Item 1. Business
Overview
DRS Inc. specializes in the scrapping and recycling of excess waste drywall as well as picking up other construction debris from homes and other buildings under construction and recycling these commodities. Once the excess drywall is gathered, the gypsum is recycled and sold for fertilizer. We believe that disposing of waste is a vitally important issue facing the construction industry, and that "green building" is an essential element to Better Building Practices. Utilizing recycled materials in new construction reduces costs and eliminates the majority of waste which would otherwise be added to landfills.
Although most of the gypsum we recycle is used in the building industry in the production of new drywall, an increasing proportion is now being used in agriculture and horticulture. Gypsum is a 'clean green' soil conditioner and is also used as an excellent calcium and sulphur fertilizer. As a result, gypsum has many applications in the Agricultural and Soil Management fields.
The paper we recycle from drywall sheets is regenerated into recycled paper that can be used in a wide variety of paper products. Our paper baling machines can handle up to 48 tons per day. Once the paper bales are secured, we ship them to manufacturing plants and agricultural sites
Recent Developments
DRS has recently begun incorporating installation of drywall into our regular business activities and together with scrapping drywall on new construction sites, we have been able to increase our revenue along with offering a more complete drywall package. Maintaining installation and scrapping on the same job site enables DRS to minimize the waste, as well as process the waste efficiently and with less cost.
Item 1A.
Item 1A. Risk Factors
RISK FACTORS RELATING TO DRS INC. AND ITS BUSINESS
Losses from continuing operations may occur and, as a result, the price of our common stock may be negatively affected.
If we are not able to grow our business, the results of our operations and our financial condition may be adversely impacted.
We are a drywall scrapping company, incorporating the installation of drywall into our daily business activities of our scrapping and recycling. The majority of our revenue is generated from new construction customers. To grow, we must:
∙ purchase currently leased equipment in order to eliminate monthly leasing fees;
∙ continue to be awarded jobs from new construction and demolition projects;
∙
continue to add and maintain additional facilities necessary to process waste from drywall and other construction debris;
∙
continue to upgrade inventory control, marketing and information systems; and
∙
impose and maintain strict quality control from green building to eliminating excess waste.
Future inability to grow our business resulting from, among other things, failing to execute any of the above factors may adversely affect the results of our operations and our financial condition.
Our operating results may fluctuate significantly, which could have a negative effect on the price of our common stock.
From time to time, our operating results may fall below investor expectations. These results are likely to fluctuate from quarter to quarter as a result of a number of factors, including the fluctuations in construction market; competition from existing and new competitors; and changes in consumer preferences. Quarterly fluctuations in our operating results as the result of these factors or for any other reason could cause our stock price to decline.
A significant interruption in the building and material industry could potentially disrupt our operations.
A significant interruption in the building and material industry, whether as a result of a natural disaster or other causes, could significantly impair our ability to operate our business on a day-to-day basis and could have a material adverse effect on our results of operations and financial condition.
Compliance with government regulations applicable to us could have a material adverse effect on our business, financial condition and results of operations.
Our facility is subject to licensing and reporting requirements by a number of governmental authorities. These governmental authorities include federal, state and local health, environmental, labor relations, sanitation, building, zoning, fire, safety and other departments. Changes in any of these laws or regulations could have a material adverse effect on our business, financial condition and results of operations.
The loss of key personnel or our inability to attract and retain qualified personnel could significantly disrupt our business.
Our continued success largely will depend on the efforts and abilities of our executive officers and other key employees. In addition, our success will depend upon our ability to attract and retain highly motivated and qualified employees. The inability to recruit and retain such individuals may have a material adverse effect on our business or results of operations.
Our lack of diversification may affect business if demand is reduced.
Our business is primarily centered on one service: the scrapping of waste drywall and other debris from construction sites. Decreases in the building industry would have a material adverse effect on our business, operating results and financial conditions.
Item 1B.
Item 1B. Unresolved Staff Comments
Not applicable.
Item 2.
Item 2. Properties
Office Space and Plants
We currently have a month to month lease on a yard that has ample room to park all of our equipment and run our operation. This yard also has a small onsite office that we currently use as both our corporate offices and as our dispatch operations facility.
We currently lease a warehouse in Ridgefield, Washington, from the Port of Ridgefield. The warehouse is approximately 20,000 square feet; which we use as our drywall processing facility. This lease will expire in December 2013.
Additionally, we lease a warehouse in Sunnyside, Washington that we use to store our saleable product. This storage facility is approximately 8,600 square feet and is on a month to month lease.
Finally, we lease land in Milton, Washington and in Bremerton, Washington on a month to month lease and use both as our drywall drop off yards.
On or before any of the lease expirations, we expect to either renew the lease or obtain a new lease in a similar facility. We believe that our facilities are generally adequate for our current needs, and that suitable additional production and administrative space will be available as needed for the foreseeable future.
Item 3.
Item 3. Legal Proceedings
In the ordinary course of business, the Company may become involved in legal proceedings from time to time. There are no material pending legal proceedings of which the company is a party.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
On August 10, 2009, our common stock received approval for trading under Form 15c2-11 and filed with FINRA. We received the ticker symbol DRSX and are listed on the OTCBB exchange. We currently have no reported sales price on the market.
