Pacific Sands, Inc Form 10-QSB December 31, 2006

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 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 December 31, 2006

 
[    ]
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:  000-29483
 
Pacific Sands, Inc.
(Exact name of small business issuer as specified in its charter)
 
Nevada
88-0322882
State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)

1509 Rapids Drive, Racine, WI 53404
(Address of principal executive offices)

(262) 619-3261
(Issuer's telephone number)


Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during the past 12 months (or for 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.

Yes     X      No ____
 
As of February 20, 2007, the Company had 33,779,124 shares outstanding of its $.001 par value common stock.


Transitional Small Business Disclosure Format (check one):

Yes  ____   No    X   





 



PART I   FINANCIAL INFORMATION
     
Item 1.
Financial Statements
3
     
 
Report of Independent Registered Public Accounting Firm
3
     
 
Condensed Balance Sheets as of December 31, 2006 (unaudited) and June 30, 2006 (audited)
4
     
 
Condensed Statements of Operations for the Three and Six Months Ended December 31, 2006 and 2005 (unaudited)
5
     
 
Condensed Statements of Stockholders' Equity Six Months Ended December 31, 2006 and 2005 (unaudited)
6
     
 
Condensed Statements of Cash Flows for the Six Months Ended December 31, 2006 and 2005 (unaudited)
7
     
 
Notes to Condensed Financial Statements (unaudited)
8
     
Item 2.
Management's Discussion and Analysis or Plan of Operation
16
     
Item 3.
Quantitative and Qualitative Disclosers About Market Risk
16
     
Item 4.
Controls and Procedures
16
     
PART II   OTHER INFORMATION
     
Item 1.
Legal Proceedings
18
     
Item 1A.
 Risk Factors
18
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
18
     
Item 3.
Defaults Upon Senior Securities
20
     
Item 4.
Submission of Matters to a Vote of Security Holders
20
     
Item 5.
Other Information
20
     
Item 6.
Exhibits
20
     
Signatures
21


2

 
Item 1
Financial Information
 
 
 
Frank L. Sassetti & Co.

Certified Public Accountants


The Board of Directors
Pacific Sands, Inc.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have reviewed the balance sheet of PACIFIC SANDS, INC. as of December 31, 2006 and the related statements of operations for the three and six months ended December 31, 2006 and 2005, and the statements of stockholders' equity and cash flows for the six months ended December 31, 2006 and 2005. These interim financial statements are the responsibility of the Company's management.

We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures to financial data and making inquires of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our reviews we are not aware of any material modifications that should be made to the financial statements referred to above for them to be in conformity with accounting principles generally accepted in the United States.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has a significant accumulated deficit which raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 14. The financial statements do not include any adjustments that might result from the outcome of this uncertainly.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the balance sheet of PACIFIC SANDS, INC. as of June 30, 2006 and the related statements of operations, stockholders' equity and cash flows for the year then ended (not presented herein); and in our report dated September 12, 2006, we expressed an unqualified opinion on these financial statements. In our opinion, the information set forth in the accompanying balance sheet as of June 30, 2006 is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

/s/ Frank L. Sassetti & Co.

February 19, 2007
Oak Park, Illinois


6611 W. North Avenue * Oak Park, Illinois 60302 * Phone (708) 386-1433 * Fax (708) 386-0139


3
PACIFIC SANDS, INC.
BALANCE SHEETS
DECEMBER 31, 2006 AND JUNE 30, 2006
 
ASSETS
  
   
December 31,
    
   
2006
  
June 30,
  
   
(A Review)
  
2006
  
CURRENT ASSETS
              
Cash and cash equivalents
 
$
27,747
  
$
4,977
  
Trade receivables, net of allowances for doubtful accounts
    
63,588
   
112,587
 
Inventories
    
56,073
   
77,069
 
Prepaid expenses
    
5,940
   
7,212
 
           
Total Current Assets
    
153,348
   
201,845
 
               
PROPERTY AND EQUIPMENT
              
Furniture, fixtures and office equipment
    
16,360
   
10,238
 
Manufacturing equipment
    
12,204
   
12,204
 
Leasehold improvements
    
3,035
   
3,035
 
Deposit on software costs
    
31,301
   
20,269
 
 
    
62,900
   
45,746
 
Less accumulated depreciation
    
10,779
   
6,940
 
               
Property and Equipment, net
    
52,121
   
38,806
 
               
OTHER ASSETS
              
               
Accounts receivable - other (net of allowance for doubtful accounts of $ 235,718)
    
