ITEM 1.
BUSINESS
Organization
San West, Inc. (“San West”, “the Company”, or “we”) is a Nevada Corporation, established in July, 2001. The Company sells and serivices off-road buggies and related after market performance products and accessories.
In August 2008, the Company purchased 100% of the outstanding stock of Buggy World, Inc. With the acquisition of Buggy World, San West expanded their presence in the southern California retail market.
On June 5, 2009, San West completed a reverse merger with Human BioSystems (See Financial Statements, NOTE N - MERGER). Upon becoming effective 100% of San West outstanding common stock was exchanged for 65,396,320 shares of Human BioSystems common stock, Human BioSystems Acquisition Company became the surviving entity and changed its name to San West, Inc. The Merger was accounted for as a “reverse merger,” whereby San West was deemed the accounting acquirer under recapitalization accounting. Consequently, our consolidated financial statements include the assets, liabilities, historical operations of San West prior to the Merger, the shares retained by the legal acquirer (Human BioSystems) for the historical amount of the net assets of the accounting acquire which in this case is a net liability of $1,981,056 and the operations of San West and our Human BioSystems operations from the Effective Date of the Merger.
We have ceased all operations that were formerly conducted by Human BioSystems, the discussion of our business both past and future will be limited to San West, Inc., except where the context may refer to Human BioSystems in certain specific instances. Further, as a condition of the Merger, all compensation and option agreements with the former officers and directors of Human BioSystems have been terminated. However, we remain obligated to pay the debts of Human BioSystems reflected on its financial statements as of the date of the Merger.
The authorized capital stock of San West, Inc. is 300,000,000 shares of common stock no par value and 10,000,000 shares of preferred stock no par value. The Company is listed on the OTC Bulletin Board under the ticker symbol SNWT.
Business Overview
We, sell and repair scooters, atv’s, utv’s and off-road buggies, and additionally provide after market performance products and accessories for buggies. Our products are sold both at our store and online while our buggy repair services are sold and fulfilled at our store. Our goal is to address the growing demand for on road and off-road vehicles while offering our customers the highest quality products at the most affordable and competitive prices, following up with customer care and support services.
Our plan of growth is to capitalize on the growth of the U.S. market for Chinese made scooters, atv’s, utv’s and off-road buggies and go karts, as well as to establish master dealer arrangements with leading brands, continue to expand our online sales and to leverage our equity to negotiate and acquire synergistic businesses.
Chinese manufacturers have taken the lead in production of the newest generation of scooters, atv’s, utv’s, off-road buggies and go karts that are being widely accepted by consumers in the United States resulting in a supply-demand issue in terms of quality repair shops capable of providing adequate support as well as in the development of modification kits and performance add-ons. Our goal is to address this growing demand while offering our customers the highest quality products at the most affordable and competitive prices, and following up with excellent customer care and support services.
Our Industry
Recreational vehicles are a $16.4 billion market, according to the trade journal Off-Road Impact. Off-road karting uses a four-wheeled powered vehicle designed for off-road use as opposed to the longer established activities of racing go karts used for racing on a paved road circuit. Off-road karting is now a well established and popular activity with a burgeoning range of vehicles, options and adherents.
Just as the automobile has been undergoing evolutionary changes, noticeably in the field of “off-road” use, the smaller recreational vehicles called “go karts” have spawned a new generation of vehicle for off-road use. The origins of using a go kart sized vehicle for off-road use undoubtedly had many stages of development and claimants whose home-made vehicles were “the first” off-road go karts. The first manufactured off-road go kart was from Honda who released in 1977 a vehicle they called the “Odyssey,” essentially an off-road go kart with a 250 cc two stroke engine, single seat, and a CVT automatic transmission. The main differences to the traditional racing go kart were a bigger size of tires (giving greater ground clearance and off-road traction) and a roll cage.
The Odyssey proved to be a very popular vehicle and in 1985, Honda made major upgrades to the Odyssey and released the FL350. Changes were an improved roll cage, 350 cc engine with electric starter, and a full front and back suspension system. Then in late 1989, Honda released the FL 400. In addition to the increased engine size (a liquid cooled 400 cc unit) it was available in an optional two side by side seating configuration and had its suspension improved to handle the extra load. However, these modifications resulted in an expensive vehicle with disappointing sales which caused Honda to cease manufacture in 1990.
Although today these aging Honda units are still present and have an enthusiastic following, their main achievement was to create a pool of enthusiasts alerted to the possibilities of off-road small vehicle fun and keen to develop these possibilities. Chinese manufacturers have taken the lead in the production of the newest generation of off-road buggies and go karts that are being widely accepted by U.S. consumers resulting in a supply-demand issue in terms of quality repair shops capable of providing adequate support as well as in the development of modification kits and performance add-ons.
Our Business Plan
It is our plan to maximize the operating and financial performance of our dealerships by achieving certain efficiencies. We believe this will enhance internal growth and profitability. We believe that by consolidating these functions we will be able to reduce overall expenses, simplify dealership management, create economies of scope with leveraged buying power and provide a level of expertise that would otherwise be unavailable to each dealership individually.
Our Primary Service Outlet. BuggyWorld.net, located in Santee, California, is our primary location to sell buggies, modification parts, and accessories for off-road buggies built in China for the U.S. market. We currently utilize a “just-in-time” inventory system which reduces our overall inventory expense and risk. We typically carry about six of each available kit in stock at the time. Additional parts can typically be received within 24-hours if we are currently out of stock. We ship all requested kits and products within 72 hours of each order.
Online Strategy. We have established an online sales presence at www.countyimports.com where we sell our own products and resell others through strategic partnerships. We believe that online sales will continue to be an important component of our growth strategy in that the nature of the business provides for greater price elasticity and less inventory risk than is available in a brick-and-mortar environment.
However, we intend to expand our brick and mortar presence to four stores which we expect will position us to negotiate exclusive sales rights on a regional basis for several key brands. We believe operating leverage through store expansion is critical to our success in securing competitive advantages in the market with leading brand names.
We currently own the rights to the following Internet domains:
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www.buggyworld.net;
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www.buggynation.com;
Acquisition Strategy. In August 2008, we purchased Buggy World, Inc., located in Santee, California, and now our primary service outlet, for $613,202 which we believe is extremely synergistic to our core offerings. Buggy World achieved revenue of $1.6 million in sales during 2007 and is particularly well-positioned for growth in the Southern California region, which is our core market. The purchase price was raised through loans from our stockholders and a loan from Cambio Enterprises, Inc. According to the terms of the sale, we purchased 100 percent of the outstanding shares of Buggy World, Inc., which included all of the assets listed on its books at the time of the sale. Buggy World, Inc. continues to operate as our wholly-owned subsidiary. The financial statements attached to this report reflect the activity of San West, Inc. for the years ending December 31, 2010 and 2009.
As we acquire new dealerships, we intend to automate as many functions as we can to reduce overall expenses, simplify operations and dealer management and to create economies of scope with leveraged buying power as well as to provide a level of expertise that would otherwise be unavailable to each dealership individually.
We have identified the following strategic components as integral to our overall success and profitability:
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Sales and Service Effectiveness. Consumers have become more sophisticated in evaluating and purchasing products, as a result of the wide-spread availability of the Internet and greater access to information, and, as a result, require a more comprehensive offering, as well as intelligent and informative presentations.
·
Competitive Workforce Development. A significant portion of the compensation we pay to our sales staff is commission based. We believe that commission-based compensation provides incentive for our salespersons to expend their greatest efforts to sell our products and services. Since their compensation is directly related to our sales, our ability to hire successful salespersons is conditioned upon their belief that our dealerships will generate significant traffic necessary to maximize sales opportunities.
·
E-Commerce and Mail Order Opportunities. We have developed e-commerce and mail order strategies for the sales of parts and accessories that are expected to expand our customer base outside of our dealership territories. We believe that the expansion of our business, over the Internet and through mail order business, will assist us in the development of a national presence and create customer interest to visit one of our stores, as well as create additional opportunities for strategic business relationships with dealerships outside of the territories where our dealerships are located.
Our Products
We specialize in developing and marketing products and services for off-road enthusiasts. We conduct our business primarily at our facilities in San Diego, California. We believe that the ratio of online transactions to our total transactions will continue to increase as the Internet population grows
We offer the following products and services to our customers:
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Buggy sales;
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Scooters sales
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Atv sales
·
Utv sales
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Buggy repair;
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Turbo kits;
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Suspension work kits;
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All related services
In addition to product sales, we also provide servicing and repair services for the products we sell as a courtesy to our customers, and third-party products as well. These services, which are provided by mechanics, include crash repairs (body work) and normal wear and tear installation and repairs such as brake replacement, repair of exhaust systems, shock absorber replacement, battery replacement, oil changes and tune-ups. We do not have any plans to increase this part of our business, in the future, as we do not believe that servicing and repairs offers any opportunity for producing significant income for our business.
Sales and Marketing
We plan to attend and present at industry tradeshows and also intend to market our products through television, radio, print and outdoor advertising. Advertising costs will be funded primarily through cooperative advertising programs established by the manufacturers of the products. Under these programs, most dealers have access to certain capital per unit sold during the previous year. It is our strategy to acquire and use the maximum amount of advertising funds available to us.
Since our online store has been operated only since 2006, we currently do not have strong brand identity or brand loyalty. We believe that establishing and maintaining brand identity and brand loyalty is critical to attracting customers to our online store and developing additional relationships with suppliers and securing contracts to directly ship our products. In order to attract customers to our online store and respond to competitive pressures, we may be forced to spend substantial funds to create and maintain brand recognition among consumers and suppliers. We believe that advertising rates and the cost of our advertising campaigns in particular, could increase substantially in the future. If our branding efforts are not successful, our ability to earn revenues and sustain our operations will be harmed.
Promotion and enhancement of our online store will also depend on our success in consistently providing high-quality products to our customers. Since we rely on suppliers to directly ship products purchased to our customers, if our suppliers do not ship quickly, or if our consumers do not perceive the products we offer as superior, the value of the our San West brand could be harmed. Any brand impairment or dilution could decrease the attractiveness of San West to one or more of these groups, which could harm our business, results of operations and financial condition.
Supplier Relationships
We have cultivated and maintained good relationships with our scooters, atv’s, utv’s,kart and accessory suppliers. We have a team of employees dedicated to enhancing our relationship with existing suppliers and develop relationships with prospective suppliers.
Competition
The recreational vehicle retailing industry is highly competitive with respect to price, service, location and selection. There are an estimated 4,000 retail stores throughout the United States. We compete with numerous dealerships in each of our market segments, many of which are large and have significant financial and marketing resources. We also compete with private market buyers and sellers of used vehicle dealers that sell used karts and other power sports products, service center chains and independent shops for service and repair business. Some of these businesses are capable of operating on smaller gross margins than those on which we are capable of operating because they have lower overhead and sales costs.
In many states, dealerships have an exclusive 5-mile to 12-mile franchised territory, similar to automobile dealerships. While franchised territories can sometimes restrict market entry and subsequently market penetration; franchise restrictions can likewise provide protection from over-saturation.
The principal competitive factors include size of customer base, customer loyalty, product breadth, availability of service, pricing and brand recognition.
We believe that the following competitive strengths enable us to compete effectively and to capitalize on the growth of the recreational vehicle market in the U.S. and distinguish us from our competitors:
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Exclusivity for Key Brands. In San Diego, California we have exclusive rights to sell certain key brands which limits direct competition to our core target consumer base.
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Excellent Service Infrastructure. We have the ability to service all makes and models including imports, which enables us to attract and expand our consumer service base and create potential for up-selling.
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Excellent Sales Force and Comprehensive Customer Service. We place significant emphasis on technology, personnel and training to facilitate consistently superior customer service and support, which we believe is critical to our long-term success.
Intellectual Property
Our intellectual property rights include trademarks and Internet domain names, discussed above, associated with the names “Buggy Nation” and copyright and other rights associated with our websites and other aspects of our business.
We regard our intellectual property as a factor contributing to our success going forward. We rely on trademark and copyright law, trade secret protection, noncompetition and confidentiality agreements with our employees to protect our intellectual property rights. We require our employees to keep confidential all information relating to our customers, methods, business and trade secrets during and after their employment with us.
In addition, we may depend on certain proprietary information such as sales data, strategies, customer lists, ideas, along with our management’s expertise in assessing potential investments, clients and marketing and other networking services, contracts and service agreements, and as such, our business depends on that proprietary information. We believe we adequately safeguard this information.
We use the brand name San West Inc. on our online stores. We do not own or license rights to the products we sell from our online store. As a result, the products we resell or our brand name may infringe on the intellectual property rights of others, and our assertions of intellectual property rights may not be enforceable or provide protection against competitive products or otherwise be commercially valuable. Moreover, enforcement of intellectual property rights typically requires time consuming and costly litigation. It is always possible that others will independently develop substantially similar products.
