NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
FOR THE THREE AND NINE
MONTHS ENDED DECEMBER 31, 2007 AND 2006
(UNAUDITED)
NOTE
1:
BASIS OF
PRESENTATION
The
financial information included herein is unaudited; however, such information
reflects all adjustments (consisting solely of normal recurring adjustments),
which are, in the opinion of management, necessary for a fair statement of
results for the interim period. 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 condensed or omitted. The results of operations for the
three and nine months ended December 31, 2007 and December 31, 2006 are not
necessarily indicative of the results to be expected for the full
year.
NOTE
2:
SALE OF
MINORITY INTEREST IN SUBSIDIARY
On May 8,
2006, Thermodynetics (“Company”) sold a 43.68% interest in its
subsidiary, Turbotec Products Plc, (“Plc”), to institutional
investors pursuant to an offering on the AIM Market of the London Stock
Exchange. Prior to the offering, the Plc was formed in the United Kingdom and
the Company transferred its entire interest in its operating subsidiary,
Turbotec Products, Inc. to the Plc. Pursuant to the offering, the
Company and the Plc each sold 2,797,183 shares (a total of 5,594,366 ordinary
shares of the Plc) for 85 pence per ordinary share, resulting in gross proceeds
of $8,765,280 before costs of $2,010,000. Under the terms of the offering the
two companies shared equally in the net proceeds after fees and
expenses. From the net proceeds received, an aggregate of
approximately $4,619,000 was used to repay bank debt.
The
Company and its Board of Directors (the “Board”) pursuant to a Relationship
Agreement (RA) have undertaken, inter alia, not to exercise its voting rights in
the shares of the Plc, except with the consent of the nominated advisor and the
Plc (on the authority of its non-executive Directors) to vote in favor of any
resolution to give the Board authority under British law to allot shares in the
Company, or under British law to vote to remove or reduce any pre-emption rights
that shareholders may have. The RA contains further provisions
restricting the ability of the Company to dispose of its interest in the
ordinary Shares into the United States in a manner that would require
registration of any such disposition under the US Securities Act.
Loan
Modifications:
The
Company, certain of its subsidiaries, and their original bank entered into
certain loan modification agreements to provide for the separation of the credit
facilities between the Company and Turbotec Products, Inc., and the release of
certain cross collateral guarantees. Principally, the Company's
remaining indebtedness with the bank were a secured mortgage term
loan in the original principal amount of $2,025,000 secured by the real estate
and building at 651 Day Hill Road, Windsor, CT. and a term loan of the original
principal amount of $183,000, secured by all of the assets of the
Company. In October 2006 the $183,000 note was repaid and in December
2006 the Company refinanced the mortgage note secured by the 651 Day Hill Road
property with another bank that holds a mortgage secured by the real estate and
building at 50 Baker Hollow Road, Windsor, CT. The Company also
received a two year revolving line of credit with a maximum availability of
$1,100,000, also secured by both properties and buildings. The Company no longer
has borrowings from the original bank; however Turbotec Products, Inc. remains
indebted on an equipment term note and a revolving line of credit with that
bank.
NOTE 3:
DISCONTINUED
OPERATIONS AND GAIN ON EXTINGUISHMENT OF DEBT
In July
2005, the Company and its Vulcan Industries, Inc. subsidiary (Vulcan), received
notices of default of term loans with a secured lender and its principal
bank. The Company subsequently consummated an agreement with a major
customer of Vulcan and the lenders, whereby the customer purchased certain
Vulcan equipment by paying certain of Vulcan’s outstanding debts. The Company
and Vulcan received releases for the related obligations.
The
Company and its bank (as the only remaining secured creditor) entered into an
agreement whereby the bank waived the existing defaults on all debt instruments
(except those relating to the Vulcan debt which continued) and modified a
financial covenant to exclude Vulcan from the compliance
calculation.
In August
2005, the Company discontinued the operations of Vulcan and began liquidating
its remaining assets and paid all sums received to the bank. At
September 2005 all operating assets of Vulcan had been liquidated and the
Company and the bank restructured the balance of the secured debt resulting from
the Vulcan closure.
In
November 2006 the Company and the selling shareholders of Vulcan reached
agreement on extinguishing the remaining unpaid notes payable relating to the
acquisition of Vulcan. Under the agreement, all unpaid notes were cancelled
together with accrued interest payable in exchange for a payment of $10,000.
