NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Organization
Transnational Automotive Group, Inc.
(the "Company", “we”, “us”, “our”) was incorporated April 2, 1999 in the State
of Nevada as Vitaminoverrun.com Corp., in August 2001 changed its name to Apache
Motor Corporation Inc. and in November 2005 the Company changed its name to
Transnational Automotive Group, Inc.
In 2001 the Company merged with Cambridge Creek Companies, Ltd.
("Cambridge"), a Nevada corporation. Cambridge was a reporting issuer and the
Company assumed the reporting issuer status after the merger.
Effective September 12, 2001 the Company acquired all of the
outstanding shares of common stock of The Apache Motor Corp. ("Apache"), an
Alberta corporation, from the shareholders of Apache in exchange for an
aggregate of 440,000 shares of its common stock. The exchange was effectively a
reverse takeover of the Company by Apache in that the shareholders of Apache
became the majority shareholders of the Company. On October 24, 2003 the
principal of The Apache Motor Corp (Robert Wither) agreed to return 278,560
shares of common stock for cancellation that he had received from the Company
and the Company disposed of its shares in its subsidiary company, The Apache
Motor Corp., to Robert Wither in conjunction with the cancellation of his shares
in the Company. The Company retained the rights to the technology and returned
the shares of the subsidiary to the original owners.
In 2002 the Company completed a 5:1 forward stock split.
On May 3, 2004 the Company terminated an agreement to acquire
100% of the issued share capital of Manter Enterprises Inc. and cancelled the
533,334 shares of common stock of the Company previously issued in trust for
Manter subject to a performance agreement.
On June 7, 2004, the Company completed a 1:75 reverse stock
split. On October 14, 2005 the Company completed a 2:1 forward stock split.
On October 28, 2005 the Company issued 24,000,000 shares of
common stock to acquire 100% of the issued share capital of Parker Automotive
Group International, Inc. (PAGI). PAGI was a development stage enterprise which
endeavoured to develop a public bus transportation system in Cameroon through
its 66% owned subsidiary, Parker Transportation, Inc., Cameroon. On September
18, 2006, 18,000,000 shares of the 24,000,000 shares originally issued were
returned to the Company and cancelled.
On June 15, 2007, the Company’s wholly-owned subsidiary, PAGI,
was dissolved pursuant to a resolution ratified by the Company’s Board of
Directors.
Description of Business
Transnational Automotive
Group, Inc. and its wholly-owned and majority-owned subsidiaries (collectively
referred to hereinafter as “the Company” or “TAUG”) are engaged in the
development and operations of mass public transportation systems in Cameroon,
Africa. The Company’s current operations are comprised of an intra-city bus
transit system in the capital city of Yaoundé under the brand name, LeBus, and
an inter-city bus transit system between Yaoundé and Douala, known as “LeCar”.
The Company’s objective is to expand its existing transportation operations in
Cameroon and establish, develop and operate mass transit systems in other
sub-Saharan African nations.
2. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited
interim consolidated financial statements of Transnational Automotive Group,
Inc. and its wholly- owned and majority-owned subsidiaries have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and with the instructions to Form 10-QSB. In
the opinion of management, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been reflected
therein. Certain information and footnote disclosures normally present in annual
consolidated financial statements prepared in accordance with accounting
principles generally accepted in the United States of America have been omitted
pursuant to such rules and regulations. The results of operations for interim
periods are not necessarily indicative of the results to be expected for the
full year ending February 28, 2008. For further information, refer to the
consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-KSB for the year ended February 28, 2007.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company, LeCar
Transportation Corporation, S.A. (“LeCar”), a wholly-owned subsidiary
in Cameroon, and Transnational Automotive Group, Cameroon, S.A. (“Taug-C”),
a wholly-owned Cameroonian subsidiary, which owns a 66% interest in Transnational
Industries – Cameroon, S.A. (“LeBus”). Various Cameroon
6
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
governmental bodies own the remaining 34% equity interest in
LeBus. All material intercompany balances and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted
in the United States (“U.S. generally accepted accounting principles”) requires
management to make estimates and assumptions that affect the amounts reported in
the Company’s consolidated financial statements and accompanying notes and
disclosure of contingent assets and liabilities at the date of these
consolidated financial statements and reported amounts of revenues and expenses
during the reporting period. On an ongoing basis, the Company evaluates its
estimates and judgments, which are based on historical and anticipated results
and trends and on various other assumptions that the Company believes to be
reasonable under the circumstances. By their nature, estimates are subject to an
inherent degree of uncertainty and, as such, actual results may differ, and the
difference may be material, from the Company’s estimates.
