Post by Zoinkers on Jun 29, 2006 17:10:23 GMT -5
Form 10QSB for SEAENA INC.
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22-May-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the our consolidated financial statements and related footnotes for the year ended December 31, 2005 included in our Annual Report on Form 10-KSB. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.
OVERVIEW
Effective October 4, 2002, an arrangement was completed between the company, then known as Americabilia.com, Inc. and Crystalix USA Group, Inc., a Nevada corporation, whereby the shareholders of Crystalix USA exchanged all of their common shares for 23,300,000 shares of Americabilia common stock. At the same time, we issued 7,000,000 shares of Americabilia Class A preferred stock to acquire a technology license from Crystalix Technology, Inc.
Immediately following the acquisition, the former shareholders of Crystalix USA held approximately 77.6% of Americabilia's total issued and outstanding common shares. Crystalix USA was thereby deemed to be the acquiror and surviving company for accounting purposes. Accordingly, the transaction has been accounted for as a reverse acquisition using the purchase method whereby the assets and liabilities of Americabilia have been recorded at their fair market values and operating results have been included in the company's financial statements from the effective date of purchase. The net assets of Crystalix USA are included in the balance sheet at their historical book values and its results of operations have been presented for the comparative prior period.
On December 23, 2002, we acquired Lazer-Tek for 1,250,000 shares of our common stock valued at $1,125,000 and an acquisition consulting fee obligation of $400,000. This acquisition has been accounted for using the purchase method. The purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values as determined by management, upon reliance on an independent valuation report, on the date of acquisition, which approximated $3.2 million. The excess of fair value of the acquired net assets over the cost has been allocated as a pro rata reduction of all the acquired assets, excluding financial assets, assets to be disposed of by sale, deferred tax assets, pension or other post-retirement benefit plans, and any other current assets.
On August 17, 2005, we purchased a 51% interest in LDI for $708,000. The payment terms were $75,000 deposit paid prior to August 17, 2005, $250,000 at closing, and $76,600 on each of the following dates: December 31, 2005, April 30, 2006, August 31, 2006, December 31, 2006, and April 8, 2007. In addition, we paid $150,000 to Norwood Operating Company, LLC in connection with this purchase agreement. A portion of the purchase price was funded by the convertible note from the UAJC 2005 Irrevocable Trust. The acquisition was accounted for using the purchase method of accounting. The total purchase price of $858,000 was allocated to the fair value of the assets and liabilities, which result in the recording of a patent of $848,961. LDI is the owner of a patent for sub surfacing laser decorative imaging, and also has exclusive rights to the license for the color technology.
As of March 31, 2006, we completed the Asset Purchase Agreement with U.C. Laser Ltd., entered into on December 29, 2005 but to be effective January 1, 2006, in which we agreed to purchase all of the assets of U.C. Laser used in connection with the manufacturing, distribution and marketing of its decorative images and products. The assets acquired include U.C. Laser's subsidiaries, U.C. Laser, Inc. and CIC Laser Technologies Ltd., as well as U.C. Laser's worldwide, exclusive license to use the colored glass technology owned by Laser Glass Ltd.
In consideration for the purchased assets, we assumed the liabilities arising from or related to the purchased assets in the approximate amount of $4,924,000, and issued 2,276,795 shares of our Class B Preferred Stock. These shares of Class B Preferred Stock collectively have voting rights equal to 45% of all voting rights of all of our capital stock outstanding immediately after the closing, determined on a fully diluted basis. Each share of Class B Preferred Stock is convertible into 2.857 shares of common stock so that collectively, the Class B Preferred Shares issued to U.C. Laser are convertible into 6,505,129 shares of our common stock, which, immediately after such conversion, represent 45% of all shares of our capital stock then outstanding on a fully diluted basis.
