UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-QSB
(Mark
One)
x
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the quarterly period ended March 31, 2008
OR
o
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the
transition period from _____________ to ________________
Commission
file number:
333-229903
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC.
(Exact
Name of Registrant as Specified in Its Charter)
Utah
|
|
30-0123229
|
(State
or other jurisdiction of incorporation )
|
|
(IRS
Employer Identification No.)
|
503
Washington Avenue, Suite 2d, Newtown, Pennsylvania 18940
(Address
and Zip Code of Principal Executive Offices)
Registrant's
Telephone Number: (215)968-0200
(Former
Name, Former Address and Former Fiscal Year, If Changed Since Last Report)
N/A
Check
whether the registrant: (1) filed all reports required to be filed by Section
13
or 15(d) of the Securities Exchange act of 1934 during the preceding 12 months
(or such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
x
Yes
o
No
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
o
Yes
x
No
As
of May
14, 2008 there are 36,608,671 shares of the registrant’s common stock, $0.001
par value, issued and outstanding.
Transitional
Small Business Disclosure Format (Check One):
o
Yes
x
No
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
Table
of
Contents
March
31,
2008
|
PAGE
|
PART
I - FINANCIAL INFORMATION
|
|
|
|
Item
1. Financial Statements
|
F-1
|
|
|
Item
2. Management's Discussion and Analysis or Plan of
Operation
|
2
|
|
|
Item
3. Controls and Procedures
|
5
|
|
|
PART
II - OTHER INFORMATION
|
|
|
|
Item
1. Legal Proceedings
|
6
|
|
|
Item
2. Unregistered Sale of Equity Securities and Use of
Proceeds
|
7
|
|
|
Item
3. Defaults Upon Senior Securities
|
7
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
7
|
|
|
Item
5. Other Information
|
7
|
|
|
Item
6. Exhibits
|
7
|
|
|
SIGNATURES
|
|
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND
SUBSIDIARIES
|
CONSOLIDATED
BALANCE SHEET
|
March
31, 2008
|
(Unaudited)
|
|
|
Assets
|
Current
assets
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
10,775
|
|
Accounts
receivable, net of allowance of $93,728
|
|
|
-
|
|
Total
current assets
|
|
|
10,775
|
|
|
|
|
|
|
Other
assets
|
|
|
|
|
Capitalized
costs
|
|
|
3,308,936
|
|
Permits
|
|
|
1,009,851
|
|
Research
vessel
|
|
|
125,000
|
|
Equipment,
net of depreciation of $3,337
|
|
|
11,457
|
|
Investments,
net of allowance of $173,868
|
|
|
51,962
|
|
Notes
receivable, net of allowance of $832,849
|
|
|
-
|
|
Total
other assets
|
|
|
4,507,206
|
|
|
|
|
|
|
Total
assets
|
|
$
|
4,517,981
|
|
|
|
|
|
|
Liabilities
and Deficiency in Assets
|
|
|
|
|
Current
liabilities
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
539,901
|
|
Related
party notes payable
|
|
|
3,558,438
|
|
Due
to related parties
|
|
|
1,449,961
|
|
Notes
payable
|
|
|
1,136,776
|
|
Total
current liabilities
|
|
|
6,685,076
|
|
Total
liabilities
|
|
|
6,685,076
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
-
|
|
|
|
|
|
|
Deficiency
in Assets
|
|
|
|
|
Preferred
stock, Series A, $0 par value, 100,000,000 shares authorized; 10,000,000
issued and outstanding
|
|
|
-
|
|
Common
stock, $.001 par value, 250,000,000,000 shares authorized; 36,368,671
issued and outstanding
|
|
|
36,369
|
|
Additional
paid-in capital
|
|
|
19,566,452
|
|
Stock
subscription receivable
|
|
|
(30,000
|
)
|
Cumulative
comprehensive income
|
|
|
(11,799
|
)
|
Minority
interest
|
|
|
(803,530
|
)
|
Accumulated
deficit
|
|
|
(20,924,587
|
)
|
Total
deficiency in assets
|
|
|
(2,167,095
|
)
|
|
|
|
|
|
Total
liabilities and deficiency in assets
|
|
$
|
4,517,981
|
|
See
accompanying notes to consolidated financial statements, which are an integral
part of the financial statements
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND
SUBSIDIARIES
|
CONSOLIDATED
STATEMENT OF OPERATIONS
|
|
|
(Unaudited)
|
|
|
|
|
For the three months ended
|
|
For the nine months ended
|
|
|
|
March 31,
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
-
|
|
$
|
79,089
|
|
$
|
395,550
|
|
$
|
421,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
-
|
|
|
65,665
|
|
|
240,250
|
|
|
252,248
|
|
Gross
profit
|
|
|
-
|
|
|
13,424
|
|
|
155,300
|
|
|
168,962
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries
and wages
|
|
|
-
|
|
|
20,178
|
|
|
122,774
|
|
|
189,506
|
|
General
and administrative
|
|
|
391,079
|
|
|
37,752
|
|
|
731,981
|
|
|
426,970
|
|
Legal
and professional fees
|
|
|
40,495
|
|
|
74,111
|
|
|
245,739
|
|
|
258,107
|
|
Total
operating expenses
|
|
|
431,574
|
|
|
132,041
|
|
|
1,100,494
|
|
|
874,583
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from operations
|
|
|
(431,574
|
)
|
|
(118,617
|
)
|
|
(945,194
|
)
|
|
(705,621
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expenses)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued - settlement agreement
|
|
|
-
|
|
|
(364,000
|
)
|
|
-
|
|
|
(364,000
|
)
|
Depreciation
and amortization
|
|
|
(1,250
|
)
|
|
-
|
|
|
(5,255
|
)
|
|
-
|
|
Interest
income
|
|
|
-
|
|
|
-
|
|
|
518
|
|
|
-
|
|
Interest
expense
|
|
|
(41,941
|
)
|
|
(75,411
|
)
|
|
(124,080
|
)
|
|
(121,136
|
)
|
Total
other (income) expense
|
|
|
(43,191
|
)
|
|
(439,411
|
)
|
|
(128,817
|
)
|
|
(485,136
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(474,764
|
)
|
|
(558,028
|
)
|
|
(1,074,011
|
)
|
|
(1,190,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(474,764
|
)
|
$
|
(558,028
|
)
|
$
|
(1,074,011
|
)
|
$
|
(1,190,757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
(0.01
|
)
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
(0.05
|
)
|
Diluted
|
|
|
|
)
|
|
(0.02
|
)
|
|
(0.04
|
)
|
|
(0.04
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average of common shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
35,122,844
|
|
|
26,203,166
|
|
|
27,580,209
|
|
|
26,203,166
|
|
Diluted
|
|
|
75,122,844
|
|
|
27,113,166
|
|
|
30,132,628
|
|
|
27,113,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
declared per common share
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
See
accompanying notes to consolidated financial statements, which are an integral
part of the financial statements
|
CONSOLIDATED
STATEMENT OF CASH FLOWS
|
|
|
(Unaudited)
|
|
|
|
|
For the nine months ended
|
|
|
|
March 31,
|
|
|
|
2008
|
|
2007
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,074,011
|
)
|
$
|
(1,190,757
|
)
|
Adjustments
to reconcile net loss from operations to net cash used in operating
activities:
|
|
|
