Notes
to Consolidated Financial Statements
Years
Ended December 31, 2006 and 2005
NOTE
A-SUMMARY OF ACCOUNTING POLICIES
A
summary
of the significant accounting policies applied in the preparation of the
accompanying consolidated financial statements follows.
BUSINESS
AND BASIS OF PRESENTATION
Seawright
Holdings, Inc., (Company) was formed on October 14, 1999 under the laws of
the
state of Delaware. The Company is a development stage enterprise, as defined
by
Statement
of Financial Accounting Standards No. 7 (SFAS 7)
and
is
seeking to develop a spring water bottling and distribution business. From
its
inception through the date of these financial statements, the Company has
recognized minimal revenues and has incurred significant operating expenses.
Consequently, its operations are subject to all risks inherent in the
establishment of a new business enterprise. For the period from inception
through December 31, 2006, the Company has accumulated losses of
$3,799,571.
The
consolidated financial statements include the accounts of the Company and
its
wholly-owned subsidiary, Seawright Springs LLC. Significant intercompany
transactions have been eliminated in consolidation.
REVENUE
RECOGNITION
For
revenue from product sales, the Company recognizes revenue in accordance
with
Staff Accounting Bulletin No. 104,
Revenue
Recognition
(“SAB104”), which superseded Staff Accounting Bulletin No. 101,
Revenue
Recognition in Financial Statements
(“SAB101”). SAB 101 requires that four basic criteria must be met before revenue
can be recognized: (1) persuasive evidence of an arrangement exists; (2)
delivery has occurred; (3) the selling price is fixed and determinable; and
(4)
collectibility is reasonably assured. Determination of criteria (3) and (4)
are
based on management’s judgments regarding the fixed nature of the selling prices
of the products delivered and the collectibility of those amounts. Provisions
for discounts and rebates to customers, estimated returns and allowances,
and
other adjustments are provided for in the same period the related sales are
recorded. The Company defers any revenue for which the product has not been
delivered or is subject to refund until such time that the Company and the
customer jointly determine that the product has been delivered or no refund
will
be required. SAB 104 incorporates Emerging Issues Task Force 00-21 (“EITF
00-21”),
Multiple-Deliverable
Revenue Arrangements.
EITF
00-21 addresses accounting for arrangements that may involve the delivery
or
performance of multiple products, services and/or rights to use assets.
USE
OF
ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that
affect the reported amounts of assets and liabilities and disclosure of
contingent liabilities at the date of the financial statements and the reported
amount of revenue and expenses during the reporting period. Accordingly,
actual
results could differ from those estimates.
CASH
AND
CASH EQUIVALENTS
The
Company maintains a cash balance in a non-interest bearing account that may,
at
times, exceed federally insured limits. For the purposes of the statements
of
cash flows, the Company considers all highly liquid debt instruments purchased
with a maturity date of three months or less to be cash
equivalents.
PROPERTY
AND EQUIPMENT
Property
and equipment are stated at cost. When retired or otherwise disposed, the
related carrying value and accumulated depreciation are removed from the
respective accounts and the net difference less any amount realized from
disposition, is reflected in earnings. Minor additions and renewals are expensed
in the year incurred. Major additions and renewals are capitalized and
depreciated over their estimated useful lives being 5 years for equipment
and 4
years for computers.
ADVERTISING
The
Company follows the policy of charging the costs of advertising to expense
as
incurred. The Company did not incur advertising costs for the past two
years.
IMPAIRMENT
OF LONG-LIVED ASSETS
The
Company has adopted
Statement
of Financial Accounting Standards No.144, Accounting for the Impairment or
Disposal of Long-Lived Assets (SFAS 144)
.
The
Statement requires that long-lived assets and certain identifiable intangibles
held and used by the Company be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of an asset may
not
be recoverable. Events relating to recoverability may include significant
unfavorable changes in business conditions, recurring losses, or a forecasted
inability to achieve break even operating results over an extended period.
The
Company evaluates the recoverability of long-lived assets based upon forecasted
undiscounted cash flows. Should an impairment in value be indicated, the
carrying value of intangible assets will be adjusted, based on estimates
of
future discounted cash flows resulting from the use of and ultimate disposition
of the intangible, to be reported at the lower of the carrying amount or
the
fair value less costs to sell.
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Statement
of Financial Accounting Standards No. 107, Disclosures About Fair Value of
Financial Instruments (SFAS 107)
requires
disclosure of the fair value of certain financial instruments. The carrying
value of cash and cash equivalents, accounts receivable, accounts payable
and
short-term borrowings, as reflected in the balance sheets, approximate fair
value because of the short-term maturity of these instruments.
STOCK
BASED COMPENSATION
On
January 1, 2006, the Company adopted the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which
requires the measurement and recognition of compensation expense for all
stock-based awards made to employees based on estimated fair values.
SFAS No. 123(R) supersedes previous accounting under Accounting
Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees” for periods beginning in fiscal 2006. In March 2005, the SEC issued
Staff Accounting Bulletin (“SAB”) No. 107, providing supplemental
implementation guidance for SFAS 123(R). The Company has applied the
provisions of SAB No. 107 in its adoption of
SFAS No. 123(R).
SFAS No. 123(R)
requires companies to estimate the fair value of stock-based awards on the
date
of grant using an option pricing model. The value of the portion of the award
that is ultimately expected to vest is recognized as expense over the requisite
service periods. The Company adopted SFAS No. 123(R) using the
modified prospective application, which requires the application of the standard
starting from January 1, 2006, the first day of the Company’s year. The
Company’s consolidated financial statements for the year ended December 31,
2006, reflect the impact, if any, of SFAS No. 123(R).
Prior
to
the adoption of SFAS No. 123(R), the Company accounted for stock-based
awards to employees using the intrinsic value method in accordance with APB
No. 25, as allowed under SFAS No. 123, “Accounting for
Stock-Based Compensation.” Under the intrinsic value method, no stock-based
compensation expense for employee stock options had been recognized in the
Company’s consolidated statements of operations because the exercise price of
the Company’s stock options granted to employees equaled the fair market value
of the underlying stock at the date of grant. In accordance with the modified
prospective transition method the Company used in adopting
SFAS No. 123(R), the Company’s results of operations prior to fiscal
2006 have not been restated to reflect, and do not include, the impact of
SFAS No. 123(R).
Stock-based
compensation expense recognized during a period is based on the value of
the
portion of stock-based awards that is ultimately expected to vest during
the
period.