Government Regulation
Our business is subject to federal, state and local laws, ordinances and regulations which establish various health and environmental quality standards, and liability related thereto, and provide penalties for violations of those standards. Under certain laws and regulations, a current or previous owner or operator of real property may be liable for the costs of removal and remediation of hazardous or toxic substances or wastes on, under, in or emanating from such property. Such laws typically impose liability whether or not the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances or wastes. Certain laws, ordinances and regulations may impose liability on an owner or operator of real property where on-site contamination discharges into waters of the state, including groundwater. Under certain other laws, generators of hazardous or toxic substances or wastes that send such substances or wastes to disposal, recycling or treatment facilities may be liable for remediation of contamination at such facilities. Other laws, ordinances and regulations govern the generation, handling, storage, transportation and disposal of hazardous and toxic substances or wastes, the operation and removal of underground storage tanks, the discharge of pollutants into surface waters and sewers, emissions of certain potentially harmful substances into the air and employee health and safety.
Business operations subject to such laws, ordinances and regulations include the use, handling and contracting for recycling or disposal of hazardous or toxic substances or wastes, including environmentally sensitive materials such as motor oil, waste motor oil and filters, transmission fluid, antifreeze, refrigerants, waste paint and lacquer thinner, batteries, solvents, lubricants, degreasing agents, gasoline and diesel fuels. Our business is also subject to other laws, ordinances and regulations as the result of the past or present existence of underground storage tanks at our properties. Certain laws and regulations, including those governing air emissions and underground storage tanks, have been amended so as to require compliance with new or more stringent standards as of future dates. Compliance with new or more stringent laws or regulations, stricter interpretation of existing laws or the future discovery of environmental conditions may require additional expenditures on our part, some of which may be material.
Employees
As of the date of this report, we have seven employees, all of whom are employed at our Santee, California dealership. All of our employees were employed on a full-time basis including two executives, one salesperson, one administrative person, two service technicians and one clerical person. We are not a party to a collective bargaining agreement with our employees and we believe that our relationship with our employees is satisfactory.
We do not currently anticipate that we will hire any additional employees in the next six months. However, as our operations expand, we may need to employ additional persons. We do not feel that we would have any difficulty in locating needed help in Southern California.
From time-to-time, we anticipate that we will use the services of independent contractors and consultants to support our business development. We believe our future success depends in large part upon the continued service of our senior management personnel and our ability to attract and retain highly qualified managerial personnel.
ITEM 1A.
ITEM 1A.
RISK FACTORS
Not applicable.
ITEM 1B.
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2.
PROPERTIES
Our principal executive offices are located at 10350 Mission Gorge Road, Santee, California 92020, which is also the office and showroom for our San Diego dealership. We lease this facility. On August 12, 2008 we entered into a new lease for this facility, effective as of August 13, 2008 and continuing through July 31, 2013, at a rental rate of $13,500 per month.
ITEM 3.
ITEM 3.
LEGAL PROCEEDINGS
We are not engaged in any litigation, and we are unaware of any claims or complaints that could result in future litigation. We will seek to minimize disputes with our customers but recognize the inevitability of legal action in today’s business environment as an unfortunate price of conducting business.
ITEM 4.
ITEM 4.
(REMOVE AND RESERVED)
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock has been traded on the OTCBB since May 18, 1999 under the symbol “HBSC.OB.” Prior to that date, our common stock was not actively traded in the public market. Since October 2001, our common stock has also been traded on the Berlin Stock Exchange under the symbol “HYT.” Due to an 1 for 80 reverse split of the shares of the Human BioSystems Common Stock which occurred on March 4, 2009, our shares have traded under the symbol “HBSY.OB.” As a result of the Merger, our common stock has been traded on the OTCBB since September 28, 2009 under the symbol “SNWT.OB.”
The following table sets forth, taking into consideration the 1 for 80 reverse split of our common stock which occurred on March 4, 2009, and the five for one forward split of our common stock which occurred on November 2, 2009, the high and low bid prices for our common stock on the OTCBB as reported by various Bulletin Board market makers. The quotations do not reflect adjustments for retail mark-ups, mark-downs, or commissions and may not necessarily reflect actual transactions.
High
Low
Quarter Ended:
March 31, 2009 (1)
June 30, 2009
September 30, 2009
December 31, 2009 (2)
$0.02
$0.03
$0.24
$0.31
$0.02
$0.03
$0.14
$0.14
Quarter Ended:
March 31, 2010
June 30, 2010
September 30, 2010
December 31, 2010
$0.19
$0.09
$0.03
$0.03
$0.07
$0.03
$0.01
$0.01
_____________
(1)
This price takes into account the 1 for 80 reverse split which occurred on March 4, 2009.
(2)
This price takes into account the five for one forward split which occurred on November 2, 2009.
We currently have 221,202,859 shares of our common stock issued and outstanding, which are held of record and beneficially owned by 316 persons not including those shares held in “street name.”
Dividends
We have not paid or declared any dividends on our common stock or preferred. We do not anticipate paying any cash dividends or other distributions on our common stock or preferred in the foreseeable future. Any future dividends are declared at the discretion of our board of directors and will depend, among other things, on our earnings, if any, our financial requirements for future operations and growth, and other facts as our board of directors may then deem appropriate.
Before the Merger, San West was a privately-held company. It is now our wholly-owned subsidiary. Before the Merger, there was no public market for the securities of San West. We have never declared or paid any cash dividends on our capital stock.
Securities Authorized for Issuance under Equity Compensation Plans
On July 21, 2009, our board of directors adopted the 2009 San West Long Term Equity Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for equity incentive benefits to awardees in the form of option rights or appreciation rights, restricted stock, restricted stock units, and/or performance shares or performance units. The total number of shares of our common stock which may be awarded under the Stock Incentive Plan is 50,000,000. If any awarded shares are forfeited, they become available for future issuance. An annual aggregate limit of 5,000,000 shares is set for any participant. The terms of each award are determined by the board and are to be evidenced in writing. No equity awards have been issued under the Stock Incentive Plan as of the date of this report.
Recent Sales of Unregistered Securities
Set forth below is information regarding shares of common stock issued and options and warrants and other convertible securities granted by us during the year ended December 31, 2010, and not previously disclosed in our quarterly reports on Form 10-Q for the respective quarterly periods ended March 31, June 30 and September 30, 2010. Also included is the consideration, if any, received by us for such shares, options and warrants, and information relating to the section of the Securities Act, or the rule of the Securities and Exchange Commission, under which an exemption from registration was claimed.
During the fiscal quarter ended December 31, 2010, San West issued 19,537,427 shares of its common stock in private transactions not involving a public offering, as follows:
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1,042,000 PUT shares were issued to Dutchess pursuant to the Investment Agreement in exchange for $11,301 of which $2,000 was applied to the outstanding debt and $9,301 returned to the Company.
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750,000 shares were issued in exchange for services valued at $7,013.
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11,795,427 shares were issued in exchange for the conversion of debt principle and accrued interest of $58,977.
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5,950,000 shares were issued for services performed in prior quarters valued at $342,868.
During the fiscal quarter ended December 31, 2010, San West issued 77,100 shares of its preferred stock in private transactions not involving a public offering (See Series A Preferred Stock Designation filed as exhibit 41 to the Registrant’s Current Report on Form 8-K filed on September 13, 2010).
All funds received from the sale of our shares were used for working capital purposes.
All shares bear a legend restricting their disposition.
The shares were issued in reliance upon an exemption from registration pursuant to Section 4(2) of the Securities Act or Rule 506 of Regulation D promulgated under the Securities Act. Each investor took his securities for investment purposes without a view to distribution and had access to information concerning us and our business prospects, as required by the Securities Act. In addition, there was no general solicitation or advertising for the purchase of our shares. Our securities were sold only to an accredited investor, as defined in the Securities Act with whom we had a direct personal preexisting relationship, and after a thorough discussion. Finally, our stock transfer agent has been instructed not to transfer any of such shares, unless such shares are registered for resale or there is an exemption with respect to their transfer.
Each purchaser was provided with access to our filings with the SEC, including the following:
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Our annual report to stockholders for the most recent fiscal year, the definitive proxy statement filed in connection with that annual report, and, if requested by the purchaser in writing, a copy of our most recent Form 10-K under the Exchange Act.
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The information contained in an annual report on Form 10-K under the Exchange Act.
·
The information contained in any reports or documents required to be filed by San West under sections 13(a), 14(a), 14(c), and 15(d) of the Exchange Act since the distribution or filing of the reports specified above.
·
A brief description of the securities being offered, the use of the proceeds from the offering, and any material changes in San West’ affairs that are not disclosed in the documents furnished.
ITEM 6.
ITEM 6.
SELECTED FINANCIAL DATA
Not applicable.
ITEM 7.
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion reflects our plan of operation. This discussion should be read in conjunction with the financial statements, which are attached to this report. This discussion contains forward-looking statements, including statements regarding our expected financial position, business and financing plans. These statements involve risks and uncertainties. Our actual results could differ materially from the results described in or implied by these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this report, particularly under the headings “Special Note Regarding Forward-Looking Statements” and “Risk Factors.”
Since the business previously operated by Human BioSystems no longer has any relevance, the discussion which follows relates primarily to our wholly-owned subsidiary, San West, Inc., following the Merger which closed on June 5, 2009. See “Business.”
Overview
Our goal is to become one of the largest dealers of off-road buggies in the United States through acquisitions and internal growth. We sell and serivice off-road buggies and related after market performance products and accessories. Our products are sold both at our store and online while our buggy repair services are sold and fulfilled at our store. Our goal is to address the growing demand for off-road vehicles while offering our customers the highest quality products at the most affordable and competitive prices, following up with customer care and support services.
Our plan of growth is to capitalize on the growth of the U.S. market for Chinese made off-road buggies and go karts, as well as to establish master dealer arrangements with leading brands, continue to expand our online sales and to leverage our equity to negotiate and acquire synergistic businesses.
The motorsports industry is highly fragmented with an estimated 4,000 retail stores throughout the United States. We are attempting to capitalize upon the consolidation opportunities available and increase our revenues and income by acquiring additional dealers and improving our performance and profitability.
We plan to maximize the operating and financial performance of our dealerships by achieving certain efficiencies that will enhance internal growth and profitability. By consolidating our corporate and administrative functions, we believe we can reduce overall expenses, simplify dealership management and create economies of scale.
We will specifically target dealers in markets with strong buyer demographics that, due to under-management or under-capitalization, are unable to realize their market share potential and can benefit substantially from our systems and operating strategy.
Buggy World, located in Santee, California, is our primary location to sell buggies, modification parts, and accessories for off-road buggies built in China for the U.S. market. We currently utilize a “just-in-time” inventory system which reduces our overall inventory expense and risk. We ship all requested kits and products within 72 hours of each order.
Critical Accounting Policies
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions and estimates that affect the amounts reported. Note A of Notes to Financial Statements describes the significant accounting policies used in the preparation of the financial statements. Certain of these significant accounting policies are considered to be critical accounting policies, as defined below.
A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes:
·
We are required to make assumptions about matters that are highly uncertain at the time of the estimate; and
·
Different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.
Estimates and assumptions about future events and their effects cannot be determined with certainty. We base our estimates on historical experience and on various other assumptions believed to be applicable and reasonable under the circumstances. These estimates may change as new events occur, as additional information is obtained and as our operating environment changes. These changes have historically been minor and have been included in the consolidated financial statements as soon as they became known. Based on a critical assessment of our accounting policies and the underlying judgments and uncertainties affecting the application of those policies, management believes that our financial statements are fairly stated in accordance with accounting principles generally accepted in the United States, and present a meaningful presentation of our financial condition and results of operations.
In preparing our financial statements to conform to accounting principles generally accepted in the United States, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. These estimates include useful lives for fixed assets for depreciation calculations and assumptions for valuing options and warrants. Actual results could differ from these estimates.
Revenue Recognition
Revenue from the sale of inventory is recognized when the earning process is complete and when title has transferred to the customer, which is considered to have occurred after delivery.
Stock-Based Compensation
The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement or the date of issuance whichever is most relevant. We use the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees. In calculating this fair value, there are certain assumptions that we use consisting of the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.
Inventories
Inventory is valued at the lower of cost or market. Cost is determined on afirst-in-first-out basis. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value. San West’s inventory consists primarily of vehicle parts and complete vehicles.
Intangible Assets
Goodwill and other intangible assets with indefinite useful lives are no longer amortized, but are evaluated for impairment annually, or immediately if conditions indicate that impairment could exist. The evaluation requires a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss. Both steps of the goodwill impairment testing involve significant estimates.
Results of Operations
Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 for San West, Inc.
Revenues. During the year ended December 31, 2010, we generated revenue of $2,728,937 or $1,681,763 more than revenue of $1,047,174 generated during the year ended December 31, 2009 representing a 160.6% year-over-year increase. The increase in sales is due mainly to the expansion of our product line to include scooters, atv’s, utv’s and off-road buggies sold through www.countyimports.com whereby the Company acts as dealer and fulfillment house since September 2009.
Cost of Goods Sold (“COGS”). During the year ended December 31, 2010, we generated COGS of $2,090,355 or $1,301,158 more than COGS of $789,197 generated during the year ended December 31, 2009. The increase in COGS is due to the increase in sales. Our gross margin decreased 1.2% to 23.4% for the year ended December 31, 2010 compared to 24.6% for 2009.
Selling, General and Administrative Expenses. Total selling, general and administrative expenses in the year ended December 31, 2010 were 2,060,749 an increase of $685,563 from $1,375,186 for the year ended December 31, 2009. The increase was due primarily to a $344,931 increase in non-cash stock compensation expense, $117,227 increase in marketing and advertising expense, $193,531 increase in professional fees, $146,925 increase in sales commissions offset by $117,054 decrease in personnel, insurance and other general operating costs.