-
   
-
 
Note receivable
    
8,694
       
Security deposits
    
841
   
841
 
               
Total Other Assets
    
9,535
   
841
 
               
Total Assets
  
$
215,004
  
$
241,492
  
               
LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
              
Accounts payable
  
$
74,943
  
$
99,795
  
Current maturities of long-term debt
    
11,180
   
9,877
 
Accrued expenses
    
74,850
   
59,691
 
Deferred compensation
    
264,280
   
227,934
 
Notes payable - other
    
24,000
   
61,177
 
           
Total Current Liabilities
    
449,253
   
458,474
 
               
LONG TERM LIABILITIES
              
Capital leases, less current portion
    
17,573
   
22,609
 
               
Total Long Term Liabilities
    
17,573
   
22,609
 
               
STOCKHOLDERS' EQUITY
              
Common stock
    
41,253
   
38,345
 
Additional paid in capital
    
3,470,063
   
3,041,947
 
Treasury stock, at cost
    
(151,030
)
  
(151,030
)
Accumulated deficit
    
(3,612,108
)
  
(3,168,853
)
           
Total Stockholders' Equity
    
(251,822
)
  
(239,591
)
               
Total Liabilities and Stockholders' Equity
  
$
215,004
  
$
241,492
  

The accompanying notes are an integral part of the financial statements.
4

PACIFIC SANDS, INC.
STATEMENTS OF OPERATIONS
THREE AND SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005

   
 Three months ended
 
Six months ended
  
   
 December 31,
  
December 31,
  
   
 2006
  
2005
  
2006
  
2005
  
   
 (A Review)
  
(A Review)
  
(A Review)
  
(A Review)
  
                    
NET SALES
  
$
106,568
  
$
59,348
  
$
226,126
  
$
130,582
  
COST OF SALES
    
41,410
   
37,421
   
106,723
   
60,000
 
GROSS PROFIT
    
65,158
   
21,927
   
119,403
   
70,582
 
                           
OPERATING EXPENSES
                          
Selling and administrative expenses
    
195,553
   
147,554
   
360,580
   
302,409
 
Stock based compensation for board of directors
    
8,000
         
43,160
       
Stock based compensation related to options
        
-
   
134,211
   
-
 
Total operating expenses
    
203,553
   
147,554
   
537,951
   
302,409
 
LOSS FROM OPERATIONS
    
(138,395
)
  
(125,627
)
  
(418,548
)
  
(231,827
)
                           
OTHER INCOME (EXPENSES)
                          
Interest expense
    
(12,778
)
  
(1,561
)
  
(24,710
)
  
(2,704
)
Loss on disposal of assets
    
-
         
-
   
(2,680
)
Miscellaneous income
    
2
   
4
   
3
   
15
 
Total Other Income (Expenses)
    
(12,776
)
  
(1,557
)
  
(24,707
)
  
(5,369
)
LOSS BEFORE INCOME TAXES
    
(151,171
)
  
(127,184
)
  
(443,255
)
  
(237,196
)
                           
INCOME TAXES
    
-
   
-
   
-
   
-
 
NET LOSS
  
$
(151,171
)
$
(127,184
)
$
(443,255
)
$
(237,196
)
                           
BASIC AND DILUTED NET LOSS PER SHARE
  
$
(0.005
)
$
(0.004
)
$
(0.014
)
$
(0.008
)
                           
BASIC AND DILUTED WEIGHTED AVERAGE SHARES
    
32,292,193
   
29,986,666
   
31,752,111
   
29,741,677
 

 
 
 
 
The accompanying notes are an integral part of the financial statements.


5

PACIFIC SANDS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005

   
Common Stock
                      
   
Par value - $.001
50,000,000 shares
  
Additional
  
Treasury Stock
          
   
authorized
  
Paid In
  
Number of
      
Accumulated
  
 
  
   
Shares
  
Amount
  
Capital
  
Shares
  
Amount
  
Deficit
  
Total
  
                               
Balance at June 30, 2005
   
36,844,298
  
$
36,844
  
$
2,879,170
    
(7,559,187
)
$
(151,030
)
$
(2,858,642
)
$
(93,658
)
                                             
Issuance of Common stock:
                                            
For cash
    
518,816
    
519
    
55,453
                      
55,972
  
For options exercised
    
-
    
-
    
-
                      
-
  
For cancellation of debt
                                        
-
  
For professional services
    
320,637
    
321
    
20,395
                      
20,716
  
For salaries
    
60,000
    
60
    
15,251
                      
15,311
  
                                             
Net loss
                                 
(237,196
)
  