The
following table illustrates the pro forma net income and earnings per share
for
the year ended December 31, 2005 as if compensation expense for stock options
issued to employees had been determined consistent with SFAS No. 123:
|
|
For
the year
ended
December
31,
2005
|
|
|
|
|
|
Net
loss - as reported
|
|
$
|
(1,116,048
|
)
|
Add:
Total stock based employee compensation expense as reported under
intrinsic value method (APB. No. 25)
|
|
|
-
|
|
Deduct:
Total stock based employee compensation expense as reported under
fair
value based method (SFAS No. 123)
|
|
|
-
|
|
Net
loss - Pro Forma
|
|
|
(1,116,048
|
)
|
Net
loss attributable to common stockholders - Pro forma
|
|
$
|
(1,116,048
|
)
|
Basic
(and assuming dilution) loss per share - as reported
|
|
$
|
(0.13
|
)
|
Basic
(and assuming dilution) loss per share - Pro forma
|
|
$
|
(0.13
|
)
|
Stock-based
compensation expense is measured using a multiple point Black-Scholes option
pricing model that takes into account highly subjective and complex assumptions.
The expected life of options granted is derived from the vesting period of
the
award, as well as historical exercise behavior, and represents the period
of
time that options granted are expected to be outstanding. Expected volatilities
are based on a blend of historical volatility and implied volatility derived
from publicly traded options to purchase the Company’s common stock, which the
Company believes is more reflective of the market conditions and a better
indicator of expected volatility than solely using historical volatility.
The
risk-free interest rate is the implied yield currently available on
U.S. Treasury zero-coupon issues with a remaining term equal to the
expected life of the option. There were no employee options granted during
2006
or 2005, and all employee options granted prior to 2005 had fully vested
by
January 1, 2005.
Stock-based
compensation expense related to 75,000 stock options issued to consultants
for
services rendered as recognized under SFAS No. 123(R) totaled $38,490
for the year ended December 31, 2006 (Note I). As of December 31, 2006, all
stock options outstanding issued to consultants were fully vested.
EARNING
(LOSS) PER SHARE
Net
earning (loss) per share is provided in accordance with
Statement
of Financial Accounting Standards No. 128, Earnings per share (SFAS
128)
.
Basic
loss per share is computed by dividing losses available to common stockholders
by the weighted average number of common shares and dilutive common stock
equivalents outstanding during the period. Dilutive common stock equivalents
consist of shares issuable upon conversion of convertible debentures and
the
exercise of the Company's stock options and warrants (calculated using the
treasury stock method). During the year ended December 31, 2006 and 2005,
common
stock equivalents are not considered in the calculation of the weighted average
number of common shares outstanding because they would be anti-dilutive,
thereby
decreasing the net loss per common share.
SEGMENT
INFORMATION
The
Company adopted
Statement
of Financial Accounting Standards No. 131, Disclosures about Segments of
an
Enterprise and Related Information (SFAS 131)
in the
year ended December 31, 1999. SFAS 131 establishes standards for reporting
information regarding operating segments in annual financial statements and
requires selected information for those segments to be presented in interim
financial reports issued to stockholders. SFAS 131 also establishes standards
for related disclosures about products and services and geographic areas.
Operating segments are identified as components of an enterprise about which
separate discrete financial information is available for evaluation by the
chief
operating decision maker, or decision-making group, in making decisions
regarding the allocation of resources and asset performance. The information
disclosed herein materially represents all of the financial information related
to the Company's principal operating segment.
INCOME
TAXES
The
Company follows
Statement
of Financial Accounting Standards No. 109, Accounting for Income taxes (SFAS
109)
for
recording the provision for income taxes. Deferred tax assets and liabilities
are computed based upon the difference between the financial statement and
income tax basis of assets and liabilities using the enacted marginal tax
rate
applicable when the related asset or liability is expected to realized or
settled. Deferred income tax expenses or benefits are based on the changes
in
the asset or liability during each period. If available evidence suggests
that
it is more likely than not that some portion or all of the deferred tax assets
will not be realized, a valuation allowance is required to reduce the deferred
tax assets to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision for deferred
income taxes in the period of change.
Deferred
income taxes may arise from temporary differences resulting from income and
expense items reported for financial accounting and tax purposes in different
periods. Deferred taxes are classified as current or non-current, depending
on
the classification of assets and liabilities to which they relate. Deferred
taxes arising from temporary differences that are not related to an asset
or
liability are classified as current or non current depending on the periods
in
which the temporary differences are expected to reverse.
CONCENTRATIONS
OF CREDIT RISK
Financial
instruments and related items, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash and cash equivalents
and marketable securities. The Company places its cash and temporary cash
investments with high credit quality institutions. At times, such investments
may be in excess of the FDIC insurance limit. Marketable securities are reviewed
periodically by management who has established guidelines for the Company’s
investment portfolio. Marketable securities maintained by the Company are
not
FDIC insured.
LIQUIDITY
The
Company is in the development stage and its efforts have been principally
devoted to developing the spring water bottling and distribution business.
To
date, the Company has generated minimal revenues, has incurred expenses and
has
sustained losses. As shown in the accompanying consolidated financial
statements, the Company has incurred accumulated losses of $3,799,571 for
the
period from inception through December 31, 2006. The Company's current
liabilities exceeded its current assets by $1,355,680 as of December 31,
2006.
Consequently, its operations are subject to all risks inherent in the
establishment of a new business enterprise.
DEBT
AND
EQUITY SECURITIES
The
Company follows the provisions of
Statement
of Financial Accounting Standards No. 115, Accounting for Certain Investments
in
Debt and Equity Securities (SFAS 115)
.
The
Company classifies debt and equity securities into one of three categories:
held-to-maturity, available-for-sale or trading. These security classifications
may be modified after acquisition only under certain specified conditions.
Securities may be classified as held-to-maturity only if the Company has
the
positive intent and ability to hold them to maturity. Trading securities
are
defined as those bought and held principally for the purpose of selling them
in
the near term. All other securities must be classified as
available-for-sale.
Held-to-maturity
securities are measured at amortized cost in the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings or in a
separate component of capital. They are merely disclosed in the notes to
the
consolidated financial statements.
Available-for-sale
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses are not included in earnings but are
reported as a net amount (less expected tax) in a separate component of capital
until realized.
Trading
securities are carried at fair value on the consolidated balance sheets.
Unrealized holding gains and losses for trading securities are included in
earnings.
Declines
in the fair value of held-to-maturity and available-for-sale securities below
their cost that are deemed to be other than temporary are reflected in earnings
as realized losses.
INTANGIBLES
In
accordance with
Statement
of Financial Accounting Standards No. 142
,
Goodwill
and Other Intangible Assets (SFAS 142)
,
indefinite-lived intangible assets are not amortized but are reviewed annually
for impairment. Separable intangible assets that are not deemed to have an
indefinite life are amortized over their useful lives and reviewed for potential
impairment whenever events or circumstances indicate that carrying amounts
may
not be recoverable.
The
Company tests, for impairment, the tradename value reported on the consolidated
balance sheet on the last day of the Company’s year. The tradename impairment
test under SFAS 142 requires a two-step approach, which is performed at the
reporting unit level, as defined in SFAS 142. Step one identifies potential
impairments by comparing the fair value of the reporting unit to its carrying
amount. Step two, which is only performed if there is a potential impairment,
compares the carrying amount of the reporting unit’s tradename value to its
implied value, as defined in SFAS 142. If the carrying amount of the reporting
unit’s tradename exceeds the implied fair value of the tradename, an impairment
loss is recognized for an amount equal to that excess.