|
|
|
|
|
Cumulative
comprehensive income
|
|
|
(11,799
|
)
|
|
-
|
|
Depreciation
and amortization
|
|
|
3,337
|
|
|
-
|
|
Stock
issued for services
|
|
|
320,530
|
|
|
-
|
|
(Increase)
decrease in:
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
323,493
|
|
|
(427,742
|
)
|
Increase
(decrease) in:
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
|
(206,486
|
)
|
|
490,461
|
|
Due
to related parties
|
|
|
212,235
|
|
|
298,069
|
|
Net
cash used in operating activities
|
|
|
(432,701
|
)
|
|
(829,969
|
)
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
Capitalized
costs
|
|
|
(336,081
|
)
|
|
(988,997
|
)
|
Investments
and loans receivable
|
|
|
-
|
|
|
(51,962
|
)
|
Purchase
of equipment
|
|
|
(14,794
|
)
|
|
-
|
|
Net
cash used in investing activities
|
|
|
(350,875
|
)
|
|
(1,040,959
|
)
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
Stock
subscription receivable
|
|
|
30,000
|
|
|
-
|
|
Proceeds
from issuance of common stock
|
|
|
60,000
|
|
|
895,999
|
|
Proceeds
from exercise of warrants - common stock
|
|
|
50,000
|
|
|
-
|
|
Distributions
to shareholders - Lavelle
|
|
|
-
|
|
|
(10,150
|
)
|
Proceeds
from related party notes payable
|
|
|
112,015
|
|
|
1,092,377
|
|
Payments
on related party notes payable
|
|
|
-
|
|
|
(156,983
|
)
|
Net
cash provided by financing activities
|
|
|
252,015
|
|
|
1,821,243
|
|
|
|
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
|
|
(531,561
|
)
|
|
(49,685
|
)
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
542,336
|
|
|
115,454
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
10,775
|
|
$
|
65,769
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosure of cash flow information:
|
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
$
|
263
|
|
Taxes
paid
|
|
|
-
|
|
|
-
|
|
See
accompanying notes to consolidated financial statements, which are an integral
part of the financial statements
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE
1
- BASIS OF PRESENTATION
The
accompanying unaudited consolidated financial statements of
Sovereign
Exploration Associates International,
Inc.
(the
“Company”) have been prepared in accordance with generally accepted accounting
principles for interim financial information and in accordance with the
instructions to Form 10-QSB. In the opinion of management, all material
adjustments (consisting of normal recurring accruals) considered necessary
for a
fair presentation have been included. Operating results for the nine month
period ended March 31, 2008 are not necessarily indicative of the results that
are expected for the year ending June 30, 2008. The information contained in
this Form 10-QSB should be read in conjunction with the audited financial
statements filed as part of the Company's Form 10-KSB for the year ended June
30, 2007.
NOTE
2
- GOING CONCERN
The
accompanying consolidated financial statements have been prepared on a
going-concern basis, which contemplates the continuation of operations,
realization of assets and liquidation of liabilities in the ordinary course
of
business. The Company has incurred an accumulated deficit of $20,924,587 as
of
March 31, 2008. The Company’s subsidiaries have capitalized all of their
ocean
exploration and archaeologically sensitive recoveries of artifacts, treasure
trove and/or cargo from shipwrecks
costs
to-date. As of March 31, 2008, Lavelle Holdings, Inc. has ceased operations
subject to the review by the Company’s management to determine its business
strategy going forward, as it relates to the business of Lavelle Holdings,
Inc.
The Company provided for the allowance for bad debts of $93,728, however, there
were no other reserves provided for as of March 31, 2008 as they relate to
Lavelle Holdings, Inc. The Company plans to obtain additional financing through
the sale of publicly traded stock, limited liability company member units of
its
subsidiaries and/or debt financing. There is no assurance these efforts will
be
successful. The Company has received extensions of the due dates for payments
on
the demand notes payable as of March 31, 2008. The accompanying consolidated
financial statements do not include any adjustments relating to the
recoverability and classifications of reported asset amounts or the amounts
of
liabilities that might result from the outcome of this uncertainty.
NOTE
3
- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES
OF CONSOLIDATION
The
accompanying consolidated financial statements, as presented herein, are
prepared on the accrual basis of accounting under the principles of
consolidation consisting of the accounts of the Company and its
subsidiaries.
As
of
March 31, 2008, the Company's subsidiaries and the related equity ownership
are
as follows:
Historic
Discoveries, Inc.
Historic
Discoveries is the Company's primary subsidiary and is wholly-owned by the
Company. The Company acquired Historic Discoveries in connection with the change
in control on October 17, 2005, and it has since made additional investments
in
Historic Discoveries. Historic Discoveries has two wholly-owned subsidiaries,
Artifact Recovery & Conservation Inc. ("ARC") and Sea Research, Inc.
("SRI").
The
Company and Historic Discoveries had agreed to distribute 20% of the net profits
arising out of the exploitation of permits, licenses, finder fees rights,
contracts and other rights (collectively, "permits") held by ARC to its former
corporate parent, Sovereign Marine Explorations, Inc. ("SME"), and to distribute
20% of the net profits arising out of the exploitation of permits held by SRI
to
its former corporate parent, Sea Hunt, Inc. ("Sea Hunt").
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
On
May
19, 2007, the Company issued 10,000,000 shares of Convertible Preferred Stock
in
exchange for this 20% net profits participation agreement. The Convertible
Preferred Stock carries a 4 to1 conversion feature into 40,000,000 common shares
of the Company.
Artifact
Recovery & Conservation, Inc.
ARC
holds
licenses for some of the Company’s most promising sites. ARC has already
recovered substantial artifacts from Le Chameau, a French ship lost off Cape
Lorembec, Cape Breton Island, Nova Scotia, on August 27, 1725. The Chameau
carried extensive ladings of specie, military supplies, trade goods, and
commercially-consigned freight, as well as the personal effects of wealthy
passengers. ARC submitted artifacts from the Chameau and other ships to the
Nova
Scotia government for artifact selection in 2005, and the selection process
was
completed in March 2006.