Twenty percent, or 455,359 of the Class B Preferred Shares issued to U.C. Laser were placed into escrow to satisfy any obligations of U.C. Laser to indemnify us for losses arising from (1) a material breach by U.C. Laser of any representation, warranty, covenant, restriction, or agreement made in the Asset Purchase Agreement or (2) fraud or an intentional misstatement by U.C. Laser. The escrow period shall terminate June 29, 2006.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of us as a going concern. We incurred a net loss for the three months ended March 31, 2006 of $601,137, used cash for operating activities of $798,526 for the three months ended March 31, 2006, and at March 31, 2006 had an accumulated deficit of $22,337,725 and a working capital deficit of $5,397,382. These conditions raise substantial doubt as to our ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
We plan to take the following steps that we believe will be sufficient to provide us with the ability to continue in existence. We have recently exchanged $12,098,036 of convertible debentures and accrued interest for 200,000,000 shares of our common stock, which has reduced our liabilities by approximately 85%. Also, on August 17, 2005, we purchased a 51% interest in LDI, which is the owner of a patent for sub surfacing laser decorative imaging, and also has exclusive rights to the license for the color technology. In addition, on March 31, 2006, we consummated the Asset Purchase Agreement with U.C. Laser, Ltd. of Israel (DBA Crystal Impressions). We purchased all of U.C. Laser's assets used in conjunction with the marketing, manufacturing, and distribution of its decorative sub surface laser art products. The assets acquired include U.C. Laser's subsidiaries, Crystal Impressions and CIC Laser Technologies of Shanghai, China, as well as U.C. Laser's worldwide exclusive license for its innovative sub surface laser color technology. Our management believes that this acquisition will enable us to continue as a going concern. While incorporating the strengths and expertise of both Seaena and Crystal Impressions and newly created economies of scale, we believe that the management team will be able to achieve profitable operations, but there can be no assurance that we will be able to raise sufficient capital and generate positive cash flows from operations sufficient to sustain operations. Our discussion in "Plan of Operation" below details additional sales strategies to sustain operations.
During the year ended December 31, 2005, we significantly reduced our overhead expenses and were able to expand our manufacturing facilities and equipment. We eliminated non-critical personnel and expenditures, reduced travel and renegotiated leases, debt and prices while building a strong team of qualified and dedicated personnel. We believe we can grow revenues during the next twelve months without a significant increase to overhead. We have partnered with a former competitor in the two-
dimensional photo market, and have taken over his accounts and are now producing and billing for another large national chain. We also are receiving new laser production equipment as a result of our business combination with U.C. Laser as we expand the production plant in Las Vegas to keep up with the growing demand. Another result of our merger is a production plant in Shanghai, China, which will allow us to produce larger run orders, standard pieces, and jobs with adequate lead time for greatly reduced costs. We have been in negotiations with several parties interested in the purchase of multiple machines and territories and will continue to pursue machine sales in this manner, looking for strong retail partners who can successfully operate in the retail marketplace. We also believe the impending patent litigation against the remaining alleged infringers will increase our revenues as violators either (1) settle and obtain legal license and pay royalties, thereby preventing them from using unfair pricing advantages, or (2) leave the industry altogether and reduce competition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets, any potential losses from pending litigation and deferred tax asset or liability. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
MACHINE SALES. Laser equipment is no longer leased, but rather sold outright to our independent distributors/retailers, most frequently in three installment payments as follows: 40% upon order, 40% prior to delivery, and 20% upon completion of installation of equipment at the retail location. We retain ownership of the proprietary software and license use of the software to the distributor/retailer for a monthly fee, which is normally $500.
PRODUCT SALES. Revenue from the sale of sub surface laser products (glass or equipment) is recognized when title to the products is transferred to the customer, which is point of sale at retail locations or customer acceptance for custom-designed products, and only when no further contingencies or material performance obligations are warranted. Revenue from the sale of glass cube products is recognized when title to the products is transferred to the distributor/retailer, which is upon shipment, and only when no further contingencies or material performance obligations are warranted.
ROYALTY REVENUE. We recognize royalty revenue from licensing our technology only when earned with no further contingences or material performance obligations are warranted.
STOCK-BASED TRANSACTIONS. Shares of our common stock issued for services, compensation or financing costs is valued at the market value of our common stock at the date of issuance. We account for our stock-based compensation in accordance with SFAS No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
INTANGIBLE ASSETS. Intangible assets consist of product and laser licenses, capitalized software costs, website development costs, artwork and copyrights, trademarks, trade names, customer lists and
relationships and were mostly acquired with the purchase of Laser-Tek and the U.C. Laser assets. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we evaluate intangible assets and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. Amortization is computed using the straight-line method over the estimated useful life of the assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005.