Financing
costs associated with the Company’s convertible promissory notes are deferred
and amortized over the term of the loan.
NEW
ACCOUNTING PRONOUNCEMENTS
Currently
Effective
In
December 2004, the Financial Accounting Standards Board issued Statement
No. 123
(revised 2004), which is a revision of Statement 123 “Accounting for Stock-Based
Compensation.” This Statement establishes standards for the accounting for
transactions in which an entity exchanges its equity instruments for goods
or
services. It also addresses transactions in which an entity incurs liabilities
in exchange for goods or services that are based on the fair value of the
entity’s equity instruments or that may be settled by the issuance of those
equity instruments. This Statement focuses primarily on accounting for
transactions in which an entity obtains employee services in share-based
payment
transactions. This Statement is effective for public entities as of the
beginning of the first interim or annual reporting period that begins after
December 15, 2005. The adoption of this Statement did not have a material
effect
on the Company’s financial condition, results of operations, or cash
flows.
In
May
2005, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 154, “Accounting Changes and
Error Corrections,” which changes the accounting for and reporting of a change
in accounting principle. This statement applies to all voluntary changes
in
accounting principles and changes required by an accounting pronouncement
in the
unusual instance that the pronouncement does not include specific transition
provisions. This statement requires retrospective application to prior period
financial statements of changes in accounting principle, unless it is
impractical to determine either the period-specific or cumulative effects
of the
change. SFAS 154 is effective for accounting changes made in fiscal years
beginning after December 15, 2005. The adoption of this standard did not
have a material effect on the Company’s financial condition, results of
operations, or cash flows.
In
November 2005, the FASB issued FASB Staff Position (FSP) FAS 115-1 and 124-1,
The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments
.
The
guidance in this FSP addresses the determination of when an investment is
considered impaired, whether that impairment is other than temporary, and
the
measurement of an impairment loss. The FSP also includes accounting
considerations subsequent to the recognition of other-than temporary impairment
and requires certain disclosures about unrealized losses that have not been
recognized as other-than-temporary impairments. The guidance in this FSP
is
required to be applied to reporting periods beginning after December 15,
2005.
Earlier application is permitted, but the Company did not adopt the recognition
provisions of this standard until January 1, 2006. The disclosure provisions
were adopted in previous years. The adoption of this Statement did not have
a
material effect on the Company’s financial condition, results of operations or
cash flows.
In
September 2006, the Securities and Exchange Commission (the “SEC”) released
Staff Accounting Bulletin No. 108 (“SAB 108”), which provides detail in the
quantification and correction of financial statement misstatements. SAB 108
specifies that companies should apply a combination of the “rollover” and “iron
curtain” methodologies when making determinations of materiality. The rollover
method quantifies a misstatement based on the amount of the error originating
in
the current year income statement. The iron curtain approach quantifies
misstatements based on the effects of correcting the misstatement existing
in
the balance sheet at the end of the current year, regardless of the year(s)
of
origination. SAB 108 instructs companies to quantify the misstatement under
both
methodologies and, if either method results in the determination of a material
error, the Company must adjust its financial statements to correct the error.
SAB 108 also reminds preparers that a change from an accounting principle
that
is not generally accepted to a principle that is generally accepted is a
correction of an error. The Bulletin is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006.
The adoption of this Bulletin did not have a material effect on the Company’s
financial condition or results of operations.
Currently
Effective in Future
Years
On
February 16, 2006 the FASB issued SFAS 155, “Accounting for Certain Hybrid
Instruments,” which amends SFAS 133, “Accounting for Derivative Instruments and
Hedging Activities,” and SFAS 140, “Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities.” SFAS 155 allows financial
instruments that have embedded derivatives to be accounted for as a whole
(eliminating the need to bifurcate the derivative from its host) if the holder
elects to account for the whole instrument on a fair value basis. SFAS 155
also
clarifies and amends certain other provisions of SFAS 133 and SFAS 140. This
statement is effective for all financial instruments acquired or issued in
fiscal years beginning after September 15, 2006. The Company does not
expect its adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.
In
July
2006, the FASB issued FASB Interpretation No. 48 (FIN 48), “Accounting for
Uncertainty in Income Taxes—an interpretation of FASB Statement 109”, which
provides guidance on the measurement, recognition, and disclosure of tax
positions taken or expected to be taken in a tax return. The interpretation
also
provides guidance on derecognition, classification, interest and penalties,
and
disclosure. FIN 48 prescribes that a tax position should only be recognized
if
it is more-likely-than-not that the position will be sustained upon examination
by the appropriate taxing authority. A tax position that meets this threshold
is
measured as the largest amount of benefit that is greater than 50 percent
likely
of being realized upon ultimate settlement. The cumulative effect of applying
FIN 48 is to be reported as an adjustment to the beginning balance of retained
earnings in the period of adoption. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The company is assessing the impact, if
any, that the adoption may have on its financial statements.
In
March
2006, the FASB issued FASB Statement No. 156, Accounting for Servicing of
Financial Assets - an amendment to FASB Statement No. 140. Statement 156
requires that an entity recognize a servicing asset or servicing liability
each
time it undertakes an obligation to service a financial asset by entering
into a
service contract under certain situations. The new standard is effective
for
fiscal years beginning after September 15, 2006. The Company does not
expect its adoption of this new standard to have a material impact on its
financial position, results of operations or cash flows.
In
September 2006, the FASB issued SFAS 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. The Company will be required to adopt SFAS 157
effective for the fiscal year beginning January 1, 2008. The requirements
of SFAS 157 will be applied prospectively except for certain derivative
instruments that would be adjusted through the opening balance of retained
earnings in the period of adoption. The Company is currently evaluating the
impact of the adoption of SFAS 157 on the Company’s consolidated financial
statements and the management believes that the adoption of SFAS 157 will
not
have a significant impact on its consolidated results of operations or financial
position.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
158,
Employers’
Accounting for Defined Benefit Pension and Other Postretirement Plans - an
amendment of FASB Statements No. 87, 88, 106, and 132R
(‘SFAS
158’). SFAS 158 changes current practice by requiring employers to
recognize the overfunded or underfunded positions of defined benefit
postretirement plans, including pension plans, on the balance sheet. The
funded status is defined as the difference between the projected benefit
obligation and the fair value of plan assets. SFAS 158 also requires
employers to recognize the change in funded status in other comprehensive
income
(a component of shareholders’ equity). SFAS 158 does not change the
requirements for the measurement and recognition of pension expense in the
statement of income. SFAS 158 is effective for fiscal years ending after
December 15, 2006. The Company does not anticipate any material impact to
its financial condition or results of operations as a result of the adoption
of
SFAS 158.
