UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2006.
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE
ACT
For the transition period from ___________ to ____________
Commission file number 0-28606
------------------------------
EMERGE CAPITAL CORP.
(Exact name of small business issuer as specified in its charter)
------------------------------
DELAWARE 22-3387630
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
109 North Post Oak Lane, Suite 422
Houston, TX 77024
(Address of principal executive offices, including area code)
713-621-2737
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of shares outstanding of our common stock at May 19, 2006 was
24,585,816.
Transitional Small Business Disclosure Format (check one): [ ] Yes [X] No
EMERGE CAPITAL CORP.
FORM 10-QSB
INDEX
Page
Number
------
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheet as of
March 31, 2006 (Unaudited) 2
Condensed Consolidated Statement of Operations for the
three months ended March 31, 2006 and 2005 (Unaudited) 3
Condensed Consolidated Statement of Cash Flows for the
three months ended March 31, 2006 and 2005 (Unaudited) 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5-9
Item 2. Management's Discussion and Analysis or Plan of Operation 9-11
Item 3. Controls and Procedures 12-14
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 14
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 14
Item 3. Defaults Upon Senior Securities 14
Item 4. Submission of Matters to a Vote of Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits 15
SIGNATURES 16
ii
PART I -FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
MARCH 31, 2006
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $ 531,537
Restricted cash 98,452
Purchased accounts receivable 84,765
Other accounts receivable (net of allowance for bad debts of $78,737) 183,910
Notes receivable 227,004
Note receivable due from affiliate 162,295
Receivable due from affiliate 166,091
Investment in marketable securities 1,156,793
Deferred financing costs 86,076
Prepaid expense 107,041
-----------
Total current assets 2,803,964
-----------
NONCURRENT ASSETS
Fixed assets, net 71,132
-----------
Total noncurrent assets 71,132
-----------
TOTAL ASSETS $ 2,875,096
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
-------------------------------------
CURRENT LIABILITIES
Accounts payable $ 302,868
Accrued liabilities 25,927
Convertible debentures--net of $357,621 discount 183,117
Notes payable 164,509
Accrued interest payable 49,298
Unearned income 264,250
Derivative liability 850,718
Due to clients 24,822
----------
Total current liabilities 1,865,509
----------
NONCURRENT LIABILITIES
Convertible debentures--net of $198,339 discount 1,501,661
Note payable 190,963
Accrued interest payable 132,189
-----------
Total noncurrent liabilities 1,824,813
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' DEFICIT
Preferred Stock, par value $.01, 2,000,000 shares authorized:
Series A Convertible Preferred Stock, noncumulative, $.01 par value;
400,000 shares authorized; none issued
Series B Convertible Preferred Stock, 100,000 shares authorized;
100,000 shares issued and outstanding; no liquidation or redemption value 1,000
Series C Preferred Stock; liquidation preference of $378,000
redeemable at $1,500 per share at Company option, cumulative
dividends of $120 per share per year, non-voting, par value $.01,
1,000 shares authorized, 254 shares issued and outstanding 3
Common stock, $.001 par value; 900,000,000 shares authorized;
23,835,816 shares issued and outstanding 23,836
Additional paid-in capital 529,015
Retained deficit (1,369,080)
-----------
Total shareholders' deficit (815,226)
-----------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 2,875,096
===========
See accompanying notes to these condensed consolidated financial statements.