ARC
has
also conducted extensive exploratory efforts in Fantome Cove, near Prospect,
Nova Scotia. The H.M.S. Fantome and accompanying ships are believed to have
been
lost in Fantome Cove on November 24, 1814. The Fantome is particularly
historically significant, as it played a role in the War of 1812 and potentially
could have been carrying plunder from the sacking of Washington, DC in August
1814. ARC's exploratory efforts have confirmed that it has located at least
two
historical shipwrecks, although it has not specifically confirmed that either
wreck is that of the Fantome. During its most recent reconnaissance efforts
in
late summer, 2006, ARC identified two very large concretion fields, and its
divers observed flatware, artifacts, ship fittings, and thousands of coins
in
the concretions. Because Fantome Cove is in Canadian waters but may involve
British ships and American plunder, any shipwrecks located in Fantome Cove
may
be subject to competing claims. The United Kingdom has filed a formal notice
on
the H.M.S. Fantome that has caused a delay in the Company’s plans for a recovery
in Fantome Cove.
ARC
was
notified on August 31, 2006, its application for a Class B recovery permit
for
the Fantome Cove treasure trove site has not been approved. A Class B permit
is
required before ARC can make any substantial recoveries from the site. The
Nova
Scotia Department of Tourism, Culture & Heritage has recommended that ARC
and Le Chameau Explorations Limited (a wholly-owned subsidiary of the Company),
secure permission from the United Kingdom. The Company’s management and counsel
believe that the admiralty and treaty laws governing the site will substantiate
ARC's and Le Chameau Explorations Limited's Interest as license holder. As
of
March 31, 2008, the Company is arranging meetings with representatives from
the
United Kingdom and is waiting for Class B permit approval.
Sea
Research, Inc.
SRI
holds
the rights to seven sites, several of which have multiple ships. The wrecked
ships are believed to have contained diverse cargoes, including money, bullion,
religious artifacts, jewelry, and other personal items. SRI also owns an
exploratory vessel, the Sea Quest, through its wholly-owned subsidiary, Sea
Quest, Inc.
Sovereign
Exploration Associates International of Spain, Inc.
Sovereign
Exploration Associates International of Spain, Inc. ("SEAI - Spain"), a
wholly-owned subsidiary of the Company, was acquired in November 2005 from
unrelated parties in exchange for $800,000 of convertible debentures. The
debentures were due on November 15, 2006, with accrued interest at a rate of
6%
per annum. The Company may, at any time prior to November 15, 2006, convert
the
principal amount of the debentures into common stock of the Company at the
average closing price of the Company's common stock for the ten business days
prior to the conversion date. The debenture holders may, at any time after
November 15, 2006, convert the principal amount of the debenture into common
stock of the Company at the average closing price of the Company's common stock
for the ten business days prior to the conversion date. SEAI - Spain has secured
the finder's rights to four shipwrecks in Spain with potential historic and
intrinsic value. Effective November 15, 2006, the Company converted the
debentures into 848,000 (including accrued interest of $48,000) common shares
of
the Company at a price of $1.00 per share.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
Lavelle
Holdings, Inc
.
On
June
11, 2007, the Company acquired 100% of the common stock of the Lavelle Holdings,
Inc., a company based in Texas, for consideration of $300,000 cash at closing
plus a cash amount equal to five (5) times the net profit of Lavelle Holdings,
Inc., if any, for a one (1) year period beginning on or the date that is six
(6)
months after the closing date. This amount will be paid in cash and/or stock
on
or before nineteen (19) months following the closing date. Management is unable
to determine the amount of this contingent liability as of the balance sheet
date of March 31, 2008. If the Company becomes insolvent during the nineteen
(19) months following the closing date, the selling shareholders have the right
of first refusal to repurchase the purchased stock from the Company.
In
consideration for certain rights to purchase common stock of Lavelle Holdings,
Inc. the Company paid $225,000, in cash, to the rights holders, at closing.
The
total cash paid for this acquisition at closing on June 11, 2007 was $525,000.
Lavelle Holdings, Inc. is a wholly-owned subsidiary of the Company.
As
of
March 31, 2008, Lavelle Holdings, Inc. has ceased operations subject to the
review by the Company’s management to determine its business strategy going
forward, as it relates to the business of Lavelle Holdings, Inc. The Company
provided for the allowance for bad debts of $93,728, however, there were no
other reserves provided for as of March 31, 2008 as they relate to Lavelle
Holdings, Inc.
LeChameau
Explorations Limited
On
June
13, 2007, the Company acquired 100% of the issued and outstanding capital stock
of LeChameau Explorations Limited, a company based in Nova Scotia, for total
consideration of USD $274,009. The payment for the stock is in the form of
a
note agreement, which is collateralized by the common stock of the Company.
The
note is due June 13, 2008. If the Company defaults, the note is convertible
to
the Company’s common stock at a rate of 1.25 times the outstanding liability as
of its due date valued at the ten day average of the stock price prior to the
conversion date. Under this acquisition, the Company now owns twenty-five
licenses under the Nova Scotia Treasure Trove Act. LeChameau Explorations
Limited is a wholly-owned subsidiary of the Company.
Investments
The
Company accounts for investments, where the Company holds from 20% up to 50%,
in
the common stock, or membership interest, of an entity, using the equity method.
The investment is initially recorded at cost and the carrying amount is adjusted
to recognize the Company’s proportionate share of the earnings or losses of the
investee after the date of acquisition. The amount of the adjustment is included
in the determination of net income or loss of the Company in the period of
the
adjustment. Any dividends received from the investee reduce the carrying value
of the investment.
Gulf
Coast Records, LLC
The
investment (a 49% minority interest) and note receivable in Gulf Coast Records,
LLC was acquired as part of the Exchange Agreement dated October 17, 2005.
In
the year ended June 30, 2006, while reporting under the 1940 Act as a business
development company, the Board of Directors agreed with management’s assessment
to write this investment down to zero based on the information received from
the
management of Gulf Coast Records, LLC. For the nine months ended March 31,
2008
and 2007, the investment in and note receivable to Gulf Coast are being carried
at a zero value, which is the lower of cost or market.
Reds
Caribbean
The
investment (a 30% minority interest) in Reds Caribbean was acquired in the
stock
purchase agreement with the shareholders of Lavelle Holdings, Inc. on June
11,
2007. As of March 31, 2008, the Company is recording this investment at its
cost
of $51,962. The Company owns a 30% equity interest in Reds
Caribbean.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
Revenue
Recognition
The
Company recognizes revenue using the accrual method of accounting wherein
revenue is recognized when earned and expenses and costs are recognized when
incurred.
Stock
Subscription Receivable
During
the three months ended March 31, 2008, the Company sold 380,000 shares of common
stock for proceeds of $40,000. As of March 31, 2008, $30,000 was due from this
shareholder.
Allowance
for Bad Debts
As
of
March 31, 2008, the allowance for bad debts was $93,728. Management of the
Company reviews the billing and collection activity on a regular basis and
provides for an allowance for bad debts based on its expectations for cash
collections. The $93,728 in accounts receivable and the allowance for bad debts
of $93,728 were all for Lavelle Holdings, Inc., a wholly-owned subsidiary of
the
Company.
