UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
x
|
QUARTERLY
REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
quarterly period ended
March 31,
2009
¨
|
TRANSITION
REPORT UNDER SECTION 13 0R 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the
transition period from
Commission
file number
002-95626-D
SIONIX
CORPORATION
(Exact name of registrant as
specified in its charter)
Nevada
(State
or other jurisdiction of incorporation or organization)
|
87-0428526
(I.R.S. Employer Identification
No.
|
3880 East Eagle Drive, Anaheim,
California
(Address
of principal executive offices)
|
92807
(Zip
Code)
|
Issuer’s
telephone number (714)
678-1000
(Former name, former address
and former fiscal year, if changed since last report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or 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
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
¨
Yes ¨
No
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filed,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
|
Accelerated
filer ¨
|
|
|
Non-accelerated
filer ¨ (Do
not check if a smaller reporting company)
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).¨ Yes
x
No
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date. As of May 11, 2009 the
number of shares of the registrant’s classes of common stock outstanding was
142,303,907.
Table of
Contents
Part
I - Financial Information
|
|
|
|
Item
1. Financial Statements
|
3
|
|
|
Balance
Sheets as of March 31, 2009 (Unaudited) and September 30,
2008
|
3
|
|
|
Statements
of Income (Operations) (Unaudited) for the three and six months ended
March 31, 2009 and March 31, 2008 (Restated) and from inception (October
3, 1994) to March 31, 2009
|
4
|
|
|
Statement
of Stockholders Equity (Deficit) (Unaudited) for the period from inception
(October 3, 1994) to March 31, 2009
|
5
|
|
|
Statements
of Cash Flows (Unaudited) for the three and six months ended March 31,
2009 and March 31, 2008 (Restated) and from inception (October 3, 1994) to
March 31, 2009
|
8
|
|
|
Notes
to unaudited financial statements
|
9
|
|
|
Forward-Looking
Statements
|
|
|
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results
of Operations
|
48
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
65
|
|
|
Item
4T. Controls and Procedures
|
65
|
|
|
Part
II – Other Information
|
|
|
|
Item
1. Legal Proceedings
|
66
|
|
|
Item
1A. Risk Factors
|
66
|
|
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
66
|
|
|
Item
3. Defaults Upon Senior Securities
|
67
|
|
|
Item
4. Submission of Matters to a Vote of Security Holders
|
68
|
|
|
Item
5. Other Information
|
68
|
|
|
Item
6. Exhibits
|
68
|
|
|
Signatures
|
69
|
Part
I, Item 1. Financial Statements.
Sionix
Corporation
A
Development Stage Company
Balance
Sheet
|
|
March
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
25,613 |
|
|
$ |
1,220,588 |
|
Inventory
|
|
|
608,565 |
|
|
|
|
|
Other
current assets
|
|
|
34,165 |
|
|
|
46,395 |
|
TOTAL
CURRENT ASSETS
|
|
|
668,343 |
|
|
|
1,266,983 |
|
|
|
|
|
|
|
|
|
|
PROPERTY
AND EQUIPMENT, net
|
|
|
77,543 |
|
|
|
87,101 |
|
|
|
|
|
|
|
|
|
|
DEPOSITS
|
|
|
28,495 |
|
|
|
33,095 |
|
TOTAL
ASSETS
|
|
$ |
774,381 |
|
|
$ |
1,387,179 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
351,862 |
|
|
$ |
259,355 |
|
Accrued
expenses
|
|
|
2,734,069 |
|
|
|
2,629,470 |
|
Customer
deposits
|
|
|
1,460,000 |
|
|
|
1,260,000 |
|
Liquidated
damages liability
|
|
|
78,750 |
|
|
|
153,750 |
|
Notes
payable to related parties
|
|
|
107,000 |
|
|
|
114,000 |
|
Convertible
notes, net
|
|
|
1,781,333 |
|
|
|
2,041,443 |
|
10%
subordinated notes payable, net
|
|
|
425,000 |
|
|
|
400,796 |
|
Warrant
and option liability
|
|
|
2,180,429 |
|
|
|
3,446,823 |
|
Beneficial
conversion feature
|
|
|
- |
|
|
|
26,000 |
|
TOTAL
CURRENT LIABILITIES
|
|
|
9,118,443 |
|
|
|
10,331,637 |
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT
|
|
|
|
|
|
|
|
|
Common
Stock (150,000,000 shares
authorized; 142,303,907 shares issued and outstanding at March 31, 2009;
136,684,616 shares issued and outstanding at September 30, 2008; 481,900
subject to cancellation)
|
|
|
141,821 |
|
|
|
134,274 |
|
Additional
paid-in capital
|
|
|
13,383,049 |
|
|
|
12,688,495 |
|
Shares
to be issued
|
|
|
400 |
|
|
|
126,429 |
|
Deficit
accumulated during development stage
|
|
|
(21,869,332 |
) |
|
|
(21,893,656 |
) |
TOTAL
STOCKHOLDERS' DEFICIT
|
|
|
(8,344,062 |
) |
|
|
(8,944,458 |
) |
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$ |
774,381 |
|
|
$ |
1,387,179 |
|
The
accompanying notes form an integral part of these unaudited financial
statements.
Sionix
Corporation
A
Development Stage Company
Statements
of Income (Operations) (Unaudited)
|
|
For the three months
|
|
|
For the six months
|
|
|
Cummulative from
|
|
|
|
ended March 31,
|
|
|
ended March 31,
|
|
|
Inception
|
|
|
|
2009
|
|
|
2008
|
|
|
2009
|
|
|
2008
|
|
|
(October
3, 1994)
|
|
|
|
|
|
|
(Restated)
|
|
|
|
|
|
(Restated)
|
|
|
to
March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
|
314,055 |
|
|
|
627,224 |
|
|
|
964,891 |
|
|
|
5,691,794 |
|
|
|
21,740,171 |
|
Research
and development
|
|
|
178,265 |
|
|
|
329,028 |
|
|
|
357,229 |
|
|
|
565,932 |
|
|
|
3,394,102 |
|
Depreciation
and amortization
|
|
|
7,615 |
|
|
|
8,157 |
|
|
|
15,104 |
|
|
|
16,314 |
|
|
|
572,479 |
|
Total
operating expenses
|
|
|
499,935 |
|
|
|
964,409 |
|
|
|
1,337,224 |
|
|
|
6,274,040 |
|
|
|
25,706,752 |
|
Loss
from Operations
|
|
|
(500,835 |
) |
|
|
(964,409 |
) |
|
|
(1,337,224 |
) |
|
|
(6,274,040 |
) |
|
|
(25,706,752 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
income
|
|
|
277 |
|
|
|
366 |
|
|
|
3,868 |
|
|
|
1,279 |
|
|
|
70,242 |
|
Interest
expense
|
|
|
(63,758 |
) |
|
|
(554,065 |
) |
|
|
(158,523 |
) |
|
|
(1,060,790 |
) |
|
|
(2,838,081 |
) |
Decrease
(increase) in warrant liability
|
|
|
(219,981 |
) |
|
|
4,168,133 |
|
|
|
1,631,387 |
|
|
|
4,927,906 |
|
|
|
6,849,627 |
|
Decrease
(increase) in beneficial conversion features liability
|
|
|
|
|
|
|
347,780 |
|
|
|
26,000 |
|
|
|
555,929 |
|
|
|
1,426,767 |
|
Impairment
of intangibles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,267,278 |
) |
Inventory
obsolesence
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(365,078 |
) |
Legal
settlement
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
344,949 |
|
Loss
on settlement of debt
|
|
|
(16,184 |
) |
|
|
|
|
|
|
(16,184 |
) |
|
|
|
|
|
|
(371,595 |
) |
Loss
on lease termination
|
|
|
|
|
|
|
(129,166 |
) |
|
|
|
|
|
|
(129,166 |
) |
|
|
(129,166 |
) |
Write-off
of property and equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,015 |
) |
Write-off
of beneficial conversion feature and discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,440 |
|
|
|
380,440 |
|
Total
Other Income (Expense)
|
|
|
(299,646 |
) |
|
|
3,833,048 |
|
|
|
1,486,548 |
|
|
|
4,675,598 |
|
|
|
3,975,812 |
|
Loss
before income taxes
|
|
|
(799,581 |
) |
|
|
2,868,639 |
|
|
|
149,324 |
|
|
|
(1,598,442 |
) |
|
|
(21,730,940 |
) |
Income
Taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900 |
|
|
|
13,392 |
|
Net
Income (Loss)
|
|
$ |
(799,581 |
) |
|
$ |
2,868,639 |
|
|
$ |
149,324 |
|
|
$ |
(1,599,342 |
) |
|
$ |
(21,744,332 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
income (loss) per share
|
|
$ |
(0.01 |
) |
|
$ |
0.03 |
|
|
$ |
0.00 |
|
|
$ |
(0.01 |
) |
|
|
|
|
Dilutive
income (loss) per share
|
|
$ |
(0.01 |
) |
|
$ |
0.02 |
|
|
$ |
0.00 |
|
|
$ |
(0.02 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and dilutive wighted average nubmer of shares of Common Stock
outstanding
|
|
|
136,973,884 |
|
|
|
107,494,374 |
|
|
|
136,277,277 |
|
|
|
107,494,374 |
|
|
|
|
|
The
accompanying notes form an integral part of these unaudited financial
statements.
SIONIX
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT)
FOR
THE PERIOD FROM INCEPTION (OCTOBER 3, 1994) TO MARCH 31, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Stock
|
|
|
Stock
|
|
|
Shares
|
|
|
Unamortized
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Number
|
|
|
|
|
|
Paid-in
|
|
|
to be
|
|
|
Subscription
|
|
|
to be
|
|
|
Consulting
|
|
|
from
|
|
|
Equity
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issued
|
|
|
Receivable
|
|
|
Cancelled
|
|
|
Fees
|
|
|
Inception
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
issued for cash October 3, 1994
|
|
|
10,000 |
|
|
$ |
10 |
|
|
$ |
90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
100 |
|
Net
loss from October 3, 1994, to December 31, 1994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,521 |
) |
|
|
(1,521 |
) |
Balance
at December 31, 1994
|
|
|
10,000 |
|
|
|
10 |
|
|
|
90 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(1,521 |
) |
|
|
(1,421 |
) |
Shares
issued for assignment rights
|
|
|
1,990,000 |
|
|
|
1,990 |
|
|
|
(1,990 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Shares
issued for services
|
|
|
572,473 |
|
|
|
572 |
|
|
|
135,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135,618 |
|
Shares
issued for debt
|
|
|
1,038,640 |
|
|
|
1,038 |
|
|
|
1,164,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,165,953 |
|
Shares
issued for cash
|
|
|
232,557 |
|
|
|
233 |
|
|
|
1,119,027 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,119,260 |
|
Shares
issued for subscription receivable
|
|
|
414,200 |
|
|
|
414 |
|
|
|
1,652,658 |
|
|
|
|
|
|
|
(1,656,800 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,728 |
) |
Shares
issued for productions costs
|
|
|
112,500 |
|
|
|
113 |
|
|
|
674,887 |
|
|
|
|
|
|
|
(675,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
loss for the year ended December 31, 1995
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(914,279 |
) |
|
|
(914,279 |
) |
Balance
at December 31, 1995
|
|
|
4,370,370 |
|
|
|
4,370 |
|
|
|
4,744,633 |
|
|
|
- |
|
|
|
(2,331,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
(915,800 |
) |
|
|
1,501,403 |
|
Shares
issued for reorganization
|
|
|
18,632,612 |
|
|
|
18,633 |
|
|
|
(58,033 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(39,400 |
) |
Shares
issued for cash
|
|
|
572,407 |
|
|
|
573 |
|
|
|
571,834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
572,407 |
|
Shares
issued for services
|
|
|
24,307 |
|
|
|
24 |
|
|
|
24,283 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,307 |
|
Net
loss for the year ended September 30, 1996
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(922,717 |
) |
|
|
(922,717 |
) |
Balance
at September 30, 1996
|
|
|
23,599,696 |
|
|
|
23,600 |
|
|
|
5,282,717 |
|
|
|
- |
|
|
|
(2,331,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
(1,838,517 |
) |
|
|
1,136,000 |
|
Shares
issued for cash
|
|
|
722,733 |
|
|
|
723 |
|
|
|
365,857 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366,580 |
|
Shares
issued for services
|
|
|
274,299 |
|
|
|
274 |
|
|
|
54,586 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,860 |
|
Cancellation
of shares
|
|
|
(542,138 |
) |
|
|
(542 |
) |
|
|
(674,458 |
) |
|
|
|
|
|
|
675,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Net
loss for the year ended September 30, 1997
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(858,915 |
) |
|
|
(858,915 |
) |
Balance
at September 30, 1997
|
|
|
24,054,590 |
|
|
|
24,055 |
|
|
|
5,028,702 |
|
|
|
- |
|
|
|
(1,656,800 |
) |
|
|
- |
|
|
|
- |
|
|
|
(2,697,432 |
) |
|
|
698,525 |
|
Shares
issued for cash
|
|
|
2,810,000 |
|
|
|
2,810 |
|
|
|
278,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
281,000 |
|
Shares
issued for services
|
|
|
895,455 |
|
|
|
895 |
|
|
|
88,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89,546 |
|
Shares
issued for compensation
|
|
|
2,200,000 |
|
|
|
2,200 |
|
|
|
217,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,000 |
|
Cancellation
of shares
|
|
|
(2,538,170 |
) |
|
|
(2,538 |
) |
|
|
(1,534,262 |
) |
|
|
|
|
|
|
1,656,800 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
120,000 |
|
Net
loss for the year ended September 30, 1998
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,898,376 |
) |
|
|
(1,898,376 |
) |
Balance
at September 30, 1998
|
|
|
27,421,875 |
|
|
|
27,422 |
|
|
|
4,079,081 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(4,595,808 |
) |
|
|
(489,305 |
) |
Shares
issued for compensation
|
|
|
3,847,742 |
|
|
|
3,847 |
|
|
|
389,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
392,925 |
|
Shares
issued for services
|
|
|
705,746 |
|
|
|
706 |
|
|
|
215,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
216,035 |
|
Shares
issued for cash
|
|
|
9,383,000 |
|
|
|
9,383 |
|
|
|
928,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
938,300 |
|
Net
loss for the year ended September 30, 1999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,158,755 |
) |
|
|
(1,158,755 |
) |
Balance
at September 30, 1999
|
|
|
41,358,363 |
|
|
|
41,358 |
|
|
|
5,612,405 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(5,754,563 |
) |
|
|
(100,800 |
) |
Shares
issued for cash
|
|
|
10,303,500 |
|
|
|
10,304 |
|
|
|
1,020,046 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,030,350 |
|
Shares
issued for compensation
|
|
|
1,517,615 |
|
|
|
1,518 |
|
|
|
1,218,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,220,116 |
|
Shares
issued for services
|
|
|
986,844 |
|
|
|
986 |
|
|
|
253,301 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
254,287 |
|
Net
loss for the year ended September 30, 2000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,414,188 |
) |
|
|
(2,414,188 |
) |
The
accompanying notes form an integral part of these unaudited financial
statements.