2
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended March 31
------------------------------
2006 2005
------------- -------------
REVENUE
Discount income $ 9,668 $ 59,232
Consulting revenue 171,250 75,000
Marketable securities gain 664,615 127,017
Fee income 20,000 --
-------------- -------------
Total revenue 865,533 261,249
-------------- -------------
GENERAL AND ADMINISTRATIVE EXPENSES
Salaries and benefits 146,540 106,388
Advertising 26,565 9,170
Business development, travel and entertainment 19,030 29,631
Rent 18,858 14,631
Depreciation and amortization 6,163 3,494
Professional fees 134,468 63,203
Other 27,869 43,652
-------------- -------------
Total general and administrative expenses--net of
allocation to affiliated entities--$24,796 for 2006
and $20,333 for 2005 379,493 270,169
-------------- -------------
OPERATING INCOME (LOSS) 486,040 (8,920)
-------------- -------------
OTHER (INCOME) EXPENSE
Interest expense 31,384 19,410
Interest expense-derivatives 81,491 17,837
Net change in fair value of derivative liabilities 182,653 148,547
Debt extinguishment (94,365) --
Other expense 11,501 --
Other income (16,268) (39,951)
Interest income (17,508) --
Gain on sale of subsidiary--Note 6 (3,042,406) --
-------------- -------------
Total other (income) expense (2,863,518) 145,843
-------------- -------------
Income (loss) before income tax 3,349,558 (154,763)
-------------- -------------
INCOME TAX PROVISION
Current income tax expense (benefit) -- --
Deferred income tax expense -- 83,795
-------------- -------------
Total income tax provision (benefit) -- 83,795
-------------- -------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 3,349,558 (238,558)
-------------- -------------
LOSS FROM DISCONTINUED OPERATIONS 4,687 53,888
-------------- -------------
NET INCOME (LOSS) 3,344,871 (292,446)
Preferred dividends paid 12,348 15,156
-------------- -------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 3,332,523 $ (307,602)
============== =============
Basic income (loss) per share:
Income (loss) from continuing operations $ 0.14 $ --
Loss from discontinued operations -- --
-------------- -------------
$ 0.14 $ --
============== =============
Diluted income (loss) per share:
Income (loss) from continuing operations $ 0.01 $ --
Loss from discontinued operations -- --
-------------- -------------
$ 0.01 $ --
============== =============
Basic average shares outstanding 23,735,816 66,630,000
============== =============
Diluted average shares outstanding 490,271,170 66,630,000
============== =============
See accompanying notes to these condensed consolidated financial statements.
3
EMERGE CAPITAL CORP. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Three Months Ended March 31
--------------------------
2006 2005
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 3,344,871 $ (292,442)
Adjustment to reconcile net income (loss) to net cash provided by (used in)
operating activities (3,290,583) 308,221
----------- -----------
Net cash provided by operating activities 54,288 15,779
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of fixed assets (5,418) (84,496)
Cash received for sale of subsidiary 93,396 --
Proceeds from sale of investments 23,220 --
----------- -----------
Net cash provided by (used in) investing activities 111,198 (84,496)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on note payable -- (73,809)
Preferred dividends paid (12,348) (15,156)
----------- -----------
Net cash used in financing activities (12,348) (88,965)
----------- -----------
Net cash provided by operating activities of discontinued operations -- 98,988
Net cash used in investing activities of discontinued operations -- (26,517)
Net cash provided by financing activities of discontinued operations -- 750
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 153,138 (84,461)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 378,399 391,143
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 531,537 $ 306,682
=========== ===========
SUPPLEMENTAL INFORMATION
Interest paid $ -- $ 4,217
----------- -----------
Taxes paid $ 9,882 $ --
----------- -----------
Redemption and purchase of preferred stock:
Decrease in accounts receivable $ 15,000 $ 43,500
----------- -----------
Increase in notes payable $ 240,000 $ --
----------- -----------
Decrease in paid-in capital $ 243,498 $ 25,337
----------- -----------
Sale of subsidiary:
Assets sold $ 2,906,001 $ --
----------- -----------
Liabilities assumed by buyer $ 5,855,011 $ --
----------- -----------
See accompanying notes to these condensed consolidated financial statements.
4
EMERGE CAPITAL CORP. AMD SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1 - Basis of Presentation
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) necessary to present fairly the condensed consolidated financial
position of Emerge Capital Corp. ("Emerge") and "Subsidiaries" as of March 31,
2006 and their condensed consolidated results of operations and cash flows for
the three months ended March 31, 2006 and the three months ended March 31, 2005.
