Item 1. Business.
Background and General Activities
Background
Our company, Boomerang Systems, Inc, is engaged in the business of marketing, designing, engineering, manufacturing, installing and servicing its RoboticValet® automated parking systems, or APSs, with corporate and sales offices in Florham Park, New Jersey, and a research, design, engineering, production and testing center in Logan, Utah.
Boomerang entered the business of APSs by developing and marketing automated self-storage systems to provide the space efficiency, security, and convenience of 100% “drive-up accessible” vertical self-storage in densely-populated urban locations with high real estate values. This system, which we refer to as Boomerang’s Automated Locker Retrieval System or ALRS, stores steel storage containers in a steel rack system with a central open atrium and shuttles that move along a rail (i.e., “rack & rail”) transporting containers back and forth between storage locations and ground floor loading bays.
While promoting our self-storage system, we received numerous inquiries to provide space-saving automated parking systems. In 2007, we began to develop APSs to expand our product line and enter that business. While we believe automated self-storage has significant potential, we believe the demand for automated parking systems is substantially larger.
We first developed a “rack & rail” system to serve this market. However, recently we have focused our efforts towards our RoboticValet® product. While our rack & rail system competed with other rail or track based APSs offered by other automated parking providers, we believe that our RoboticValet system is unique in the marketplace with distinct advantages over other systems historically offered by competitors.
During 2013, Boomerang ceased pursuing its legacy rack-and-rail based APS in order to focus its resources and efforts on the next-generation RoboticValet system in the U.S. and Canada.
Boomerang has filed patent applications with respect to key aspects of its automated parking and self-storage systems. To date we have been awarded five (5) patents on a variety of automated self-storage system and components related to our RoboticValet and AGV systems. In addition, we have numerous domestic and international patent applications pending worldwide with additional applications in the pipeline. As an innovator in the field of APSs, Boomerang considers its patent estate and industry know-how to be an important corporate asset and market differentiator as compared with other providers in the field. In addition, Boomerang has the rights to various trademarks, trade names or service marks used in its business, including RoboticValet and TrafficMaster®.
General Activities
Since we entered the business of automation in 2007, we have developed ALRS and APS test systems as well as commercial systems. We believe that our test systems have been instrumental in advancing our understanding of the business, our proprietary technology and our implementation capabilities. Demonstrating these systems to prospective customers has also proven useful in advancing our sales efforts. Boomerang has manufactured one ALRS and four APSs for commercial use. In addition, we have begun implementing our sixth commercial system, which is a RoboticValet APS and our largest APS to date, and signed two additional contracts to deliver RoboticValet APS systems.
The first commercial system was a fully automated ALRS installed in New Kensington, PA. This self-storage facility is a six-level steel rack system with 170 leasable units. Storage units in the system are retrieved and delivered automatically to one of five drive up accessible loading bays when requested by tenants via a kiosk adjacent to the loading bay or remotely via an access control panel upon the tenant entering the property.
The second system installed for a commercial use in 2008 was an APS installed in San Juan del Rio, Queretaro, Mexico. This six level APS has the capacity to store eleven vehicles which can be retrieved to a ground floor loading bay via a kiosk and is used by the customer for employee parking.
The third system in commercial use is a RoboticValet APS installed at the Crystal Springs Golf & Spa Resort complex in Sussex County, NJ on property owned by Route 94 Development Corporation. Route 94 Development Corporation is principally owned by Gail Mulvihill, who also has a substantial ownership interest in Boomerang and is the mother of Christopher Mulvihill, our President. The structure housing this system was built in fiscal 2010, and the RoboticValet system was installed within the structure in fiscal 2011. Implementation of this system has not and will not produce any revenue for us, however, we have the ability to bring prospective customers to the site to demonstrate the system to them. While we have been able to demonstrate our RoboticValet technology at our test facility in Utah, we believe that having this pilot facility installed and operational provides prospective buyers a more substantial validation of the viability of our RoboticValet system, since it serves as a demonstration of the RoboticValet system used in a commercial application. This facility also provides a more convenient demonstration location for prospective customers located on the East Coast. This two level APS is designed to store up to 39 vehicles, with two ground level loading bays from which resort employees can store and retrieve vehicles. We received the Certificate of Occupancy for this facility on October 3, 2011.
Our fourth commercial system is an eight level APS in Miami Beach, Florida, with a maximum storage capacity of 139 vehicles. The APS was installed and commenced partial commercial operation in September 2012. This APS is currently inoperative and is the subject of ongoing arbitration between Boomerang and the customer. See “Item 3 - Legal Proceedings.”
Our fifth commercial system is a rack and rail APS system we installed in a museum in Stuart, Florida, where it is used to store 55 antique cars in an interactive display. This APS has been in successful operation since December 2012, when the customer accepted the completed system.
Boomerang began implementing its sixth system and its second RoboticValet APS in July 2013 at a site in Miami, FL. Completion of this project is scheduled for the first half of calendar 2015. This twelve-level system has been designed to consist of 480 parking spaces. Upon completion, cars will be automatically parked after entering one of five loading bays and automatically retrieved through one of the five loading bays when requested by tenants via a kiosk adjacent to the loading bay. This APS is being built with a fully-integrated suite of hardware, 28 AGVs, five lifts, 480 vehicle trays, operating system software, and user interface (kiosks).
In December 2013, Boomerang executed a contract to deliver its seventh system and its third RoboticValet APS. This system will be installed at a site in Champaign, Illinois. Boomerang commenced installation in calendar 2014, with completion of the project scheduled for calendar 2015. This four-level system has been designed to consist of up to 240 parking spaces, three AGVs, two lifts and two loading bays, with a fully-integrated suite of operating system software and user interfaces (kiosks).
In August 2014, Boomerang executed a contract to deliver its eighth system and its fourth RoboticValet APS. This system will be installed at a site in Hollywood, Florida. Boomerang commenced fabrication in calendar 2014, with completion of the project scheduled for calendar 2015. This eight-level system has been designed to consist of up to one hundred seventy five parking spaces, eight AGVs, two lifts and three loading bays, with a fully-integrated suite of operating system software and user interfaces (kiosks).
We are working with a number of other customers to develop additional RoboticValet Parking Systems, including a number of projects which we expect to result in revenue over the next two to three years. Our sales and marketing efforts are now focused on working with developers with qualified, near-term projects. We are currently engaged with customers that have paid us approximately $370,000 to design and engineer RoboticValet Parking Systems for their prospective projects.
We typically work with customers during the preliminary stages of their projects to provide a limited range of services without compensation. We will then perform paid site studies as the need for more detailed engineering drawings emerges. As the project advances to the design phase, we negotiate a detailed agreement with the customer or customer’s general contractor that will further define the deliverables, items related to the system to be provided by the customer and final design of the system. Following the design period and execution of a detailed agreement, we would commence fabrication and installation of the agreed upon system. The agreements typically provide that we receive installment payments upon achievement of certain contract milestones.
Revenue on these projects is recognized on a percentage of completion basis.
Generally, our agreements with customers provide that:
·our customers will purchase deliverables from us, consisting of equipment/materials and services, which, when combined, result in a system that will be constructed to perform to certain specified criteria;
·delivery of a working system is contingent upon a customer providing materials and services for which we were not contracted to provide, in accordance with our specifications;
·the customer makes a series of progress payments to us as engineering commences, materials are fabricated, delivered, installed and tested, with final payment typically being due 30 days following acceptance of the system by the customer;
·the customer has the ability to terminate the contract if it is unable to obtain the necessary financing or approvals or if there are material changes to the estimate we provided. If the customer terminates a contract, it must make any progress payments due through the date of termination;
·we typically provide a one-year warranty and, for a recurring monthly fee, an optional ongoing maintenance and service plan; and
·confidentiality agreements exist prohibiting our customers from sharing any of our proprietary information.
Agreement with John Bean Technologies Corporation (“JBT”)
On May 15, 2013, Boomerang entered into a Manufacturing and Licensing Agreement (the “Agreement”) with JBT Corporation (“JBT”), pursuant to which JBT would manufacture all Boomerang automated guided vehicles (“AGVs”) and license certain software to us for use in our robotic parking systems, including a non-exclusive, non-transferable, license to sub-license the software to customers for the duration of each customer contract with Boomerang. In each year from the effective date of May 15, 2013, Boomerang was required to purchase a minimum of 25 AGVs from JBT based on JBT’s cost plus an agreed upon profit. If we did not meet these minimum requirements, JBT’s sole remedy was to terminate the Agreement. In the event of expiration or termination of the Agreement, JBT is subject to a three-year non-competition provision, and obligated to license to Boomerang software for up to three years from the expiration or termination date. The Agreement was terminated by JBT effective May 23, 2014, due to Boomerang not meeting the minimum purchase requirements described above. With JBT’s knowledge, Boomerang manufactured, assembled, tested and delivered all AGVs for our first RoboticValet project, BrickellHouse, and expects to do so for subsequent projects in which our first-generation AGV design is included. Under the Agreement, Boomerang has the right to continue to license software through May 22, 2017. Boomerang is collaborating with JBT and expects to continue to do so on a project-by-project basis going forward.
Benefits of Automated Parking Systems
Even though conventional structured parking garages (also known as multi-level parking, parking decks, parking garages, or parking ramps) are used extensively in densely populated areas to minimize the amount of land consumed by parking, the three dimensional space consumed by these structures still has a significant impact on the urban landscape. An alternative to these conventional parking structures are automated parking systems or APSs, which use machinery controlled by computers to automatically park vehicles in a structure without a human driver.
We have developed a proprietary APS that we believe has the potential to yield many benefits to real estate developers, consumers and society in general including the following:
Maximum Parking Density - By using tandem parking, eliminating the ramps, circulation driveways and passenger lifts typical in self park garages, our APS consume significantly less space per vehicle than conventional self-park garages, especially in cases of small or irregularly shaped sites. While valet parking services can also be used to attain density in parking garages, valet labor can be expensive and undesirable for a number of reasons. The increase in density from APS is attractive to real estate developers who wish to minimize the impact of parking on their project such that they can reduce the cost of excavation for underground garages or, in the case of above ground garages, reduce the amount of space required for parking that could otherwise be used for other revenue producing purposes.
Improved Parking Experience - Unlike self-park garages where parkers must hunt for a convenient space, remember where they parked, and risk the possibility of damage to their vehicles, users of APS park and retrieve their car from the same spacious parking bays conveniently located near the building’s access points. The experience is similar to the convenience of a valet garage, but allows the drivers to lock their car and retain their keys, allowing them to maintain privacy, while reducing the risk of theft or damage that may occur by leaving their car in the hands of a stranger.
Fraud Prevention - Parking is a significant source of income in urban development projects, and parking garage operators are often one of the largest tenants in the buildings they serve. With cash being handled by the operator and their employees, fraud can be a concern. Whether the employee is under reporting income to the operator, or the operator is under reporting to the developer, there are opportunities for loss and exposure that could prevent developers from realizing the full value of their parking assets. Installing an APS can mitigate this issue by creating a record of every parking transaction, thereby exposing fraud.
Lower Insurance Premiums - Parking garages often pay high insurance premiums because of the disproportionately high number of claims for accidents, vandalism, theft, and personal injury that occur in parking garages. We believe that the elimination of human occupancy inside the parking facility greatly mitigates these risks and could result in lower insurance premiums.
Environmentally Friendly - Because vehicles are shut off before they are parked, there are no carbon emissions generated in an APS, and in the case of enclosed garages, significantly less electricity is required for ventilation. In addition, due to the space efficient nature of APS, significantly less materials are used in construction. Additionally, the robots used in the garage do not require lights to see, reducing the amount of electricity used.
Faster Construction Time - We believe that use of an APS can shorten a project’s construction timeline leading to lower borrowing costs and earning rent several months earlier. This is especially the case when an APS is installed below ground because the increased density of an APS allows for elimination of the lowest basements, which are the most time consuming and costly to build.
Market Adoption - It is our belief that these benefits listed above are evidenced by the widespread adoption of other APS in certain parts of Europe and Asia. However, it should be noted that the U.S. market has been slow to adopt these types of systems. While the number of these systems being built in the U.S. increased in recent years, we believe the market has not realized its full potential due to a lack of a reliable domestic supplier and due to the limitations of legacy systems as outlined below.
Limitations of Legacy APS - Rail and Track-based Systems
Prior to developing our RoboticValet APS, we studied the existing APS market. Our meetings with real estate developers, architects, parking garage design consultants, traffic engineers, general contractors, parking operators and building and fire code officials led us to believe that despite all the potential benefits these systems could offer, the market for existing rail and track based APS technology was limited, for four primary reasons:
Redundancy Concerns - Because the machinery in a rack or track based APS system travels on a rail through the center of the structure, a breakdown of machinery could result in the entire system or a large portion of the system becoming largely incapacitated until such time that the machinery can be fixed. In our experience, the possibility of such a single point of failure represents a significant risk that most real estate developers, operators and financial backers are not willing to take.
Throughput Concerns -Use of a central rail for the transport of machinery results in a system in which, on any given level, one piece of machinery cannot navigate past another. This results in traffic bottlenecks which limit the number of simultaneous transactions that can be processed within the system. We believe this limitation has been a major concern of traffic engineers, parking design consultants and operators who need to confirm that the system is capable of handling the inbound and outbound traffic they project will be generated during peak hours of operation.
Fire & Life Safety Concerns - Typical rack & rail systems require a floor-to-ceiling atrium in the center of the structure to accommodate retrieval machinery. We believe building and fire officials have concerns that this floor-to-ceiling atrium results in a lack of fire separation between levels as well as a falling hazard to fire and life safety personnel in the event they need to gain access to a burning car. Attempts to mitigate the fire safety issues by adding catwalks, grating, and fire-proof coatings to the steel rack create engineering and operational challenges, and can make it cost prohibitive to use rack & rail systems.
Specialty Construction Concerns - While many architects, engineers, contractors and parking design consultants have experience with conventional solid concrete slab garage structures, relatively few of these professionals have experience in the design, engineering or construction of specialized steel rack structures or concrete shelf structures required to house a rail based automated parking system. We believe many real estate developers are concerned that they cannot properly source these specialized structures to local professionals and would prefer that the structure be sourced through the APS provider. We believe this poses a problem for APS providers, because it forces them to be involved in the business of sourcing the structures to house their systems. We do not believe that is a scalable business model, since local building conditions may vary considerably from market to market and requires the manufacturer to maintain a physical presence in or near each market it intends to enter.
Boomerang’s RoboticValet System
The key component to the Boomerang RoboticValet System is our RoboticValet, an omni-directional, battery-powered robot that carries vehicles parked on self-supporting steel trays to and from storage spaces by driving directly on a concrete slab surface without a rail. Unlike the machinery in rack & rail based systems, the RoboticValet can travel in any direction anywhere in the garage, including underneath rows of parked vehicles.
The three key design modifications, which we believe provide the enhanced functionality that makes the RoboticValet unique are:
Solid Concrete Slab Construction Instead Of Custom Steel Racking
·Fire fighter access is easier and safer due to elimination of the open atrium;
·Acceptable and cost-effective fire separation between floors;
·Maintenance personnel can service equipment without needing a safety harness to service equipment;
·Concrete is stronger, safer, easier to engineer, and can be competitively bid in local markets; and
·Allows symbiotic relationship with industry players (no need for a design/build contract) such as local architects, structural engineers and contractors who can participate in the process by sourcing the structure required to house the system.
Omni-Directional Robots Instead Of Rail-Based Mechanisms
·Provide redundancy through multiple paths of travel that can’t be achieved in a central rail system; and
·Eliminate single point of failure and system down conditions. A disabled robot can be pushed into an empty parking space to be serviced while allowing the system to remain operational;
·Navigate through large & irregularly shaped garages;
·Move from floor-to-floor to react to demand spikes;
·Avoid creating bottlenecks in high traffic areas;
·Attain a higher throughput than a rail based system with less equipment;
Self-Supporting Stacking Steel Trays Instead Of Lifting Vehicles By Tires
·Robots can travel under rows of parked vehicles to avoid bottlenecks
·Multiple lanes of lateral movement eliminate single points of failure that can block traffic in the facility;
·Vehicles lifted and moved without touching the vehicle;
·Simplifies robot’s task of acquiring vehicles since the robot interfaces with the same standard tray on each transaction;
·Mitigates complications arising from varied wheel bases, custom tires, flat tires, low hanging mufflers, mud flaps, and packed snow;
·Stacking five or more trays eliminates the need to return empty trays each time a car exits.
Marketing
We employ two full-time sales persons. In addition, we retain independent representatives to market our system. Our marketing activities are principally directed at identifying and understanding potential customers and markets and educating government agencies, architects, engineers, and contractors, as well as potential customers about our products and services. We are currently focused on markets in the United States and Canada. We target the following markets: residential apartments and condominiums, office complexes, car dealerships, public garages, hospitals, casinos, hotels, airports, service facilities and universities.
We utilize the RoboticValet demonstration unit in our manufacturing facility in Logan, Utah to demonstrate the capabilities of our system to potential customers. In addition, the RoboticValet parking facility we installed in 2011 at Crystal Springs Golf & Spa Resort not only functions in a commercial environment, but also serves as a “show room” for our customers.
On June 6, 2013, Boomerang entered into a marketing agreement with BrickellHouse Holding, LLC, pursuant to which, BrickellHouse Holding, LLC will allow Boomerang to use its parking system for sales and marketing purposes. Boomerang will pay BrickellHouse Holding, LLC a royalty for each sale of a system equal to 2% of the purchase price of that system, not to exceed an aggregate of $2 million. The agreement shall be in effect until the amount of royalty payments reaches $2 million. As of September 30, 2014, the Company has accrued $31,500 of royalty payments under this agreement.
Sales
We work with numerous prospective customers to evaluate the feasibility of RoboticValet Parking Systems and focus on projects that we reasonably expect to result in revenue over the next two to three years. Our sales and marketing efforts are focused on working with developers with qualified, near-term projects. We typically work with customers during the preliminary stages of their projects to provide a limited range of services without compensation. We will perform paid site studies as the need for more detailed engineering drawings emerges. As a project advances to the design phase, we negotiate a detailed agreement with the customer or customer’s general contractor that further defines the deliverables, items related to the system to be provided by the customer and final design of the system.
Manufacturing & Installation
Every component of a RoboticValet project is tested at our manufacturing facility in Logan, Utah, before it arrives at a customer’s site, where experienced teams install and commission the system. Boomerang’s dedicated installation team and a group of subcontracting companies work at the customer site to install and commission the equipment for our RoboticValet system into a concrete deck structure provided by the client, which results in a significant simplification of the installation process, in contrast to legacy systems that require a specialized structure. In all cases, our customers will be responsible for obtaining all local and other governmental permits and approvals to construct the structure at their intended location.
On May 15, 2013, Boomerang entered into an exclusive software licensing and manufacturing agreement with JBT Corporation, see “Business - Agreement with John Bean Technologies Corporation.” JBT Corporation is the only principal supplier to Boomerang, see “Item 1A.
Item 1A. Risk Factors.
An investment in the Company's securities involves a high degree of risk, including, but not necessarily limited to, the risk factors described below. You should carefully consider the following risk factors inherent in and affecting the Company and its business before making an investment decision to purchase the Company’s securities.
We have limited a relevant operating history which makes it difficult to predict future growth and operating results.
Due to our transition from building test systems to the commercialization of our systems including our recent focus on our Robotic Valet system, we have a limited relevant operating history which makes it impossible to reliably predict future growth and operating results. We are subject to all the risks and uncertainties which are characteristic of an emerging business enterprise, including the substantial problems, expenses and other difficulties typically encountered in the course of its business, in addition to normal business risks. We face a high risk of business failure because we have limited commercial sales, generated relatively small revenues and have had only material losses since our inception. We may continue to incur losses in the future. We have designed, marketed and manufactured only a small number of automated storage and parking systems and have had limited implementations of our systems. There can be no assurance that we will enter into contracts for and complete a significant number of APSs, generate significant operating revenues in the future or that we will ever be able to achieve profitable operations in the future. We face all of the risks commonly encountered by other businesses that lack an established profitable operating history and significant and recurring revenue, including, but not limited to, the need for additional capital and personnel, and intense competition.
Our debt obligations could impair our liquidity and financial condition, and in the event we are unable to meet our debt obligations we could lose title to our intellectual property and/or other assets.
As of September 30, 2014, the principal amount of debt outstanding was approximately $27.39 million. The Company entered into a $10 million Loan and Security Agreement (“the Loan and Security Agreement”) on June 6, 2013. The Company raised commitments of $7.85 million and has fully-drawn the $7.85 million principal amount of commitments under the Loan and Security Agreement. As of December 29, 2014, we have obtained additional commitments to increase the size of the Loan and Security Agreement by approximately $7.08 million, to a total of approximately $14.93 million. The Company may obtain additional commitments under the Loan and Security Agreement, which may total $15 million. Our obligations under the Loan and Security Agreement are secured by a first priority lien in all tangible and intangible assets of the Company. The Loan and Security Agreement matures on May 31, 2016. As of December 29, 2014, after the completion of the offer to exchange, the principal amount of debt outstanding was approximately $8.25 million, with approximately $7.08 million of additional borrowing availability under our Loan Agreement. Our level of indebtedness could have important consequences to us and you, including:
·could impair our liquidity;
·could make it more difficult for us to satisfy our other obligations;
·require us to dedicate a substantial portion of our cash flow to payments on our debt obligations, which reduces the availability of our cash flow to fund working capital, capital expenditures and other corporate requirements;
·could impede us from obtaining additional financing in the future for working capital, capital expenditures, acquisitions and general corporate purposes;
·impose restrictions on us with respect to the use of our available cash, including in connection with future transactions;
·make us more vulnerable in the event of a downturn in our business prospects and could limit our flexibility to plan for, or react to, changes in our licensing markets; and
·could place us at a competitive disadvantage when compared to our competitors who have less debt.