In
September 2006, the FASB ratified the consensus reached by the EITF on Issue
No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit
Aspects of Endorsement Split-Dollar Life Insurance Arrangements.” EITF 06-4
requires the recognition of a liability and related compensation costs for
endorsement split-dollar life insurance policies that provide a benefit to
an
employee that extends to postretirement periods as defined in SFAS No. 106,
“ Employers’ Accounting for Postretirement Benefits Other Than Pensions.” The
EITF reached a consensus that “Company Owned Life Insurance” policies purchased
for this purpose do not effectively settle the entity’s obligation to the
employee in this regard, and thus the entity must record compensation cost
and a
related liability. Entities should recognize the effects of applying this
Issue
through either, (a) a change in accounting principle through a
cumulative-effect adjustment to retained earnings or to other components
of
equity or net assets in the balance sheet as of the beginning of the year
of
adoption, or (b) a change in accounting principle through retrospective
application to all prior periods. This Issue is effective for fiscal years
beginning after December 15, 2007. The Company is assessing the impact, if
any, that adoption may have on its financial statements.
In
December 2006, the FASB issued FSP EITF 00-19-2, Accounting for Registration
Payment Arrangements ("
FSP
00-19
-2")
which addresses accounting for registration payment arrangements.
FSP
00-19
-2
specifies that the contingent obligation to make future payments or otherwise
transfer consideration under a registration payment arrangement, whether
issued
as a separate agreement or included as a provision of a financial instrument
or
other agreement, should be separately recognized and measured in accordance
with
FASB Statement No. 5, Accounting for Contingencies.
FSP
00-19
-2
further clarifies that a financial instrument subject to a registration
payment
arrangement should be accounted for in accordance with other applicable
generally accepted accounting principles without regard to the contingent
obligation to transfer consideration pursuant to the registration payment
arrangement. For registration payment arrangements and financial instruments
subject to those arrangements that were entered into prior to the issuance
of
EITF 00-19-2, this guidance is effective for financial statements issued
for
fiscal years beginning after December 15, 2006 and interim periods within
those
fiscal years. The adoption of FSP 00-19-2 is not expected to have a material
impact on the Company’s financial condition or results of
operations.
In
February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for
Financial Assets and Financial Liabilities.”
SFAS
159
permits entities to choose to measure many financial instruments, and certain
other items, at fair value.
SFAS
159
applies to reporting periods beginning after November 15, 2007. The adoption
of
SFAS 159 is not expected to have a material impact on the Company’s financial
condition or results of operations.
RECLASSIFICATIONS
Certain
reclassifications have been made in prior year’s financial statements to conform
to classifications used in the current year.
NOTE
B -
MARKETABLE SECURITIES
During
the year ended December 31, 2006 and 2005, the Company classified all of
its
marketable securities as trading as the securities were bought and held
principally for the purpose of selling them in the near term. The Company
actively and frequently trades securities with the objective of generating
profits on short-term differences in price. The trading securities are marked
to
market on a monthly basis. At December 31, 2006 and 2005, the Company's trading
securities were carried at fair values of $17,993 and $138,910, respectively.
The Company included a realized net loss of $1,570, a net loss of $54,592,
and a
net gain of $37,356 on trading securities during the years ended December
31,
2006 and 2005, and for the period from October 14, 1999 (date of inception)
through December 31, 2006, respectively.
NOTE
C -
PROPERTY AND EQUIPMENT
In
October, 2003, the Company acquired approximately 140 acres of land and
related
improvements in Augusta County, Virginia, in exchange for $1,000,000, comprised
of $300,000 of cash and a $700,000 promissory note payable. In June 2005,
the
Company purchased a parcel of land located approximately 10 miles south
of the
Augusta County, Virginia location. The purchased parcel is 33.52 acres
which the
Company acquired for $725,000, comprised of $225,000 of cash and a $500,000
promissory note payable. The Company anticipates entering the sale of bulk
spring water and retail bottling business utilizing the properties’ water
resources. The Company also completed the purchase of the second Staunton,
Virginia property on April 10, 2006. The purchase price for the second
property
was $240,000, less a previously made $10,000 refundable deposit. The Company
paid $90,000 of the remaining purchase price at settlement and has financed
the
remaining $140,000.
Major
classes of property and equipment at December 31,
2006 and 2005 consisted of the following:
|
|
2006
|
|
2005
|
|
Land
|
|
$
|
1,965,000
|
|
$
|
1,725,000
|
|
Equipment
|
|
|
32,167
|
|
|
29,438
|
|
Building
improvements
|
|
|
118,595
|
|
|
24,280
|
|
|
|
|
|
|
|
|
|
|
|
|
2,115,762
|
|
|
1,778,718
|
|
Less
- accumulated depreciation
|
|
|
(5,725
|
)
|
|
(3,049
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
2,110,037
|
|
$
|
1,775,669
|
|
Depreciation
expense was $2,676 and $2,632 for the years ended December 31, 2006 and 2005,
respectively. The building improvements have not been placed in service as
of
December 31, 2006. Accordingly, depreciation has not been recorded on this
asset
group.
NOTE
D -
INTANGIBLES
INTANGIBLE
ASSET
In
June
2005, the Company purchased intellectual property including trademarks, service
marks, trade dress, trade names, brand names, designs and logos as well as
formulas for flavored sparkling waters and teas from a competitor. Under
the
terms of the agreement, the Company paid a purchase price of $10,000 with
royalties to be paid for the first 4,000,000 cases of bottled water or tea
sold
under the trademarks. As of the fifth anniversary of the effective date of
the
purchase, if the Company has not sold 4,000,000 cases of product under the
trademark, the seller shall be entitled to a payment of $50,000 less any
royalties previously paid under the agreement. The royalty payable under
this
intangible has been recorded at its present value of $34,200 at December
31,
2006 and is included in other long-term liabilities. The intangibles have
been
recorded at the carrying amount of $27,343 net of the discount amortized
and
charged to interest expense in relation to these intangibles through December
31, 2006 of $11,719. The intangible assets acquired will be amortized over
a
period of 5 years.
The
Company has adopted SFAS No. 142, Goodwill and Other Intangible Assets, whereby
the Company periodically tests its intangible assets for impairment. On an
annual basis, and when there is reason to suspect that their values have
been
diminished or impaired, these assets are tested for impairment, and write-downs
will be included in results from operations.
Estimated
amortization expense is as follows for years ending December 31:
2007
|
|
$
|
7,812
|
|
2008
|
|
|
7,812
|
|
2009
|
|
|
7,812
|
|
2010
|
|
|
3,907
|
|
2011
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
|
|
|
|
|
Total
|
|
$
|
27,343
|
|
DEFERRED
FINANCING COSTS
Deferred
financing costs associated with the Company’s convertible and various notes
payable are deferred and amortized over the life of the loan. Deferred financing
costs consisted of the following at December 31:
|
|
2006
|
|
2005
|
|
Deferred
financing costs
|
|
$
|
911,667
|
|
$
|
701,445
|
|
Less
- accumulated amortization
|
|
|
(359,860
|
)
|
|
(194,198
|
)
|
|
|
|
551,807
|
|
|
507,247
|
|
Less
- current portion
|
|
|
(293,941
|
)
|
|
(140,289
|
)
|
|
|
|
|
|
|
|
|
Deferred
financing costs - long-term
|
|
$
|
257,866
|
|
$
|
366,958
|
|
Amortization
expense on deferred financing costs was $165,662 and $141,788 as of December
31,
2006 and 2005, respectively.