Economic
Dependence
The
Company’s wholly-owned subsidiary, Lavelle Holdings, Inc, which was acquired by
the Company in June 2007, has economic dependence for its revenue on less than
ten (10) customers and they have less than ten (10) vendors with whom they
conduct their business.
Fair
Value of Financial Instruments
The
Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts receivable, accounts
payable and accrued payroll and other expenses, the carrying amounts approximate
fair value due to their short maturities. The amount shown for notes payable
also approximates fair value because the current interest rates offered to
the
Company for debt of similar maturities are substantially the same.
Use
of
Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America requires management to
make estimates and assumptions that affect certain 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. Accordingly, actual results could differ from
those
estimates.
Cash
and Cash Equivalents
For
the
purpose of the Consolidated Statement of Cash Flows, the Company considers
cash
equivalents to be all highly liquid securities with an original maturity date
of
three months or less.
Advertising
costs
For
the
nine month periods ended March 31, 2008 and 2007, the Company did not incur
any
advertising costs.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
Foreign
Currency Translation
The
accompanying consolidated financial statements are stated in United States
Dollars (USD). For the nine months ended March 31, 2008 and 2007, the Company
incurred a currency translation adjustment of $11,799 and $0,
respectively.
New
Accounting Pronouncements
In
July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109" ("FIN 48"). FIN 48 clarifies the
accounting for uncertainty in income taxes by prescribing the recognition
threshold a tax position is required to meet before being recognized in the
financial statements. It also provides guidance on derecognizing,
classification, interest and penalties, accounting in interim periods,
disclosure and transition. FIN 48 is effective for fiscal years beginning after
December 15, 2006. The cumulative effects, if any, of applying FIN 48 will
be recorded as an adjustment to retained earnings as of the beginning of the
period of adoption. Additionally, in May 2007, the FASB published FASB
Staff Position No. FIN 48-1, "Definition of Settlement in FASB Interpretation
No. 48" ("FSP FIN 48-1"). FSP FIN 48-1 is an amendment to FIN 48. It
clarifies how an enterprise should determine whether a tax position is
effectively settled for the purpose of recognizing previously unrecognized
tax
benefits. FSP FIN 48-1 is effective upon the initial adoption of FIN 48. The
Company does not expect the adoption of FIN 48 to have an effect on its
financial statements.
In
September 2006, the Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standards No. 157 ("FAS 157"), Fair Value
Measurements, which defines fair value, establishes a framework for measuring
fair value in generally accepted accounting principles ("GAAP"), and expands
disclosures about fair value measurements. FAS 157 applies under other
accounting pronouncements that require or permit fair value measurements. Prior
to FAS 157, there were different definitions of fair value and limited guidance
for applying those definitions in GAAP. Moreover, that guidance was dispersed
among the many accounting pronouncements that require fair Value measurements.
Differences in that guidance created inconsistencies that added to the
complexity in applying GAAP. The changes to current practice resulting from
the
application of FAS 157 relate to the definition of fair value, the methods
used
to measure fair value, and the expanded disclosures about fair value
measurements. FAS 157 is effective for financial statements issued for fiscal
years beginning after November 15, 2007, and interim periods within those fiscal
years.
Management
expects that none of the new accounting pronouncements will have a material
effect on the accompanying financial statements.
NOTE
4
- FIXED ASSETS
Fixed
assets are stated at cost. The cost of equipment is charged against income
over
their estimated useful lives, using the straight-line method of depreciation.
Repairs and maintenance which are considered betterments and do not extend
the
useful life of equipment are charged to expense as incurred. When property
and
equipment are retired or otherwise disposed of, the asset and accumulated
depreciation is removed from the accounts and the resulting profit and loss
are
reflected in income.
NOTE
5 – CAPITALIZED COSTS
As
of
March 31, 2008, the Company accounted for its
ocean
exploration
and
archaeologically sensitive recoveries of artifacts, treasure trove and/or cargo
from shipwrecks
costs
incurred to-date as capitalized costs. At least on a quarterly basis, management
of the Company reviews the recoverability of each of the sites that the Company
has the rights to and determines whether costs need to be expensed or continued
to be capitalized.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE
6
- PERMITS
As
of
March 31, 2008, the Company accounted for its various permits on the
ocean
exploration
and
archaeologically sensitive recoveries of artifacts, treasure trove and/or cargo
from shipwrecks
as
intangible assets. At least on a quarterly basis, management of the Company
reviews the recoverability of each of the sites that the Company has the rights
to and determines whether the permits need to be expensed or continued to be
capitalized until they expire. As of March 31, 2008, no permits that the Company
currently owns have expired.
NOTE
7
- STOCK ISSUED FOR SERVICES
During
the nine months ended March 31, 2008, the Company issued 1,001,655 shares of
common stock for services rendered on behalf of the Company with a value of
$320,530, which was charged to operations. The Company did not issue any stock
for services during the nine months ended March 31, 2007.
NOTE
8
- INCOME TAXES
The
Company has approximately $1,380,448 in deferred tax assets at March 31, 2008,
resulting from net operating loss carryforwards to offset future taxable income
through 2027. A valuation allowance has been recorded to fully offset these
deferred tax assets because the future realization of the related income tax
benefits is uncertain.
For
the
nine months ended March 31, 2008 and 2007 the difference between the tax
provision at the statutory federal income tax rate and the tax provision
attributable to loss before income taxes is as follows (in
percentages):
Statutory
federal income tax rate
|
|
|
34
|
%
|
State
taxes – net of federal benefits
|
|
|
5
|
%
|
Valuation
allowance
|
|
|
39
|
%
|
|
|
|
|
|
Income
tax rate – net
|
|
|
0
|
%
|
For
the
nine months ended March 31, 2008, the net change in the valuation allowance
was
$148,604.
NOTE
9
- LEASE ARRANGEMENTS
The
Company maintains shared office space in Pennsylvania and Florida with unrelated
companies controlled by certain officers of the Company. As of March 31, 2008,
the Company shares office space with these companies at no cost. Rent expense
for the nine months ended March 31, 2008 and 2007 was $0 and $0 respectively.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
NINE MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE
10 - AGREEMENTS
Prior
to
the Exchange Agreement of October 17, 2005, as on file with the SEC, there
was a
Revenue Agreement as outlined in Exhibit B of the Exchange Agreement, that
requires 20% revenue participation payable to the original owners of the permits
from the net recovery of the shipwrecks for the permits that have been assigned
to the subsidiaries of one of the Company's subsidiaries, Historic Discoveries,
Inc. The 20% revenue participation allows Historic Discoveries, Inc. to defer
permit transfer fees and align site permit cost with revenue generation,
eliminating the exposure associated with sites that do not produce a material
number of artifacts. Historic Discoveries, Inc. was only required to pay the
20%
revenue participation when sites produce net revenue. The 20% revenue
participation also provides Historic Discoveries, Inc. the right of first
refusal on future sites, creating a mechanism for Historic Discoveries, Inc.
and
its operating companies to build site inventory while deferring the associated
cost and reducing financial risk. The Revenue Agreement with the original owners
was executed prior to October 17, 2005. The original owners of these permits
are
the beneficial owners of the controlling interest in the stock received in
the
Exchange Agreement. Additionally, officers and directors of the Company hold
certain executive positions in Historic Discoveries, Inc. and its subsidiaries.