As of September 20, 2009, there were 15,903,718 shares of our common stock outstanding and 85 stockholders of record. Additionally, there are 3,361,600 options to purchase our common stock outstanding. We have not paid dividends on our common stock and do not anticipate paying dividends in the foreseeable future. Information required by Item 201(d) or Regulation S-K is included in Part 111, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
Item 6.
Item 6.
Selected Financial Data
Not applicable.
Item 7.
Item 7.
Management’s Discussion and Analysis of Financial Condition and Result of Operations
INTRODUCTION
Management’s discussion and analysis of financial condition and results of operations is provided as a supplement to the accompanying consolidated financial statements and footnotes help provide an understanding of our financial condition, the changes in our financial condition and the results of operations. Our discussion is organized as follows:
∙ Overview. This section provides a general description of our business, as well as recent significant transactions or events that we believe are important in understanding the results of operations, as well as to anticipate future trends in those operations.
∙ Results of operations. This section provides an analysis of our results of operations presented in the accompanying consolidated statements of operations by comparing the results for fiscal years 2009 and 2008.
∙ Financial condition and liquidity and capital resources. This section provides an analysis of our cash flows, as well as a discussion of our outstanding debt that existed as of June 30, 2009.
Overview
The Company was incorporated in November 2006 and is currently focused on drywall and other waste removal from construction sites for disposal and recycling in the Northwest United States. The Company recycles the gypsum and other products from the drywall for sale to farmers in Washington State as fertilizer. However, the revenues received from these sales were not material in fiscal years 2008 and 2007 to warrant discussion.
Management plans to raise capital through an offering of its common stock. The Company will use the proceeds of this offering to purchase leased equipment. Management estimates the purchase will save the Company approximately $475,000 in depreciation expense, leased trucks expense, and interest expense.
Management has entered into an Agreement with a consulting firm to develop markets for our services as well as to develop further investor relations.
Results of Operations
Gross sales from drywall removal and other hauling were $3,497,655 and $3,100,164 for the twelve months ended June 30, 2009 and June 30, 2008, respectively. Sales are billed to the client based upon the amount of debris removed, the type of debris, and transportation distances.
Gross margin as a percent of sales was about 15% and 12% respectively for the twelve months period. The gross margin percent increased for 2009 mainly as a result of lower fuel costs.
Administrative costs for the twelve months ended June 30, 2009 and June 30, 2008 are as follows:
Salaries & benefits
$227,855
$109,500
Automobile expense
7,710
9,402
Bad debt expense
123,571
25,930
Bank fees
3,420
Depreciation- office equipment
2,967
1,296
Insurance
63,730
55,319
Licenses
9,092
6,463
Management consulting
181,162
176,014
Marketing
41,844
5,933
Meals
4,814
6,688
Administration
95,228
45,082
Professionals & consulting fees
47,473
74,924
Rent expense
190,771
106,587
Taxes
12,403
14,910
Telephone
43,564
29,432
Total
$1,055,604
$668,257
Although salaries and wages increased over the current fiscal period in support of additional sales focus and growth prior to the industry cutbacks, salaries in general have been reduced severely in the 4th quarter of this fiscal year to match current sales levels, including management level positions.
Bad Debts increased from $25,930 to $123,571 over the prior twelve month period as a result of industry cutbacks, company failures and closures and overall cash flow shortages. DRS will continue to negotiate with debtors and has ongoing collection efforts; management believes the coming fiscal year will be more consistent with past collection rates.
Marketing costs increased from $5,933 in the prior twelve month period to $41,844 for current twelve month period due to increase in stock offerings and general business growth focus.
Administration increased from $45,082 in prior twelve month period to $95,288 for current twelve month period as a result of increases in facility costs, which have been reduced to match current sales levels.
Professionals and consulting fees decreased from $74,924 in prior twelve month period to $47,473 for current twelve month period as a result of the company not incurring additional public offering costs and management cutback of some consulting services. The Company achieved its goal of becoming a publicly traded company in February 2009.
Rent expense increase from $106,587 in prior twelve month period to $190,771 for current twelve month period as a result of additional expense for the Ridgefield facility and new offices.
In May of 2009, the company entered into an operating agreement with Drywall Recycling Services, Inc., a Wyoming corporation, to operate our Ridgefield facility. This will reduce monthly rent expense, saving $5,924 per month, eliminate employees, power and other expenses to operate the facility, reduce sales staff overhead by one employee, and help conserve cash during the off season. DRS will receive 2% of all product sales generated through the operation of the facility, but has eliminated the financial burden to operate the facility.
To further lower its’ overhead, the company vacated its’ main offices in April of 2009 which will reduce rent expense by $4,100 per month plus CAM charges and also vacated the yard space it was using to eliminate this rent of $2,000 per month. The company then moved to a new yard that has a smaller office to run its’ operations that will have a monthly rent expense of $3,425 per month that will accommodate both yard and office needs.
