NOTES TO UNAUDITED FINANCIAL STATEMENTS
Note A. Basis of Presentation, Background and Description of Business
Basis of presentation
The accompanying unaudited condensed financial statements of SMSA Crane Acquisition Corp. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive financial statements and should be read in conjunction with our audited financial statements for the year ended December 31, 2013, included in our Annual Report on Form 10-K for the year ended December 31, 2013.
In the opinion of the management of the Company, all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three month period have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms "Company", "we", "us" or "our" mean SMSA Crane Acquisition Corp.
Background
SMSA Crane Acquisition Corp. (the “Company”) was organized on September 9, 2009 as a Nevada corporation to effect the reincorporation of Senior Management Services of Crane, Inc. (Predecessor Company), a Texas corporation, mandated by the plan of reorganization discussed below.
The Company’s emergence from Chapter 11 of Title 11 of the United States Code on August 1, 2007 created the combination of a change in majority ownership and voting control - that is, loss of control by the then-existing stockholders, a court-approved reorganization, and a reliable measure of the entity’s fair value - resulting in a fresh start, creating, in substance, a new reporting entity. Accordingly, the Company, post-bankruptcy, has no significant assets, liabilities or operating activities. Therefore, the Company, as a new reporting entity, qualifies as a “development stage enterprise” as defined in Development Stage Entities topic of the FASB Accounting Standards Codification and as a shell company as defined in Rule 405 under the Securities Act of 1933, (Securities Act), and Rule 12b-2 under the Securities Exchange Act of 1934, (Exchange Act).
On November 5, 2010, the Company entered into a Share Purchase Agreement (Share Purchase Agreement) with Carolyn C. Shelton (Shelton), a resident of Tyler, Texas, pursuant to which on November 10, 2010 she acquired 9,500,000 shares of our common stock for approximately $9,500 cash or $0.001 per share.
On August 29, 2013, Coquí Radio Pharmaceuticals, Corp. (“Coquí”) closed a transaction through which Coquí purchased 9,500,000 outstanding shares of common stock and agreed to purchase an additional 400,000 outstanding shares of common stock of the Company from existing shareholders in a private transaction in exchange for $280,000. The additional 400,000 shares were subsequently acquired on October 24, 2013.
Description of Business
The Company’s business plan is to consummate the reverse acquisition transaction with Coquí which intends to establish a dedicated Medical Isotope Production Facility in the United States to provide a reliable domestic source of certain radioisotopes for use in nuclear medicine. In order to accomplish this, substantial additional capital must be raised. Moreover, there are a number of material contingencies including approval by the Nuclear Regulatory Commission (“NRC”). To date, no application has been filed by Coquí due to insufficient working capital. There is no assurance that the Company will be able to successfully implement this business plan or that the execution of the same will result in the appreciation of our stockholders’ investment in the Company’s common stock. The Company intends to consummate such merger as soon as Coquí finishes auditing its financial statements required to permit it to comply with applicable Securities and Exchange Commission rules.
Note B - Reorganization Under Chapter 11 of the U. S. Bankruptcy Code
The Company’s Plan of Reorganization was confirmed by the Bankruptcy Court on August 1, 2007 and became effective on August 10, 2007. On November 5, 2010, the Company entered into a transaction with Carolyn C. Shelton as discussed in Note A and a Certificate of Compliance with certain bankruptcy confirmation provisions was issued by the Bankruptcy Court on November 10, 2010.
Note C – Development Stage Company and Use of Estimates
The Company is presented as a development stage company beginning on the date of the bankruptcy settlement (confirmation date) of August 1, 2007, when Fresh Start accounting was applied. Activities during the development stage have been maintaining corporate and reporting compliance, seeking a business combination and raising capital.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Note D – Cash in Escrow Account (Unrestricted) and Company Liquidity
The Company has no post-bankruptcy operating history however the Company has raised approximately $4.1 million in equity capital from January 2014 through April 28, 2014 in contemplation of a reverse acquisition transaction with an operating company, Coquí, as discussed in Note A and Note K. On February 14, 2014, the Company closed on the sale of 927,000 shares of common stock, the minimum amount offered in its private placement offering to accredited investors in exchange for gross proceeds of $3,068,370. The net proceeds to the Company from the offering was $2,941,939 and this amount, as of March 31, 2014, was held in the Company’s legal counsel’s escrow account, unrestricted. $2,891,673 of this escrow was distributed out of the Company’s legal counsel’s escrow account on April 14, 2014, with the remaining $50,266 distributed out of the Company’s legal counsel’s escrow account on April 28, 2014.
The Company is not conducting operations pending completion of the reverse merger with Coquí. It is dependent upon Coquí to provide loans to pay its legal and accounting fees. The Company is continuing its private placement offering since Coquí needs substantial additional capital. Coquí faces considerable risk in its business plan and a potential shortfall of funding due the potential inability to raise additional capital in the equity securities market that it needs to implement its business plan. If adequate operating capital and/or cash flows are not received during the next twelve months, the Company and/or Coquí could become dormant until such time as necessary funds could be raised or provided as set forth in the Plan. There is no assurance that the Company Coquí and/or will be able to obtain additional funding through the sales of additional equity securities or, that such funding, if available, will be obtained on terms favorable to or affordable by the Company.