Going Concern
The Company is subject to various
risks in connection with the operation of its business including, among other
things, (i) losses from operations, (ii) social and political instability in its
region of operations, (iii) changes in the Company's business strategy,
including the inability to execute its strategy due to unanticipated changes in
the market, (iv) various competitive factors that may prevent the Company from
competing successfully in the marketplace, (v) the Company's lack of liquidity
and potential ability to raise additional capital, and (vi) the lack of
historical operations necessary to demonstrate the eventual profitability of its
business strategy. As of August 31, 2007, the Company has an accumulated deficit
of $14,576,869 as well as a working capital deficiency of $7,274,800.
As a result of the aforementioned factors and related
uncertainties, there is substantial doubt of the Company's ability to continue
as a going concern. The consolidated financial statements do not include any
adjustments to reflect the possible effects of recoverability and classification
of assets or liabilities, which may result from the inability of the Company to
continue as a going concern.
Funding of the Company's working capital deficiency, its
current and future anticipated operating losses, and growth of the Company's
transportation operations in Cameroon will require continuing capital
investment. Historically, the Company has received funding through the issuance
of convertible debentures and warrants issued in connection with private
placement offerings, the issuance of common stock and subscriptions to acquire
common stock, advances received from unsecured promissory note arrangements, and
the financing of its acquisition of buses through a capital lease obligation due
to a related party trust. The Company's strategy is to fund its current and
future cash requirements through the issuance of additional debt instruments,
current and long-term borrowing arrangements and additional equity
financing.
The Company has been able to arrange debt facilities and equity
financing to date. However, there can be no assurance that sufficient debt or
equity financing will continue to be available in the future or that it will be
available on terms acceptable to the Company. Failure to obtain sufficient
capital to fund current working capital requirements and future capital
expenditures necessary to grow the business would materially affect the
Company's operations in the short term and expansion strategies. The Company
will continue to explore external financing opportunities. Currently, the
Company is in negotiations with multiple parties to obtain additional financing,
and the Company will continue to explore financing opportunities with additional
parties.
Reclassifications
Certain prior period amounts have
been reclassified to conform to the current period presentation.
Foreign Currency Translation
All assets and
liabilities of foreign operations included in the consolidated financial
statements are translated at period-end exchange rates and all accounts in the
consolidated statements of operations are translated at the average exchange
rate for the reporting period. Stockholders’ equity accounts are translated at
historical exchange rates. The Company considers the U.S. dollar to be its
functional currency, given that the majority of all funds used in operations
through the end of August 31, 2007 were funded in U.S. dollars. Accordingly,
accumulated exchange rate adjustments resulting from the process of translating
the Company’s financial statements expressed in foreign currencies into U.S.
dollars are reflected as income or loss in the accompanying consolidated
statements of operations.
Fair market value of financial instruments
Statement
of Financial Accounting Standards No. 107, “Disclosures about the Fair Value of
Financial Instruments”, requires that the Company disclose estimated fair values
of financial instruments. The carrying amounts reported in the statement of
financial position for current assets and current liabilities qualifying as
financial instruments are a reasonable estimate of fair value.
The carrying amount for current assets and liabilities are not
materially different than fair market value because of the short term maturity
of these financial instruments.
7
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Cash equivalents
The Company considers all highly liquid debt instruments with original maturities
of three months or less to be cash equivalents.
Accounts receivable
Accounts receivable consist of amounts due from the Company’s outside Ad
Agency, who is responsible for the billing and collection of fees from customers
for the placement of advertisements on the Company’s buses. Such amounts
are billed when earned or due and when collection is reasonably assured. The
Company does not accrue finance or interest charges on outstanding receivable
balances. The carrying amount of accounts receivable is reduced by a valuation
allowance that reflects management’s best estimate of the amounts that
will not be collected. Management periodically reviews all delinquent accounts
receivable balances, if any, and based on an assessment of recoverability, estimates
the portion, if any, of the balance that will not be collected. The accounts
receivable as of August 31, 2007 was $0, net of allowance for doubtful accounts
of $71,225.