Accordingly, the Company recorded a gain on extinguishment of debt of $605,928,
less applicable income taxes of $193,000.
NOTE
4:
INVENTORIES
Inventories
consist of the following at (in 000’s):
|
|
December 31, 2007
|
|
|
March 31, 2007
|
|
Raw
materials
|
|
$
|
1,946
|
|
|
$
|
2,224
|
|
Work-in-process
|
|
|
185
|
|
|
|
123
|
|
Finished
goods
|
|
|
1,216
|
|
|
|
1,104
|
|
Less:
Reserves
|
|
|
(35
|
)
|
|
|
( 35
|
)
|
|
|
$
|
3,312
|
|
|
$
|
3,416
|
|
Inventories
are valued at the lower of cost or market, with cost determined on a standard
cost basis which approximates a first-in, first-out basis.
NOTE
5:
EARNINGS
PER SHARE
The
Company has adopted Statement of Accounting Standards No. 128, “Earnings per
Share" (SFAS 128). Earnings per share for the three and nine months
ended December 31, 2007 and December 31, 2006 have been computed in accordance
with this pronouncement, based on the weighted average of outstanding shares
during the periods.
The
weighted average numbers of shares outstanding used in the calculations are as
follows:
|
|
Three
Months Ended Dec. 31
|
|
|
Nine
Months Ended Dec 31
|
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
Weighted
Average Shares - (Basic)
|
|
|
4,062,937
|
|
|
|
4
,027,361
|
|
|
|
4,051,906
|
|
|
|
4,023,261
|
|
Assumed
Conversion of Stock Options
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
|
|
-0-
|
|
Weighted
Average Shares- (Diluted)
|
|
|
4,062,937
|
|
|
|
4
,027,361
|
|
|
|
4,051,906
|
|
|
|
4,023,261
|
|
NOTE
6:
INCOME
TAXES
In
accordance with "Statement of Accounting Standards No. 109, Accounting for
Income Taxes", the primary components of the Company's deferred tax assets and
liabilities and the related valuation allowance are as follows (in
000’s):
|
|
December 31, 2007
|
|
|
March 31, 2007
|
|
Assets:
|
|
|
|
|
|
|
Uniform
capitalization adjustment
|
|
$
|
34
|
|
|
$
|
4
|
|
Net
operating loss carryforward
|
|
|
1,225
|
|
|
|
1,112
|
|
Research
and development credit
|
|
|
121
|
|
|
|
69
|
|
Other
|
|
|
342
|
|
|
|
479
|
|
|
|
|
1,722
|
|
|
|
1,664
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accelerated
depreciation
|
|
|
( 1,108
|
)
|
|
|
(1,019
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
614
|
|
|
$
|
645
|
|
NOTE 7:
INVESTMENT /
LOAN
In
September 2006, the Company advanced $300,000 to an unaffiliated company and
received a note due March 7, 2007 in the amount of $342,858. The note
is convertible into common stock at the option of the Company at the rate of
$0.439 per share and bears interest at a rate of 25% per annum. The
Company also received 208,001 warrants exercisable at $0.439 that expire on
September 7, 2010. In March 2007 the Company reduced the carrying value of the
note to $30,000.
NOTE
8:
CASH
FLOW INFORMATION AND NON CASH INVESTING ACTIVITIES
The
following supplemental information is disclosed pursuant to the requirements of
Financial Accounting Standards Board's (“FASB”) "Statement of Accounting
Standards No 95, Statement of Cash Flows”.
|
|
9
Months Ended Dec 31, (in 000’s)
|
|
|
|
2007
|
|
|
2006
|
|
Cash
payments for interest
|
|
$
|
122
|
|
|
$
|
197
|
|
NOTE 9:
FINANCIAL ACCOUNTING
STANDARDS
In July 2002, the Public Company
Accounting Reform and Investor Protection Act of 2002 (the Sarbanes-Oxley Act)
was enacted. Section 404 stipulates that public companies must take
responsibility for maintaining an effective system of internal
control. The Act requires public companies to report on the
effectiveness of their control over financial reporting and obtain an attest
report from their independent registered public accountant about management’s
report. The Company is not required to report on the effectiveness of
its controls over financial reporting in order to comply with section 404 of the
Act until the fiscal year ending March 31, 2008, nor is it required
to
obtain a report from its independent registered public accountant
attesting to the Company's internal
controls over financial reporting
until the fiscal year ending March 31,
2009.
THERMODYNETICS,
INC. AND SUBSIDIARIES