NOTE
E -
NOTES PAYABLE
Notes
payable at December 31 consisted of the following:
|
|
2006
|
|
2005
|
|
Note
payable, 8% interest, principal and outstanding interest due and
payable
in May 2006, collateralized by land.
|
|
$
|
-
|
|
$
|
500,000
|
|
9.375
% note payable, monthly payments of $4,592 with remaining principal
and
outstanding interest due and payable June 2009,
collateralized
by land.
|
|
|
524,236
|
|
|
-
|
|
15%
note payable, monthly interest payments, principal due June 2007,
collateralized by land.
|
|
|
515,000
|
|
|
-
|
|
35%
note payable, monthly principal and interest payments of $65,000,
maturing
in December 2007, collateralized by signed put notices.
|
|
|
658,736
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
1,697,972
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
Less
- current portion
|
|
|
(1,179,950)
|
|
|
(500,000
|
)
|
|
|
|
|
|
|
|
|
Notes
payable - long-term
|
|
$
|
518,022
|
|
$
|
-
|
|
Aggregate
maturities of long-term debt as of December 31, 206 are as follows:
Fiscal
Year
|
|
|
|
|
|
|
|
2007
|
|
$
|
1,179,950
|
|
2008
|
|
|
55,098
|
|
2009
|
|
|
462,924
|
|
2010
|
|
|
-
|
|
2011
and after
|
|
|
-
|
|
|
|
|
|
|
|
|
$
|
1,697,972
|
|
During
June 2006, the Company obtained a $525,000 loan, which is secured by the
Mt.
Sidney property. The Company’s President absolutely and unconditionally
guaranteed the loan on behalf of the Company. By the terms of this second
loan,
the Company promised to pay to the lender the principal amount of $525,000
together with interest at a rate of 9.375% per annum on the unpaid principal
balance of the loan. The loan requires 35 regular installments of $4,592
each
and one balloon payment equal to the remaining principal balance of the loan,
accrued interest, and other applicable fees, costs and charges, due in June
2009. This loan was obtained to pay off a promissory note issued in May 2005
in
the amount of $500,000 and a portion of the accrued interest in the amount
of
$25,000 in connection with the promissory note. The remaining accrued interest
in connection with this promissory note and related fees and penalties were
also
paid off in cash during the year ended December 31, 2006.
During
2006, the Company obtained two interest-only mortgage loans totaling $515,000
in
regard to its Mt. Sidney property. The loans bear interest at a fixed rate
of
15.00% per annum, require monthly installments of interest throughout their
terms with a balloon payment, equal to the principal balance of the loans,
due
in June 2007.
During
December 2006, the Company entered into a promissory note with a face amount
of
$780,000. Under the terms of the note, the Company received $650,000 less
closing costs of $50,075 creating a calculated effective interest rate of
35%.
As a further incentive, the Company agreed to issue 250,000 shares of its
common
stock to the holder of the promissory note. The fair value of the shares,
$127,500, has been accounted for as deferred financing costs to be amortized
over the life of the note. An incentive stock liability was recorded to account
for the Company’s obligation at year end 2006. As detailed in the agreement, the
Company shall make payments to the holder in the amount of the greater of
(a)
100% of each Put (as defined in the investment agreement detailed in Note
N)
given to the investor from the Company or (b) made in 12 monthly increments
of
$65,000. The agreement is collateralized by signed put notices as well as
the
personal property of the President and Chief Executive Officer of the Company.
The Company is required to abide by certain covenants as detailed in the
promissory note. As the promissory note is neither a mandatorily redeemable
financial instrument or a forward contract, the obligation was recorded as
a
liability and measured in accordance with FASB 150 at its fair
value.
NOTE
F -
PRIVATE PLACEMENT AND CONVERTIBLE PROMISSORY NOTES PAYABLE
The
Company entered into a Private Placement Memorandum in August 2004 to offer
up
to 1,000 units of an equity/notes payable instrument. Each unit consists
of
2,500 shares of common stock of the Company, $1,500 of convertible promissory
notes (Convertible Notes), and 1 warrant to purchase 300 shares of the Company's
common stock at $0.85 per share. The Convertible Notes accrue interest at
11%
per annum which is payable and due in September 2009. The note holders have
the
option to convert any unpaid note principal and accrued interest to the
Company's common stock at a rate of $0.85 per share anytime after six months
from the issuance date of the note.
As
of
December 31, 2005, the Company had received proceeds of $2,665,116, net of
placement costs and fees of $331,884, for 999 units subscribed. Pursuant
to the
terms of the Private Placement Memorandum, the Company issued to the investors
Convertible Notes in an aggregate of $1,498,500. The Company is obligated
to
issue 2,497,500 shares of its common stock, valued at $1,563,376, to the
investors in connection with the private placement. The Company also issued
to
investors an aggregate of 999 warrants to purchase 299,700 shares of common
stock as of December 31, 2005.
A
summary
of convertible promissory notes payable at December 31 are as
follows:
|
|
2006
|
|
2005
|
|
Convertible
notes payable (Convertible Notes), 11% per
|
|
|
|
|
|
|
|
annum,
maturity of September 2009, note holder has
|
|
|
|
|
|
|
|
the
option to convert unpaid note principal and interest
|
|
|
|
|
|
|
|
to
the Company's common stock at $0.85 per share
|
|
$
|
1,498,500
|
|
$
|
1,498,500
|
|
Debt
discount - note, net of accumulated amortization
|
|
|
|
|
|
|
|
of
and $125,970 and $69,929 at December 31, 2006 and
|
|
|
|
|
|
|
|
2005,
respectively.
|
|
|
(154,238
|
)
|
|
(210,278
|
)
|
|
|
|
|
|
|
|
|
Debt
discount - beneficial conversion feature - note, net
|
|
|
|
|
|
|
|
of
accumulated amortization of $125,970 and $69,929
|
|
|
|
|
|
|
|
at
December 31, 2006 and 2005, respectively.
|
|
|
(154,238
|
)
|
|
(210,278
|
)
|
|
|
|
|
|
|
|
|
|
|
|
1,190,024
|
|
|
1,077,944
|
|
|
|
|
|
|
|
|
|
Less
- current portion
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,190,024
|
|
$
|
1,077,944
|
|
In
accordance with
Emerging
Issues Task Force Issue 98-5, Accounting For Convertible Securities With
a
Beneficial Conversion Feature or Contingently Adjustable Conversion Ratios
(EITF
98-5)
,
the
Company allocated, on a relative fair value basis, the net proceeds amongst
the
common stock, convertible notes and warrants issued to the investors. As
of
December 31, 2005, the Company recognized a discount to the notes in the
amount
of $280,207. The note discount is being amortized over the maturity period
of
the notes, being five years. As of December 31, 2005, the Company had recognized
a total of $280,207 of the proceeds, which is equal to the intrinsic value
of
the imbedded beneficial conversion feature, to additional paid-in capital
and a
discount against the Convertible Note. The debt discount attributed to the
beneficial conversion feature is amortized over the Convertible Notes’ maturity
period, being five years, as interest expense.