(237,196
)
Balance at December 31, 2005
    
37,743,751
  
$
37,744
  
$
2,970,269
    
(7,559,187
)
$
(151,030
)
$
(3,095,838
)
$
(238,855
)
                                             
Balance at June 30, 2006
   
38,344,760
  
$
38,345
  
$
3,041,947
    
(7,559,187
)
$
(151,030
)
$
(3,168,853
)
$
(239,591
)
                                             
Issuance of Common Stock:
                                            
For cash
    
1,350,000
    
1,350
    
134,550
                      
135,900
  
For professional services
    
550,141
    
550
    
58,670
                      
59,220
  
In lieu of interest payment
    
187,098
    
187
    
14,523
                      
14,710
  
For cancellation of debt
    
375,200
    
375
    
38,432
                      
38,807
  
For salaries
    
446,112
    
446
    
47,730
                      
48,176
  
                                             
Stock based compensation related to options
                
134,211
                      
134,211
  
Net loss
                                 
(443,255
)
  
(443,255
)
Balance at December 31, 2006
    
41,253,311
  
$
41,253
  
$
3,470,063
    
(7,559,187
)
$
(151,030
)
$
(3,612,108
)
$
(251,822
)

The accompanying notes are an integral part of the financial statements.


6

PACIFIC SANDS, INC.
STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED DECEMBER 31, 2006 AND 2005

   
 2006
  
2005
  
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net loss
  
$
(443,255
)
$
(237,196
)
Adjustments to reconcile net loss to net cash provided by used in operating activities -
              
Depreciation
    
3,838
   
2,850
 
Loss on disposal of equipment
    
-
   
2,680
 
Deferred compensation
    
36,346
   
37,488
 
Compensation expense on stock options granted
    
134,211
   
-
 
Common shares and rights issued for services and compensation
    
122,106
   
36,027
 
Changes in assets and liabilities -
             
Trade accounts receivable
    
48,999
   
12,123
 
Inventories
    
20,996
   
(23,956
)
Prepaid expenses
    
1,272
   
626
 
Note receivables
    
(8,694
)
  
35,924
 
Accounts payable and other current liabilities
    
(9,692
)
  
68,381
 
Net Cash Used in Operating Activities
    
(93,873
)
  
(65,053
)
               
CASH FLOWS FROM INVESTING ACTIVITIES
              
Purchases of equipment
    
(17,154
)
  
(2,704
)
Net Cash Used in Investing Activities
   
(17,154
)
  
(2,704
)
               
CASH FLOWS FROM FINANCING ACTIVITIES
              
Issuance of common stock
    
135,900
   
55,972
 
Issuance of notes payable
    
36,601
   
35,000
 
Repayment of notes payable
    
(38,704
)
  
(21,264
)
Net Cash Provided by Financing Activities
    
133,797
   
69,708
 
               
NET INCREASE IN CASH AND CASH EQUIVALENTS
    
22,770
   
1,951
 
               
CASH AND CASH EQUIVALENTS
              
Beginning of period
    
4,977
   
541
 
End of period
  
$
27,747
  
$
2,492
  
               
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
              
Cash paid during the period for
              
Interest
  
$
24,710
  
$
2,704
  
Income taxes
 
$
-
  
$
-
  
               
SUPPLEMENTAL INFORMATION FROM NONCASH FINANCING ACTIVITIES
              
Conversion of debt to equity
  
$
38,807
          
Non-cash financing activities
    
 
   
 
 
Capital Lease Obligations
  
$
3,732
  
$
2,496
  

The accompanying notes are an integral part of the financial statements.


7

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006
(A Review)

1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Business - Pacific Sands, Inc. with the right to do business as Natural Water Technologies (the "Company") was incorporated in Nevada on July 7, 1994 with an original authorized capital stock of 25,000 shares of $0.001 par value which was increased to 20,000,000 shares in 1997 with the same par value. On May 6, 2002, the authorized capital stock was increased to 50,000,000 shares.

The Company manufactures and distributes nontoxic cleaning and water treatment products with applications ranging from home spas and swimming pools to cleaning and pet care.