Subsidy receivable
Subsidy receivable are amounts
receivable from the government of Cameroon for subsidies to fund the Company’s
intra-city bus operations known as LeBus.
Other receivables
Other receivables consist
primarily of Value Added Taxes (“VAT”) receivable due from various agencies of
the government of Cameroon.
Other receivables as of August 31, 2007 are comprised of the
following:
|
VAT receivable
|
$
|
334,611
|
|
|
Insurance claim receivable
|
|
127,811
|
|
|
Other
|
|
3,147
|
|
|
Total
|
$
|
465,569
|
|
Inventory
Inventory is stated at the lower of cost
or market, cost generally being determined on a first-in, first-out basis.
Inventory consist primarily of materials, spare parts and fuel for bus
operations.
Property, buses and equipment
Property, buses and
equipment is stated at cost and depreciated or amortized using the straight-line
method over the estimated useful lives of the assets as follows:
|
Asset
Description
|
|
Useful Life (years)
|
|
Computer equipment
|
|
3
|
|
Computer software
|
|
3
|
|
Furniture and equipment
|
|
3 - 5
|
|
Buses
|
|
3
|
|
Automobile equipment
|
|
5
|
Leasehold and building improvements are amortized on the
straight-line method over the term of the lease or estimated useful life,
whichever is shorter.
Costs for capital assets not yet available for commercial use,
if any, are capitalized as construction in progress and will be depreciated once
placed into service. Assets classified as “held for future use” are not
depreciated until they are placed in productive service. Costs for repairs and
maintenance are expensed as incurred.
Revenue and Expense Recognition
The Company
recognizes revenue in accordance with the Securities and Exchange Commissions
(“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial
Statements” (“SAB 104”) and the American Institute of Certified Public
Accountants (“AICPA”) Statement of Position (“SOP”) 97-2, “Software Revenue
Recognition,” as amended by SOP 98-4 and SOP 98-9.
In June 2006, the Emerging Issues Task Force (EITF) reached a
consensus on Issue No. 06-03, “How Taxes Collected from
8
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation” (EITF
06-03). EITF 06-03 applies to taxes assessed by a governmental authority that
are directly imposed on a revenue-producing transaction between a seller and a
customer, and states that the presentation of such taxes on either a gross basis
(included in revenues and costs) or on a net basis (excluded from revenues) is
an accounting policy decision that should be disclosed. Additionally, for such
taxes reported on a gross basis, the amount of such taxes should be disclosed in
interim and annual financial statements if the amounts are significant. The
provisions of EITF 06-03 are effective for interim and annual reporting periods
beginning after December 15, 2006. On March 1, 2007, the Company adopted EITF
06-03. The Company collects certain Value Added Taxes (“VAT”) on its ticket
sales, which are levied by the government of Cameroon. VAT taxes are accounted
for on a gross basis and recorded as revenue. For the three month and six month
periods ended August 31, 2007, total VAT taxes levied on ticket sales
approximated $272,296 and $440,115, respectively.
The majority of the Company’s revenues were derived from the
sale of tickets for its inter-city and city bus operations. The Company
recognizes revenue from the sale of bus tickets when the transportation services
have been provided. The Company also generates revenue from cash subsidies
provided by agencies of the government of Cameroon (“government subsidies”).
Revenue from government subsidies are recognized as revenue when earned and when
collection is reasonably assured. Selling, general and administrative costs are
charged to operations as incurred.
Basic and diluted loss per share
Basic loss per
common share is computed by dividing net loss available to common stockholders
by the weighted-average number of common stock outstanding during the period.
Diluted loss per common share is computed by dividing the net loss available to
common stockholders by the weighted-average number of shares of common stock
outstanding during the period increased to include the number of additional
shares of common stock that would have been outstanding if the dilutive
potential shares of common stock had been issued. The shares issuable upon the
exercise of warrants and convertible debentures for the three and six month
periods ended August 31, 2007 and 2006, were anti-dilutional and, therefore,
excluded from the calculation of net loss per share.
Recent accounting pronouncements
In September 2006, the FASB issued SFAS No. 157, “Fair Value
Measurements.” This Statement clarifies the definition of fair value,
establishes a framework for measuring fair value and expands the disclosures on
fair value measurements. SFAS No. 157 is effective for fiscal years beginning
after November 15, 2007. Management has not determined the effect, if any, the
adoption of this statement will have on the financial statements.