In
connection with the placement of the Convertible Notes, the Company issued
detachable warrants granting the holders the right to acquire a total of
299,700
shares of the Company’s common stock at $0.85 per share as of December 31, 2005.
The warrants expire five years from their issuance. As of December 31, 2005,
the
Company had recognized the value attributable to the warrants, being $190,143,
to additional paid-in capital in accordance with
Emerging
Issues Task Force Issue 00-27, Application of Issue No. 98-5 to Certain
Convertible Instruments (EITF 00-27).
The
Company valued the warrants in accordance with EITF 00-27 using the
Black-Scholes pricing model and the following assumptions: contractual terms
of
5 years, an average risk free interest rate of 3.38%, a dividend yield of
0%,
and volatility of 296%.
The
Company amortized the Convertible Notes’ debt discount and the debt discount
attributed to the beneficial conversion feature and recorded non-cash interest
expense of $112,083 for the years ended December 31, 2006 and 2005.
Financing
costs attributable to the equity portion of the private placement totaled
$175,899 and were netted against the amount attributable to common stock.
Deferred financing costs of $155,985 attributable to the debt portion of
the
private placement are being amortized over the life of the debt instrument,
being 5 years. The Company amortized $31,197 for the years ended December
31,
2006 and 2005, in relation to the deferred financing costs.
NOTE
G -
COMMON STOCK
The
Company was incorporated under the laws of the State of Delaware on October
14,
1999 under the name of Pre-Settlement Funding Corporation. The Company has
authorized 100,000 shares of preferred stock, with a par value of $.001 per
share. The Company has designated 60,000 of its preferred stock as Series
A
Convertible Preferred Stock. As of December 31, 2006 and 2005, the Company
does
not have any shares of Series A Convertible Preferred Stock issued and
outstanding. The Company has authorized 19,900,000 shares of common stock,
with
a par value of $.001 per share. As of December 31, 2006 and 2005, there were
8,935,474 and 8,875,476 shares of common stock issued and outstanding,
respectively.
In
March
2000, the Company issued $ 124,000 of notes payable convertible into common
stock at a price equal to $.50 per share. As of December 31, 2000, the holders
of the notes payable elected to convert $52,000 of the notes, net of costs,
in
exchange for 104,000 shares of the Company's common stock.
In
January 2001, the holders of the $ 72,000 of convertible Notes Payable,
exercised their rights to convert the unpaid principal to 144,000 shares
of the
Company's common stock at the conversion price of $.50 per share.
In
January 2001, $15,000 of convertible notes payable were issued and converted
to
30,000 shares of the Company's common stock.
In
January 2001, the Company issued 5,000,000 shares of its common stock to
the
Company's Founders in exchange for services provided to the Company from
its
inception. The Company valued the shares issued at $.001 per share, which
approximated the fair value of the services rendered. The compensation costs
of
$5,020 were charged to income during the year ended December 31,
2001.
In
January 2001, the Company issued 90,000 shares of its common stock to
consultants in exchange for services provided to the Company. The Company
valued
the shares issued at $ .50 per share, which approximated the fair value of
the
shares issued during the period the services were rendered. The compensation
costs of $ 45,000 were charged to income during the year ended December 31,
2001.
During
the year ended December 31, 2003, the Company authorized the issuance of
60,000
shares of newly designated Series A Convertible Preferred stock, with a par
value of $0.001 per share. As of December 31, 2003 the Company issued 55,000
shares of the Series A Convertible Preferred stock in exchange for $275,000,
net
of costs and fees.
The
Series A Convertible Preferred Stock are convertible into the Company's common
stock at the option of the holder at a ratio of ten (10) shares of common
stock
for each share of preferred stock if converted before the first anniversary
of
the original issue date and at a ratio of five (5) shares of common stock
for
each share of preferred stock if conversion is made after the first anniversary
but before the second anniversary.
The
preferred shares may be redeemed for cash at the option of the Company, any
time
after the first anniversary of the original issue date but before the second
anniversary. The Preferred Shareholders shall be entitled to cumulative
dividends when and if declared by the Company's Board of Directors at a per
share rate of 10% per annum of the original issue price. At the option of
the
preferred shareholders, accrued and unpaid cumulative dividends may be applied
to the purchase of additional shares of the Company's common stock upon
conversion of the preferred shares to common shares. The Preferred Shares
rank
senior to the common stock. The Preferred Shares have a liquidation preference
of payment of the original purchase price of the Preferred Shares plus all
declared but unpaid dividends on such shares.
The
fair
value of the Company's common stock at the time the conversion option was
granted was below the value of the Preferred Stock if converted. Accordingly,
the Company recognized no beneficial conversion feature embedded in the Series
A
Preferred Stock.
In
April
2004, the Company issued 160,000 shares of its common stock to a shareholder
in
exchange for previously issued stock options exercised at $.5625 per share,
for
a total of $90,000. In exchange for the shares, the holder of the options
paid
$63,500 in cash, and tendered 5,000 shares of the Company's previously issued
Series A preferred stock valued at $5 per share. The remaining balance of
$1,500
was accounted for as financing expenses and was charged to operations during
the
year ended December 31, 2004. The preferred shares tendered were subsequently
cancelled by the Company.
In
April
2004, the Company issued an aggregate of 300,000 shares of its restricted
common
stock to an investor in exchange for $90,000 of proceeds, net of costs and
fees.
Pursuant
to the Private Placement Memorandum, the Company was obligated to issue an
aggregate of 2,460,000 shares of its common stock, valued at $1,387,477 net
of
placement costs attributable to the equity portion of the private placement,
to
the investors in connection with 984 units sold in the private placement
as of
December 31, 2004. The Company has issued an aggregate of 2,404,978 shares
to
the investors at December 31, 2004, and the remaining aggregate of 54,998
shares
were issued to the investors in January 2005 (fractional shares of 24 shares
of
common stock will not be issued). The Company has accounted for the shares
not
issued at December 31, 2004 as common stock subscription payable in the amount
of $25,581.
In
December 2004, the Company's Series A Preferred Stock holders elected to
convert
an aggregate of 50,000 sharers of Preferred Stock into 500,000 shares of
the
Company's common stock, at a ratio of ten (10) shares of common stock for
each
share of preferred stock. In connection with the conversion, the Company
also
issued an aggregate of 50,000 shares of its common stock in exchange for
$25,000
of dividends in arrears. As of December 31, 2004, all Series A Convertible
Preferred Stock has been converted to the Company's common stock, and there
was
no Preferred Stock issued and outstanding at December 31, 2004.