Interim Financial Statements - The balance sheet as of December 31, 2006 and the statements of operations for the three and six months ended December 31, 2006 and 2005 and the statements of stockholders' equity and cash flows for the six months ended December 31, 2006 and 2005, are unaudited. In the opinion of management, such financial statements reflect all adjustments, which were of a normal and recurring nature, necessary for a fair presentation of financial position as of December 31, 2006 and the results of operations and cash flows for the six months ended December 31, 2006 and 2005.

Inventories - Inventories are stated at the lower of cost or market on the first-in, first-out (FIFO) basis.

Depreciation - For financial reporting purposes, depreciation of property and equipment has been computed over estimated useful lives of two to seven years primarily using the straight-line method. Depreciation charges totaled $ 3,838 and $2,850 during the six months ended on December 2006 and 2005, respectively.

Revenue Recognition - Revenue from sales to distributors and resellers is recognized when the related products are shipped.

Advertising and Promotional Costs - Advertising and promotion costs are expensed as incurred. During the six months ended December 31, 2006 and 2005, advertising and promotion costs totaled $17,649 and $ 34,367, respectively.

Income Taxes - The Company accounts for income taxes under Statement of Financial Accounting Standards (SFAS) 109. Under the asset and liability method of SFAS 109, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory rates applicable to future years to the difference between the financial statement carrying amounts and the tax basis of existing assets and liabilities.


8

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

1.
NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED

Accounts Receivable - The Company makes judgments as to the collectibility of trade and other accounts receivable based on historic trends and future expectations. Management estimates an allowance for doubtful receivables, which reflects its current assessment of the collectibility of the receivables. Management believes that the current specific and general receivable reserves aggregating $ 242,242 is adequate as of December 31, 2006.

Basic and Diluted Net Loss Per Share - Net loss per share is calculated in accordance with Statement of Financial Accounting Standards 128, Earnings Per Share ("SFAS 128"). Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

Use of Accounting 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 assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.

Statement of Cash Flows - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents.

2 .
INVENTORIES

Inventories as of December 31, 2006 and June 30, 2006 consisted of the following.
 
   
December 31,
2006
  
June 30,
2006
  
           
Raw materials
  
$
39,850
  
$
49,364
  
Finished goods
    
16,223
    
27,705
  
   
$
56,073
  
$
77,069
  


9

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

3.
LONG TERM OBLIGATIONS

Long term obligations consists of a four year lease agreement for software dated June 20, 2005 with an imputed interest rate of 14.45%, a two year lease agreement for computer hardware with an imputed interest rate of 22.94% placed in service in December, 2005, a three year lease for computer hardware with an imputed interest rate of 21.62%, placed in service in August, 2005, a three and a half year lease agreement for software dated January 6, 2006 with an imputed interest rate of 12.64% and a two year computer lease with an imputed interest rate of 22.81%, placed in service in September, 2006. Monthly installment payments are $691, $67, $93, $312 and $59, respectively with a bargain purchase option at the end of each lease of $1. The transactions have been accounted for as capital leases in accordance with generally accepted accounting principles.

The scheduled maturities are as follows for the years ending December 31,

2007
  
$
11,180
  
2008
    
11,490
  
2009
    
6,083
  

4.
NOTES PAYABLE - OTHER

Notes payable - other consist of various small unsecured notes to stockholders/officers at rates fluctuating up to 10%. Management intends to restructure its debt. To date, $19,417 in interest has been converted to equity.

 
 
 
 
 
 

 

10

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

5.
STOCK-BASED COMPENSATION

Prior to December 31, 2005, the Company accounted for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees," and related interpretations. There was no impact/disclosure required for the six months ended December 31, 2005.

Effective January 1, 2006 the Company adopted the revision to SFAS 123 ("SFAS 123R"), "Share-Based Payment", that focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions utilizing the modified perspective method. This statement replaces SFAS 123, "Accounting for Stock-Based Compensation", and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees". SFAS 123R requires companies to expense the fair value of employee stock options and similar awards.

During the quarter ended September 30, 2006, the Company modified 3,000,000 options that were set to expire on July 5, 2006 by reissuing for one year with no vesting period at the same price. On September 28, 2006 these 3,000,000 vested options were surrendered and reissued for four years with no vesting period and exercise prices as follows; 2,000,000 shares at $.16 and 1,000,000 shares at $1.00.

The fair value of each option award is estimated on the date of grant using the standard Black-Scholes-Merton model and modified using calculations based on likely "expected term" rather than "contractual term" additionally modified by historic likelihood that the participants will exercise the options based on previous exercise behavior. The Historic volatility was calculated using weekly price observations for the expected term of the options. Expected Term was calculated using the formula (vesting term plus original contractual term divided by two). The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury constant maturity for one year at July 3, 2006 and the difference between three and five years at December 31, 2006.