Our operations may not generate sufficient cash to enable us to service our debt. If we were to fail to make any required payment under the Loan and Security Agreement, notes and agreements governing our indebtedness or fail to comply with the covenants contained in the Loan and Security Agreement, notes and agreements, we would be in default. A default under the Loan and Security Agreement could significantly diminish the market value and marketability of our common stock and could result in the acceleration of the payment obligations under all or a portion of our consolidated indebtedness, or a renegotiation of our Loan and Security Agreement with more onerous terms and/or additional equity dilution. If the debt holders were to require immediate payment, we might not have sufficient assets to satisfy our obligations under the Loan and Security Agreement, notes or our other indebtedness. It may also enable their lenders under the Loan and Security Agreement to foreclose on the Company’s assets and/or its ownership interests in its subsidiaries. In such event, we could be forced to seek protection under bankruptcy laws, which could have a material adverse effect on our existing contracts and our ability to procure new contracts as well as our ability to recruit and/or retain employees. Accordingly, a default could have a significant adverse effect on the market value and marketability of our common stock.
We have a limited amount of cash to grow our operations. If we cannot obtain additional sources of cash, our growth prospects and future profitability may be materially adversely affected and we may not be able to implement our business plan or fulfill contracts. Such additional financing may not be available on satisfactory terms or it may not be available when needed, or at all.
As of September 30, 2014, we had cash and cash equivalents of $958,877 and additional borrowings of $1,364,460 available through our Loan and Security Agreement, subject to the terms thereof. As of December 29, 2014, we had additional borrowings of approximately $7.08 million available through our Loan and Security Agreement. These two sources of cash are expected to allow us to operate our business until at least January 2016 without securing any additional contracts. To implement our full business plan we may require additional funds and would anticipate seeking to raise these funds through public or private debt or equity offerings, including offerings to our existing security holders. In addition, we may seek to restructure our existing liabilities and debt. There can be no assurance that the capital we require to meet our operating needs will be available to us on favorable terms, or at all. If we are unsuccessful in raising sufficient capital, we may be required to curtail our operations. If we issue securities to raise capital, our existing stockholders may experience dilution, or the new securities may have rights senior to those of our common stock.
Moreover, if we do not have adequate capital to complete a contract subsequent to its commencement, particularly if we have received installment payments, we may not be able to fulfill our obligations under existing and future projects and generate progress payments and may be subject to claims for failure to perform by the customer. Our financial condition may also deter potential customers from contracting with us.
We have a history of losses and cash outflow from operations which may continue if we do not increase our sales or reduce our costs.
Since emerging from the status of a business development company in 2008, we have generated few sales, and have generated an operating loss in each financial period. Our accumulated deficit as of September 30, 2014 was $84,128,855. Losses are continuing to date and are expected to continue into the future until such time as we are able to generate meaningful sales of our systems. In order to improve our operating results, we have taken action to reduce our costs but we will need to continue to generate new sales. As we continue to invest to grow our business, we may not be able to successfully generate sufficient sales to achieve profitability. If we fail to generate cash from projects, or if the cash requirements of our business change as the result of changes in the cost of materials, a decline in the real estate market or other causes, we could no longer have the cash resources required to run our business. There is no assurance that we will achieve profitable operations at any point in time.
We have generated only limited revenues to date and we cannot assure you that we will be able to significantly increase our revenues.
We have only generated aggregate revenues of approximately $12.5 million from system sales since we entered the business of automation in 2008, although our revenues have increased from approximately $2.7 million in 2013 to approximately $5.4 million in 2014. Although we are focused on projects that may result in short-term revenue and are currently engaged with six customers to evaluate the feasibility of RoboticValet Parking Systems, there is no guarantee that these customers will ever produce revenue for our business.
We have limited experience commercializing our APSs and much of our technology has been factory tested but not fully field tested.
We expect that, as our systems are installed and used, they will be tested in ways that we cannot fully duplicate in our factory. As a result, once our APSs are used in commercial operations, we may discover various aspects of our systems that require improvement. Any significant improvement could delay existing projects and new sales, could result in increased cost or lowered performance for our systems and could negatively impact the market’s acceptance of our systems.
Because our APSs are different from those currently available, we must actively seek market acceptance of our systems, which we expect may occur gradually.
Our systems are new and our current RoboticValet system is substantially different from existing APSs as well as traditional parking garages. A number of enterprises, municipalities and other organizations that could be potential customers for our systems may be reluctant to commit themselves to our systems until one or more systems have been tested in commercial operations over a significant period of time. As a result, we may experience difficulty in achieving market acceptance for our systems. A number of automated parking systems exist in the United States and elsewhere. These systems are materially different in concept from our robotic system. We believe that our RoboticValet system offers a number of advantages over existing automated systems and traditional parking structures. However, we expect challenges in demonstrating the advantages of our systems to potential customers and possibly others in the absence of significant historical data as to their performance. A customer that purchases our systems will likely design the project around it and therefore would encounter significant difficulties if the system did not perform as claimed. We expect that widespread market acceptance of our systems may occur only gradually over time. A significant ramp-up in sales may be delayed until our systems achieve a meaningful history of commercial operations, which would delay our anticipated recognition of revenues.
We have in the past experienced delays and cost overruns and may do so on future projects.
Our APSs are complex systems that require significant advance planning and constitute a key component of our customer’s real estate development project, and the project itself consists of many other components not provided by us. Some of these components, such as the foundation upon which the system is to be installed, must be in place before we can install our system. In addition, other components provided by the customer are not supplied by us but must be implemented in conjunction with the installation and commissioning of our system. Delays in the procurement of those components, and lack of coordination between other contractors implementing those components could have a negative impact on the project schedule and result in cost overruns. We have in the past experienced a number of delays and cost overruns on certain projects and may experience delays and cost overruns on future projects. From inception of the project through September 30, 2014, we have incurred a loss of $2,857,436 on one of our projects, and estimate that the gross cumulative loss on the project will be $3,194,625. Delays and cost overruns in implementing a project will negatively affect our cash flow and operating results and could cause harm to our reputation.
We may experience substantial delays in the start dates, manufacturing and installation of our systems due to factors out of our control.
Although we are not experiencing delays in obtaining approvals necessary to begin fulfilling contracts, certain of our customers are experiencing delays in their efforts to obtain the necessary financing and/or government permitting required for their entire project to move forward, of which our systems may only be a small component. Some examples of tasks a real estate developer may need to complete before commencing the construction of a building include:
·conducting environment impact studies;
·conducting traffic impact studies;
·securing planning approvals;
·finishing design of building;
·finishing engineering of building;
·securing construction permits;
·selecting general contractor; and
·securing construction loan.
Because our systems are complex, it is difficult to know prior to commencing project specific design and engineering work if our proposed system is adequate to meet the customer’s requirements.
Since we typically do not perform such work until we have been contracted by our customer, it is possible that our proposed design solution may not meet our customer’s requirements or perform consistently under continuous commercial application. Failure of a system to meet our customers’ expectations or properly perform could harm our reputation and negatively impact our operating results and cash flow and could subject us to litigation.
Some of our contracts contain fixed-price provisions that could result in losses or decreased profits if we fail to execute according to the project budget.
To date, we have incurred a loss on all of our contracts except one. Some of our contracts contain pricing provisions that require the payment of a set fee by the customer for our services regardless of the costs we incur in performing these services. In such situations, we are exposed to the risk that we will incur significant unforeseen costs in performing the contract. Therefore, the financial success of a fixed-price contract is dependent upon the accuracy of our cost estimates made during contract negotiations. Prior to bidding on a fixed-price contract, we attempt to factor in variables including equipment costs, labor, materials and related expenses over the term of the contract. However, it is difficult to predict future costs, especially for contract terms that range from 3 to 5 years. Any shortfalls resulting from the risks associated with fixed-price contracts will reduce our working capital and profitability. Our inability to accurately estimate the cost of providing services under these contracts could have an adverse effect on our profitability and cash flows.
The pace of commercial construction may cause a decline in the type of real estate development projects that we intend to target.
Because our sales will depend on the development of projects in which our systems will be incorporated, our sales are likely to be heavily dependent on the construction climate in the markets that we address. Since 2007, new real estate projects in the United States have experienced substantial declines and it is not clear whether, when or to what extent a recovery will occur. Any significant slump in new project construction would make it more difficult for us to achieve our growth objectives.
Our ability to perform under our contracts and thereby recognize some or all revenues is dependent on the ability of the project owner to commence and complete construction of the project.
Major residential and commercial construction projects are subject to various uncertainties at several stages. Design, permitting or financing issues can result in substantial delays and, ultimately, can render a project untenable. Our contracts permit our customers to terminate the contract during the design phase if a more detailed agreement is not executed, permits are not obtained, or other events outside of our control occur. Furthermore, even when the underlying project is fully funded and permitted, economic and other real estate market conditions, and possible interruptions in the project moving forward, continue to create uncertainty as to whether and when the project will be completed. Changes in demographics and other macroeconomic changes can cause major construction projects to be delayed or abandoned because they are no longer viable or because they cannot be financed. For example, the recent recession has resulted in a substantial decrease in construction on a global basis. We intend that our contracts with our customers will provide for a percentage of the contract price to be paid to us if a project is substantially delayed or abandoned. However, we may be unable to negotiate such arrangements and any such compensation is likely to be substantially less than the revenues and profit we would have earned if the project had been completed. Our long-term planning will be based on various assumptions about project completion rates that may not prove to be accurate. A significant delay in construction schedules or a significant number of project abandonments would have a material adverse impact on our business.
We have limited experience estimating our manufacturing and other costs and may underestimate these costs rendering our contracts less profitable or creating losses.
As of December 29, 2014, we have manufactured and assembled five APSs and one automated storage system intended for commercial use and have two additional system currently being assembled and installed. While in the past we have underestimated costs for certain projects, we believe we have improved our ability to estimate the costs required to manufacture and install a project. However, there is no assurance that we will estimate all costs correctly on future projects, and this could lead to contracts that are not profitable.
We are presently dependent on JBT Corporation for certain software used in our RoboticValet system, specifically the supervisory or vehicle routing element, used within our robotic parking systems. On May 15, 2013, Boomerang entered into a Manufacturing and Licensing Agreement with JBT Corporation (“JBT”), pursuant to which JBT would manufacture all Boomerang automated guided vehicles (“AGVs”) and license certain software to us for use in our robotic parking systems, including a non-exclusive, non-transferable, license to sub-license the software to customers for the duration of each customer contract with Boomerang. The Agreement was terminated by JBT effective May 23, 2014, due to Boomerang not meeting minimum purchase requirements. Under the Agreement, Boomerang has the right to continue to license software through May 22, 2017. We are currently working with JBT and expect to collaborate with them on a project-by-project basis going forward. We may be required to find another third party provider of software. In addition, we are actively working with JBT and on alternatives to JBT for the supervisory component within our APS system. As a result, we could experience delays and unforeseen costs that could have a negative impact on our business.
The loss of one or more of our key suppliers, or increase in prices, could cause production delays, a reduction of revenues or an increase in costs.
The principal components we use in our systems are a combination of mechanical, electromechanical and computing components. In addition, we use several components such as batteries, control boards and sensors in the manufacture of our equipment. We have no long-term supply agreements with any of our major suppliers. However, we have generally been able to obtain sufficient supplies of raw materials and components for our operations. Although we believe that such raw materials and components are readily available from alternate sources, an interruption in the supply of steel and related products or a substantial increase in the price of any of these raw materials and components could result in a delay in our ability to build and install systems and reductions in our profit margins.
We expect to face intense competition in selling our systems and we may not be able to compete with our more established competitors.
While we believe that our systems offer a number of advantages over existing garage structures, and other automated parking systems, we expect to face intense competition not only from other systems, but from rack and rail systems and traditional parking garages. Many of the companies with which we may compete have established products, existing relationships and financial capacity that may offer them a competitive advantage. If we are correct in our assumption that the advantages of our systems are significant to customers, we can anticipate that other companies, some with stronger financial capabilities than we have, will seek to design comparable systems that offer similar or greater advantages. We expect that we will have to continually innovate our products and solutions to reduce cost and increase effectiveness in order to remain competitive and there is no assurance that our systems will become competitive or remain so over time.
There is no guarantee that we will be granted patent protection for all patents we have filed or will file in the future. This may decrease our competitive position and subject us to intellectual property disputes with third parties, both of which may have a material adverse effect on our business, results of operations and financial condition.
We have filed and will continue to file patent applications with respect to key components of our automated parking systems and have been granted patent protection for certain subsystems of our RoboticValet parking system. However, there can be no assurance that our pending applications will be allowed and that additional patent protection will be granted. Accordingly, we may have limited protection to prevent others from entering into competition with us.
In addition, others may obtain knowledge of our know-how and technologies through independent development. Our failure to protect our production process, related know-how and technologies and/or our intellectual property and proprietary rights may undermine our competitive position. Third parties may infringe or misappropriate our proprietary technologies or other intellectual property and proprietary rights. Policing unauthorized use of proprietary technology can be difficult and expensive. Litigation, which can be costly and divert management attention and other resources away from our business, may be necessary to enforce our intellectual property rights, protect our trade secrets or determine the validity and scope of our proprietary rights. We cannot assure you that the outcome of such potential litigation will be in our favor. An adverse determination in any such litigation will impair our intellectual property and proprietary rights and may harm our business, prospects and reputation.
We may be exposed to infringement or misappropriation claims by third parties, which, if determined adversely to us, could cause us to pay significant damage awards.
Our success also depends largely on our ability to use and develop our technology and know-how without infringing the intellectual property rights of third parties. The validity and scope of claims relating to patents involve complex scientific, legal and factual questions and analysis and, therefore, may be highly uncertain. We may be subject to litigation involving claims of patent infringement or violation of intellectual property rights of third parties. The defense and prosecution of intellectual property suits and related legal and administrative proceedings can be both costly and time consuming and may significantly divert the efforts and resources of our technical and management personnel. An adverse determination in any such litigation or proceedings to which we may become a party could subject us to significant liability to third parties, require us to seek licenses from third parties, to pay ongoing royalties, or to redesign our anticipated products or subject us to injunctions prohibiting the manufacture and sale of our anticipated products or the use of our technologies. Protracted litigation could also result in our customers or potential customers deferring or limiting their purchase or use of our anticipated products until resolution of such litigation.
Failures of our systems could expose us to liabilities that may not be fully covered by insurance.
Although we have designed a number of safeguards into our systems, they may fail, causing delays, injury or damage to persons, vehicles or other property that may not be covered by insurance. Our insurance does not cover any contractual liability that we may have as a result of a delay in delivery of systems to our customers. Any such events, whether covered by insurance or not, could have a material adverse effect on our business.
Our success is dependent upon our executive officers and other key personnel.
We rely for the conduct of our business on a small group of people whose expertise and knowledge of our business are critical to the prospects for its success. Our Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, and other key personnel have accepted substantial equity interests and less cash for their services and it is unlikely that we could attract employees of comparable ability for the cash compensation that we are currently paying to these individuals. The loss of any of our key management team would cause significant disruption in our operations and would require us to seek suitable replacements. There is no assurance that we could attract qualified employees quickly or without incurring significant increased cost.
Because our Chief Executive Officer has only agreed to provide his services on a part-time basis, he may not be able or willing to devote a sufficient amount of time to our business operations, which may cause our business to fail.
Although our Chief Executive Officer has agreed to devote the vast majority of his productive time, ability and attention to our business, he also is permitted to provide consulting services to third parties on a limited basis, and to serve on other boards of directors. Accordingly, our Chief Executive Officer may not be able to devote sufficient time to the management of our business, as and when needed. It is possible that the demands of our Chief Executive Officer’s other business commitments will keep him from devoting sufficient time to the management of our business. Competing demands on his time may lead to a divergence between his interests and the interests of other shareholders.
Our systems and the projects in which they are installed are subject to complex and diverse regulation that may increase the cost of our systems or limit their efficiency.
Our systems and the real estate development projects in which they are installed are subject to a variety of regulations, including zoning and building codes, permitting, and fire and other safety regulations. Most of these regulations are local and vary considerably from location to location. We and our customers will be required to design systems and garages that conform to all applicable regulations, which may make it more difficult to standardize our offerings or to maximize the efficiency of our systems. The enforcement of local regulations often involves the exercise of considerable judgment and there is likely to be a certain level of uncertainty as to what the regulations will be held to require in each project. Local regulations may cause delays or cost increases that could have an adverse impact on our business.
Environmental regulation and liability may increase our costs and adversely affect us.
Our manufacturing operations are subject to federal and state environmental laws and regulations concerning, among other things, water discharges, air emissions, hazardous material and waste management. Environmental laws and regulations continue to evolve and we may become subject to increasingly stringent environmental standards in the future, particularly under air quality and water quality laws and standards related to climate change issues, such as reporting of greenhouse gas emissions. We are required to comply with environmental laws and the terms and conditions of environmental permits. Failure to comply with these regulations, laws or permits could result in fines and penalties. We also may be required to make significant expenditures relating to environmental matters on an ongoing basis.
Based upon our marketing experience to date, we expect to undergo rapid growth of our operations as our sales, manufacturing and installation activity increase; we may experience challenges associated with growth, including being able to retain and hire qualified employees and to implement infrastructure changes necessary to support this growth which would negatively adversely affect us.
We are currently managed and run by a small staff of employees who are engaged primarily in system design, manufacture and sales activity and general and administrative functions. We expect that, if sales increase as we anticipate, and particularly as sales cycles advance, we will be subjected to rapid growth and a substantial increase in the activities that we are called upon to perform and the duties we must fulfill. We may fail properly to anticipate the need for additional employees or be unable to attract and retain qualified employees as required to sustain our expected growth. We will also be required to put in place in a timely manner effective accounting systems, reporting structures and other infrastructure required to sustain our growing and developing operations. The failure to anticipate and effectively deal with these requirements could cause us to miss opportunities that would otherwise be available to us and could cause our performance to suffer across a broad range of activities. Any such occurrences would have a material adverse effect on our business and prospects.
Our management team is limited in size. Our current resources may be faced with competing demands, including public company obligations.
As a public company, we are subject to various requirements of the Securities and Exchange Commission, including record-keeping, financial reporting, and corporate governance rules. Our management team has limited experience in managing a public company and, historically, has not had the resources typically found in a public company. Our internal infrastructure may not be adequate to support our reporting and other compliance obligations and we may be unable to hire, train or retain necessary staff and may be reliant on hiring outside consultants or professionals to overcome our lack of experience or trained and experienced employees. Our business could be adversely affected if our internal infrastructure is inadequate, we are unable to engage outside consultants, or are otherwise unable to fulfill our public company obligations.
Our management and a limited number of stockholders, many of whom are related parties, collectively hold a controlling interest in us, they have significant influence over our management and their interests may not be aligned with our interests or the interests of our other stockholders.
Our company’s management and a limited number of stockholders, many of whom are related parties, retain majority control over us and our business plans and investors may be unable to meaningfully influence the course of action of our company. The existing management and a limited number of stockholders, many of whom are related parties, are able to control substantially all matters requiring stockholder approval, including nomination and election of directors and approval or rejection of significant corporate transactions. There is also a risk that our existing management and a limited number of stockholders may have interests which are different from investors and that they will pursue an agenda which is beneficial to themselves at the expense of other stockholders.
There are limitations on the liabilities of our directors and executive officers. Under certain circumstances, we are obligated to indemnify our directors and executive officers against liability and expenses incurred by them in their service to us.
Pursuant to our amended and restated certificate of incorporation and under Delaware law, our directors are not liable to us or our stockholders for monetary damages for breach of fiduciary duty, except for liability for breach of a director’s duty of loyalty, acts or omissions by a director not in good faith or which involve intentional misconduct or a knowing violation of law, dividend payments or stock repurchases that are unlawful under Delaware law or any transaction in which a director has derived an improper personal benefit. In addition, we have entered into indemnification agreements with each of our directors and executive officers. These agreements, among other things, require us to indemnify each director and executive officer for certain expenses, including attorneys’ fees, judgments, fines and settlement amounts, incurred by any such person in any action or proceeding, including any action by us or in our right, arising out of the person’s services as one of our directors or executive officers. The costs associated with providing indemnification under these agreements could be harmful to our business.
Risks Related to Our Securities
The conversion price of remaining outstanding convertible notes and the exercise price of remaining outstanding warrants are subject to adjustment for below conversion price and exercise price issuances of common stock and common stock equivalents.
As of December 29, 2014, we had outstanding $400,000 principal amount of convertible notes at rates between $3.00 and $3.31, and warrants to purchase 127,021 shares of common stock at exercise prices between $3.00 and $3.31, respectively, which are subject to adjustment for issuances of common stock or common stock equivalents below the respective conversion price or exercise price. In the event we issue shares of common stock or securities convertible into or exchangeable or exercisable for common stock, the conversion rate of the outstanding notes and the exercise price of the warrants would decrease, resulting in a greater number of shares of common stock issuable upon conversion of the convertible notes and exercise of the warrants. Such an adjustment would have a dilutive effect on the holders of our outstanding common stock and could negatively impact the market price for our common stock.
There is no assurance of an active public market for our common stock and the price of our common stock may be volatile.