In September 2006, the FASB issued SFAS No. 158 “Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans—an
amendment of FASB Statements No. 87, 88, 106, and 132(R)”. This Statement
improves financial reporting by requiring an employer to recognize the
overfunded or underfunded status of a defined benefit postretirement plan (other
than a multiemployer plan) as an asset or liability in its statement of
financial position and to recognize changes in that funded status in the year in
which the changes occur through comprehensive income of a business entity or
changes in unrestricted net assets of a not-for-profit organization. This
Statement also improves financial reporting by requiring an employer to measure
the funded status of a plan as of the date of its year-end statement of
financial position, with limited exceptions. An employer with publicly traded
equity securities is required to initially recognize the funded status of a
defined benefit postretirement plan and to provide the required disclosures as
of the end of the fiscal year ending after December 15, 2006. An employer
without publicly traded equity securities is required to recognize the funded
status of a defined benefit postretirement plan and to provide the required
disclosures as of the end of the fiscal year ending after June 15, 2007.
However, an employer without publicly traded equity securities
is required to disclose the following information in the notes to financial
statements for a fiscal year ending after December 15, 2006, but before June 16,
2007, unless it has applied the recognition provisions of this Statement in
preparing those financial statements:
|
|
1
|
A brief description of the provisions of this
Statement
|
|
|
2
|
The date that adoption is required
|
|
|
3.
|
The date the employer plans to adopt the recognition
provisions of this Statement, if earlier.
|
The requirement to measure plan assets and benefit obligations
as of the date of the employer’s fiscal year-end statement of financial position
is effective for fiscal years ending after December 15, 2008.
In February 2007 the FASB issued SFAS 159, "The Fair Value
Option for Financial Assets and Financial Liabilities--Including an amendment of
FASB Statement No. 115." The statement permits entities to choose to measure
many financial instruments and certain
9
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
other items at fair value. The objective is to improve
financial reporting by providing entities with the opportunity to mitigate
volatility in reported earnings caused by measuring related assets and
liabilities differently without having to apply complex hedge accounting
provisions. The statement is effective as of the beginning of an entity's first
fiscal year that begins after November 15, 2007. The Company is analyzing the
potential accounting treatment. The Company’s management is currently evaluating
the effect of this pronouncement on its financial statements.
3.
PROPERTY, BUSES & EQUIPMENT
As of August 31, 2007, property, buses and equipment consist of
the following:
|
Computer equipment
|
$
|
66,486
|
|
|
Computer software
|
|
27,740
|
|
|
Furniture and equipment
|
|
148,585
|
|
|
Automotive equipment
|
|
7,030
|
|
|
Building improvements
|
|
332,385
|
|
|
Buses used in operations
|
|
7,354,866
|
|
|
|
|
7,937,092
|
|
|
Less: accumulated depreciation and amortization
|
|
(1,070,305
|
)
|
|
|
|
6,866,787
|
|
|
Construction in progress
|
|
12,314
|
|
|
Total property and
equipment
|
$
|
6,879,101
|
|
Depreciation and amortization expense for the three month periods
ended August 31, 2007 and 2006 were $533,920 and $3,026, respectively and for
the six month periods ended August 31, 2007 and 2006 were $774,997 and $5,917,
respectively,
4.
ACCOUNTS PAYABLE & ACCRUED EXPENSES
As of August 31, 2007, accounts payable and accrued expenses
were comprised of the following:
|
Accounts payable
|
$
|
1,495,732
|
|
|
Payroll liabilities
|
|
241,877
|
|
|
Accrued expenses
|
|
258,705
|
|
|
Taxes payable to governmental agencies of Cameroon
|
|
515,748
|
|
|
Provision for fines and penalties
|
|
173,620
|
|
|
Total accounts payable and accrued expenses
|
$
|
2,685,682
|
|
5. NOTES PAYABLE
The Company issued various promissory notes payable which are
unsecured, due on demand, and bear interest at rates ranging from 7% to 40% per
annum. A description of all outstanding unsecured promissory note obligations is
as follows:
-
As of August 31, 2007, the Company has $110,000 outstanding
due to two unrelated parties that bear interest at 7% and are due on demand.