 
July 3, 2006
  
September 28, 2006
       
Weighted average volatility
116%
  
161%
Expected dividends
0%
  
0%
Expected term (in years)
1
  
2
Risk free rate
5.260%
  
4.585%

A summary of option activity as of December 31, 2006 and changes during the year then ended is presented below:

       
Price per share
  
   
Shares
  
Range
  
Weighted Average
  
               
Balance, June 30, 2006
    
3,000,000
  
$
.03 - $.10  
 
$
0.053
  
Granted /modified
    
7,250,000
  
$
.03 - $1.00
        
Exercised
                    
Cancelled
    
(3,000,000
)
$
.03 - $.10  
 
$
0.053
  
Expired
    
(3,000,000
)
$
.03 - $.10  
 
$
0.053
  
                     
Outstanding at December 31, 2006
    
4,250,000
  
$
.16 - $1.00
  
$
0.440
  


11

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

6.
LEASE COMMITMENT

The Company entered into a one and a half year lease expiring July 31, 2007 for 11,000 square feet of office and warehouse space for $1,987 per month. The Company is responsible for insuring the premises. Rent expense was approximately $11,922 and $11,046 for the six months ended December 31, 2006 and 2005 respectively.  Remaining payments on the lease are $13,909.


7.
BASIC AND DILUTED LOSS PER SHARE

The following table illustrates the reconciliation of the numerators and denominators of the basic and diluted loss per share computations.

   
Six months ending December 31,
  
   
2006
  
2005
  
Basic and diluted loss per share:
              
Numerator:
              
Net loss
  
$
(443,255
)
$
(237,196
)
               
Denominator:
              
Basic and diluted weighted average number of common shares outstanding during the period
    
31,752,111
    
29,741,677
  
               
Basic and diluted loss per share
  
$
(0.014
)
$
(0.008
)

Since the Company has incurred losses from all periods presented, the dilutive per share calculation is the same as the basic calculation.

8.
INCOME TAXES

The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred assets are reduced by a valuation allowance when deemed appropriate.

The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets at December 31, 2006 are as follows:

Deferred tax asset
        
         
Net operating loss carryforwards
  
$
803,000
  
         
Valuation allowance
    
(803,000
)
         
Net deferred tax asset
  
$
-
  

At December 31, 2006, the Company has net operating loss carryforwards for Federal tax purposes of approximately $2,295,000 which, if unused to offset future taxable income, will expire in years beginning in 2018.


12

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

9.
RELATED PARTY TRANSACTIONS AND FORGIVENESS OF DEBT

On June 15, 2004, Stan and Rita Paulus resigned as officers and board members of the Company and were replaced by a new management team. As part of the transition in management, several transactions occurred which are all recorded below.

Stan and Rita agreed to waive all unpaid compensation from the Company except for $100,000, which shall be paid in full within three years of the transition date.

The Paulus' purchased from the Company the inventory known as "technical books" for the sum of $150,000 in exchange for 4,859,187 shares of Pacific Sands, Inc. common stock. Based on the average market value of the Company's stock, which valued these shares at $121,480, there was an additional write down of the inventory of $28,500. This amount was recorded as a reduction to additional paid in capital based on the related party nature of the transaction. Since the shares were still being held in escrow by legal counsel at June 30, 2004, the transaction was recorded as due from shareholder. As of June 30, 2006, the shares had been returned to treasury.
 
On June 14, 2006, one day prior to the due date of the unpaid compensation to the Paulus' of $100,000, the Company and the Paulus' agreed to extend the payment until January, 2007 with monthly payments of $25,000 beginning in October, 2006. In addition, there was a $5,000 note payable rolled into the monthly payment plan due January, 2007. In July, 2006 100,000 shares of restricted stock were issued as in exchange for extending the payment. The value of the shares was $6,000 and is included in interest expense for the six month period ended December 31, 2006.

Finally, two of the current officers of the company have agreed to defer a substantial portion of their salaries until such time as it may be paid. As of December 31, 2006, the deferred compensation for these two officers was $ 156,470. Prior to accepting the position as an officer of the company, one of the current officers agreed to defer $11,500 of his professional consulting services which is still unpaid as of December 31, 2006. The deferred compensation charges to operations for the six months ended December 31, 2006 and 2005 was $36,346 and $37,488, respectively.
 