Given the relatively minimal public float and trading activity in our securities, there is little likelihood of any active and liquid public trading market developing for our shares. If such a market does develop, the price of the shares may be volatile. In the light of our limited operating history and revenues, continuing losses and financial condition, quotations published in the “pink sheets” are not necessarily indicative of the value of the Company. Such quotations are inter-dealer prices, without retail mark-up, mark-down or commissions and may not necessarily represent actual transactions. Since the shares do not qualify to trade on any national securities exchange, if they do actually trade, the only available market will continue to be through the OTC Bulletin Board or in the OTCQB tier of the OTC Markets. It is possible that no active public market with significant liquidity will ever develop. This could negatively impact your ability to sell the notes, warrants or common stock.
Fluctuations in the price of our common stock may impact your ability to resell the notes, warrants or the common stock issuable upon conversion of the notes or exercise of the warrants when you want or at prices you find attractive.
Because the notes are convertible into and the warrants are exercisable for our common stock, volatility or depressed prices for our common stock could have an effect on the trading price of the notes or warrants. Holders who have received common stock upon conversion of the notes or exercise of the warrants will also be subject to the risk of volatility and depressed prices of our common stock.
Our common stock price can fluctuate as a result of a variety of factors, many of which are beyond our control. These factors include, among others:
·our performance and prospects;
·the depth and liquidity of the market for our common stock;
·investor perception of us and the industry in which we operate;
·changes in earnings estimates or buy/sell recommendations by analysts;
·general financial and other market conditions; and
·general economic conditions.
In addition, the stock market in general has experienced extreme volatility that has often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect the market price of our common stock.
Application of guidance related to the Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock has negatively impacted our statement of operations in the past and could continue to negatively impact our statement of operations.
For the year ended September 30, 2014, we reported an unrealized gain on derivatives of $11,108,488 in our consolidated statements of operations as a result of the change in fair value of derivative liability relating to the outstanding warrants and the beneficial conversion feature associated with our November and December 2011 offering. Our net income (loss) will continue to fluctuate as a result of the impact of such warrants and will be adversely affected in each reporting period in which the fair value of the warrants and beneficial conversion feature increase.
We are subject to the penny stock rules adopted by the Securities and Exchange Commission that require brokers to provide extensive disclosure to its customers prior to executing trades in penny stocks. These disclosure requirements may cause a reduction in the trading activity of our Common Stock, which in all likelihood would make it difficult for our stockholders to sell their securities.
Rule 3a51-1 of the Securities Exchange Act of 1934 establishes the definition of a “penny stock,” for purposes relevant to us, as any equity security that has a minimum bid price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to a limited number of exceptions which are not available to us. This classification would severely and adversely affect any market liquidity for our Common Stock.
For any transaction involving a penny stock, unless exempt, the penny stock rules require that a broker or dealer approve a person’s account for transactions in penny stocks and the broker or dealer receive from the investor a written agreement to the transaction setting forth the identity and quantity of the penny stock to be purchased. In order to approve a person’s account for transactions in penny stocks, the broker or dealer must obtain financial information and investment experience and objectives of the person and make a reasonable determination that the transactions in penny stocks are suitable for that person and that that person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prepared by the SEC relating to the penny stock market, which, in highlight form, sets forth:
·The basis on which the broker or dealer made the suitability determination; and
·That the broker or dealer received a signed, written agreement from the investor prior to the transaction.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and commission payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
Because of these regulations, broker-dealers may not wish to engage in the above-referenced necessary paperwork and disclosures and/or may encounter difficulties in their attempt to sell shares of our common stock, which may affect the ability of selling securityholders or other holders to sell their shares in any secondary market and have the effect of reducing the level of trading activity in any secondary market. These additional sales practice and disclosure requirements could impede the sale of our common stock, if and when our common stock becomes publicly traded. In addition, the liquidity for our common stock may decrease, with a corresponding decrease in the price of our common stock. Our common stock, in all probability, will be subject to such penny stock rules for the foreseeable future and our stockholders will, in all likelihood, find it difficult to sell their common stock.
Future sales of our common stock in the public market or the issuance of our common stock or securities senior to our common stock could adversely affect the trading price of our common stock.
Our Certificate of Incorporation currently authorizes our Board of Directors to issue up to 200,000,000 shares of common stock and 1,000,000 shares of undesignated preferred stock. Any additional issuances of any of our authorized but unissued shares will not require the approval of stockholders and may have the effect of further diluting the equity interest of stockholders.
We may issue common stock or equity securities senior to our common stock in the future for a number of reasons, including to attract and retain key personnel, to finance our operations and growth strategy, to adjust our ratio of debt to equity, to satisfy outstanding obligations or for other reasons. If we issue securities, our existing stockholders may experience dilution or the new securities may have rights senior to those of our common stock. In addition, the terms of these securities could impose restrictions on our operations. Future sales of our common stock, the perception that such sales could occur or the availability for future sale of shares of our common stock or securities convertible into or exercisable for our common stock could adversely affect the market prices of our common stock prevailing from time to time.
As of December 29, 2014, we had:
·8,262,502 shares of common stock that were subject to outstanding warrants;
·2,479,542 shares of common stock that were subject to options; and
·$400,000 of outstanding notes that were convertible into a maximum of 127,091 shares of common stock, subject to adjustment.
We have never paid dividends on our common stock and do not expect to pay dividends in the foreseeable future.
We intend to invest all available funds to finance our growth. Therefore our stockholders cannot expect to receive any dividends on our common stock in the foreseeable future. Even if we were to determine that a dividend could be declared, we could be precluded from paying dividends by restrictive provisions of loans, leases or other financing documents or by legal prohibitions under applicable corporate law.
Item 2.
Item 2. Properties.
In March 2013, we entered into a five year lease on our principal office, consisting of 2,400 square feet, located at 30 A Vreeland Road, Florham Park, NJ. This is also the location of our sales and marketing activities. Manufacturing and assembly occurs at 324 West 2500 North, Logan, Utah. A total of approximately 50,150 square feet for manufacturing, office and conference room space is subject to lease agreements with SB&G Properties and Stan Checketts Properties, both of which are related parties. Both of these leases are on a month-to-month basis. If we are unable to extend these leases in the future, we will need to find another manufacturing facility, which may have an adverse impact on our operations.
Item 3.
Item 3. Legal Proceedings
On March 15, 2013, Crescent Heights R&D, LLC (“Crescent Heights”), filed a complaint against Boomerang in the State of Florida for fraud, breach of contract and specific performance, as well as equitable rescission which alleged an unspecified amount of damages in excess of the purchase price. Boomerang was subsequently granted a motion to remove this matter to federal court. On May 17, 2013, the court entered an order that our motion to compel arbitration and stay proceedings be granted. The parties have agreed to arbitrate the matter in front of the American Arbitration Association. An arbitrator was selected, an arbitration hearing took place in November 2014, and written closing arguments are to be submitted to the arbitrator on December 29, 2014. The arbitrator is expected to decide the matter 30 days after submission of closing arguments. The dispute arises from a contract to provide a rack and rail automated parking system. Crescent Heights’ claims, Boomerang’s defenses and Boomerang’s affirmative claims all arise from the contract. Due to the ongoing arbitration with Crescent Heights, Boomerang has eliminated the warranty reserve associated with this project.
In addition to the above, we may from time to time become involved in litigation relating to claims arising from the ordinary course of business. These claims, even if not meritous, could result in the expenditure of significant financial and managerial resources.
Item 4.
Item 4. Mine Safety Disclosures
Not applicable
PART II
Item 5.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market for Common Equity and Dividends
Our common stock is quoted for trading on the OTCQB tier of the OTC Markets under the symbol “BMER”. The market for our common stock is limited, sporadic and highly volatile. Since our shares do not qualify to trade on any national securities exchange, if they do actually trade, the only market currently available will continue to be in the "pink sheets". It is possible that no active public market with significant liquidity will ever develop. Thus, investors run the risk of never being able to sell their shares.
The following table sets forth the quarterly range of high and low bid information quoted on the OTCQB for the past two fiscal years. These quotations represent prices between dealers and do not include retail mark-ups, mark-downs or commissions. They do not necessarily represent actual transactions.
On December 26, 2014, the last sale of our common stock was $2.15 and the number of record holders of our Common Stock was 508. We have never paid a cash dividend on our Common Stock and anticipated capital requirements make it unlikely that any cash dividends will be paid on our common stock in the foreseeable future.
Item 6.
Item 6. Selected Financial Data.
As a smaller reporting company, we are not required to respond to this Item.
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Introduction
The following discussion and analysis of financial condition and results of operations should be read in conjunction with the Company's consolidated financial statements and accompanying notes appearing elsewhere in this report. This discussion and analysis contains forward looking statements that involve risks, uncertainties and assumptions. The actual results may differ materially from those anticipated in these forward looking statements as a result of certain factors, including but not limited to the risks discussed in this report.
Revenue Recognition
Revenues from the sales of RoboticValet and rail based systems are generally completed over a period exceeding one year and recognized using the percentage of completion method, whereby revenue and the related gross profit is determined by comparing the actual costs incurred to date for the project to the total estimated project costs at completion. Project costs generally include all material and shipping costs, our direct labor, subcontractor costs and an allocation of indirect costs related to the direct labor.
Changes in the project scope, site conditions, staff performance and delays or problems with the equipment used on the project can result in changes to costs may or may not be billable to the customer and can result in changes to the project profit or loss.
Estimates for the costs to complete the project are periodically updated by management during the performance of the project. Provisions for changes in estimated costs and losses, if any, on uncompleted projects are made in the period in which such losses are determined.
We may have service contracts in the future after the contract warranty period is expired, which are separate and distinct agreements from project agreements and will be billed according to the terms of the contract.
Liquidity and Capital Resources
Cash and cash equivalents for the fiscal year ended September 30, 2014 increased by $321,937 to $958,877 as of September 30, 2014, up from $636,940 as of September 30, 2013. As of September 30, 2014, our working capital together with funds of approximately $1.4 million available under our Loan and Security Agreement (approximately $7.08 million as of December 29, 2014), expect to allow us to carry out our business plan until at least January 2016 without securing any additional contracts. To implement our full business plan, we may require additional funds and anticipate raising these funds through public or private debt or equity offerings, including offerings to our existing security holders. In addition, we may seek to restructure our existing liabilities and debt. There can be no assurance that the capital we require to meet our operating needs will be available to us on favorable terms, or at all. If we are unsuccessful in raising sufficient capital, we may be required to curtail our operations.
For the fiscal year ended September 30, 2014, we had a net loss of $2,669,356. Included in this net loss were several non-cash expenses that partially offset the use of cash. These non-cash expenses include depreciation of $303,746, amortization of discount on debt of $3,966,917, issuance of common stock for interest expense of $1,253,971, allowance for doubtful accounts receivable of $17,500, a loss on the disposal of fixed assets of $7,789 and expenses from the issuance of stock options of $295,039. These items were offset by a non-cash gain on the fair value of derivative of $11,108,488. Cash decreased as we experienced fiscal year increases in accounts receivable of $872,891, in retainage receivable of $367,706 and in inventories of $174,854. Cash increased as we experienced fiscal year decreases in prepaid expenses and other assets of $97,205, in deposits payable of $90,000, and in costs in excess of billings of $380,630. Cash also increased as we experienced increases in accounts payable and accrued liabilities of $1,571,825, due to related parties of $176,610, billings in excess of costs of $3,688,059, and in estimated loss on uncompleted contract of $253,385. After adjusting our net loss for these non-cash items and the net changes in assets and liabilities, net cash used in operations was $3,090,619 for the fiscal year ended September 30, 2014.
Financing activities provided $3,420,977 for the fiscal year ended September 30, 2014. Net cash provided by financing activities consisted of $3,452,207 of borrowings under the Loan Agreement, offset by $31,230 of note repayments.
During the fiscal year ended September 30, 2014, net cash used in investing activities consisted of additional purchases of property, plant and equipment of $8,421.
There were no off-balance sheet arrangements during the fiscal year ended September 30, 2014 that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to our interests.
Convertible Notes
As of September 30, 2014, the Company had approximately $20.9 million of indebtedness under convertible promissory notes associated with the November/December 2011 Offering (“2011 Notes”), June/July 2012 Offering (“2012 Notes”) and December 2012 Offering (“December 2012 Notes” and, together with the 2011 Notes and 2012 Notes, the “Notes”). The Notes become due between November 2016 and December 2017. The Notes are convertible into 2,942,946 shares of common stock at $3.95, 1,347,850 shares of common stock at $4.60 and 662,723 shares of common stock at $4.64, respectively. The 2011 Notes and 2012 Notes are subject to a weighted average adjustment, and the December 2012 Notes a full ratchet adjustment, in each case, for issuances of common stock or common stock equivalents below the conversion price, subject to certain exceptions. The respective conversion price for the 2012 Notes and December 2012 Notes may not be adjusted below $0.25. Interest accrues on the Notes at 6% per annum, payable quarterly at the Company’s option in: (i) cash or (ii) shares of Common Stock.
Certain officers, directors, 5% stockholders and affiliates are holders of the above Notes, see “Certain Relationships and Related Transactions” for a list of these affiliate noteholders.
On October 31, 2014, the Company completed an offer to exchange outstanding 2011 Notes, 2012 Notes and December 2012 Notes and 2011 Warrants, 2012 Warrants and December 2012 Warrants issued under three private placements in 2011 and 2012 for the issuance of common stock at the rate of $2.15 per share in exchange for the entire balance (principal and interest) of the notes and warrants issued with the applicable note. The Company exchanged $20.5 million principal amount of the previously outstanding $20.9 million of convertible notes and 4,859,409 warrants for 9,583,384 shares of common stock in the exchange offer. Following the offer to exchange, $200,000 principal amount 2011 Notes and $200,000 principal amount 2012 Notes remain outstanding, at conversion ratios of $3.00 and $3.31 per share, respectively, and 66,667 2011 Warrants and 60,424 2012 Warrants remain outstanding with an exercise price of $3.00 and $3.31, respectively.
Immediately prior to exchanging their Notes in the offer to exchange, holders of a majority of the principal amount of each of the 2011 Notes, 2012 Notes and December 2012 Notes consented to the Company (i) issuing debt from time to time on terms which may be approved by the Company’s Board of Directors, in an aggregate amount up to $100,000,000, which debt may be secured or unsecured and senior or subordinated to or pari passu with, the Notes, (ii) entering into transactions with its officers, directors, employees and Affiliates on terms approved by a majority of the Company’s independent and disinterested directors from time to time, (iii) declaring and paying dividends and making distributions to its holders of common stock as may be approved by the Company’s Board of Directors from time to time and (iv) purchasing or acquiring shares of the Company’s common stock or other equity securities, including the Eligible Securities, on terms as may be approved by the Company’s Board of Directors from time to time.
Derivative Liability
The Company has valued the warrants issued in connection with the November/December 2011 Offering, the 2011 Warrants, and the beneficial conversion features (“BCF”) of the 2011 Notes, to their maximum value in proportion to the 2011 Notes and had accounted for them as a discount to the debt. In certain circumstances the convertibility features and the attached Warrants contain reset provisions which adjust the conversion price of the 2011 Notes and the exercise price of the 2011 Warrants should the Company sell additional shares of common stock below the conversion price of the 2011 Notes or 2011 Warrant exercise price then in effect. The Company has assessed that the reset provision for the convertibility feature and the warrant exercise price are such that they are not indexed to the Common Stock and is therefore a derivative in accordance with ASC 815-40 (formerly EITF 07-5). As such the derivative was valued on the date of its initiation, with each issuance of convertible debt, and will be re-valued at its fair value at each subsequent interim and annual reporting period.
The Company valued the 2011 Warrants and the beneficial conversion features (“BCF”) of the 2011 Notes, and the resulting derivative liability, at $5,309,941 each for the 2011 Warrants and the BCF, for a total of $10,619,882 recorded as a discount to the convertible debt during the first quarter of fiscal 2012. This discount is being amortized over the life of the 2011 Note or until such time as the note is repaid or converted, or upon exercise of the 2011 Warrants. The valuation of the 2011 Warrants, BCF, and the resulting derivative liability, were determined using the Black-Scholes option pricing model with the following weighted assumptions for all debt issuances: i) expected dividend rate of 0%, ii) expected volatility of 52.7%, iii) risk free interest rate of 0.9%, and iv) expected term of 5 years.
As of September 30, 2013, the aggregate fair value of the derivative was $11,537,248. The revaluation of the derivative as of September 30, 2014 resulted in a derivative value of $646,120. The change in fair value of the derivative from September 30, 2013 to September 30, 2014 resulted in a gain on the fair value of the derivative liability of $10,891,128. Substantially all of the increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company’s common stock during the quarter ended March 31, 2014 (see Note 2). The derivative liability was revalued on September 30, 2014 using the Black-Scholes option pricing model with the following weighted assumptions: i) expected dividend rate of 0% ii) expected volatility of 35.34% iii) risk free interest rate of 1.78%, iv) expected term of 2.10 years and v) market price of $2.26. If the Company did not change this method of valuation, it would have recognized a gain on the fair value of the derivative liability of approximately $2,750,000 for the year ended September 30, 2014.
In connection with the 2011 Offering, the Company issued warrants to the placement agent (the “Placement Agent Warrants”) to purchase shares of Common Stock. The Company issued an aggregate of 109,176 Placement Agent Warrants in November and December 2011 valued at $212,040. The Placement Agent Warrants were valued based on the Black-Scholes Model with assumptions similar to those used to value the 2011 Warrants issued to the purchasers of 2011 Notes in the 2011 Offering. The Placement Agent Warrants have similar terms to those issued to the convertible debt holders, including a reset provision included with the warrants if the Company should obtain equity financing at a price per share lower than that of the exercise price of the warrants. The Placement Agent Warrants, similar to the 2011 Warrants issued to the purchasers of 2011 Notes in the 2011 Offering, do not meet the definition of being indexed to the Company’s own stock in accordance with ASC 815-40. Accordingly, the Company has recorded a derivative liability for the value of the Placement Agent Warrants. The derivative liability valued at $230,256 at September 30, 2013 was revalued at $12,896 at September 30, 2014. The difference in valuation for the year ended September 30, 2014 was $217,360, accounted for as a gain on the fair value of derivative. Substantially all of the increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company’s common stock during the quarter ended March 31, 2014 (see Note 2). The valuation at September 30, 2014 was valued based on the Black-Scholes Model with assumptions similar to those used to value the 2011 Warrants granted to the debt holders as of September 30, 2014. If the Company did not change this method of valuation, it would have recognized a gain on the fair value of the derivative liability of approximately $55,000 for the year ended September 30, 2014.
June 2013 Loan and Security Agreement
On June 11, 2013, the Company and its wholly-owned subsidiaries Boomerang Sub, Inc., Boomerang USA Corp. and Boomerang MP Holdings Inc. (collectively with the Company, the “Borrowers” and individually, a “Borrower”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”) dated as of June 6, 2013 with lenders who became a lender party thereto (together with any party which subsequently becomes a lender party, the “Lenders” and, individually, a “Lender”) and the Agent (as defined in the Loan and Security Agreement). Pursuant to the Loan and Security Agreement, Lenders committed to fund $4,750,000 principal amount of loans to the Borrowers. The Loan and Security Agreement contemplates that the aggregate principal amount of borrowings may be increased to $10,000,000 through commitments from additional Lenders who subsequently become a party to the Loan and Security Agreement.
On July 12, 2013 and August 6, 2013, the Borrowers entered into Amendments No. 1 (the “Amendment”) and No. 2 (the “2nd Amendment”) to the Loan and Security Agreement (collectively “the Amendments”). Pursuant to the Amendments, the additional Lenders committed to fund an additional $3,100,000 principal amount of loans to the Borrowers, bringing aggregate commitments under the Loan and Security Agreement to $7,850,000.
As of September 30, 2013, the Company drew down an aggregate of $3,033,333 under the Loan and Security Agreement. The Company drew down an additional $3,452,207 during the year ended September 30, 2014, bringing the total amount of borrowings under the Loan and Security Agreement to $6,485,540 as of September 30, 2014.
The notes bear interest at the rate of 15% per annum, payable upon maturity. The maturity date of the Notes is May 31, 2016, subject to earlier prepayment upon acceleration of the occurrence of an event of default (as defined in the Loan and Security Agreement); provided further that the Company may prepay the Notes at any time without penalty. The Company accrued $794,713 of interest expense during the year ended September 30, 2014. Total accrued interest related to the Loan and Security Agreement was $902,083 as of September 30, 2014.
Pursuant to draws under the Loan and Security Agreement during the year ended September 30, 2013, the Company issued warrants to purchase an aggregate of 606,680 shares of common stock. The Company valued these warrants at $1,357,139, recorded as a discount to long-term debt. During the year ended September 30, 2014, the Company amortized $467,545 of the debt discount.
Pursuant to draws under the Loan and Security Agreement on October 29, 2013, February 27, 2014, May 19, 2014 and June 24, 2014, the Company issued warrants to purchase an aggregate of 690,493 shares of common stock. The Company valued these warrants at $587,549, recorded as a discount to long-term debt. This discount is being amortized over the life of the notes or until such time as the notes are repaid, or upon exercise of the warrants. The valuation of the warrants was determined using the Black-Scholes option pricing model with the following weighted assumptions: i) expected dividend rate of 0% ii) expected volatility of 35.85-43.36% iii) risk free interest rate of 1.49-1.75% and expected term of 3.95-4.60 years. During the year ended September 30, 2014, the Company amortized $204,753 of the debt discount.
The following officers, directors and 5% shareholders of the Company participated as Affiliate Lenders:
(1) Gail Mulvihill and Andrew Mulvihill, the co-administrators of the estate, exercise voting and investment power over the shares issuable upon exercise of the Warrants. Gail Mulvihill is a principal stockholder of the Company and mother of Christopher, the Company’s President and a principal stockholder of the Company. Andrew Mulvihill is a brother of Christopher Mulvihill.