REVENUE. We generate product sales through the sale of laser machines, of engraved glass products to customers in our retail kiosks, to corporate customers, through portrait studios, and through the sale of glass blanks, display bases, and related products to our independent distributors. Our revenue for the three months ended March 31, 2006 decreased by $185,137 or 16.1% from $1,152,225 for the three months ended March 31, 2005 to $967,088 for the three months ended March 31, 2006. The decrease is primarily due to the cancellation of our contracts with licensees in 2005 which resulted in no lease revenue for the three months ended March 31, 2006. Revenue for the three months ended March 31, 2006 includes the revenue generated by U.C Laser from January 1, 2006. We expect the sales of U.C. Laser to increase throughout 2006 as we fully integrate their operations with ours.
The cost of revenue consists of the cost of the laser machines, glass blanks, bases, and other items that we purchase from our suppliers. Our cost of revenue also decreased by $116,458 or 23.6% from $493,724 for the three months ended March 31, 2005 to $377,266 for the three months ended March 31, 2006. Cost of sales as a percentage of sales decreased from 42.8% for the three months ended March 31, 2005 to 39.0% for the three months ended March 31, 2006. The decrease is due to higher sales of higher gross margin products.
OPERATING EXPENSES. Payroll and related benefits for the three months ended March 31, 2006 decreased by $91,377 or 20.8% from $439,419 for the three months ended March 31, 2005 to $348,042 for the three months ended March 31, 2006. The decrease is a result of a reduction in personnel due to corporate downsizing in 2005 offset by the payroll costs associated with the U.C. Laser acquisition. We do not anticipate a large increase in payroll rated expenses from the acquisition of U.C. Laser as all duplicate functions will be eliminated.
General and administrative expenses for the three months ended March 31, 2006 decreased by $28,371 or 4.0% from $702,145 for the three months ended March 31, 2005 to $673,774 for the three months ended March 31, 2006. The decrease is principally due to corporate downsizing in 2005 offset by an increase in general and administrative expenses as a result of the U.C. Laser acquisition.
Interest expense for the three months ended March 31, 2006 decreased by $492,367 or 89.2% from $552,245 for the three months ended March 31, 2005 to $59,878 for the three months ended March 31, 2006. The significant decrease is due to the conversion of over $12 million in debt to equity in December 2005.
Other, net for the three months ended March 31, 2006 decreased by $358,528 or 143.8% from other income of $249,263 for the three months ended March 31, 2005 to other expense of $109,265 for the
three months ended March 31, 2006. During the three months ended March 31, 2005, we recognized other income of $249,263 related to the cancellation of certain licensee agreements. Five of our licensees and we mutually agreed to cancel the existing contracts. Under the terms of the agreements, the licensees were released from their obligation under the agreement and in return, the licensees took ownership of the laser equipment. We removed the laser equipment and deferred income from our books related to these five licensees and recognized a gain of $249,263. During the three months ended March 31, 2006, the other expense of $109,265 principally relates to a settlement with a former licensee.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had a working capital deficit of $5,397,382 as compared to $1,165,314 at December 31, 2005. We had cash and cash equivalents of $245,275 at March 31, 2006 as compared to $59,844 at December 31, 2005. The increase in the working capital deficit is principally due to the acquisition of liabilities in the U.C. Laser transaction.
Our current cash on hand plus cash expected to be generated from operations will not be sufficient to sustain our current operations and service our outstanding debt for the next twelve months. Without giving effect to the assumption of liabilities upon the acquisition of U.C. Laser, we will need to issue debt or equity securities of at least $500,000 in the short-term in order to sustain operations until such time that we can generate positive cash flow from our operations. If we can obtain financing to meet these short-term needs, then we should be able to generate a positive cash flow in the long-term from the sales generated from the machinery that would be manufactured using funds received from the financing. We are in the process of exploring various ways to address the U.C. Laser debt, such as restructuring the debt and/or borrowing from a different lender.
During the three months ended March 31, 2006, our investing and financing activities provided cash of $41,745 and $942,212, respectively, while our operating activities used cash of $798,526. The cash used in operating activities was principally a result of the net loss we incurred.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
PLAN OF OPERATION
We believe that we have positioned Seaena to become the leader in the sub-surfaced glass etching industry, with our acquisition of U.C. Laser (DBA Crystal Impressions). Our management has developed a plan of operation for 2006. In our Las Vegas corporate headquarters, we have put into place officers and department heads bringing various areas of expertise to design and implement our plan of operation.
Our sales push began in 2006 again at the Promotional Product Industry Convention, where our goal to increase sales in the corporate and promotional lines seems to be succeeding based on the new orders and inquires we are receiving. The two-dimensional portrait line is growing rapidly as we have just added another major national chain and are in discussions with others. The demand for new products in the photo processing industry is stronger than we had originally anticipated and should prove to provide us with incredible growth opportunity.
