20-Feb-2015
Quarterly Report
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion of our financial condition and results of operations for the six months ended December 31, 2014 and 2013 should be read in conjunction with the financial statements and the notes to those statements that are included elsewhere in this report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including those set forth under "Risk Factors" in our Annual Report on Form 10-K for the year ended June 30, 2014 as filed with the Securities and Exchange Commission. We use words such as "anticipate," "estimate," "plan," "project," "continuing," "ongoing," "expect," "believe," "intend," "may," "will," "should," "could," and similar expressions to identify forward-looking statements.
Overview
We are a provider of green technology solutions, managing the equipment disposition needs of our government and commercial clients by buying, reselling, or recycling, in an environmentally and regulatory compliant manner, computers and other technology hardware. We operate in one segment. We generate revenues from:
? fees for logistics, inventory management and data destruction services,
? sales of used equipment to wholesalers providing a second life to IT equipment that may otherwise be discarded, and
? sales to companies that specialize in removing recyclable or remarketable parts of electronics from equipment that no longer has a usable life.
Our industry is relatively new and has grown during the past few years. We believe that this growth has been driven by both the increasing rate of changes in IT which accelerates the rate at which IT equipment becomes obsolete, the expansion of the remarketing and demanufacturing segments of our industry and a general increased awareness of the "green" aspect of information technology asset disposition, or ITAD. We expect the growth of our industry, as well as the growth of our company, to continue in the future. Our business strategy is based upon leveraging our experience and building on our existing business model by expanding our relationships and resources and includes:
? expanding our sources of technology equipment;
? expanding our resources for environmentally compliant recycling, reuse and data storage and destruction;
? expanding our geographical footprint;
? expanding the demanufacturing and recycling services we provide; and
? further penetrating the large global market for the resale of useful equipment.
Our business model is to grow our company both organically and through acquisitions, joint ventures and strategic partnerships with similar or complementary businesses. To support this expected growth, during fiscal 2011 we leased space which effectively doubled our warehouse space to enable us to store inventory in the local market. In an effort to further accelerate our organic growth, we are investing in our relationships with our existing partners through training sessions and other efforts to increase awareness and educate their organizations of the value of practicing sound asset recovery. During fiscal 2012 we realized our infrastructure, including warehouse configuration, product flow, processes and systems, limited our ability to grow while maintaining our profit margins. As such, in fiscal 2013 we redesigned the product flow and processes in our New Jersey facilities and implemented a new management system in our main warehouse in New Jersey. In the second quarter of fiscal 2014 we consolidated our two warehouses in New Jersey to streamline processes, reduce operating costs and realize efficiencies. We believe the new infrastructure, processes and system enable us to be scalable and have a repeatable solution to grow both organically and through acquisitions. In May 2014, we discontinued our operations in Tampa, Florida.
As the e-waste industry is not a mature industry, federal regulations have not yet been adopted and companies are left to their own accord to adopt best practices. We have decided that a differentiator in our industry will be companies that comply with standards that reflect policies that closely monitor where e-waste and scrap is sent after leaving a recycling facility. In this vein, in October 2011 we were awarded certifications for the responsible recycling E-Stewards practices as well as ISO 14001:2004 Environmental Management System for responsible electronics recyclers which are administered by the ISRI Services Corporation and the International Organization for Standardization (ISO). Additionally, in June 2012, we were awarded the ISO 9001 Quality Management Certification as well as the e-Stewards Certification from the Basel Action Network. We believe these industry certifications will assist us in building awareness of the benefits of our services. We have a zero landfill policy and prioritize resale over other potential means of recycling.
In order for us to continue to grow, we will need to raise additional capital to fund an expansion of our operations. We also expect to seek to acquire additional companies whose operations are complementary to ours, including companies with similar business models located in different geographical areas, and companies that offer different services, such as demanufacturers. Based upon our internal analysis of our industry and our competitors, we believe that there are a number of potential target companies, but there are no assurances our beliefs are correct or that we will ever close any acquisitions.
Weedhire.com
In May 2014, we launched Weedhire.com, a career website specifically targeting employment within the legal cannabis industry. In order to support our transition into this business, we have changed our corporate name to WeedHire International, Inc. We made the decision to diversify into this space due to the perceived underserved market for employer and employee candidates to connect within the legal marijuana industry. As marijuana legislation continues to pass, we believe that more career opportunities will be created. Although Weedhire.com is to be an online portal and social media source for job seekers and providers, it will not be involved with the growth, sale, or distribution of marijuana.