(2) James Mulvihill, was a principal stockholder of the Company at the time we entered into the Loan and Security Agreement, has voting and investment power over the shares issuable upon exercise of the Warrants and is a brother of Christopher Mulvihill.
(3) MRP Holdings LLC is owned by Mark Patterson, the Chief Executive Officer and a director and principal stockholder of the Company.
(4) Directly and indirectly through entities they control and by members of their families and entities they control, Burton Koffman and David Koffman are principal stockholders of the Company. In addition, David Koffman is a director of the Company.
(5) Anthony P. Miele, III is a director of the Company.
(6) Alexandria Equities, LLC was a principal stockholder of the Company at the time we entered into the Loan and Security Agreement.
(7) Albert Behler is a principal stockholder of the Company.
A majority of the principal amount of each series of Notes consented to the Company’s entering into the Loan and Security Agreement and increasing the secured indebtedness under the Loan Agreement, and acknowledged that the secured indebtedness under the Loan and Security Agreement is senior in right of payment and otherwise to the Notes.
On December 24, 2014, the Borrowers entered into Amendment No. 3 (the “3rd Amendment”) to the Loan and Security Agreement. Pursuant to the 3rd Amendment, the maximum aggregate principal amount of advances that may be permitted to be outstanding at any one time was increased to $15,000,000. In addition, existing lenders and incremental lenders committed to fund an additional $7,075,000 principal amount of loans to the Borrowers, bringing aggregate commitments under the Loan and Security Agreement to $14,925,000.
Results of Operations
Fiscal Year 2014 Compared to Fiscal Year 2013
Revenues were $5,446,890 for the fiscal year ended September 30, 2014 compared with $2,718,410 for the fiscal year ended September 30, 2013, for an increase of $2,728,480. The increase was due to the progression of a large scale Robotic Valet project. This revenue was recognized using the percentage of completion method.
Cost of goods sold were $8,444,041 for the fiscal year ended September 30, 2014 compared with $2,613,254 for the fiscal year ended September 30, 2013, for an increase of $5,830,787. The increase was attributable to cost overruns associated with a large scale Robotic Valet project that progressed in this fiscal year. The increase in cost of goods sold was partially offset by the cessation of work under the Crescent Heights project and the subsequent reversal of accrued costs of approximately $500,000 that were expected to be incurred to complete the project. The Company recognized a gross loss of $2,997,151 and a gross profit of $105,156 for the years ended September 30, 2014 and September 30, 2013, respectively, for an increase of $3,102,307.
Sales and marketing expenses were $722,559 during the fiscal year ended September 30, 2014 compared with $977,815 during the fiscal year ended September 30, 2013, for a decrease of $255,256. The decrease was primarily the result of decreases in salary related expenses of approximately $160,000 and advertising expenses of $100,000. Advertising expenses for the fiscal year ended September 30, 2014 and 2013 were $79,355 and $178,226 respectively. As of September 30, 2014, the Company employed two full-time salesmen, whose salaries are recorded under sales and marketing expenses.
General and administrative expenses were $3,629,254 during the fiscal year ended September 30, 2014 compared with $4,226,506 during the fiscal year ended September 30, 2013, for a decrease of $597,252. This decrease was due to a reduction of approximately $570,000 in salary related expenses, $82,000 in travel expenses, $69,000 in license fees, $30,000 in rent expense and $490,000 in bad debt expense due to the cessation of work on the Crescent Heights project in the fiscal year ended September 30, 2013. This was offset by increases in professional fees of approximately $95,000, in non-cash expenses incurred in connection with issuances of stock options and warrants of $110,000, insurance costs of $76,000, shop and office supplies of $41,000, in provision for doubtful accounts of $17,500 and in warranty expense of $306,000 that was reversed and credited in fiscal year 2013 due to the cessation of the work on the Crescent Heights project.
Research and development expenses were $95,950 during the fiscal year ended September 30, 2014 compared with $2,242,414 during the fiscal year ended September 30, 2013, for a decrease of $2,146,464. This decrease was due to less resources being needed to complete existing research and development projects during the fiscal year ended September 30, 2014.
Depreciation and amortization was $303,746 during the fiscal year ended September 30, 2014 compared to $380,055 during the fiscal year ended September 30, 2013, for a decrease of $76,309. This decrease is attributable to the disposal of certain fixed assets during the last quarter of the fiscal year ended September 30, 2013, thereby reducing depreciation for the fiscal year ended September 30, 2014.
Interest expense was $2,071,236 during the fiscal year ended September 30, 2014, compared with $1,342,856 during the fiscal year ended September 30, 2013, for an increase of $728,380. This increase is due to an increase in outstanding indebtedness due to the issuance of the December 2012 Notes as well as interest accrued on the Loan and Security Agreement due to additional borrowings during the fiscal year ended September 30, 2014.
In connection with the 2011 Offering, the Company recorded a discount for the BCF and the 2011 Warrants. In addition, the Placement Agent Warrants were deemed not indexed to the Company’s common stock and accordingly the Company recorded a derivative liability. The derivative liability is required to be revalued at each interim and annual reporting date until such time that it is settled. This revaluation resulted in a gain on fair value of derivative of $11,108,488 during the year ended September 30, 2014. With respect to the 2012 Offering and the December 2012 Offering, the Company recorded a discount for the BCF and the warrants issued in connection with each offering. In addition, the placement agent was granted warrants similar in their terms to those issued to the debt holders. The Company has determined that the 2012 Offering and the December 2012 Offering are indexed to the Company’s common stock and has not recorded a derivative liability. During the year ended September 30, 2014 the Company amortized an aggregate of $3,966,917 of the debt discount for the 2011 Offering, the 2012 Offering and the December 2012 Offering.
Critical Accounting Policies and Estimates
Our financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires our management to make estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. We continually evaluate the accounting policies and estimates we use to prepare the consolidated financial statements. We base our estimates on historical experiences and assumptions believed to be reasonable under current facts and circumstances. Actual amounts and results could differ from these estimates made by management.
The Company has identified the accounting policies below as critical to our business operations and the understanding of our results of operations.
Principles of consolidation - The accompanying consolidated financial statements include the accounts of Boomerang Systems, Inc. and the accounts of all majority-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents- For purposes of the statement of cash flows, we consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts receivable and allowance for doubtful accounts - Trade receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts is our best estimate of the amount of probable credit losses in our existing accounts receivable. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We determine this allowance based on known troubled accounts, history and other currently available evidence. Accordingly, we recorded an allowance for doubtful accounts of $17,500 and $0 at September 30, 2014 and 2013, respectively.
Retainage Receivable - The Company’s contracts for automated parking systems sometimes require a holdback of a percentage of the contract price as retainage. This holdback is recorded on the Company’s balance sheet as “Retainage receivable”. Retainage is a portion of the total price of a project that is held back by the customer until the project reaches certain milestones specified in the contract terms. Retainage percentages typically range from 0% to 10% and are usually collected anywhere from nine to eighteen months from the inception of the project. Retainage receivable for the years ended September 30, 2014 and 2013 was $367,706 and $0, respectively.
Property and equipment - Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Costs of major additions and betterments are capitalized. Depreciation is calculated on the straight-line method over the estimated useful lives which range from three years to fifteen years. Depreciation and amortization for the years ended September 30, 2014 and September 30, 2013 was $303,746 and $380,055, respectively.
Research and development - Pursuant to ASC 730, Research and Development, research and development costs are expensed as incurred. Research and development costs for the years ended September 30, 2014 and 2013 were $95,950 and $2,242,414, respectively.
Inventories - Inventories consisting of parts, materials, and assemblies are stated at the lower of cost or market. Cost is determined using the weighted average cost method.
Stock-based compensation - We adopted ASC 718-10-25, using the modified-prospective-transition method on February 7, 2008. Under this method, we are required to recognize compensation cost for stock-based compensation arrangements with employees and directors based on their grant date fair value using the Black-Scholes option-pricing model, such cost to be expensed over the compensations’ respective vesting periods. For awards with graded vesting, in which portions of the award vest in different periods, we recognize compensation costs over the vesting periods using the straight-line method. For calculating the value for warrants, the Black-Scholes method is also used.
Inherent in determining the fair value of options are several judgments and estimates that must be made. These include determining the underlying valuation methodology for share compensation awards and the related inputs utilized in each valuation, such as our expected stock price volatility, expected term of the options granted to employees and consultants, expected dividend yield, the expected risk-free interest rate, the underlying stock price and the exercise price of the option. Changes to these assumptions could result in different valuations for individual share awards. The company uses the Black-Scholes option pricing model to determine the fair value of options granted to employees, non-employee directors and non-employee consultants.
Revenue recognition - Revenues from the sales of RoboticValet and rack and rail systems will be recognized using the percentage of completion method, whereby revenue and the related gross profit is determined by comparing the actual costs incurred to date for the project to the total estimated project costs at completion.
Project costs generally include all material and shipping costs, our direct labor, subcontractor costs and an allocation of indirect costs related to the direct labor. Changes in the project scope, site conditions, staff performance and delays or problems with the equipment used on the project can result in increased costs that may not be billable or accepted by the customer and a loss or lower profit from what was originally anticipated at the time of the proposal.
Estimates for the costs to complete the project are periodically updated by management during the performance of the project. Provisions for changes in estimated costs and losses, if any, on uncompleted projects are made in the period in which such losses are determined.
When the current estimate of total contract costs exceeds the current estimate of total contract revenues, a provision for the entire loss on the contract is made. Losses are recognized in the period in which they become evident under the percentage-of-completion method. The loss is computed on the basis of the total estimated costs to complete the contract, including the contract costs incurred to date plus the estimated costs to complete. As of September 30, 2014, it was estimated that the cumulative gross loss on current contracts would be $3,194,625. This loss is comprised of $2,857,436 recognized through September 30, 2014, and $337,189 as a provision for the remaining loss on contracts.
Revenues of $5,446,890 and $2,718,410 have been recognized for the years ended September 30, 2014 and 2013, respectively.
The Company may have service contracts in the future after the contract warranty period is expired, which are separate and distinct agreements from project agreements and will be billed according to the terms of the contract.
Warranty Reserves - The Company provides warranty coverage on its products for a specified time as stipulated in its sales contracts. As revenues for contracts are recognized, the Company will record a warranty reserve for estimated costs in connection with future warranty claims. The amount of warranty reserve is based primarily on the estimated number of products under warranty and historical costs to service warranty claims. Management periodically assesses the adequacy of the reserves based on these factors and adjusts the reserve accordingly. The Company accrued a warranty reserve of $0 and $12,000 at September 30, 2014 and 2013, respectively.
Earnings Per Common Share - We adopted ASC 260. The statement established standards for computing and presenting earnings per share (“EPS”). It replaced the presentation of primary EPS with a basic EPS and also requires dual presentation of basic and diluted EPS on the face of the income statement. Basic loss per share was computed by dividing our net loss by the weighted average number of common shares outstanding during the period.
Investments at Equity - The Company accounts for its investments using the equity method unless its value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. The Company reviews this investment periodically for impairment and makes appropriate reductions in carrying value when other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During its review, the Company evaluates the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investment. Adverse changes in market conditions or operating results of the issuer that differ from expectation could result in additional other-than-temporary losses in future periods. During the year ended September 30, 2013, the Company terminated the joint ventures Boomerang Systems Middle East, LLC and Boomerang-Stokes Mechanical Parking LLC and recognized an aggregate loss on these investments of $404,431.
Income Taxes - We account for income taxes under ASC 740-10. ASC 740-10 requires an asset and liability approach for financial reporting for income taxes. Under ASC 740-10, deferred taxes are provided for temporary differences between the carrying values of assets and liabilities for financial reporting and tax purposes at the enacted rates at which these differences are expected to reverse. The Company and its subsidiaries file a consolidated Federal income tax return and separate state returns in New Jersey, Utah and Florida. The fiscal 2009 and forward years are still open for examination. The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis.
Use of Estimates - Management of the Company has made estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Estimates are used in accounting for, among other items, allowance for doubtful accounts, inventory obsolescence, warranty expense, income taxes and percentage of completion contracts. Actual results could differ from these estimates.
Impairment of Long-Lived Assets - We review the long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to the fair value. Factors considered in the determination of the fair value include current operating results, trends and the present value of estimated expected future cash flows.
Derivative Liability - The Company accounts for reset provisions in connection with their issuance of debt, and reset provisions of equity instruments attached to their debt, in accordance with ASC 815 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity’s own stock. Under ASC 815 the Company is required to (1) evaluate an instrument’s contingent exercise provisions and (2) evaluate the instrument’s settlement provisions. The derivative liabilities are remeasured at fair value at the end of each reporting period as long as they are outstanding.
Fair Value Measurements - As defined in ASC Topic 820 - 10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 - 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements.
As required by ASC Topic 820 - 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the consolidated financial statements of the Company.
Cautionary Statement for Purposes of the “Safe Harbor” Provisions of the Private Securities Litigation Act of 1996
This Annual Report on Form 10-K includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, and Section 21E of the Exchange Act of 1934. These forward-looking statements are largely based on our current expectations and projections about future events and conditions affecting our business, the markets for our products and customer acceptance of our products and conditions in the construction industry. Such forward-looking statements include, in particular, among others, projections about our future results included in our Exchange Act reports, statements about our plans, liquidity, working capital, strategies, business prospects, changes and trends in our business and the markets in which we operate and intend to operate. These forward-looking statements may be identified by the use of terms and phrases such as “believes”, “can”, “could”, “estimates”, “expects”, “forecasts”, “intends”, “may”, “plans”, “projects”, “targets”, “will”, “anticipates”, and similar expressions or variations of these terms and similar phrases. Comments about our critical need for additional capital and our ability to raise such capital when and as needed and on acceptable terms are forward-looking statements. Additionally, statements concerning future matters such as the costs and expenses we expect to incur, our ability to realize material revenues, delays we may encounter in selling our products and gaining market acceptance for our products, the cost of the further development of our products, estimating costs for fixed cost contracts and achieving enhancements or improved technologies, achieving material sales levels, marketing expenses, projected cash flows, our intentions regarding raising additional capital and when additional capital may be required, and other statements regarding matters that are not historical are forward-looking statements. Management cautions that these forward-looking statements relate to future events or our future financial performance and are subject to business, economic, and other risks and uncertainties, both known and unknown, that may cause actual results, levels of activity, performance or achievements of our business or our industry to be materially different from those expressed or implied by any forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include without limitation those discussed under Item 1A - Risk Factors, as well as those discussed elsewhere in this Annual Report. The cautionary statements should be read as being applicable to all forward-looking statements wherever they appear in this Annual Report and they should also be read in conjunction with the consolidated financial statements, including the related footnotes.
Neither management nor any other person assumes responsibility for the accuracy and completeness of the forward-looking statements. All forward-looking statements in this Annual Report are made as of the date hereof, based on information available to us as of the date hereof, and subsequent facts or circumstances may contradict, obviate, undermine, or otherwise fail to support or substantiate such statements. We caution you not to rely on these statements without also considering the risks and uncertainties associated with these statements and our business that are addressed in this Annual Report. Certain information included in this Annual Report may supersede or supplement forward-looking statements in our other Exchange Act reports filed with the Securities and Exchange Commission. We assume no obligation to update any forward-looking statement to conform such statements to actual results or to changes in our expectations, except as required by applicable law or regulation
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
As a smaller reporting company, we are not required to respond to this Item.
Item 8.
Item 8. Financial Statements and Supplementary Data.
The following financial statements are attached hereto. See pages, et. seq.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A.
Item 9A. Controls and Procedures.
The Company, under the supervision and with the participation of its management, including its principal executive officer and principal financial officer, evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our company's principal executive officer and chief financial officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2014 in reaching a reasonable level of assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure due to our inability to record, process, summarize and report within the time periods specified in the SEC’s rules and forms. We are currently taking measures to educate our staff to enable us to record, process, summarize and report on a timely basis.
The Company’s principal executive officer and principal financial officer also conducted an evaluation of internal control over financial reporting (“Internal Control”) to determine whether any changes in Internal Control occurred during the quarter (the Company’s fourth fiscal quarter in the case of an annual report) that have materially affected or which are reasonably likely to materially affect Internal Control. Based on that evaluation, there has been no such change during the quarter covered by this report.
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. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected. The Company conducts periodic evaluations to enhance, where necessary its procedures and controls.
Management’s Report on Internal Control over Financial Reporting
The management of Boomerang Systems, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to the Company’s management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.
The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) 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 controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. 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.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of September 30, 2014. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on the Company’s assessment, it believes that, as of September 30, 2014, the Company’s internal control over financial reporting was effective based on those criteria.
This annual report 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 rules of the Securities and Exchange Commission that permit the Company to provide only management’s report in this annual report.
Item 9B.
Item 9B. Other Information.
N/A
PART III
Item 10.
Item 10. Directors, Executive Officers, and Corporate Governance
Our directors and executive officers and their ages are as follows:
Name
Title
Age
Mark Patterson
Chief Executive Officer and Chairman
Christopher Mulvihill
President and Director
Scott Shepherd
Chief Financial Officer
Maureen Cowell
Secretary and Director
Joseph R. Bellantoni
Director
David Koffman*
Director
Kevin M. Cassidy*
Director
Anthony P. Miele, III*
Director
*Independent Director
Directors and Executive Officers
Each director serves for a term of one year and until his or her successor is duly elected and qualified.
All of our directors bring to our Board executive leadership experience derived from their service as senior executives and, in many cases, founders of industry or knowledge specific consulting firms or operational businesses. Some offer extensive public company board experience. Each of our board members has demonstrated strong business acumen and an ability to exercise sound judgment and has a reputation for integrity, honesty and adherence to ethical standards. When considering whether directors and nominees have the experience, qualifications, attributes and skills, taken as a whole, to enable the Board of Directors to satisfy its oversight responsibilities effectively in light of the company’s business and structure, the Corporate Governance and Nominating Committee and the Board of Directors focused primarily on the information discussed in each of the Directors’ individual biographies and the specific individual qualifications, experience and skills as described below:
Mark Patterson. Mr. Patterson has served as the Chief Executive Officer of our company since August 2010 and Chairman of the Board since May 2011. From January of 2009 until joining the Company in June of 2010 as an Executive Vice President, Mr. Patterson was a real estate consultant. Until January of 2009, Mr. Patterson was a Managing Director and the Head of Real Estate Global Principal Investments at Merrill Lynch, where he oversaw the real estate principal investing activities of Merrill Lynch. Mr. Patterson joined Merrill Lynch in April 2005 as the Global Head of Real Estate Investment Banking and in 2006 also became the Co-Head of Global Commercial Real Estate which encompassed real estate investment banking, principal investing and mortgage debt. Prior to joining Merrill Lynch, Mr. Patterson spent 16 years at Citigroup where he held numerous positions including the Global Head of Real Estate Investment Banking since 1996. Mr. Patterson is a member of the Board of Directors of General Growth Properties, a company traded on the New York Stock Exchange under the symbol GGP, and UDR, Inc., a company traded on the New York Stock Exchange under the symbol UDR. During his career, Mr. Patterson has been involved in a wide variety of financing and investing activities that have spanned virtually all types of real estate in most major global property markets. Mr. Patterson’s day to day leadership of our company, as Chief Executive Officer, provides him with intimate knowledge of our business, results of operations and financial condition. Mr. Patterson, as a result of experience in the real estate investment banking industry, provides unique insights into our target customers as well as our challenges and opportunities.
Christopher Mulvihill. Mr. Mulvihill has been employed as President and Manager of Sales and Marketing of our company since February 2008, and prior thereto served in that capacity for Boomerang Utah from January 2007 to February 2008. Mr. Mulvihill was appointed as a Director of our company in May 2011. From August 2005 to January 2007, he was employed by The Active Network, Inc., a provider of online registration software and event management software, as the Director of Business Development for Golf. From January 2002 to July 2005, Mr. Mulvihill was the founder and President of Tee Time King, Inc., a provider of golf reservation, inventory management and point of sale software, which grew to become the country’s largest municipal golf course reservation company before being sold to The Active Network, Inc. in August 2005. As President of our company, Mr. Mulvihill provides significant experience in sales, management and commercial issues associated with technology based businesses which comprise an important aspect of our business.
Scott Shepherd. Mr. Shepherd has served as our chief financial officer since January 18, 2012. Prior thereto, he served as our controller from February 2011 until January 2012. Mr. Shepherd served as corporate controller for heavy equipment manufacturer and distributor, Komatsu Equipment Company, from July 2009 to February 2011. From May 2008 to July 2009, he served as Chief Financial Officer for The Levitin Group, an online, interactive computer based training company. He worked for Eskay Corporation (subsequently merged with Daifuku America Corporation), a global automated material handling company from 1995 to 2008 and served as its Chief Financial Officer from 2000 until May 2008.
Maureen Cowell. Ms. Cowell was the Secretary of Digital Imaging Resources, Inc. since July 2007 and has remained so through the merger with Boomerang in February 2008. Ms. Cowell also became a Director of Boomerang on April 14, 2009. Ms. Cowell is also employed as Vice President of North Jersey Management Services, Inc., a private company providing accounting and financial record-keeping services to various companies, including Crystal Springs, since December 1995. Ms. Cowell has managed dozens of small private development stage corporations since 1992. Ms. Cowell has a comprehensive knowledge of accounting, financial reporting, financial strategies, corporate governance and compliance.