SIONIX
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT) – Continued
FOR
THE PERIOD FROM INCEPTION (OCTOBER 3, 1994) TO MARCH 31, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Stock
|
|
|
Stock
|
|
|
Shares
|
|
|
Unamortized
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Number
|
|
|
|
|
|
Paid-in
|
|
|
to be
|
|
|
Subscription
|
|
|
to be
|
|
|
Consulting
|
|
|
from
|
|
|
Equity
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issued
|
|
|
Receivable
|
|
|
Cancelled
|
|
|
Fees
|
|
|
Inception
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2000
|
|
|
54,166,322 |
|
|
|
54,166 |
|
|
|
8,104,350 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(8,168,751 |
) |
|
|
(10,235 |
) |
Shares
issued for services and prepaid expenses
|
|
|
2,517,376 |
|
|
|
2,517 |
|
|
|
530,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(141,318 |
) |
|
|
|
|
|
|
391,567 |
|
Shares
issued for cash
|
|
|
6,005,000 |
|
|
|
6,005 |
|
|
|
594,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
600,500 |
|
Shares
to be issued for cash (100,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
Shares
to be issued for debt (639,509 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,295 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,295 |
|
Net
loss for the year ended September 30, 2001
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,353,429 |
) |
|
|
(1,353,429 |
) |
Balance
at September 30, 2001
|
|
|
62,688,698 |
|
|
|
62,688 |
|
|
|
9,229,213 |
|
|
|
113,295 |
|
|
|
- |
|
|
|
- |
|
|
|
(141,318 |
) |
|
|
(9,522,180 |
) |
|
|
(258,302 |
) |
Shares
issued for services and prepaid expenses
|
|
|
1,111,710 |
|
|
|
1,112 |
|
|
|
361,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,400 |
|
|
|
|
|
|
|
417,115 |
|
Shares
issued as a contribution
|
|
|
100,000 |
|
|
|
100 |
|
|
|
11,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,300 |
|
Shares
issued for compensation
|
|
|
18,838 |
|
|
|
19 |
|
|
|
2,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,916 |
|
Shares
issued for cash
|
|
|
16,815,357 |
|
|
|
16,815 |
|
|
|
1,560,782 |
|
|
|
(10,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,567,597 |
|
Shares
issued for debt
|
|
|
1,339,509 |
|
|
|
1,340 |
|
|
|
208,639 |
|
|
|
(103,295 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106,684 |
|
Shares
to be issued for services related to raising equity (967,742
shares)
|
|
|
|
|
|
|
|
|
|
|
(300,000 |
) |
|
|
300,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Cancellation
of shares
|
|
|
(7,533,701 |
) |
|
|
(7,534 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,534 |
) |
Net
loss for the year ended September 30, 2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,243,309 |
) |
|
|
(1,243,309 |
) |
Balance
at September 30, 2002
|
|
|
74,540,411 |
|
|
|
74,540 |
|
|
|
11,074,334 |
|
|
|
300,000 |
|
|
|
- |
|
|
|
- |
|
|
|
(86,918 |
) |
|
|
(10,765,489 |
) |
|
|
596,467 |
|
Shares
issued for services and prepaid expenses
|
|
|
2,467,742 |
|
|
|
2,468 |
|
|
|
651,757 |
|
|
|
(300,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354,225 |
|
Shares
issued for capital equity line
|
|
|
8,154,317 |
|
|
|
8,154 |
|
|
|
891,846 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
900,000 |
|
Amortization
of consulting fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86,918 |
|
|
|
|
|
|
|
86,918 |
|
Cancellation
of shares
|
|
|
(50,000 |
) |
|
|
(50 |
) |
|
|
50 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Shares
to be cancelled (7,349,204 shares)
|
|
|
|
|
|
|
|
|
|
|
7,349 |
|
|
|
|
|
|
|
|
|
|
|
(7,349 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
Net
loss for the year ended September 30, 2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,721,991 |
) |
|
|
(1,721,991 |
) |
Balance
at September 30, 2003
|
|
|
85,112,470 |
|
|
|
85,112 |
|
|
|
12,625,336 |
|
|
|
- |
|
|
|
- |
|
|
|
(7,349 |
) |
|
|
- |
|
|
|
(12,487,480 |
) |
|
|
215,619 |
|
Shares
issued for capital equity line
|
|
|
19,179,016 |
|
|
|
19,179 |
|
|
|
447,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
466,885 |
|
Shares
issued for services
|
|
|
5,100,004 |
|
|
|
5,100 |
|
|
|
196,997 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,075 |
) |
|
|
|
|
|
|
189,022 |
|
Share
to be issued for cash (963,336 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,900 |
|
Shares
to be issued for debt (500,000 shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
Cancellation
of shares
|
|
|
(7,349,204 |
) |
|
|
(7,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,349 |
|
|
|
|
|
|
|
|
|
|
|
- |
|
Issuance
of warrants related to 2004 stock purchase
|
|
|
|
|
|
|
|
|
|
|
24,366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,366 |
|
Net
loss for the year ended September 30, 2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,593,136 |
) |
|
|
(1,593,136 |
) |
The
accompanying notes form an integral part of these unaudited financial
statements.
SIONIX
CORPORATION
(A
DEVELOPMENT STAGE COMPANY)
STATEMENTS
OF STOCKHOLDERS’ EQUITY (DEFICIT) - Continued
FOR
THE PERIOD FROM INCEPTION (OCTOBER 3, 1994) TO MARCH 31, 2009
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deficit
|
|
|
Total
|
|
|
|
Common Stock
|
|
|
Additional
|
|
|
Stock
|
|
|
Stock
|
|
|
Shares
|
|
|
Unamortized
|
|
|
Accumulated
|
|
|
Stockholders'
|
|
|
|
Number
|
|
|
|
|
|
Paid-in
|
|
|
to be
|
|
|
Subscription
|
|
|
to be
|
|
|
Consulting
|
|
|
from
|
|
|
Equity
|
|
|
|
of Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Issued
|
|
|
Receivable
|
|
|
Cancelled
|
|
|
Fees
|
|
|
Inception
|
|
|
(Deficit)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at September 30, 2004, Restated
|
|
|
102,042,286 |
|
|
|
102,042 |
|
|
|
13,294,405 |
|
|
|
43,900 |
|
|
|
- |
|
|
|
- |
|
|
|
(13,075 |
) |
|
|
(14,080,615 |
) |
|
|
(653,343 |
) |
Amortization
of consulting fees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,075 |
|
|
|
|
|
|
|
13,075 |
|
Net
loss for the year ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(722,676 |
) |
|
|
(722,676 |
) |
Balance
at September 30, 2005,
|
|
|
102,042,286 |
|
|
|
102,042 |
|
|
|
13,294,405 |
|
|
|
43,900 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(14,803,291 |
) |
|
|
(1,362,944 |
) |
Net
loss for the year ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,049,319 |
) |
|
|
(1,049,319 |
) |
Balance
at September 30, 2006,
|
|
|
102,042,286 |
|
|
|
102,042 |
|
|
|
13,294,405 |
|
|
|
43,900 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(15,852,610 |
) |
|
|
(2,412,263 |
) |
Shares
issued for services
|
|
|
4,592,915 |
|
|
|
4,593 |
|
|
|
80,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,929 |
|
Reclassification
of 2001 Executive Option Plan as of July 17, 2007
|
|
|
|
|
|
|
|
|
|
|
(2,271,879 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,271,879 |
) |
Reclassification
of beneficial conversion features liability related to advisory
board compensation as of July 17, 2007
|
|
|
|
|
|
|
(269,851 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(269,851 |
) |
|
|
|
|
Reclassification
of warrants related to 2004 stock purchase agreement as of July
17, 2007
|
|
|
|
|
|
|
|
|
|
|
(70,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(70,029 |
) |
Net
loss for the year ended September 30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,168,226 |
) |
|
|
(2,168,226 |
) |
Balance
at September 30, 2007,
|
|
|
106,635,201 |
|
|
|
106,635 |
|
|
|
10,762,982 |
|
|
|
43,900 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(18,020,836 |
) |
|
|
(7,107,319 |
) |
Shares
issued for services
|
|
|
1,539,750 |
|
|
|
1,540 |
|
|
|
254,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
255,870 |
|
Shares
to be issued for services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,029 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126,029 |
|
Shares
converted from debt
|
|
|
17,149,359 |
|
|
|
17,149 |
|
|
|
886,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
903,782 |
|
Shares
issued for cash
|
|
|
8,950,003 |
|
|
|
8,950 |
|
|
|
784,550 |
|
|
|
(43,500 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
750,000 |
|
Net
loss for the year ended September 30, 2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,872,820 |
) |
|
|
(3,872,820 |
) |
Balance
at September 30, 2008
|
|
|
134,274,313 |
|
|
|
134,274 |
|
|
|
12,688,495 |
|
|
|
126,429 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
(21,893,656 |
) |
|
|
(8,944,458 |
) |
Shares
issued for services
|
|
|
600,139 |
|
|
|
600 |
|
|
|
125,429 |
|
|
|
(126,029 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
Shares
converted from debt
|
|
|
6,114,221 |
|
|
|
6,114 |
|
|
|
444,958 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
451,072 |
|
Shares
issued for property and equipment
|
|
|
833,333 |
|
|
|
833 |
|
|
|
124,167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
125,000 |
|
Deemed
dividend to related to related party on purchase of machinery and
equipment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(125,000 |
) |
|
|
(125,000 |
) |
Net
income for the six months ended March 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,324 |
|
|
|
149,324 |
|
|
|
|
141,822,006 |
|
|
$ |
141,821 |
|
|
$ |
13,383,049 |
|
|
$ |
400 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(21,869,332 |
) |
|
$ |
(8,344,062 |
) |
The
accompanying notes form an integral part of these unaudited financial
statements.
Sionix
Corporation
A
Development Stage Company
Statement
of Cash Flows (Unaudited)
|
|
|
|
|
|
|
|
Cummulative
|
|
|
|
For the Six Months
|
|
|
from
|
|
|
|
Ended March 31,
|
|
|
Inception
|
|
|
|
|
|
|
2008
|
|
|
(October 3, 1994) to
|
|
|
|
2009
|
|
|
(As Restated)
|
|
|
March 31,2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
activities:
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
149,324 |
|
|
$ |
(1,599,342 |
) |
|
$ |
(21,744,332 |
) |
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
15,104 |
|
|
|
16,314 |
|
|
|
659,396 |
|
Amortization
of beneficial conversion features discount and warrant
discount
|
|
|
27,094 |
|
|
|
833,775 |
|
|
|
2,074,433 |
|
Stock
based compensation expense - employee
|
|
|
116,241 |
|
|
|
1,791,360 |
|
|
|
3,795,143 |
|
Stock
based compensation expense - consultant
|
|
|
248,752 |
|
|
|
3,171,049 |
|
|
|
6,899,343 |
|
Impairment
of assets
|
|
|
|
|
|
|
|
|
|
|
514,755 |
|
Write-down
of obsolete assets
|
|
|
|
|
|
|
|
|
|
|
38,862 |
|
Impairment
of intangible assets
|
|
|
|
|
|
|
|
|
|
|
1,117,601 |
|
Loss
on settlement of debt
|
|
|
16,184 |
|
|
|
|
|
|
|
400,761 |
|
Loss
on lease termination
|
|
|
|
|
|
|
129,166 |
|
|
|
129,166 |
|
Write-off
of beneficial conversion features
|
|
|
|
|
|
|
(380,440 |
) |
|
|
(576,000 |
) |
Stock
issued for services and rent
|
|
|
|
|
|
|
|
|
|
|
114,850 |
|
Accrual
of liquidating damages
|
|
|
|
|
|
|
138,375 |
|
|
|
153,750 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
(799,044 |
) |
(Increase)
decrease in assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory
|
|
|
(608,565 |
) |
|
|
|
|
|
|
(608,565 |
) |
Other
current assets
|
|
|
12,230 |
|
|
|
(33,650 |
) |
|
|
(34,165 |
) |
Other
assets
|
|
|
4,600 |
|
|
|
|
|
|
|
(128,495 |
) |
Increase
(decrease) in liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
|
92,508 |
|
|
|
345,724 |
|
|
|
508,027 |
|
Accrued
expenses
|
|
|
189,486 |
|
|
|
174,508 |
|
|
|
2,834,698 |
|
Customer
deposits
|
|
|
200,000 |
|
|
|
|
|
|
|
1,460,000 |
|
Warrant
liability
|
|
|
(1,631,387 |
) |
|
|
(4,927,906 |
) |
|
|
(6,849,627 |
) |
Beneficial
conversion feature liability
|
|
|
(26,000 |
) |
|
|
(555,929 |
) |
|
|
(1,426,768 |
) |
Net
cash used in operating activities
|
|
|
(1,194,429 |
) |
|
|
(896,996 |
) |
|
|
(11,466,211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition
of property and equipment
|
|
|
(5,546 |
) |
|
|
(29,164 |
) |
|
|
(473,553 |
) |
Acquisition
of patents
|
|
|
|
|
|
|
|
|
|
|
(158,212 |
) |
Net
cash used in investing activities
|
|
|
(5,546 |
) |
|
|
(29,164 |
) |
|
|
(631,765 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment
on notes payable to officer
|
|
|
|
|
|
|
(19,260 |
) |
|
|
(218,502 |
) |
Proceeds
from notes payable, related party
|
|
|
|
|
|
|
|
|
|
|
442,433 |
|
Payments
on notes payable to related party
|
|
|
|
|
|
|
(5,000 |
) |
|
|
428,664 |
|
Receipt
from (payments to) equity line of credit
|
|
|
|
|
|
|
(27,336 |
) |
|
|
|
|
Proceeds
from convertible notes payable
|
|
|
|
|
|
|
|
|
|
|
2,861,000 |
|
Proceeds
from 10% subordinted notes payable
|
|
|
|
|
|
|
425,000 |
|
|
|
425,000 |
|
Issuance
of common stock
|
|
|
5,000 |
|
|
|
|
|
|
|
8,184,594 |
|
Receipt
of cash for stock to be issued
|
|
|
|
|
|
|
283,000 |
|
|
|
400 |
|
Net
cash provided by (used in) financing activities
|
|
|
5,000 |
|
|
|
656,404 |
|
|
|
12,123,589 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
(1,194,975 |
) |
|
|
(269,756 |
) |
|
|
25,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents balances:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning
of period
|
|
|
1,220,588 |
|
|
|
372,511 |
|
|
|
|
|
End
of month
|
|
$ |
25,613 |
|
|
$ |
102,755 |
|
|
$ |
25,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents paid for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Income
taxes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
The
accompanying notes form an integral part of these unaudited financial
statements.
Sionix
Corporation
A
Development Stage Company
March
31, 2009
Notes
to Financial Statements (Unaudited)
Note
1 ORGANIZATION AND DESCRIPTION OF BUSINESS
Sionix
Corporation (the "Company") was incorporated in Utah in 1985. The
Company was formed to design, develop, and market automatic water filtration
systems primarily for small water districts.
The
Company completed its reincorporation as a Nevada corporation effective July 1,
2003. The reincorporation was completed pursuant to an Agreement and Plan of
Merger between Sionix Corporation, a Utah corporation ("Sionix Utah") and its
wholly-owned Nevada subsidiary, Sionix Corporation ("Sionix Nevada"). Under the
merger agreement, Sionix Utah merged with and into Sionix Nevada, and each share
of Sionix Utah’s Common Stock was automatically converted into one share of
Common Stock, par value $0.001 per share, of Sionix Nevada. The merger was
effected by the filing of Articles of Merger, along with the Agreement and Plan
of Merger, with the Secretary of State of Nevada.