-
On February 12, 2007, the
Company was advanced $400,000 under a short-term unsecured promissory note
obligation from an unrelated party, bearing interest at 40% with an original
maturity date of May 12, 2007. The Company negotiated an extended repayment term
through October 31, 2007. Under the terms of the renewal agreement, the Company
issued to the holder 30,000 shares of the Company’s common stock. The Company
recognized $41,100 of aggregate debt discount, representing the fair market
value of the 30,000 shares issued pursuant to this obligation, which is included
in additional paid-in capital in the accompanying consolidated balance sheet as
of August 31, 2007.
-
On March 28, 2007, the Company
was advanced $400,000 under a short-term unsecured promissory note obligation
from an unrelated party, bearing interest at 14% per annum and payable in full
on September 28, 2007. Under the terms of the promissory note agreement, the
Company issued to the holder 40,000 shares of the Company’s common stock. The
Company recognized $34,000 of aggregate debt discount, representing the fair
market value of the 40,000 shares under this obligation, which is included in
additional paid-in capital in the accompanying consolidated balance sheet as of
August 31, 2007.
10
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
-
As of August 31, 2007, an
aggregate of $1,575,000 was borrowed from Tov Trust (“Tov”), a trust whose
trustee is Seid Sadat, the chief financial officer and a director of the Company
(note 8). These borrowings were advanced in three separate installments. The
first installment of $425,000 was advanced on November 6, 2006 and is unsecured,
bearing interest at 10% per annum and was initially due on demand. The second
installment of $400,000 was advanced on February 12, 2007. Borrowings under the
second advance are unsecured, bearing interest at 40% per annum, and was
initially due on May 12, 2007, including unpaid interest. The third installment
of $750,000 was borrowed on May 30, 2007 and is unsecured, bearing interest at
10% per annum and was initially due on demand.
On July 31, 2007, the Company's Board
of Directors approved a resolution to issue 170,000 shares of the Company’s
common stock to Tov in exchange for extending the maturity date of the
$1,575,000 of aggregate outstanding obligations due to Tov through October 31,
2007. The Company recognized $232,900 of aggregate debt discount, representing
the fair market value of the 170,000 shares under these related party
obligations, which is included in additional paid-in capital in the accompanying
consolidated balance sheet as of August 31, 2007.
The debt discount for all shares of common stock issued
pursuant to these notes payable obligations is being amortized beginning on the
date each respective shares of common stock were issued through October 31,
2007, the maturity date of these obligations. Total finance costs charged to
operations in connection with the amortization of the deferred interest for the
three and six month periods ended August 31, 2007 was $109,704 and $121,982,
respectively.
As of August 31, 2007, aggregate amounts outstanding under
unsecured notes payable to unrelated parties were $878,405, net of $31,595 of
debt discount. As of August 31, 2007, notes payable due to related party was
$1,420,577, net of $154,423 of debt discount.
6. CONVERTIBLE DEBENTURES
Convertible Debentures
Through the end of the fiscal year ended February 28, 2007, the Company
raised an aggregate of $3,781,000 from the issuance of convertible debentures
(“convertible debentures”) under several private placement memorandum
offerings. The debentures were convertible into the common stock of the Company
at exercise prices ranging from $.48 to $.50 per share. The debentures bear
interest at 7% per annum and are automatically converted into common stock after
one year from the date of issuance, unless converted earlier. There were no
convertible debentures issued during the three and six month periods ended August
31, 2007.
The Company calculated the beneficial conversion feature embedded
in the convertible debentures in accordance with EITF 98-5, “Accounting
for Convertible Securities with Beneficial Conversion Features or Contingently
Adjustable Conversion Ratios” (“EITF 98-5”) and EITF 00-27, “Application
of Issue No. 98-5 to Certain Convertible Instruments”, (“EITF 00-27”)
and recorded $1,003,050 of aggregate debt discount for the year ended February
28, 2007, which was included in additional paid-in capital as of February 28,
2007.
The Company also issued to the holders of the convertible
debentures warrants to acquire an aggregate of 8,427,416 shares of the Company’s
common stock at an exercise price of $1.50 per share. The warrants had an
original term of two-years from the date of issuance. In connection with these
debentures, the Company recorded aggregate debt discount of $2,777,950 related
to the fair of the warrants issued, which was included in additional paid-in
capital as of February 28, 2007.