The Company and Historic Discoveries had agreed to distribute 20% of the net
profits arising out of the exploitation of permits, licenses, finder fees
rights, contracts and other rights (collectively, "permits") held by ARC to
its
former corporate parent, Sovereign Marine Explorations, Inc. ("SME"), and to
distribute 20% of the net profits arising out of the exploitation of permits
held by SRI to its former corporate parent, Sea Hunt, Inc. ("Sea Hunt"). On
May
19, 2007, the Company issued 10,000,000 shares of Convertible Preferred Stock
in
exchange for this 20% net profits participation agreement. The stock carries
a 4
to1 conversion feature which allows the holders to convert into 40,000,000
common shares of the Company.
NOTE
11 - SETTLEMENT AGREEMENT AND GENERAL RELEASE
Effective
June 30, 2006, the Company entered into a Settlement Agreement and General
Release (the “Settlement Agreement") with Former Management, KMA Capital
Partners, Inc., and CF Holdings, LLC (collectively, the "Settlement Agreement
Parties") in order to reach a comprehensive resolution of their disputes. The
Settlement Agreement provides that the Settlement Agreement Parties release
all
claims that they may have against the Company, its parents, subsidiaries,
affiliates, predecessors, successors, assigns, partners, agents,
representatives, and attorneys (collectively, "affiliated parties") and that
the
Company releases all claims it may have against the Settlement Agreement Parties
and their respective affiliated parties. On December 26, 2006, 910,000 common
shares were issued pursuant to the Settlement Agreement effective June 30,
2006.
These 910,000 common shares are subject to a Leak-Out Agreement and are
restricted under Rule 144.
NOTE
12 - SHAREHOLDERS’ EQUITY AND ISSUANCE OF STOCK
As
of
March 31, 2008, the authorized capital of the Company was 250,000,000,000 shares
of common stock (with voting rights), par value $.001. For the nine months
ended
March 31, 2008 and 2007, the Company issued 1,001,655 and zero shares of common
stock, respectively.
NOTE
13 - CONCENTRATION OF CREDIT RISK
Financial
instruments, which potentially expose the Company to concentrations of credit
risk, consist principally of cash. As of March 31, 2008, the Company maintains
its cash accounts with financial institutions located in Pennsylvania, Florida,
Texas and Nova Scotia. The Federal Deposit Insurance Corporation (FDIC)
guarantees the Company's deposits in US-based financial institutions up to
$100,000. Historically, the Company has not experienced any losses on its
deposits in excess of federally insured guarantees.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE
14 - NOTES PAYABLE
1)
On
June 4, 2007, the Company received $1,000,000 cash under a promissory note.
Under the terms of the note, the Company is obligated to pay the note in one
payment of all outstanding principal plus all accrued unpaid interest on or
before the six month anniversary of the closing date unless the note holders
agree to extend the note, in which case the note shall become a demand note,
payable upon demand or at such later date as specified by the note holders
to
Company in writing, in the note holders’ sole discretion. The Company’s stock is
the collateral that supports this note. Unless otherwise agreed or required
by
applicable law, payments will be applied first to any accrued unpaid interest;
then to principal; then to any late charges; and then to any unpaid collection
costs. The annual interest rate for this note is computed on a 365 days per
year
basis. Company will pay the note holders at their respective address or at
such
other place as the note holders may designate in writing. The interest rate
on
this note is six percent (6%) per annum calculated on the principal amount
of
the Note then outstanding. The Company may make a prepayment, in whole or in
part, of this note without the prior consent of the note holders with no
prepayment penalty. At the maturity date of the note, the note holders shall
be
entitled to purchase 250,000 shares of common stock of the Company at a price
of
$.20 per share. The note holders will also be entitled to purchase an additional
250,000 shares of common stock of the Company at the closing price of the
Company stock as reported on the OTCBB on the closing date and, in addition,
these shares must be exercised within one year from the closing date.
As
of
March 31, 2008, the holders of this note have verbally agreed to extend the
payment date on the note. On February 28, 2008, the holders of this note
exercised the first set of warrants. They purchased 250,000 shares of common
stock of the Company for $50,000 with a per share price of $.20. As of March
31,
2008, there remains another warrant for the note holder to purchase 250,000
of
common stock of the Company.
As
of
March 31, 2008, the total due
under
this note including principal and interest is $1,031,515.
For
the
three months ended March 31, 2008, the Company recognized the $50,000 as
proceeds from the exercise of these warrants.
2)
On
June 29, 2005, the Company received $40,000 cash under a debenture note payable.
Under the terms of the debenture, the debenture is due on June 29, 2008,
including principal and accrued interest at a rate of 5.25% per annum.
Management of the Company continues to review this debenture and the
circumstances surrounding the continued dispute with the debenture holders.
The
debenture holders and the Company are in dispute because
of
issues
related to the conversion rates relative to the current asking price of the
Company’s common stock trading on the OTC Bulletin Board
As
of
March 31, 2008, the total due under this debenture including principal and
interest is $105,261.
As
of
March 31, 2008, the total notes payable due including principal and interest
are
$1,136,736.
NOTE
15 - RELATED PARTY TRANSACTIONS
For
the
nine months ended March 31, 2008, there are no accruals for salaries and
unreimbursed expenses for the officers of the parent company; Sovereign
Exploration Associates, International, Inc.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE
16. - RELATED PARTY NOTES PAYABLE
As
of
March 31, 2008, the related party notes payable were as follows:
Demand
note payable - advances to Sovereign Exploration Associates International,
Inc.
|
|
|
56,719
|
|
|
|
|
|
|
Demand
Note payable of $500,000 plus accrued interest of $3,444 per month
as a
direct pass through from Nova Savings Bank - origination date was
July 10,
2006 (b)
|
|
|
571,884
|
|
|
|
|
|
|
Term
Note payable of $274,009 due June 13, 2008 plus at 6% per annum for
the
acquisition of LeChameau LeChameau Explorations Limited – June 13,
2007
|
|
|
292,736
|
|
|
|
|
|
|
Demand
note payable of $350,000 plus accrued interest at 6% per annum for
the
purchase of the original permits
|
|
|
433,341
|
|
|
|
|
|
|
Demand
Note payable of $250,000 plus accrued interest at 6% per annum for
the
balance of the Fantome Cove Project
|
|
|
275,274
|
|
|
|
|
|
|
Demand
Note payable of $160,000 due on November 15, 2007 plus accrued interest
of
the lesser of 0.9% or the legal rate under Texas law – origination
date was November 15, 2006 (a)
|
|
|
162,533
|
|
|
|
|
|
|
Demand
note payable - advances to Interspace Explorations Limited plus accrued
interest at 6% per annum
|
|
|
515,882
|
|
|
|
|
|
|
Demand
note payable - advances to Sea Research, Inc.
|
|
|
574,355
|
|
|
|
|
|
|
Demand
Note payable of $600,000 due on November 15, 2007 plus accrued interest
of
the lesser of 0.9% or the legal rate under Texas law – origination
date was November 15, 2006 (a)
|
|
|
675,653
|
|
|
|
|
|
|
Total
related party notes payable - all current
|
|
$
|
3,558,438
|
|
(a)
these
two demand notes payable are being held by the chairman of the Company and
an
affiliated entity. He has agreed to extend the due dates for payments on
these notes, however, as of March 31, 2008; no formal documentation has been
prepared to memorialize the extensions.