In
January 2005, pursuant to the Private Placement Memorandum, the Company was
obligated to issue an aggregate of 37,500 shares of its common stock, valued
at
$25,188 to the investors in connection with 15 units sold in the private
placement as of December 31, 2005.
During
the year ended 2006, the Company issued an aggregate of 219,998 shares of
common
stock in exchange for $99,000 of proceeds, net of costs and fees.
In
December 2006, the Company repurchased 160,000 shares of common stock from
a
former employee for $1.25 per share. In accordance with FASB Technical Bulletin
85-6, the amount paid per share was considered to be significantly in excess
of
the current market price of $0.51 per share thereby creating a presumption
that
the purchase price is not attributable to the stock value alone. As such,
the
excess amount of $0.74 per share is deemed to be attributable to a severance
payment and $118,400 was charged to compensation expense in 2006. The shares
were retired by the Company immediately after repurchase.
NOTE
H -
TERMINATION AGREEMENT
In
April
2004, the Company issued 160,000 shares of its common stock to a shareholder
in
exchange for previously issued stock options exercised at $.5625 per share,
for
a total of $90,000. In exchange for the shares, the holder of the options
paid
$63,500 in cash, and tendered 5,000 shares of the Company's previously issued
Series A preferred stock valued at $5 per share. The remaining balance of
$1,500
was accounted for as financing expense and was charged to operations during
the
year ended December 31, 2004.
In
October 2004, the Company entered into an agreement (termination agreement)
granting the shareholder an option to put the 160,000 shares of common stock
to
the Company one year from the date of the agreement for $1.25 per share.
The
shareholder agreed to cancel 677,500 stock options exercisable at $.5625
per
share.
The
Company accounted for the puts in accordance with
Statement
of Financial Accounting Standards No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity (SFAS
150)
,
and
classified the fair value attributable to the put option as an accrued
liability, as the puts issued under the termination agreement embody an
obligation to repurchase the Company's equity shares which would require
the
Company to settle the agreement by transferring its assets. The put option
was
initially measured at its fair value of $170,256 as of the date of the
agreement.
Assumptions
used to estimate the fair value of the put option are as follows:
Risk-free
interest rate
|
|
|
3.38%
|
|
Dividend
yield
|
|
|
-
|
|
Volatility
|
|
|
296%
|
|
Time
to expiration
|
|
|
1
year
|
|
Equity
was reduced by the original value of the shares, being $90,000, with the
remaining value of $80,256 being charged to other expense.
In
October 2005, the termination agreement and puts expired without being
exercised. At the time of expiration, the fair value of the accrued liability
attributable to the puts was $87,984. Accordingly, equity has been increased
by
the original value of the shares, being $90,000, with the remaining value
of
$2,016 being charged to other expense.
NOTE
I -
STOCK OPTIONS AND WARRANTS
STOCK
OPTIONS
The
following table summarizes the changes in options outstanding and the related
prices for the shares of the Company's common stock issued to the Company’s
Chief Executive Officer. These options were granted in lieu of cash compensation
for services performed or other consideration.
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Contractual Life
(Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Numbers
Exercisable
|
|
|
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.50 - 2.00
|
|
|
1,575,000
|
|
|
3.84
|
|
$
|
1.33
|
|
|
1,575,000
|
|
$
|
1.33
|
|
Transactions
involving options issued to employees and consultants during 2006 and 2005
are
summarized as follows:
|
|
|
Number
of
Shares
|
|
|
Weighted
Average
Price
Per
Share
|
|
Outstanding
at December 31, 2004
|
|
|
1,500,000
|
|
|
1.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
1,500,000
|
|
$
|
1.35
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
75,000
|
|
|
0.85
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
1,575,000
|
|
$
|
1.33
|
|
The
estimated value of the compensatory options granted to a consultant in exchange
for services rendered was determined using the Black-Scholes pricing model
and
the following assumptions: contractual term of 4 years, a risk free interest
rate of 4.875%, a dividend yield of 0% and volatility of 111%. The Company
charged $38,490 to operations in connection with these options during the
year
ended December 31, 2006.
WARRANTS
In
connection with the Company’s Private Placement (Note F) the Company granted an
aggregate of 999 warrants to investors, each exercisable for 300 shares of
common stock Additionally, the Company granted 594,000 warrants to a placement
agent in exchange for services. Each warrant will be exercisable for one
share
of the Company's common stock.
The
following table summarizes the changes in warrants outstanding and the related
prices for the shares of the Company's common stock.
Warrants Outstanding
|
|
Warrants
Exercisable
|
|
Exercise
Price
|
|
|
Number
Outstanding
|
|
|
Weighted
Average Contractual Life
(Years)
|
|
|
Weighted
Average Exercise Price
|
|
|
Numbers
Exercisable
|
|
|
Average
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
0.85
|
|
|
594,999
|
|
|
2.69
|
|
$
|
0.85
|
|
|
594,999
|
|
$
|
0.85
|
|
Transactions
involving warrants issued to investors and consultants are summarized as
follows:
|
|
Number
of
common
shares
issuable
upon
exercise
of warrants
|
|
Weighted
Average
Price
Per
Share
|
|
Outstanding
at December 31, 2004
|
|
|
889,200
|
|
|
0.85
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
4,500
|
|
|
0.85
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2005
|
|
|
893,700
|
|
$
|
0.85
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
-
|
|
Cancelled
or expired
|
|
|
-
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
|
|
893,700
|
|
$
|
0.85
|
|
The
estimated value of the compensatory warrants granted to the Company's placement
agent in exchange for services rendered was determined using the Black-Scholes
pricing model and the following assumptions: contractual term of 5 years,
a risk
free interest rate of 3.38%, a dividend yield of 0% and volatility of 291%.
The
Company capitalized financing costs of $545,460 and the financing costs were
amortized over the contractual terms (five years) of the convertible debenture.
During the year ended December 31, 2006 and 2005, the Company amortized
financing costs and charged $109,092 and $110,591, respectively, to
operations.
NOTE
J -
RELATED PARTY TRANSACTIONS
The
Company’s President had advanced funds to the Company for working capital
purposes. The Company had paid in full the amount due to the Company’s President
during the years ended December 31, 2004. Additionally, the total payment
the
Company remitted exceeded the total balance due to the Company’s President in
the amount of $42,951, $50,500 and $144,006 during the years ended December
31,
2006, 2005 and 2004, respectively. The Company has accounted for the excess
payments to the Company’s President as a nonreciprocal transfer to a shareholder
for 2006, 2005 and 2004 and, accordingly, has reflected the overpayment as
a
direct reduction of additional paid-in capital.
During
2005, the Company’s President contributed capital of $140,000 to the Company in
direct response to the excess payment. The Company has accounted for the
net
contribution of $89,500 as an addition to paid-in capital.