As a result, our net loss from operations for twelve months ended June 30, 2009 and June 30, 2008 was $529,031 and $307,540. After deducting the interest costs on the capital leases for our trucks and adding interest income, we incurred a net loss of $579,777 in twelve months of 2009, or about $0.04 per share compared to $333,278 in twelve months of 2008, or about $0.02 per share.
Financial Condition and Liquidity and Capital Resources
Cash on hand at June 30, 2009 was $18,481 compared to $50,525 at June 30, 2008. We used $141,364 for operations in the twelve months of 2009 compared to $299,292 in the twelve months of 2008. We used $88,676 to purchase additional equipment and deposits on our new vehicles as of June 30, 2009 compared to $42,487 at June 30, 2008. In fiscal year 2009, we raised $150,000 by issuing an unsecured note to individuals unrelated to the Company. In addition we received $35,450 by issuing 34,450 shares of our common stock. In fiscal year 2009, we issued notes to the president of the Company and received proceeds of $115,000. The notes above are secured by accounts receivable and mature within the coming year. In fiscal year 2008, we raised $90,000 by issuing 113,334 shares of common stock and 166,668 options. In fiscal years 2009 and 2008, we used $102,454 and $59,684 to pay down the capital leases on our vehicles and other equipment.
Total assets at June 30, 2009 and June 30, 2008 were $1,280,325 and $908,851, respectively. Our working capital at June 30, 2009 was a deficit of $247,625 as compared to $172,916 at June 30, 2008.
Accounts receivable collection has been affected by tightening industry cash flows and current market slowdowns which have prevented further expansion until additional capital can be raised.
Without additional funding management believes that additional operational reductions will be required.
Management does not foresee any additional capital expenditures in the next quarter. DRS Inc. will continue to promote the company through the public venue.
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company does not hold any assets or liabilities requiring disclosure under this item.
Item 8.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data required by this item are set forth at the end of this Annual Report on Form 10-K beginning on page.
Item 9.
Item 9. Changes in and Disagreements with Accountants and Financial Disclosure
There are no changes in or disagreements with accountants on accounting and/or financial disclosure at this time.
Item 9A.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures. Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)), in connection with the preparation of this Annual Report on Form 10-K, as of June 30, 2009.
Based on the review described above, our Chief Executive Officer and Chief Financial Officer determined that our disclosure controls and procedures were effective as of the end of the period covered by this report.
Internal Control Over Financial Reporting. Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. 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. In addition, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, 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. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on 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. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.
Our management assessed our internal control over financial reporting as of June 30, 2009 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, our management concluded that our internal control over financial reporting was effective as of June 30, 2009 to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles.
This annual report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report on Form 10-K.
There were no changes in our internal control over financial reporting that occurred during the fourth quarter ended June 30, 2009, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Item 9B.
Item 9B. Other Information
Upon effect of our Form S-1 Registration Statement given February 5, 2009, we filed a Form 15c2-11 with FINRA. We received approval of our filing on August 10, 2009, and received our OTCBB ticker symbol of DRSX.
PART III
Item 10.
Item 10. Directors, Executive Officers and Corporate Governance
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16 of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the Securities and Exchange Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. These Section 16 reporting persons are required by Securities and Exchange Commission regulations to furnish us with copies of all Section 16 forms they file.
Only our two members of the Board of Directors, Daniel Mendes and George Guimont, own more than ten percent of our registered equity securities. Although we have not, to date, filed Form 3 or Form 4 for these persons, we are in the process of filing these forms.
Code of Conduct
We have adopted a code of conduct that describes the ethical and legal responsibilities of all of our employees and, to the extent applicable, the members of our board of directors. This code includes, but is not limited to, the requirements of the Sarbanes-Oxley Act of 2002 pertaining to codes of ethics for chief executives and senior financial and accounting officers. Our board of directors has reviewed and approved this code of conduct. Our employees agree in writing to comply with the code at commencement of employment and periodically thereafter. Our employees are encouraged to report suspected violations of the code through various means, and they may do so anonymously. If we make substantive amendments to the code or grant any waiver, including any implicit waiver, to our principal executive, financial or accounting officer, or persons performing similar functions, we will disclose the nature of such amendment or waiver on our website and/or in a report on Form 8-K in accordance with applicable rules and regulations.
Item 11.
Item 11. Executive Summary and Compensation
Information Regarding the Directors of DRS Inc.
Our bylaws provide that our board of directors shall consist of at least two members and will be determined by resolution of our board of directors. The number of members of our board of directors is currently two.
The following table lists our directors and provides their respective ages and titles as of June 30, 2009.
Name
Age
Title
Director Since
Daniel Mendes (1)
President, Director, Principal Executive Officer, Controller
George Guimont (2)
Secretary/Treasurer, Director, Principal Financial Officer
(1)
From inception of DRS Inc., on November 17, 2006, Daniel Guimont was President and Daniel Mendes was Secretary/Treasurer. On August 1, 2007, Daniel Guimont resigned as President and Daniel Mendes stepped in as President.