The results of operations for the three months ended March 31, 2006 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 2006.
As used herein, the "Company" refers to Emerge or Emerge together with its
subsidiaries. The Company's fiscal year ends on December 31st.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America have been omitted in accordance with the
published rules and regulations of the Securities and Exchange Commission for
interim financial statements. The unaudited condensed consolidated financial
statements and the notes thereto in this report should be read in conjunction
with the audited consolidated financial statements and notes thereto included in
the Company's Annual Report on Form 10-KSB for the fiscal year ended December
31, 2005 (the "10-KSB").
On August 31, 2005, NuWave Technologies, Inc. ("NuWave") entered into a merger
agreement (the "Agreement") with Corporate Strategies, Inc. ("Corporate
Strategies") and the shareholders of Corporate Strategies. The Company was
subsequently renamed Emerge.
As a result of the merger, former shareholders of Corporate Strategies
collectively own 100% of the Company's Series B Convertible Preferred Stock
("the Series B Preferred"). Upon conversion of the Series B Preferred into
common shares, the common shares issued upon conversion shall be equal to
ninety-five percent (95%) of the issued and outstanding stock of the Company
(calculated on a fully diluted basis as of the date of the merger.)
The Series B Preferred shareholders and the holders of the common stock vote
together and the Series B Preferred shall be counted on an "as converted" basis,
thereby giving the Series B Preferred shareholders control of the Company. The
transaction is being accounted for as a reverse acquisition since control of the
merged group has passed to the shareholders of the acquired company (Corporate
Strategies).
5
The Company primarily provides business restructuring, turnaround execution and
business development advisory services for emerging and re-emerging public and
private companies.
The Company owned Aim American Mortgage, Inc. ("Aim") from February 18, 2003
through December 31, 2005. Aim is engaged in residential mortgage brokerage
activities. The consolidated financial statements of the Company include the
results of the operations of Aim through December 31, 2005. Aim was sold on
December 31, 2005 and has been reflected in discontinued operations in the
financial statements.
On October 22, 2004, the Company formed CSI Business Finance, Inc. ("CSIBF"), a
corporation organized under the laws of the state of Texas, for the purpose of
engaging in equipment leasing and other business finance activities. The
consolidated financial statements of the Company include the results of
operations of CSIBF for the period from October 22, 2004 (inception) through
August 31, 2005, the date CSIBF was distributed to shareholders. The results are
presented in discontinued operations.
Lehigh Acquisition Corp. ("Lehigh") was a subsidiary of NuWave and is treated as
if it was acquired August 31, 2005, the date of merger. Lehigh was sold on
February 3, 2006. The interim financial statements include the operations of
Lehigh from September 1, 2005 through February 3, 2006. The results are
presented in discontinued operations.
The accompanying condensed consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant inter-company
balances and transactions have been eliminated.
Since Corporate Strategies is the surviving entity of the reverse merger, the
financial statements include the results of operations since the merger (August
31, 2005) for NuWave and its consolidated subsidiaries, and the operations of
Corporate Strategies since its inception.
Note 2 - Income (Loss) Per Common Share
Basic net income (loss) per common share is computed by dividing the net income
(loss) applicable to common shares by the weighted average number of common
shares outstanding during the period.
Diluted net income (loss) per common share is computed by dividing the net
income (loss) by the weighted average number of common shares outstanding
adjusted for the dilutive effects of the assumed issuance of potentially
dilutive securities. The number of shares issuable upon the conversion of the
outstanding Series B Preferred and secured convertible debentures that was used
in the fully diluted earnings per share computation for the quarter ended March
31, 2006 was 466,535,354. There were no potentially dilutive shares at March 31,
2005.
The following is a reconciliation of the numerators and denominators used in the
calculation of basic and diluted earnings per share for March 31, 2006. The
adjustments were the same for both income from continuing operations and income
applicable to common shares.