(b)
this
demand note payable is being held by the President and CEO of the Company.
He has agreed to extend the due date for payment on this note, however, as
of
March 31, 2008, no formal documention has been prepared to memorialize the
extension.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES
TO
CONSOLIDATED FINANCIAL STATEMENTS
FOR
THE
SIX MONTHS ENDED MARCH 31, 2008 AND 2007
(UNAUDITED)
NOTE
17 - LEGAL PROCEEDINGS
In
a
matter related to KMA Capital Partners Ltd, James Jenkins and Charles Giannetto,
filed as
KMA
Capital Partners Ltd., v. Sovereign Exploration Association, Inc., et
al
,
in the
Circuit Court of the Ninth Judicial Circuit, in and for Orange County, Florida,
the Company claims that KMA Capital Partners Ltd, James Jenkins and Charles
Giannetto are in breach of a “Leak Out Agreement”, which restricts the number of
shares of the Company’s common stock, traded as SVXA.OB, they are allowed to
sell or transfer. As of June 30, 2006, the court entered an Order which limits
Mr. Jenkins and Mr. Giannetto to selling no more than 2,000 shares of the
Company’s common stock per trading day. As of March 31, 2008, there is no
liability under this matter that requires the establishment of a liability
within the accompanying consolidated financial statements.
The
Company is one of several defendants in a law suit,
Patricia
A. Mullican v. Sovereign Exploration Associates International, Inc., et al
in
the
Circuit Court of the Ninth Judicial Circuit, in and for Orange County, Florida.
The plaintiff in this case is seeking damages for the alleged failure to pay
two
(2) debentures issued by TS&B Holdings to Mr. Mullican (one for $150,000 and
the other for $250,000) as well as an unpaid promissory note for $50,000 plus
accrued interest on the debentures and the promissory note along with attorney
fees. TS&B Holdings, Inc. subsequently became Cali Holdings, Inc., which was
acquired by the Company in October 2005.
It
is the
Company’s position that these debts are not the Company’s responsibility, to the
extent that neither the debentures nor promissory notes were disclosed at the
time Cali Holdings, Inc. was acquired by the Company. There are numerous
defenses which the Company will be relying upon to support its legal position
that these obligations are not its responsibility. As of March 31, 2008, the
accompanying consolidated financial statements do not provide for any liability
in the event that the Company is deemed responsible in this
case.
ITEM
2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION
FORWARD-LOOKING
STATEMENTS
THIS
REPORT CONTAINS STATEMENTS THAT WE BELIEVE ARE, OR TO BE CONSIDERED TO BE,
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995. ALL STATEMENTS OTHER THAN STATEMENTS OF
HISTORICAL FACT INCLUDED IN THIS REPORT REGARDING THE PROSPECTS OF OUR INDUSTRY
OR OUR PROSPECTS, PLANS, FINANCIAL POSITION OR BUSINESS STRATEGY, DO CONSTITUTE
FORWARD-LOOKING STATEMENTS. IN ADDITION, FORWARD-LOOKING STATEMENTS GENERALLY
CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING WORDS SUCH AS "WILL," "EXPECT,"
"INTEND," "ESTIMATE," "FORESEE," "PROJECT," "ANTICIPATE," "BELIEVE," "PLANS,"
"FORECASTS," "CONTINUE" OR "COULD" OR THE NEGATIVES OF THESE TERMS OR VARIATIONS
OF THEM OR SIMILAR TERMS. FURTHERMORE, SUCH FORWARD-LOOKING STATEMENTS THAT
ARE
INCLUDED IN VARIOUS FILINGS THAT WE MAKE WITH THE SEC OR PRESS RELEASES OR
ORAL
STATEMENTS MADE BY OR WITH THE APPROVAL OF ONE OF OUR AUTHORIZED EXECUTIVE
OFFICERS. ALTHOUGH WE BELIEVE THAT THE EXPECTATIONS REFLECTED IN THESE
FORWARD-LOOKING STATEMENTS ARE REASONABLE, WE CANNOT ASSURE YOU THAT THESE
EXPECTATIONS WILL PROVE TO BE CORRECT. THESE FORWARD-LOOKING STATEMENTS ARE
SUBJECT TO CERTAIN KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES, AS WELL AS
ASSUMPTIONS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
REFLECTED IN THESE FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED NOT TO
PLACE UNDUE RELIANCE ON ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH
REFLECT MANAGEMENT'S OPINIONS ONLY AS OF THE DATE HEREOF. EXCEPT AS REQUIRED
BY
LAW, WE UNDERTAKE NO OBLIGATION TO REVISE OR PUBLICLY RELEASE THE RESULTS OF
ANY
REVISION TO ANY FORWARD-LOOKING STATEMENTS. YOU ARE ADVISED, HOWEVER, TO CONSULT
ANY ADDITIONAL DISCLOSURES WE MAKE IN OUR REPORTS TO THE SEC. ALL SUBSEQUENT
WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS ATTRIBUTABLE TO US OR PERSONS ACTING
ON OUR BEHALF ARE EXPRESSLY QUALIFIED IN THEIR ENTIRETY BY THE CAUTIONARY
STATEMENTS CONTAINED IN THIS REPORT.
The
following information should be read in conjunction with the consolidated
financial statements and notes thereto appearing elsewhere in this Form
10-QSB.
Overview
The
Company was a financial service company providing financing and advisory
services to small and medium-sized companies throughout the United States.
Effective January 5, 2004, the Company's shareholders approved the proposal
to
allow the Company to elect to be treated as a business development company
("BDC") under the 1940 Act. The Company on September 22, 2006, withdrew its
election to be treated as a BDC. Following the withdrawal of its election,
the
Company carries on a marine recovery and explorations business, which it
conducts through subsidiaries and controlled companies, and will be managed
so
that it will not be subject to the provisions of the 1940 Act.
The
increasing complexity of the business environment and applicable authoritative
accounting guidance required the Company to closely monitor its accounting
policies. The following is a summary of the Company’s critical accounting
policies and its intended to enhance your ability to assess its financial
condition and results of operation and the potential volatility due to changes
in estimates.