The Company’s Articles of Incorporation authorize the issuance of up to 10,000,000 shares of preferred stock and 100,000,000 shares of common stock. The Company’s ability to issue preferred stock may limit the Company’s ability to obtain debt or equity financing as well as impede potential takeover of the Company, which may be in the best interest of stockholders. The Company’s ability to issue these authorized but unissued securities may also negatively impact our ability to raise additional capital through the sale of our debt or equity securities.
Note E - Summary of Significant Accounting Policies
1.
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Cash and cash equivalents
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The Company considers all cash on hand and in banks, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents.
The Company has adopted the provisions of provisions required by the Start-Up Activities topic of the FASB Accounting Standards Codification whereby all costs incurred with the incorporation and reorganization of the Company were charged to operations as incurred.
The Company files income tax returns in the United States of America and various states, as appropriate and applicable. As a result of the Company’s bankruptcy action, the Company is no longer subject to U.S. federal, state and local, as applicable, income tax examinations by regulatory taxing authorities for any period prior to January 1, 2010. The Company does not anticipate any examinations of returns filed for periods ending on or after December 31, 2009.
The Company uses the asset and liability method of accounting for income taxes. At March 31, 2014 and December 31, 2013, respectively, the deferred tax asset and deferred tax liability accounts, as recorded when material to the financial statements, are entirely the result of temporary differences. Temporary differences generally represent differences in the recognition of assets and liabilities for tax and financial reporting purposes, primarily accumulated depreciation and amortization, allowance for doubtful accounts and vacation accruals.
The Company has adopted the provisions required by the Income Taxes topic of the FASB Accounting Standards Codification. The Codification Topic requires the recognition of potential liabilities as a result of management’s acceptance of potentially uncertain positions for income tax treatment on a “more-likely-than-not” probability of an assessment upon examination by a respective taxing authority. As a result of the implementation of Codification’s Income Tax Topic, the Company did not incur any liability for unrecognized tax benefits.
4.
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Income (Loss) per share
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Basic earnings (loss) per share is computed by dividing the net income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the respective period presented in our accompanying unaudited financial statements.
Fully diluted earnings (loss) per share is computed similar to basic income (loss) per share except that the denominator is increased to include the number of common stock equivalents (primarily outstanding options and warrants).
Common stock equivalents represent the dilutive effect of the assumed exercise of the outstanding stock options and warrants, using the treasury stock method, at either the beginning of the respective period presented or the date of issuance, whichever is later, and only if the common stock equivalents are considered dilutive based upon the Company’s net income (loss) position at the calculation date.
As of March 31, 2014 and December 31, 2013 and subsequent thereto, the Company had no outstanding stock warrants, options or convertible securities which could be considered as dilutive for purposes of the loss per share calculation. At March 31, 2014 there were an additional 92,700 outstanding warrants which could dilute future earnings per share.
Note F - Fair Value of Financial Instruments
The carrying amount of cash, accounts payable and accrued expenses and due to stockholder, approximates fair value due to the short term nature of these items and/or the current interest rates payable in relation to current market conditions.
Interest rate risk is the risk that the Company’s earnings are subject to fluctuations in interest rates on either investments or on debt and is fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to interest rate risk, if any.
Financial risk is the risk that the Company’s earnings are subject to fluctuations in interest rates or foreign exchange rates and are fully dependent upon the volatility of these rates. The Company does not use derivative instruments to moderate its exposure to financial risk, if any.
Note G - Related Party Transactions
Halter Financial Group, Inc. (H.G.), pursuant to the Plan, managed the $1,000 in cash transferred from the bankruptcy creditor’s trust on our behalf until exhausted and contributed additional monies through September 16, 2013 (the date of sale of shares of common stock to Coquí.-see Note A) to support our operations. This contributed capital totaled $375 and $5,600 for the three months ended March 31, 2014 and the year ended December 31, 2013, respectively and $58,710 the period from August 1, 2007 (date of bankruptcy settlement) through March 31, 2014. These amounts have been reflected as a component of additional paid-in capital in the accompanying unaudited balance sheets.
During the three months ended March 31, 2014 and the year ended December 31, 2013, Coquí contributed a total of $25,409 and $3,825 to support the Company’s operations. This amount has been reflected in due to stockholder in the accompanying financial statements at March 31, 2014 and December 31, 2013, respectively (see Note H).
The Company has advanced the net proceeds of its private placement to Coquí, which advances have not been documented by any loan agreements or notes. Additionally, the Company’s Chief Executive Officer is a principal of the Placement Agent which is raising the capital in the private placement and has received compensation directly from the private placement fees paid to the placement agent. See Note J.