The debt discount underlying the valuation of the warrants was
calculated using the Black-Scholes pricing model with the following assumptions:
applicable risk-free interest rate based on the current treasury-bill interest
rate at the grant date of 3.5%; dividend yields of 0%; volatility factors of the
expected market price of the Company’s common stock of 203%; and an expected
life of the warrants of one year. The debt discount is being amortized over one
year, the life of the convertible debentures. Total finance costs associated
with the amortization of the warrants was $430,241 and $250,926 for the three
month periods ended August 31, 2007 and 2006, respectively. Total finance costs
associated with the amortization of the warrants for the six months ended August
31, 2007 and 2006 was $950,667 and $422,775, respectively.
During the six month period ended August 31, 2007, $1,098,500
of convertible debentures and $72,525 of related accrued interest were converted
into 2,463,037 shares of common stock.
The following is a schedule of the aggregate amounts of
outstanding convertible debentures as of August 31, 2007:
11
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
Convertible
|
|
|
|
|
Convertible
|
|
|
Unamortized
|
|
|
Debentures
|
|
|
|
|
Debentures -
|
|
|
Warrant
|
|
|
Net of Debt
|
|
|
|
|
Gross
|
|
|
Discounts
|
|
|
Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible debentures, non related parties
|
$
|
1,400,000
|
|
$
|
(235,567
|
)
|
$
|
1,164,433
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Related party convertible debentures (note
8)
|
$
|
1,020,000
|
|
$
|
(130,420
|
)
|
$
|
889,580
|
|
On May 24, 2007, the Company’s Board of Directors issued
a resolution to extend the maturity date of the convertible debentures issued
pursuant to the Private Placement Memorandum dated January 23, 2006 and to increase
the number of shares of common stock eligible for conversion. The number of
warrants issued to convertible debenture holders was also adjusted to equal
the number of shares to be issued upon conversion. In connection with the Board
Resolution, the maturity date on the warrants was extended from two years to
five years and the conversion rate of the exercise option was reduced from $.48
- $.50 per share to an adjusted conversion rate of $.4464 per share. The reduction
in the conversion rate resulted in an increase of 455,226 additional warrants
outstanding and an additional 455,226 shares of common stock eligible for conversion
for the debenture holders.
7. CAPITAL TRANSACTIONS
Common stock
During the three month period ended August 31, 2007, $192,000
of convertible debentures and $11,942 of related accrued interest were converted
into 430,108 shares of common stock. During the six month period ended August
31, 2007, $1,098,500 of convertible debentures and $72,525 of related accrued
interest were converted into 2,463,037 shares of common stock.
In connection with a Private Placement Memorandum to accredited
investors dated January 17, 2007, the Company entered into Subscription
Agreements with various accredited investors for the sale of investment units
(“Units”), with each Unit consisting of (i) one share of the Company’s common
stock at $0.50 per share and (ii) a warrant to purchase one share of common
stock at $1.50 per share. The warrants do not offer a “cashless exercise”
provision and holders will be required to pay $1.50 per share to exercise each
warrant. The warrants have a term of five years from the date of each underlying
Subscription Agreement. The Company has agreed to pay the placement agents the
equivalent of $162,250 of commissions (or 5% of the proceeds received from the
sale of the Units) as compensation for their services.
During the six month period ended August 31, 2007, investors
purchased an aggregate of $3,677,500 in Units representing 7,355,000 shares of
common stock at a price of $0.50 per share, and warrants to purchase an
additional 7,355,000 shares of common stock at $1.50 per share. The fair value
of the 7,355,000 warrants issued in connection with the January 17, 2007 private
placement offering was $2,609,076. This amount was calculated using the
Black-Scholes pricing model with the following assumptions: applicable risk-free
interest rate based on the current treasury-bill interest rate at the date of
grant of 3.5%; dividend yield of 0%; volatility factors of the expected market
price of our common stock of 203%; and an expected life of the warrants of five
years.
During the three month period ended August 31, 2007, the
Company had received cash proceeds of $550,000 from the issuance of stock
subscriptions to investors in connection with the Private Placement Memorandum
dated January 17, 2007 and has committed to the future issuance of 1,100,000
investment Units consisting of 1,100,000 shares of the Company’s common stock at
$0.50 per share and 1,100,000 warrants to purchase common stock at $1.50 per
share.
During the six month period ended August 31, 2007, the Company
recognized $312,634 of current and $132,692 of deferred finance costs in
connection with the 455,226 additional shares to be issued to debenture holders
as result of the repricing of the investment units sold to debenture holders
(note 6).