We have secured direct glass suppliers in China, which should help reduce glass and component costs. We have acquired a production facility in China through our U.C. Laser acquisition. Given this, with the addition of the Crystal Impressions machinery and technology and the experience of our laser operators, we expect to decrease not only our over head as a percentage of sales but also expect to reduce our job
costs in 2006 and increase our production efficiencies helping again to achieve a lower cost. Negotiations are in progress with major component and equipment suppliers for the retail laser equipment we sell to independent retailers for quantity discounts we know will qualify for to once again help lower our costs. Accordingly, we expect our gross margins in both the glass and machine segments to increase in addition to the anticipated increases in product sales.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, as well as statements made by the company in periodic press releases, oral statements made by the company's officials to analysts and shareholders in the course of presentations about the company, constitute "forward-looking statements." All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "project," "estimate," "anticipate," "believe," "to become," or "continue" or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") include, but are not limited to, (1) risks pertaining to implementation of our proposed expansion of our distribution network; (2) competitive pressures in the giftware industry; (3) disputes or claims regarding the company's proprietary rights to its software and intellectual property; (4) acceptance of our products by corporate customers; (5) costs of desirable retail locations; (6) availability of suitable optic glass and laser equipment components; (7) general economic and business conditions; (8) ability to successfully integrate acquired operations; and (9) other factors over which we have little or no control. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.
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22-May-2006
Quarterly Report
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
GENERAL
The following discussion and analysis should be read in conjunction with the our consolidated financial statements and related footnotes for the year ended December 31, 2005 included in our Annual Report on Form 10-KSB. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.
OVERVIEW
Effective October 4, 2002, an arrangement was completed between the company, then known as Americabilia.com, Inc. and Crystalix USA Group, Inc., a Nevada corporation, whereby the shareholders of Crystalix USA exchanged all of their common shares for 23,300,000 shares of Americabilia common stock. At the same time, we issued 7,000,000 shares of Americabilia Class A preferred stock to acquire a technology license from Crystalix Technology, Inc.
Immediately following the acquisition, the former shareholders of Crystalix USA held approximately 77.6% of Americabilia's total issued and outstanding common shares. Crystalix USA was thereby deemed to be the acquiror and surviving company for accounting purposes. Accordingly, the transaction has been accounted for as a reverse acquisition using the purchase method whereby the assets and liabilities of Americabilia have been recorded at their fair market values and operating results have been included in the company's financial statements from the effective date of purchase. The net assets of Crystalix USA are included in the balance sheet at their historical book values and its results of operations have been presented for the comparative prior period.
On December 23, 2002, we acquired Lazer-Tek for 1,250,000 shares of our common stock valued at $1,125,000 and an acquisition consulting fee obligation of $400,000. This acquisition has been accounted for using the purchase method. The purchase price was allocated to the assets purchased and liabilities assumed based upon their estimated fair values as determined by management, upon reliance on an independent valuation report, on the date of acquisition, which approximated $3.2 million. The excess of fair value of the acquired net assets over the cost has been allocated as a pro rata reduction of all the acquired assets, excluding financial assets, assets to be disposed of by sale, deferred tax assets, pension or other post-retirement benefit plans, and any other current assets.
On August 17, 2005, we purchased a 51% interest in LDI for $708,000. The payment terms were $75,000 deposit paid prior to August 17, 2005, $250,000 at closing, and $76,600 on each of the following dates: December 31, 2005, April 30, 2006, August 31, 2006, December 31, 2006, and April 8, 2007. In addition, we paid $150,000 to Norwood Operating Company, LLC in connection with this purchase agreement. A portion of the purchase price was funded by the convertible note from the UAJC 2005 Irrevocable Trust. The acquisition was accounted for using the purchase method of accounting. The total purchase price of $858,000 was allocated to the fair value of the assets and liabilities, which result in the recording of a patent of $848,961. LDI is the owner of a patent for sub surfacing laser decorative imaging, and also has exclusive rights to the license for the color technology.
As of March 31, 2006, we completed the Asset Purchase Agreement with U.C. Laser Ltd., entered into on December 29, 2005 but to be effective January 1, 2006, in which we agreed to purchase all of the assets of U.C. Laser used in connection with the manufacturing, distribution and marketing of its decorative images and products. The assets acquired include U.C. Laser's subsidiaries, U.C. Laser, Inc. and CIC Laser Technologies Ltd., as well as U.C. Laser's worldwide, exclusive license to use the colored glass technology owned by Laser Glass Ltd.