(2)
On August 1, 2007, George Guimont became Secretary/Treasurer.
Both Mr. Mendes and Mr. George Guimont each currently own and operate separate drywall companies and spend at least 40 hours each week at their respective companies.
Daniel Mendes: Mr. Mendes oversees the physical operation and marketing of DRS Inc. as well as the daily business operation of DRS Inc. Mr. Mendes graduated from Santa Clara University, Santa Clara, California in 1981 with a BSC in Finance. Mr. Mendes' experience in management, transportation, and drywall are all assets that will be drawn upon in his role as President of DRS Inc., which works primarily with drywall companies, and manages a fleet of equipment used to pick up and transport materials.
In addition to running the day to day business of DRS Inc., Mr. Mendes is also the Vice President and Owner of Redhawk Construction Inc. In this position since 1996, Mr. Mendes manages all phases of operation including financials and growth development. Mr. Mendes brought this company from approximately $250,000 in annual revenue to over $1,000,000 in 4 years and over 2,000,000 in 8 years.
George Guimont: Mr. Guimont has been with DRS Inc. since its inception and brings with him many years of experience in the drywall industry. Mr. Guimont holds a two-year degree from Pima College in Arizona and completed a two-year union apprentice program, working as a journeyman drywaller until he started his own company.
Mr. Guimont assists in the daily business of DRS Inc. in addition to running the company he began in 1987. As Owner and President of Living Home Construction in Seattle, Washington, his company performs drywall installation, taping and mudding and specializes in custom homes and tenant improvement remodeling for commercial space.
Additionally, Mr. Guimont spent four years in the Air Force and was part of a missile launch control team for our Titan II missile system.
Salaries to our executives are set forth in the table below:
Name & Principal Position
Year
Salary
Other Compensation
Daniel Mendes
President/Director
$0.00
$0.00
George Guimont
Secretary/Treasurer
Director
$0.00
$0.00
Neither Mr. Mendes nor Mr. Guimont are currently taking salaries or other compensation from DRS Inc. They are committed to building and expanding the company and have elected to not take salaries for the time being.
Item 12.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth information regarding the beneficial ownership of our common stock as of September 20, 2009 by:
∙
each person or group of affiliated persons who we know beneficially owns more than 5% of our common stock; and
∙
each of our directors and named executive officers;
The information presented below regarding beneficial ownership of our voting securities has been presented in accordance with the rules of the Securities and Exchange Commission and is not necessarily indicative of ownership for any other purpose. Under these rules, a person is deemed to be a "beneficial owner" of a security if that person has or shares the power to vote or direct the voting of the security or the power to dispose or direct the disposition of the security. A person is deemed to own beneficially any security as to which such person has the right to acquire sole or shared voting or investment power within 60 days through the conversion or exercise of any convertible security, warrant, option or other right. More than one person may be deemed to be a beneficial owner of the same securities. The percentage of beneficial ownership by any person as of a particular date is calculated by dividing the number of shares beneficially owned by such person, which includes the number of shares as to which such person has the right to acquire voting or investment power within 60 days, by the sum of the number of shares outstanding as of such date plus the number of shares as to which such person has the right to acquire voting or investment power within 60 days. Consequently, the denominator used for calculating such percentage may be different for each beneficial owner. Except as otherwise indicated below and under applicable common share property laws, we believe that the beneficial owners of our common stock listed below have sole voting and investment power with respect to the shares shown. The business address of the shareholders set forth below is 5906-B 238th Street SE ∙ Woodinville, Washington 98072.
NAME
TOTAL SHARES OWNED
PERCENTAGE
Daniel Mendes
7,000,000
28%
George Guimont
7,000,000
28%
Terry Wong (1)
1,066,664
4.3% (3)
Karen Okazaki Wong (2)
1,333,332
5.3% (3)
(1) Mr. Terry Wong, personally and through his trust, purchased for cash, 266,666 shares of our Common Stock during our private placement. Additionally, Mr. Wong has Options to purchase 799,998 shares of our Common Stock, making him a beneficial owner of more than 4.3% of our Common Stock, and under Item 403 under Regulation S-K of the Securities and Exchange Act, retains voting power associated with more than 5% of our Common Stock (together with his wife). Mr. Wong and his wife have been family friends of Mr. Mendes for over ten years.
(2) Ms. Karen Okazaki Wong purchased, for cash, 333,333 shares of our Common Stock during our private placement. Additionally, Ms. Wong has Options to purchase 999,999 shares of our Common Stock, making her a beneficial owner of more than 5% of our Common Stock and thus, under Item 403 under Regulation S-K of the Securities and Exchange Act, retains voting power associated with more than 5% of our Common Stock. Ms. Wong and her husband have been family friends of Mr. Mendes for over ten years.
(3) Together, Mr. Terry Wong, Ms. Karen Okazaki Wong and the Wong Family Trust retain voting power associated with 9.6% of our Common Stock.
Item 13.
Item 13. Certain Relationships and Related Transactions and Director Independence
During fiscal years 2009 and 2008, sales revenues of $291,999 and $267,610, respectively were generated from client companies owned by the Company’s management and other shareholders. Accounts receivables from related parties at June 30, 2009 and June 30, 2008 were $6,678 and $8,108, respectively.