Note H – Due to Stockholder
As of March 31, 2014 and December 31, 2013, the Company owes $29,234 and $3,825, respectively, to Coquí the controlling stockholder of the Company for the funding of its current operating expenses. The amount owing is unsecured, non-interest bearing, and due on demand.
Note I – Concentration of Credit Risk
The Company maintained its cash at March 31, 2014 in its legal counsel’s escrow account, unrestricted (cash from proceeds from the sale of its common stock from its private placement offering) and on hand. At times cash deposited with financial institutions may exceed federally insured limits. The Company has not experienced any losses in such accounts through March 31, 2014. At March 31, 2014, the Company cash balances were not insured.
Note J- Capital Stock Transactions
Pursuant to the Plan affirmed by the U. S. Bankruptcy Court - Northern District of Texas - Dallas Division, the Company issued 500,005 plan shares to meet the requirements of the Plan. The 500,005 shares of the Company’s “new” common stock was issued to holders of various claims, as defined in the Plan, in settlement of all unpaid pre-confirmation obligations of the Company and/or the bankruptcy trust.
On November 5, 2010, the Company entered into a Share Purchase Agreement with Shelton pursuant to which she acquired 9,500,000 shares of our common stock for approximately $9,500 cash or $0.001 per share. As a result of this transaction, 10,000,005 shares of our common stock were issued and outstanding as of December 31, 2013.
The Company in 2014 is conducting a private placement offering on a best efforts partial all-or-none basis, minimum offering of $3 million, maximum offering of $49,032,225 at $3.31 per share.
On February 14, 2014, the Company closed on the sale of 927,000 shares of common stock, the minimum amount offered in its private placement offering to accredited investors in exchange for gross proceeds of $3,068,370. Pariter Securities, LLC (“Pariter”) was paid $125,431 for acting as a placement agent for the offering, which was charged against the proceeds recorded in additional paid-in capital and was issued 92,700 five-year warrants exercisable at $3.31 per share. The valuation of the warrants issued to Pariter was approximately $84,000 using the Black Scholes valuation model. The assumptions used in the Black Scholes valuation model to value these warrants were; stock price and exercise price $3.31; risk free interest rate 1.5%; volatility factor, derived by using comparable public companies in the same industry, was 28% and the expected term of the warrant to be 5 years.
Additionally, Pariter waived cash commissions of $304,001 by electing to purchase 91,843 shares of the Company’s common stock at the offering price of $3.31 per share (without commissions or expenses) and other fees of $1,000 were also paid and expensed. The net proceeds to the Company were $2,941,939.
The Company’s principal shareholder is Coquí. Coquí is a radio pharmaceutical company that seeks to establish a medical isotope production facility (the “Facility”) to produce Molybdenum-99 (“Mo-99”). Mo-99 is used to manufacture one of the principal medical isotopes used for diagnostic applications in nuclear medicine.
The net proceeds of the Company’s private placement offering will be used, primarily through advances to Coquí, for preparing an environmental report on the site where the Facility is to be located, Nuclear Regulatory Commission (“NRC”) counsel, hiring contractors to begin preliminary work on the Facility prior to receiving any NRC licensing, and for general working capital purposes.
Following completion of the required audit of Coquí, the intent is for Coquí to merge into the Company.
Note L - Subsequent Events
After the closing on the above 927,000 shares on February 14, 2014, an additional 368,000 common shares were sold on April 28, 2014 in the Company’s private placement to accredited investors in exchange for gross proceeds of approximately $1.2 million at $3.31 per share. Pariter was paid $48,723 for acting as a placement agent for the offering and was issued 36,800 five-year warrants exercisable at $3.31 per share. Additionally, Pariter waived cash commissions of $121,808 by electing to purchase 36,800 shares of the Company’s common stock at the offering price of $3.31 per share (without commissions or expenses) and other fees of $2,000 were also paid. The net proceeds to the Company were $1,167,357. All funds received by the Company have been loaned to Coquí.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this report contains forward-looking statements. . We use words such as “believe”, “expect”, “anticipate”, “project”, “target”, “plan”, “optimistic”, “intend”, “aim”, “will” or similar expressions which are intended to identify forward-looking statements. Such statements include, among others, any statements describing our proposed merger with Coquí, our ability to raise the necessary capital and Coquí’s ability to get all regulatory approvals including that of the NRC. You are cautioned that any such forward-looking statements are not guarantees of future performance and involve risks and uncertainties, as well as assumptions that if they were to ever materialize or prove incorrect, could cause the results of the Company to differ materially from those expressed or implied by such forward-looking statements. Such risks include unforeseen audit issues, the ability of Pariter to raise the necessary capital and regulatory issues which may arise if Coquí files an application with the NRC.
All statements other than statements of historical fact are statements that could be deemed forward-looking statements. The Company assumes no obligation and does not intend to update these forward-looking statements, except as required by law.