Continuing Applicable to
Operations Common Shares
------------ ------------
Income $ 3,349,558 $ 3,332,523
Less effect of derivatives 218,785 218,785
------------ ------------
Income (numerator) $ 3,568,343 $ 3,551,308
============ ============
Shares--basic 23,735,816 23,735,816
Effect of convertible debentures 12,319,034 12,319,034
Effect of conversion of Series B Preferred 454,216,320 454,216,320
------------ ------------
Shares--diluted (denominator) 490,271,170 490,271,170
============ ============
Per share amount:
Basic $ 0.14 $ 0.14
============ ============
Diluted $ 0.01 $ 0.01
============ ============
6
Note 3 - Restatement of Previously Issued Consolidated Financial Statements
The Company has restated its consolidated balance sheet, consolidated statements
of operations and cash flows for the year ended December 31, 2004 and interim
periods during 2004 and 2005 from the amounts previously reported. The
restatements include adjustments to (a) correct the accounting for convertible
debentures to recognize the effects of derivatives, (b) remove the beneficial
conversion feature previously recorded for the convertible debentures, and (c)
recognize the effects those changes had on recording the merger at August 31,
2005. The Company is required to reissue and restate the Form10-QSB previously
issued as of September 30, 2005 and for the three and nine months then ended,
and the information included therein should not be relied on.
Note 4 - Convertible Debentures - Derivative Financial Instruments
The Convertible Debentures issued from 2003 through 2005 have been accounted for
in accordance with SFAS 133 and EITF No. 00-19, "Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a Company's Own
Stock".
The Company identified the following instruments with imbedded derivatives
requiring evaluation and accounting under the relevant guidance applicable to
financial derivatives:
Cornell Debenture issued 5/6/04 in the face amount of $400,000
Cornell Debenture issued 6/24/04 in the face amount of $500,000
Cornell Debenture issued 9/28/04 in the face amount of $400,000
Cornell Debenture issued 4/6/05 in the face amount of $400,000
Holland et. al. Debentures issued 12/8/03 in the face amount of $135,000
Holland et. al. Debentures issued 12/22/03 in the face amount of $250,000
Saporito Debenture issued 1/29/04 in the face amount of $100,000
Viola Debenture issued 10/12/04 in the face amount of $100,000
Cornell Debentures issued 5/5/05 in the face amount of $250,000
Cornell Debenture issued 7/20/05 in the face amount of $150,000
These embedded derivatives have been bifurcated from their respective host debt
contracts and accounted for as derivative liabilities in accordance with EITF
00-19 and SFAS No. 133.
The embedded derivatives are marked-to-market each reporting period with changes
in fair value recorded to the Company's income statement as "Net change in fair
value of derivative liabilities". The Company has utilized a third party
valuation firm to fair value the embedded derivatives using a layered discounted
probability-weighted cash flow approach.
7
The fair value of the derivative liabilities are subject to the changes in the
trading value of the Company's common stock, as well as other factors. As a
result, the Company's financial statements may fluctuate from quarter-to-quarter
based on factors, such as the price of the Company's stock at the balance sheet
date and the amount of shares converted by debenture holders. Consequently, our
financial position and results of operations may vary from quarter-to-quarter
based on conditions other than our operating revenues and expenses.
On February 3, 2006, as part of the sale of Lehigh, the Cornell Debentures for
$250,000 issued 5/5/05 and $150,000 issued 7/20/05 were cancelled. The resulting
gain on extinguishment of $94,365 has been included in debt extinguishment
income.
Note 5 - Segment Reporting
The Company had four segments: business services (which consists of turnaround
execution services, management restructuring services, and business development
services) which was continuing at December 31, 2005, and mortgage brokerage,
previously through its 85% owned subsidiary, Aim American Mortgage, Inc. which
was sold on December 31, 2005; equipment leasing and business finance, through
its wholly owned subsidiary, CSI Business Finance, Inc. which was distributed to
the shareholders of Corporate Strategies effective August 31, 2005; and real
estate development through its wholly owned subsidiary , Lehigh which was sold
in February 2006. The mortgage brokerage, equipment leasing and real estate
development segments are treated as discontinued operations in the financial
statements.