The Company has entered into equipment rental agreements with the secretary and treasurer of the Company and a majority shareholder. The rental agreements are on a month to month basis and the Company has deposited $227,681 as security with this related party to secure the rental agreements. The deposits are unsecured and non interest bearing. For the fiscal years 2008 and 2007, the Company paid $340,960 and $297,830, respectively to this related party for the equipment’s rental.
During fiscal year 2009, the Company issued notes payable to a shareholder and received proceeds of $115,000. The loan is secured by the receivables of the Company and matures from May 2010 to July 2010. Although there was no stated interest on these notes, the Company imputed an interest rate of 10.67% and recorded interest expense of $1,041 in the statement of operations for fiscal year 2009.
Item 14.
Item 14. Principal Accountant Fees and Services
The following table presents the aggregate fees billed by Donahue Associates L.L.C. for services provided during our 2009 and 2008 fiscal years.
Audit Fees. The fees identified under this caption were for professional services rendered by Donahue Associates L.L.C. for fiscal years 2009 and 2008 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered accounting firm in connection with statutory and regulatory filings and engagements for the years identified.
Audit-Related Fees. The fees identified under this caption were for assurance and related services that were related to the performance of the audit or review of our financial statements and were not reported under the caption “Audit Fees.” Audit-related fees consisted primarily of fees paid for Securities and Exchange Commission reporting matters and consents related to our uniform franchise offering circulars.
Tax Fees. Tax fees consist principally of assistance related to tax compliance and reporting.
Approval Policy. Our audit committee approves in advance all services provided by our independent registered public accounting firm. All engagements of our independent registered public accounting firm in fiscal years 2009 and 2008 were pre-approved by Board of Directors.
PART IV
Item 15.
Item 15. Exhibits, Financial Statements, Schedules
Financial Statements and Schedules.
The financial statements and schedules required to be filed hereunder are set forth at the end of this Annual Report on Form 10-K beginning on page, and is accompanied by a Financial Statements Index.
Exhibits.
The Exhibit Index attached behind the signature page is incorporated herein by reference.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
FINANCIAL STATEMENTS INDEX
Management’s Report on Internal Control Over Financial Reporting
Independent Auditor’s Report
Balance Sheets
Statements of Operations
Statements of Cash Flows
Statement of Changes in Shareholder’s Equity
Notes to the Financial Statements
Management’s Discussion and Analysis and Plan of Operation
EXHIBIT INDEX
Exhibit No.
SEC Ref. No.
Title of Document
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
2.
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1
Certification of the Principal Executive Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2
Certification of the Principal Financial Officer pursuant to U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
* The Exhibit attached to this Form 10-Q shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934 (the “Exchange Act”) or otherwise subject to liability under that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act, except as expressly set forth by specific reference in such filing.
DRS Inc.
Audited Financial Statements
For the Years Ended June 30, 2009 and June 30, 2008
Management's Report on Internal Control Over Financial Reporting
The management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rules 13-a-15(f) and 15d-15(f) under the Exchange Act as a process designed by, or under the supervision of, the Company's principal executive and principal financial officers and effected by the Company's board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles and includes those policies and procedures that:
* pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
* provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorization of management and directors of the Company; and
* provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the financial statements.
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.
Management assessed the effectiveness of the Company's internal control over financial reporting as of June 30, 2009. 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 (COSO).
Based on this assessment, management believes that, as of June 30, 2009, the Company's internal control over financial reporting is effective.
There have not been any changes in the Company's internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
/s/ Daniel Mendes
Daniel Mendes- President
DONAHUE ASSOCIATES, L.L.C.
BEACH ROAD, SUITE CO5-A
MONMOUTH BEACH, NJ. 07750
Phone: (732) 229-7723
Independent Auditor’s Report
The Shareholders,
DRS Inc.
We have audited the accompanying balance sheets of DRS Inc. as of June 30, 2009 and June 30, 2008 and the related statements of operations and changes in shareholders’ equity, and cash flows for the years then ended. These financial statements are the responsibility of management. Our responsibility is to express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted by the Public Company Accounting Oversight Board in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements presented are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the balance sheets of DRS Inc. as of June 30, 2009 and June 30, 2008 and the related statements of operations and changes in shareholders’ equity, and cash flows for the years then ended, in conformity with generally accepted accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 13 to the financial statements, the Company has suffered recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue as a going concern. Management’s plans in regard to these matters are also discussed in Note 13. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Monmouth Beach, New Jersey
September 20, 2009
DRS Inc.
Balance Sheets
As of June 30, 2009 and June 30,
DRS Inc.
Statements of Operations
For the Years Ended June 30, 2009 and June 30,
DRS Inc.
Statements of Cash Flows
For the Years Ended June 30, 2009 and June 30,
DRS Inc.
Statement of Changes in Shareholder’s Equity
For the Years Ended June 30, 2009 and June 30, 2008
DRS Inc.