10.
CONTINGENCIES

Accounts receivable from a major former customer, Mariani Raisin Company in the amount of $235,718 invoiced on October 25, 2001 and January 17, 2002 are being contested for compliance requirements. The customer maintained that the equipment did not work properly, but management felt that this equipment was built to customer specifications. Accordingly, management intends to vigorously pursue the outstanding receivable. Since counsel suggests that this amount cannot be collected without incurring some legal costs and that there is the potential that a settlement could ultimately not be reached, an allowance for bad debts of $235,718 exists. Bad debt expense in the amount of $4,658 and $35,980 was recorded in the statement of operations for the six months ended December 31, 2006 and 2005, respectively.


13
 
PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

11
RECENT PRONOUNCEMENTS
 
In June 2006, the FASB released FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, " an interpretation of FASB Statement No. 109 ("FIN48"). FIN 48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A Company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation procedures, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statement. This interpretation is effective for fiscal years beginning after December 15, 2006. Earlier application of the provisions of this interpretation is interim financial statement, in the period this interpretation is adopted. The provisions of FIN 48 are not expected to have a material affect on the company's consolidated financial statements.

In March 2006, the FASB issued SFAS N. 156, "Accounting for Servicing of Financial Assets, " which provides an approach to simplify efforts to obtain hedge-like (offset) accounting. This Statement amends FASB SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, " with respect to the accounting for separately recognized servicing assets and servicing liabilities.

The Statement (1) requires an entity to recognize a servicing asset or servicing liability each time it undertakes an obligation to service a financial asset by entering into a servicing contract in certain situations; (2) requires that a separately recognized servicing asset or servicing liability be initially measured at fair value, if practicable; (3) permits an entity to choose either the amortization method or the fair value method for subsequent measurement for each class of separately recognized servicing assets or servicing liabilities;(4) permits at initial adoption a one-time reclassification of available-for-sale securities to trading securities by an entity with recognized servicing rights, provided the securities reclassified offset the entity's exposure to changes in the fair value of the servicing assets or liabilities; (5) requires separate presentation of servicing assets and servicing liabilities subsequently measured at fair value in the balance sheet and additional disclosures for all separately recognized servicing assets and servicing liabilities.

SFAS No. 156 is effective for all separately recognized servicing assets and liabilities as of the beginning of an entity's fiscal year that begins after September 15, 2006, with earlier adoption permitted in certain circumstances. The Statements also describes the manner in which it should be initially applied. The provisions of SFAS No. 156 are not expected to affect the Company's financial statements.

In November 2004, the FASB issued SFAS No. 151, Inventory Costs. The new Statement amends ARB No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. This Statement requires that those items be recognized as current period charges and requires that allocation of fixed production overhead to the cost of conversion be based on the normal capacity of the production facilities. This Statement is effective for fiscal years beginning after June 15, 2005. The adoption of this statement did not have a material impact on the Company's financial position or results of operations.


14

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2006 AND 2005 AND JUNE 30, 2006

12
DISPUTED PAYABLES WRITTEN OFF
 
During the fiscal year ended June 30, 2004, the Company incurred professional fees for services that were reflected in the statement of operations. During the fiscal year ended June 30, 2005, the Company threatened to sue the vendor for dispute of services performed if they pursued this debt and after sending repeated letters to resolve the matter and not having any response for over two years, management has decided to write off the disputed amount and has reflected this in the quarter ended June 30, 2006 statement of operations.

13
CONCENTRATIONS
 
The Company distributes water treatment and nontoxic cleaning products to the entire U.S. market. For the six months ended December 31, 2006, one customer accounted for approximately 33% of the Company's sales. For the six months ended December 31, 2005, there were four customers that accounted for 29.78% of the Company's sales.
 
14
GOING CONCERN

The accompanying financial statements have been presented assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. Through December 31, 2006, the Company had incurred cumulative losses of $3,612,108. The Company's successful transition to attaining profitable operations is dependent upon obtaining financing adequate to fulfill its development, marketing, and sales activities, and achieving a level of revenues adequate to support the Company's cost structure. Management's plan of operations anticipates that the cash requirements of the Company for the next twelve months will be met by obtaining capital contributions through the sale of common stock and from current operations. However, there is no assurance that the Company will be able to fully implement its plan in order to generate the funds needed on a going concern basis.