The Company primarily provides business restructuring, turnaround execution and
business development advisory services for emerging and re-emerging public
companies
The Company's operations are conducted in the United States.
DISCONTINUED OPERATIONS
------------------------------------------
BUSINESS REAL MORTGAGE EQUIPMENT
SERVICES ESTATE BROKERAGE LEASING
Three months ended March 31, 2006:
Revenue $ 865,533 $ -- $ -- $ --
Income (Loss) before income tax $ 3,349,558 $ -- $ -- $ --
Segment assets $ 2,875,096 $ -- $ -- $ --
Three months ended March 31, 2005:
Revenue $ 261,249 $ -- $ 256,733 $ 40,034
Income (Loss) before income tax $ (154,759) $ -- $ (65,626) $ 11,738
Segment assets $ 2,002,215 $ -- $ 308,144 $ 338,136
Note 6 - Sale of Lehigh Acquisition Corp.
In February 2006, the Company sold its wholly-owned subsidiary, Lehigh, to
Cornell Capital Partners, LP ("Cornell")for total proceeds of $5,948,407
including the assumption of $4,881,274 promissory notes, $400,000 of convertible
debentures, $573,737 of accrued expense and interest and cash of $93,396. The
transaction resulted in a gain of $3,042,406.
Note 7. - Income Taxes
The gain from sale of the subsidiary discussed in Note 6 is a non-taxable
transaction under the Internal Revenue Code.
8
Note 8 - Repurchase of Preferred Stock
On February 21, 2006, the Company agreed to repurchase 272.278 shares of the
Company's Series C preferred stock for a promissory note of $240,000. The note
bears interest at 8% and is payable in monthly installments of approximately
$4,800 until paid in full.
On March 31, 2006 the Company redeemed ten shares of Series C preferred stock
for $15,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
Information included or incorporated by reference in this filing may contain
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended (the "Securities Act") and Section 21E of the Exchange
Act of 1934, as amended (the "Exchange Act"). This information may involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from the future
results, performance or achievements expressed or implied by any forward-looking
statements. Forward-looking statements, which involve assumptions and describe
our future plans, strategies and expectations, are generally identifiable by use
of the words "may", "will", "should", "expect", "anticipate", "estimate",
"believe", "intend", or "project" or the negative of these words or other
variations on these words or comparable terminology.
This filing contains forward-looking statements, including statements regarding,
among other things, (a) our projected sales and profitability, (b) our Company's
growth strategies, (c) our Company's future financing plans and (d) our
Company's anticipated needs for working capital. These statements may be found
under this Section as well as in this report generally. Actual events or results
may differ materially from those discussed in forward-looking statements as a
result of various factors, including, without limitation, those described in our
Form 10-KSB for the year ended December 31, 2005 and matters described in this
report generally. In light of these risks and uncertainties, there can be no
assurance that the forward-looking statements contained in this report will in
fact occur.
The following discussion of our financial condition, changes in financial
condition and results of operations for the three months ended March 31, 2006
and 2005 should be read in conjunction with our most recent audited annual
financial statements for the year ended December 31, 2005, the unaudited interim
financial statements included herein, and, in each case, the related notes.
OVERVIEW
On August 31, 2005, NuWave Technologies, Inc. ("NuWave") entered into a merger
agreement (the "Agreement") with Corporate Strategies. The Company was
subsequently renamed Emerge Capital Corp. The transaction is being accounted for
as a reverse acquisition since control of the merged group has passed to the
shareholders of the acquired company (Corporate Strategies).
The Company primarily provides business restructuring, turnaround execution and
business development advisory services for emerging and re-emerging public and
private companies.