The
Company is a development stage company as defined in Statement of Financial
Accounting Standards (“SFAS”) No. 7, “Accounting and Reporting by Development
Stage Enterprises.” The Company is in the development stage and its efforts have
been principally devoted to research and development, organizational activities,
and raising capital. All losses accumulated since inception have been considered
as part of the Company’s development stage activities.
Note
2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
USE OF
ESTIMATES
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States (“GAAP”) requires management to make
certain estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates. Significant estimates include collectibility of accounts
receivable, accounts payable, sales returns and recoverability of long-term
assets.
CASH AND
CASH EQUIVALENTS
Cash and
cash equivalents represent cash and short-term highly liquid investments with
original maturities of three months or less.
INVENTORY
Inventory
is stated at the lower of cost, using the first in, first out method, or market.
Management compares the cost of inventories with the market value, and an
allowance is made for writing down the inventories to their market value, if
lower. As of March 31, 2009, the Company believes that no reserve is
required. Inventory at March 31, 2009 was $608,585 and consisted of work in
process.
PROPERTY
AND EQUIPMENT
Property and equipment is stated at
cost. The cost of additions and improvements are capitalized while maintenance
and repairs are expensed as incurred. Depreciation of property and equipment is
provided on a straight-line basis over the estimated useful lives of the
assets.
Property
and equipment are being depreciated and amortized on the straight-line basis
over the following estimated useful lives:
|
|
Years
|
|
|
|
|
|
|
Machinery
and equipment
|
|
|
5 |
|
Furniture
and fixtures
|
|
|
3-5 |
|
Leasehold
improvements
|
|
|
3 |
|
ADVERTISING
The cost
of advertising is expensed as incurred. There were no advertising costs for the
three and six months ended March 31, 2009, respectively. Total advertising costs
were $2,474 for the three and six months ended March 31, 2008,
respectively.
STOCK
BASED COMPENSATION
Effective
October 1, 2006, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 123-R, “Share-Based Payment” (“SFAS 123-R”), which requires the
measurement and recognition of compensation expense for all share-based payment
awards made to employees and directors, including stock options, to be based on
their fair values. SFAS 123-R supersedes Accounting Principles Board Opinion No.
25, “Accounting for Stock Issued to Employees” (“APB 25”), which the Company
previously followed in accounting for stock-based awards. In March 2005, the SEC
issued Staff Accounting Bulletin No. 107 (SAB 107) to provide guidance on SFAS
123-R. The Company has applied SAB 107 in its adoption of SFAS
123-R.
EARNINGS
PER SHARE
Statement
of Financial Accounting Standards No. 128, “Earnings per share” requires the
presentation of basic earnings per share and diluted earnings per
share. Basic and diluted earnings per share computations presented by
the Company conform to the standard and are based on the weighted average number
of shares of Common Stock outstanding during the year.
Basic
earnings per share is computed by dividing net income or loss by the weighted
average number of shares outstanding for the year. “Diluted” earnings
per share is computed by dividing net income or loss by the total of the
weighted average number of shares outstanding, and the dilutive effect of
outstanding stock options (applying the treasury stock method).
The
following is a reconciliation of the numerators and denominators of the basic
and diluted earnings per share computations:
|
|
For the Three Months Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Net
|
|
|
|
|
|
Per
|
|
|
Net
|
|
|
|
|
|
Per
|
|
|
|
Loss
|
|
|
Shares
|
|
|
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Share
|
|
Basic
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(Loss) Income Available to Stockholders
|
|
$ |
(799,581 |
) |
|
|
136,973,884 |
|
|
$ |
(0.01 |
) |
|
$ |
2,868,639 |
|
|
|
107,494,374 |
|
|
$ |
0.03 |
|
Effect
of Dilutive Securities
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted
Earnings Per Share
|
|
|
(799,581 |
) |
|
|
136,973,884 |
|
|
$ |
(0.01 |
) |
|
$ |
2,868,639 |
|
|
|
107,494,374 |
|
|
$ |
0.03 |
|
|
|
For the Six Months
Ended March 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Net
|
|
|
|
|
|
Per
|
|
|
Net
|
|
|
|
|
|
Per
|
|
|
|
Income
|
|
|
Shares
|
|
|
Share
|
|
|
Loss
|
|
|
Shares
|
|
|
Share
|
|
Basic
Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Loss Available to Stockholders
|
|
$ |
149,324 |
|
|
|
136,277,277 |
|
|
$ |
0.00 |
|
|
$ |
(1,599,342 |
) |
|
|
107,494,374 |
|
|
$ |
(0.01 |
) |
Effect
of Dilutive Securities
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Diluted
Earnings Per Share
|
|
$ |
149,324 |
|
|
|
136,277,277 |
|
|
$ |
0.00 |
|
|
$ |
(1,599,342 |
) |
|
|
107,494,374 |
|
|
$ |
(0.01 |
) |
FAIR
VALUE OF FINANCIAL INSTRUMENTS
Statement
of Financial Accounting Standard No. 107, Disclosures about Fair Value of
Financial Instruments , requires that the Company disclose estimated fair
values of financial instruments. The carrying amounts reported in the statements
of financial position for assets and liabilities qualifying as financial
instruments are a reasonable estimate of fair value.
CONCENTRATION
OF CREDIT RISK
During
the six months ended March 31, 2008 the Company had deposits in financial
institutions over the federally insured limits of $100,000. The Company does not
believe there is any credit risk related to these deposits due to the financial
condition of the financial institution.
RELATED
PARTY TRANSACTION
On
October 14, 2008, the Company entered into an agreement to purchase machinery
and equipment with a fair value of $125,000 from RJ Metal, Co. As compensation,
the Company issued 833,333 shares of Common Stock with a fair value of $108,333
to the shareholders of RJ Metal, Co. The purchase qualified as a related party
transaction because the Company’s interim Chief Executive Officer, who is also a
director, is also a director, officer and significant stockholder of RJ Metal,
Co. The Company recorded the machinery and equipment at the book value of RJ
Metal, Co. and the excess of the fair value of the equipment was recorded as a
deemed dividend.
RECLASSIFICATIONS
Certain
items in the prior financial statements have been reclassified to conform to the
current period’s presentation. Due from officer of $92,500 from the balance
sheet as of September 30, 2008 has been reclassified in the accrued expenses.
This reclassifications have no effect on the previously reported net
loss.
Note 3
PROPERTY AND EQUIPMENT
Property
and equipment consisted of the following at:
|
|
March 31,
|
|
|
|
|
|
|
2009
|
|
|
September 30,
|
|
|
|
(Unaudited)
|
|
|
2008
|
|
Machinery
and equipment
|
|
$ |
271,972 |
|
|
$ |
266,426 |
|
Furniture
and fixtures
|
|
|
41,176 |
|
|
|
41,176 |
|
Leasehold
improvement
|
|
|
1,695 |
|
|
|
1,695 |
|
TOTAL
PROPERTY AND EQUIPMENT
|
|
|
314,843 |
|
|
|
309,296 |
|
Less
accumulated depreciation
|
|
|
(237,300 |
) |
|
|
(222,195 |
) |
|
|
|
|
|
|
|
|
|
NET
PROPERTY AND EQUIPMENT
|
|
$ |
77,543 |
|
|
$ |
87,101 |
|
Depreciation
expenses for the three and six months ended March 31, 2009 were $7,615 and
$15,104, respectively. Depreciation expenses for the three and six months ended
March 31, 2008 were $8,157 and $16,314, respectively
Note 4
ACCRUED EXPENSES
Accrued
expenses consisted of the following at:
|
|
March 31,
|
|
|
|
|
|
|
2009
|
|
|
September 30,
|
|
|
|
(Unaudited)
|
|
|
2008
|
|
|
|
|
|
|
|
|
Accrued
salaries
|
|
$ |
1,474,785 |
|
|
$ |
1,400,944 |
|
Advisory
board compensation
|
|
|
576,000 |
|
|
|
576,000 |
|
Auto
allowance accruals
|
|
|
104,785 |
|
|
|
94,408 |
|
Interest
payable
|
|
|
346,957 |
|
|
|
272,016 |
|
Other
accruals
|
|
|
231,542 |
|
|
|
286,102 |
|
|
|
|
|
|
|
|
|
|
TOTAL
ACCRUED EXPENSES
|
|
$ |
2,734,069 |
|
|
$ |
2,629,470 |
|
Note 5
CUSTOMER DEPOSITS
In May
2008, the Company received an order for two water filtration systems, which
required a deposit. The Company is in the design phase of the manufacturing
process, and has not recognized any revenue related to these water filtration
systems. As of March 31, 2009 and September 30, 2008 customer deposits were
$1,420,000 and $1,260,000.
Note 6
NOTES PAYABLE – RELATED PARTIES
The
Company has received advances in the form of unsecured promissory notes from
stockholders in order to pay ongoing operating expenses. These notes bear
interest at rates up to 13% and are due on demand. As of March 31, 2009 and
September 30, 2008, notes payable amounted to $107,000 and $114,000. Accrued
interest on the notes amounted to $78,539 and $74,482 at March 31, 2009 and
September 30, 2008, respectively, and is included in accrued expenses. Interest
expenses on these notes for the three and six months ended March 31, 2009 were
$2,886 and $5,872, respectively. Interest expenses on these notes for the three
and six months ended March 31, 2008 were $3,204 and $6,443,
respectively
Note 7
CONVERTIBLE NOTES
Convertible
Notes 1
Between
October 2006 and February 2007, the Company completed an offering of $750,000 in
principal amount of convertible notes, which bear interest at 10% per annum and
mature at the earlier of (i) 18 months from the date of issuance (ii) an event
of default or (iii) the closing of any equity related financing by the Company
in which the gross proceeds are a minimum of $2,500,000. These notes are
convertible into shares of the Company’s Common Stock at $0.05 per share or
shares of any equity security issued by the Company at a conversion price equal
to the price at which such security is sold to any other party. In the event
that a registration statement covering the underlying shares was not declared
effective within 180 days after the closing, the conversion price was to be
reduced by $0.0025 per share for each 30 day period that the effectiveness of
the registration statement was delayed but in no case could the conversion price
to be reduced below $0.04 per share. As of March 31, 2009 the conversion price
was $0.04 per share.
SFAS 133,
paragraph 12 was applied to determine if the embedded beneficial conversion
features should be bifurcated from the convertible notes. The Company determined
that the economic characteristics of the embedded beneficial conversion features
are not clearly and closely related to the convertible notes, the embedded
beneficial conversion feature and convertible notes are not remeasured at fair
value at each balance sheet date, and a separate contract with the same terms
would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
embedded beneficial conversion features were bifurcated from the convertible
notes. SFAS 133,
paragraph 6 was applied to determine if the embedded beneficial conversion
features were within the scope and definition of a derivative. The embedded
beneficial conversion features had one or more underlings and one or more
notional amounts, required no initial investment and required or permitted net
settlement. Therefore, the embedded beneficial conversion features were
determined to be derivatives. The terms of the conversion feature only allow the
counterparty to convert the notes into shares of Common Stock. Therefore, EITF
00-19, paragraphs 12-33 were included in the analysis to determine the
classification of the conversion feature. The Company included SFAS 150 in the
analysis of the convertible notes. SFAS 150 requires
three classes of freestanding financial instruments, as defined in paragraphs 8
through 17, to be classified as liabilities. The first class, as defined in
paragraph 9, is financial instruments that are mandatorily redeemable financial
instruments. There are no terms or conditions that require the Company to
unconditionally redeem the convertible notes by transferring assets at a
specified or determinable date. The second class, as defined in paragraph 11, is
financial instruments that require the repurchase of shares of Common Stock by
transferring assets. There are no terms or conditions that require the Company
to repurchase shares of Common Stock. The third class, as defined in paragraph
12, is financial instruments that require the issuance of a variable number of
shares of Common Stock. There are no terms or conditions that require the
Company to issue a variable number of shares of Common Stock. Therefore, the
Company concluded that the convertible notes were not within the scope of SFAS
150.
The fair
value of the embedded beneficial conversion features was $750,000 at the date of
issuance using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 2.02% to 5.09%; volatility of 268% to
275%; dividend yield of 0% and an expected term of 1.5 years.
Based on
the calculation of the fair value of the embedded beneficial conversion feature,
the Company allocated $750,000 to the beneficial conversion feature and the
beneficial conversion feature discount, and none to the convertible note at the
date of issuance. The embedded beneficial conversion feature discount is
amortized to interest expense over the term of the note, which is $41,667 per
month.
As of
March 31, 2009, the outstanding principal amount of the convertible notes was
$523,333 and there was no unamortized embedded beneficial conversion feature
discount. As of August 27, 2008, the convertible notes had matured and the
outstanding principal amount of $533,333 and accrued interest of $86,981 were
due. Since the convertible notes matured, $10,000 of principal has been
converted into 250,000 shares of Common Stock and the Company has not repaid the
remaining outstanding amount of the convertible notes.
As of
September 30, 2008, the outstanding principal amount of the convertible notes
was $533,333 and there was no unamortized embedded beneficial conversion feature
discount.
For the
three and six months ended March 31, 2009, interest expense was $13,083 and
$26,638, respectively, which was included in the other income (expense) section
of the statement of income (operations).
For the
three and six months ended March 31, 2008, interest expense was $18,958 and
$38,334, respectively, and amortization expense for the embedded beneficial
conversion feature discount was $125,000 and $250,000, respectively, which was
included in interest expense in the other income (expense) section of the
statement of income (operations).
Calico
Capital Management, LLC acted as a financial advisor for Convertible Notes 1 and
2 for the Company and received a fee of $75,000. Southridge Investment Group
LLC, Ridgefield, Connecticut (“Southridge) acted as an agent for the Company in
arranging the transaction for Convertible Notes 1 and 2. The Company recorded
these fees as an expense during the period.
Convertible
Notes 2
On June
6, 2007, the Company completed an offering of $86,000 in principal amount of
convertible notes, which bear interest at 10% per annum and are due and payable
upon the earlier of (i) the occurrence of an Event of Default or (ii) the
Maturity Date, which is defined as any business day that is not sooner than
December 31, 2008, as the holder of the notes may specify in written notice
delivered to the Company not less than 30 days prior to such specified date.
These notes are convertible into shares of the Company’s Common Stock at $0.01
per share or shares of any equity security issued by the Company at a conversion
price equal to the price at which such security is sold to any other party.
There are no registration rights associated with these notes.
SFAS 133,
paragraph 12 was applied to determine if the embedded beneficial conversion
features should be bifurcated from the convertible notes. The Company determined
that the economic characteristics of the embedded beneficial conversion features
are not clearly and closely related to the convertible notes, the embedded
beneficial conversion feature and convertible notes are not remeasured at fair
value at each balance sheet date, and a separate contract with the same terms
would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
embedded beneficial conversion features were bifurcated from the convertible
notes. SFAS 133,
paragraph 6 was applied to determine if the embedded beneficial conversion
features were within the scope and definition of a derivative. The embedded
beneficial conversion features had one or more underlings and one or more
notional amounts, required no initial investment and required or permitted net
settlement. Therefore, the embedded beneficial conversion features were
determined to be derivatives. The terms of the
conversion feature only allow the counterparty to convert the notes into shares
of common stock. Therefore, EITF 00-19, paragraphs 12-33 were included in the
analysis to determine the classification of the conversion feature. The Company
included SFAS 150 in the analysis of the convertible notes. SFAS 150 requires
three classes of freestanding financial instruments, as defined in paragraphs 8
through 17, to be classified as liabilities. The first class, as defined in
paragraph 9, is financial instruments that are mandatorily redeemable financial
instruments. There are no terms or conditions that require the Company to
unconditionally redeem the convertible notes by transferring assets at a
specified or determinable date. The second class, as defined in paragraph 11, is
financial instruments that require the repurchase of shares of Common Stock by
transferring assets. There are no terms or conditions that require the Company
to repurchase shares of Common Stock. The third class, as defined in paragraph
12, is financial instruments that require the issuance of a variable number of
shares of Common Stock. There are no terms or conditions that require the
Company to issue a variable number of shares of Common Stock. Therefore, the
Company concluded that the convertible notes were not within the scope of SFAS
150.