Other Income and Expense. Other expense increased $852,573 from income of $511,425 during the year ended December 31, 2009 to expense of $341,148 during the year ended December 31, 2010. The increase is mainly due to the recognition of a $298,519 beneficial conversion feature for various convertible notes in 2010 with no such expense recognized in 2009. Also during 2009 the Company recognized a $625,976 gain on the forgiveness of debt and a $65,960 loss on the disposal of assets originally assumed from Human BioSystems compared to a $13,000 gain and no loss recognized during 2010. Interest expense increased $3,492 to $52,308 during 2010 compared to $48,816 during 2009.
Net Loss. As a result of the foregoing, our net loss increased to $1,763,315 for the year ended December 31, 2010, from a net loss of $605,784 for the year ended December 31, 2009.
Financial Condition
From inception to December 31, 2010, we have incurred an accumulated deficit of $2,869,827. This loss has been incurred through a combination of professional fees and expenses supporting our plans to acquire synergistic businesses as well as past operating losses.
Our primary source of liquidity has been cash generated by operations, issuance of promissory notes and capital raised through equity sales of our common stock. During the year ended December 31, 2010 we had cash on hand of $11,566 and experienced a net decrease in cash of $39,093 compared to cash on hand of $50,659 at December 31, 2009.
As of December 31, 2010, we had outstanding liabilities of $1,875,050. Of this amount, approximately $1,364,820 is payable within 12 months. In the event that we are unable to repay all or any portion of these outstanding amounts from cash from operations, we would be required to:
·
Seek one or more extensions for the payment of such amounts;
·
Refinance such debt to the extent available; Raise additional equity capital; or
·
Consummate any combination of the foregoing transactions.
Our available working capital and capital requirements will depend upon numerous factors, including product sales, the timing and cost of expanding into new markets, the status of our competitors, and our ability to attract and retain key employees.
Inventory Management
We believe that successful inventory management is the most important factor in determining our profitability. In the recreational vehicle business, and particularly as it relates to the sale of motorcycles, there is normally a limited timeframe for the sale of current year models. For example, if we are unable to sell a significant portion of our 2010 models before the 2011 models are released, it could be very difficult for us to sell our remaining inventory of 2010 models. Therefore, our goal is to limit sales of carryover products (i.e., products that remain in inventory after the release of new models) to no more than 10 percent of our total sales each year. This is accomplished by making all of our purchasing decisions based on sales information for the prior year and then utilizing aggressive sales and marketing techniques during the early part of a model year in order to assure the timely sale of our products.
The Company’s Liquidity Plan
Recent operating results give rise to concerns about the Company's ability to generate cash flow from operations sufficient to sustain ongoing viability. Net loss for the year ended December 31, 2010 was $1,685,866, while cash used for operations was $436,526.
During the year ended December 31, 2010, San West:
·
The Company issued 5,275,000 shares of common stock at prices ranging from $0.005 to $0.035 per share with a weighted average price of $0.0084 per share for proceeds of $44,500;
·
The Company issued 5,000,000 shares to Jesse Gonzales for director services valued on the date of issuance at $552,925;
·
The Company issued 6,000,000 shares of common stock for services valued on the date of issuance at $202,951;
·
The Company PUT 2,167,000 shares of common stock to Dutchess in exchange for $37,852 of which the Company received $17,989 and $19,863 was applied to reduce our debt due to Dutchess;
·
The Company issued 2,093,145 to Dutchess as a finder’s fee related to the Investment Agreement and recorded stock compensation expense of $75,353;
·
The Company issued 44,369,871 upon the conversion of $503,660 of debt;
·
The company issued 77,100 shares of Series A Preferred stock in exchange for $77,100;
·
The Company received $296,500 and repaid $38,656 of various promissory notes.
During the year ended December 31, 2009, San West:
·
Received gross proceeds of $798,500 in exchange for 33,017,959 shares of common stock of which $67,500 or 964,286 shares were unissued as of December 31, 2009;
·
Received services valued at $434,965 in exchange for 9,480,000 shares of common stock;
·
Received $60,944 upon the transfer of 6,146,270 shares from the existing outstanding shares of Harry Masuda, our former Chief Executive Officer, net of finder’s fees of $31,257;
·
Converted $368,000 of our Dutchess Notes and issued 15,950,000 shares of common stock; and
·
Canceled 39,520,735 founders’ shares in exchange for a $100,000 promissory note.
·
During the year ended December 31, 2009, the Company issued 833,333 shares of common stock as an inducement to invest from one of our shareholders.
In its report prepared in connection with our 2010 financial statements, our independent registered public accountants have included an explanatory paragraph that the Company has suffered recurring losses and current liabilities exceed current assets which raises substantial doubt about its ability to continue as a going concern.
Management is currently in the process of seeking additional equity financing with potential investors. There can be no assurance that such additional financing will be obtained. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company's need to raise additional equity or debt financing and the Company's ability to generate cash flow from operations will depend on its future performance and the Company's ability to successfully implement business and growth strategies. The Company's performance will also be affected by prevailing economic conditions. Many of these factors are beyond the Company's control. If future cash flows and capital resources are insufficient to meet the Company's commitments, the Company may be forced to reduce or delay activities and capital expenditures or obtain additional equity capital. In the event that the Company is unable to do so, the Company may be left without sufficient liquidity.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We conduct all of our transactions, including those with foreign suppliers and customers, in U.S. dollars. We are therefore not directly subject to the risks of foreign currency fluctuations and do not hedge or otherwise deal in currency instruments in an attempt to minimize such risks. Demand from foreign customers and the ability or willingness of foreign suppliers to perform their obligations to us may be affected by the relative change in value of such customer or supplier’s domestic currency to the value of the U.S. dollar. Furthermore, changes in the relative value of the U.S. dollar may change the price of our products relative to the prices of our foreign competitors.
Effects of Changes in Fuel Costs
Fuel prices rose significantly during the first half of 2008, reaching an all-time high in July 2008, and then fell significantly during the third quarter as a result of a significant reduction in demand caused by a severe weakening of the global economy. Increases in the price of gasoline to over $4.00 per gallon, during the first half of 2008, resulted in a reduction in demand for oil in the second half of 2008. This reduction in demand has continued, to a slightly lesser degree, during 2009 -2010 due to the overall weak global economy and has resulted in a reduction of gas prices to below $3.00 per gallon for the past two years. However, based on current improving economic forecasts and social unrest in the middle-east, we believe that it is reasonable to assume that there will continue to be a strengthening of demand for oil throughout 2011, notwithstanding the higher price of oil. To the extent that gas prices continue to climb to levels in excess of approximately $3.50 per gallon for an extended period of time or rise even further, it is possible that consumers will feel that they have less discretionary income to spend on off-road buggies and other powersports equipment, which may be considered more for entertainment and not essential. Notwithstanding these higher prices, there is no assurance that such higher gas prices will provide potential customers with less disposable income as a result of the overall improvement in the economy.
Effects of Increase in Unemployment
The rate of unemployment in the United States has reached historically high levels with some improvement to 8.9% from over 9.5% during most of 2010. In addition to all of the other current economic factors potentially contributing to downward pressure on sales, it seems likely that a continued high unemployment rate will have a negative impact on sales.
Overall impact on our Future Earnings
We intend to continue to evaluate and analyze our business decisions through effective inventory management. As described in the preceding paragraphs, the health of the U.S. economy, particularly the availability of credit and the discretionary spending power of potential customers, all will have an impact on our future earnings. We believe that we may be able to counter a portion of the reduction in sales by focusing more on sales of used off-road buggies which have smaller ticket prices than new off-road buggies and provide us with profit margins that can be between 30 percent and 40 percent greater than sales of new off-road buggies. Additionally, although our revenue per unit may be less, it appears that we have been able to maintain greater sales levels of smaller off-road buggies which even when sold new sell at prices significantly less than the larger models. While we are hoping that this strategy will help to increase our sales through 2011, until the credit markets are hopefully revived, there is no assurance that we will be successful. Furthermore, in the event that we are able to successfully integrate additional dealerships and/or new brands into our existing business, we believe that this could result in greater sales margins and an even greater increase in earnings. These greater sales margins would be created by the consolidation of expenses through the implementation of our superstore business plan, resulting in greater earnings per unit sold. While it is management's intent to pursue the goals described herein, we are uncertain that these goals will be achieved at any level.
Seasonality
Our products are subject to seasonality. Traditionally, the atv’s, utv’s and off-road buggy season begins in early September and runs until May. Scooter sales in the colder regions are March though Mid August.
Impact of Inflation
General inflation in the economy has driven the operating expenses of many businesses higher, and, accordingly we have experienced higher prices for supplies, goods and services. We continuously seek methods of reducing costs and streamlining operations while maximizing efficiency through improved internal operating procedures and controls. While we are subject to inflation as described above, our management believes that inflation currently does not have a material effect on our operating results. However, inflation may become a factor in the future.
ITEM 8.
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this Item is submitted as a separate section of this Form 10-K. See REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS AND NOTES, Page 24.
ITEM 9.
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A.
CONTROLS AND PROCEDURES
See Item 9A(T) below.
ITEM 9A(T).
CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of December 31, 2010, under the direction of the Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13a - 15(e) under the Securities Exchange Act of 1934, as amended. Based on the evaluation of these controls and procedures required by paragraph (b) of Sec. 240.13a-15 or 240.15d-15 the disclosure controls and procedures have been found to be ineffective to provide reasonable assurance that information we are required to disclose in our reports under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to our management, including our manager's CEO and CFO, as appropriate to allow timely decisions regarding required disclosure due to the material weakness in our internal control over financial reporting as described below.
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis. We identified the following material weakness in our assessment of the effectiveness of internal control over financial reporting:
The Company maintains a set of disclosure controls and procedures designed to ensure that information required to be disclosed by us in our reports filed under the securities Exchange Act, is recorded, processed, summarized, and reported within the time periods specified by the SEC’s rules and forms. Disclosure controls are also designed with the objective of ensuring that this information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Evaluation of Internal Control Over Financial Reporting
Management conducted an evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2010. In making this assessment, management used the criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO. The COSO framework summarizes each of the components of a company's internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. In management's assessment of the effectiveness of internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) as required by Exchange Act Rule 13a-15(c), our management concluded as of the end of the fiscal year covered by this Annual Report on Form 10-K, that we did not maintain effective internal control over financial reporting due to the weakness described below.
A material weakness in the Company’s internal control over financial reporting exists in that there is limited segregation of duties amongst the Company’s employees with respect to the Company’s preparation and review of the Company’s financial statements. This material weakness is a result of the Company’s limited number of employees. This material weakness may affect management’s ability to effectively review and analyze elements of the financial statement closing process and prepare financial statements in accordance with U.S. GAAP.
We did not have adequate segregation of duties, due to our resources and size which prevent us from being able to employ sufficient resources to enable us to have adequate segregation of duties within our internal control system.
We did not design and implement adequate controls related to the accounting of our merger with Human BioSystems. Specifically, applying guidance from ASC 805-40, Business Combinations, Reverse Acquisitions we originally accounted for the merger under purchase accounting when recapitalization accounting was more appropriate. This material weakness has resulted in the required restatement of previously issued financial statements for the year ended December 31, 2009 as described in the notes to our financial statements; Note N, Merger and Note O, 2009 Restatement.
We did not design and implement adequate controls related to the accounting for the issuance of stock and the inclusion of beneficial conversion features associated with our convertible promissory notes as described in the footnotes to our financial statements; Note P, 2010 Accounting Error Adjustments.
Plan of Remediation
To remediate the aforementioned material accounting weaknesses, we are implementing additional controls to help ensure that all accounting pronouncements are sufficiently researched and that our conclusions relative to the effect of such pronouncements on us are communicated to management and our auditors. Regarding the lack of segregation of duties, if the volume of business increases and sufficient capital is secured, it is the Company's intention to further increase staffing to mitigate the current lack of segregation of duties within the general, administrative and financial functions.
This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit us to provide only management’s report in this prospectus.
Changes in Internal Controls
Management of the Company has evaluated, with the participation of the Chief Executive Officer of the Company, any change in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the fiscal year ended December 31, 2010. There was no change in the Company’s internal control over financial reporting identified in that evaluation that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting, other than what has been reported above.
Limitations on the Effectiveness of Controls and Other Matters
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). Internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls may be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, a control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
Risk Factor Related to Controls and Procedures
The Company has limited segregation of duties amongst its employees with respect to the Company’s preparation and review of the Company’s financial statements due to the limited number of employees, which is a material weakness in internal controls, and if the Company fails to maintain an effective system of internal controls, it may not be able to accurately report its financial results or prevent fraud. As a result, current and potential stockholders could lose confidence in the Company’s financial reporting which could harm the trading price of the Company’s stock.
Management has found it necessary to limit the Company’s administrative staffing in order to conserve cash until the Company’s level of business activity increases. As a result, there is limited segregation of duties amongst the employees. The Company and its independent public accounting firm have identified this as a material weakness in the Company’s internal controls. The Company intends to remedy this material weakness by hiring additional employees and reallocating duties, including responsibilities for financial reporting, among the employees as soon as there are sufficient resources available. However, until such time, this material weakness will continue to exist.