15

Item 2
Management Discussion and Analysis of Financial Condition and Results of Operation
 
 
Item 3
Quantitative and Qualitative Disclosers About Market Risk

An investment in the common stock of the Company involves a high degree of risk. In addition to the other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business. This Report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "plan," "expect," or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should review carefully various risks and uncertainties identified in this report, including the matters set below and in the Company's other SEC filings. These risks and uncertainties could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
 
THE COMPANY HAS EXPERIENCED LOSSES FROM OPERATIONS SINCE COMMENCING OPERATIONS:
With the exception of 4th quarter, 2006, the Company since commencing operations, has not been profitable on an annual or quarterly basis. The company cannot guarantee that recent quarterly profitability will continue on a quarter by quarter basis. The Company may not, in the future, generate sufficient revenues to achieve sustainable profitability.
 
POSSIBLE DIFFICULTY FINANCING PLANNED GROWTH:
The company's present plans require an amount of expenditure and working capital. In the future the Company will require financing in addition to the cash generated from operations to fund planned growth. If additional resources are unavailable the Company may be unable to grow according to its present plan.
 
MANAGEMENT'S ASSUMPTIONS REGARDING THE FUTURE MARKET MAY BE FAULTY:
Management assumes there will be a continuing and increased desirability in the retail market for nontoxic, environment and health friendly products for cleaning and water treatment use. Should management's assumptions as to this increased desirability be faulty, the Company may have difficulty achieving its planned growth.
 
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT THE COMPANY:
The Company is run by a small number of key personnel. Should the Company experience a loss of these key people due to their inability or unwillingness to continue in their present positions, the Company's business and financial results could be adversely affected.

Item 4.
Controls and Procedures

(a) Evaluation of disclosure controls and procedures
 
We maintain disclosure controls and procedures designed to ensure that financial information required to be disclosed in our reports filed under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the required time periods, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow for timely decisions regarding disclosure.
 

16

In connection with the completion of its audit of, and issuance of its report on, our financial statements for the year ended June 30, 2006, Frank L. Sassetti & Co. (“Sassetti”) considered our internal controls in order to determine their auditing procedures for the purpose of expressing their opinion on the financial statements and not to provide assurance on our internal controls. Sassetti identified deficiencies that existed in the design or operation of our internal controls over financial reporting that it considered to be “significant deficiencies” or “material weaknesses.” The Public Company Accounting Oversight Board (“PCAOB”) has defined “significant deficiency” as a control deficiency, or a combination of control deficiencies, that adversely affects the company’s ability to initiate, authorize, record, process, or report external financial data reliably in accordance with generally accepted accounting principles such that there is more than a remote likelihood that the misstatement of the company’s annual or interim financial statements that is more than inconsequential will not be detected. The PCAOB has defined a “material weakness” as a “significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial will not be prevented or detected.”
 
During the first quarter ended September 30, 2005, we hired an outside accounting firm to assist in the timely reconciliation of general ledger accounts, and controls over property and equipment and debt documentation. However, significant deficiencies or material weaknesses in our internal controls related to segregation of incompatible duties and controls over inventory and equity transactions still exist. We have disclosed those significant deficiencies and material weaknesses to our Board of Directors. Additional effort will continue to work with our management and outside advisors with the goal to implement internal controls over financial reporting that are adequate and effective.
 
Because of inherent limitations of internal control, errors or fraud may nevertheless occur and not be detected. Also, projection of any evaluation of the internal control to future periods is subject to the risk that internal control may become inadequate because of changes in conditions or that the degree of compliance may deteriorate. Sassetti noted the following reportable conditions that they believe to be material weaknesses: (i) Improve segregation of incompatible accounting department duties, (ii) Improve maintenance of accounting records by implementing the use of an accounting software system and (iii) Implement a Corporate Code of Conduct.
 
Based upon the above evaluation of Management, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are not yet effective, but the procedures are as effective as possible, considering the fact that there is a lack of segregation of duties which will continue until such time as the Company can support additional executive personnel to enhance segregation of duties.
 
(b) Changes in internal controls and procedures
 
There has been no change in our internal control over financial reporting during the second quarter ended December 31, 2006, that has materially affected, or is reasonably likely to material affect, our internal control over financial reporting.
 





17
 
 
PART II  OTHER INFORMATION

Item 1.
Legal Proceedings

There are no legal proceedings against the Company and the Company is unaware of proceedings contemplated against it.