The fair
value of the embedded beneficial conversion features was $86,000 at the date of
issuance using the Black Sholes valuation model with the following assumptions:
risk free rate of return of 4.96%; volatility of 259.58%; dividend yield of 0%
and an expected term of 1.5 years.
Based on
the calculation of the fair value of the embedded beneficial conversion feature,
the Company allocated $86,000 to the beneficial conversion feature and the
beneficial conversion feature discount, and none to the convertible note. The
embedded beneficial conversion feature discount is amortized to interest expense
over the term of the note, which is $4,778 per month.
As of
March 31, 2009, the outstanding principal amount of the convertible notes was
$8,000 and there was no unamortized embedded beneficial conversion feature
discount. As of December 31, 2008, the convertible notes had matured and the
outstanding principal amount of $26,000 and accrued interest of $4,153 were due.
Since the convertible notes matured, $18,000 of principal has been converted
into 1,800,000 shares of Common Stock and the Company has not repaid the
remaining outstanding amount of the convertible notes.
As of
September 30, 2008, the outstanding principal amount of the convertible notes
was $26,000 and unamortized embedded beneficial conversion feature discount was
$2,890.
For the
three and six months ended March 31, 2009, interest expense was $626 and $1,290,
and amortization expense for the embedded beneficial conversion feature discount
was $2,890, which was included in interest expense in the other income (expense)
section of the statement of income (operations).
For the
three and six months ended March 31, 2008, interest expense was $2,144 and
$4,335, respectively, and amortization expense for the embedded beneficial
conversion feature discount was $14,333 and $28,666, which was included in
interest expense in the other income (expense) section of the statement of
income (operations).
Calico
Capital Management, LLC acted as a financial advisor for Convertible Notes 1 and
2 for the Company and received a fee of $75,000. Southridge acted as an agent
for the Company in arranging the transaction for Convertible Notes 1 and 2. The
Company recorded these fees as an expense during the period.
Convertible
Notes 3
On July
17, 2007, the Company completed an offering of $1,025,000 in principal amount of
Subordinated Convertible Debentures to a group of institutional and accredited
investors, which bear interest at the rate of 8% per annum, and mature 12 months
from the date of issuance. Convertible Notes 3 are convertible into shares of
the Company’s Common Stock at an initial conversion rate of $0.22 per share,
subject to anti-dilution adjustments. As part of the above offering the Company
issued warrants to purchase 2,329,546 shares of Common Stock at an initial
exercise price of $0.50 per share. An amendment dated March 13, 2008 reduces the
conversion rate of the notes to $0.15 per share and the exercise price of the
warrants to $0.30 per share.
Under the
terms of a Registration Rights Agreement signed in conjunction with this
offering, the Company is required to file a registration statement under the
Securities Act of 1933 in order to register the resale of the shares of Common
Stock issuable upon conversion of the Convertible Notes 3 and the
warrant shares (collectively, the "Registrable Securities"). If the Company did
not file a registration statement with respect to the Registrable Securities
within 45 days following the closing of the offering, or if the registration
statement was not declared effective by the Securities and Exchange Commission
within 90 days, then the Company was required to pay to each purchaser damages
equal to 1.5% of the purchase price paid by the purchaser for Convertible Notes
3 for each 30 day period that followed these deadlines. The aggregate amount of
damages payable by the Company is limited to 15% of the purchase price. The
Company had until August 31, 2007 to file the registration statement and has
accrued $153,750 of expenses as liquidated damages. For the three and six months
ended March 31, 2009, $75,000 of the liquidating damages were converted into
937,500 shares of Common Stock For the three and six months ended March 31,
2008, the Company recorded $92,250 and $138,375 as liquidated damages,
respectively. No derivative liability is recorded as the amount of liquidated
damage is fixed with a maximum ceiling.
The
Company applied APB 14, paragraph 15 to determine the allocation of the proceeds
of the convertible debt, which states that proceeds from the sale of debt with
stock purchase warrants should be allocated between the debt and warrants, and
paragraph 16 states that the proceeds should be allocated based on the relative
fair values of the two securities at the time of issuance.
The fair
value of the warrants was $741,341 at the date of issuance calculated using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 4.96% to 5.02%; volatility of 219.89% to 226.04%; dividend yield of 0%
and an expected term of 5 years. As a result, the
relative fair value of the warrants was $430,189.
SFAS 133,
paragraph 12 was applied to determine if the embedded beneficial conversion
features should be bifurcated from the convertible notes. The Company determined
that the economic characteristics of the embedded beneficial conversion features
are not clearly and closely related to the convertible notes, the embedded
beneficial conversion feature and convertible notes are not remeasured at fair
value at each balance sheet date, and a separate contract with the same terms
would be a derivative pursuant to SFAS 133, paragraphs 6-11. Therefore, the
embedded beneficial conversion features were bifurcated from the convertible
notes. SFAS 133,
paragraph 6 was applied to determine if the embedded beneficial conversion
features were within the scope and definition of a derivative. The embedded
beneficial conversion features had one or more underlings and one or more
notional amounts, required no initial investment and required or permitted net
settlement. Therefore, the embedded beneficial conversion features were
determined to be derivatives. The terms of the
conversion feature only allow the counterparty to convert the notes into shares
of Common Stock. Therefore, EITF 00-19, paragraphs 12-33 were included in the
analysis to determine the classification of the conversion
feature. The Company included SFAS 150 in the analysis of the
convertible notes. SFAS 150 requires
three classes of freestanding financial instruments, as defined in paragraphs 8
through 17, to be classified as liabilities. The first class, as defined in
paragraph 9, is financial instruments that are mandatorily redeemable financial
instruments. There are no terms or conditions that require the Company to
unconditionally redeem the convertible notes by transferring assets at a
specified or determinable date. The second class, as defined in paragraph 11, is
financial instruments that require the repurchase of shares of Common Stock by
transferring assets. There are no terms or conditions that require the Company
to repurchase shares of Common Stock. The third class, as defined in paragraph
12, is financial instruments that require the issuance of a variable number of
shares of Common Stock. There are no terms or conditions that require the
Company to issue a variable number of shares of Common Stock. Therefore, the
Company concluded that the convertible notes were not within the scope of SFAS
150.
The fair
value of the embedded beneficial conversion features was $594,811 at the date of
issuance using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89%
to 226.04%; dividend yield of 0% and an expected term of 1 year.
Southridge
acted as the Company’s agent in arranging the transaction and received a
placement fee of $102,500. Southridge also received warrants to purchase 465,909
shares of the Company’s Common Stock on the same terms and conditions as the
warrants issued to the purchasers. The Company recorded the placement fees as an
expense. The grant date fair value of the warrants amounted to $124,060 and was
calculated using the Black-Sholes valuation model, using the following
assumptions: risk free rate of return of 5.01%, volatility of 226.04%, dividend
yield of 0% and expected term of five years.
As of
March 31, 2009, the outstanding principal amount of the convertible notes was
$250,000, there was no unamortized warrant discount or embedded beneficial
conversion feature discount, and the number of outstanding warrants was
2,329,546. As of July 16, 2008, the convertible notes had matured and the
outstanding principal amount of $485,000 and accrued interest of $67,417 were
due. Since the convertible notes matured, $235,000 of principal has been
converted into 1,566,667 shares of Common Stock and the Company has not repaid
the remaining outstanding principal amount or accrued interest of the
convertible notes.
As of
September 30, 2008, the outstanding principal amount of the convertible notes
was $485,000, there was no unamortized warrant discount or embedded beneficial
conversion feature discount, and the number of outstanding warrants was
2,329,546.
For the
three and six months ended March 31, 2009, interest expense was $7,105 and
$16,595, respectively, which was included in the other income (expense) section
of the statement of income (operations).
For the
three and six months ended March 31, 2008, interest expense was $20,444 and
$40,663, amortization expense for the warrant discount was $111,031 and
$218,578, which was included in interest expense in the other income (expense)
section of the statement of operations, and amortization expense for the
beneficial conversion feature discount was $153,553 and $302,255, which was also
included in interest expense in the other income (expense) section of the
statement of income (operations).
12%
SUBORDINATED CONVERTIBLE NOTES
On July
29, 2008, the Company completed an offering of $1,000,000 in principal amount of
Subordinated Debentures to a group of institutional and accredited
investors. The 12% Subordinated Convertible Notes mature on July 29,
2009 or sooner if
declared due and payable by the holder upon the occurrence of an event of
default, and bear interest at the rate of 12% per annum. The Debentures will be
convertible into Common Stock at a conversion price of $0.25 per share (the
“Conversion Price”) from and after such time as the authorized Common Stock is
increased in accordance with applicable federal and state laws. In the event of
an offering of Common Stock, or securities convertible into Common Stock, at a
price, conversion price or exercise price less than the conversion price (a
“dilutive issuance”), then the conversion price of any then outstanding
subordinated convertible notes will be reduced to equal such lower price, except
in connection with certain exempt issuances. In an event of default,
the conversion price will be reduced to $0.15 per share. As part of the above
offering, the Company issued warrants to purchase 3,333,333 shares of Common
Stock, which expire five years from the date of grant, are exercisable at an
exercise price of $0.30 per share from and after such time as the authorized
Common Stock is increased in accordance with applicable federal and state laws,
and may be exercised on a cashless basis at the election of the
holder. In the event of a dilutive issuance, the exercise price of
the warrants will be reduced to equal the price of the securities issued in the
dilutive issuance, except in connection with certain exempt
issuances.
The
requirement to increase the number of authorized shares of Common Stock is a
condition that has not occurred, is not certain to occur, and is outside the
control of the Company. Therefore, the Company has not recognized the related
beneficial conversion feature or the warrants related to these notes. If and
when this condition does occur, the Company will recognize the beneficial
conversion feature and warrants at fair value on the date the number of
authorized shares is increased. The note will be converted into 4,000,000 shares
of Common Stock at a conversion price of $0.25 per share. These shares were
excluded from the earnings per share calculation as the effect of dilutive
securities is anti-dilutive.
Calico
Capital Management, LLC acted as a financial advisor for the Company and
received a fee of $40,000. LBS Financial Services, LLC acted as an agent for the
Company in arranging the transaction and received a fee of $120,000. The Company
recorded these fees as an expense during the period.
As of
March 31, 2009 and September 30, 2008, the principal outstanding totaled
$1,000,000.
For the
three and six months ended March 31, 2009, interest expense was $29,589 and
$59,836, respectively.
Note 8
10% SUBORDINATED NOTES PAYABLE
In
January 2008, the Company completed an offering of $425,000 in principal amount
of Subordinated Debentures to a group of institutional and accredited
investors. The Subordinated Debentures mature on December 31, 2008,
and bear interest at the rate of 10% per annum. As part of the above offering,
the Company issued warrants to purchase 850,000 shares of Common Stock, which
expire six years from the date of grant.
The
Company applied APB 14, paragraphs 15 and 16, to determine the allocation of the
proceeds of the convertible debt. Paragraph 15 states that proceeds from the
sale of debt with stock purchase warrants should be allocated between the debt
and warrants, and paragraph 16 states that the proceeds should be allocated
based on the relative fair values of the two securities at the time of
issuance.
The grant
date fair value of the warrants was determined to be $125,462 which was
calculated using the Black-Sholes valuation model, using the following
assumptions: risk free rate of return of 2.64% to 3.26%, volatility of 97.08% to
98.27%, dividend yield of 0% and expected life of six years. As a result, the
relative fair value of the warrants was determined to be $96,814.
As of
March 31, 2009, the principal outstanding totaled $425,000, and there was no
unamortized warrant discount. As of December 31, 2008, the notes had matured and
the outstanding principal amount of $425,000 and accrued interest of $41,081
were due.
As of
September 30, 2008, the principal outstanding totaled $425,000, and unamortized
warrant discount was $24,204.
For the
three and six months ended March 31, 2009, interest expense was $10,479 and
$21,192, respectively.
For the
three and six months ended March 31, 2008, interest expense was $8,938, and
amortization expense for the warrant discount was $24,204, which was included in
interest expense in the other income (expense) section of the statement of
operations.
Note 9
WARRANT LIABILITY
2001
Executive Officers Stock Option Plan
In
October 2000, the Company amended its employment agreements with its executive
officers. In conjunction with the amendments the Company adopted the 2001
Executive Officers Stock Option Plan. The plan has reserved 7,576,680 shares of
Common Stock and has issued options for the purchase of 7,034,140 shares of
Common Stock. The options expire 5 years from the date of
issuance.
On the
grant date, the Company applied SFAS 133, paragraph 6 to determine if
the options were within the scope and definition of a derivative. The options
had one or more underlings, one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the options
were determined to be derivatives. In order to determine how to classify the
options, the Company followed the guidance of paragraphs 7 and 8 of EITF 00-19,
which states that contracts that require
settlement in shares are equity instruments. In order to determine the
value of the options, the Company applied EITF 00-19, paragraph 9, which states
that contracts that require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair value.
In accordance with EITF 00-19, the options were recorded in additional paid-in
capital at fair value on the date of issuance.
In
accordance with EITF 00-19, the options were reclassified as of July 17, 2007
from additional paid-in capital to warrant liability on the balance sheet, at
the fair value of $2,271,879 using the Black Sholes valuation model with the
following assumptions: risk free rate of return of 5.02%; volatility of 219.89%;
dividend yield of 0%; and an expected term of 3.67 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options issued remained derivatives
as of March 31, 2009. All of the criteria in the original analysis were met, and
the options issued were determined to be within the scope and definition of a
derivative. The Company next followed the guidance of EITF 00-19, paragraph 19,
which states that if a company is required to obtain shareholder approval to
increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. The Company next applied
EITF 00-19, paragraph 10, which states that if classification changes as the
result of an event, the contract should be reclassified as of the date of the
event at fair value. The event responsible for the change in classification was
the issuance of the Convertible Note 3 on July 17, 2007.
The fair
value of the options was $251,036 as of March 31, 2009, calculated using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 2.00 years.
The fair
value of the options was $484,440 as of September 30, 2008, calculated using the
Black Sholes model with the following assumptions: risk free rate of return of
1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term of 2.5
years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the options was recorded by increasing (decreasing) warrant liability
on the balance sheet by $18,522 and $(233,404), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
options was recorded by decreasing warrant liability on the balance sheet by
$766,474 and $1,469,800, respectively.
Warrants
Related to Convertible Notes 3
On July
17, 2007 the Company completed an offering of $1,025,000 of Convertible Notes 3
to a group of institutional and accredited investors which included warrants to
purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common Stock to
holders of the Convertible Notes 3 and 465,908 shares of Common Stock as a
placement fee) at an exercise price of $0.50 per share. An amendment dated March
13, 2008 reduces the exercise price of the warrants to $0.30 per
share.
On the
date of grant, the Company followed the guidance of SFAS 133, paragraph 6, to
determine if the warrants were within the scope and definition of a derivative.