Joseph R. Bellantoni. Mr. Bellantoni has served as a director since February 2008. Mr. Bellantoni was Chief Financial Officer and a Director of Digital Imaging Resources, Inc. from January 2007 until we acquired it and then served as our Chief Financial Officer from February 2008 until January 2012. Mr. Bellantoni previously served as a director of Digital Imaging Resources, Inc. and as its Treasurer from April 1995 until November 2004. Mr. Bellantoni has also served as President of North Jersey Management Services, Inc, a private company providing accounting and financial record-keeping services, since December 1995. North Jersey Management provides accounting and financial services to Crystal Springs. Mr. Bellantoni possesses extensive knowledge of accounting, corporate governance, corporate compliance, financial reporting and financial strategies, which has been an asset to our company in its development stage and ongoing operations.
David Koffman. Mr. Koffman was appointed to the Company’s Board of Directors in November 2013. Mr. Koffman also serves as a member of the Company’s Audit Committee. Mr. Koffman is a graduate of the University of Pennsylvania’s Wharton School of Business and has worked for HSK Industries, Inc., for over 30 years. His past experience in finance, operations and strategic planning will provide the Board with useful insight.
Kevin M. Cassidy. Mr. Cassidy has served as our Director since May 2010. Mr. Cassidy is currently the Managing Member of Logic International Consulting Group, LLC, a consulting firm he formed in October, 1996, that specializes in the development of global trading businesses and the creation of the requisite infrastructure, management and support paradigms of said platforms. From September 2002 to December 2008, Mr. Cassidy was a Partner and Chief Operating Officer of Archeus Capital Management, LLC, which is a multi-strategy hedge fund. Mr. Cassidy’s knowledge in a range of business functions, including raising capital, leasing and corporate administration, provides insight to our Board.
Anthony P. Miele, III. Mr. Miele has served as our Director since May 2010. Mr. Miele has been a Partner of White Honey, which offers a full spectrum of professional photography of luxury fragrances for high profile clients, since August 2009. Mr. Miele was employed by Ricoh Business Solutions as an Account Executive from August 2006 to July 2009. Mr. Miele was formerly employed by Tyco ADT Security Systems as a Small Business Sales Representative from August 2005 to June 2006. Prior thereto, Mr. Miele was a sales trader on the New York Stock Exchange from August 2003 to August 2005. Through his past work experiences, Mr. Miele has been involved with companies that were in all stages of development which provides the Company with useful insight.
Section 16(a) Beneficial Ownership Reporting Compliance
To our knowledge, based solely on a review of Forms 3 and 4 and any amendments thereto furnished to our company pursuant to Rule 16a-3(e) under the Securities Exchange Act of 1934, or representations that no Forms 5 were required all Section 16(a) filing requirements applicable to our officers, directors and beneficial owners of more than 10% of our equity securities were timely filed except that the following reports were not timely filed during the fiscal year ended September 30, 2014: Forms 4 were not timely filed for two transactions by Mark Patterson, two transactions by Christopher Mulvihill, two transactions by David Koch, one transaction by Scott Shepherd, one transaction by Stanley Checketts and two transactions by Gail Mulvihill.
Code of Ethics
We have adopted a Code of Ethics that applies to our principal executive officer, principal financial and accounting officer, controller and persons performing similar functions. A copy of our Code of Ethics was filed as an exhibit to our Current Report on Form 8-K filed December 28, 2009. We will provide to any person, without charge, upon request, a copy of such Code of Ethics, as amended. Requests should be addressed to Mr. Scott Shepherd, Chief Financial Officer at our address appearing on the cover page of this Annual Report on Form 10-K.
Audit Committee and Audit Committee Financial Expert
Our Board of Directors has appointed an Audit Committee which consists of Messrs. Koffman and Cassidy. Each of such persons has been determined to be an “independent director” under the listing standards of the NASDAQ Capital Market, which is the independence standard that was adopted by our Board of Directors. Mr. Cassidy has been appointed as the Company’s Audit Committee Financial Expert by our Board of Directors. The Audit Committee operates under a written charter adopted by our Board of Directors. The Audit Committee assists the Board of Directors by providing oversight of the accounting and financial reporting processes of the Company, appoints the independent registered public accounting firm, reviews with the registered independent registered public accounting firm the scope and results of the audit engagement, approves professional services provided by the independent registered public accounting firm, reviews the independence of the independent registered public accounting firm, considers the range of audit and non-audit fees and reviews the adequacy of internal accounting controls.
Item 11.
Item 11. Executive Compensation.
The following table sets forth the compensation of our principal executive officer and our other most highly compensated executive officers (who we collectively refer to as “named executive officers”) who received total compensation exceeding $100,000 for the year ended September 30, 2014 and who served in such capacity at September 30, 2014.
(1) Represents the grant date fair value in accordance with ASC 718 (formerly FAS 123R). See Note 9 to Notes to Financial Statements for the year ended September 30, 2014 for a description of valuation assumptions used in the calculation of grant date fair value.
(2) Mark Patterson’s 2014 salary of $200,000 was comprised of an accrual of $200,000 and his 2013 salary of $200,000 was comprised of cash payments of $38,000 and an accrual of $162,000.
(3) Chris Mulvihill’s 2014 salary of $150,000 was comprised of an accrual of $150,000 and his 2013 salary of $150,000 was comprised of cash payments of $29,000 and an accrual of $121,000.
(4) Scott Shepherd was granted 60,000 options to purchase common stock on February 27, 2014. The options vest as to 20,000 each on February 27, 2015, February 27, 2016 and February 27, 2017.
Narrative Disclosure to Summary Compensation Table
Employment Agreements
On August 21, 2010, the Company entered into an Employment Agreement with Mark Patterson, to serve as the Company’s Chief Executive Officer, which was amended and restated on October 1, 2010. The amended agreement provides for a base salary of $200,000 and provides for a grant of an aggregate of 1,080,000 five-year warrants with an exercise price of $5.00 per share that vested and became exercisable as to 270,000 shares on October 1, 2010, and vest and become exercisable as to 210,000 shares on each of February 1 and August 1, 2011 and February 1, 2012, and 180,000 shares on August 1, 2012. The amended agreement provides Mr. Patterson with a right of first refusal, pursuant to which Mr. Patterson has the right, but not the obligation, to maintain his then pro rata share of the Company’s issued and outstanding shares and warrants by purchasing additional shares and warrants each time the Company offers shares and/or warrants for sale.
Mr. Mulvihill is employed as our President and Manager of Sales and Marketing. Pursuant to his employment agreement, Mr. Mulvihill receives an annual base salary of $150,000 and is eligible to receive commission of 3% of the gross sales during the year. Pursuant to the agreement, the Company granted Mr. Mulvihill options to purchase 200,000 shares vesting immediately, exercisable at $5.00 per share for a term of 10 years.
Non-compete Agreements
All management and employees of the Company have signed non-compete agreements.
Outstanding Equity Awards at September 30, 2014
The following table reflects the equity awards granted by us to the Named Executive Officers that remain outstanding at September 30, 2014:
(1) These options and warrants are fully vested and currently exercisable.
On November 17, 2014, the Company issued options to purchase 471,719 shares of common stock at $2.15 to Mark Patterson, CEO, in lieu of $334,386 of cash compensation and options to purchase 176,894 shares of common stock at $2.15 to Christopher Mulvihill, President, in lieu of $125,357 of cash compensation.
Director Compensation
Our directors received no cash compensation during the years ended September 30, 2014 and September 30, 2013, other than the compensation paid to our named executive officers who are also directors, which is reflected in the Summary Compensation Table above.
Our Directors are reimbursed for their out-of-pocket expenses incurred in connection with attending meetings.
On November 17, 2014, the Company granted options to purchase 25,000 shares of common stock at $2.15 to each of Directors Joseph Bellantoni, Maureen Cowell, Kevin Cassidy, David Koffman and Anthony Miele.
Compensation Committee
Our Board of Directors has appointed a Compensation Committee consisting of Messrs. Miele and Bellantoni. Each of such persons has been determined to be an “independent director” under the listing standards of the NASDAQ Capital Market. Our Board of Directors has adopted a written Compensation Committee Charter that sets forth the committee’s responsibilities. The committee is responsible for determining all forms of compensation for our executive officers, and establishing and maintaining executive compensation practices designed to enhance long-term stockholder value.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The following table sets forth, as of December 29, 2014, information with respect to each person (including any "group" as that term is used in Section 13(d)(3) of the Securities Exchange Act of 1934) who is known to us to be the beneficial owner of more than five percent of our Common Stock as well as the number of shares of Common Stock beneficially owned by all of our Directors, each of our named executive officers identified in the Summary Compensation Table above, and all our Directors and executive officers as a group. The percentages have been calculated on the basis of treating as outstanding for a particular holder, all shares of our Common Stock outstanding on said date and all shares issuable to such holder in the event of exercise of outstanding options, warrants or conversion of notes held by such holder at said date. As of December 29, 2014, we had 18,228,407 shares of Common Stock outstanding.
Unless otherwise indicated, the address for each of the above is c/o Boomerang Systems, Inc., 30 A Vreeland Road, Florham Park, NJ 07932.
* Less than 1%
(1) This tabular information is intended to conform with Rule 13d-3 promulgated under the Securities Exchange Act of 1934 relating to the determination of beneficial ownership of securities. Unless otherwise indicated, the tabular information gives effect to the exercise of warrants or options exercisable within 60 days of December 29, 2014, owned in each case by the person or group whose percentage ownership is set forth opposite the respective percentage and is based on the assumption that no other person or group exercise their option.
(2) Includes 190,000 shares held by Mr. Patterson, 1,881,719 shares issuable upon exercise of options and warrants held by Mr. Patterson, 404,530 shares held by MRP Holdings LLC (“MRP”), over which Mr. Patterson exercises sole voting and investment control, 193,027 shares issuable upon the exercise of warrants held by MRP, 153,721 shares held by Mark R. Patterson Revocable Trust (“Patterson Trust”), over which Mr. Patterson exercises sole voting and investment control, and 100,000 shares issuable upon the exercise of warrants held by Patterson Trust. All options and warrants are exercisable within 60 days of December 29, 2014.
(3) Includes 1,105,347 shares owned directly by Mr. Mulvihill, 376,894 shares issuable upon the exercise of options held by Mr. Mulvihill and 20,000 shares owned by Great Delaware & American, Inc. over which Mr. Mulvihill exercises sole voting and investment control. All options are exercisable within 60 days of December 29, 2014.
(4) Includes 20,000 shares issuable upon the exercise of options held by Mr. Shepherd, which are exercisable within 60 days of December 29, 2014. Does not include 40,000 shares issuable upon the exercise of options held by Mr. Shepherd, of which 20,000 options vest on each of February 27, 2016 and 2017.
(5) Includes 167 shares held by Mr. Bellantoni’s father and 697 shares held by Mr. Bellantoni’s wife, both of which Mr. Bellantoni disclaims beneficial ownership. Also includes 45,833 shares issuable upon exercise of options exercisable within 60 days of December 29, 2014. Does not include 16,667 shares issuable upon exercise of options held by Mr. Bellantoni, of which 8,333 vest on November 17, 2015 and 8,334 vest on November 17, 2016.
(6) Includes 35,867 shares issuable on exercise of options held by Ms. Cowell, exercisable within 60 days of December 29, 2014. Does not include 16,667 shares issuable upon exercise of options held by Ms. Cowell, of which 8,333 vest on November 17, 2015 and 8,334 vest on November 17, 2016.
(7) Includes 73,750 shares owned directly by Mr. Miele and Heather Miele and 19,964 shares issuable upon exercise of options and warrants exercisable within 60 days of December 29, 2014. Does not include 16,667 shares issuable upon exercise of options held by Mr. Miele, of which 8,333 vest on November 17, 2015 and 8,334 vest on November 17, 2016.
(8) Includes 28,486 shares held directly by Mr. Koffman, 10,883 shares issuable upon the exercise of options and warrants held by Mr. Koffman, 20,000 shares held by 300 Plaza Drive Associates, 116,235 shares issuable upon exercise of warrants held by 300 Plaza Drive Associates, 678,408 shares held by HSK Funding Inc. (“HSK”), 217,831 shares issuable upon exercise of warrants held by HSK, 202,886 shared held by SB&G Properties (“SB&G”), 84,154 shares issuable upon exercise of warrants held by SB&G, 4,176 shares held by K-6 Family Limited Partnership and 4,592 shares held by Public Loan Company, all of which are exercisable within 60 days of December 29, 2014. Mr. Koffman is a member of, or exercises at least co-voting and investment control of all securities held by these entities. The address for Mr. Koffman is 300 Plaza Drive, Vestal, NY 13850. Does not include 16,667 shares issuable upon exercise of options held by Mr. Koffman, of which 8,333 vest on November 17, 2015 and 8,334 vest on November 17, 2016.
(9) Includes 8,333 shares issuable on exercise of options held by Mr. Cassidy, exercisable within 60 days of December 29, 2014. Does not include 16,667 shares issuable upon exercise of options held by Mr. Cassidy, of which 8,333 vest on November 17, 2015 and 8,334 vest on November 17, 2016.
(10) Includes 710,034 shares held by Mrs. Mulvihill, 15,400 shares issuable upon the exercise of warrants held by Mrs. Mulvihill, 555,394 shares held by Sail Energy LLC (“Sail Energy”), over which Mrs. Mulvihill exercises sole voting and investment control, 1,225,928 shares held by Lake Isle Corp. (“Lake Isle”), over which Mrs. Mulvihill exercises sole voting and investment control, 233,915 shares issuable upon the exercise of warrants held by Lake Isle, 599,232 shares held by the Estate of Gene Mulvihill (“Mulvihill Estate”) over which Mrs. Mulvihill is the administrator and individual who exercises shared voting and investment power, 312,164 shares issuable upon the conversion of outstanding warrants held by the Mulvihill Estate, 202,886 shares held by SB&G, which is owned, in part, by Lake Isle, 84,154 shares issuable upon the exercise of warrants held by SB&G, all of which are exercisable within 60 days of December 29, 2014. The address for Sail Energy and Lake Isle is 3621 Route 94, 2nd Floor, Hamburg, NJ 07419.
(11) This information is based in part on a Schedule 13G filed with the Securities and Exchange Commission on November 13, 2009. Includes 86,771 shares owned directly by Mr. Koffman, 48,996 shares issuable upon exercise of warrants held by Mr. Koffman, 4,592 shares owned by Public Loan Company, 4,176 shares owned by The K-6 Family Limited Partnership, 20,000 shares owned by 300 Plaza Drive Associates, 116,235 shares issuable upon exercise of warrants held by 300 Plaza Drive Associates, 25,000 shares owned by New Valu, Inc., 290,484 shares owned by IA 545 Madison Assoc., 39,871 shares issuable upon exercise of warrants held by IA 545 Madison Assoc., 678,408 shares owned by HSK, 217,831 shares issuable upon exercise of warrants held by HSK, 202,886 shares held by SB&G, which is owned, in part, by HSK and 84,154 shares issuable upon the exercise of warrants held by SB&G, all of which are exercisable within 60 days of December 29, 2014. Mr. Koffman exercises voting and investment control of all securities held by these entities. The address for Mr. Koffman is 300 Plaza Drive, Vestal, NY 13850.
(12) Includes 1,225,928 shares held by Lake Isle, over which Gail Mulvihill exercises sole voting and investment control, 233,915 shares issuable upon the exercise of warrants held by Lake Isle, 202,886 shares held by SB&G, which is owned, in part, by Lake Isle and 84,154 shares issuable upon the exercise of warrants held by SB&G, all of which are exercisable within 60 days of December 29, 2014. The address for Lake Isle is 3621 Route 94, 2nd Floor, Hamburg, NJ 07419.
(13) Includes 1,395,352 shares issuable upon the exercise of warrants held by Parking Source, LLC, all of which are exercisable within 60 days of December 29, 2014.
(14) Includes 678,408 shares held by HSK, 217,831 shares issuable upon exercise of warrants held by HSK, 202,886 shares held by SB&G, which is owned, in part, by HSK and 84,154 shares issuable upon the exercise of warrants held by SB&G, all of which are exercisable within 60 days of December 29, 2014. The address for HSK is 300 Plaza Drive, Vestal, NY 13850.
(15) David Selengut is the natural person who exercises voting and investment control over the shares held by Venturetek, LP (“Venturetek”). Includes 750,671 shares owned directly by Venturetek, 109,315 shares issuable upon exercise of warrants held by Venturetek, 202,886 shares held by SB&G, which is owned, in part, by Venturetek and 84,154 shares issuable upon the exercise of warrants held by SB&G, all of which are exercisable within 60 days of December 29, 2014. The address for Venturetek is c/o Nesher LLC, P.O. Box 339, Lawrence, NY 11559.
(16) Includes 250,000 shares issuable upon exercise of options held directly by Mr. Checketts, 450,965 shares held by Stan Checketts Properties (“SCP”), over which Mr. Checketts exercises sole voting and investment control, 45,790 shares issuable upon the exercise of warrants held by SCP, 202,886 shares held by SB&G, which is owned, in part, by SCP and 84,154 shares issuable upon the exercise of warrants held by SB&G. All of the options and warrants are exercisable within 60 days of December 29, 2014. The address for SCP is P.O. Box 55, Providence, UT 84332.
(17) Includes 613,104 shares owned directly by Mr. Behler and 403,026 shares issuable upon exercise of warrants, all of which are exercisable within 60 days of December 29, 2014.
Equity Compensation Plan Information -The following table provides information as of September 30, 2014 with respect to our compensation plans (including individual compensation arrangements), under which securities are authorized for issuance aggregated as to (i) compensation plans previously approved by stockholders, and (ii) compensation plans not previously approved by stockholders.
Equity Compensation Plan Information as of September 30,
(1) On February 27, 2014, options to purchase an aggregate of 364,250 shares of common stock were granted to employees of the Company under the 2012 Stock Incentive Plan. These options are exercisable at $1.51 per share and have a term of 5 years. The options are subject to a vesting schedule, under which one-third of the options will vest on each of February 27, 2015, February 27, 2016 and February 27, 2017.
On February 27, 2014, options to purchase 303,625 shares of common stock were granted to a consultant of the Company under the 2012 Stock Incentive Plan. These options are exercisable at $1.51 per share, have a term of 5 years and vest immediately.
On September 9, 2014, options to purchase 94,500 shares of common stock were granted to employees of the Company under the 2012 Stock Incentive Plan. The options are exercisable at $2.35 per share and have a term of five years. Options to purchase 44,500 are subject to a vesting schedule, under which one-third of the options will vest on each of September 9, 2015, September 9, 2016, and September 9, 2017. Options to purchase 50,000 are subject to a vesting schedule, under which half of the options vest immediately and half will vest on December 31, 2014.
On September 9, 2014, options to purchase 100,000 shares of common stock were granted to consultants of the Company under the 2012 Stock Incentive Plan. The options are exercisable at $2.35 per share, have a term of five years and vest immediately.
(2) On February 6, 2008, our Board of Directors granted options to purchase an aggregate of 57,385 shares of common stock to persons who were or became officers, directors or consultants to the Company. These options are exercisable at $18.00 per share. Such options have a term of ten years. The option price and number of shares issuable on exercise of the options are subject to anti-dilution adjustment under certain circumstances.
In October 2009, options to purchase 21,000 shares were granted to three persons who are employees of the Company. All 21,000 options have a term of five years and are fully vested with an exercise price of $2.00 per share.
In February 2010, options to purchase 290,000 shares were granted to three officers of the Company. All 290,000 options have a term of ten years and are fully vested with an exercise price of $2.00 per share.
In October 6, 2010, options to purchase 200,000 shares were granted to Mr. Christopher Mulvihill as part of his employment agreement. All 200,000 options have a term of ten years and are fully vested with an exercise price of $5.00 per share.
In November 2010, warrants to purchase 5,000 shares were granted to a consultant of the Company. The warrants have a term of five years with an exercise price of $5.00 per share.
During fiscal years 2011 and 2012, warrants to purchase 1,360,000 shares were granted to Mr. Mark Patterson as part of his employment agreement with the Company. The warrants have a term of five years with an exercise price of $5.00 per share.
In June 2012, warrants to purchase an aggregate of 17,458 shares were granted to consultants of the Company. The warrants have a term of five years with an exercise price of $4.60 per share.
In September 2012, warrants to purchase an aggregate of 28,045 shares were granted to consultants of the Company. The warrants have a term of five years with an exercise price of $4.60 per share.
Item 13.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
HSK Funding, Inc., Lake Isle Corp., and Venturetek, LP, are beneficial holders of shares of our company’s common stock and certain of their members and stockholders are also the members of SB&G Properties, LC. (“SB&G”), which is the landlord under a lease with us at 324 West 2450 North, Building B, Logan, Utah. Gail Mulvihill, the individual who exercises sole voting and investment control over Lake Isle Corp., is the mother of Christopher Mulvihill, our President, and is a principal stockholder of our company. The approximately 29,750 square foot leased premises are used for Boomerang’s manufacturing activities. This is a month-to-month lease at a rate of $21,717 per month, of which $14,717 is classified as deferred rent. Deferred rental payments totaling $529,830 have been accrued as of September 30, 2014 and classified as due to related party on our balance sheet.
Stan Checketts Properties (“SCP”), a company owned by Stanley Checketts, a principal stockholder of the Company and the former chief executive officer of Boomerang’s wholly owned subsidiary, Boomerang Sub, Inc., is the landlord under a lease with us for premises located at 324 West 2450 North, Building B, Logan, Utah. The approximately 18,000 square foot leased premises are, in addition to Building A, also used for Boomerang’s manufacturing activities. We are currently leasing an additional 2,400 square feet of office and conference room space with Stan Checketts Properties for $1,800 per month. This is a month-to-month lease at a rate of $14,940 per month.