ITEM 9B.
ITEM 9B.
OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10.
DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
In compliance with Section 16(a) of the Exchange Act as of December 31, 2010, our executive officers, directors and key employees, their positions and their ages are as follows:
Our directors and executive officers are:
Name
Age
Position(s)
Position(s) Held Since
Frank J. Drechsler
Chief Executive Officer Chief Financial Officer, Principle Accounting Officer, Secretary and Chairman of the Board
Jesse Gonzalesp
Board Member
Vlad Cood
Board Member
The members of our board of directors are subject to change from time to time by the vote of the stockholders at special or annual meetings to elect directors. The number of the directors may be fixed from time to time by resolution duly passed by our board. Our board has fixed the number of our directors at two.
Each director will hold office for the term for which elected and until his successor is elected and qualified or until his earlier death, resignation or removal. Vacancies and newly created directorships resulting from any increase in the number of authorized directors may generally be filled by a majority of the directors then remaining in office. The directors elect officers annually. There are no family relationships among our directors and officers.
We may employ additional management personnel, as our board of directors deems necessary. We have not identified or reached an agreement or understanding with any other individuals to serve in management positions, but do not anticipate any problem in employing qualified staff.
A description of the business experience during the past several years for our directors and executive officer is set forth below.
Frank J. Drechsler has been our Chief Executive Officer and Chairman since our inception. As of May 10, 2010, with the resignation of Bryan Britton, former Chief Financial Officer, Mr. Drechsler also serves as Chief Financial Officer and Secretary. Since 2002, Mr. Drechsler has been an officer and director of Krinner USA, Inc., a privately-held Nevada corporation ("Krinner") which markets and sells Christmas tree stands designed in Germany. Mr. Drechsler also works as a sales agent for Krinner but receives no compensation from Krinner when its products are sold on our online store. Since July 2001, Mr. Drechsler has also been the President, Secretary and a Director of Finger Tip Drive, Inc., a Nevada corporation, which provides online computer data storage services. From October 1998 to May 2001, Mr. Drechsler was the President and a Director of Pacific Trading Post, Inc., a Nevada corporation, which marketed and sold products on the Internet within the outdoor sports industries, specifically in the areas of skate, surf and snow. In January 1998, Mr. Drechsler co-founded and developed the business model for skatesurfsnow.com, where he was responsible for the day-to-day operations. During 1997, Mr. Drechsler was self-employed as a consultant and helped start-up companies develop sales and marketing programs. From 1995 to December 1996, Mr. Drechsler was the international sales manager for Select Distribution.
Mr. Drechsler graduated from California State University, Fullerton in 1992 with a Bachelor of Science degree in International Business . Mr. Drechsler was previously an officer and director of Zowcom, Inc. a Nevada corporation, JPAL, Inc., a Nevada corporation, and Expressions Graphics, Inc., a Nevada corporation, all of which are reporting companies. Mr. Drechsler is not an officer or director of any other reporting company.
Jesse Gonzales graduated from Embry Riddle University with a Major in Professional Aeronautics and Minor in Airport Management. Mr. Gonzales’ was employed by the Federal Aviation Administration and the US Navy as an Air Traffic Controller. Mr. Gonzales began in the burgeoning industry of ecommerce in 1999 while still employed with the FAA specializing in the niche of high-profit, fast-selling products through online sources such as eBay.
Using the “import” and “drop ship” business model for online resellers, his company focused on affordable imported tools. As eBay and other online departments grew, so did Mr. Gonzales’ dealer network. In 2004, Mr. Gonzales became National Sales Manager at Patriot Motorcorp, a publicly traded company specializing in motorsports. Applying his business model in the motorsports industry, Mr. Gonzales was at the forefront of the growth in online distribution of affordable family motorsports via the new Chinese motorsports import market which has expanded significantly since 2004.
Vladimir Robert Cood immigrated to the US from Kiev in 1974. Since that time he has been an active member of many distinguished organizations throughout his schooling and successful career. Mr. Cood earned a Bachelor’s of Science Degree in Industrial And Systems Engineering from San Jose State University. Mr. Cood has built and run multiple multi-million dollar businesses in the multimedia sector, at times managing 300+ employees. With a focus on entertainment, music and dance, Mr. Cood has built a reputation in the San Francisco area as an influential businessman and cornerstone in the multimedia industry. Mr. Cood currently owns and runs multiple nightclubs and restaurants in the San Francisco area in addition to overseeing entertainment partnerships at his, and many other, venues.
Bryan Britton, our former Chief Financial Officer since June 2009 resigned on May 10, 2010 to pursue other interests. Mr. Britton co-founded LGR with our Chief Executive Officer, Frank J. Drechsler, on August 12, 2008. Between August 2004 and June 2007, Mr. Britton worked to develop aftermarket turbo kits, king shocks and other high performance accessories for the recreational vehicle market. In August 2004, Mr. Britton founded Letz Go Racing Off-Road Center in Lake Havasu City, Arizona, strictly importing off-road mini buggies, and managing operations. In June 1980, Mr. Britton founded Britton's Unique Auto Service, Inc., d.b.a. Britton's Automotive Group in Huntington Beach, California. Mr. Britton graduated with a master degree in all phases of automotive, service, repair and diagnosis from the Arizona Automotive Institute in Glendale, Arizona in 1979. He also holds a master ASE certification..
Section 16(a) Beneficial Ownership Reporting Compliance
Compliance with Section 16 of the Exchange Act
Section 16(a) of the Exchange Act requires our officers and directors, and persons who own more than ten percent of a class of our capital stock, to file reports of ownership and changes in their ownership with the Securities and Exchange Commission. These persons are required to furnish us with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms received by us, to our knowledge, no person has failed to timely file a Section 16(a) form during the year ended December 31, 2010.
Other Matters
We have not yet drafted and adopted a Code of Ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or person performing similar functions. We intend to do so once we reach and maintain greater financial stability.
ITEM 11.
ITEM 11.
EXECUTIVE COMPENSATION
The following table sets forth, for the last three fiscal years, the compensation earned for services rendered in all capacities by our Chief Executive Officer, Chief Financial Officer and the other highest-paid executive officers serving as such at the end of 2010 whose compensation for that fiscal year was in excess of $100,000. The individuals named in the table will be hereinafter referred to as the “Named Officers.” No other executive officer of San West, Inc. received compensation in excess of $100,000 during fiscal year 2010.
Name and Principal Position
Year
Salary ($)
Bonus ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation ($)
All Other Compensation ($)
Total ($)
Harry Masuda (1)
90,000
3,200
93,200
Harry Masuda (1)
Frank J. Drechsler (2)
Frank J. Drechsler (2)
Bryan Britton (2)
130,000
130,000
Bryan Britton (2)
38,000
38,000
(1)
Our former Chief Executive Officer. The other compensation for Mr. Masuda represents corporate office allowance of $800 per quarter for use of his home and facilities for 2008. As a result of the Merger in 2009, Mr. Masuda was replaced as our Chief Executive Officer.
(2)
Mr. Drechsler became our Chief Executive Officer as a result of the Merger. Mr. Drechsler became our Chief Financial Officer and Principle Accounting Officer as a result of the resignation of Bryan Britton during 2010.
(3)
Mr. Britton became our Chief Financial Officer as a result of the Merger in 2009. Mr. Britton resigned from San West, Inc. effective_May 10, 2010.
Outstanding Equity Awards at Fiscal Year-End
The following table provides information for each of our named executive officers as of the end of our last completed fiscal year, December 31, 2010:
Option Awards
Stock Awards
Name
Number of Securities Underlying Unexercised Options (#) Exercisable
Number of Securities Underlying Unexercised Options (#) Unexercisable
Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)
Option Exercise Price ($)
Option Expiration Date
Number of Shares or Units of Stock That Have Not Vested
Market Value of Shares or Units of Stock That Have Not Vested
Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested
Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
H. Masuda (1)
F. Drechsler (2)
B. Britton (3)
(1)
Our former Chief Executive Officer. As a result of the Merger in 2009, Mr. Masuda was replaced as our Chief Executive Officer.
(2)
Mr. Drechsler became our Chief Executive Officer as a result of the Merger in 2009. Mr. Drechsler became our Chief Financial Officer and Principle Accounting Officer as a result of the resignation of Bryan Britton during 2010.
(3)
Mr. Britton became our Chief Financial Officer as a result of the Merger in 2009. Mr. Britton resigned from San West, Inc. effective May 10, 2010.
Director Compensation
The following table provides concerning the compensation of our directors as of the end of our last completed fiscal year, December 31, 2010:
Name
Fees Earned or Paid in Cash ($)
Stock Awards ($)
Option Awards ($)
Non-Equity Incentive Plan Compensation ($)
Nonqualified Deferred Compensation Earnings
($)
All Other Compensation ($)
Total ($)
Frank J. Drechsler (1)
Bryan Britton (2)
Jesse Gonzales
Vladimir Cood
(1)
Mr. Drechsler became our Chief Executive Officer as a result of the Merger in 2009. Mr. Drechsler became our Chief Financial Officer and Principle Accounting Officer as a result of the resignation of Bryan Britton during 2010.
(2)
Mr. Britton became our Chief Financial Officer as a result of the Merger in 2009. Mr. Britton resigned from San West, Inc. effective May 10, 2010.
Employment Agreements
As of the date of this report, we do not have any employment agreements with our employees.
Director Compensation
Our directors do not receive compensation for their services as directors.
ITEM 12.
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
As of December 31, 2010, we have authorized 300,000,000 shares of common stock, no par value, of which 192,742,859 shares were issued and outstanding and 10,000,000 shares of preferred stock, no par value, of which 77,100 shares are issued and outstanding. The following table sets forth certain information regarding beneficial ownership of our common stock as of December 31, 2010, by (i) each person known by us to be the beneficial ownership of more than 5 percent of the outstanding common stock, (ii) each director, (iii) each executive officer, and (iv) all executive officers and directors as a group. The number of shares beneficially owned is determined under the rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under those rules, beneficial ownership includes any shares as to which the individual has sole or shared voting power or investment power and also any shares which the individual has the right to acquire within 60 days of the date hereof, through the exercise or conversion of any stock option, convertible security, warrant or other right. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. Including those shares in the tables does not, however, constitute an admission that the named stockholder is a direct or indirect beneficial owner of those shares. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power (or shares that power with that person's spouse) with respect to all shares of capital stock listed as owned by that person or entity.
(1)
Unless otherwise indicated, the address for each of these stockholders is c/o San West, Inc., 10350 Mission Gorge Road, Santee, California 92069. Also, unless otherwise indicated, each person named in the table above has the sole voting and investment power with respect to his shares of our common stock beneficially owned.
(2)
Beneficial ownership is determined in accordance with the rules of the SEC. For purposes of calculating the percentage beneficially owned, the number of shares of our common stock deemed outstanding is 200,988,848 as of December 31, 2010 and includes $192,742,859 shares of common stock and 8,245,989 shares of common stock that would result from the conversion of preferred stock.
(3)
Including 24,091,036 shares of common stock underlying convertible debt.
(4)
Including 21,624,501 shares of common stock underlying convertible debt.
As indicated in the table above, our executive officers and directors beneficially own, in the aggregate, 14.93 percent of our outstanding common stock. As a result, these stockholders may, as a practical matter, be able to influence all matters requiring stockholder approval including the election of directors, merger or consolidation and the sale of all or substantially all of our assets. This concentration of ownership may delay, deter or prevent acts that would result in a change of control, which in turn could reduce the market price of our common stock.
Other than as stated herein, there are no arrangements or understandings, known to us, including any pledge by any person of our securities:
·
The operation of which may at a subsequent date result in a change in control of San West; or
·
With respect to the election of directors or other matters.
ITEM 13.
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
During the year ended December 31, 2010 and 2009, Frank Drechsler, CEO, loaned $0 and $80,000, respectively.
ITEM 14.
ITEM 14.
PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table shows the aggregate fees billed to us for professional services by L.L. Bradford & Company, LLC, our independent auditors, for the years ended December 31, 2010 and 2009.
Audit Fees
$ 45,860
$ 35,253
Audit-Related Fees*
2,655
-
Tax Fees
-
4,500
Other Fees -
-
Total
$ 48,515
$ 39,753
Audit Fees. This category includes the aggregate fee billed for professional services rendered for the audits of our consolidated financial statements for the years ended December 31, 2010 and 2009, for the reviews of the financial statements included in our quarterly reports on Form 10-Q during 2010 and 2009, and for other services that are normally provided by the independent auditors in connection with statutory and regulatory filings or engagements for the relevant fiscal years.
Audit-Related Fees. This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent auditors that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under “Audit Fees,” and generally consist of fees for other engagements under professional auditing standards, accounting and reporting consultations, internal control-related matters, and audits of employee benefit plans.
Tax Fees. This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice. Of these amounts, $4,500 was related to tax compliance services for review of federal and state tax returns for both 2010 and 2009.
All Other Fees. This category includes the aggregate fees billed in each of the last two fiscal years for products and services provided by the independent auditors that are not reported above under “Audit Fees,” “Audit-Related Fees,” or “Tax Fees.”