The warrants had one or more underlings and one or more notional amounts,
required no initial investment and required or permitted net settlement.
Therefore, the warrants were determined to be derivatives at the date of
issuance. In order to determine how to classify the warrants, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the control
of the company) are liability instruments. In order to determine
the value of the options, the Company followed the guidance of EITF 00-19,
paragraph 9, which states that contracts which require the company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
The fair
value of the warrants was $554,249 ($430,189 attributable to the holders of the
Convertible Notes 3 and $124,060 attributable to the placement fee) at the date
of issuance calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 4.96% to 5.02%; volatility of 219.89%
to 226.04%; dividend yield of 0% and an expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options issued remained derivatives
as of March 31, 2009. All of the criteria in the original analysis were met, and
the options issued were determined to be within the scope and definition of a
derivative. The Company next followed the guidance of EITF 00-19, paragraph 19,
which states that if a company is required to obtain shareholder approval to
increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability.
The fair
value of the warrants was determined to be $96,411 ($79,391 attributable to the
holders of the Convertible Notes 3 and $17,020 attributable to the placement
fee) as of March 31, 2009, which was calculated using the Black Sholes valuation
model with the following assumptions: risk free rate of return of 0.57%;
volatility of 109.22%; dividend yield of 0%; and an expected term of 3.17 to
3.25 years.
The fair
value of the warrants was determined to be $153,789 ($125,440 attributable to
the holders of the Convertible Notes 3 and $28,349 attributable to the placement
fee) as of
September 30, 2008, which was calculated using the Black Sholes model with the
following assumptions: risk free rate of return of 1.78%; volatility of 84.94%;
dividend yield of 0%; and an expected term of 3.67 to 3.75 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $15,720 ($12,778 attributable to the holders of the
Convertible Notes 3 and $2,942 attributable to the placement fee) and $(57,378)
($(46,048) attributable to the holders of the Convertible Notes 3 and $(11,329)
attributable to the placement fee), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
warrants was recorded by decreasing warrant liability on the balance sheet by
$185,827 ($143,242 and attributable to the holders of the Convertible Notes 3
and $42,585 attributable to the placement fee) and $363,982 ($268,469 and
attributable to the holders of the Convertible Notes 3 and $95,513 attributable
to the placement fee), respectively.
Warrant
Issued to Legal Counsel
The
Company entered into an agreement with its legal counsel to issue 150,000 shares
of Common Stock and a five year warrant to purchase up to 150,000 shares of
Common Stock at an exercise price of $0.25 per share for services.
On the
grant date, the Company followed the guidance of FASB 133, paragraph 6, to
determine if the warrant was within the scope and definition of a derivative.
The warrant had one or more underlings and one or more notional amounts,
required no initial investment and required or permitted net settlement.
Therefore, the warrant was determined to be a derivative at the date of
issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the control
of the company) are liability instruments. In order to determine the value of
the warrant, the Company followed the guidance of EITF 00-19, paragraph 9, which
states that contracts which require a company to deliver shares as part of a
physical settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the warrant was $32,394 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 3.93%, volatility of 116.99%, dividend yield of 0% and expected
term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options issued remained derivatives
as of March 31, 2009. All of the criteria in the original analysis were met, and
the options issued were determined to be within the scope and definition of a
derivative. The Company next followed the guidance of EITF 00-19, paragraph 19,
which states that if a company is required to obtain shareholder approval to
increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability.
The fair
value of the warrant was determined to be $6,353 as of March 31, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 3.50 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $906 and $(4,155), respectively.
Warrants
Issued to Advisory Board Members
On
December 13, 2007, the Company’s Board of Directors approved the issuance of
five year warrants to the Company’s three advisory board members to purchase a
total of 8,640,000 shares of the Company’s Common Stock at an exercise price of
$0.25 per share.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrants were within the scope and definition of a derivative at the date of
issuance. The warrants had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. In order to determine how to classify the warrants, the
Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the company) are liability instruments. In order to determine the
value of the warrants, the Company followed the guidance of EITF 00-19,
paragraph 9, which states that contracts which require a company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
The fair
value of the warrants was $1,557,705 at the date of issuance and was calculated
using the Black Sholes option valuation model with the following assumptions:
risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields
of 0% and expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options issued remained derivatives
as of March 31, 2009. All of the criteria in the original analysis were met, and
the options issued were determined to be within the scope and definition of a
derivative. The Company next followed the guidance of EITF 00-19, paragraph 19,
which states that if a company is required to obtain shareholder approval to
increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability.
The fair
value of the warrants was determined to be $378,136 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 3.67 years.
The fair
value of the warrants was determined to be $620,453 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate of
return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $53,039 and $(242,317), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
warrants was recorded by decreasing warrant liability on the balance sheet by
$983,628 and $1,008,033, respectively.
Option
Issued to Director
On
December 13, 2007, the Company’s Board of Directors approved the issuance of a
five year option to a Company director to purchase a total of 1,000,000 shares
of the Company’s common stock at an exercise price of $0.25 per
share.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
option was within the scope and definition of a derivative at the date of
issuance. The option had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the option was determined to be a derivative at the date
of issuance. In order to determine how to classify the option, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the control
of the company) are liability instruments. In order to determine the value of
the option, the Company followed the guidance of EITF 00-19, paragraph 9, which
states that contracts which require the company to deliver shares as part of a
physical settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the option was $171,520 at the date of issuance and was calculated
using the Black Sholes option valuation model with the following assumptions:
risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yields
of 0% and expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the option as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the option remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
option was determined to be within the scope and definition of a derivative. The
Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the option was determined to be $43,766 as of March 31, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 3.67 years.
The fair
value of the option was determined to be $71,812 as of September 30, 2008, using
the Black Sholes model with the following assumptions: risk free rate of return
of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term of
4.17 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $6,139 and $(28,046), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
option was recorded by decreasing warrant liability on the balance sheet by
$113,845 and $107,900, respectively.
Option
Issued to Former Chief Financial Officer
On
December 13, 2007, the Company’s Board of Directors approved the issuance to the
Chief Financial Officer of a five year option to purchase a total of 1,000,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
option was within the scope and definition of a derivative at the date of
issuance. The option had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the option was determined to be a derivative at the date
of issuance. In order to determine how to classify the option, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the control
of the company) are liability instruments. In order to determine the value of
the option, the Company followed the guidance of EITF 00-19, paragraph 9, which
states that contracts which require the company to deliver shares as part of a
physical settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the option was $171,520 at the date of issuance and was calculated
using the Black Sholes option valuation model with the following assumptions:
risk free interest rate of 3.22%, expected volatility of 99.86%, dividend yield
of 0% and expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the option as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the option remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
option was determined to be within the scope and definition of a derivative. The
Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the option was determined to be $43,766 as of March 31, 2009, using the
Black Sholes valuation model with the following assumptions: risk free rate of
return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 3.67 years.
The fair
value of the option was determined to be $71,812 as of September 30, 2008, using
the Black Sholes model with the following assumptions: risk free rate of return
of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term of
4.17 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the options was recorded by increasing (decreasing) warrant liability
on the balance sheet by $6,139 and $(28,046), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
options was recorded by decreasing warrant liability on the balance sheet by
$113,845 and $107,900, respectively.
Option
Issued to Former Chief Executive Officer
On December 19, 2007, the Company
entered into a one year Employment Agreement with Richard H. Papalian pursuant
to which Mr. Papalian had been appointed as the Company’s Chief Executive
Officer. As compensation for his services, the Company granted Mr. Papalian a
five year option to purchase up to 8,539,312 shares of the Company’s Common
Stock at an exercise price of $0.25 per share. As per the terms of the stock
option agreement, the right to purchase 340,000 shares of Common Stock is not
exercisable until the notes dated June 6, 2007 (Convertible Notes 2 as discussed
in Note 7 above) are eligible for conversion into shares of Common Stock. These
options were not issued from the 2001 Executive Officers Stock Option
Plan. On August 14,
2008, Mr. Papalian resigned as the Company’s Chief Executive
Officer
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the company) are liability instruments. In order
to determine the value of the option, the Company applied EITF 00-19, paragraph
9, which states that contracts that require the company to deliver shares as
part of a physical settlement or net-share settlement should be initially
measured at fair value.
The fair
value of the option was $1,448,321 at the date of issuance, which was calculated
using the Black Sholes model with the following assumptions: risk free rate of
return of 3.26%; volatility of 98.01%; dividend yield of 0%; and an expected
term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the option as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the option remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
option was determined to be within the scope and definition of a derivative. The
Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the option was determined to be $128,388 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 3.67 years.
The fair
value of the option was determined to be $613,223 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate of
return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $18,008 and $(484,835), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
option was recorded by decreasing warrant liability on the balance sheet by
$972,165 and $905,054, respectively.
Warrant
Issued to Consultant
On
December 19, 2007, the Company entered into a one year Consulting Agreement with
Mark Maron pursuant to which Mr. Maron has been appointed as Special Adviser to
the Company. As compensation for his services, the Company granted Mr. Maron a
five year warrant to purchase up to 8,539,312 shares of the Company’s Common
Stock at an exercise price of $0.25 per share. As per the terms of the warrant
agreement, the right to purchase 340,000 shares of Common Stock is not
exercisable until the notes dated June 6, 2007 (Convertible Notes 2 as discussed
in Note 7 above) are eligible for conversion into shares of Common
Stock. The warrant was not issued from the 2001 Executive Officers
Stock Option Plan.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require net-cash settlement (including a requirement to net cash
settle the contract if an event occurs and if that event is outside the control
of the company) are liability instruments. In order to determine the
value of the warrant, the Company followed the guidance of EITF 00-19, paragraph
9, which states that contracts which require the company to deliver shares as
part of a physical settlement or net-share settlement should be initially
measured at fair value.
The fair
value of the warrant was $1,448,321 at the date of issuance and was calculated
using the Black Sholes option valuation model with the following assumptions:
risk free interest rate of 3.26%, expected volatility of 98.01%, dividend yield
of 0% and expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrant as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrant remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
warrant was determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the warrant was determined to be $373,729 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 3.67 years.
The fair
value of the warrant was determined to be $613,223 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate of
return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.17 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $52,421 and $(239,494), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
warrants was recorded by decreasing warrant liability on the balance sheet by
$972,165 and $905,054, respectively.
Warrants
Related to 10% Subordinated Debentures
In
January 2008, the Company completed an offering of $425,000 in principal amount
of Subordinated Debentures to a group of institutional and accredited investors.
As part of the above offering, the Company issued warrants to purchase 850,000
shares of Common Stock.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrants were within the scope and definition of a derivative at the date of
issuance. The warrants had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. In order to determine how to classify the warrants, the
Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the company) are liability instruments. In order to determine the
value of the warrants, the Company followed the guidance of EITF 00-19,
paragraph 9, which states that contracts which require a company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
The fair
value of the warrants was determined to be $96,814 at the date of issuance,
which was calculated using the Black-Sholes valuation model, using the following
assumptions: risk free rate of return of 2.64% to 3.26%, volatility ranging from
97.08% to 98.27%, dividend yield of 0% and expected life of six
years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrants as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrants issued remained
derivatives as of March 31, 2009. All of the criteria in the original analysis
were met, and the warrants were determined to be within the scope and definition
of a derivative. The Company next followed the guidance of EITF 00-19, paragraph
19, which states that if a company is required to obtain shareholder approval to
increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability.
The fair
value of the warrants was determined to be $36,060 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free rate
of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an expected
term of 4.83 years.
The fair
value of the warrants was determined to be $52,609 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate of
return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 5.33 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $5,970 and $(16,548), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
warrants was recorded by decreasing warrant liability on the balance sheet by
$51,429.
Warrants
Related to $750,000 Stock Issuance
On May
28, 2008 the Company completed an offering of units consisting of Common Stock
and warrants to purchase shares of its Common Stock to a group of institutional
and accredited investors. The Company raised a total of $750,000
through this offering. The Company issued warrants to purchase
15,000,000 shares of Common Stock at an exercise price of $0.10 per share. The
warrants expire three years from the date of issuance.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrants were within the scope and definition of a derivative at the date of
issuance. The warrants had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. In order to determine how to classify the warrants, the
Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require net-cash settlement (including a requirement to net
cash settle the contract if an event occurs and if that event is outside the
control of the company) are liability instruments. In order to determine the
value of the warrants, the Company followed the guidance of EITF 00-19,
paragraph 9, which states that contracts which require a company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
The fair
value of the warrants was determined to be $483,476 at the date of issuance,
which was calculated using the Black Sholes valuation model, using the following
assumptions: risk free rate of return of 1.32% to 2.17%, volatility of 72.4% to
77.86%, dividend yield of 0%, and expected term of 3 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrants as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrants issued remained
derivatives as of March 31, 2009. All of the criteria in the original analysis
were met, and the warrants issued were determined to be within the scope and
definition of a derivative. The Company next followed the guidance of EITF
00-19, paragraph 19, which states that if a company is required to obtain
shareholder approval to increase the company’s authorized shares in order to
net-share or physically settle a contract, share settlement is not controlled by
the company, and the contract is required to be classified as a
liability.
The fair
value of the warrants was determined to be $348,642 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 1.92 to 2.08 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrants was recorded by increasing (decreasing) warrant liability
on the balance sheet by $4,609 and $(119,437), respectively.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
warrants was recorded by decreasing warrant liability on the balance sheet by
$8,754.
Warrant
Issued to Legal Counsel
On June
24, 2008, the Company entered into an agreement with its legal counsel to issue
600,139 shares of Common Stock and a six year warrant to purchase up to 400,000
shares of Common Stock at an exercise price of $0.15 per share for services
previously rendered.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the warrant, the
Company followed the guidance of EITF 00-19, paragraph 9, which states that
contracts which require a company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the warrant was $60,645 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.36%, expected volatility of 74.90%, dividend yields of 0% and
expected term of 6 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrant as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrant remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
warrant was determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the warrant was determined to be $23,910 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 5.17 years.
The fair
value of the warrant was determined to be $38,802 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 5.75 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $1,616 and $(14,891), respectively.
Warrant
Issued to Director (John Pavia)
On July
11, 2008, the Company’s Board of Directors approved the issuance of a five year
warrant to a director to purchase a total of 500,000 shares of the Company’s
Common Stock at an exercise price of $0.25 per share.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine
the value of the warrant, the Company followed the guidance of EITF 00-19,
paragraph 9, which states that contracts which require a company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
The fair
value of the warrant was $51,582 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.30%, expected volatility of 71.69%, dividend yield of 0% and
expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrant as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrant issued remained a
derivative as of March 31, 2009. All of the criteria in the original analysis
were met, and the warrant issued was determined to be within the scope and
definition of a derivative. The Company next followed the guidance of EITF
00-19, paragraph 19, which states that if a company is required to obtain
shareholder approval to increase the company’s authorized shares in order to
net-share or physically settle a contract, share settlement is not controlled by
the company, and the contract is required to be classified as a
liability.
The fair
value of the warrant was determined to be $24,136 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 4.25 years.
The fair
value of the warrant was determined to be $38,759 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term
of 4.75 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $3,179 and $(14,623), respectively.
Warrant
Issued to Director (Marcus Woods)
On July
11, 2008, the Company’s Board of Directors approved the issuance of a five year
warrant to a director to purchase a total of 500,000 shares of the Company’s
Common Stock at an exercise price of $0.25 per share.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments.
