of common stock and common stock equivalents
outstanding.
As of March 31, 2009, the Company had (i) 10,000,000 shares of common stock
issuable under convertible preferred stock arrangements and, (ii) 200,000 shares
of common stock issuable upon the exercise of outstanding warrants and (iii)
reserved an aggregate of 22,705,493 shares of common stock issuable under
outstanding convertible debt agreements. These 32,905,493 shares, which would be
reduced by applying the treasury stock method, were excluded from diluted
weighted average outstanding shares amount for computing the net loss per common
share, because the net effect would be antidilutive for each of the periods
presented.
As of December 31, 2008, the Company had (i) 7,100,000 shares of common stock
issuable under convertible preferred stock arrangements and (ii) reserved an
aggregate of 22,705,493 shares of common stock issuable under outstanding
convertible debt agreements. These 29,805,493 shares, which would be reduced by
applying the treasury stock method, were excluded from diluted weighted average
outstanding shares amount for computing the net loss per common share, because
the net effect would be antidilutive for each of the periods presented.
Note 13. Related Party Transactions
We lease our office and warehouse facility in Belgium Wisconsin from Monte B.
Tobin, our President, and his wife, (the Tobins) under a five-year net lease.
The facility consists of approximately 3,500 square feet of office space and
1,000 square feet of warehouse space, with an option to increase the warehouse
space by up to 500 feet. We currently pay a base rent of approximately $4,300
per month. The Tobins hold a note receivable from the Company representing
unpaid rent and interest from 2005 and 2006 totaling $105,801. Interest is at
12% per year.
Note 14. Stockholders' Equity
COMMON STOCK
The Company is authorized to issue 239,500,000 shares of $.0001 par value common
stock. The Company has 121,367,387 shares of its common stock issued and
outstanding at March 31, 2009. Dividends may be paid on outstanding shares as
declared by the Board of Directors. Each share of common stock is entitled to
one vote.
PREFERRED STOCK
The Company is authorized to issue 10,500,000 shares of $0.05 par value
preferred stock.
As of December 31, 2008, there were 5,420,000 Series A Convertible Preferred
shares outstanding. Of these outstanding shares, 420,000 are convertible at any
time into common shares at a ratio of five (5) common shares for each Series A
Preferred share and 5,000,000 are convertible at any time into common shares at
a ratio of one common share for each Series A Preferred share. In addition, each
Series A Preferred share has one vote for each common share outstanding. There
is no liquidation preference relative to Series A Preferred shares.
During the three month period ended March 31, 2009, the Company executed an
agreement with the Series A Convertible Preferred Shareholders for a return to
the Company of 4,420,000 Series A Preferred shares. These shares were returned
to the Company in February 2009. As of March 31, 2009, the Company and
shareholders had not yet reached an agreement on the specifics of the
arrangement; however, the Company recorded 2,500,000 common shares, valued at
$221,000, as issuable as their estimate as to the number of shares the former
preferred shareholders' would receive in return for canceling their Series A
Preferred shares.
As of March 31, 2009, there are 1,000,000 Series A Convertible Preferred Shares
issued and outstanding. The remaining Series A Convertible Preferred Shares are
convertible at any time into common shares at a ratio of one common share for
each Series A Preferred share.
Pursuant to the acquisition of MPS, the Company issued 500,000 shares of Series
B Preferred Stock. The Series B Preferred Stock shares are convertible at any
time into Common shares at a ratio of two Common shares for each Preferred
share. In addition, each Preferred share has one vote for each Common share
outstanding and has a liquidation preference of $1.00 per share.
Pursuant to the acquisitions of Ceres, the Company issued 8,000,000 shares of
Series C Preferred Stock. The Series C Preferred Stock shares are convertible at
any time into Common shares at a ratio of one Common share for each Preferred
share. In addition, each Preferred share has one vote for each Common share
outstanding and has a liquidation preference of $.50 per share.
13
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
STOCK ISSUANCES
During the three months ended March 31,2009, the Company issued:
o 2,273,333 shares of common stock valued at $170,500 for professional
services related to the issuance of the short-term convertible note
payable. This amount was properly recorded as a discount to debt,
and is being amortized ratably to interest expense over the term of
the related note.
o 8,000,000 shares of common stock and 8,000,000 shares of Series C
Convertible Preferred Stock, with an estimated value of $2,500,000
were issued to the shareholders' of Ceres in exchange for their
shares in Ceres under the acquisition agreement between the parties
and the Company.
o 500,000 shares of Series B Convertible Preferred Stock, with an
estimated value of $150,000 were issued to Thomsen in exchange for
its share ownership in MPS under the acquisition agreement between
Thomsen and the Company.