During the six month period ended August 31, 2007, the Company
recognized an aggregate of $308,000 (including $232,900 to a related party) of
deferred finance costs in connection with the issuance of 240,000 (including
170,000 to a related party) shares of the Company’s common stock to various
holders of unsecured promissory note agreements (see note 5). Total finance
costs associated with the amortization of the deferred interest under these
obligations for the three and six month periods ended August 31, 2007 was
$109,704 and $121,982, respectively.
12
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Warrants
The following schedules present a summary of the activity of
the aggregate number of warrants outstanding as of August 31, 2007:
|
Warrants outstanding
|
|
Aggregate
|
|
|
Number of
|
|
|
|
|
Intrinsic Value
|
|
|
Warrants
|
|
|
Outstanding at February 28, 2007
|
$
|
-
|
|
|
8,722,190
|
|
|
Granted
|
|
-
|
|
|
7,810,226
|
|
|
Exercised
|
|
-
|
|
|
-
|
|
|
Cancelled
|
|
-
|
|
|
-
|
|
|
Outstanding at August 31, 2007
|
$
|
-
|
|
|
16,532,416
|
|
|
Outstanding
Warrants
|
|
|
|
Exercisable
Warrants
|
|
Range of
|
|
|
|
Weighted Average
|
|
Weighted Average
|
|
|
|
|
|
Exercise
|
|
|
|
Remaining
|
|
Exercise
|
|
|
|
Average Exercise
|
|
Price
|
|
Number
|
|
Contractual Life
|
|
Price
|
|
Number
|
|
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ 1.50
|
|
16,532,416
|
|
4.4 years
|
|
$ 1.50
|
|
16,532,416
|
|
$ 1.50
|
The fair value of the 7,355,000 warrants issued during the year
was calculated using the Black-Sholes pricing model with the following assumptions:
Applicable risk-free interest rate based on the current treasury-bill interest
rate at the date of grant of 3.5%; dividend yield of 0%; volatility factors
of the expected market price of our common stock of 203%; and an expected life
of the warrants of five years.
The fair value of the 455,226 warrants issued during the year
was calculated using the Black-Sholes pricing model with the following assumptions:
applicable risk-free interest rate based on the current treasury-bill interest
rate at the grant date of 3.5%; dividend yields of 0%; volatility factors of
the expected market price of the Company’s common stock of 203%; and an
expected life of the warrants of five years.
8. RELATED PARTY TRANSACTIONS
As of August 31, 2007, an aggregate of $1,575,000 was borrowed
from Tov against notes payable(note 5). These borrowings were advanced in three
separate installments. The first installment of $425,000 was advanced on
November 6, 2006 and is unsecured, bearing interest at 10% per annum and is due
on October 31, 2007. The second installment of $400,000 was advanced on February
12, 2007. Borrowings under the second advance are unsecured, bearing interest at
40% per annum, and are due on October 31, 2007, including unpaid interest. The
third installment of $750,000 was borrowed on May 30, 2007 and is unsecured,
bearing interest at 10% per annum and is due on October 31, 2007.
During the six month period ended August 31, 2007, an aggregate
of 170,000 shares of the Company’s common stock were issued to Tov in
consideration for the Company being granted a deferred maturity date on the
$1,575,000 of outstanding promissory note obligations advanced by Tov (note 5).
As of August 31, 2007, an aggregate of $137,156 of accrued interest
was owed to Tov under these unsecured promissory note obligations.
As of August 31, 2007, Tov had advanced TAUG $1,020,000 in
connection with a private placement offering of 7% convertible debentures and
stock warrants to accredited investors. On November 7, 2006, our Board of
Directors issued a resolution that resulted in the settlement of these advances
through the issuance of a 7% convertible debenture to Tov. Under the terms of
the agreement, at the election of the Trustee, Tov could convert these
debentures into 2,240,143 shares of common stock. The Company also issued Tov
5-year warrants to purchase an additional 2,240,143 shares of common stock of
TAUG, exercisable at $1.50 per share. Through August 31, 2007, the trustee of
Tov had not exercised his conversion election on behalf of the debentures owned
by the trust. As of August 31, 2007, an aggregate of $39,171 of accrued interest
was owed to Tov under this convertible debenture.