In the past, our Board of Directors has reviewed and approved the fees to be paid to the auditors. Such fees have been based upon the complexity of the matters in question and the time incurred by the auditors. We believe that the fees negotiated in the past with the auditors were reasonable in the circumstances and would be comparable to fees charged by other auditors providing similar services.
ITEM 15.
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES.
Exhibit No.
Identification of Exhibit
2.1**
Plan and Agreement of Triangular Merger between Human BioSystems, Human BioSystems Acquisition Company, and San West, Inc. dated April 7, 2009, filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
3.1**
Amended and Restated Articles of Incorporation of Human BioSystems filed with the Secretary of State of California on June 14, 2007, filed as Exhibit 3.1 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
3.2**
Bylaws of Human BioSystems adopted February 26, 1998, filed as Exhibit 2.2 to Form 10SB12G on December 8, 1999.
3.3**
Articles of Incorporation of Human BioSystems Acquisition Company filed with the Secretary of State of Nevada on June 3, 2009, as described in the Plan and Agreement of Triangular Merger between Human BioSystems, Human BioSystems Acquisition Company, and San West, Inc. dated April 7, 2009, filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
3.4**
Bylaws of Human BioSystems Acquisition Company adopted on June 3, 2009, as described in the Plan and Agreement of Triangular Merger between Human BioSystems, Human BioSystems Acquisition Company, and San West, Inc. dated April 7, 2009, filed as Exhibit 2.1 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
3.5**
Articles of Incorporation of San West, Inc. filed with the Secretary of State of Nevada on July 17, 2001, filed as Exhibit 3.5 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
3.6**
Bylaws of San West, Inc., filed as Exhibit 3.6 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
3.7**
Articles of Merger filed with the Secretary of State of Nevada effective June 5, 2009, filed as Exhibit 3.7 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
5.0*
Opinion of Counsel.
10.1**
Charter of the Audit Committee of San West, Inc., filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.2**
Code of Business Conduct of San West, Inc., filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.3**
Code of Ethics for Senior Executive Officers and Senior Financial Officers of San West, Inc., filed as Exhibit 10.3 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.4**
Charter of the Compensation Committee of San West, Inc., filed as Exhibit 10.4 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.5**
Corporate Governance Principles of the Board of Directors of San West, Inc., filed as Exhibit 10.5 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.6**
Charter of the Executive Committee of the Board of Directors of San West, Inc., filed as Exhibit 10.6 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.7**
Charter of the Finance Committee of San West, Inc., filed as Exhibit 10.7 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.8**
Charter of the Governance and Nominating Committee of San West, Inc., filed as Exhibit 10.8 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.9**
Reporting Financial Integrity Concerns, filed as Exhibit 10.9 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.10**
Form of Subscription Agreement executed by the San West Stockholders, filed as Exhibit 10.10 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
10.11**
Investment Agreement dated January 6, 2009 between Human BioSystems and Dutchess Private Equity Fund, Ltd., filed as Exhibit 10.21 to the registrant’s Form S-1 filed on January 13, 2009.
10.12**
Registration Rights Agreement dated January 6, 2009 between Human BioSystems and Dutchess Private Equity Fund, Ltd., filed as Exhibit 10.22 to the registrant’s Form S-1 filed on January 13, 2009.
10.13**
Amendment to the Promissory Note dated May 15, 2007 between Human BioSystems and Dutchess Private Equity Fund, Ltd., filed as Exhibit 10.23 to the registrant’s Form S-1 filed on January 13, 2009.
10.14**
Amendment to the Promissory Note dated May 15, 2007 between Human BioSystems and Dutchess Private Equity Fund, Ltd. filed as Exhibit 10.24 to the registrant’s Form S-1 filed on January 13, 2009.
10.15**
Investment Agreement dated as of December 18, 2009 by and between San West, Inc., a California corporation, and Dutchess Opportunity Fund, II, LP, a Delaware Limited Partnership, filed as Exhibit 10.1 to the registrant’s Current Report on Form 8-K filed on December 21, 2009.
10.16**
Registration Rights Agreement dated as of December 18, 2009, by and between San West, Inc., a California corporation, and Dutchess Opportunity Fund, II, LP, a Delaware Limited Partnership, filed as Exhibit 10.2 to the registrant’s Current Report on Form 8-K filed on December 21, 2009.
10.17**
Series A Preferred Stock Designation filed as exhibit 41 to the Registrant’s Current Report on Form 8-K filed on September 13, 2010.
21.0**
Subsidiaries of the registrant, filed as Exhibit 21.1 to the registrant’s Current Report on Form 8-K filed on June 9, 2009.
23.2*
Consent of Independent Certified Public Accountants.
31.1*
Certification of Frank J. Drechsler, Chief Executive Officer and Chief Financial Officer of San West, Inc., pursuant to 18 U.S.C. §1350, as adopted pursuant to §302 of the Sarbanes-Oxley Act of 2002.
32.1*
Certification of Frank J. Drechsler, Chief Executive Officer and Chief Financial Officer of San West, Inc., pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002.
*
Filed herewith.
**
Previously filed.
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
SAN WEST, INC.
Date: April 5, 2011.
By /s/ Frank Drechsler
Frank Drechsler, Chief Executive Officer and
Chief Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Frank Drechsler
Chief Executive Officer and Director
April 5, 2011
SAN WEST, INC.
REPORT ON AUDIT OF CONSOLIDATED FINANCIAL STATEMENTS AND NOTES
YEARS ENDED DECEMBER 31, 2010 AND 2009
CONTENTS
PAGE
FINANCIAL STATEMENTS
Report of Independent Registered Public Accounting Firm ...
Consolidated Balance Sheets......................................
Consolidated Statements of Operations................ ........
Consolidated Statement of Stockholders’ Deficit ............F-4
Consolidated Statements of Cash Flows........... .........
Notes to the Financial Statements ........... -26
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Stockholders of
San West, Inc.
Santee, California
We have audited the accompanying consolidated balance sheets of San West, Inc. as of December 31, 2010 and 2009, and the related consolidated statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2010 and 2009. San West, Inc.’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of San West, Inc as of December 31, 2010 and 2009, and the results of its operations and cash flows for each of the years in the two-year period ended December 31, 2010, in conformity with accounting principles generally accepted in the United States.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note A to the consolidated financial statements, the Company’s current liabilities exceed current assets and the Company has incurred recurring losses, all of which raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also described in Note A. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/S/ L.L. Bradford & Company, LLC
Las Vegas, Nevada
April 4, 2011
SAN WEST, INC.
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010 AND 2009
NOTE A - ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
San West, Inc. (“San West”, “the Company”, or “we”) is a Nevada Corporation, established in July, 2001. The Company sells and serivices off-road buggies and related after market performance products and accessories. Our products are sold both at a physical location and online while the buggy repair services are sold and fulfilled at the physical location. Its primary service outlet, “Letz Go Racing Off-Road Center” is located in Huntington Beach, California and provides customers with modification parts, accessories and repair services for off-road buggies built in China for the U.S. market.
In August 2008, the Company purchased 100% of the outstanding stock of Buggy World, Inc. With the acquisition of Buggy World, San West expanded their presence in the southern California retail market. The accompanying financial statements reflect the activity of Buggy World since its acquisition.
On June 5, 2009, San West completed a reverse merger with Human BioSystems by merging with Human BioSystems Acquisition Company a wholly owned subsidiary of Human BioSystems Upon becoming effective, 1) 100% of San West outstanding common stock was exchanged for 65,396,320 shares of Human BioSystems common stock, 2) Human BioSystems Acquisition Company became the surviving entity and assumed all San West assets and liabilities and 3) Human BioSystems Acquisition Company changed its name to San West, Inc. The authorized capital stock of San West, Inc (formerly Human BioSystems Acquisition Company) is 400,000,000 shares of common stock no par value and 50,000,000 shares of preferred stock no par value. The merger was accounted for as a “reverse merger”, wherein Human BioSystems Acquisition Company and Human BioSystems are treated as the acquiree for accounting purposes meaning the historical earnings, assets and liabilities of San West, Inc (pre merger) shall remain with the assets and liabilities of Human BioSystems Acquisition Company and Human BioSystems accounted for as a purchase by San West thus recapitalizing the previously reported financial position and statements of Human BioSystems. Human BioSystems changed its name to San West, Inc. on July 31, 2009. Herein, all references to “San West”, “the Company”, or “we” shall mean San West, Inc. and Human BioSystems, unless the context requires otherwise. The Company is listed on the OTC Bulletin Board under the ticker symbol SNWT.
Going Concern
The accompanying financial statements have been prepared in conformity with generally accepted accounting principles in the United States of America, which contemplate continuation of the Company as a going concern. The Company has sustained operating losses since inception and has an accumulated deficit of $2,869,827 and $1,106,512 at December 31, 2010 and December 31, 2009, respectively. In addition, the Company had negative working capital of $1,103,001 and $1,223,883 at December 31, 2010 and December 31, 2009, respectively.
The Company has and will continue to use significant capital to grow and acquire market share. These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard, management is proposing to raise any necessary additional funds not provided by operations through loans or through additional sales of their common stock. There is no assurance that the Company will be successful in raising this additional capital or in achieving profitable operations. The 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 result from this uncertainty.
Principles of consolidation
The consolidated financial statements include the accounts of San West (formerly Human BioSystems, Inc.) and its subsidiary, Buggy World which is 100% consolidated in the financial statements. All material inter-company accounts and transactions have been eliminated.
NOTE A - ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Accounting estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents
For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents may at times exceed federally insured limits. To minimize this risk, the Company places its cash and cash equivalents with high credit quality institutions.
Accounts Receivable
Accounts receivable are reported at the customers' outstanding balances. The Company does not have a history of significant bad debt and has not recorded any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable. The Company evaluates receivables on a regular basis for potential reserve.
Inventory
The Company currently utilizes a “just-in-time” inventory system. Inventories are valued at the lower of cost or market. Cost is determined on an average cost basis. Management performs periodic assessments to determine the existence of obsolete, slow moving and non-salable inventories, and records necessary provisions to reduce such inventories to net realizable value. The Company’s inventory consists primarily of vehicle parts and complete vehicles.
Goodwill
Goodwill and other intangible assets with indefinite useful lives are no longer amortized, but are evaluated for impairment annually, or immediately if conditions indicate that impairment could exist. The evaluation requires a two-step impairment test to identify potential goodwill impairment and measure the amount of a goodwill impairment loss. The first step of the test compares the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of the impairment loss. Both steps of the goodwill impairment testing involve significant estimates.
Property and Equipment
Property and equipment are stated at cost. Major renewals and improvements are charged to the asset accounts while replacements, maintenance and repairs, which do not improve or extend the lives of the respective assets, are expensed. At the time property and equipment are retired or otherwise disposed of, the asset and related accumulated depreciation accounts are relieved of the applicable amounts. Gains or losses from retirements or sales are credited or charged to income.
The Company depreciates its property and equipment on a straight line basis at the following rates as applied to net depreciable value:
Computer equipment and software:
3 years
Furniture and fixtures:
5 - 7 years
Machinery and equipment
:
5 - 7 years
Leasehold improvements:
7 years
NOTE A - ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Long-Lived Assets
Accounting for the Impairment or Disposal of Long-Lived Assets requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the historical cost-carrying value of an asset may not be recovered. The Company assesses recoverability of the carrying value of an asset by estimating the fair value of the asset. If the fair value is less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset's carrying value and fair value.
Revenue
Revenue from the sale of parts, service and vehicles is recognized when the earning process is complete and the risk and rewards of ownership have transferred to the customer, which is generally considered to have occurred upon the delivery of the equipment and/or service to the customer. Customer returns and exchanges for unused parts require a receipt, all sales on discounted items are final and the Company does not accept returns on special order or electrical items. The Company does not provide warranties. Warranties are generally provided by the manufacturer of the items we sell.
Cost of Goods Sold
Cost of goods sold is recognized with the associated parts, service and vehicle revenue and consists primarily of resale parts and vehicles.
Commissions
Commissions are recorded to different employees when they are earned by; selling parts, buggies and/or service. Rates are different for each employee in different departments.
Advertising Costs
The Company expenses all advertising as incurred. During the year ended December 31, 2010 and 2009, the Company incurred approximately $191,833 and $78,011, respectively in marketing and advertising expense.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on differences between financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, we would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax provisions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.
NOTE A - ORGNIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Stock-Based Compensation
The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement. We use the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees. In calculating this fair value, there are certain assumptions that we use consisting of the expected life of the option, risk-free interest rate, dividend yield, volatility and forfeiture rate. The use of a different estimate for any one of these components could have a material impact on the amount of calculated compensation expense.
Earnings (Loss) per common share
The Company reports both basic and diluted earnings (loss) per share. Basic loss per share is calculated using the weighted average number of common shares outstanding in the period. Diluted loss per share includes potentially dilutive securities such as outstanding options and warrants, using the “treasury stock” method and convertible securities using the “if-converted” method.