Currently, 23 states including the District of Columbia have approved medical marijuana and more are expected to follow. Industry analysts predict the current trend will accelerate and that the regulated domestic cannabis industry will grow from its current $1.5 billion market to over $20 billion by 2019. Our expected capital requirements for this segment initially are in the area of $250,000 which we will need to raise through the sale of debt or equity securities. We do not have any commitments for this additional capital, however, at this time and there are no assurances we will be able to raise the necessary capital. In that event, our ability to expand our operations through this new venture will be limited. During the second quarter of fiscal 2015, we did not have any significant activities related to our WeedHire business.
Our Performance and Outlook
The biggest challenges we are facing in our organic growth efforts are our ability to sustain growth and increase sales, our access to sufficient qualified employees, extensive competition and sufficient capital to support our efforts, all of which are necessary to support the expansion of our business. We have hired additional management personnel and are using a staffing company to provide qualified personnel to fill our technical and labor needs. This approach allows us to control our overhead expenses. While we are located in an area with a good supply of qualified candidates, the process, however, of evaluating the candidates is time intensive for our management and maintaining a sufficiently qualified workforce will continue to be a challenge for us in the near future. We have implemented a new, fully automated, management system to support our operations. We went live on the new system in the first quarter of fiscal 2013 in our main warehouse in NJ, went live in Tampa in the fourth quarter of fiscal 2013 and went live in the second NJ warehouse in the first quarter of fiscal 2014. This new system provides operating and reporting efficiencies to enable us to grow our business while minimizing the need to expand warehouse space and personnel. In May 2014, we discontinued using the operating facility in Tampa, Florida.
During the six months ended December 31, 2014, our net sales decreased by 6% from the six months ended December 31, 2013, our gross profit margins increased by 24% and our operating expenses decreased by 16% from the six months ended December 31, 2013. While we do not have any commitments for capital expenditures, in order for us to sustain our current operations and grow our business we will need to raise additional working capital. As a small public company with a limited market for our common stock, we face a number of challenges in accessing the capital markets, and the number of sources to raise working capital is limited. During fiscal 2014 and the six months ended December 31, 2014 we explored a number of options to provide additional capital to our company and we are continuing our efforts to raise additional working capital, either in the form of equity, debt or a combination of the two. During the six months ended December 31, 2014 we have raised net proceeds of $823,000 primarily through the sale of convertible notes which mature between October 2014 and August 2016, and are convertible at the option of the holders into shares of our common stock based upon a disclosure to the market price. In addition, we have $175,850 principal amount of 12% convertible notes which matured in December 2014 and are currently in default. These notes are convertible at the option of the holders into shares of our common stock at a conversion price of $0.30 per share. We do not presently have sufficient funds to satisfy these obligations and will need to raise additional capital should the holders not elect to convert the notes. However, we do not have any commitments for additional capital, and there are no assurances we will be successful in raising capital upon terms acceptable to us, if at all. If we are unable to raise additional working capital, absent a significant increase in our net sales, we will have to reduce certain operating expenses, which may not be sufficient to sustain our operations. In order to reduce our operating expenses we have opted out of the second warehouse lease in New Jersey, effective November 1, 2013, and in May 2014, we entered into a lease amendment agreement with the landlord of the Tampa, Florida facility to terminate that lease. We have also made some personnel reductions in accordance with the sales decline during the prior fiscal year. If we are unable to grow sales we will potentially have to make additional personnel reductions. If we are unable to raise additional capital as needed, increase sales or significantly reduce costs, our current cash position will only sustain operations for approximately three months and we will not have the funds necessary to satisfy our obligations as they become due. In that event, our ability to continue as a going concern is in jeopardy.
Going Concern
For the six months ended December 31, 2014 the Company reported a net loss of approximately $3,544,000 and at December 31, 2014 we had an accumulated deficit of approximately $14,400,000. The report of our independent registered public accounting firm on our financial statements for the year ended June 30, 2014 contains an explanatory paragraph regarding our ability to continue as a going concern based upon the loss for the current year, the accumulated deficit and the net cash used in operating activities. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our financial statements do not include any adjustments that might result from the outcome of this uncertainty. There are no assurances we will be successful in our efforts to increase our sales and report profitable operations or to continue as a going concern, in which event investors would lose their entire investment in our company.