SB&G is obligated on a twenty-year promissory note due August 1, 2027 owing to Zions Bank. The principal amount due was $656,008 as of September 30, 2014, and the note bears interest at 3.807% per annum. The promissory note is collateralized by the real property that is the subject of the lease from SB&G to the Company. Boomerang, the Estate of Gene Mulvihill and Messrs. Stan Checketts and Burton Koffman (“Koffman”) are the joint and several guarantors of this promissory note. Gail Mulvihill, the administrator of the estate and individual who exercises shared voting and investment power over the shares, is a principal stockholder of the Company and mother of Christopher Mulvihill, the Company’s President and a director and principal stockholder of the Company. Burton Koffman is a principal stockholder of the Company and father of David Koffman, a director.
The Estate of Gene Mulvihill and Burton Koffman are the guarantors of a financing lease entered into on September 1, 2007 between Boomerang Utah and a nonaffiliated bank. The lease relates to certain equipment used by Boomerang Utah in its manufacturing operations. The total cost of the equipment was approximately $900,000. The rental was payable in sixty monthly installments of approximately $12,750, through August 31, 2012. At that time, Boomerang Utah had the option to purchase the equipment for approximately $315,000 or refinance it for an additional twenty four months. Boomerang refinanced the rental over twenty four months and has the option to purchase the equipment for $1 at the conclusion of the lease term. The lease commences on January 1, 2013 and ends on December 1, 2014, with twenty four monthly installments of approximately $13,890. In the year ended September 30, 2013, the Company sold part of the equipment on this lease and paid the lease down from $315,000 to $40,255. As of September 30, 2014, the remaining amount on the lease is $9,024.
The Company used the services of Coordinate Services, Inc. for product development. The owner of Coordinate Services, Inc., is Gene Mulvihill, Jr., the brother of Christopher Mulvihill, our President, and the son of Gail Mulvihill. The amount of this expense for the year ended September 30, 2014 and 2013 was $0 and $102,711, respectively; which is recorded under research and development expenses.
The Company reimbursed North Jersey Management Services, Inc. for consulting expenses for the services of Joseph Bellantoni, a director and the former Chief Financial Officer of the Company, and Maureen Cowell, a director and the Company’s Corporate Secretary. Mr. Bellantoni is also the President and Mrs. Cowell is the Vice President of North Jersey Management Services, Inc. Mr. Bellantoni and Ms. Cowell are directors of the Company. The amount of this expense for the year ended September 30, 2014 and 2013 was $0 and $19,500, respectively; which is recorded under general and administrative expenses.
In April 2010, we entered into a twenty-year ground lease with Route 94 Development Corporation (“Route 94”) to lease a portion of an approximately fifteen acre parcel in the town of Hamburg, located in Hardyston Township, New Jersey, on which we constructed a RoboticValet parking facility. The leased property is adjacent to Grand Cascades Lodge (“Cascades”), a hotel within the Crystal Springs Golf and Spa Resort (“the Resort”). The parking facility was constructed by Crystal Springs Builders, LLC (“Builders”). It is intended that this facility will be used by us primarily for demonstration and marketing
purposes in the eastern portion of the United States. In consideration of the benefits to us under the terms of the lease, we agree to provide to the lessor and its affiliates parking and storage space within the facility at no cost to the lessor and its affiliates subject to our right to use the facility for demonstration purposes. In addition, we are required to pay the operating costs, premiums on the insurance required under the terms of the lease and incremental property taxes resulting from our construction of the facility. For a period of 60 months, commencing five years after execution of the lease, the lessor has the option to purchase the facility from us and we have a right to cause the lessor to buy from us the facility we construct. The price to be paid by the lessor upon exercise of its option to purchase the facility is 110% of the greater of (i) the depreciated value of the facility, or (ii) the fair market value of the facility, and the price to be paid by the lessor upon exercise of our right to cause the lessor to buy the facility is $1.00.
The Resort owns and operates seven golf courses, two hotels and a fitness facility and develops real estate in Sussex County NJ, which is comprised of more than 40 additional entities, including the above named entities. Gail Mulvihill owns 50% of each of Builders, Cascades and Route 94 and, indirectly, through these and various other entities, Gail Mulvihill and her family own approximately 50% of the Resort. Except as set forth above, no other officer, director or 5% or greater stockholder of the Company has any equity interest in Builders, Cascades or Route 94. The Company incurred expenses of approximately $7,000 and $49,000 payable to Cascades for the year ended September 30, 2014 and 2013, respectively. No expenses were incurred for Builders or Route 94 during the year ended September 30, 2014 and 2013.
On October 31, 2014, the expiration date of the Company’s offer to exchange, the Company issued an aggregate of 9,583,384 shares of common stock in exchange for the cancellation of $11,424,520, $6,000,000 and $3,075,000 principal amount 2011 Notes, 2012 Notes and December 2012 Notes, respectively, and 2,892,314, 1,304,372 and 662,723 2011 Warrants, 2012 Warrants and December 2012 Warrants, respectively.
The following officers, directors, 5% stockholders and affiliates of the Company participated in the Offer with respect to the 2011 Notes and 2011 Warrants:
(1) HSK Funding Inc. is a principal stockholder and a member of SB&G Properties LLC.
(2) Gail Mulvihill, the individual who exercises sole voting and investment control over Lake Isle Corporation, is a principal stockholder and the mother of Christopher Mulvihill, the Company’s President, and a director and principal stockholder. Lake Isle Corporation is a member of SB&G Properties LLC.
(3) Christopher Mulvihill is the Company’s President and a director and principal stockholder of the Company.
(4) James Mulvihill is the brother of Christopher Mulvihill and son of Gail Mulvihill.
(5) MRP Holdings LLC, and Mark R Patterson Revocable Trust are owned by Mark Patterson, the Company’s Chief Executive Officer and a director and principal stockholder of the Company.
(6) Sail Energy LLC is owned by Gail Mulvihill.
(7) Stan Checketts Properties, LLC. is owned by Stan Checketts, a principal stockholder of the Company. Stan Checketts Properties is a member of SB&G Properties LLC.
(8) SB&G Properties LLC is owned by HSK Funding Inc., Stan Checketts Properties, Lake Isle Corporation and Venturetek L.P.
(9) Albert Behler is a principal stockholder of the Company.
The following officers, directors, 5% stockholders and affiliates of the Company participated in the Offer with respect to the 2012 Notes and 2012 Warrants:
(1) Mark R. Patterson, the sole member of MRP Holdings LLC, is the Company’s Chief Executive Officer and a director and principal stockholder of the Company.
(2) Sail Energy, LLC is owned by Gail Mulvihill, a principal stockholder and mother of Christopher Mulvihill, the Company’s President and a director and principal stockholder of the Company.
(3) Heather Mulvihill is the sister-in-law of Christopher Mulvihill and daughter-in-law of Gail Mulvihill.
(4) Burton I. Koffman, a partner of IA 545 Madison Assoc., is a principal stockholder of the Company and father of David Koffman, a director of the Company.
The following officers, directors, 5% stockholders and affiliates of the Company participated in the Offer with respect to the December 2012 Notes and December 2012 Warrants:
(1) Gail Mulvihill, the administrator of the estate and individual who exercises shared voting and investment power over the shares, is a principal stockholder and mother of Christopher Mulvihill, the Company’s President and a principal stockholder of the Company.
(2) Heather Mulvihill is the sister-in-law of Christopher Mulvihill, the Company’s President and a director and principal stockholder of the Company.
(3) MRP Holdings LLC is owned by Mark Patterson, the Company’s Chief Executive Officer and a director and principal stockholder of the Company.
(4) Albert Behler is a principal stockholder of the Company.
(5) Directly and indirectly through various entities he controls, Burton I Koffman is a principal stockholder of the Company and father of David Koffman, a director of the Company.
On December 24, 2014, the Borrowers entered into Amendment No. 3 (the “3rd Amendment”) to the Loan and Security Agreement. Pursuant to the 3rd Amendment, the maximum aggregate principal amount of advances that may be permitted to be outstanding at any one time was increased to $15,000,000. In addition, existing lenders and incremental lenders committed to fund an additional $7,075,000 principal amount of loans to the Borrowers, bringing aggregate commitments under the Loan and Security Agreement to $14,925,000.
The following officers, directors and 5% shareholders of the Company participated as Lenders in the Loan and Security Agreement:
(1) Gail Mulvihill and Andrew Mulvihill, the co-administrators of the estate, exercise voting and investment power over the shares issuable upon exercise of the Warrants. Gail Mulvihill is a principal stockholder of the Company and mother of Christopher, the Company’s President and a principal stockholder of the Company. Andrew Mulvihill is a brother of Christopher Mulvihill.
(2) James Mulvihill, was a principal stockholder of the Company at the time we entered into the Loan and Security Agreement, has voting and investment power over the shares issuable upon exercise of the Warrants and is a brother of Christopher Mulvihill.
(3) MRP Holdings LLC is owned by Mark Patterson, the Chief Executive Officer and a director and principal stockholder of the Company.
(4) Directly and indirectly through entities they control and by members of their families and entities they control, Burton Koffman and David Koffman are principal stockholders of the Company. In addition, David Koffman is a director of the Company.
(5) Anthony P. Miele, III is a director of the Company.
(6) Alexandria Equities, LLC was a principal stockholder of the Company at the time we entered into the Loan and Security Agreement.
(7) Albert Behler is a principal stockholder of the Company.
(8) Fox Hunt Wine Collectors, LLC, is managed by Peter Mulvihill, brother of Christopher Mulvihill.
Our management believes that the terms of the above transactions are as favorable to our company as could have been obtained from nonaffiliated persons at the time and under the circumstances as when the transactions were entered into.
Independence of the Board of Directors
We are not a “listed issuer” as such term is defined in Rule 10A-3 under the Exchange Act. We use the definition of independence of The NASDAQ Stock Market LLC. The board has determined that Messrs. Koffman, Cassidy and Miele are independent. Each current member of the Audit Committee, Compensation Committee and Nominating Committee is independent and meets the applicable rules and regulations regarding independence for such committee, including those set forth in pertinent NASDAQ listing standards, and that each member is free of any relationship that would interfere with his individual exercise of independent judgment.
Item 14.
Item 14. Principal Accounting Fees and Services
The following sets forth fees incurred by us during the fiscal years ended September 30, 2014 and 2013 for services provided by Liebman, Goldberg & Hymowitz, L.L.P., our independent registered public accounting firm (“Liebman”):
Audit Fees. The foregoing table presents the aggregate fees billed by Liebman for the audit of our annual financial statements and review of financial statements included in our Forms 10-Q for the fiscal years ended September 30, 2014 and 2013.
Tax Fees. The foregoing table also reflects the aggregate fees billed by Liebman for professional services rendered for tax compliance, tax advice and tax planning for the fiscal years ended September 30, 2014 and 2013.
Our Board of Directors believes that the provision of the services during the two years ended September 30, 2014 is compatible with maintaining the independence of Liebman. Our Board of Directors has not adopted any pre-approval policies and procedures for engaging an accountant to render audit or non-audit services that are subject to the pre-approval requirement. All of the above fees have been pre-approved by the Board of Directors.
PART IV
Item 15.
Item 15. Exhibits, Financial Statement Schedules.
3.1 Certificate of Incorporation of Registrant, as amended (4)
3.2 Amendment to Certificate of Incorporation of Registrant, dated March 4, 2013 (15)
3.3 Second Restated and Amended By-laws of Registrant (2)
4.1 Specimen Common Stock Certificate, $0.001 par value (1)
10.2 Form of Common Stock Purchase Warrant issued and to be issued with respect to payment defaults on our 12% Promissory Notes (5)
10.3 Amended and Restated Executive Employment Agreement between Mark R. Patterson and Boomerang Systems, Inc., dated as of October 1, 2010 (6)
10.4 Lease agreement by and between SB&G Properties, L.C. and Boomerang Systems, Inc. dated as of October 1, 2007, Amendment No. 1 thereto dated October 1, 2008, and Amendment No. 2 thereto dated March 15, 2010 (7)
10.5 Lease agreement by and between Stan Checketts Properties, L.C. and Boomerang Systems, Inc. dated as of October 1, 2007, Amendment No. 1 thereto dated October 1, 2008 and Amendment No. 2 thereto dated March 15, 2010 (7)
10.6 Loan agreement by and between SB&G Properties and Zions First National Bank and Guaranty of such loan provided by Boomerang Systems, Inc dated July 9, 2007 (7)
10.8 Form of Warrant issued to the lenders signatory to the Commitment letter dated December 29, 2010 by and between Boomerang Systems, Inc. and the lenders signatory thereto (8)
10.9 Chris Mulvihill employment agreement dated March 31, 2008 and amendment #1 dated October 2010 (8)*
10.10 Ground Lease with Route 94, dated April 30, 2010 (9)
10.11 Equipment Lease with M&T Bank, dated September 1, 2007 and personal guarantees of the lease (8)
10.12 Form of 6% Convertible Subordinate Note due 2016 (10)
10.13 Form of Warrant (10)
10.14 Form of Placement Agent Warrant (10)
10.15 Form of Registration Rights Agreement issued by and among Boomerang Systems, Inc. and the Subscribers (10)
10.17 Loan Agreement between Mark R. Patterson and Boomerang Systems, Inc. dated November 1, 2011 (11)
10.18 Third Amendment to the Lease between Stan Checketts Properties, L.C. and Boomerang Sub, Inc. dated October 28, 2011 (11)
10.19 Third Amendment to the Lease between SB&G Properties, LC and Boomerang Sub, Inc. dated October 1, 2011 (11)
10.20 Lease between Thirty Vreeland Associates, L.L.C. and Boomerang Systems, Inc. dated December 1, 2011 (11)
10.21 Loan Agreement between Lake Isle Corporation and Boomerang Systems, Inc. dated October 28, 2011 (11)
10.22 Loan Agreement between Atlantic & Madison of NJ Corp. and Boomerang Systems, Inc. dated October 31, 2011 (11)
10.23 Form of 6% Convertible Subordinate Note due June 14, 2017 (12)
10.24 Form of Warrant (12)
10.25 Form of Placement Agent Warrant (12)
10.26 Form of Registration Rights Agreement issued by and among Boomerang Systems, Inc. and the Subscribers (12)
10.30 Loan and Security Agreement dated June 6, 2013 (14)
10.31 Amendment No. 1 to Loan and Security Agreement dated July, 15, 2013 (14)
10.32 Amendment No. 2 to Loan and Security Agreement dated August 6, 2013 (14)
10.33 JBT Manufacturing and License Agreement (17)
Code of Ethics (16)
Subsidiaries of the Registrant as of September 30, 2012 (1)
31.1 Certification of Chief Executive Officer (Principal Executive Officer) Pursuant to Rule 13a-14(a) **
31.2 Certification of Chief Financial Officer (Principal Financial Officer) Pursuant to Rule 13a-14(a) **
32.1 Certification of Chief Executive Officer (Principal Executive Officer) Pursuant to Section 1350 (furnished, not filed) **
32.2 Certification of Chief Financial Officer (Principal Financial Officer) Pursuant to Section 1350 (furnished, not filed) **
XBRL The following materials from Boomerang Systems, Inc.’s Annual Report on Form 10-K for the year ended September 30, 2014 formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Operations for the Years Ended September 30, 2014 and 2013, (ii) Consolidated Balance Sheets as of September 30, 2014 and 2013, (iii) Consolidated Statements of Stockholders’ Equity for the Years Ended September 30, 2014 and 2013, (iv) Consolidated Statements of Cash Flows for the Years Ended September 30, 2014 and 2013, and (v) Notes to Consolidated Financial Statements. ***
(1) Incorporated by reference to an exhibit filed with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011.
(2) Incorporated by reference to an exhibit filed with Quarterly Report on Form 10-Q for quarter ended December 31, 2009.
(3) Incorporated by reference to an exhibit filed with the Company’s Annual Report on Form 10-K/A for the fiscal year ended September 30, 2008.
(4) Incorporated by reference to an exhibit filed with the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended June 30, 2012.
(5) Incorporated by reference to an exhibit filed with the Company’s Current Report on Form 8-K filed on October 28, 2009
(6) Incorporated by reference to an exhibit filed with the Company’s Current Report on Form 8-K filed on October 7, 2010
(7) Incorporated by reference to an exhibit filed with the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2010.
(8) Incorporated by reference to an exhibit filed with the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2011 filed on September 14, 2011.
(9) Incorporated by reference to an exhibit filed with the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2011 filed on December 16, 2011.
(10) Incorporated by reference to an exhibit filed with the Company’s Current Report on Form 8-K filed on December 15, 2011.
(11) Incorporated by reference to an exhibit filed with the Company’s Registration Statement on Form S-1 (file no. 333-179226) filed on January 27, 2012.
(12) Incorporated by reference to an exhibit filed with the Company’s Current Report on Form 8-K filed on July 18, 2012.
(13) Incorporated by reference to an exhibit filed with the Company’s Registration Statement on Form S-1 (file no. 333-183904) filed on September 14, 2012.
(14) Incorporated by reference to an exhibit filed with the Company’s Quarterly Report on Form 10-Q/A for the quarter ended June 30, 2013 filed on August 14, 2013.
(15) Incorporated by reference to an exhibit filed with the Company’s Current Report on Form 8-K filed on March 4, 2013.
(16) Incorporated by reference to an exhibit filed with the Company’s Current Report on Form 8-K filed on December 28, 2009.
* Denotes management compensation plan or arrangement.
** Filed herewith.
***Pursuant to Rule 406T of Regulation S-T, the interactive data files included in Exhibit 101 are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities and 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 date indicated.
Signature
Title
Date
/s/ MARK R. PATTERSON
Chief Executive Officer (principal executive officer) and Director
December 29, 2014
Mark R. Patterson
/s/ CHRISTOPHER MULVIHILL
President and Director
December 29, 2014
Christopher Mulvihill
/s/ JOSEPH R. BELLANTONI
Director
December 29, 2014
Joseph R. Bellantoni
/s/ MAUREEN COWELL
Secretary and Director
December 29, 2014
Maureen Cowell
/s/ DAVID KOFFMAN
Director
December 29, 2014
David Koffman
/s/ KEVIN CASSIDY
Director
December 29, 2014
Kevin Cassidy
/s/ ANTHONY P. MIELE, III
Director
December 29, 2014
Anthony P. Miele, III
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To The Board of Directors and Stockholders of
Boomerang Systems, Inc.
Florham Park, New Jersey
We have audited the accompanying consolidated balance sheets of Boomerang Systems, Inc. and Subsidiaries as of September 30, 2014 and 2013, and the related consolidated statements of operations, stockholders’ deficit and cash flows for each of the years in the two-year period ended September 30, 2014. Boomerang Systems Inc. and Subsidiaries management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these consolidated 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 also 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 Boomerang Systems, Inc. and Subsidiaries as of September 30, 2014 and 2013, and the results of its operations and cash flows for each of the years in the two-year period ended September 30, 2014, in conformity with accounting principles generally accepted in the United States of America.
Liebman Goldberg & Hymowitz, LLP
Garden City, New York
December 29, 2014
BOOMERANG SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
See accompanying notes to the consolidated financial statements.
BOOMERANG SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
See accompanying notes to the consolidated financial statements.
BOOMERANG SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
See accompanying notes to the consolidated financial statements.
BOOMERANG SYSTEMS INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
See accompanying notes to the consolidated financial statements.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 1 - ORGANIZATION AND NATURE OF OPERATIONS
The Company
Boomerang Systems, Inc, is engaged in the business of marketing, designing, engineering, manufacturing, installing and servicing its own line of fully automated parking systems, with corporate and sales offices in Florham Park, New Jersey, a demonstration center in Hamburg, New Jersey, and a research, design, production and testing center in Logan, Utah.
Unless the context otherwise requires, the terms “Company,” “we,” “our,” and “us,” means Boomerang Systems, Inc. and its consolidated subsidiaries.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Boomerang Systems, Inc. and the accounts of all majority-owned subsidiaries, including Boomerang Sub, Inc., Boomerang USA Corp. and Boomerang MP Holdings, Inc. All significant inter-company balances and transactions have been eliminated in consolidation.
Research and Development
Pursuant to ASC 730, Research and Development, research and development costs are expensed as incurred. Research and development costs for the years ended September 30, 2014 and 2013 were $95,950 and $2,242,414, respectively.
Earnings Per Common Share
The weighted average number of common shares used to calculate basic and diluted loss per common share for the years ended September 30, 2014 and September 30, 2013 was 8,281,779 and 7,631,108, respectively. The Company’s common stock equivalents, of outstanding options, warrants and convertible notes, have not been included as to include them would be anti-dilutive. As of September 30, 2014 and 2013, there were fully vested options outstanding for the purchase of 997,010 and 623,385 common shares, warrants for the purchase of 10,665,522 and 10,091,549 common shares, and notes convertible into 4,953,522 and 4,762,313 common shares, respectively, all of which could potentially dilute future earnings per share.
Revenue Recognition
Revenues from the sales of RoboticValet and rack and rail systems are recognized using the percentage of completion method, whereby revenue and the related gross profit is determined by comparing the actual costs incurred to date for the project to the total estimated project costs at completion.
Project costs generally include all material and shipping costs, our direct labor, subcontractor costs and an allocation of indirect costs related to the direct labor. Changes in the project scope, site conditions, staff performance and delays or problems with the equipment used on the project can result in changes to costs that may or may not be billable to the customer and can result in changes to the project profit.
Estimates for the costs to complete the project are periodically updated by management during the performance of the project. Provisions for changes in estimated costs and losses, if any, on uncompleted projects are made in the period in which such losses are determined.