Recent Accounting Pronouncements
In January 2010, the FASB issued ASU 2010-06 - “Fair Value Measurements and Disclosures-Improving Disclosures about Fair Value Measurements”, which requires new disclosures and reasons for transfers of financial assets and liabilities between Levels 1 and 2. ASU 2010-06 also clarifies that fair value measurement disclosures are required for each class of financial asset and liability, which may be a subset of a caption in the consolidated balance sheets, and those disclosures should include a discussion of inputs and valuation techniques. It further clarifies that the reconciliation of Level 3 measurements should separately present purchases, sales, issuances, and settlements instead of netting these changes. With respect to matters other than Level 3 measurements, ASU 2010-
06 is effective for fiscal years and interim periods beginning on or after December 15, 2009. New guidance related to Level 3 measurements is effective for fiscal years and interim periods beginning on or after December 15, 2010. Adoption of ASU 2010-06 did not result in any significant financial impact on the Company upon adoption.
In February 2010, the FASB issued ASU No. 2010-09, which amends subsequent event disclosure requirements for SEC filers. An entity that is an SEC filer is not required to disclose the date through which subsequent events have been evaluated. This ASU was effective upon issuance and adoption of this ASU did not result in a material impact to the Company’s financial statements.
In January 2010, the FASB issued ASU No. 2010-10 - Consolidation (Topic 810) that amends accounting and disclosure requirements for a decrease in ownership in a business under existing GAAP standards for consolidations. It also clarifies the types of businesses that are in the scope of these consolidations. As required by this guidance, we retroactively applied the amendments as of January 1, 2009, which did not have a material impact on our financial statements or footnote disclosures.
In December 2010, the FASB issued ASU No. 2010-29 - Business Combinations (Topic 805); disclosure of Supplementary Pro Forma Information for Business Combinations. ASU No. 2010-29 requires a public entity that presents comparative financial statements to disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only. The amendments in this update also expand the supplemental pro forma disclosures under Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business. The amendments in this update are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. adoption of this ASU did not have a material impact on our financial statements or footnote disclosures.
NOTE B - INVENTORY
Inventory is comprised of buggy vehicles and parts and stated at the lower of cost or market. The following table represents the major components of inventory at December 31, 2010 and December 31, 2009:
NOTE C - OTHER CURRENT ASSETS
Other current assets of $113,406 as of December 31, 2010 are comprised solely of sale proceeds held in reserve by our credit card processors as a buffer against potential customer chargebacks.
Other current assets of $33,897 as of December 31, 2009 are comprised prepaid rent and prepaid advertising costs.
NOTE D - FIXED ASSETS
Furniture and equipment are depreciated on a straight line basis over their estimated useful life from 3 - 7 years. A majority of the fixed assets listed were acquired in the purchase of Buggy World in August of 2008. Fixed assets consisted of the following at December 31, 2010 and 2009:
Depreciation expense for the year ended December 31, 2010 and 2009 was $21,752 and $22,744, respectively.
NOTE E - GOODWILL
On August 20, 2008, the Company executed an Asset Purchase and Stock Transfer Agreement for 100% of the outstanding ownership interests in Buggy World, Inc. The total purchase price was $613,202 paid with $350,000 cash and $263,202 of promissory notes to Cambio Enterprises (See Note I, Subsidiary Purchase Loan). Identifiable tangible assets acquired were valued at $394,102 leaving $219,100 recorded as goodwill.
On September 5, 2008, the Company purchased certain rights, title and interest to Johnson’s Bug Machine for $15,000 which was recorded to goodwill. Payments were due $5,000 after completion of the first referred job was complete and $1,000 per month thereafter. This obligation was non-interest bearing. In October 2009, the Company settled this debt for a $5,000 cash payment and full release netting the Company a $10,000 gain on the forgiveness of debt recorded as other income in our 2009 Statement of Operations.
As of December 31, 2010, we have recorded goodwill of $234,100 in connection with our acquisition of Buggy World, Inc. on August 20, 2008 ($219,100) and Johnson’s Bug Machine ($15,000) on September 5, 2008. Goodwill represents the excess of the purchase price over the fair value of current financial assets, property and equipment, and separately reportable intangible assets. The tangible assets, intangible assets, and goodwill acquired are then assigned to reporting units. Goodwill is then tested for
NOTE E - GOODWILL (Continued)
impairment at least annually for each reporting unit. Step one of the goodwill impairment test involves comparing the fair value of the reporting unit to its carrying value. If the fair value significantly exceeds the carrying value, no further testing is required. If the carrying value exceeds the fair value, a step two test must be performed. Step two includes estimating the fair value of all tangible and intangible assets. The fair value of goodwill is then estimated by subtracting the fair value of tangible and intangible assets from the fair value of total assets determined in step one. The goodwill impairment is the excess of the recorded goodwill over the estimated fair value of goodwill.
We performed a goodwill impairment test on December 31, 2010 and December 31, 2009. Pursuant to ASC 350-20-35-22 quoted market prices in an active market are the best evidence of fair value and should be used as the basis for measurement, if available. There are active markets for our reporting units which are comprised of our company as a whole given that the goodwill balance relates directly to our existing business. We determined the fair value as of December 31, 2010 to be $2,505,657 (192,742,859 shares outstanding x $0.013 12/31/10 closing stock price) which exceeded the carrying value of our goodwill balance by 1,070%. We determined the fair value as of December 31, 2009 to be $16,994,672 (124,960,826 shares outstanding x $0.136 12/31/09 closing stock price) which exceeded the carrying value of our goodwill balance by 7,260%. Accordingly, we determined our goodwill balance passed step one of the goodwill impairment test. Thus, no impairment of goodwill existed as of or has been recorded for the year ended December 31, 2010 or 2009.
We acknowledge the uncertainty surrounding the key assumptions that drive the estimated fair value. Any material negative change in the fundamental outlook of our business, our industry or the capital market environment could cause the business unit to fail step one. Accordingly, we will be monitoring events and circumstances each quarter (prior to the annual testing date) to determine whether an additional goodwill impairment test should be performed.
NOTE F - ACCOUNTS PAYABLE
Accounts payable at December 31, 2010 consisted of $637,042 of assumed Human BioSystems accounts, $7,437 of sales tax payable, $99,664 related to professional fees and $147,037 of trade payables.
Accounts payable at December 31, 2009 consisted of $668,642 of assumed Human BioSystems accounts, $6,599 of sales tax payable, $5,000 related to professional fees and $69,016 of trade payables.
NOTE G - FLOORPLAN NOTES PAYABLE
During 2010, we sold or disposed of all our flooring inventory. The balance of $4,721 represents the interest and fees due to the flooring company as of December 31, 2010. The interest charged by our flooring company was 12% per year.
During 2009, the Company used Castle Flooring to finance certain vehicles. During 2009 Castle was paid off and the Company no longer does business with Castle who has since filed for Chapter 7 bankruptcy.
GE Flooring and DSC Flooring provided financing to the former owners of Buggy World. DSC was paid off in 2009. The December 31, 2009 balance of $117,962 is due to GE Flooring and is a carryover from 2008. The GE balance is secured by certain vehicles financed by that lender.
When we have vehicle inventory we evaluate our vehicles at the lower of cost or market value approach. If the book value of our vehicles is more than fair value, we could experience losses on our vehicles in future periods. All new vehicles are pledged to collateralize floorplan notes payable to floorplan providers. The floorplan notes payable bear interest, payable monthly on the outstanding balance, at a rate of interest that typically varies by provider. Vehicle floorplan notes are typically payable on demand and are typically paid upon the sale of the related vehicle. As such, our floorplan notes payable are shown as current liabilities in the accompanying balance sheets with related cash flows accounted for as Operating Activities.
NOTE H - CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE
Gemini
In connection with a Securities purchase Agreement dated February 12, 2010, the Company issued a convertible promissory note (the “Note”) dated February 4, 2010 generating gross proceeds to the Company of $150,000. Issuance fees totaled $3,485, which were paid in cash. The Note bears interest of ten percent (10%) per annum that accrues daily and matures on February 1, 2011 with no payment due before the maturity date. On January 12, 2011, the Note’s maturity date was extended one year to February 12, 2012.
At any time after the issuance date on February 4, 2010, and prior to maturity, the Note is convertible into the Company's restricted common stock at a conversion price equal to the lesser of (i) $0.04, or (ii) 80% of the lowest closing bid price of the Company’s Common Stock during the 10 trading days immediately preceding the applicable conversion date. Common stock issued pursuant to a conversion carries piggyback registration rights.
The Note provides that the holder may only convert the debenture if the number of shares held by the lender or its affiliates after conversion would not exceed 4.99% of the outstanding shares of the Company's common stock following such conversion.
The issuance costs related to the Note of $3,485 in cash were capitalized to current assets on the balance sheet and are being amortized over the original term of the Note based upon the effective interest method. For the year ended December 31, 2010, the Company recognized $3,485as other expense related to the amortization of the issuance costs.
The Company determined that the Note was issued with a beneficial conversion feature (“BCF”) due to the conversion price ($0.04) being less than the closing stock price ($0.095) on the date of issuance, and the conversion feature being in-the-money. Thus, the BCF was been determined based on the gross debenture amount, and recorded as a discount to reduce the carry value of the Note and increase additional-paid-in-capital. The Company calculated the initial BCF on the closing date of the transaction to be $206,250 using the intrinsic value method. Since this amount is greater than the $150,000 value of the Note, the Company reduced the initial carry value of the Note to zero effectively recording a BCF of $150,000 as additional-paid-in-capital. The BCF discount was expensed when the note became convertible which was on the date of issuance. On October 14, 2010, the note was further modified to provide for a conversion price of $0.005 per share. The Company calculated the BCF on the closing date of the modification to be $83,528 using the intrinsic value method.
During the year ended December 31, 2010, related to the note above, the Company:
1.
Recognized $233,528 in non-cash amortization expense attributable to the amortization of the beneficial conversion feature discount;
2.
Recognized $13,216 in interest expense related to the Note.
3.
Converted $42,761, including $40,000 of principle and $2,761 of accrued interest into 7,140,000 shares of common stock;
4.
Had a non-current principle balance and accrued interest balance of $110,000 and $10,455, respectively.
Seacoast Advisors, Inc.
On February 13, 2009, the Company cancelled and reissued the Seacoast Advisors, Inc. $80,000 note originally dated August 10, 2008, maturing on August 12, 2009 and carrying eight percent (8%) interest per annum. The new $80,000 note dated February 13, 2009 matured on August 12, 2009, carried interest of eight percent (8%) per annum with no prepayments required and converted into shares of the Company upon default at a conversion price of $.05. Per ASC 470-20-25-12, no portion of the proceeds from this note were attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount and the conversion price was greater than the perceived market value of the stock. Additionally, this note was issued pior to the merger with Human BioSystems and there was no active market for the Company’s stock at that time. In March of 2009 $6,000 was paid against this note. In February and March of 2010, Seacoast converted $74,000 of this note into 7,400,000 shares of common stock at an exercise price of $.01 reflecting the decrease in the conversion price due to the 5:1 forward stock split affected on November 3, 2009. $9,596 remained
NOTE H - CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE (Continued)
due under this note and was converted in full into 959,649 sharesof common stock at a conversion price of $.01 on August 30, 2010. On September 30, 2009, an addendum was added to this note increasing the face amount to $54,000 for additional funds loaned to the Company. The addendum increased the maturity date for these funds to September 30, 2010 and increased the conversion price to $0.35 per share, or $.07 per share after giving effect to the 5:1 forward stock split. Per ASC 470-20-25-12, no portion of the proceeds from this adendum were attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount and the conversion price was greater than the market price of the stock. On August 16, 2010, this addendum was modified reducing the exercise price to $.01 per share exerciseable at the option of Seacoast at any time. The balance of principle and interest under this note at modification was $57,723. The market price of common stock on the date of this modification was $0.02 resulting in a beneficial conversion feature of $57,356. On August 19, 2010 and August 30, 2010, Seacoast converted $50,395 into 5,039,489 shares of common stock leaving a balance due of $7,581. Then, on September 1, 2010, the note was further modified to decrease the conversion price to $0.005. The balance of principle and interest under this note at modification was $7,581. The market price of common stock on the date of this modification was $0.01 resulting in a beneficial conversion feature of $7,581. On October 22, 2010, Seacoast converted $4,750 into 950,000 shares of common stock leaving a balance due of $2,791.11 which was converted into 579,871 shares on December 22, 2010 leaving no balance due under the aforementioned note(s) as of December 31, 2010. As of December 31, 2009, the balance under the above loan activity was $128,000.
In addition to the above, during the year ended December 31, 2010, the Company borrowed $133,000 from Seacoast Advisors, Inc. in various tranches for which separate promissory notes were issued. The notes have the same terms and conditions, including interest at eight percent (8%) per annum and only one principal and interest payment due upon maturity on January 1, 2012. On October 14, 2010, The Company and Seacoast canceled the previous notes and issued a single note in the amount of $121,631 ($119,000 principle and $2,631 accrued interest). Also, on October 14, 2010, Seacoast loaned and additional $9,000 and on November 2, 2010, Seacoast loaned an additional $5,000. The terms of the $121,631, $9,000 and $5,000 notes provide for interest at eight percent (8%) per annum, and only one principal and interest payment due upon maturity with maturity being six (6) months from the date each tranche was first received by the Company. In the event of default, the notes become convertible at the option of the holder into common stock of the Company at a conversion price of $0.005 per share. The Notes contain a provision limiting the conversion thereof by any party to not more that 4.99% ownership of the stock of the Company at any time after taking into account all of the holdings of the converting party. Per ASC 470-20-25-12, no portion of the proceeds from this note are attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount, the interest rate is lower than the Company would pay for non-convertible debt and the conversion price was greater than the perceived market value of the stock. In addition, the restrictions on the conversion prevent the holders from fully exercising the conversion, the Company has experienced significant operating losses and shareholder dilution, in the event of a conversion an attempt to sell converted shares would most likely result in a lower stock price due to the thin trading volume of the Company’s stock on the secondary markets, and the perceived market value of the stock was less than the conversion price due to the above and due to the significant decrease in the stated trading values of the Company’s stock which has decreased 97.4% from $0.308 one year prior to these notes leaving significant uncertainty about the future trading price of the stock and the ability of Seacoast to recover the face amount of the debt.