Notes to the Financial Statements
For the Years Ended June 30, 2009 and June 30, 2008
1.
Organization of the Company and Significant Accounting Principles
DRS Inc. (the “Company”) is a privately held corporation formed in November 2006 in the state of Nevada. The Company removes drywall and other rubbish from construction sites for disposal and recycling. The Company operates mainly in the state of Washington.
Use of Estimates- The preparation of the financial statements in conformity with generally accepted accounting principles requires management to make reasonable estimates and assumptions that affect the reported amounts of the assets and liabilities and disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses at the date of the financial statements and for the year they include. Actual results may differ from these estimates.
Cash- For the purpose of calculating changes in cash flows, cash includes all cash balances and highly liquid short-term investments with maturity dates of three months or less.
Fixed Assets- Fixed assets are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful life of the asset. The following is a summary of the estimated useful lives used in computing depreciation expense:
Office equipment
years
Vehicles
years
Equipment
Years
Furniture & fixtures
Years
Expenditures for major repairs and renewals that extend the useful life of the asset are capitalized. Minor repair expenditures are charged to expense as incurred.
Long Lived Assets- The Company reviews for the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset and its eventual disposition is less than its carrying amount.
Income taxes- The Company accounts for income taxes in accordance with the Statement of Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes". SFAS No. 109 requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for differences between financial statement and income tax bases of assets and liabilities that will result in taxable income or deductible expenses in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets and liabilities to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period adjusted for the change during the period in deferred tax assets and liabilities.
Revenue Recognition- The Company realizes revenues from drywall removal jobs when the existence of an unconditional binding arrangement with a client is present, the work has been performed, the Company fees are determined and fixed, and the assurance of the revenue collection is reasonably secured.
Bad Debt Expense- The Company provides, through charges to income, a charge for bad debt expense, which is based upon management's evaluation of numerous factors. These factors include economic conditions, a predictive analysis of the outcome of the current portfolio and prior credit loss experience. The Company’s reserve for bad debt is $166,792 at June 30, 2009 and $61,634 at June 30, 2008.
Recent accounting pronouncements:
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 provides guidance for using fair value to measure assets and liabilities. It also responds to investors’ requests for expanded information about the extent to which companies measure assets and liabilities at fair value, the information used to measure fair value and the effect of fair value measurements on earnings. SFAS 157 applies whenever other standards require (or permit) assets or liabilities to be measured at fair value. The standard does not expand the use of fair value in any new circumstances, but provides clarification on acceptable fair valuation methods and applications. SFAS 157 was effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The adoption of SFAS 157 will not have a material affect on the Company’s consolidated financial statements.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 will not have a material affect on the Company’s consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination or a gain from a bargain purchase and determines what information to disclose to enable users of financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of SFAS 141(R) will not have a material affect on the Company’s consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133” (“SFAS 161”). SFAS 161 updates guidance regarding disclosure requirements for derivative instruments and hedging activities. It responds to constituents’ concerns that FASB Statement No. 133 does not provide adequate information about how derivative and hedging activities affect an entity’s financial position, financial performance, and cash flows. SFAS 161 is effective for financial statements issued for fiscal years and interim period beginning after November 15, 2008. The adoption of SFAS 161 will not have a material affect on the Company’s consolidated financial statements.
2. Fair values of Financial Instruments
Cash, accounts receivable, prepaid expenses, security deposits, accounts payable and accrued expenses, capital leases payable, notes payable, and loan payable- shareholder in the balance sheet are estimated to approximate fair market value at June 30, 2009 and June 30, 2008.
3. Net Loss per Share
The Company applies SFAS No. 128, Earnings per Share to compute net loss per share. In accordance with SFAS No. 128, basic net loss per share has been computed based on the weighted average of common shares outstanding during the years. Diluted net loss per share gives the effect of outstanding common stock equivalents of the warrants outstanding. The effects on net loss per share of the common stock equivalents, however, are not included in the calculation of net loss per share since their inclusion would be anti-dilutive.
Net loss per common share has been computed as follows:
4. Concentration of Credit Risks
The Company’s president and secretary have provided personal guarantees on some of the leased vehicles discussed in Note 9. A withdrawal of this support may have a material adverse effect on the Company’s ability to lease equipment.
5. Provision for Income Taxes
6. Issuance of Common Stock and Options
In February 2007, the Company began an offering of 1,500,000 shares of its common stock through an offering as defined by Rule 501 of Regulation D of the Securities Exchange Act. The offering price per share was $0.75. The offering also includes common stock options to be issued to purchasers of common stock in excess of 6,667 shares at exercise prices and maturity dates depending upon the amount of shares purchased. Please see the table below for a detail of exercise prices and maturity dates.
At the time of the issuance of the options, the Company applied an option pricing model to determine the fair value of the options issued using the following assumptions, the dividend yield is 0%, volatility is 40%, and a risk-free interest rate of 5.50%. The fair values generated by option pricing model may not be indicative of the future values, if any, that may be received by the option holder.