Valuation
of Investments
The
Company is no longer subject to independently valuing its private investments
as
value is defined in Section 2(a)(41) of the 1940 Act as, (i) the market price
for those securities for which a market quotation is readily available and
(ii)
for all other securities and assets, fair value is determined in good faith
by
the board of directors.
As
of
March 31, 2008, the following is a list of the private companies in which the
Company had an investment in and notes receivable, stated at the lower of cost
or market value;
|
|
|
|
Fair
|
|
|
|
|
|
Market
|
|
Name of Company
|
|
Cost
|
|
Value
|
|
|
|
|
|
|
|
Gulf
Coast Records, LLC
|
|
|
|
|
|
|
|
Minority
Investment (49%) and Note Receivable
|
|
$
|
1,006,717
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
Reds
Caribbean - held by Lavelle Holdings, Inc.
|
|
|
|
|
|
|
|
Minority
Investment (30%)
|
|
$
|
51,962
|
|
$
|
51,962
|
|
|
|
|
|
|
|
|
|
Totals
|
|
$
|
1,058,679
|
|
$
|
51,962
|
|
The
investments are reflected at the lower of cost or market. Since there is
typically no readily ascertainable market value for the investments in its
portfolio, the Company valued substantially all of its investments at the lower
of cost or market as determined in good faith by the board of directors pursuant
to a valuation policy and consistent valuation process. Because of the inherent
uncertainty in determining the fair value of investments that do not have a
readily ascertainable market value, the fair value of its investments determined
in good faith by the board of directors may differ significantly from the values
that would have been used had a ready market existed for the investments, and
the differences could be material.
Initially,
the fair value of each such portfolio investment was based upon original cost.
There is no single standard for determining fair value in good faith. As a
result, determining fair value requires the judgment be applied to the specific
facts and circumstances of each portfolio investment. The Board of Directors
considers fair value to be the amount which the Company may reasonably expect
to
receive for portfolio securities when sold on the valuation date.
Gulf
Coast Records, LLC
The
investment (a 49% minority interest) and note receivable in Gulf Coast Records,
LLC was acquired as part of the Exchange Agreement dated October 17, 2005.
In
the year ended June 30, 2006, while reporting under the 40 Act as a business
development company, the Board of Directors agreed with management’s assessment
to write this investment down to zero based on the information received from
the
management of Gulf Coast Records, LLC. As of March 31, 2008, the investment
in
and note receivable to Gulf Coast is being carried as zero, which is the lower
of cost or market.
Reds
Caribbean
The
investment (a 30% minority interest) in Reds Caribbean was acquired in the
stock
purchase agreement with the shareholders of Lavelle Holdings, Inc. on June
11,
2007. As of March 31, 2008, the Company is recording this investment at its
cost
of $51,962. Management expects to receive additional financial information
before June 30, 2008 in order to ascertain the carrying value of this investment
in Red Caribbean.
Valuation
of Loans and Debt Securities
The
Company did not value its loans or debt securities above cost, but loans and
debt securities were subject to fair value write-down when the asset is
considered impaired with respect to the Company’s investments. As of March 31,
2008, the note receivable to Gulf Coast Records, LLC of $832,849 was considered
impaired and continues to be carried as zero. The investment is Reds Caribbean
was acquired in June 2007 in conjunction with the acquisition of Lavelle
Holdings, which is not considered as impaired and it is being carried at its
original cost.
Financial
Condition
Comparison
of operating results for the three and nine months ended March 31, 2008 and
2007:
Net
Sales
Net
sales
for the three months ended March 31, 2008 were $0, compared to $79,089 for
the
three months ended March 31, 2007. The sales were from the Company’s
wholly-owned subsidiary, Lavelle Holdings, Inc. The Company’s other subsidiaries
have yet to realize any revenue from the artifacts they have recovered
to-date
As
of
March 31, 2008, Lavelle Holdings, Inc. has ceased operations subject to the
review by the Company’s management to determine its business strategy going
forward, as it relates to the business of Lavelle Holdings, Inc. The Company
provided for the allowance for bad debts of $93,728, however, there were no
other reserves provided for as of March 31, 2008 as they relate to Lavelle
Holdings, Inc.
Net
sales
for the nine months ended March 31, 2008 were $395,550, compared to $421,210
for
the nine months ended March 31, 2007. The sales were from the Company’s
wholly-owned subsidiary, Lavelle Holdings, Inc. The Company’s other subsidiaries
have yet to realize any revenue from the artifacts they have recovered
to-date.
Gross
Profit
Gross
profit for the three months ended March 31, 2008 was $0 compared to $13,424
for
the three months ended March 31, 2007. The decrease was due to no revenue being
realized for the three months ended March 31, 2008.
Gross
profit for the nine months ended March 31, 2008 was $155,300 compared to
$168,962 for the nine months ended March 31, 2007. The decrease was due to
lower
sales.
Operating
Expenses
Operating
expenses for the three months ended March 31, 2008 were $474,764 compared to
$558,028 for the three months ended March 31, 2007. The decrease was primarily
due to stock issued for services for $288,530 during the quarter ended March
31,
2008. Salaries and wages decreased to zero because the officers of the parent
company agreed to forego salaries starting in 2007.
Operating
expenses for the nine months ended March 31, 2008 were $1,074,011 compared
to
$1,190,757, for the nine months ended March 31, 2007. The decrease was primarily
due to stock issued for services for $320,530 during the nine months ended
March
31, 2008.
Interest
Expense
Interest
expense for the three months ended March 31, 2008 was $41,941 compared to
$75,411 for the three months ended March 31, 2007. The decrease was due to
additional debt financing received by the Company, which was converted to
equity.
Interest
expense for the nine months ended March 31, 2008 was $124,080 compared to
$121,136 for the nine months ended March 31, 2007. The increase was due to
additional debt financing received by the Company.
Liquidity
and Capital Resources
As
of
March 31, 2008, total assets increased by $629,480 or 16.2% to $4,517,981.
Cash
decreased by $54,994 primarily there was no realized revenue in the nine months
ended March 31, 2008.
Capitalized
costs increased by $963,920 or 28.7% to $3,308,936, which was primarily funded
by the issuance of common stock, proceeds from notes payable and proceeds from
related party notes payable.
The
Company does not expect its cash on hand and cash generated from operations
to
be adequate to meet its cash needs at its current level of operations, including
the next twelve months. The Company intends to seek to raise additional funds
from investors, either directly or through its subsidiaries or controlled
companies, including special-purpose entities formed to conduct specific marine
exploration operations. There can be no assurance that the Company’s
fund-raising efforts will be successful.
Quantitative
and Qualitative Disclosures about Market Risk
The
Company’s investment activities contain elements of risk. The portion of the
Company’s investment portfolio consisting of equity or equity-linked debt
securities in private companies was subject to valuation risk. Because there
was
typically no public market for the equity and equity-linked debt securities
in
which it invested, the valuation of the equity interest in the portfolio is
stated at "fair value" and determined in good faith by the Board of Directors
on
a quarterly basis in accordance with the Company's investment valuation policy.