When the current estimate of total contract costs exceeds the current estimate of total contract revenues, a provision for the entire loss on the contract is made. Losses are recognized in the period in which they become evident under the percentage-of-completion method. The loss is computed on the basis of the total estimated costs to complete the contract, including the contract costs incurred to date plus the estimated costs to complete. As of September 30, 2014, the Company had three projects in process. Two of the projects are estimated to be profitable, while one project is estimated to have a gross loss. As of September 30, 2014, it was estimated that the cumulative gross loss on this project would be $3,194,625. This loss is comprised of $2,857,436 recognized through September 30, 2014, and $337,189 as a provision for the estimated remaining loss on the project.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Revenues of $5,446,890 and $2,718,410 have been recognized for the years ended September 30, 2014 and 2013, respectively.
The Company may have service contracts in the future after the contract warranty period is expired, which are separate and distinct agreements from project agreements and will be billed according to the terms of the contract.
Warranty Reserves
The Company provides warranty coverage on its products for a specified time as stipulated in its sales contracts. As revenues for contracts are recognized, the Company will record a warranty reserve for estimated costs in connection with future warranty claims associated with those contracts. The amount of warranty reserve is based primarily on the estimated number of products under warranty and historical costs to service warranty claims. Management periodically assesses the adequacy of the reserves based on these factors and adjusts the reserve accordingly. The Company recorded a warranty reserve of $0 and $12,000 at September 30, 2014 and 2013, respectively.
Cash and Equivalents
For purposes of the statement of cash flows, we consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Accounts Receivable and Allowance for Doubtful Accounts
Trade receivables are recorded at the invoiced amount and do not bear interest. The allowance for doubtful accounts reflects our best estimate of probable credit losses inherent in our existing accounts receivable balance. Account balances are charged off against the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. We determine this allowance based on known troubled accounts, history and other currently available evidence. We recorded an allowance for doubtful accounts of $17,500 and $0 at September 30, 2014 and 2013, respectively.
Retainage Receivable
The Company’s contracts for automated parking systems sometimes require a holdback of a percentage of the contract price as retainage. This holdback is recorded on the Company’s balance sheet as “Retainage receivable.” Retainage is a portion of the total price of a project that is held back by the customer until the project reaches certain milestones specified in the contract terms. Retainage percentages typically range from 0% to 10% and are usually collected anywhere from nine to eighteen months from the inception of the project. Retainage receivable for the years ended September 30, 2014 and 2013 was $367,706 and $0, respectively.
Investment at Equity
The Company accounts for its investments using the equity method unless its value has been determined to be other than temporarily impaired, in which case we write the investment down to its impaired value. The Company reviews this investment periodically for impairment and makes appropriate reductions in carrying value when other-than-temporary decline is evident; however, for non-marketable equity securities, the impairment analysis requires significant judgment. During its review, the Company evaluates the financial condition of the issuer, market conditions, and other factors providing an indication of the fair value of the investment. Adverse changes in market conditions or operating results of the issuer that differ from expectation could result in additional other-than-temporary losses in future periods. During the year ended September 30, 2013, the Company terminated the joint ventures Boomerang Systems Middle East, LLC and Boomerang-Stokes Mechanical Parking LLC and recognized an aggregate loss on these investments of $404,431.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Inventory
Inventory is stated at the lower of cost or market using the weighted average cost method. Inventory includes materials, parts, assemblies and work in process. The Company records an inventory reserve for the anticipated loss associated with slow moving, obsolete and/or damaged inventory.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. Maintenance and repairs are charged to expense as incurred. Costs of major additions and betterments are capitalized. Depreciation is calculated on the straight-line method over the estimated useful lives which range from three years to fifteen years. Depreciation and amortization for the years ended September 30, 2014 and 2013 was $303,746 and $380,055, respectively.
Income Taxes
We account for income taxes under ASC 740-10. ASC 740-10 requires an asset and liability approach for financial reporting for income taxes. Under ASC 740-10, deferred taxes are provided for temporary differences between the carrying values of assets and liabilities for financial reporting and tax purposes at the enacted rates at which these differences are expected to reverse. The Company and its subsidiaries file a consolidated Federal income tax return and separate state returns in New Jersey, Utah and Florida. The fiscal 2010 and forward years are still open for examination. The Company measures and recognizes the tax implications of positions taken or expected to be taken in its tax returns on an ongoing basis and there are none.
Use of Estimates
Management of the Company has made estimates and assumptions relating to the reporting of assets, liabilities, revenues and expenses, and the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with accounting principles generally accepted in the United States of America. Estimates are used in accounting for, among other items, allowance for doubtful accounts, inventory obsolescence, warranty expense, income taxes and percentage of completion contracts. Actual results could differ from these estimates.
Impairment of Long-Lived Assets
We review the long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be fully recoverable. To determine if impairment exists, we compare the estimated future undiscounted cash flows from the related long-lived assets to the net carrying amount of such assets. Once it has been determined that an impairment exists, the carrying value of the asset is adjusted to the fair value. Factors considered in the determination of the fair value include current operating results, trends and the present value of estimated expected future cash flows. No impairment charges were recorded in fiscal year 2014 or 2013.
Derivative Liability
The Company accounts for reset provisions in connection with their issuance of debt, and reset provisions of equity instruments attached to their debt, in accordance with ASC 815. Under ASC 815 the Company is required to (1) evaluate an instrument’s contingent exercise provisions and (2) evaluate the instrument’s settlement provisions. The derivative liabilities are remeasured at fair value at the end of each reporting period as long as they are outstanding.
Fair Value Measurements
As defined in ASC Topic 820 - 10, “Fair Value Measurements and Disclosures,” fair value is the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC Topic 820 - 10 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements be classified and disclosed in one of the following categories:
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. The Company considers active markets as those in which transactions for the assets or liabilities occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. This category includes those derivative instruments that the Company values using observable market data. Substantially all of these inputs are observable in the marketplace throughout the term of the derivative instruments, can be derived from observable data, or supported by observable levels at which transactions are executed in the marketplace.
Level 3: Measured based on prices or valuation models that require inputs that are both significant to the fair value measurement and less observable from objective sources (i.e. supported by little or no market activity). The Company’s valuation models are primarily industry standard models. Level 3 instruments include derivative warrant instruments. The Company does not have sufficient corroborating evidence to support classifying these assets and liabilities as Level 1 or Level 2.
As required by ASC Topic 820 - 10, financial assets and liabilities are classified based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement requires judgment, and may affect the valuation of the fair value of assets and liabilities and their placement within the fair value hierarchy levels.
The estimated fair value of the derivative liability was calculated using the Black-Scholes option pricing model. The Company uses Level 3 inputs to value its derivative liabilities. The following table provides a reconciliation of the beginning and ending balances for the major classes of assets and liabilities measured at fair value using significant unobservable inputs (Level 3) and reflects gains and losses for the years ended September 30, 2014 and 2013.
Commencing with the quarter ended March 31, 2014, the Company changed its methodology for measuring the market price of its common stock as it pertains to the Black-Scholes model. The methodology for measuring the market price of its stock was previously based on the last private placement sale of the Company’s securities, due to the thinly-traded nature of the Company’s Common Stock. The Company determined this measurement was no longer sufficient to determine the fair value of the Company’s stock. The Company has not sold securities in a private sale since December 2012. The methodology was changed to a weighted-average of the last sale price on the over-the-counter markets, based on the last twenty trading days. If the Company did not change this method of valuation, it would have recognized a gain of approximately $2,805,000 on the fair value of the derivative liability for the year ended September 30, 2014.
The Company recorded the derivative liability set forth on the balance sheet in connection with the Offering (see Note 8).
Advertising Expense
Advertising costs amounted to $79,355 and $178,226 for the years ended September 30, 2014 and 2013, respectively, and are included in Sales and Marketing. Advertising costs are expensed as incurred.
Stock-Based Compensation
The analysis and computation was performed based on our adoption of ASC 718-10-25, which requires the recognition of the fair value of stock-based compensation. For the fiscal years ended September 30, 2014 and 2013, we recognized $295,039 and $16,863, respectively, in share-based payments related to the issuance of stock options. We recognized no expense related to the issuance of warrants for the years ended September 30, 2014 and 2013.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Reclassification
Certain fiscal year ended September 30, 2013 items have been reclassified to conform with the fiscal year ended September 30, 2014 presentation.
Recent Accounting Pronouncements
A variety of proposed or otherwise potential accounting standards are currently under study by standard setting organizations and various regulatory agencies. Due to the tentative and preliminary nature of those proposed standards, management has not determined whether implementation of such proposed standards would be material to the consolidated financial statements of the Company.
NOTE 3 - INVENTORY
The components of inventory as of September 30, 2014 and 2013 were as follows:
NOTE 4 - PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at September 30, 2014 and 2013:
NOTE 5 - COSTS IN EXCESS OF BILLINGS/BILLINGS IN EXCESS OF COSTS
Information with respect to uncompleted contracts at September 30, 2014 and 2013 are as follows:
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 6 - ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at September 30, 2014 and 2013 consisted of the following:
NOTE 7 - INCOME TAXES
The tax expense (benefit) for the years ended September 30, 2014 and 2013 consisted of the following components:
The income tax benefit for the year does not bear the expected relationship between pretax loss and the Federal corporate income tax rate of 34% because of the direct effect of state and local income taxes.
The reconciliation between the actual and expected federal tax is as follows:
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Deferred income taxes consisted of the following at September 30, 2014 and 2013:
As of September 30, 2014, the Company had net operating losses (“NOLs”) of approximately $39,910,000. These amounts are available to be carried forward to offset future taxable income. The carry forwards begin to expire during the year ended September 30, 2027. The Company has provided a full 100% valuation allowance on the deferred tax assets at September 30, 2014 and 2013 to reduce such deferred income tax assets to zero as it is management’s belief that realization of such amounts do not meet the criteria required by generally accepted accounting principles. Management will review the valuation allowance required periodically and make adjustments if warranted.
Under Section 382 of the Internal Revenue Code of 1986, as amended (the "Code"), the utilization of net operating loss carry forwards is limited under the change in stock ownership rules of the Code. The Company's operating loss carry forwards are
subject to these limitations. Future ownership changes could also further limit the utilization of any net operating loss carry forwards as of that date.
NOTE 8 -DEBT
Debt - Current Portion
Effective February 6, 2008, the Company became indebted for an unsecured loan to a third party. As of September 30, 2014, the principal balance of this loan was $80,538. The loan is not collateralized, bears interest at an annual rate of 10% and is due on demand. As of September 30, 2014, the balance of the loan including accrued interest was $119,982.
The Company entered into a twenty-four month capital lease secured by equipment with a third party commencing on January 1, 2013. The total principal balance of this lease was $315,000 at an annual rate of 6%. As of September 30, 2014, the principal balance was $9,024 and classified as current on our balance sheet.
Long-Term Debt
Private Placement Offering - November/December 2011
In November and December 2011, the Company issued to subscribers 6% convertible promissory notes (“2011 Notes”) in the aggregate principal amount of approximately $11.6 million and warrants (“2011 Warrants”) to purchase an aggregate of approximately 2.7 million shares of Common Stock of the Company in three (3) closings of a private placement (the “2011 Offering”). The 2011 Notes are due five years after the respective date of issuance and were initially convertible into Common Stock at $4.25 per share, subject to weighted average adjustment for issuances of common stock or common stock equivalents below the conversion price, subject to certain exceptions.
The Company valued the 2011 Warrants and the beneficial conversion features (“BCF”) of the 2011 Notes, and the resulting derivative liability, at $5,309,941 each for the 2011 Warrants and the BCF, for a total of $10,619,882 recorded as a discount to the convertible debt during the first quarter of fiscal 2012. This discount is being amortized over the life of the note or until such time as the note is repaid or converted, or upon exercise of the 2011 Warrants. The valuation of the 2011 Warrants, BCF, and the resulting derivative liability, were determined using the Black-Scholes option pricing model with the following weighted assumptions for all debt issuances: i) expected dividend rate of 0%, ii) expected volatility of 52.7%, iii) risk free interest rate of 0.9%, and iv) expected term of 5 years. During the years ended September 30, 2014 and 2013, the Company amortized $2,123,976 and $2,123,977, respectively, of the debt discount.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
As of September 30, 2013, the aggregate fair value of the derivative was $11,537,248. The revaluation of the derivative as of September 30, 2014 resulted in a derivative value of $646,120. The change in fair value of the derivative from September 30, 2013 to September 30, 2014 resulted in a gain on the fair value of the derivative liability of $10,891,128. Substantially all of the increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company’s common stock during the quarter ended March 31, 2014 (see Note 2). The derivative liability was revalued on September 30, 2014 using the Black-Scholes option pricing model with the following weighted assumptions: i) expected dividend rate of 0% ii) expected volatility of 35.34% iii) risk free interest rate of 1.78%, iv) expected term of 2.10 years and v) market price of $2.26. If the Company did not change this method of valuation, it would have recognized a gain on the fair value of the derivative liability of approximately $2,750,000 for the year ended September 30, 2014.
In connection with the 2011 Offering, the Company issued warrants to the placement agent (the “Placement Agent Warrants”) to purchase shares of Common Stock. The Company issued an aggregate of 109,176 Placement Agent Warrants in November and December 2011 valued at $212,040. The Placement Agent Warrants were valued based on the Black-Scholes Model with assumptions similar to those used to value the 2011 Warrants issued to the purchasers of 2011 Notes in the 2011 Offering. The Placement Agent Warrants have similar terms to those issued to the convertible debt holders, including a reset provision included with the warrants if the Company should obtain equity financing at a price per share lower than that of the exercise price of the warrants. The Placement Agent Warrants, similar to the 2011 Warrants issued to the purchasers of 2011 Notes in the 2011 Offering, do not meet the definition of being indexed to the Company’s own stock in accordance with ASC 815-40. Accordingly, the Company has recorded a derivative liability for the value of the Placement Agent Warrants. The derivative liability valued at $230,256 at September 30, 2013 was revalued at $12,896 at September 30, 2014. The difference in valuation for the year ended September 30, 2014 was $217,360, accounted for as a gain on the fair value of derivative. Substantially all of the increase in the gain on the fair value of the derivative was due to a change in methodology in measuring the market price of the Company’s common stock during the quarter ended March 31, 2014 (see Note 2). The valuation at September 30, 2014 was valued based on the Black-Scholes Model with assumptions similar to those used to value the 2011 Warrants granted to the debt holders as of September 30, 2014. If the Company did not change this method of valuation, it would have recognized a gain on the fair value of the derivative liability of approximately $55,000 for the year ended September 30, 2014.
Private Placement Offering - June/July 2012
In June and July 2012, the Company issued to subscribers 6% convertible promissory notes due on June 14, 2017 (“2012 Notes”) in the aggregate principal amount of $6.2 million and warrants to purchase an aggregate of approximately 1.2 million shares of Common Stock (“2012 Warrants”) in a private placement (the “2012 Offering”).
The 2012 Notes were initially convertible into Common Stock at $5.00 per share, subject to weighted average adjustment for issuances of common stock or common stock equivalents below the conversion price, subject to certain exceptions. Additionally, the conversion price may not be adjusted below $0.25.
The Company valued the 2012 Warrants and the BCF at $1,956,517 each for a total of $3,913,034 recorded as a discount to the convertible debt during the third quarter of fiscal 2012. This discount is being amortized over the life of the 2012 Notes or until such time as the 2012 Notes are repaid or converted, or upon exercise of the 2012 Warrants. The valuation of the 2012 Warrants and BCF were determined using the Black-Scholes option pricing model with the following weighted assumptions for all debt issuances: i) expected dividend rate of 0% ii) expected volatility of 53.43% iii) risk free interest rate of 0.9% and expected term of 5 years. During each of the years ended September 30, 2014 and 2013, the Company amortized $785,157 of the debt discount.
Private Placement Offering - December 2012
In December 2012 and March 2013, the Company issued to subscribers 6% convertible notes due on December 28, 2017 (the “December 2012 Notes”) in the aggregate principal amount of approximately $3.1 million and warrants to purchase an aggregate of 615,000 shares of Common Stock (the “December 2012 Warrants”) in a private placement (the “December 2012 Offering”).
The December 2012 Notes were initially convertible into Common Stock at $5.00 per share, subject to full ratchet adjustment for issuances of Common Stock or Common Stock equivalents below the conversion price, subject to certain exceptions, and subject to weighted average anti-dilution adjustment for issuances of Common Stock as payment of interest on the Notes, the 2012 Notes and the December 2012 Notes. Additionally, the conversion price may not be adjusted below $0.25.
The Company valued the December 2012 Warrants and the BCF at $962,904 each for a total of $1,925,808 recorded as a discount to the convertible debt during the first quarter of fiscal 2013. This discount is being amortized over the life of the December 2012 Notes or until such time as the December 2012 Notes are repaid or converted, or upon exercise of the December 2012 Warrants. The valuation of the December 2012 Warrants and BCF were determined using the Black-Scholes option pricing model with the following weighted assumptions for all debt issuances: i) expected dividend rate of 0% ii) expected volatility of 52.92% iii) risk free interest rate of 0.72% and expected term of 5 years. During the years ended September 30, 2014 and 2013, the Company amortized $385,486 and $290,626, respectively, of the debt discount.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
As a result of the issuance of shares of common stock as payment of interest on the 2011 Notes, 2012 Notes and December 2012 Notes, the conversion prices of the 2011 Notes, 2012 Notes and December 2012 Notes were adjusted to $3.95, $4.60 and $4.64, respectively.
June 2013 Loan and Security Agreement
On June 11, 2013, the Company and its wholly-owned subsidiaries Boomerang Sub, Inc., Boomerang USA Corp. and Boomerang MP Holdings Inc. (collectively with the Company, the “Borrowers” and individually, a “Borrower”), entered into a Loan and Security Agreement (the “Loan and Security Agreement”) dated as of June 6, 2013 with lenders who became a lender party thereto (together with any party which subsequently becomes a lender party, the “Lenders” and, individually, a “Lender”) and the Agent (as defined in the Loan and Security Agreement). Pursuant to the Loan and Security Agreement, Lenders committed to fund $4,750,000 principal amount of loans to the Borrowers. The Loan and Security Agreement contemplates that the aggregate principal amount of borrowings may be increased to $10,000,000 through commitments from additional Lenders who subsequently become a party to the Loan and Security Agreement.
On July 12, 2013 and August 6, 2013, the Borrowers entered into Amendments No. 1 (the “Amendment”) and No. 2 (the “2nd Amendment”) to the Loan and Security Agreement (collectively “the Amendments”). Pursuant to the Amendments, the additional Lenders committed to fund an additional $3,100,000 principal amount of loans to the Borrowers, bringing aggregate commitments under the Loan and Security Agreement to $7,850,000.
As of September 30, 2013, the Company drew down an aggregate of $3,033,333 under the Loan and Security Agreement. The Company drew down an additional $3,452,207 during the year ended September 30, 2014, bringing the total amount of borrowings under the Loan and Security Agreement to $6,485,540 as of September 30, 2014.
The notes bear interest at the rate of 15% per annum, payable upon maturity. The maturity date of the Notes is May 31, 2016, subject to earlier prepayment upon acceleration of the occurrence of an event of default (as defined in the Loan and Security Agreement); provided further that the Company may prepay the Notes at any time without penalty. The Company accrued $794,713 and $107,370 of interest expense during the years ended September 30, 2014 and 2013, respectively. Total accrued interest related to the Loan and Security Agreement was $902,083 as of September 30, 2014.
Pursuant to the Loan and Security Agreement, the Borrowers assigned, pledged and granted to the Lenders a security interest in substantially all of their respective assets, including their respective intellectual property, accounts receivable, general intangibles, equipment, inventory, all of the proceeds and products of the foregoing and the Company’s equity interests in the other Borrowers.
As partial consideration for providing advances under the Loan and Security Agreement, the Company agreed to issue to each Lender warrants to purchase 20,000 shares of its common stock for each $100,000 advanced. The warrants are exercisable at $5.00 per share, subject to full-ratchet adjustment for issuance below the exercise price, subject to certain exceptions. The warrants expire on June 6, 2018.
Pursuant to draws under the Loan and Security Agreement during the year ended September 30, 2013, the Company issued warrants to purchase an aggregate of 606,680 shares of common stock. The Company valued these warrants at $1,357,139, recorded as a discount to long-term debt. During the years ended September 30, 2014 and 2013, the Company amortized $467,545 and $108,975, respectively, of the debt discount.
Pursuant to draws under the Loan and Security Agreement on October 29, 2013, February 27, 2014, May 19, 2014 and June 24, 2014, the Company issued warrants to purchase an aggregate of 690,493 shares of common stock. The Company valued these warrants at $587,549, recorded as a discount to long-term debt. This discount is being amortized over the life of the notes or until such time as the notes are repaid, or upon exercise of the warrants. The valuation of the warrants was determined using the Black-Scholes option pricing model with the following weighted assumptions: i) expected dividend rate of 0% ii) expected volatility of 35.85-43.36% iii) risk free interest rate of 1.49-1.75% and expected term of 3.95-4.60 years. During the year ended September 30, 2014, the Company amortized $204,753 of the debt discount.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
The following officers, directors and 5% shareholders of the Company participated as Affiliate Lenders:
(1) Gail Mulvihill and Andrew Mulvihill, the co-administrators of the estate, exercise voting and investment power over the shares issuable upon exercise of the Warrants. Gail Mulvihill is a principal stockholder of the Company and mother of Christopher, the Company’s President and a principal stockholder of the Company. Andrew Mulvihill is a brother of Christopher Mulvihill.
(2) James Mulvihill, a principal stockholder of the Company at the time we entered into the Loan and Security Agreement, has voting and investment power over the shares issuable upon exercise of the Warrants and is a brother of Christopher Mulvihill.
(3) MRP Holdings LLC is owned by Mark Patterson, the Chief Executive Officer and a director and principal stockholder of the Company.
(4) Directly and indirectly through entities they control and by members of their families and entities they control, Burton Koffman and David Koffman are principal stockholders of the Company. In addition, David Koffman was appointed as a director of the Company and a member of the Audit Committee in November 2013.