During the year ended December 31, 2010, related to the notes above, the Company:
1.
Recognized $64,937 in non-cash amortization expense attributable to the amortization of the beneficial conversion feature discount;
2.
Recognized $8,771 and $7,252 in interest expense during 2010 and 2009, respectively.
3.
Converted $171,391, including $154,703 of principle and $16,687 of accrued interest into 14,926,309 shares of common stock;
4.
Had a current principle balance and accrued interest balance of $106,297 and $1,826, respectively.
NOTE H - CONVERTIBLE PROMISSORY NOTES AND NOTES PAYABLE (Continued)
Dutchess Private Equities L.P.
In November 2006, Human BioSystems entered into a loan transaction with Dutchess Private Equities, LP (“Dutchess”), and issued to Dutchess a Promissory Note with a face value of $1,200,000, net proceeds to the Company of $1,000,000 and an imputed annual rate of interest of 43.278%. The November 2006 Dutchess Note matured on August 31, 2007. Repayment of the face value was to be made monthly in the amount of $120,000, plus 50% of any proceeds raised over $120,000 per month from Puts, issued by the Company as collateral. In May 2007, the Company entered into a loan transaction with Dutchess and issued a Promissory Note with a face value of $462,000, net proceeds to the Company of $350,000 and an imputed annual rate of interest of 63.108%. The May 2007 Dutchess Note matured on April 15, 2008. Repayment of the face value was to be made monthly in an amount of the greater of 1) 100% of the proceeds raised from Puts given to Dutchess by the Company exceeding $120,000 per month or 2) $51,333 per month. If both Dutchess Note’s face value was not paid off by maturity, the Company would be required to pay an additional 10% on the face value of the First Dutchess Note, plus 2.5% per month until paid off. Any beneficial conversion feature that may have been recognized would not be relevant to the financial statements for the post-merger reporting which occurred on June 5, 2009 as these transactions occurred prior to the merger. Both notes were in default at the time of the merger on June 5, 2009. As a result of the default, Dutchess had the right to increase the face amount of the debentures by 10% of the face amount as an initial penalty and 2.5% of the face amount per month as liquidated damages. As of March 31, 2009, Dutchess had not elected this right. Then, as a result of the merger between Human BioSystems and San West (close date June 5, 2009), Dutchess elected to exercise their right to impose penalties under the original notes and agreed to a $327,526 increase in the face amount of the debentures to $650,000. Both notes contain a conversion feature that became exerciseable only upon default. As a result of the default status of the notes, Ducthess currently has the right to convert the notes at a conversion price equal to 80% of the closing bid price of our common stock on the day prior to the conversion date. All conversions of Dutchess debentures are performed according to the methodology contained in the original notes.
During the year ended December 31, 2010, $202,363 was converted into 6,582,911 shares of common stock. Of the 6,582,911 shares issued, $182,500 was converted into 5,650,000 shares and $19,863 was repaid through the Company’s exercise of PUTS into 932,911 shares (See Note L, Investment Agreements below). As of December 31, 2010 and 2009, the balance of these notes was $74,637 and $282,000, respectfully.
Other Convertible Promissory Notes
On February 13, 2009 the Company issued an unsecured promissory note with a face amount of $100,000 in exchange for retiring 39,520,735 shares of the Company’s common stock that was originally issued in 2005. The note accrued interest at eight percent (8%) per annum, was due in one year or February 13, 2010 and required only one principal and interest payment upon maturity. On April 23, 2009, the note was modified to add a conversion feature at the option of the holder with a conversion price of $0.01 per share. At the time of modification the stock price was $0.008 thus, no beneficial conversion feature was recognized. During the year ended December 31, 2009, the Company recognized $7,036 of interest expense. As of December 31, 2009, the total due under this note was $107,036, including $7,036 of accrued interest and $100,000 of principal. During the year ended December 31, 2010, the Company received conversion notices to convert the entire outstanding balance of $107,036 into 10,703,600 shares of the Company’s common stock.
On December 17, 2010 the Company issued $13,500 face value note that carries interest of eight percent (8%) per annum with no prepayments required and converts into shares of the Company upon default at a conversion price of $0.005. Per ASC 470-20-25-12, no portion of the proceeds from this note are attributable to the conversion feature as the conversion can be made at the option of the holder at a specified price and only upon default, the conversion price does not decrease, the debt was originally sold at the face amount, the interest rate is lower than the Company would pay for non-convertible debt and the conversion price was greater than the perceived market value of the stock. In addition, the Company has experienced significant operating losses and shareholder dilution, in the event of a conversion an attempt to sell converted shares would most likely result in a lower stock price due to the thin trading volume of the Company’s stock on the secondary markets, and the perceived market value of the stock was less than the conversion price due to the above and due to the significant decrease in the stated trading values of the Company’s stock which has decreased 97% from $0.308 one year prior to this note leaving significant uncertainty about the future trading price of the stock and the ability to recover the face amount of the debt. During the year ended December 31, 2010, the Company recognized $41 of interest expense on this note.
NOTE I - SUBSIDIARY PURCHASE LOAN
Secured Promissory Note to Cambio Enterprises in the amount of $263,202 dated August 12th 2008. The note bears interest of eight percent (8.0%) per annum, requires monthly principal and interest payments of $4,102, matures seven years from the date of the note or August 12, 2015 and is secured by certain assets of the Company.
In addition, the note is personally guaranteed by Frank J. Drechsler, CEO and General Manager, of San West, Inc. As of December 31, 2010, the total principle due under this note was $222,456, and includes $39,176 and $183,280 recorded as current and non-current notes payable, respectively. During the year ended December 31, 2010 and 2009, the Company recorded interest expense of $17,633 and $24,334, respectively related to this note. During the year ended December 31, 2010, the Company made payments totaling $59,859 ($33,656 of principle and $26,203 of interest).
NOTE J - SHAREHOLDER LOANS
From time to time, the Company’s CEO, Frank J. Drechsler has deposited funds and made payments to vendors on behalf of the Company. On April 1, 2009, the Company and Mr. Drechsler entered into a promissory note for the principal balance then due or $216,950. The note accrues interest at four percent (4%) per annum, is due in three years or April 1, 2012 and requires only one principal and interest payment upon maturity. During the year ended December 31, 2010 and 2009, the Company recognized $8,678 and $6,520, respectively of interest expense related to this note.
NOTE K - CAPITAL STOCK
Preferred Stock
During the year ended December 31, 2010, the Company issued 77,100 shares of non cumulative Series A Preferred Stock (See SAN WEST, INC. CERTIFICATE OF DESIGNATION FOR THE SERIES A PREFERRED STOCK filed with the Securities and Exchange Commission on Form 8-K on September 13, 2010).
Common Stock
During the year ended December 31, 2009, our Company recognized the following common stock related activity:
1.
On November 3, 2009, the Company effected a five-for-one (5:1) forward stock split,
2.
The Company received services valued at $62,640 in exchange for 3,480,000 shares of common stock were valued at the market price of our common stock on the date of issuance.
3.
The Company recorded $372,325 of stock compensation expense related to 6,000,000 shares that were owed but unissued as of December 31, 2009. The shares have been included in the calculation of earnings per share and the related payable included in the equity section of our balance sheet as common stock payable. The related Corporate Consulting Agreement provided for renumeration at the beginning of each quarter whereby 1.5 million shares was due on 1/1/09, 4/1/09, 7/1/09 and 10/1/09 for a total of 6,000,000 shares to be issued. The shares were valued at the market price of our common stock on the date the shares were owed. The expense and issuance recognition for EPS purposes is consistent with ASC 260-10-45 in that at the time the expense was recognized all conditions of that issuance were satisfied and there was no circumstance under which the stock would not be issued as it eventually was. Furthermore, the Company’s obligation to issue the shares was always acknowledged. There was no variability to the number of shares to be issued and there were no provisions requiring stock be issued at any specific time or penalties would accrue. All shares have been issued (in 2010) at the exact number of shares stated in the Consulting Agreement. Recording the stock compensation expense, the increase to equity and inclusion in the calculation of weighted average shares outstanding was done on the date specified in the agreement at market prices. No liability was recorded due to the
NOTE K - CAPITAL STOCK (Continued)
Common Stock (Continued)
fact that the agreement was payable in stock and the classification in equity more accurately reflects the nature of the transaction. Whether or not the stock had been issued is not relevant to the obligation of the Company to issue the stock. Displaying the stockpayable as a separate component on the statement of shareholders’ equity more clearly identifies the nature of the liability as being related to stock and including the shares in basic EPS provides a more accurate measure of our performance over our reporting periods.
4.
The Company received gross proceeds of $798,500 in exchange for 33,017,958 shares of common stock of which $67,500 or 964,286 shares were issued in 2010.
5.
The Company converted $368,000 of our Dutchess Notes and issued 15,950,000 shares of common stock (See Note H - Convertible Notes Payable above).
6.
6,146,270 shares were issued from the existing outstanding shares of our CEO in exchange for $92,200 in gross proceeds.
7.
The Company issued 833,333 shares of common stock as an inducement to invest from one of our shareholders.
During the year ended December 31, 2010, our Company recognized the following common stock related activity:
1.
Towards the end of 2009, the Company received $67,500 in exchange for 964,286 shares of common stock that was issued in 2010.
2.
The Company issued 5,275,000 shares of common stock at prices ranging from $0.005 to $0.035 per share with a weighted average price of $0.0084 per share for proceeds of $44,500.
3.
The Company issued 5,000,000 shares to Jesse Gonzales for director services valued on the date of issuance at $552,925.
4.
As of December 31, 2009, the Company had recorded $372,325 of service related expense related to 6,000,000 shares that were owed but unissued. During 2010, all 6,000,000 shares were issued, including 1,300,000 shares on March 17, 2010, 4,500,000 on October 22, 2010, and 200,000 on December 23, 2010.
5.
The Company issued 6,000,000 shares of common stock for services valued on the date of issuance at $202,951.
6.
The Company PUT 2,167,000 shares of common stock to Dutchess in exchange for $37,852 of which the Company received $17,989 and $19,863 was applied to reduce our debt due to Dutchess (See Note L below).
7.
The Company issued 2,093,145 to Dutchess as a finder’s fee related to the Investment Agreement and recorded stock compensation expense of $75,353 (See Note L and Note P below).
8.
Dutchess canceled 4,087,270 shares originally received in connection with the merger between Human BioSystems and San West in 2009. The shares were originally recorded as expense in the amount of $122,618. Pursuant to ASC 505-30-30-7, the cost of treasury shares shall be reflected in capital. Since the stock has no par value and the cancellation did not require any cash outlays by the Company, no value has been assigned to these shares and the cancellation only affected the calculation of weighted average shares outstanding used in the calculation of earnings per share (See Note P below)..
9.
The Company issued 44,369,871 upon the conversion of $503,660 of debt and accrued interest.
Common stock issued in a period subsequent to our reporting dates is included in the calculation of weighted average shares outstanding as of the date the expense was recognized or funds received.
NOTE K - CAPITAL STOCK (Continued)
2009 San West Long Term Equity Incentive Plan
On July 21, 2009, the Board of Directors of the Company adopted the 2009 San West Long Term Equity Incentive Plan (the “Stock Incentive Plan”). The Stock Incentive Plan provides for equity incentive benefits to awardees in the form of option rights or appreciation rights, restricted stock, restricted stock units, and/or performance shares or performance units. The total number of shares of Common Stock which may be awarded under the Plan is 50,000,000. If any awarded shares are forfeited, they become available for future issuance. An annual aggregate limit of 5,000,000 shares is set for any participant. The terms of each award are determined by the board and are to be evidenced in writing. No equity awards have been issued under the 2009 San West Long Term Equity Incentive Plan as of the date of this report.