In fiscal year 2008, the Company issued 113,334 shares of common stock and 166,668 common stock options and received proceeds of $90,000. Additionally, the Company issued 20,000 shares of its common stock to a consultant for services rendered and recorded a consulting expense of $15,001 in the statement of operations for fiscal year 2008.
During fiscal year 2009, the Company issued 34,450 shares of common stock and received proceeds of $34,450. No options were issued during fiscal year 2009.
There is no formal stock option plan for employees.
A list of options outstanding at June 30, 2009 is as follows:
7. General Administrative Expenses
A detail of general administrative expenses in the statement of operations at June 30, 2009 and June 30, 2008 is as follows:
8. Fixed Assets- Net
The following table is a summary of fixed assets at June 30, 2009 and June 30, 2008:
Assets lease under capital lease agreements, more fully discussed in Note 9, are $736,652 with accumulated depreciation of $177,411 at June 30, 2009. Depreciation expense on these leased assets for fiscal years 2009 and 2008 is $98,073 and $61,434, respectively.
9. Commitments and Contingencies
The Company is committed to various non-cancelable operating leases for office, vehicle parking space, and recycling facilities in Washington State. Future minimum lease payments required under these leases is as follows:
Rent expense for fiscal years 2009 and 2008 is $190,771 and $106,587, respectively.
The Company has entered into various capital lease agreements for the vehicle equipment. Future minimum lease payments required under these leases is as follows:
10. Litigation
The Company is a defendant in various lawsuits initiated against it as a result of the ordinary course of its business. At the date of this report, management cannot predict the likelihood of an unfavorable of these lawsuits nor can management estimate a probable range of loss, if any, upon the resolution of these matters. However, in the opinion of management, the eventual disposition of these lawsuits will not have a material effect on the Company’s financial position.
11. Related Party Transactions
During fiscal years 2009 and 2008, sales revenues of $291,999 and $267,610, respectively were generated from client companies owned by the Company’s management and other shareholders. Accounts receivables from related parties at June 30, 2009 and June 30, 2008 were $6,678 and $8,108, respectively.
The Company has entered into equipment rental agreements with the secretary and treasurer of the Company and a majority shareholder. The rental agreements are on a month to month basis and the Company has deposited $227,681 as security with this related party to secure the rental agreements. The deposits are unsecured and non interest bearing. For the fiscal years 2008 and 2007, the Company paid $340,960 and $297,830, respectively to this related party for the equipment’s rental.
During fiscal year 2009, the Company issued notes payable to a shareholder and received proceeds of $115,000. The loan is secured by the receivables of the Company and matures from May 2010 to July 2010. Although there was no stated interest on these notes, the Company imputed an interest rate of 10.67% and recorded interest expense of $1,041 in the statement of operations for fiscal year 2009.
11. Non Cash Transactions
During fiscal years 2009 and 2008, the Company acquired $435,652 and $76,750, respectively, various equipment through capital leases which are more fully discussed in Note 9. The transactions have been excluded from the statement of cash flows for the fiscal years 2009 and 2008 since the transactions did not involve the exchange of cash.
12. Debt and Credit Line
In October 2008, the Company issued a note payable to a creditor and received proceeds of $200,000. The loan is secured by the receivables of the Company and matures in December 2009 at an interest rate of 10%.
In January 2009, the Company issued a note payable to a creditor and received proceeds of $100,000. The loan is secured by the receivables of the Company and matures in February 2010 at an interest rate of 12%.
The Company has a $10,000 line of credit from a bank at a fluctuating interest rate based on the prime interest rate. The Company did not use the credit line in fiscal year 2008.
13. Going Concern
The accompanying financial statements have been presented in accordance with generally accepted accounting principals, which assume the continuity of the Company as a going concern. However, the Company has incurred significant losses since its inception and continues to rely on financing and the issuance of shares to raise capital to fund its business operations.
Management’s plans with regard to this matter are as follows:
Management planes to raise capital through an offering of its common stock. The Company will use the proceeds of this offering to purchase the leased equipment discussed in Note 9. Management estimates the purchase will save the Company approximately $475,000 in depreciation expense, leased trucks expense, and interest expense.
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MANAGEMENT’S DISCUSSION AND ANALYSIS AND PLAN OF OPERATION
Summary of Operations
Overview
You should read the following discussion and analysis in conjunction with the Consolidated Financial Statements and Notes thereto, and the other financial data appearing elsewhere in this Report.
The information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contains certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, Section 21E of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995, including, among others (i) expected changes in the Company’s revenues and profitability, (ii) prospective business opportunities and (iii) the Company’s strategy for financing its business. Forward-looking statements are statements other than historical information or statements of current condition. Some forward-looking statements may be identified by use of terms such as “believes”, “anticipates”, “intends” or “expects”. These forward-looking statements relate to the plans, objectives and expectations of the Company for future operations. Although the Company believes that its expectations with respect to the forward-looking statements are based upon reasonable assumptions within the bounds of its knowledge of its business and operations, in light of the risks and uncertainties inherent in all future projections, the inclusion of forward-looking statements in this report should not be regarded as a representation by the Company or any other person that the objectives or plans of the Company will be achieved. In light of these risks and uncertainties, there can be no assurance that actual results, performance or achievements of the Company will not differ materially from any future results, performance or achievements expressed or implied by such forward-looking statements. The foregoing review of important factors should not be construed as exhaustive. The Company undertakes no obligation to release publicly the results of any future revisions it may make to forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
The Company was incorporated in November 2006 and is currently focused on drywall and other waste removal from construction sites for disposal and recycling in the Northwest United States. The Company recycles the gypsum and other products from the drywall for sale to farmers in Washington State as fertilizer. However, the revenues received from these sales were not material in fiscal years 2008 and 2007 to warrant discussion.