RESULTS OF OPERATIONS
Three months ended March 31, 2006 and March 31, 2005
Revenue
Gross revenue for the three months ended March 31, 2006 increased to $865,533
from $261,249 for the three months ended March 31, 2005. The breakdown of the
sources of our gross revenue is as follows:
2006 2005
-------- --------
Discount income $ 9,668 $ 59,232
Consulting income 171,250 75,000
Marketable securities gain 664,515 127,017
Fee Income 20,000 --
Discount income decreased by approximately $50,000 for the three months ended
March 31, 2006 compared to the same period in 2005, primarily representing
decreased revenues as a result of the bankruptcy of a former customer.
Management does not anticipate generating any significant new business in this
area.
9
Consulting revenue increased by approximately $96,000 from the same period in
2005. Consulting revenues are generally one-time fees related to specific
events, or contracts for services rendered over a period of time. During the
quarter ended March 31, 2006 there were five ongoing consulting customers
compared to one during the same period 2005, and a specific event type fee in
2005 of $60,000 (none in 2006).
Marketable securities gain increased by approximately $537,000 for the quarter
ended March 31, 2006 compared to the same quarter in 2005. Marketable securities
gain included unrealized gains of approximately $571,000 for the quarter ended
March 31, 2006 compared to $159,888 during the same period in 2005.
General and Administrative Expenses
General and administrative expenses increased by approximately $110,000 to
$379,493 for 2006 as compared to the same period in 2005.
Salaries and benefits increased by approximately $40,000 to $146,540 in 2006 as
compared to the same period in 2005, primarily representing two new employees
added in the third and fourth quarter 2005 and NuWave personnel in August 2005.
Professional fees were $134,468 in 2006, an increase of approximately $71,000 as
compared to the same period in 2005. The increase represented additional
accounting, legal and consulting fees relating to additional requirements for
public companies, additional entities and restatements related to derivative
accounting.
Other income and expense
Interest expense increased by approximately $12,000 in 2006, representing
interest on significant debt from NuWave entities.
Interest expense-derivatives reflect the amortization of derivative related
discount on convertible debentures. The increase of approximately $64,000 in
2006 primarily reflects the amortization of discounts related to NuWave
indebtedness added in August 2005.
Derivative expense of $182,653 in 2006 ($148,547 in 2005) represents the change
in the fair value of the net derivative liability for the quarter. The increase
also reflects the NuWave indebtedness added as a result of the August 2005
merger.
Certain convertible debt was considered extinguished in the first quarter 2006
because of the partial conversion to common stock. The extinguishment gain was
$94,365.
Gain on sale of subsidiary of $3,042,406 represents the gain on the sale of
Lehigh Acquisition Corp. ("Lehigh") in February 2006.
Discontinued Operations
10
During February 2006, the Company sold the shares of its wholly-owned subsidiary
Lehigh. During 2005, the Company either sold or distributed the shares of its
mortgage brokerage subsidiary and its business finance subsidiary. The loss from
discontinued operations was $4,687 in 2006 ($53,888 in 2005).
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2006, the Company had working capital of $938,455 including $98,452
of restricted cash. Working capital is net of a computed liability for the fair
value of derivatives of $850,718, which will only be realized on the conversion
of the derivatives, or settlement of the debentures. The Company at its option
can force conversion of $1,700,000 of convertible debentures into the Company's
common stock at maturity date.
NuWave has a Standby Equity Distribution Agreement (the "SEDA") with Cornell
under which the Company may, at its discretion, periodically sell to Cornell
registered shares of the Company's common stock for a total purchase price of up
to $30 million. For each share of common stock purchased under the SEDA, Cornell
will pay NuWave 99% of the lowest closing bid price on the Over-the-Counter
Bulletin Board or other principal market on which its common stock is traded for
the 5 days immediately following the notice date. Furthermore, Cornell will
retain a fee of 10% of each advance made under the SEDA.
The amount of each advance is limited to a maximum draw down of $1,000,000 every
seven (7) trading days up to a maximum of $4,000,000 in any 30-day period. The
Company's ability to request advances is conditioned upon the Company having
enough shares of common stock registered pursuant to the SEC rules and
regulations. In addition, the Company may not request advances if the shares to
be issued in connection with such advances would result in Cornell owning more
than 9.9% of the Company's outstanding common stock.