WARRANTS
On January 3, 2009, Mach One granted a Warrant to purchase 200,000 shares of its
common stock at an exercise price of $.125 per share to one of its legal counsel
for services rendered. The Warrant is valued at $25,000 and was recorded in
operating expenses in the Company's statement of operations during the three
months ended March 31, 2009. The exercise price was the fair market value of
Mach One's common stock on the date of grant. The Warrant expires on January 3,
2014.
Note 15. Commitments and Contingencies
The Company forwards contracts for a certain portion of its future grain
requirements. At March 31, 2009, the Company had outstanding commitments for
grain purchases totaling approximately $4,200,000 related to forward purchase
contracts. These contracts are set price contracts to deliver grain to the
Company, and are not derivative in nature as they have no net settlement
provision and are not transferable.
Pursuant to a warehouse agreement, the Company is obligated to minimum monthly
storage and handling amounts totaling $12,000 for the year ending December 31,
2009.
The Company periodically is subject to claims and lawsuits that arise in the
ordinary course of business. It is the opinion of management that the
disposition or ultimate resolution of such claims and lawsuits will not have a
material adverse effect on the financial position of the Company.
Note 16. Fair Value Measurements
In accordance with SFAS No. 157, we value our marketable securities based on a
three-level fair value hierarchy. The fair value hierarchy gives the highest
priority to quoted prices in active markets for identical assets or liabilities
(Level 1). The next highest priority is based on quoted prices for similar
assets or liabilities in active markets or quoted prices for identical or
similar assets or liabilities in non-active markets or other observable inputs
(Level 2). The lowest priority is given to unobservable inputs (Level 3).
The following table provides information regarding fair value measurements for
our cash equivalents and marketable securities as of March 31, 2009 according to
the three-level fair value hierarchy:
FAIR VALUE MEASUREMENTS AT REPORTING DATE USING
QUOTED PRICES IN SIGNIFICANT SIGNIFICANT
ACTIVE MARKETS OTHER UNOBSERVABLE
BALANCE FOR OBSERVABLE INPUTS
MARCH 31, IDENTICAL ASSETS INPUTS (LEVEL 3)
2009 (LEVEL 1) (LEVEL 2)
Equity securities $ 384,803 $ -- $ 384,803 $ --
14
MACH ONE CORPORATION
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
Note 17. Subsequent Events
Subsequent to March 31, 2009, certain holders of the short-term convertible
notes payable referenced in Note 10. Short-term Notes Payable and Other Debt
herein, converted their notes into common stock under the terms of their
agreements. 4,389,505 shares were issued for the conversion of $160,000 in
short-term convertible notes plus interest accrued on those notes.
In April of 2009, the Company issued 164,336 and 520,000 shares of its common
stock for conversion of Short-term convertible notes payable and for services,
respectively. The shares issued for services will result in a charge to the
Company's statement of operations for the three-month period ending June 30,
2009.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
NOTE REGARDING FORWARD-LOOKING STATEMENTS
Sections of this Form 10-Q, including the Management's Discussion and Analysis
or Plan of Operation, contain "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act"),
Section 21E of the Securities and Exchange Act of 1934, as amended (the
"Exchange Act"), and the Private Securities Litigation Reform Act of 1995, as
amended. These forward-looking statements are subject to risks and uncertainties
and other factors that may cause our actual results, performance or achievements
to be materially different from the results, performance or achievements
expressed or implied by the forward-looking statements. You should not unduly
rely on these statements. Forward-looking statements involve assumptions and
describe our plans, strategies, and expectations. You can generally identify a
forward-looking statement by words such as "may," "will," "should," "would,"
"could," "plan," "goal," "potential," "expect," "anticipate," "estimate,"
"believe," "intend," "project," and similar words and variations thereof. This
Quarterly Report on Form 10-Q contains forward-looking statements that address,
among other things,
CRITICAL ACCOUNTING POLICIES AND ESTIMATES:
The preparation of the financial information contained in this 10-Q requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of contingent assets
and liabilities. We evaluate these estimates on an ongoing basis, including
those related to allowances for doubtful accounts and returns, warranty
obligations, inventory valuation, the carrying value and any impairment of
intangible assets, and income taxes. These critical accounting policies are
discussed in more detail in the Management's Discussion and Analysis of
Financial Condition and Results of Operations contained in our Annual Report on
Form 10-K for the year ended December 31, 2008.