Results of Operations
For the Fiscal Years Ended June 30, 2009 and June 30, 2008
Gross sales from drywall removal and other hauling were $3,497,655 and $3,100,164 for the twelve months ended June 30, 2009 and June 30, 2008, respectively. Sales are billed to the client based upon the amount of debris removed, the type of debris, and transportation distances.
Gross margin as a percent of sales was about 15% and 12% respectively for the twelve months period. The gross margin percent increased for 2009 mainly as a result of lower fuel costs.
Administrative costs for the twelve months ended June 30, 2009 and June 30, 2008 are as follows:
Although salaries and wages increased over the current fiscal period in support of additional sales focus and growth prior to the industry cutbacks, salaries in general have been reduced severely in the 4th quarter of this fiscal year to match current sales levels, including management level positions.
Bad Debts increased from $25,930 to $123,571 over the prior twelve month period as a result of industry cutbacks, company failures and closures and overall cash flow shortages. DRS will continue to negotiate with debtors and has ongoing collection efforts and management believes the coming fiscal year will be more consistent with past collection rates.
Marketing costs increased from $5,933 in the prior twelve month period to $41,844 for current twelve month period due to increase in stock offerings and general business growth focus.
Administration increased from $45,082 in prior twelve month period to $95,288 for current twelve month period as a result of increases in facility costs, which have been reduced to match current sales levels.
Professionals and consulting fees decreased from $74,924 in prior twelve month period to $47,473 for current twelve month period as a result of the company not incurring additional public offering costs and management cutback of some consulting services. The Company achieved its goal of becoming a publicly traded company in February 2009.
Rent expense increase from $106,587 in prior twelve month period to $190,771 for current twelve month period as a result of additional expense for the Ridgefield facility and new offices.
In May of 2009, the company entered into an operating agreement with Drywall Recycling Services, Inc., a Wyoming corporation, to operate our Ridgefield facility. This will reduce monthly rent expense, saving $5,924 per month, eliminate employees, power and other expenses to operate the facility, reduce sales staff overhead by one employee, and help conserve cash during the off season. DRS will receive 2% of all product sales generated through the operation of the facility, but has eliminated the financial burden to operate the facility.
To further lower its’ overhead, the company vacated its’ main offices in April of 2009 which will reduce rent expense by $4,100 per month plus CAM charges and also vacated the yard space it was using to eliminate this rent of $2,000 per month. The company then moved to a new yard that has a smaller office to run its’ operations that will have a monthly rent expense of $3,425 per month that will accommodate both yard and office needs.
As a result, our net loss from operations for twelve months ended June 30, 2009 and June 30, 2008 was $529,031 and $307,540. After deducting the interest costs on the capital leases for our trucks and adding interest income, we incurred a net loss of $579,777 in twelve months of 2009, or about $0.04 per share compared to $333,278 in twelve months of 2008, or about $0.02 per share.
Liquidity & Capital Resources
Cash on hand at June 30, 2009 was $18,481 compared to $50,525 at June 30, 2008. We used $141,364 for operations in the twelve months of 2009 compared to $299,292 in the twelve months of 2008. We used $88,676 to purchase additional equipment and deposits on our new vehicles as of June 30, 2009 compared to $42,487 at June 30, 2008. In fiscal year 2009, we raised $150,000 by issuing an unsecured note to individuals unrelated to the Company. In addition we received $35,450 by issuing 34,450 shares of our common stock. In fiscal year 2008, we raised $90,000 by issuing 113,334 shares of common stock and 166,668 options. In fiscal years 2009 and 2008, we used $102,454 and $59,684 to pay down the capital leases on our vehicles and other equipment.
Total assets at June 30, 2009 and June 30, 2008 were $1,280,325 and $908,851, respectively. Our working capital at June 30, 2009 was a deficit of $247,625 as compared to $172,916 at June 30, 2008.
Accounts receivable collection has been affected by tightening industry cash flows and current market slowdowns which have prevented further expansion until additional capital can be raised.
Without additional funding management believes that additional operational reductions will be required.
Management does not foresee any additional capital expenditures in the next quarter. DRS Inc. will continue to promote the company through the public venue.
New Developments
In August 2009 DRS Inc. received it ticker symbol from FNRA. It will be trading on the OTCBB exchange under the symbol DRSX and can be located on the exchanges website.
The company has now applied to have its’ stock DTC certified so that shares can be traded electronically.