In order to determine the value of the warrant, the Company followed the
guidance of EITF 00-19, paragraph 9, which states that contracts which require a
company to deliver shares as part of a physical settlement or net-share
settlement should be initially measured at fair value.
The fair
value of the warrant was $51,582 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.30%, expected volatility of 71.69%, dividend yield of 0% and
expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrant as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrant remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
warrant was determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the warrant was determined to be $24,136 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 4.25 years.
The fair
value of the warrant was determined to be $38,759 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.75 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $3,179 and $(14,623), respectively.
Warrant
Issued to Legal Counsel
On July
22, 2008, the Company entered into an agreement with its legal counsel to issue
641,000 shares of Common Stock and a six year warrant to purchase up to 641,000
shares of Common Stock at an exercise price of $0.15 per share for services
previously rendered.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the warrant, the
Company followed the guidance of EITF 00-19, paragraph 9, which states that
contracts which require a company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the warrant was $82,779 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.27%, expected volatility of 70.18%, dividend yield of 0% and
expected term of 6 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrant as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrant remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
warrant was determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the warrant was determined to be $38,571 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 5.25 years.
The fair
value of the warrant was determined to be $62,512 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected term
of 5.75 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $2,577 and $(23,941), respectively.
Warrant
Issued to Advisory Board Member
On
September 23, 2008, the Company issued a five year warrant to a member of the
Company’s advisory board to purchase 1,500,000 shares of the Company’s Common
Stock at an exercise price of $0.25 per share.
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine
the value of the warrant, the Company followed the guidance of EITF 00-19,
paragraph 9, which states that contracts which require a company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
The fair
value of the warrant was $144,641 at the date of issuance and was calculated
using the Black Sholes valuation model with the following assumptions: risk free
interest rate of 2.01%, expected volatility of 78.92%, dividend yield of 0% and
expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the warrant as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the warrant remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
warrant was determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the warrant was determined to be $74,171 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 4.42 years.
The fair
value of the warrant was determined to be $118,551 as of September 30, 2008,
using the Black Sholes model with the following assumptions: risk free rate
of return of 1.78%; volatility of 84.94%; dividend yield of 0%; and an expected
term of 4.83 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the warrant was recorded by increasing (decreasing) warrant liability
on the balance sheet by $9,582 and $(44,380), respectively.
Option
Issued to Former Chief Executive Officer
On
November 11, 2008 the Company’s Board of Directors approved the issuance to the
Chief Executive Officer of a five year option to purchase a total of 3,500,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability
instruments. In order to determine the value of the option, the Company applied
EITF 00-19, paragraph 9, which states that contracts that require the company to
deliver shares as part of a physical settlement or net-share settlement should
be initially measured at fair value.
The fair
value of the option was $238,244 at the date of issuance, which was calculated
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 1.16%; volatility of 89.31%; dividend yield of 0%; and an
expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the option as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the option remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
option was determined to be within the scope and definition of a derivative. The
Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the option was determined to be $177,019 as of March 31, 2009, using
the Black Sholes valuation model with the following assumptions: risk free
rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and an
expected term of 4.58 years.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $22,418 and $(61,225), respectively.
Option
Issued to Director (Rodney Anderson)
On March
30, 2009 the Company issued an option to a director to purchase a total of
1,380,114 shares of the Company’s common stock at an exercise price of $0.15 per
share. The right to purchase 690,057 shares of Common Stock vested on the date
of grant and the right to purchase 172,514 shares of Common Stock vests on June
30, September 30, December 31, 2009 and March 31, 2010,
respectively.
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if
the options were within the scope and definition of a derivative. The options
had one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the options
were determined to be a derivative. In order to determine how to classify the
options, the Company followed the guidance of EITF 00-19, paragraphs 7 and 8,
which state that contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability
instruments. In order to determine the value of the options, the Company applied
EITF 00-19, paragraph 9, which states that contracts that require the company to
deliver shares as part of a physical settlement or net-share settlement should
be initially measured at fair value.
The fair
value of the vested options was $41,847 at the date of issuance, which was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 0.58%; volatility of 109.22%; dividend
yield of 0%; and an expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
options were determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the vested options was determined to be $40,392 as of March 31, 2009,
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and
an expected term of 4.58 years.
For the
three and six months ended March 31, 2009, the decrease in the fair value of the
vested options was recorded by decreasing warrant liability on the balance sheet
by $1,455.
Option
Issued to Director (Robert Hasson)
On March
30, 2009 the Company issued an option to a director to purchase a total of
958,412 shares of the Company’s common stock at an exercise price of $0.15 per
share. The right to purchase 479,206 shares of Common Stock vested on the date
of grant and the right to purchase 119,802 shares of Common Stock vests on June
30, September 30, December 31, 2009 and March 31, 2010,
respectively.
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if
the options were within the scope and definition of a derivative. The options
had one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the options
were determined to be a derivative. In order to determine how to classify the
options, the Company followed the guidance of EITF 00-19, paragraphs 7 and 8,
which state that contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability
instruments. In order to determine the value of the options, the Company applied
EITF 00-19, paragraph 9, which states that contracts that require the company to
deliver shares as part of a physical settlement or net-share settlement should
be initially measured at fair value.
The fair
value of the vested options was $29,060 at the date of issuance, which was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 0.58%; volatility of 109.22%; dividend
yield of 0%; and an expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
options were determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the vested options was determined to be $28,050 as of March 31, 2009,
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and
an expected term of 4.58 years.
For the
three and six months ended March 31, 2009, the decrease in the fair value of the
vested options was recorded by decreasing warrant liability on the balance sheet
by $1,010.
Option
Issued to Employee
On March
30, 2009 the Company issued an option to an employee to purchase a total of
1,495,124 shares of the Company’s common stock at an exercise price of $0.15 per
share. The right to purchase 747,562 shares of Common Stock vested on the date
of grant and the right to purchase 186,891 shares of Common Stock vests on June
30, September 30, December 31, 2009 and March 31, 2010,
respectively.
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if
the options were within the scope and definition of a derivative. The options
had one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the options
were determined to be a derivative. In order to determine how to classify the
options, the Company followed the guidance of EITF 00-19, paragraphs 7 and 8,
which state that contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability
instruments. In order to determine the value of the options, the Company applied
EITF 00-19, paragraph 9, which states that contracts that require the company to
deliver shares as part of a physical settlement or net-share settlement should
be initially measured at fair value.
The fair
value of the vested options was $45,334 at the date of issuance, which was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 0.58%; volatility of 109.22%; dividend
yield of 0%; and an expected term of 5 years.
The
Company followed the guidance of EITF 00-19, paragraph 9, which states that all
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The Company analyzed the options as of March 31, 2009 by following the guidance
of SFAS 133, paragraph 6 to ascertain if the options remained a derivative as of
March 31, 2009. All of the criteria in the original analysis were met, and the
options were determined to be within the scope and definition of a derivative.
The Company next followed the guidance of EITF 00-19, paragraph 19, which states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability.
The fair
value of the vested options was determined to be $43,758 as of March 31, 2009,
using the Black Sholes valuation model with the following assumptions: risk
free rate of return of 0.57%; volatility of 109.22%; dividend yield of 0%; and
an expected term of 4.58 years.
For the
three and six months ended March 31, 2009, the decrease in the fair value of the
vested options was recorded by decreasing warrant liability on the balance sheet
by $1,576.
Note 10
BENEFICIAL CONVERSION FEATURES LIABILITY
The
Company issued convertible notes between October 17, 2006 and July 17, 2007 that
matured between June 17, 2008 and December 31, 2008, and included embedded
beneficial conversion features that allowed the holders of the convertible notes
to convert their notes into Common Stock shares at rates between $.01 and $.22.
The convertible notes accrue interest at rates between 8% and 10%, and any
accrued but unpaid interest is also convertible by the holder of the convertible
notes into shares of Common Stock at the same rate.
The
Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the
embedded beneficial conversion features were derivatives at the date of issue.
The embedded beneficial conversion features had one or more underlings and one
or more notional amounts, required no initial investment and required or
permitted net settlement. Therefore, the embedded beneficial conversion features
were determined to be derivatives. In order to determine the classification of
the embedded conversion features, the Company applied paragraph 19 of EITF
00-19, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. In order to determine the
value of the embedded conversion features, the Company followed the guidance of
EITF 00-19, paragraph 9, which states that all contracts classified as
liabilities are to be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
The fair
value of the embedded beneficial conversion features was $1,430,811 at the date
of issuance using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 2.02% to 5.09%; volatility of 108.5% to
274.86%; dividend yield of 0% and an expected term of 1 to 1.5
years.
The
Company followed the guidance of SFAS 133, paragraph 6, to ascertain if the
embedded beneficial conversion features remained derivatives as of September 30,
2007. All of the criteria in the original analysis were met, and the embedded
beneficial conversion features were determined to be within the scope and
definition of a derivative. The Company followed the guidance of SFAS 133,
paragraph 12, to determine if the embedded beneficial conversion features should
be separated from the convertible notes. All of the criteria in the original
analysis were met, and the embedded beneficial conversion features were
separated from the convertible notes. In order to determine the classification
of the embedded conversion features, the Company applied paragraph 19 of EITF
00-19, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. In order to determine the
value of the embedded conversion features, the Company followed the guidance of
EITF 00-19, paragraph 9, which states that all contracts classified as
liabilities are to be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
The fair
value of the embedded beneficial conversion features was $26,000 as of September
30, 2008, which was calculated using the Black Sholes model with the following
assumptions: risk free rate of return of 1.78%; volatility of 84.94%; dividend
yield of 0% and an expected term of .25.
For the
three and six months ended March 31, 2009, the increase (decrease) in the fair
value of the option was recorded by increasing (decreasing) warrant liability on
the balance sheet by $22,418 and $(61,225), respectively.
For the
three and six months ended March 31, 2009, the decrease in the fair value of the
embedded beneficial conversion feature was recorded by decreasing beneficial
conversion features liability on the balance sheet by $26,000.
For the
three and six months ended March 31, 2008, the decrease in the fair value of the
embedded beneficial conversion feature was recorded by decreasing beneficial
conversion features liability on the balance sheet by $347,740 and $555,929,
respectively.
Note 11
STOCKHOLDERS’ EQUITY
COMMON
STOCK
The
Company has 150,000,000 authorized shares of Common Stock, par value $0.001 per
share. As of March 31, 2009 and September 30, 2008, the Company had
142,303,907 and 134,756,213 shares of Common Stock issued and outstanding,
respectively. As of March 31, 2009, there are 481,900 shares of Common Stock
subject to cancellation. Subsequent to cancellation, the total issued and
outstanding shares of Common Stock would be 141,822,007.
During
the six months ended March 31, 2009 the Company issued 6,114,221 shares of
Common Stock for the payment of $270,000 of debt, $6,909 of accrued interest,
$77,979 of late fees and penalties and $75,000 of liquidated damages at
conversion prices between $0.04 and $0.15. Additionally, the Company issued
833,333 shares of common stock for $125,000 for machinery and equipment from RJ
Metal Co. Lastly, the Company issued 600,139 shares of Common Stock to legal
counsel for services having a value of $60,014. The fair value of the
Common Stock on the date of issuance was $126,029.
The
Company has not issued 13,333 shares of Common Stock representing $400 to
certain investors pursuant to the terms of an offering undertaken by the Company
in 2004. The investment was made and funds deposited into the Company’s bank
accounts between February 9, 2004, and August 25, 2004. The
investment has been recorded on the Company’s balance sheet in the Stockholders’
Deficit section as “Shares to be Issued”.
STOCK
OPTIONS
A summary
of the Company’s option activity is listed below:
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Number
|
|
|
Intrinsic
|
|
|
|
Price
|
|
|
of Options
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at October 1, 2008
|
|
$ |
0.19 |
|
|
|
11,967,666 |
|
|
$ |
- |
|
Granted
|
|
|
0.20 |
|
|
|
7,333,650 |
|
|
|
- |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at March 31, 2009
|
|
$ |
0.19 |
|
|
|
19,301,316 |
|
|
$ |
- |
|
Options
outstanding as of March 31, 2009:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
Average
|
|
Exercise
|
|
Options
|
|
Options
|
|
Contractual
|
|
Exercise Price
|
|
Price
|
|
Outstanding
|
|
Exercisable
|
|
Life
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.15
- $0.25
|
|
19,301,316
|
|
17,384,491
|
|
3.47
|
|
$ |
0.19
|
|
$ |
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Remaining
|
|
Option
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
Holder
|
|
Amount
|
|
|
Price
|
|
|
Amount
|
|
|
Price
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
Executive Officers Stock Option Plan
|
|
|
7,034,140 |
|
|
$ |
0.15 |
|
|
|
7,034,140 |
|
|
$ |
0.15 |
|
|
|
2.00 |
|
Director
|
|
|
1,000,000 |
|
|
|
0.25 |
|
|
|
1,000,000 |
|
|
|
0.25 |
|
|
|
3.67 |
|
Former
Chief Financial Officer
|
|
|
1,000,000 |
|
|
|
0.25 |
|
|
|
1,000,000 |
|
|
|
0.25 |
|
|
|
3.67 |
|
Former
Chief Executive Officer
|
|
|
2,933,526 |
|
|
|
0.25 |
|
|
|
2,933,526 |
|
|
|
0.25 |
|
|
|
3.67 |
|
Former
Chief Executive Officer
|
|
|
3,500,000 |
|
|
|
0.25 |
|
|
|
3,500,000 |
|
|
|
0.25 |
|
|
|
4.58 |
|
Director
|
|
|
1,380,114 |
|
|
|
0.15 |
|
|
|
690,057 |
|
|
|
0.15 |
|
|
|
4.92 |
|
Director
|
|
|
958,412 |
|
|
|
0.15 |
|
|
|
479,206 |
|
|
|
0.15 |
|
|
|
4.92 |
|
Employee
|
|
|
1,495,124 |
|
|
|
0.15 |
|
|
|
747,562 |
|
|
|
0.15 |
|
|
|
4.92 |
|
STOCK
WARRANTS
A summary
of the Company’s warrant activity is listed below:
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Aggregate
|
|
|
|
Exercise
|
|
|
Number
|
|
|
Intrinsic
|
|
|
|
Price
|
|
|
of Options
|
|
|
Value
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at October 1, 2008
|
|
$ |
0.20 |
|
|
|
39,365,766 |
|
|
$ |
- |
|
Granted
|
|
|
0.25 |
|
|
|
150,000 |
|
|
|
- |
|
Expired
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Forfeited
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
Outstanding
at March 31, 2009
|
|
$ |
0.20 |
|
|
|
39,515,766 |
|
|
$ |
- |
|
Warrants
outstanding as of March 31, 2009:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
Weighted
Average
|
|
Exercise
|
|
Warrants
|
|
Options
|
|
Contractual
|
|
Exercise Price
|
|
Price
|
|
Outstanding
|
|
Exercisable
|
|
Life
|
|
Outstanding
|
|
Exercisable
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.10
- $0.40
|
|
39,515,766
|
|
39,515,766
|
|
3.12
|
|
$ |
0.20
|
|
$ |
0.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
Outstanding
|
|
|
Exercisable
|
|
|
Remaining
|
|
Warrant
|
|
|
|
|
Exercise
|
|
|
|
|
|
Exercise
|
|
|
Contractual
|
|
Holder
|
|
Amount
|
|
|
Price
|
|
|
Amount
|
|
|
Price
|
|
|
Life
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
Notes 3
|
|
|
2,795,454 |
|
|
$ |
0.30 |
|
|
|
2,795,454 |
|
|
$ |
0.30 |
|
|
|
3.25 |
|
Richarson
& Patel LLP
|
|
|
150,000 |
|
|
|
0.25 |
|
|
|
150,000 |
|
|
|
0.25 |
|
|
|
3.50 |
|
Advisory
Board Members
|
|
|
8,640,000 |
|
|
|
0.25 |
|
|
|
8,640,000 |
|
|
|
0.25 |
|
|
|
3.67 |
|
Consultant
|
|
|
8,539,312 |
|
|
|
0.25 |
|
|
|
8,539,312 |
|
|
|
0.25 |
|
|
|
3.67 |
|
10%
Subordinated Notes Payable
|
|
|
850,000 |
|
|
|
0.40 |
|
|
|
850,000 |
|
|
|
0.40 |
|
|
|
4.83 |
|
Stockholders
|
|
|
15,000,000 |
|
|
|
0.10 |
|
|
|
15,000,000 |
|
|
|
0.10 |
|
|
|
2.02 |
|
Richarson
& Patel LLP
|
|
|
400,000 |
|
|
|
0.15 |
|
|
|
400,000 |
|
|
|
0.15 |
|
|
|
5.17 |
|
Director
|
|
|
500,000 |
|
|
|
0.25 |
|
|
|
500,000 |
|
|
|
0.25 |
|
|
|
4.25 |
|
Director
|
|
|
500,000 |
|
|
|
0.25 |
|
|
|
500,000 |
|
|
|
0.25 |
|
|
|
4.25 |
|
Richarson
& Patel LLP
|
|
|
641,000 |
|
|
|
0.15 |
|
|
|
641,000 |
|
|
|
0.15 |
|
|
|
5.25 |
|
Advisory
Board Member
|
|
|
1,500,000 |
|
|
|
0.25 |
|
|
|
1,500,000 |
|
|
|
0.25 |
|
|
|
4.42 |
|
Note 12
GOING CONCERN
The
accompanying financial statements have been prepared 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 March 31, 2009, the Company has incurred
cumulative losses of $21,869,332 including net income for the six months ended
March 31, 2009 of $149,324. As the Company has no cash flow from
operations, its ability to transition from a development
stage company to an operating company is entirely dependent upon obtaining
adequate cash to finance its overhead, research and development activities, and
acquisition of production equipment. It is unknown when, if ever, the Company
will achieve a level of revenues adequate to support its costs and expenses. In
order for the Company to meet its basic financial obligations, including rent,
salaries, debt service and operations, it plans to seek additional equity or
debt financing. Because of the Company’s history and current debt levels, there
is considerable doubt that the Company will be able to obtain financing. The
Company’s ability to meet its cash requirements for the next twelve months
depends on its ability to obtain such financing. Even if financing is obtained,
any such financing will likely involve additional fees and debt service
requirements which may significantly reduce the amount of cash we will have for
our operations. Accordingly, there is no assurance that the Company will be able
to implement its plans.