Item 1A
Risk Factors

There have been no material changes from the risk factors previously disclosed in the Company’s 10-KSB dated June 30, 2006
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

On October 5th, 2006, John D. Hagarty was issued 50,330 shares of restricted stock for professional services valued at $6,000.

On October 5th, 2006, Amy M. Parrish was issued 62,919 shares of restricted stock for professional services valued at $7,500.00

On October 5th, 2006, an accredited investor was issued 67,115 shares of restricted stock for $8,000.

On October 5th, 2006, Robert M. Krug was issued 16,112 shares of restricted stock for professional services valued at $1,611.20

On October 5th, 2006, an accredited investor was issued 5,000 shares of restricted stock for $5,900.

On October 18th, 2006, AllPennyStocks.com was issued 60,000 shares of restricted stock for a deposit for professional services valued at $6,000.

On October 18th, 2006, Stanley Paulus was issued 40,025 shares of restricted stock valued at $5,000 to extend the term of the note he currently holds.

On November 1st, 2006, Stanley Paulus was issued 47,073 shares of restricted stock valued at $5,000 to extend the term of the note he currently holds.

On December 11th, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 11th, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 11th, 2006, an accredited investor was issued 200,000 shares of restricted stock for $20,000.
 
 
18
 
On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 50,000 shares of restricted stock for $5,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 100,000 shares of restricted stock for $10,000.

On December 22nd, 2006, an accredited investor was issued 116,000 shares of restricted stock for $11,600.

On December 22nd, 2006, Robert M. Krug was issued 25,000 shares of restricted stock for professional services valued at $2,500.00

On December 22nd, 2006, Todd Taylor was issued 20,000 shares of restricted stock for professional services valued at $2,000.00

On December 22nd, 2006, Angela M. Wuerker was issued 15,000 shares of restricted stock for professional services valued at $1,500.00

On December 22nd, 2006, Jill M. Wegener was issued 20,000 shares of restricted stock for professional services valued at $2,000.00

On December 22nd, 2006, Richard S. Blades was issued 10,000 shares of restricted stock for professional services valued at $1,000.00

On December 22nd, 2006, John D. Hagarty was granted 20,000 shares of restricted stock as a stipend for BOD duties valued at 2,000.00
 
19
 
On December 22nd, 2006, John D. Hagarty was issued 40,000 shares of restricted stock for professional services valued at $4,000.00.

On December 22nd, 2006, Michael L. Wynhoff was granted 20,000 shares of restricted stock as a stipend for BOD duties valued at 2,000.00

On December 22nd, 2006, Michael D. Michie was granted 20,000 shares of restricted stock as a stipend for BOD duties valued at 2,000.00

On December 22nd, 2006, Mark R. Rauscher was granted 20,000 shares of restricted stock as a stipend for BOD duties valued at 2,000.00

Item 3.
Defaults Upon Senior Securities

None.

Item 4.
Submission of Matters to a Vote of Security Holders

No matters were submitted to the security holders for a vote during this quarter.

Item 5.
Other Information

A group of accredited investors purchased a total of 1,250,000 restricted, rule 144 treasury shares from the company during December of 2006 for a total investment of $125,000. Additionally, the investors have been issued two sets of options to purchase additional restricted shares from the company. The first options, callable on Feb 1, 2007 are for 625,000 restricted, rule 144 treasury shares at 10 cents per share. The second set of options, callable June 15, 2007 are for 625,000 restricted, rule 144 treasury shares at 15 cents per share. 
 
Item 6.
Exhibits
 
 
31.1
CEO Certification
 
31.2
CFO Certification
 
32.1
CEO 906 Certification
 
32.2
CFO 906 Certification
 
99.1
Press release issued December 29, 2006 (filed on Form 8-K on January 3, 2007 and incorporated herein by reference)




20

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


 
PACIFIC SANDS, INC.
 
 
 
Dated: February 20, 2007 
By:
/s/ Michael Wynhoff                               
 
 
Michael Wynhoff
 
 
Chief Executive Officer
 
 
 
 
 
 
 
 
 
 
 
 
Dated: February 20, 2007 
By:
/s/ Michael Michie                                  
 
 
Michael Michie
 
 
Chief Financial Officer
 
 
 
 
 
 
 
 
 
 
 
 

 


21
 
Index of Exhibits
 
 
31.1
CEO Certification
 
31.2
CFO Certification
 
32.1
CEO 906 Certification
 
32.2
CFO 906 Certification
 
99.1
Press release issued December 29, 2006 (filed on Form 8-K on January 3, 2007 and incorporated herein by reference)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
22