In the absence of a readily ascertainable market value, the estimated value
of
the Company’s portfolio may have differed significantly from the value that
would be placed on the portfolio if a ready market for the investments existed.
At times a portion of the Company’s portfolio may have included marketable
securities traded in the over-the-counter market. In addition, there may have
been a portion of the Company’s portfolio for which no regular trading market
existed. In order to realize the full value of a security, the market must
have
traded in an orderly fashion or a willing purchaser must be available when
a
sale is to be made. Should an economic or other event occur that would not
allow
the markets to trade in an orderly fashion the Company may not have been able
to
realize the fair value of its marketable investments or other investments in
a
timely manner.
As
of
March 31, 2008, the Company did not have any off-balance sheet investments
or
hedging investments.
Impact
of Inflation
The
Company does not believe that its business was materially affected by inflation,
other than the impact inflation may have on the securities markets, the
valuations of business enterprises and the relationship of such valuation to
underlying earnings, all of which will influence the value of the Company's
investments.
ITEM
3.
CONTROLS AND PROCEDURES
CEO
and CFO Certifications
As
of the
end of the period covered by this quarterly report, the Company carried out
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer ("the Certifying
Officers"), an evaluation of the effectiveness of our "disclosure controls
and
procedures." The certifications of the CEO and the CFO required by Rules
13a-14(a) and 15d-14(c) of the Securities Exchange Act of 1934, as amended
(the
"Certifications") are filed as exhibits to this report.
This
section of this report contains information concerning the evaluation of our
"disclosure controls and procedures" (as defined in Exchange Act Rules 13a-15(e)
and 15d-15(e)) ("Disclosure Controls") and changes to internal control over
financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
("Internal Controls") referred to in the Certifications and should be read
in
conjunction with the Certifications for a more complete understanding of the
topics presented.
Evaluation
of Disclosure Controls
The
Company maintains controls and procedures designed to ensure that they are
able
to collect the information that is required to be disclosed in the reports
they
file with the Securities and Exchange Commission (the "SEC") and to process,
summarize and disclose this information within the time period specified in
the
rules of the SEC. The Company’s Chief Executive Officer and Chief Financial
Officer are responsible for establishing, maintaining and enhancing these
procedures. The officers are also responsible, as required by the rules
established by the SEC, for the evaluation of the effectiveness of these
procedures.
Based
on
management's evaluation (with participation of our principal executive officer
and principal financial officer), as of the end of the period covered by this
report, the principal executive officer and principal financial officer
concluded that no deficiencies were identified in the Company's internal
controls over financial reporting which constituted a "material weakness."
Accordingly, management concluded that the Company's disclosure controls and
procedures were effective.
Limitations
on the Effectiveness of Controls
The
Company's management does not expect that their disclosure controls or their
internal controls over financial reporting will prevent all error and fraud.
A
control system, no matter how well conceived and operated, can provide only
reasonable, but not absolute, assurance that the objectives of a control system
are met. Further, any control system reflects limitations on resources, and
the
benefits of a control system must be considered relative to its costs. These
limitations also include the realities that judgments in decision-making can
be
faulty and that breakdowns can occur because of simple error or mistake.
Additionally, controls can be circumvented by the individual acts of some
persons, by collusion of two or more people or by management override of a
control. A design of a control system is also based upon certain assumptions
about potential future conditions; over time, controls may become inadequate
because of changes in conditions, or the degree of compliance with the policies
or procedures may deteriorate. Because of the inherent limitations in a
cost-effective control system, misstatements due to error or fraud may occur
and
may not be detected.
Changes
in Internal Controls
The
Company maintains a system of internal controls designed to provide reasonable
assurance that transactions are executed in accordance with management's general
or specific authorization; transactions are recorded as necessary to permit
preparation of financial statements in conformity with Generally Accepted
Accounting Principles ("GAAP"). It is the responsibility of Company’s management
to establish and maintain adequate internal control over financial
reporting.
PART
II: OTHER INFORMATION
Item
1.
Legal
Proceedings
In
a
matter related to KMA Capital Partners Ltd, James Jenkins and Charles Giannetto,
filed as
KMA
Capital Partners Ltd., v. Sovereign Exploration Association, Inc., et
al
,
in the
Circuit Court of the Ninth Judicial Circuit, in and for Orange County, Florida,
the Company claims that KMA Capital Partners Ltd, James Jenkins and Charles
Giannetto are in breach of a “Leak Out Agreement”, which restricts the number of
shares of the Company’s common stock, traded as SVXA.OB, they are allowed to
sell or transfer. As of June 30, 2006, the court entered an Order which limits
Mr. Jenkins and Mr. Giannetto to selling no more than 2,000 shares of the
Company’s common stock per trading day. As of March 31, 2008, there is no
liability under this matter that requires the establishment of a liability
within the accompanying consolidated financial statements.
The
Company is one of several defendants in a law suit,
Patricia
A. Mullican v. Sovereign Exploration Associates International, Inc., et al
in
the
Circuit Court of the Ninth Judicial Circuit, in and for Orange County, Florida.
The plaintiff in this case is seeking damages for the alleged failure to pay
two
(2) debentures issued by TS&B Holdings to Mr. Mullican (one for $150,000 and
the other for $250,000) as well as an unpaid promissory note for $50,000 plus
accrued interest on the debentures and the promissory note along with attorney
fees. TS&B Holdings, Inc. subsequently became Cali Holdings, Inc., which was
acquired by the Company in October 2005.
It
is the
Company’s position that these debts are not its responsibility, to the extent
that neither the debentures nor promissory notes were disclosed at the time
Cali
Holdings, Inc. was acquired by the Company. There are numerous defenses which
the Company will be relying upon to support its legal position that these
obligations are not its responsibility. As of March 31, 2008, the accompanying
consolidated financial statements do not provide for any liability in the event
that the Company is deemed responsible in this case.
ITEM
2.
UNREGISTERED SALE OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM
3.
DEFAULTS UPON SENIOR SECURITIES.
ITEM
4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM
5.
OTHER INFORMATION.
None
ITEM
6.
EXHIBITS.
Section
302 CEO and CFO Certifications
Section
906 CEO and CFO Certifications
SIGNATURES
Pursuant
to the requirements of Section 3 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Quarterly Report on Form 10-QSB to
be
signed on its behalf by the undersigned, thereunto duly authorized.
SOVEREIGN
EXPLORATION ASSOCIATES INTERNATIONAL, INC
May
14, 2008
|
By:
|
/s/
Robert D. Baca
|
Date
|
|
Robert
D. Baca
|
|
|
Chief
Executive Officer
|
|
|
|
|
|
|
May
14, 2008
|
By:
|
/s/
Martin Thorp
|
Date
|
|
Martin
Thorp
|
|
|
Chief
Financial Officer
|
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