This amount of net available working capital plus anticipated cash flow from
operations and potential proceeds from the shelf registration statement should
be sufficient to satisfy the Company's need for working capital for the
immediate future.
OFF-BALANCE SHEET ARRANGEMENTS
The Company had no off-balance sheet arrangements or guarantees of third party
obligations at March 31, 2006.
INFLATION
The Company believes that inflation has not had a significant impact on
operations since inception.
11
ITEM 3. CONTROLS AND PROCEDURES
(A) Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, the Company's management
carried out an evaluation, under the supervision and with the participation of
the Company's Chief Executive Officer ("CEO") and contract Chief Financial
Officer ("CFO"), of the effectiveness of the design and operation of the
Company's system of disclosure controls and procedures pursuant to the Exchange
Act (Rules 13a-15(e) and 15d-15(e) under the Exchange Act). The Company's
disclosure controls and procedures are designed to provide a reasonable level of
assurance of achieving the Company's disclosure control objectives. The
Company's CEO and CFO have concluded that the Company's disclosure controls and
procedures were not effective, as of the date of that evaluation, for the
purposes of recording, processing, summarizing and timely reporting of material
information required to be disclosed in reports filed by the Company under the
Exchange Act.
(B) Changes in Internal Controls over Financial Reporting
In connection with the evaluation of the Company's internal controls during the
Company's last fiscal quarter covered by this report, the Company's CEO and CFO
have determined that there were no changes to the Company's internal controls
over financial reporting that have materially affected, or are reasonably likely
to materially effect, the Company's internal controls over financial reporting.
Material Weaknesses Identified
In connection with the audit of our financial statements for the fiscal year
ended December 31, 2005, our independent registered public accounting firm
informed us that we have significant deficiencies constituting material
weaknesses. As defined by the Public Company Accounting Oversight Board Auditing
Standard No. 2, a material weakness is a significant control deficiency or a
combination of significant control deficiencies that result in there being more
than a remote likelihood that a material misstatement in the annual or interim
financial statements will not be prevented or detected. The specific problems
identified by the auditor were (1) lack of segregation of duties necessary to
maintain proper checks and balances between functions, (2) failure of internal
personnel to adequately communicate the scope and nature of non-routine
transactions, and (3) applications of improper accounting principles to
financial derivatives. The absence of qualified full time accounting personnel
was a contributing factor to the problems identified by the auditor. The
specific circumstances giving rise to the weaknesses include utilizing the
services of contract accountants on a part time basis in the absence of internal
accounting personnel. As a result of the absence of full time in-house
accounting personnel and the failure of in-house personnel to adequately
communicate information to the outside contract accountants, certain journal
entries required during 2004 and 2005 were not made until the time of the audit
when the need for such entries was identified by the auditor.
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As a result of our review of the items identified by our auditors, we have
concluded that our previous derivative accounting policies were incorrect and a
communication failure resulted in not properly discounting a note receivable and
reserving an account receivable balance.
In light of the above, we have determined to restate our consolidated financial
statements for quarters in 2004 and 2005 and for the year ending December 31,
2004 to correct our accounting for derivatives.
Furthermore, based on the material weaknesses described herein, we concluded
that our disclosure controls and procedures were not effective at the reasonable
assurance level at March 31, 2006. More specifically, our failure to maintain
effective controls over the selection, application and monitoring of our
accounting policies to assure that certain transactions were accounted for in
conformity with generally accepted accounting principles resulted in a failure
during 2005 to record an appropriate derivative liability, deemed interest
expense associated with the derivative liability and related charges associated
with changes in the value of embedded derivatives, arising from the issuance
during 2004, 2005 and from the merged companies of convertible debentures that
included imbedded derivatives; and a failure during the last quarter of 2005 to
properly discount the notes receivable from the sale of the subsidiary and to
properly provide an allowance for bad debts on an accounts receivable balance.