On March 24, 2006, the Company’s chief financial officer, Seid
Sadat, advanced the Company $150,000 in connection with a private placement
offering of 7% convertible debentures and stock warrants to accredited investors
(note 6). Under the terms of the subscription agreement, Mr. Sadat’s debentures
are convertible into 336,022 shares of common stock. In connection with the
subscription agreement, Mr. Sadat was also issued 5-year warrants to acquire an
additional 336,022 shares of common stock at an exercise price of $1.50. On May
21, 2007, Mr. Sadat’s $150,000 debenture and $10,120 of accrued interest on the
debenture were
13
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
converted into 336,022 shares of common stock.
The Company entered into a consulting agreement with Magidoff
Sadat & Gilmore, LLP (“MSG”), a professional services firm, pursuant to
which MSG agreed to provide services to TAUG including assistance in managerial
oversight, internal accounting and financial reporting, and advisory services.
The agreement also obligates the Company to reimburse MSG $3,500 per month in
shared rent costs. For the three and six month periods ended August 31, 2007,
the Company was charged an aggregate of $146,500 and $293,000, respectively,
including $10,500 (three months) and $21,000 (six months) of shared rent costs,
by MSG under this consulting agreement. As of August 31, 2007, $665,200 was owed
to MSG, which comprised due from related party in the accompanying consolidated
balance sheet as of May 31, 2007. Seid Sadat is the managing partner of MSG and
the chief financial officer and director of TAUG.
As of August 31, 2007, an aggregate of $38,486 was owed to Dr.
Ralph Thomson, the Company’s president and chief executive officer. Amounts owed
to Dr. Thomson have been included in due to related parties in the accompanying
consolidated balance sheet as of August 31, 2007.
9. COMMITMENTS AND CONTINGENCIES
Officer Indemnification
Under the organizational documents, the Company’s officers are
indemnified against certain liabilities arising out of the performance of their
duties to the Company. The Company does not maintain insurance for its directors
and officers to insure them against liabilities arising from the performance of
their duties required by the positions with the Company. The Company’s maximum
exposure under these arrangements is unknown as this would involve future claims
that may be made against the Company that have not yet incurred.
Employment Agreements
On October 27, 2006, the Company entered into an employment
agreement with its vice-president of business development. Under the terms of
the agreement, the Company agreed to remunerate the employee cash compensation
of $3,000 per month plus deferred compensation of $3,000 per month through the
duration of the employment term, which expires in September 2007. The Company
has accrued $30,000 of deferred compensation owed to this employee as of August
31, 2007, representing deferred compensation payable to the employee through the
end of August 31, 2007.
Loss Contingencies
In May 2006, the Company was assessed a claim approximating
$461,000 in connection with a breach of contract dispute with its sea freight
carrier related to the first shipment of 28 buses from China to Cameroon. The
claim arose out of the Company’s alleged failure and delinquency to procure the
bus shipments within the terms of the underlying sea freight agreement. The
Company’s management initiated settlement negotiations with its sea freight
carrier to withdraw their monetary claim in exchange for contracting the carrier
for future sea freight of 60 additional buses. During the six month period ended
August 31, 2007, the Company satisfied a portion of their future commitment to
the sea freight carrier in connection with their purchase and shipment of 30
additional buses, which were delivered to Cameroon on May 2, 2007.
Purchase Commitments
As of August 31, 2007, the Company was obligated under a
purchase commitment agreement with a bus manufacturer in China and a sea freight
carrier for the purchase and sea freight charges associated with the acquisition
of 30 urban transportation buses for an aggregate cost of $1,600,000 plus sea
freight.
Litigation
On March 19, 2007, one of the Company’s inter-city coach buses
was involved in a collision en route between Yaoundé and Douala that resulted in
the deaths of two passengers and injuries sustained to the surviving passengers.
In accordance with Cameroonian law, the Company’s subsidiary, LeCar, was cited
with responsibility for the collision. The Company maintains insurance coverage
for damage claims arising from collisions. However, management cannot determine
the amount of monetary damages in excess of amounts covered under insurance, if
any, that may be awarded to passengers involved in this collision.
The Company is involved in various other legal claims and
assessments. Management believes that these actions, either individually
14
TRANSNATIONAL AUTOMOTIVE GROUP, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
or in the aggregate, will not have a material adverse effect on
the Company’s results of operations or financial condition.