The
Company expects to continue to incur substantial operating losses for the
foreseeable future, and it cannot predict the extent of the future losses or
when it may become profitable, if ever. The Company expects to incur increasing
sales and marketing, research and development and general and administrative
expenses. Also, the Company has a substantial amount of short-term debt, which
will need to be repaid or refinanced, unless it is converted into equity. As a
result, if the Company begins to generate revenues from operations, those
revenues will need to be significant in order to cover current and anticipated
expenses. These factors raise substantial doubt about the Company's ability to
continue as a going concern unless it is able to obtain substantial additional
financing in the short term and generate revenues over the long term. If the
Company is unable to obtain financing, it would likely discontinue its
operations.
As
mentioned in Notes 7 and 8, the Company has convertible notes and subordinated
notes payable that have matured. The Company is in the process of renegotiating
the terms of the notes with the note holders to extend the maturity date. If the
Company is unsuccessful in extending the maturity date, the Company may not be
able to continue as a going concern.
Management
expects an order for 14 additional water treatment systems from the customer who
purchased two water treatment systems. Additionally, management will continue to
identify new markets and demonstrate the water treatment unit to potential
customers. Management will closely monitor and evaluate expenses to identify
opportunities to reduce operating expenses.
Note 13
COMMITMENTS
As of
August 1, 2008, we entered into a 36 month lease for an industrial site
consisting of approximately 12,000 square feet of administrative offices and a
manufacturing facility. Monthly lease payments for the period from
August 1, 2008 through July 31, 2009 are $8,650 plus common area maintenance
charges; monthly lease payments for the period from August 1, 2009 through July
31, 2010 are $8,995 plus common area maintenance charges and monthly lease
payments for the period from August 1, 2010 through July 31, 2011 are $9,355
plus common area maintenance charges. The lease agreement includes an
option to extend the lease for an additional 36 months. If the option is
exercised, monthly payments over the three year term would be $9,730 plus common
area maintenance charges from August 1, 2011 through July 31, 2012, $10,118 plus
common area maintenance charges from August 1, 2012 through July 31, 2012, and
$10,523 plus common area maintenance charges from August 1, 2013 through July
31, 2014. The future aggregate minimum annual lease payments arising from
this lease agreement are as follows.
For the Fiscal Year Ended September
30,
|
|
|
|
|
|
|
|
2009
|
|
$ |
52,590 |
|
2010
|
|
|
108,660 |
|
2011
|
|
|
93,550 |
|
Total
rent expense under the operating lease was approximately $18,470 for the year
ended September 30, 2008.
Note
14 SUPPLEMENTAL CASH FLOW INFORMATION
The
Company had the following noncash transactions.
The
Company issued 6,114,221 shares of Common Stock for the payment of $270,000 of
debt, $6,909 of accrued interest, $77,979 of late fees and penalties and $75,000
of liquidated damages at conversion prices between $0.04 and $0.15.
The
Company issued 833,333 shares of Common Stock for the purchase of machinery and
equipment from RJ Metal, Co. having a value of $125,000.
The
Company issued 600,139 shares of Common Stock for legal services having a value
of $60,014. The fair value of the Common Stock on the date of
issuance was $126,029.
Note 15
SUBSEQUENT EVENT
On May
13, 2009, convertible note holders converted a total of $11,632 of accrued
interest into 290,798 shares of Common Stock.
On May
13, 2009, the Company entered into a letter of understanding regarding the
issuance of a total of $300,000 in principal amount of notes payable of which
notes having a principal value of $35,000 will mature on May 22, 2009 and notes
having a principal value of $265,000 will mature on August 21, 2009. The notes
will include a provision that will permit the holders, upon the occurrence of a
default, to convert the outstanding principal and unpaid accrued interest into
shares of Common Stock at $0.10 per share. The Company will issue to the
placement agent compensation consisting of five year warrants to purchase a
total of 600,000 shares of Common Stock at $0.20 to $0.30 per share and $47,500
in cash. Terms of the warrants include a cashless exercise option and
anti-dilution provisions. The securities being offered will not be or
have not been registered under the Securities Act of 1933, as amended, and may
not be offered or sold in the United States absent registration or an applicable
exemption from registration requirements.
Note 16
RESTATEMENT
Subsequent
to filing Form 10-QSB for the six months ended March 31, 2008, the Company
determined that the beneficial conversion feature discounts and warrant
discounts related to the issuance of the convertible notes payable were not
properly accounted for, and certain warrants and options were omitted. As a
result, the Company recorded the following adjustments.
2001 Executive Officers
Stock Option Plan
In
October 2000, the Company amended its employment agreements with each of the
executive officers. A result of the amendments was that the Company adopted
the 2001 Executive Officers Stock Option Plan. The plan has reserved 7,576,680
shares of Common Stock and has issued options to purchase 7,034,140 shares of
Common Stock that expire 5 years from the date of issuance.
Balance
Sheet
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if the
options were within the scope and definition of a derivative. The options: had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the options
were determined to be derivatives. Emerging Issue Task Force, paragraphs 7 and 8
were then applied to determine the classification. These paragraphs state that
contracts
that require settlement in shares are equity instruments. EITF 00-19, paragraph 9 was
applied to determine the value of the options. This paragraph states that
contracts that require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair value.
In accordance with EITF 00-19, the options were recorded in additional paid-in
capital at fair value on the date of issuance.
The
Company began the analysis for the restatement as of and for the fiscal year
ended September 30, 2007 by applying FASB 133, paragraph 6 to ascertain if
the options remained derivatives as of September 30, 2007. All of the criteria
in the original analysis were met, and the options were determined to be within
the scope and definition of a derivative. EITF 00-19, paragraph 19 was applied
next, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. EITF 00-19, paragraph 10
was then applied. Paragraph 10 states that if classification changes as the
result of an event, the contract should be reclassified as of the date of the
event at fair value. The event responsible for the change in classification was
the issuance of the $1,025,000 Convertible Bridge Notes on July 17,
2007.
In
accordance with EITF 00-19, the options were reclassified as of July 17, 2007
from additional paid-in capital to warrant liabilities on the balance sheet, at
the fair value of $2,271,879. The value was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
5.02%; volatility of 219.89%; dividend yield of 0%; and an expected term
of 3.67 years.
EITF
00-19, paragraph 9 was then applied, which states that all contracts classified
as liabilities should be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
The
Company began the analysis for the restatement by applying FASB 133, paragraph 6 to ascertain if
the options remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the options were determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the options was determined to be $457,114 as of March 31, 2008 and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 3 years.
The
decrease in the fair value of the options was $766,474 for the three months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.
The
decrease in the fair value of the options was $1,469,800 for the six months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Operations
EITF
00-19, paragraph 9 was applied which requires all contracts classified as
liabilities to be measured at fair value, with changes in fair value reported in
earnings as long as the contracts remain classified as liabilities.
The
change in the fair value of the options for the three months ended March 31,
2008 was $766,474 and included in decrease in warrant liability in the other
income (expense) section of the statement of operations.
The
change in the fair value of the options for the six months ended March 31, 2008
was $1,469,800 and included in decrease in warrant liability in the other income
(expense) section of the statement of operations.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the options of
$1,469,800.
Advisory Board
Compensation
On
October 1, 2004, the Company formed an advisory board consisting of four
members. Each member was to receive $5,000 monthly from October 1, 2004 to
February 22, 2007 for a total of $576,000, convertible by the advisory board
members into 11,520,000 shares of Common Stock at a rate of $0.05 per share. On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of Common Stock in exchange for warrants
exercisable at $0.25 per share. The Company determined that the accrued expense,
embedded beneficial conversion feature, embedded beneficial conversion feature
discount, and related amortization expense were not recorded at the date of
issuance, or prior to the restatement of the financial statements as of March
31, 2008, no payments have been made to any advisory board members, there has
been no conversion by any Advisory Board members of the accrued liability into
shares of Common Stock, and no warrant has been exercised.
Balance
Sheet
The
Company began the analysis for the restatement by applying paragraph 6 of
Financial Accounting Standard Board (FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, to ascertain if the
embedded beneficial conversion features were derivatives at the date of
issuance. The embedded beneficial conversion features had one or more underlings
and one or more notional amounts; required no initial investment; and required
or permitted net settlement. Therefore, the embedded beneficial conversion
features were determined to be within the scope and definition of a derivative
at the date of issuance. Next, FASB 133, paragraph 12 was applied to determine
if the embedded beneficial conversion features should be separated from the
accrued expense. The Company determined that the economic characteristics of the
embedded beneficial conversion features are not clearly and closely related to
the accrued expense; the embedded beneficial conversion features and accrued
expense are not remeasured at fair value at each balance sheet date; and a
separate contract with the same terms would be a derivative pursuant to FASB
133, paragraphs 6-11. Therefore, the embedded beneficial conversion features
were separated from the accrued expense to determine the classification and
valuation. EITF 00-19, paragraphs 7 and 8 were applied to determine the
classification. Paragraph 7 states that contracts which require net-cash
settlement are liabilities, and paragraph 8 states that contracts which give the
counterparty (advisory board members) a choice of net-cash settlement or
settlement in shares are liabilities. Therefore, the embedded conversion
features were determined to be liabilities. EITF 00-19, paragraph 9 was applied
to determine the value. Paragraph 9 of EITF 00-19 states all contracts
classified as liabilities should be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The fair
value of the monthly embedded beneficial conversion features was determined to
be $576,000 as of September 30, 2007, and was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
4.05%; volatility of 126.94%; dividend yield of 0%; and an expected term of 2.08
to 4.42 years.
On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of common stock in exchange for warrants.
As a result, the beneficial conversion feature of $576,000 and the unamortized
beneficial conversion feature discount of $195,560 were written off for a net of
$380,440.
The
beneficial conversion features discount amortization was $15,104 for the three
and six months ended March 31, 2008, which increased accrued
expenses.
Statement
of Operations
EITF
00-19, paragraph 9 was applied which requires all contracts classified as
liabilities to be measured at fair value, with changes in fair value reported in
earnings as long as the contracts remain classified as liabilities.
There was
no increase in the fair value of the beneficial conversion features for the
three or six months ended March 31, 2008.
The
beneficial conversion feature discount amortization was determined to be $15,104
and has been included in general and administrative expenses in the operating
expenses section of the statement of operations for the three and six months
ended March 31, 2008.
The
beneficial conversion feature of $576,000 and the beneficial conversion feature
discount of $195,560 were written off for a net of $380,440 and has been
included in the other income (expense) section of the statement of income
(operations) for the three and six months ended March 31, 2008.
Statement
of Cash Flows
Changes
in the statement of cash flows were the result of the amortization of the
beneficial conversion features discount of $15,104, and the net write off of
beneficial conversion feature and beneficial conversion feature discount of
$380,440 on the statement of operations.
Warrants Related to 2004
Stock Purchase Agreement
Under the
terms of a 2004 Stock Purchase Agreement, the Company issued warrants to
purchase 1,463,336 shares of Common Stock at an exercise price of $0.03 which
expire from February 9, 2007 to August 25, 2007. The Company determined that the
warrants and related expense were not recorded at the date of issuance or prior
to the restatement and there has been no exercise of the warrants into shares of
Common Stock.
Balance
Sheet
The
Company began the analysis by applying FASB 133, paragraph 6 to determine if
the warrants were within the scope and definition of a derivative at the date of
issuance. The warrants: had one or more underlings, and one or more notional
amounts; required no initial investment; and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. EITF 00-19, paragraphs 7 and 8 were then applied to determine
classification. These paragraphs state that contracts
which require settlement in shares are equity instruments. EITF 00-19, paragraph
9 was applied to determine the value of the options. Paragraph 9 of EITF 00-19
states that contracts which require the company to deliver shares as part of a
physical settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the warrants was determined to be $24,366 at the date of issuance which
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.21% to 2.14%; volatility of 141.91%
to 170.27%; dividend yield of 0% and an expected term of 5 years. The
warrants were considered an expense prior to October 1, 2006. Therefore, $24,366
was recorded to additional paid-in capital and deficit accumulated during
development stage.
EITF
00-19, paragraph 19 was applied next. Paragraph 19 states that if a company is
required to obtain shareholder approval to increase the company’s authorized
shares in order to net-share or physically settle a contract, share settlement
is not controlled by the company and the contract is required to be classified
as a liability. EITF 00-19, paragraph 10 was then applied. This paragraph states
that if classification changes as the result of an event, the contract should be
reclassified as of the date of the event at fair value. The event responsible
for the change in classification was the issuance of the
$1,025,000 Convertible Bridge Notes on July 17, 2007.