NOTE L - INVESTMENT AGREEMENTS
In December 2008, HBS entered into the Investment Agreement with Dutchess effective December 29, 2008 whereby the Company could sell up to $10 million of shares to Dutchess based on a certain formula. However, as a result of the reverse merger between San West, Inc and Human BioSystems in June 2009, this original Investment Agreement was considered void due to the significant change in control. As a result, on January 8, 2010, the Company filed a Post-Effective Amendment No.1 to Form S-1 seeking to register for resale up to 8.5 million shares common stock by Dutchess Opportunity Fund, II, LP, a selling stockholder pursuant to a “put right” under an investment agreement (the “Investment Agreement”), also referred to as an Equity Line of Credit, that we have entered into with Dutchess. The S-1 and subsequent amendments became effective on June 21, 2010. Pursuant to the terms of the Investment Agreement, we may offer, through a series of puts, and Dutchess must purchase from time to time shares of our common stock, provided that Dutchess shall not be required to purchase shares of our stock with an aggregate purchase price in excess of $10,000,000. We will not receive any proceeds from the sale of these shares of common stock offered by Dutchess. However, we will receive proceeds from the sale of securities pursuant to our exercise of this put right if and when the Company exercises its right. The purchase price of shares purchased under this Investment Agreement shall be equal to 92% of the lowest closing “best bid” price (the highest posted bid price) of the common stock during the five consecutive trading days immediately following the date of our notice to Dutchess of our election to put shares pursuant to this Investment Agreement (The Company does not recognize expense for the 8% discount. Dutchess in effect acts as a vehicle for the Company to be able to finance our operations through the Investment Agreement and they reasonably expect to make a small profit or commission which in this case is theoretically 8% assuming no negative volatility in our stock price. In accounting for the discount, we rely on Title 17, 230.141; SFAS No. 141, Business Combinations, Paragraph 24; and IAS 32 Financial Instruments, SIC 17. We treat the discount as an issuance cost. As such, the value of the stock issuance is reduced by the 8% discount and each issuance is reflected at 92% in our common stock equity balance with no expense booked to the statement of operations). The dollar value that we will be permitted to put pursuant to this Investment Agreement will be either: (A) 200% of the average daily volume in the US market of the common stock for the three trading days prior to the notice of our put, multiplied by the average of the three daily closing prices immediately preceding the date of the put, or (B) $100,000. During the year ended December 31, 2010, the Company “put” to Dutchess 2,167,000 shares of common stock and received net proceeds of $37,852 of which $19,863 was applied to debt owed to Dutchess and $17,989 was remitted to the Company.
NOTE M - RELATED PARTY TRANSACTIONS
During the year ended December 31, 2010, our CEO Frank Drechsler made a $5,000 payment to a vendor on behalf of the Company.
NOTE N - MERGER
On June 5, 2009 (the “Effective Date”), Human BioSystems, a California corporation (“HBS”), Human BioSystems Acquisition Company, a Nevada corporation (the “Subsidiary”), and San West, Inc., a Nevada corporation (“San West”) closed their Plan and Agreement of Triangular Merger (the “Plan of Merger”). In accordance with the Plan of Merger, San West became a wholly-owned subsidiary of HBS through a merger with the Subsidiary. The San West Stockholders received restricted HBS Common Stock at the rate of 3.16165 shares for each of their 20,684,180 shares issued and outstanding. As a result, HBS issued 65,396,320 restricted shares in exchange for 100 percent of the outstanding capital stock of San West. In addition, 4,087,270 restricted shares of the HBS Common Stock were issued to Dutchess Advisors, LLC as a finder’s fee. HBS had 21,009,670shares outstanding as of the Effective Date of the merger. In total 90,493,260 shares were outstanding following the Effective Date of Merger.
The Merger was accounted for as a “reverse merger,” as the stockholders of San West owned a majority of the outstanding shares of Human BioSystems common stock immediately following the Merger. San West was deemed to be the acquirer in the reverse merger. Consequently, the assets and liabilities and the historical operations of San West prior to the Merger are reflected in the financial statements and have been recorded at the historical cost basis of San West. Our consolidated financial statements after completion of the Merger include the assets and liabilities of both Human BioSystems and San West, historical operations of San West and our Human BioSystems operations from the Effective Date of the Merger.
We accounted for the merger under recapitalization accounting whereby the equity of the acquiring enterprise (San West, Inc.) is presented as the equity of the combined enterprise and the capital stock account of the acquiring enterprise is adjusted to reflect the par value of the outstanding stock of the legal acquirer (HBS) after giving effect to the number of shares issued in the business combination. Shares retained by the legal acquirer (HBS) are reflected as an issuance as of the reverse merger date (June 5, 2009) for the historical amount of the net assets of the acquired entity which in this case is a net liability of $1,981,056 and represents the net deficit of HBS on the date of merger of $1,653,531 plus the increase in the Dutchess debt assumed of $327,525 which increased as a result of the merger.
Our consolidated financial statements after completion of the Merger included the assets and liabilities of both HBS and San West, and historical operations of San West and HBS operations from the Effective Date of the Merger. The summarized assets and liabilities of the purchased company (Human BioSystems) on June 5, 2009 were as follows:
Cash
$ 6,070
Other current assets
8,157
Fixed assets, net
65,960
$ 80,187
Current liabilities
$ 1,733,719
Total stockholders’ equity
(1,653,532)
$ 80,187
NOTE N - MERGER (Continued)
Following is a breakdown of the purchase price paid by San West for the merger:
Shareholder Loans ($615,976) - Represents wages payable to stockholder employees of HBS. Pursuant to the Plan of Merger the assets were to transfer to certain parties in satisfaction of 100% of the shareholder loans ($615,975) if after six months from the effective date of the merger, or by December 6, 2009, the Company is unable to sell said assets to a third party. Since the Company was unable to secure the sale of these assets, as of December 31, 2009 they had transferred to certain parties and the Company reduced the carrying value of our assets and liabilities by $65,960 (loss on the disposal of assets) and $615,975 9Gain on the forgiveness of debt), respectfully.
Dutchess Promissory Notes ($322,474) + Penalty ($327,525) - Represents original assumed balance and penalties and interest on the November 2006 and May 2007 promissory notes to Dutchess Private Equities L.P. In order to bring the notes current, HBS, its subsidiary and San West executed an Amendment to the Finance Documents on June 11, 2009 whereby the balance owing to Dutchess was acknowledged to be $650,000 in total or $327,526 greater than the carrying balance on HBS books as of June 5, 2009, the Effective Date of the merger. In addition, the amendment amended the financing documents to 1) allow Dutchess conversion rights whether or not the Company is in default under Article 4 of the finance documents, and 2) Article 8 “No Assignment” was deleted from the finance documents. All other terms and conditions of all previously executed documents remained unchanged. As of December 31, 2010 and 2009, the balance of these notes was $74,637 and $282,000, respectfully (See Note H, Convertible Promissory Notes).
Net Equity Adjustment ($1,981,056) - Under recapitalization accounting the excess of the liabilities assumed over the assets acquired is reflected as a decrease in our common stock balance.
The following unaudited financial information has been developed by application of pro forma adjustments to the historical financial statements of San West, Inc. appearing elsewhere in this Current Report. The unaudited pro forma information gives effect to the Merger which has been assumed to have occurred on January 1, 2008 for purposes of the statement of operations.
The unaudited pro forma financial information is presented for informational purposes only and does not purport to represent what the results of operations or financial position of San West, Inc. would have been had the transactions described above actually occurred on the dates indicated, nor do they purport to project the financial condition of San West, Inc. for any future period or as of any future date. The unaudited pro forma financial information should be read in conjunction with the San West, Inc. financial statements and notes thereto included elsewhere in this Current Report.
NOTE N - MERGER (Continued)
The condensed pro forma results of operations for the year ended December 31, 2009 and 2008 were as follows:
NOTE O - 2009 RESTATEMENT
The 2009 financial statements have been restated as a result of changing our accounting for the reverse merger with Human BioSystems, Inc. from Purchase accounting to Recapitalization accounting. Accordingly, we have updated this Form 10-K as of and for the year ended December 31, 2009 to reflect the following:
·
To reverse the recognition and subsequent impairment of goodwill of $2,131,647,
·
To record the historical amount of the net assets of the acquired entity which is in this case is a net liability of $1,981,056,
·
To recognize a gain on the forgiveness of debt of $615,976, and
·
To recognize a loss on the disposal of assets of $65,960.
NOTE O - 2009 RESTATEMENT (Continued)
NOTE O - 2009 RESTATEMENT (Continued)
NOTE O - 2009 RESTATEMENT (Continued)
NOTE O - 2009 RESTATEMENT (Continued)
NOTE P - 2010 ACCOUNTING ERROR ADJUSTMENTS
During our fourth quarter of 2010 we discovered certain accounting errors in our second and third quarters of 2010 as described in our Form 8-K filed with the Securities and Exchange Commission on February 1, 2011. The errors relate to the following:
1.
4,087,270 Cancelled Shares. On June 22, 2010, 4,087,270 shares of common stock originally issued as a result of our merger with HBS were returned to the company and canceled. As a result, the Company recorded other income equal to the amount originally expensed as a result of the initial issuance, or $122,618. Pursuant to ASC 505-30-30-7, the cost of treasury shares shall be reflected in capital. Since the stock has no par value and the cancellation did not require any cash outlays by the Company, no value should have been assigned to these shares and the cancellation should only affect the calculation of weighted average shares outstanding used in the calculation of earnings per share. Thus, we inadvertently recorded other income of $122,618 when we should not have recorded any monetary financial statement impact for this cancellation. We have adjusted this error in our fourth quarter resulting in a decrease to our other income of approximately $122,618.
NOTE P - 2010 ACCOUNTING ERROR ADJUSTMENTS (Continued)
2.
2,093,145 Issued Shares. On June 25, 2010, Dutchess received 2,093,145 shares in conjunction with the Investment Agreement (also known as the Equity line of Credit) as described in our S-1, page 3, filed on April 28, 2010. The purpose of the investment agreement was to provide the Company with the ability to sell shares to Dutchess in order to gain operating capital. The 2,093,145 share commitment fee was issued as an inducement to enter the Equity Line of Credit and is customary for this type of transaction. The ability of the Company to put shares to the company and receive financing was contingent on the S-1 being declared effective. Without an effective S-1, the Company would not have been able to put any Put Shares to Dutchess. Without an effective S-1, the Company would not have issued the Commitment Fee shares. The S-1 was declared effective on June 21, 2010 and the commitment shares were issued on June 25, 2010. At the time of the commitment in December, 2010, the market value of the shares was approximately $400,000 based on the market price of our stock and this is the amount expensed to stock compensation on the date of issuance on June 25, 2010. On the issuance date of the shares the market value of said shares was $75,353 for a difference of $324,647. Dutchess has acknowledged that the commitment amount was not specific as to the dollar amount, but the number of shares. As the commitment shares have been delivered, no further obligation of the Company exists. Therefore, the Company over expensed this share issuance by $324,647 in our second quarter. We have adjusted this error in our fourth quarter resulting in a decrease to our operating expenses.
3.
Unrecorded Beneficial Conversion Feature. Upon review of our financial statements for the three months ended September 30, 2010, we discovered unrecorded expense associated with a beneficial conversion feature contained in one of our outstanding notes that totals $64,937 and is the result of two debt modifications to the Seacoast debt described under NOTE H above. We have adjusted this error in our fourth quarter resulting in an increase to our operating expenses of approximately $64,937.
The net effect on our net income and statement of operations for the quarter ended June 30, 2010 is a credit or decrease to our net loss of $202,029 (Net of items No. 1 and No. 2 above). Net income for the three and six months ended June 30, 2010 was reported as $426,240 and $1,378,644, respectively, of which the proposed adjustment of $202,029 represents a positive adjustment of 47% and 15%, respectively.
The reported net loss for the nine months ended September 30, 2010 was $1,667,929. A net credit of $137,092 (combining adjustments No. 1 through 3 above) represents a positive adjustment of 8% to our results of operations for the nine months ended September 30, 2010.
Since the proposed Q2 and Q3 adjustments above would have a positive impact on the reported statement of operations, and do not effect assets or liabilities, only equity, we do not intend to amend our quarterly Form 10-Q filings for the three and six months ended June 30, 2010 or the three and nine months ended September 30, 2010. We have made the above adjustments in our fourth quarter of 2010 and for the year then ended.
NOTE Q - SUBSEQUENT EVENTS
Pursuant to FASB Accounting Standards Codification 855, Subsequent Events, Including ASC 855-10-S99-2, the Company evaluated subsequent events through March 29, 2011.
Subsequent to December 31, 2010, the Company:
1.
Issued 7,500 shares of Series A Preferred Stock in exchange for $7,500;
2.
Issued 4,750,000 shares of restricted common stock in exchange for services valued at $61,750;
3.
Issued 250,000 shares of restricted common stock in exchange for services valued at $3,250.
4.
Issued 19,000,000 shares to Seacoast Advisors upon their conversion of $95,000 of debt.
5.
Issued 4,460,000 shares to Gemini Master Fund upon their conversion of $22,300 of debt.
NOTE Q - SUBSEQUENT EVENTS (Continued)
The Gemini Note’s (See Note H - Convertible Promissory Notes) maturity date was extended to February 12, 2012 from February 12, 2010.
On January 13, 2011 Dutchess sold their remaining debenture balance to Gemini Master Fund, LTD. The terms and conditions of said note did not change.
On January 12, 2011, The Company issued $104,000 of convertible notes ($24,000 and $80,000) to Gemini Master Fund, Ltd. The terms of both notes are the same and include ten percent (10%) interest per annum, mature on February 1, 2012, are convertible at the option of the note holder at any time at a conversion price equal to the lesser of (i) $0.005 and (ii) 80% of the lowest closing bid price of the Company’s common stock during the 10 trading days immediately preceding the applicable conversion date. The Notes provide that the holder may only convert the debenture if the number of shares held by the lender or its affiliates after conversion would not exceed 4.99% of the outstanding shares of the Company's common stock following such conversion. In the event of default the interest rate on the notes shall increase to the lesser of 24% or the maximum rate permitted under applicable law.