RECENT ACCOUNTING DEVELOPMENTS
See Note 2 to the accompanying interim consolidated financial statements for a
summary of recent accounting developments.
PLAN OF OPERATION
OVERVIEW
During the three months ended March 31, 2009, Mach One acquired Ceres Organic
Harvest Inc. (Ceres) --an acquisition that closed Feb. 24, 2009. Ceres is now
part of the Mach One Organics and Sustainables Group (OSG). Along with its
subsidiary, Organic Grain and Milling Inc. (OGM), Ceres and OGM supplies organic
grain and grain-based ingredients to the food, feed and dairy industries,
including varieties of wheat, flour, oats, corn, flax, barley and other
products. Ceres is currently launching a new line of oat-based products using a
proprietary oat cultivar with substantially higher fiber and beta-glucan
content, which was developed in a cooperative breeding program between the North
Dakota State University and the United States Department of Agriculture's (USDA)
Agricultural Research Service. Ceres and OGM operate a grain elevator in North
Dakota, with corporate offices in St. Paul, Minnesota. The integration of
organic foods and animal feeds to the Mach One package of global wellness
solutions extends Mach One's reach as well as its ability to expand its success
in sustainable bio-solutions. OSG is headquartered in Minneapolis, Minnesota.
Modular Process Constructors, LLC (dba MPS-BioPharm)--an acquisition that closed
Feb. 19, 2009-- is now part of Mach One's BioPharm Process Systems Group and
engages in the design and manufacture of constructed systems for the
biopharmaceutical industry. It offers process modules and skids, custom tanks
and vessels, and sanitary stainless steel flow equipment, along with
professional project management, design qualifications, detail design, component
procurement, schedule metrics and reporting. With the addition of MPS-BioPharm,
it enables Mach One to accelerate production of biopharmaceutical,
Nutraceutical, and Bridge(TM) Iggs on a global basis. The BioPharm Process
Systems Group is headquartered in Kenosha, Wisconsin.
Today Mach One and its three Operating Groups--Animal Wellness, Organics and
Sustainables, and BioPharm Process Systems--offer a broad range of solutions to
global health problems, from helping calves develop immunity at birth to
carefully managing organic grain crops, to testing equipment that helps detect
compromised food products long before they can cause a problem.
We have not generated significant operating revenues, and as of March 31, 2009
we had incurred a cumulative consolidated net loss from inception of $4,669,291.
For the periods ended March 31, 2009 and 2008, our consolidated net losses were
$954,531 and $435,053 respectively. Our current liabilities as of March 31, 2009
exceed current assets by $1,180,885.
Although we recently completed a convertible debt financing with gross proceeds
of approximately $2,250,000 in November 2008 and January 2009, we will
eventually require significant additional funding in order to achieve our
business plan. We believe that our current cash position will be able to sustain
our proposed operations for 3-4 months. Over the next 18 months, in order to
have the capability of achieving our business plan, we believe that we will
require at least $3,000,000 in additional funding. We will attempt to raise
these funds by means of one or more public or private offerings of debt or
equity securities or both. We believe that some, if not all, of the required
funds could be generated from the increased cash flows of our divisions as they
become fully integrated.
16
RESULTS OF OPERATIONS
QUARTER ENDING MARCH 31, 2009 COMPARED TO QUARTER ENDING MARCH 31, 2008
Net sales for the quarter ended March 31, 2009 were $811,448 compared to $60,407
for the same period last year. Net sales increased due to increased revenues
from the acquisition of Ceres ($731,763) and MPS ($34,566). There were no
significant changes in sales of the parent company between the periods
presented.
Cost of goods sold were $719,612 for the quarter ended March 31, 2009 compared
to $28,098 for the quarter ended March 31, 2008. This increase was primarily due
to acquisition of Ceres ($666,027) and MPS ($1,493). There were no significant
changes in cost of goods sold of the parent company between the periods
presented.
Gross profits for the quarter ended March 31, 2009 were $91,836 compared to
$32,309 for the same period last year. Gross profit increased due to increased
sales with the acquisition of Ceres Organic ($65,075) and MPS.($33,073) This was
offset by a negative gross profit for the parent company in the current period.