(5) Anthony P. Miele, III is a director of the Company.
(6) Alexandria Equities, LLC was a principal stockholder of the Company at the time we entered into the Loan and Security Agreement.
(7) Albert Behler is a principal stockholder of the Company.
A majority of the principal amount of each series of convertible notes (due 2016, June 2017 and December 2017) consented to the Company’s entering into the Loan and Security Agreement and increasing the secured indebtedness under the Loan and Security Agreement, and acknowledged that the secured indebtedness under the Notes is senior in right of payment and otherwise to the convertible notes.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Capital lease payable to bank*
*payable in monthly installments of $3,163 including interest at 6% with the last payment due December 1, 2014
The aggregate maturities of our long-term debt are as follows:
On October 31, 2014, the expiration date of the Company’s offer to exchange, the Company issued an aggregate of 9,583,384 shares of common stock in exchange for the cancellation of $11,424,520, $6,000,000 and $3,075,000 principal amount 2011 Notes, 2012 Notes and December 2012 Notes, respectively, and 2,892,314, 1,304,372 and 662,723 2011 Warrants, 2012 Warrants and December 2012 Warrants, respectively. See Note 13.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 9 - EQUITY
On March 1, 2013, an amendment to the Company’s Certificate of Incorporation was filed, decreasing our authorized capital stock from 401,000,000 shares to 201,000,000 shares and our authorized common stock from 400,000,000 shares to 200,000,000 shares.
Preferred Stock:
The Company is authorized to issue 1,000,000 shares of preferred stock, with a par value of $0.01 per share. As of September 30, 2014 and 2013, there were no shares of preferred stock issued and outstanding.
Common Stock:
On December 31, 2013, the Company issued an aggregate of 199,987 shares of common stock in lieu of cash payments of $316,069 for interest earned by noteholders for the quarter ended December 31, 2013. These shares of stock were issued at $1.58 per share, pursuant to the terms of the 2011 Notes, 2012 Notes and December 2012 Notes.
On March 31, 2014, the Company issued an aggregate of 141,194 shares of common stock in lieu of cash payments of $309,199 for interest earned by noteholders for the quarter ended March 31, 2014. These shares of stock were issued at $2.19 per share, pursuant to the terms of the 2011 Notes, 2012 Notes and December 2012 Notes.
On June 30, 2014, the Company issued an aggregate of 140,639 shares of common stock in lieu of cash payments of $312,634 for interest earned by noteholders for the quarter ended June 30, 2014. These shares of stock were issued at $2.22 per share, pursuant to the terms of the 2011 Notes, 2012 Notes and December 2012 Notes.
On September 30, 2014, the Company issued an aggregate of 138,943 shares of common stock in lieu of a cash payment of $316,069 for interest earned by noteholders during the quarter ended September 30, 2014. These shares of stock were issued at $2.28 per share, pursuant to the terms of the 2011 Notes, 2012 Notes and December 2012 Notes.
The aggregate common shares issued were 620,763 and 554,894 for the fiscal years ended September 30, 2014 and 2013, respectively.
At September 30, 2014, the Company requires shares of common stock for issuance upon exercise as follows:
Options:
On February 27, 2014, the Company granted to employees options to purchase 364,250 shares of Common Stock of the Company, under the Company’s 2012 Stock Incentive Plan. The options are exercisable at $1.51 per share and have a term of five years. The options are subject to a vesting schedule, under which one-third of the options will vest on each of February 27, 2015, February 27, 2016, and February 27, 2017. When these options were issued, the fair value of each option granted was estimated on the date of grant using the Black-Scholes valuation model. The following weighted assumptions were used: (i) risk free interest rate of 1.49%, (ii) expected life of 5 years, (iii) dividend rate of 0.00% and (iv) expected volatility of 38.39%. The Company valued these warrants at $199,084 and is allocating this expense over the vesting period. The Company recorded an expense of $38,710 related to these options during the year ended September 30, 2014.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
On February 27, 2014, the Company issued to a consultant options to purchase 303,625 shares of Common Stock of the Company, under the Company’s 2012 Stock Incentive Plan. The options were issued in exchange for approximately $166,000 of services provided to the Company. The options are exercisable at $1.51 per share, have a term of five years and vest immediately. When these options were issued, the fair value of each option granted was estimated on the date of grant using the Black-Scholes valuation model. The assumptions used were similar to those used for the employee option grant on February 27, 2014. The Company valued these options at $165,949 and recorded the expense during the year ended September 30, 2014.
On September 9, 2014, the Company granted to employees options to purchase 94,500 shares of Common Stock of the Company, under the Company’s 2012 Stock Incentive Plan. The options are exercisable at $2.35 per share and have a term of five years. Options to purchase 44,500 are subject to a vesting schedule, under which one-third of the options will vest on each of September 9, 2015, September 9, 2016, and September 9, 2017. Options to purchase 50,000 are subject to a vesting schedule, under which half of the options will vest immediately and half will vest on December 31, 2014. When these options were issued, the fair value of each option granted was estimated on the date of grant using the Black-Scholes valuation model. The following weighted assumptions were used: (i) risk free interest rate of 1.76%, (ii) expected life of 5 years, (iii) dividend rate of 0.00% and (iv) expected volatility of 35.34%. The Company valued these warrants at $75,094 and is allocating this expense over the respective vesting periods. The Company recorded an expense of $10,915 related to these options during the year ended September 30, 2014.
On September 9, 2014, the Company issued to consultants options to purchase 100,000 shares of Common Stock of the Company, under the Company’s 2012 Stock Incentive Plan. The options are exercisable at $2.35 per share, have a term of five years and vest immediately. When these options were issued, the fair value of each option granted was estimated on the date of grant using the Black-Scholes valuation model. The assumptions used were similar to those used for the employee option grant on September 9, 2014. The Company valued these options at $79,465 and recorded the expense during the year ended September 30, 2014.
As of September 30, 2014, there were $224,552 of unrecognized costs related to unvested stock options.
The volatility assumption for the period was based on the weighted average for the most recent year and long term volatility measures of our stock as well as certain of our peers. Although stock-based compensation expense, recognized in the accompanying consolidated statement of operations for the twelve months ended September 30, 2014 and 2013, is based on awards ultimately expected to vest, it has been reduced for estimated forfeitures. ASC 718-10-25 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Currently the Company has no historical data to use for estimating forfeitures.
The following table summarizes option activity for the years ended September 30, 2014 and 2013:
The following table summarizes information about stock options outstanding and exercisable as of September 30, 2014 and 2013:
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
Warrants:
Pursuant to the Loan and Security Agreement described in Note 9, on October 29, 2013, February 27, 2014, May 19, 2014 and June 24, 2014, we issued warrants to Lenders to purchase an aggregate of 690,493 shares of Common Stock of the Company. The warrants are exercisable at $5.00 per share, subject to full ratchet adjustment for issuance below the exercise price, subject to certain exceptions. Additionally, the exercise price may not be adjusted below $1.00. Cashless exercise is permitted if the average trading volume of the Company’s Common Stock during at least five (5) of the ten (10) consecutive trading days immediately preceding the date of the notice of exercise is at least 10,000 shares, and will be based upon the average of the last sale price of the Common Stock during such five (5) consecutive trading day period. The warrants expire on June 6, 2018. When these warrants were issued, the fair value of each warrant granted was estimated on the date of grant using the Black-Scholes valuation model. The following weighted assumptions were used: (i) risk free interest rate of 1.49-1.75%, (ii) expected life of 3.95-4.60 years, (iii) dividend rate of 0.00% and (iv) expected volatility of 35.85-43.36%. The Company valued these warrants at $587,549, recorded as a discount to long-term debt. This discount is being amortized over the life of the Loan Agreement or until such time as it is repaid, or upon exercise of the warrants. During the year ended September 30, 2014, the Company amortized $204,753 of the debt discount.
As a result of the issuance of shares of common stock as payment of interest on the 2011 Notes, 2012 Notes and December 2012 Notes, the exercise prices of the 2011 Warrants and related Placement Agent Warrants, 2012 Warrants and related Placement Agent Warrants, and December 2012 Warrants were adjusted to $3.95, $4.60 and $4.64, respectively. Based on ratchet provisions in the above notes, the 2011 Warrants, 2012 Warrants and December 2012 Warrants were convertible into an additional 199,918 shares of common stock as of September 30, 2014.
The following table summarizes warrant activity for the years ended September 30, 2014 and 2013:
The following table summarizes information about warrants outstanding and exercisable as of September 30, 2014 and 2013:
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
NOTE 10 - RELATED PARTY TRANSACTIONS
HSK Funding, Inc., Lake Isle Corp., and Venturetek, LP, are beneficial holders of shares of our company’s common stock and certain of their members and stockholders are also the members of SB&G Properties, LC. (“SB&G”), which is the landlord under a lease with us at 324 West 2450 North, Building B, Logan, Utah. Gail Mulvihill, the individual who exercises sole voting and investment control over Lake Isle Corp., is the mother of Christopher Mulvihill, our President, and is a principal stockholder of our company. The approximately 29,750 square foot leased premises are used for Boomerang’s manufacturing activities. This is a month-to-month lease at a rate of $21,717 per month, of which $14,717 is classified as deferred rent. Deferred rental payments totaling $529,830 have been accrued as of September 30, 2014 and classified as due to related party on our balance sheet.
Stan Checketts Properties (“SCP”), a company owned by the former chief executive officer of Boomerang’s wholly owned subsidiary, Boomerang Sub, Inc., is the landlord under a lease with us for premises located at 324 West 2450 North, Building B, Logan, Utah. The approximately 18,000 square foot leased premises are, in addition to Building A, also used for Boomerang’s manufacturing activities. We are currently leasing an additional 2,400 square feet of office and conference room space with Stan Checketts Properties for $1,800 per month. This is a month-to-month lease at a rate of $14,940 per month.
SB&G is obligated on a twenty-year promissory note due August 1, 2027 owing to Zions Bank. The principal amount due was $656,008 as of September 30, 2014, and the note bears interest at 3.807% per annum. The promissory note is collateralized by the real property that is the subject of the lease from SB&G to the Company. Boomerang, the Estate of Gene Mulvihill and Messrs. Stan Checketts and Burton Koffman (“Koffman”) are the joint and several guarantors of this promissory note. Gene Mulvihill was the husband of Gail Mulvihill and the father of Christopher Mulvihill, the President of the Company.
The Estate of Gene Mulvihill and Mr. Koffman are the guarantors of a financing lease entered into on September 1, 2007 between Boomerang Utah and a nonaffiliated bank. The lease relates to certain equipment used by Boomerang Utah in its manufacturing operations. The total cost of the equipment was approximately $900,000. The rental was payable in sixty monthly installments of approximately $12,750, through August 31, 2012. At that time, Boomerang Utah had the option to purchase the equipment for approximately $315,000 or refinance it for an additional twenty four months. Boomerang refinanced the rental over twenty four months and has the option to purchase the equipment for $1 at the conclusion of the lease term. The lease commences on January 1, 2013 and ends on December 1, 2014, with twenty four monthly installments of approximately $13,890. In the year ended September 30, 2013, the Company sold part of the equipment on this lease and paid the lease down from $315,000 to $40,255. As of September 30, 2014, the remaining amount on the lease is $9,024.
The Company used the services of Coordinate Services, Inc. for product development. The owner of Coordinate Services, Inc., is Gene Mulvihill, Jr., the brother of Christopher Mulvihill, our President, and the son of Gail Mulvihill. The amount of this expense for the year ended September 30, 2014 and 2013 was $0 and $102,711, respectively; which is recorded under research and development expenses.
The Company reimbursed North Jersey Management Services, Inc. for consulting expenses for the services of Joseph Bellantoni, the former Chief Financial Officer of the Company, and Maureen Cowell, the Company’s Corporate Secretary. Mr. Bellantoni is also the President and Mrs. Cowell is the Vice President of North Jersey Management Services, Inc. Mr. Bellantoni and Ms. Cowell are directors of the Company. The amount of this expense for the year ended September 30, 2014 and 2013 was $0 and $19,500, respectively; which is recorded under general and administrative expenses.
In April 2010, we entered into a twenty-year ground lease with Route 94 Development Corporation (“Route 94”) to lease a portion of an approximately fifteen acre parcel in the town of Hamburg, located in Hardyston Township, New Jersey, on which we constructed a RoboticValet parking facility. The leased property is adjacent to Grand Cascades Lodge (“Cascades”), a hotel within the Crystal Springs Golf and Spa Resort (“the Resort”). The parking facility was constructed by Crystal Springs Builders, LLC (“Builders”). It is intended that this facility will be used by us primarily for demonstration and marketing purposes in the eastern portion of the United States. In consideration of the benefits to us under the terms of the lease, we agree to provide to the lessor and its affiliates parking and storage space within the facility at no cost to the lessor and its affiliates subject to our right to use the facility for demonstration purposes. In addition, we are required to pay the operating costs, premiums on the insurance required under the terms of the lease and incremental property taxes resulting from our construction of the facility. For a period of 60 months, commencing five years after execution of the lease, the lessor has the option to purchase the facility from us and we have a right to cause the lessor to buy from us the facility we construct. The price to be paid by the lessor upon exercise of its option to purchase the facility is 110% of the greater of (i) the depreciated value of the facility, or (ii) the fair market value of the facility, and the price to be paid by the lessor upon exercise of our right to cause the lessor to buy the facility is $1.00.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
The Resort owns and operates seven golf courses, two hotels and a fitness facility and develops real estate in Sussex County NJ, which is comprised of more than 40 additional entities, including the above named entities. Gail Mulvihill owns 50% of each of Builders, Cascades and Route 94 and, indirectly, through these and various other entities, Gail Mulvihill and her family own approximately 50% of the Resort. Except as set forth above, no other officer, director or 5% or greater stockholder of the Company has any equity interest in Builders, Cascades or Route 94. The Company incurred expenses of approximately $7,000 and $49,000 payable to Cascades for the year ended September 30, 2014 and 2013, respectively. No expenses were incurred for Builders or Route 94 during the year ended September 30, 2014 and 2013.
Certain officers, directors and 5% shareholders of the Company participated as Affiliate Lenders under the June 2013 Loan and Security Agreement and the offer to exchange. See Notes 8 and 13.
Our management believes that the terms of the above transactions are as favorable to our company as could have been obtained from nonaffiliated persons at the time and under the circumstances as when the transactions were entered into.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
The Company is a joint and several guarantor on a twenty-year promissory note owing to a non-affiliated bank in the principal amount of $656,008, bearing interest at 3.807% per annum and due August 1, 2027. The promissory note is collateralized by the real property that is the subject of the lease from SB&G to Boomerang. The Estate of Gene Mulvihill and Messrs. Checketts and Koffman are the other joint and several guarantors of the promissory note.
In March 2013, we entered into a five year lease on our principal office, which expires in March 2018. The aggregate future minimum annual rental payments on this lease, exclusive of escalation payments for taxes and operating costs, are as follows:
On March 15, 2013, Crescent Heights R&D, LLC (“Crescent Heights”), filed a complaint against Boomerang in the State of Florida for fraud, breach of contract and specific performance, as well as equitable rescission which alleged an unspecified amount of damages in excess of the purchase price. Boomerang was subsequently granted a motion to remove this matter to federal court. On May 17, 2013, the court entered an order that our motion to compel arbitration and stay proceedings be granted. The parties have agreed to arbitrate the matter in front of the American Arbitration Association. An arbitrator was selected, an arbitration hearing took place in November 2014, and written closing arguments are to be submitted to the arbitrator on December 29, 2014. The arbitrator is expected to decide the matter 30 days after submission of closing arguments. The dispute arises from a contract to provide a rack and rail automated parking system. Crescent Heights’ claims, Boomerang’s defenses and Boomerang’s affirmative claims all arise from the contract. Due to the ongoing arbitration with Crescent Heights, Boomerang has eliminated the warranty reserve associated with this project.
On May 15, 2013, Boomerang entered into a Manufacturing and Licensing Agreement (the “Agreement”) with JBT Corporation (“JBT”), pursuant to which JBT would manufacture all Boomerang automated guided vehicles (“AGVs”) and license certain software to us for use in our robotic parking systems, including a non-exclusive, non-transferable, license to sub-license the software to customers for the duration of each customer contract with Boomerang. In each year from the effective date of May 15, 2013, Boomerang was required to purchase a minimum of 25 AGVs from JBT based on JBT’s cost plus an agreed upon profit. If we did not meet these minimum requirements, JBT’s sole remedy was to terminate the Agreement. In the event of expiration or termination of the Agreement, JBT is subject to a three-year non-competition provision, and obligated to license to Boomerang software for up to three years from the expiration or termination date. The Agreement was terminated by JBT effective May 23, 2014, due to Boomerang not meeting the minimum purchase requirements described above. With JBT’s knowledge, Boomerang manufactured, assembled, tested and delivered all AGVs for our first RoboticValet project, BrickellHouse, and expects to do so for subsequent projects in which our first-generation AGV design is included. As mentioned above, under the Agreement, Boomerang has the right to continue to license software through May 22, 2017, and expects to collaborate with JBT on a project-by-project basis going forward.
BOOMERANG SYSTEMS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED SEPTEMBER 30, 2014 AND 2013
On June 6, 2013, Boomerang entered into a marketing agreement with BrickellHouse Holding, LLC, whereas BrickellHouse Holding, LLC will allow Boomerang to use its parking system for sales and marketing purposes. Boomerang will pay BrickellHouse Holding, LLC a royalty for each sale of a system equal to 2% of the purchase price of that system, not to exceed an aggregate of $2 million. The agreement shall be in effect until the amount of royalty payments reaches $2 million. As of September 30, 2014, the Company accrued $31,500 of royalty payments under this agreement.
The Company has employment agreements with two of its corporate officers, which provide for base salaries, participation in employment benefit programs including our stock option plans, and severance payments for termination without cause.
NOTE 12 - CONCENTRATION OF RISK
Financial instruments, which potentially expose the Company to concentrations of risk, consist primarily of cash and trade accounts receivable. At September 30, 2014, our cash balances exceeded federally insured limits by approximately $420,000. The Company has not experienced any losses to date resulting from this policy. Certain vendors to the Company also accounted for a large representation of its purchases. The purchases from four vendors were in excess of 5% of purchases. At September 30, 2014, receivables from two customers comprised over 90% of our total accounts receivable. To date, these customers have routinely remitted payments on time. The Company routinely assesses the financial strength of its customers, and as a consequence believes the concentration of these credit risks are limited.
NOTE 13 - SUBSEQUENT EVENTS
In preparing the accompanying consolidated financial statements, the Company has reviewed events that have occurred after September 30, 2014, through the date of issuance of the financial statements.
On October 9, 2014, October 16, 2014 and November 18, 2014, the Company drew down an additional $1,364,152 under the Loan Agreement, to bring the total borrowings under the Loan Agreement to $7,850,000. In connection with these draws on the Loan Agreement, the Company issued warrants to purchase approximately 273,000 shares of common stock. Approximately $78,000 related to these draws was received prior to September 30, 2014.
On October 31, 2014, the Company completed an offer to exchange outstanding 2011 Notes, 2012 Notes and December 2012 Notes and 2011 Warrants, 2012 Warrants and December 2012 Warrants issued under three private placements in 2011 and 2012 for the issuance of common stock at the rate of $2.15 per share in exchange for the entire balance (principal and interest) of the notes and warrants issued with the applicable note. The Company exchanged $20.5 million principal amount of the previously outstanding $20.9 million of convertible notes and 4,859,409 warrants for 9,583,384 shares of common stock in the exchange offer. Following the offer to exchange, $200,000 principal amount 2011 Notes and $200,000 principal amount 2012 Notes remain outstanding, at conversion ratios of $3.00 and $3.31 per share, respectively, and 66,667 2011 Warrants and 60,424 2012 Warrants remain outstanding with an exercise price of $3.00 and $3.31, respectively. Immediately prior to exchanging their notes in the offer to exchange, holders of a majority of the principal amount of each of the 2011 Notes, 2012 Notes and December 2012 Notes consented to the Company (i) issuing debt from time to time on terms which may be approved by the Company’s Board of Directors, in an aggregate amount up to $100,000,000, which debt may be secured or unsecured and senior or subordinated to or pari passu with, the Notes, (ii) entering into transactions with its officers, directors, employees and Affiliates on terms approved by a majority of the Company’s independent and disinterested directors from time to time, (iii) declaring and paying dividends and making distributions to its holders of common stock as may be approved by the Company’s Board of Directors from time to time and (iv) purchasing or acquiring shares of the Company’s common stock or other equity securities, including the Eligible Securities, on terms as may be approved by the Company’s Board of Directors from time to time.
On November 17, 2014, the Company granted options to purchase 471,719 shares of common stock at $2.15 to Mark Patterson, CEO, in lieu of $334,386 of cash compensation. The Company granted options to purchase 176,894 shares of common stock at $2.15 to Christopher Mulvihill, President, in lieu of $125,357 of cash compensation. The Company granted options to purchase 25,000 shares of common stock at $2.15 to each of Directors Joseph Bellantoni, Maureen Cowell, Kevin Cassidy, David Koffman and Anthony Miele.
On December 24, 2014, the Borrowers entered into Amendment No. 3 (the “3rd Amendment”) to the Loan and Security Agreement. Pursuant to the 3rd Amendment, the maximum aggregate principal amount of advances that may be permitted to be outstanding at any one time was increased to $15,000,000. In addition, existing lenders and incremental lenders committed to fund an additional $7,075,000 principal amount of loans to the Borrowers, bringing aggregate commitments under the Loan and Security Agreement to $14,925,000.