In consideration for the purchased assets, we assumed the liabilities arising from or related to the purchased assets in the approximate amount of $4,924,000, and issued 2,276,795 shares of our Class B Preferred Stock. These shares of Class B Preferred Stock collectively have voting rights equal to 45% of all voting rights of all of our capital stock outstanding immediately after the closing, determined on a fully diluted basis. Each share of Class B Preferred Stock is convertible into 2.857 shares of common stock so that collectively, the Class B Preferred Shares issued to U.C. Laser are convertible into 6,505,129 shares of our common stock, which, immediately after such conversion, represent 45% of all shares of our capital stock then outstanding on a fully diluted basis.
Twenty percent, or 455,359 of the Class B Preferred Shares issued to U.C. Laser were placed into escrow to satisfy any obligations of U.C. Laser to indemnify us for losses arising from (1) a material breach by U.C. Laser of any representation, warranty, covenant, restriction, or agreement made in the Asset Purchase Agreement or (2) fraud or an intentional misstatement by U.C. Laser. The escrow period shall terminate June 29, 2006.
GOING CONCERN
The accompanying consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplate continuation of us as a going concern. We incurred a net loss for the three months ended March 31, 2006 of $601,137, used cash for operating activities of $798,526 for the three months ended March 31, 2006, and at March 31, 2006 had an accumulated deficit of $22,337,725 and a working capital deficit of $5,397,382. These conditions raise substantial doubt as to our ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. These consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
We plan to take the following steps that we believe will be sufficient to provide us with the ability to continue in existence. We have recently exchanged $12,098,036 of convertible debentures and accrued interest for 200,000,000 shares of our common stock, which has reduced our liabilities by approximately 85%. Also, on August 17, 2005, we purchased a 51% interest in LDI, which is the owner of a patent for sub surfacing laser decorative imaging, and also has exclusive rights to the license for the color technology. In addition, on March 31, 2006, we consummated the Asset Purchase Agreement with U.C. Laser, Ltd. of Israel (DBA Crystal Impressions). We purchased all of U.C. Laser's assets used in conjunction with the marketing, manufacturing, and distribution of its decorative sub surface laser art products. The assets acquired include U.C. Laser's subsidiaries, Crystal Impressions and CIC Laser Technologies of Shanghai, China, as well as U.C. Laser's worldwide exclusive license for its innovative sub surface laser color technology. Our management believes that this acquisition will enable us to continue as a going concern. While incorporating the strengths and expertise of both Seaena and Crystal Impressions and newly created economies of scale, we believe that the management team will be able to achieve profitable operations, but there can be no assurance that we will be able to raise sufficient capital and generate positive cash flows from operations sufficient to sustain operations. Our discussion in "Plan of Operation" below details additional sales strategies to sustain operations.
During the year ended December 31, 2005, we significantly reduced our overhead expenses and were able to expand our manufacturing facilities and equipment. We eliminated non-critical personnel and expenditures, reduced travel and renegotiated leases, debt and prices while building a strong team of qualified and dedicated personnel. We believe we can grow revenues during the next twelve months without a significant increase to overhead. We have partnered with a former competitor in the two-
dimensional photo market, and have taken over his accounts and are now producing and billing for another large national chain. We also are receiving new laser production equipment as a result of our business combination with U.C. Laser as we expand the production plant in Las Vegas to keep up with the growing demand. Another result of our merger is a production plant in Shanghai, China, which will allow us to produce larger run orders, standard pieces, and jobs with adequate lead time for greatly reduced costs. We have been in negotiations with several parties interested in the purchase of multiple machines and territories and will continue to pursue machine sales in this manner, looking for strong retail partners who can successfully operate in the retail marketplace. We also believe the impending patent litigation against the remaining alleged infringers will increase our revenues as violators either (1) settle and obtain legal license and pay royalties, thereby preventing them from using unfair pricing advantages, or (2) leave the industry altogether and reduce competition.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to impairment of long-lived assets, any potential losses from pending litigation and deferred tax asset or liability. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; however, we believe that our estimates, including those for the above-described items, are reasonable.