Operating expenses increased to $811,399 in the quarter ended March 31, 2009
from $414,002 in the same quarter in 2008. Additional personnel in the parent
company and costs associated with additional employees and facilities from the
acquisition of Ceres and MPS contributed to the increase.
LIQUIDITY AND CAPITAL RESOURCES
We had a cash balance of $533,475 as of March 31, 2009 and a cash balance of
$635,334 as of December 31, 2008.
The value of our marketable securities on March 31, 2009 decreased to $384,803
from $483,900 as of market close on December 31, 2008. The decrease is due to
the decline in market values of these securities.
Accounts receivable as of March 31, 2009 increased to $1,161,094 from $44,603 at
December 31, 2008 due to the acquisition of Ceres, which added $1,090,422 as of
March 31, 2009.
Net inventory as of March 31, 2009 increased to $2,230,557 from $520,020 at
December 31, 2008 due to the acquisition of Ceres, which added $1,710,537 as of
March 31, 2009.
Total assets at March 31, 2009 are $12,539,935 compared to 6,196,748 at December
31, 2008. This increase is attributable to the acquisitions of Ceres and MPS.
As of March 31, 2009 we have current liabilities totaling 6,105,969 compared to
1,223,904 at December 31, 2008. Increase in accounts payable is mainly due to
the acquisition of Ceres, which added $2,614,306 as of March 31, 2009, and to
the issuance of short-term notes payable of $1,490,000.
Long term debt as of March 31, 2009 is 3,209,966 compared to 3,164,268 at
December 31, 2008. The slight increase is due to the acquisition of Ceres.
Factors that caused our cash flows from operations to decrease during the three
months ended March 31, 2009 as compared to the three month period ended March
31, 2008, were the acquisition of Ceres and the use of funds for escrow of
property. Our investing activities in those same periods were relatively
unchanged. Cash flow from financing activities increased during the three months
ended March 31, 2009 as compared to the same period in 2008 as a result of the
issuance of short term notes, which was offset by the purchase of treasury
stock.
Our longer-term working capital and capital requirements will depend upon
numerous factors, including revenue and profit generation, the cost of filing,
prosecuting, defending, and enforcing patent claims and other intellectual
property rights, competing technological and market developments, collaborative
arrangements. Additional capital will be required in order to attain our goals.
We cannot assure you that funds from our future operations or funds provided by
our current financing activities will meet the requirements of our operations,
and in that event, we will continue to seek additional sources of financing to
maintain liquidity. We are actively pursuing all potential financing options as
we look to secure additional funds both to stabilize and to grow our business
operations. Our management will review any financing options at their disposal,
and will judge each potential source of funds on its individual merits. We
cannot assure you that we will be able to secure additional funds from debt or
equity financing, as and when we need to, or if we can, that the terms of this
financing will be favorable to us or our stockholders.
17
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK.
None.
ITEM 4(T). CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We maintain disclosure controls and procedures designed to provide reasonable
assurance that information required to be disclosed in our reports filed
pursuant to the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the SEC's rules and
forms, and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer as
appropriate, to allow timely decisions regarding required disclosure. A control
system, no matter how well conceived and operated, can provide only reasonable,
not absolute, assurance the objectives of the control system are met.
As of March 31, 2009, our management (with the participation of our Chief
Executive Officer and Chief Financial Officer) carried out an evaluation of the
effectiveness of our disclosure controls and procedures as such term is defined
in Rule 13a-15(e) under the Exchange Act. Based on this evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that our disclosure
controls and procedures were not effective as of March 31, 2009, because of the
identification of the material weaknesses in internal control over financial
reporting described below. Notwithstanding the material weaknesses that existed
as of March 31, 2009, our Chief Executive Officer and Chief Financial Officer
has concluded that the financial statements included in this Form 10-Q present
fairly, in all material respects, the financial position, results of operations
and cash flows of the Company in conformity with accounting principles generally
accepted in the United States of America ("GAAP"). We are currently looking into
cost effective steps to potentially remediate the material weaknesses as
described below.