The effects of the aforementioned weaknesses related to the closing and
preparation of the financial statements were corrected by management prior to
the issuance of this Quarterly Report on Form 10-QSB.
Remediation Plan regarding the Material Weaknesses
Because of its size, The Company shares its accounting staff with an affiliated
company and is comprised of its CFO, accounting manager and a data entry clerk.
The accounting staff are employees of the Company and the Company bills its
affiliate for its share of the costs.
Management is actively engaged in remediation efforts to address the material
weaknesses identified in the Company's internal control over financial reporting
as of March 31, 2006. These on-going remediation efforts, outlined below, are
specifically designed to address the material weaknesses identified by
management and to improve and strengthen the Company's overall control
environment.
The Company has taken the following steps to address the specific problems
identified by the auditors:
o Our current CFO is a part time, contract employee. Due to family
health issues he is unable to devote full time to this position and
will resign as contract CFO and become a part time contract
controller. We have authorized the hiring of a contract CFO and a
full-time bookkeeper to allow us to properly implement the
segregation of duties necessary to maintain checks and balances
between functions of our accounting manager, contract controller,
and executive functions.
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o All non-routine transactions will be reviewed by our contract CFO,
contract controller and accounting manager before they are
completed.
o Our contract CFO will monitor our accounting policies to assure
proper accounting for financial derivatives and other unusual
transactions on an ongoing basis.
During the quarter ended December 31, 2005, the Company hired a full time
accounting manager. We believe that in conjunction with the hiring of a full
time bookkeeper we will be able to materially improve our internal controls over
financial reporting.
The Company continues its efforts to remediate control weaknesses and further
improve and strengthen its internal control over financial reporting under the
direction of the CEO and the contract CFO.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not currently involved in any material legal proceedings.
ITEM 2. UNREGISTERED SALES (REPURCHASES) OF EQUITY SECURITIES
On February 21, 2006, the Company purchased Two Hundred Seventy-Two and 278/1000
(272.278) shares of Series C Preferred stock. In lieu of cash, the Company
issued a Promissory Note in the amount of Two Hundred Forty Thousand Dollars
($240,000.00). The Promissory Note will be paid over a period of sixty months at
an eight percent (8%) annual interest rate, resulting in monthly payments of
Four Thousand, Eight Hundred Thirty Four and 11/100 Dollars ($4,834.11). On
March 31, 2006, the Company redeemed ten (10) shares of Series C Preferred
Stock. The Company paid Fifteen Thousand Dollars ($15,000.00) as consideration
for such redemption.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Documents filed as a part of this report:
Exhibit 31.1: Officer's Certification Pursuant to Section 302
Exhibit 32.1: Certificate pursuant to 18 U.S.C. Section 1350 as adopted to
Section 906 of the Sarbanes - Oxley Act of 2002
(B) Current Reports filed on Form 8-K:
On January 30, 2006, the Company filed a Current Report on Form 8-K disclosing
that Corporate Strategies entered into a stock purchase agreement on November
11, 2005 pursuant to which Corporate Strategies purchased a controlling interest
in Sagamore Holdings, Inc.
On February 15, 2006, the Company filed a Current Report on Form 8-K disclosing
that it had entered into a Stock Purchase Agreement related to the sale of
Lehigh Acquisition Corp.
On February 28, 2006, the Company filed a Current Report on Form 8-K disclosing
that effective as of December 31, 2005, Corporate Strategies, Inc, a
wholly-owned subsidiary of the Company, had entered into a Securities Purchase
Agreement with Elite Flight Solutions, Inc ("Elite") pursuant to which Elite
purchased 1,000 shares of the issued and outstanding Class A common stock of Aim
American Mortgage, Inc.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Company has caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Emerge Capital Corp.
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(Registrant)
Date May 22, 2006 _______________________
Timothy J. Connolly
Chief Executive Officer
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