MACHINE SALES. Laser equipment is no longer leased, but rather sold outright to our independent distributors/retailers, most frequently in three installment payments as follows: 40% upon order, 40% prior to delivery, and 20% upon completion of installation of equipment at the retail location. We retain ownership of the proprietary software and license use of the software to the distributor/retailer for a monthly fee, which is normally $500.
PRODUCT SALES. Revenue from the sale of sub surface laser products (glass or equipment) is recognized when title to the products is transferred to the customer, which is point of sale at retail locations or customer acceptance for custom-designed products, and only when no further contingencies or material performance obligations are warranted. Revenue from the sale of glass cube products is recognized when title to the products is transferred to the distributor/retailer, which is upon shipment, and only when no further contingencies or material performance obligations are warranted.
ROYALTY REVENUE. We recognize royalty revenue from licensing our technology only when earned with no further contingences or material performance obligations are warranted.
STOCK-BASED TRANSACTIONS. Shares of our common stock issued for services, compensation or financing costs is valued at the market value of our common stock at the date of issuance. We account for our stock-based compensation in accordance with SFAS No. 123R, "Share-Based Payment, an Amendment of FASB Statement No. 123." We recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees and non-employees.
INTANGIBLE ASSETS. Intangible assets consist of product and laser licenses, capitalized software costs, website development costs, artwork and copyrights, trademarks, trade names, customer lists and
relationships and were mostly acquired with the purchase of Laser-Tek and the U.C. Laser assets. In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," we evaluate intangible assets and other long-lived assets for impairment, at least on an annual basis and whenever events or changes in circumstances indicate that the carrying value may not be recoverable from its estimated future cash flows. Recoverability of intangible assets and other long-lived assets is measured by comparing their net book value to the related projected undiscounted cash flows from these assets, considering a number of factors including past operating results, budgets, economic projections, market trends and product development cycles. If the net book value of the asset exceeds the related undiscounted cash flows, the asset is considered impaired, and a second test is performed to measure the amount of impairment loss. Amortization is computed using the straight-line method over the estimated useful life of the assets.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005.
REVENUE. We generate product sales through the sale of laser machines, of engraved glass products to customers in our retail kiosks, to corporate customers, through portrait studios, and through the sale of glass blanks, display bases, and related products to our independent distributors. Our revenue for the three months ended March 31, 2006 decreased by $185,137 or 16.1% from $1,152,225 for the three months ended March 31, 2005 to $967,088 for the three months ended March 31, 2006. The decrease is primarily due to the cancellation of our contracts with licensees in 2005 which resulted in no lease revenue for the three months ended March 31, 2006. Revenue for the three months ended March 31, 2006 includes the revenue generated by U.C Laser from January 1, 2006. We expect the sales of U.C. Laser to increase throughout 2006 as we fully integrate their operations with ours.
The cost of revenue consists of the cost of the laser machines, glass blanks, bases, and other items that we purchase from our suppliers. Our cost of revenue also decreased by $116,458 or 23.6% from $493,724 for the three months ended March 31, 2005 to $377,266 for the three months ended March 31, 2006. Cost of sales as a percentage of sales decreased from 42.8% for the three months ended March 31, 2005 to 39.0% for the three months ended March 31, 2006. The decrease is due to higher sales of higher gross margin products.
OPERATING EXPENSES. Payroll and related benefits for the three months ended March 31, 2006 decreased by $91,377 or 20.8% from $439,419 for the three months ended March 31, 2005 to $348,042 for the three months ended March 31, 2006. The decrease is a result of a reduction in personnel due to corporate downsizing in 2005 offset by the payroll costs associated with the U.C. Laser acquisition. We do not anticipate a large increase in payroll rated expenses from the acquisition of U.C. Laser as all duplicate functions will be eliminated.
General and administrative expenses for the three months ended March 31, 2006 decreased by $28,371 or 4.0% from $702,145 for the three months ended March 31, 2005 to $673,774 for the three months ended March 31, 2006. The decrease is principally due to corporate downsizing in 2005 offset by an increase in general and administrative expenses as a result of the U.C. Laser acquisition.
Interest expense for the three months ended March 31, 2006 decreased by $492,367 or 89.2% from $552,245 for the three months ended March 31, 2005 to $59,878 for the three months ended March 31, 2006. The significant decrease is due to the conversion of over $12 million in debt to equity in December 2005.