A material weakness is a control deficiency, or combination of control
deficiencies, that results in more than a remote likelihood that a material
misstatement of annual or interim financial statements will not be prevented or
detected. In connection with the evaluation described above, management
identified the following control deficiencies that represent material weaknesses
at March 31, 2009:
o Due to the limited number of Company personnel, a lack of
segregation of duties exists. An essential part of internal control
is for certain procedures to be properly segregated and the results
of their performance be adequately reviewed. This is normally
accomplished by assigning duties so that no one person handles a
transaction from beginning to end and incompatible duties between
functions are not handled by the same person.
o The Company lacks a board oversight role within the financial
reporting process that is actively involved in the preparation of
the financial statements.
Since we do not have a formalized audit committee, our board of directors
oversees the responsibilities of the audit committee. The board of directors is
fully aware that there is lack of segregation of duties due to the small number
of employees dealing with general administrative and financial matters.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial reporting that
occurred during the quarter ended March 31, 2009, that have materially affected,
or are reasonably likely to materially affect, our internal control over
financial reporting.
The Company is currently evaluating the internal control structure at its
recently acquired wholly owned subsidiaries. The Company expects to have
completed its evaluation and fully implemented any internal control structure
improvements at these subsidiaries by the end of the third quarter of 2009.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Not Applicable.
ITEM 1A. RISK FACTORS
The Company is a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and is not required to provide the information required under this
item.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On January 3, 2009, Mach One granted a Warrant to purchase 200,000 shares of its
common stock at an exercise price of $.125 per share to one of its legal counsel
for services rendered. The exercise price was the fair market value of Mach
One's common stock on the date of grant. The Warrant expires on January 3, 2014.
On February 18, 2009, Mach One issued 500,000 shares of Series B Convertible
Preferred Stock (the "Series B Preferred Stock") to the Thomsen Group, LLC
("Thomsen") for the purchase of all of the assets of Modular Process
Contractors, LLC ("MPC"). Each share of Series B Preferred Stock is convertible
into two shares of Mach One common stock. In addition to the issuance of the
Series B Preferred Stock, Mach One entered into an Earn-Out Agreement with
Thomsen, providing for Thomsen to acquire up to an additional 35% of issued and
outstanding common stock of Mach One on December 31, 2011, based upon the
combined net income of MPC for the years ending December 31, 2009, 2010, and
2011.
On February 20, 2009, pursuant to a Plan and Agreement of Reorganization, Mach
One issued 8,000,000 shares of its common stock and 8,000,000 shares of Series C
Convertible Preferred Stock ("Series C Preferred Stock") in exchange for all of
the issued and outstanding common stock of Ceres Organic Harvest, Inc. (Ceres).
Each share of Series C Preferred Stock is convertible into one share of Mach
One's common stock.
All of the investors above are sophisticated individuals who had the opportunity
to review all of the Company's SEC filings and to discuss with the officers and
directors of the Company the business and financial activities of the Company.
All the investors acquired their Warrant, Common Stock and/or Preferred Stock
(the "Securities") for investment and not with a view toward distribution. All
of the stock and warrant certificates issued, or to be issued upon conversion or
exercise, to the Warrant holder, the thirty Pacific Rim shareholders and the
stock certificates issued to Thomsen and to the six Ceres shareholders have
been, affixed with an appropriate legend restricting sales and transfers.
Therefore, based on the foregoing, the Company issued the Securities in reliance
upon the exemptions from registration provided by Section 4(2) of the Securities
Act of 1933 and/or Regulation D, there under.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS OF A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
Not Applicable.
ITEM 6. EXHIBITS
(a) Exhibits: The following exhibits are filed with this report:
31.1 Certification pursuant to Rule 13a-14(a) or 15d-14(a) under The Securities
Exchange Act of 1934 as amended. *
31.2 Certification pursuant to Rule 13a-14(a) or 15d-14(a) under The Securities
Exchange Act of 1934 as amended. *
32. Certifications pursuant to 18 U.S.C section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002. *
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* The Exhibit attached to this Form 10-Q shall not be deemed "filed" for
purposes of Section 18 of the Securities Exchange Act of 1934 (the "Exchange
Act") or otherwise subject to liability under that section, nor shall it be
deemed incorporated by reference in any filing under the Securities Act of 1933,
as amended, or the Exchange Act, except as expressly set forth by specific
reference in such filing.
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SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934, as
amended, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Mach One Corporation
Date: May 22, 2009 By: /s/ Monte B. Tobin
-------------------------------------
Monte B. Tobin,
President and Chief Executive Officer
By: /s/ Patrick G. Sheridan
-------------------------------------
Patrick G. Sheridan,
Chief Financial Officer
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