During
2006, the Company’s President contributed capital of $54,505 to the Company in
direct response to the excess payment. The Company has accounted for the
contribution as an addition to paid-in capital.
The
Company’s director, Ronald L. Attkisson, is also the principal stockholder of
Jones, Byrd and Attkisson, which, from August 2004 until February 2005, acted
as
placement agent for the Company’s private placement. In connection with its role
as placement agent, Jones, Byrd and Attkisson received a fee of $299,700
and was
issued 594,000 warrants exercisable for 594,000 shares of our common stock
at
$0.85 per share (Note F and Note I). Jones, Byrd and Attkisson is also acting
as
placement agent under the investment agreement with regard to the equity
line of
credit. Under our placement agent agreement for the equity line of credit
(Note
N), we agreed to pay Jones, Byrd and Attkisson 1% of the gross proceeds from
each put exercised under the investment agreement. Subsequent to the date
of
financial statements, Ronald Attkisson resigned as a director of the Company.
NOTE
K -
EARNINGS PER SHARE
|
|
2006
|
|
|
|
Income
(Numerator)
|
|
Shares
(Denominator)
|
|
Per-share
Amount
|
|
Loss
available to common shareholders
|
|
$
|
(1,785,386
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and fully diluted loss per share
|
|
$
|
(1,785,386
|
)
|
|
9,005,009
|
|
$
|
(0.20
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
available to common shareholders
|
|
$
|
(1,116,048
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and fully diluted loss per share
|
|
$
|
(1,116,048
|
)
|
|
8,874,462
|
|
$
|
(0.13
|
)
|
Options
to purchase 1,575,000 shares of common stock at $1.33 per share outstanding
during 2006 and as well as options to purchase 1,500,000 shares of common
stock
at $1.35 per share outstanding during 2005 were not included in the computation
of diluted earnings per share due to their anti-dilutive effect on earnings
per
share. The options to purchase 1,575,000 shares of common stock were still
outstanding at the end of year 2006.
Warrants
to purchase 893,700 shares of common stock at $0.85 per share were outstanding
at December 31, 2006 and 2005, and were not included in the computation of
diluted earnings per share due to their anti-dilutive effect on earnings
per
share.
Convertible
notes with the option to purchase 1,762,942 shares of common stock at $0.85
per
share were outstanding at December 31, 2006 and 2005, and were not included
in
the computation of diluted earnings per share due to their anti-dilutive
effect
on earnings per share.
NOTE
L -
INCOME TAXES
The
Company has adopted SFAS 109, which requires the recognition of deferred
tax
liabilities and assets for the expected future tax consequences of events
that
have been included in the financial statements or tax returns. Under this
method, deferred tax liabilities and assets are determined based on the
difference between financial statements and tax bases of assets and liabilities
using enacted tax rates in effect for the year in which the differences are
expected to reverse. Permanent differences between taxable income reported
for
financial reporting purposes and income tax purposes are
insignificant.
For
income tax reporting purposes, the Company's aggregate unused net operating
losses approximate $3,280,000, and expire through 2026, subject to limitations
of Section 382 of the Internal Revenue Code, as amended. The deferred tax
assets
related to the net operating loss carryforwards are approximately $1,100,000
and
$673,500 for the years ended December 31, 2006 and 2005, respectively.
The
Company has provided a valuation reserve against the full amount of the net
operating loss benefit for 2006 and 2005 since, in the opinion of management
based upon the earning history of the Company, it is unlikely the benefits
will
be realized.
NOTE
M -
COMMITMENTS AND CONTINGENCIES
LEASE
COMMITMENTS
The
Company leases office space for its corporate offices in Alexandria, Virginia
on
a month to month basis. Rental expense for the years ended December 31, 2006
and
2005 was $2,253 and $2,308, respectively, and was charged to operations in
the
period incurred.
CONSULTING
AGREEMENTS
The
Company has consulting agreements with outside contractors to provide web
development, business development, and investment banking services. The
agreements are generally for a term of 12 months from inception and renewable
automatically from year to year unless either the Company or Consultant
terminates such engagement with written notice. Compensation under each
agreement varies in accordance with the terms of each engagement.
LITIGATION
As
of
December 31, 2006, the Company is not a party to ant legal proceedings, nor
are
there any judgments against the Company. However, the Company may be subject
to
legal proceedings and claims, which arise in the ordinary course of its
business. Although occasional adverse decisions or settlements may occur,
the
Company believes that the final disposition of such matters should not have
a
material adverse effect on its financial position, results of operations
or
liquidity.
NOTE
N -
LINE OF CREDIT
On
September 12, 2005, the Company entered into an investment agreement (Agreement)
with Dutchess Private Equities Fund, LP (Dutchess) to provide the Company
with
an Equity Line of Credit. Pursuant to the Agreement, Dutchess has agreed
to
provide the Company with up to $5,000,000 of funding during the 36-month
period
following the date a registration statement of the Company’s common stock is
declared effective by the Securities and Exchange Commission. During this
36
month period, the Company may request a draw down under the Equity Line of
Credit by which the Company would sell shares of its common stock to Dutchess,
which is obligated to purchase the shares under the Agreement. The Company
may,
at its election, require Dutchess to purchase an amount equal to no more
than
either (a) 200% of the average daily volume of the Company’s common stock for
the 10 trading days prior to the put notice date, multiplied by the average
of
the three daily closing bid prices immediately preceding the put notice date
or
(b) $100,000; provided that the Company may not request more than $1,000,000
in
any single put notice. On the trading day following the put notice date,
a
pricing period of five trading days will begin. The purchase price for the
common stock identified in the put notice will be equal to 95% of the lowest
closing best bid price of the Company’s common stock during the pricing period.
The Company is under no obligation to draw down under the Equity Line of
Credit.
In November 2006, a registration statement
pertaining
to the Company’s common stock was declared effective by the Securities and
Exchange Commission.
NOTE
O -
GOING CONCERN MATTERS
The
accompanying statements have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities
in
the normal course of business. As shown in the financial statements from
October
14, 1999 (date of inception of Company), the Company has generated minimal
revenues and has accumulated losses of $3,799,571. These factors, among others,
may indicate that the Company will be unable to continue as a going concern
for
a reasonable period of time.
The
Company's existence is dependent upon management's ability to develop profitable
operations and resolve its liquidity problems. Management anticipates the
Company will attain profitable status and improve its liquidity through the
continued development of its products, establishing a profitable market for
the
Company's products and additional equity investment in the Company. The
accompanying financial statements do not include any adjustments that might
result should the Company be unable to continue as a going concern.
In
order
to improve the Company's liquidity, the Company is actively pursing additional
debt and equity financing through discussions with investment bankers and
private investors. There can be no assurance the Company will be successful
in
its effort to secure additional equity financing.
If
operations and cash flows continue to improve through these efforts, management
believes that the Company can continue to operate. However, no assurance
can be
given that management's actions will result in profitable operations or in
the
resolution of its liquidity problems.