Other, net for the three months ended March 31, 2006 decreased by $358,528 or 143.8% from other income of $249,263 for the three months ended March 31, 2005 to other expense of $109,265 for the
three months ended March 31, 2006. During the three months ended March 31, 2005, we recognized other income of $249,263 related to the cancellation of certain licensee agreements. Five of our licensees and we mutually agreed to cancel the existing contracts. Under the terms of the agreements, the licensees were released from their obligation under the agreement and in return, the licensees took ownership of the laser equipment. We removed the laser equipment and deferred income from our books related to these five licensees and recognized a gain of $249,263. During the three months ended March 31, 2006, the other expense of $109,265 principally relates to a settlement with a former licensee.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, we had a working capital deficit of $5,397,382 as compared to $1,165,314 at December 31, 2005. We had cash and cash equivalents of $245,275 at March 31, 2006 as compared to $59,844 at December 31, 2005. The increase in the working capital deficit is principally due to the acquisition of liabilities in the U.C. Laser transaction.
Our current cash on hand plus cash expected to be generated from operations will not be sufficient to sustain our current operations and service our outstanding debt for the next twelve months. Without giving effect to the assumption of liabilities upon the acquisition of U.C. Laser, we will need to issue debt or equity securities of at least $500,000 in the short-term in order to sustain operations until such time that we can generate positive cash flow from our operations. If we can obtain financing to meet these short-term needs, then we should be able to generate a positive cash flow in the long-term from the sales generated from the machinery that would be manufactured using funds received from the financing. We are in the process of exploring various ways to address the U.C. Laser debt, such as restructuring the debt and/or borrowing from a different lender.
During the three months ended March 31, 2006, our investing and financing activities provided cash of $41,745 and $942,212, respectively, while our operating activities used cash of $798,526. The cash used in operating activities was principally a result of the net loss we incurred.
OFF-BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements.
PLAN OF OPERATION
We believe that we have positioned Seaena to become the leader in the sub-surfaced glass etching industry, with our acquisition of U.C. Laser (DBA Crystal Impressions). Our management has developed a plan of operation for 2006. In our Las Vegas corporate headquarters, we have put into place officers and department heads bringing various areas of expertise to design and implement our plan of operation.
Our sales push began in 2006 again at the Promotional Product Industry Convention, where our goal to increase sales in the corporate and promotional lines seems to be succeeding based on the new orders and inquires we are receiving. The two-dimensional portrait line is growing rapidly as we have just added another major national chain and are in discussions with others. The demand for new products in the photo processing industry is stronger than we had originally anticipated and should prove to provide us with incredible growth opportunity.
We have secured direct glass suppliers in China, which should help reduce glass and component costs. We have acquired a production facility in China through our U.C. Laser acquisition. Given this, with the addition of the Crystal Impressions machinery and technology and the experience of our laser operators, we expect to decrease not only our over head as a percentage of sales but also expect to reduce our job
costs in 2006 and increase our production efficiencies helping again to achieve a lower cost. Negotiations are in progress with major component and equipment suppliers for the retail laser equipment we sell to independent retailers for quantity discounts we know will qualify for to once again help lower our costs. Accordingly, we expect our gross margins in both the glass and machine segments to increase in addition to the anticipated increases in product sales.
FORWARD-LOOKING STATEMENTS
Certain statements in this Quarterly Report on Form 10-QSB, as well as statements made by the company in periodic press releases, oral statements made by the company's officials to analysts and shareholders in the course of presentations about the company, constitute "forward-looking statements." All statements other than statements of historical facts included or incorporated by reference in this report, including, without limitation, statements regarding our future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements. In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as "may," "will," "expect," "intend," "project," "estimate," "anticipate," "believe," "to become," or "continue" or the negative thereof or variations thereon or similar terminology. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot give any assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from our expectations ("Cautionary Statements") include, but are not limited to, (1) risks pertaining to implementation of our proposed expansion of our distribution network; (2) competitive pressures in the giftware industry; (3) disputes or claims regarding the company's proprietary rights to its software and intellectual property; (4) acceptance of our products by corporate customers; (5) costs of desirable retail locations; (6) availability of suitable optic glass and laser equipment components; (7) general economic and business conditions; (8) ability to successfully integrate acquired operations; and (9) other factors over which we have little or no control. All subsequent written and oral forward-looking statements attributable to us, or persons acting on our behalf, are expressly qualified in their entirety by the cautionary statements. We assume no duty to update or revise our forward-looking statements based on changes in internal estimates or expectations or otherwise.