In
accordance with EITF 00-19, the warrants were reclassified as of July 17, 2007
from additional paid-in capital to warrant liabilities on the balance sheet at
the fair value of $70,029, which was calculated using the Black Sholes valuation
model with the following assumptions: risk free rate of return of 5.02%;
volatility of 219.89%; dividend yield of 0%; and an expected term of .08
years.
EITF
00-19, paragraph 9 was also applied in the analysis. Paragraph 9 states that all
contracts classified as liabilities must be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The fair
value of the warrants was $0 as of September 30, 2007, due to their
expiration.
The
decrease in the fair value of the warrants was $70,029 for the year ended
September 30, 2007, which was recorded to warrant liability and accumulated
deficit during development stage as of March 31, 2008.
Statement
of Operations
There was
no change in the fair value of the warrants for the three months ended March 31,
2008, due to their expiration.
Statement
of Cash Flows
There was
no change in the statement of cash flows for the three months ended March 31,
2008.
Beneficial Conversion
Features
As of
March 31, 2008, the Company had Convertible Bridge Notes outstanding totaling
$1,811,000 which were issued between October 17, 2006 and July 17, 2007. The
bridge notes included an embedded beneficial conversion feature that allowed the
holders of the convertible notes to convert their notes into shares of Common
Stock at rates between $0.01 and $0.22. The bridge notes mature between June 17,
2008 and December 31, 2008. The bridge notes accrue interest at rates between 8%
and 10%, and any accrued but unpaid interest is also convertible by the holder
of the bridge notes into shares of Common Stock at the same rate.
Balance
Sheet
The
Company began the analysis for the restatement as of and for the six months
ended March 31, 2008 by applying FASB 133, paragraph 6 to ascertain if
the embedded beneficial conversion features remained derivatives subsequent to
the date of issuance. All of the criteria in the original analysis were met, and
the embedded beneficial conversion features issued were determined to be within
the scope and definition of a derivative. FASB 133, paragraph 12 was applied to
determine if the embedded beneficial conversion features should be separated
from the convertible bridge notes. All of the criteria in the original analysis
were met, and the embedded beneficial conversion features were separated from
the convertible bridge notes. EITF 00-19, paragraphs 7 and 8 were applied to
determine the classification. Paragraph 7 states that contracts which require
net-cash settlement are liabilities, and paragraph 8 states that contracts which
give the counterparty (holders of the convertible notes) a choice of net-cash
settlement or settlement in shares are liabilities. Therefore the embedded
conversion features were determined to be liabilities. The change in the
determination of the classification from equity to a liability was based on the
rights of the holders of the convertible notes to convert the notes into shares
of Common Stock. Therefore, share settlement is not controlled by the Company.
EITF 00-19, paragraph 9 was applied to determine the value of the embedded
beneficial conversion features. Paragraph 9 states that all contracts classified
as liabilities must be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
The fair
value of the monthly embedded beneficial conversion features was determined to
be $874,882 as of March 31, 2008, which was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
1.56%; volatility of 72.53%; dividend yield of 0%; and an expected term
of .08 to .33 years.
The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.
The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.
The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, which increased convertible
notes.
The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, which increased convertible notes.
Statement
of Operations
The
beneficial conversion features were analyzed in accordance with EITF 00-19,
paragraph 9, which requires all contracts classified as liabilities to be
measured at fair value, with changes in fair value reported in earnings as long
as the contracts remain classified as liabilities.
The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.
The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.
The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.
The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.
Statement
of Cash Flows
Changes
in the statement of cash flows for the three months ended March 31, 2008 were
the result of the decrease in the fair value of the beneficial conversion
features liability of $347,850 and the amortization of the beneficial conversion
features discounts of $285,610 on the statement of operations.
Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the fair value of the beneficial conversion features
liability of $555,929 and the amortization of the beneficial conversion features
discounts of $573,646 on the statement of operations.
Warrants related to
$1,025,000 of Convertible Bridge
Notes
On July
17, 2007 the Company completed an offering of $1,025,000 of convertible notes to
a group of institutional and accredited investors which included warrants to
purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common
Stock to holders of the convertible bridge notes, 465,908 shares of Common Stock
as a placement fee) at an exercise price of $0.50 per share. An amendment to the
convertible notes dated March 13, 2008 reduced the exercise price to $0.30 per
share.
Balance
Sheet
The
Company began the analysis for the restatement of the financial statements as of
and for the six months ended March 31, 2008 by applying FASB 133, paragraph 6 to ascertain if
the warrants issued remained derivatives as of March 31, 2008. All of the
criteria in the original analysis were met, and the warrants issued were
determined to be within the scope and definition of a derivative. EITF 00-19,
paragraph 19 was applied next to determine classification. Paragraph 19 states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability. EITF 00-19, paragraph 9 was applied to
determine the value of the warrants. Paragraph 9 states that all contracts
classified as liabilities must be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The fair
value of the warrants was determined to be $135,950 as of March 31, 2008, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 4.17 to 4.25 years.
The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded by decreasing warrant
liabilities on the balance sheet by $185,827 ($143,242 related to the holders of
the convertible bridge notes, and $42,585 related to the placement fee).
The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded by decreasing warrant liabilities
on the balance sheet by $363,982 ($268,470 related to the holders of the
convertible bridge notes, and $95,512 related to the placement fee).
The
amortization of the warrant discount was $213,353 for the six months ended March
31, 2008, which increased convertible notes.
Statement
of Operations
EITF
00-19, paragraph 9 was applied which requires all contracts classified as
liabilities to be measured at fair value, with changes in fair value reported in
earnings as long as the contracts remain classified as liabilities.
The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.
The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.
The
increase in the amortization of the warrant discount of $30,065 is included in
interest expense in the other income (expense) section of the statement of
operations.
Statement
of Cash Flows
Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the amount of $363,982 in the fair value of the
warrants at the date of issuance on the statement of operations, and the
increase in the amortization of the warrant discount of $30,065 on the balance
sheet.
Warrant Issued to
Consultant
On
December 19, 2007, the Company entered into a one year Consulting Agreement with
Mark Maron pursuant to which Mr. Maron was appointed as Special Adviser to the
Company. As compensation for his services, the Company granted Mr. Maron a five
year warrant to purchase up to 8,539,312 shares of the Company’s Common Stock at
an exercise price of $0.25 per share. As per the terms of the warrant agreement,
the right to purchase 340,000 shares of Common Stock is not exercisable until
the notes dated June 6, 2007 (Convertible Notes 2 as discussed in Note 6 to our
financial statements) are eligible for conversion into shares of Common
Stock. The warrant was not issued from the 2001 Executive
Officers Stock Option Plan.
Balance
Sheet
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments.
In order to determine the value of the warrant, the Company followed the
guidance of EITF 00-19, paragraph 9, which states that contracts which require
the company to deliver shares as part of a physical settlement or net-share
settlement should be initially measured at fair value.
The fair
value of the warrant was determined to be $1,448,321 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.26%, expected volatility of 98.01%,
dividend yields of 0% and expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the warrant by applying FASB 133, paragraph 6 to ascertain if
the warrant remained a derivative as of December 31, 2007. All of the criteria
in the original analysis were met, and the warrant issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 was also
applied, which states that contracts classified as liabilities should be
measured at fair value at each balance sheet date, with changes in fair value
reported in earnings and disclosed in the financial statements as long as the
contracts remain classified as liabilities.
The fair
value of the warrant was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.
The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.
The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Operations
The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.
The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the warrant of
$905,054.
Option Issued to Chief
Executive Officer
On
December 19, 2007, the Company entered into a one year Employment Agreement with
Richard H. Papalian pursuant to which Mr. Papalian had been appointed as the
Company’s Chief Executive Officer. As compensation for his services, the Company
granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of
the Company’s Common Stock at an exercise price of $0.25 per share. As per the
terms of the stock option agreement, the right to purchase 340,000 shares of
Common Stock is not exercisable until the notes dated June 6, 2007 (Convertible
Notes 2 as discussed in Note 6 to our financial statements) are eligible for
conversion into shares of Common Stock. These options were not issued from the
2001 Executive Officers Stock Option Plan. On the grant date, the
Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the option, the
Company applied EITF 00-19, paragraph 9, which states that contracts that
require the company to deliver shares as part of a physical settlement or
net-share settlement should be initially measured at fair value.
Balance
Sheet
The fair
value of the option was determined to be $1,448,321 at the date of issuance, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 3.26%; volatility of 98.01%; dividend
yield of 0%; and an expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the option as of March 31, 2008 by applying FASB 133, paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by a company, the contract is
required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the option was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.
The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Operations
The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$905,054.
Option Issued to
Director
On
December 13, 2007, the Company’s Board of Directors approved the issuance to a
director of a five year option to purchase a total of 1,000,000 shares of the
Company’s common stock at an exercise price of $0.25 per share.
Balance
Sheet
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
option was within the scope and definition of a derivative at the date of
issuance. The option had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the option was determined to be a derivative at the date
of issuance. In order to determine how to classify the option, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments.
In order to determine the value of the option, the Company followed the guidance
of EITF 00-19, paragraph 9, which states that contracts which require the
company to deliver shares as part of a physical settlement or net-share
settlement should be initially measured at fair value.
The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the option by applying FASB 133, paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the option was determined to be $63,620 as of March 31, 2008, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Operations
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.
Option Issued to Chief
Financial Officer
On
December 13, 2007, the Company’s Board of Directors approved the issuance to the
Chief Financial Officer of a five year option to purchase a total of 1,000,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.
Balance
Sheet
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
option was within the scope and definition of a derivative at the date of
issuance. The option had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the option was determined to be a derivative at the date
of issuance. In order to determine how to classify the option, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments.
In order to determine the value of the option, the Company followed the guidance
of EITF 00-19, paragraph 9, which states that contracts which require the
company to deliver shares as part of a physical settlement or net-share
settlement should be initially measured at fair value.
The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the option by applying FASB 133, paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9, which
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the option was determined to be $63,620 as of March 31, 2008 using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Operations
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.
Table 1 -
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beneficial
|
|
|
Warrant
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
|
|
|
Related
to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Features
|
|
|
$1,025,000
of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2001
|
|
|
|
|
|
Warrants
|
|
|
and
|
|
|
Convertible
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
|
|
|
|
Related
to
|
|
|
Beneficial
|
|
|
Bridge
Notes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
|
|
|
Officers
|
|
|
Advisory
|
|
|
2004
Stock
|
|
|
Conversion
|
|
|
and
|
|
|
|
|
|
Option
Issued
|
|
|
|
|
|
Warrant
Issued
|
|
|
|
|
|
Warrants
Related
|
|
|
|
|
|
|
|
|
|
Previously
|
|
|
Option
|
|
|
Board
|
|
|
Purchase
|
|
|
Features
|
|
|
Warrant
|
|
|
Warrant
Issued
|
|
|
to
Chief Executive
|
|
|
Warrant
Issued
|
|
|
to
Chief
|
|
|
10%
Subordinated
|
|
|
to
$750,000
|
|
|
|
|
|
As
|
|
|
|
Stated
|
|
|
Plan
|
|
|
Compensation
|
|
|
Agreement
|
|
|
Discount
|
|
|
Discount
|
|
|
to
Consultant
|
|
|
Officer
|
|
|
to
Director
|
|
|
Financial
Officer
|
|
|
Notes
Payable
|
|
|
Stock
Issuance
|
|
|
Other
|
|
|
Restated
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$ |
102,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151 |
|
|
$ |
102,755 |
|
Accounts
payable
|
|
|
470,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,987 |
|
|
|
503,124 |
|
Accrued
expenses
|
|
|
1,847,254 |
|
|
|
|
|
|
576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,423,254 |
|
Convertible
Notes, net
|
|
|
1,306,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,913 |
|
|
|
206,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,525,971 |
|
10%
subordinated notes payable
|
|
|
332,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,169 |
|
|
|
|
|
|
38 |
|
|
|
352,389 |
|
Warrant
liability
|
|
|
974,632 |
|
|
|
457,114 |
|
|
|
549,672 |
|
|
|
|
|
|
|
|
|
|
36,522 |
|
|
|
128,358 |
|
|
|
128,358 |
|
|
|
63,620 |
|
|
|
63,620 |
|
|
|
|
|
|
|
156,268 |
|
|
|
|
|
|
|
2,558,164 |
|
Beneficial
conversion feature liability
|
|
|
857,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874,882 |
|
Additional
paid-in capital
|
|
|
12,815,792 |
|
|
|
(2,271,879 |
) |
|
|
(269,848 |
) |
|
|
(45,663 |
) |
|
|
473,797 |
|
|
|
135,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,837,605 |
|
Deficit
accumulated during development stage
|
|
|
(19,149,208 |
) |
|
|
1,814,765 |
|
|
|
(855,824 |
) |
|
|
45,663 |
|
|
|
(503,914 |
) |
|
|
(378,393 |
) |
|
|
(128,358 |
) |
|
|
(128,358 |
) |
|
|
(63,620 |
) |
|
|
(63,620 |
) |
|
|
(20,169 |
) |
|
|
(156,268 |
) |
|
|
(32,874 |
) |
|
|
(19,620,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations (for the three months ended March 31,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$ |
395,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
165,022 |
|
|
$ |
32,540 |
|
|
$ |
593,452 |
|
Research
and development
|
|
|
328,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
329,028 |
|
Interest
expense
|
|
|
(492,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,677 |
|
|
|
(78,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,169 |
) |
|
|
|
|
|
|
|
|
|
|
(574,060 |
) |
Decrease
(increase) in warrant liability
|
|
|
273,778 |
|
|
|
766,474 |
|
|
|
983,628 |
|
|
|
|
|
|
|
|
|
|
|
(36,522 |
) |
|
|
972,165 |
|
|
|
972,165 |
|
|
|
113,845 |
|
|
|
113,845 |
|
|
|
|
|
|
|
8,754 |
|
|
|
|
|
|
|
4,168,132 |
|
Increase
in beneficial conversion feature liability
|
|
|
364,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,740 |
|
Basic
and dilutive loss per share
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations (for the six months ended March 31,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$ |
1,526,663 |
|
|
|
|
|
|
$ |
1,557,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,033,412 |
|
|
$ |
1,033,412 |
|
|
$ |
171,520 |
|
|
$ |
171,520 |
|
|
|
|
|
|
$ |
165,022 |
|
|
$ |
32,540 |
|
|
$ |
5,691,794 |
|
Research
and development
|
|
|
565,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
565,932 |
|
Interest
expense
|
|
|
(906,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,816 |
|
|
|
(167,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,169 |
) |
|
|
|
|
|
|
|
|
|
|
(1,060,790 |
) |
Decrease
(increase) in warrant liability
|
|
|
427,991 |
|
|
|
1,469,800 |
|
|
|
1,008,033 |
|
|
|
|
|
|
|
|
|
|
|
(12,580 |
) |
|
|
905,054 |
|
|
|
905,054 |
|
|
|
107,900 |
|
|
|
107,900 |
|
|
|
|
|
|
|
8,754 |
|
|
|
|
|
|
|
4,927,906 |
|
Increase
in beneficial conversion feature liability
|
|
|
637,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,929 |
|
Write-off
of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
380,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,440 |
|
Basic
and dilutive loss per share
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows (for the six months ended March 31,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,077,833 |
) |
|
$ |
1,469,800 |
|
|
$ |
(169,232 |
) |
|
|
|
|
|
$ |
(48,943 |
) |
|
$ |
(179,867 |
) |
|
$ |
(128,358 |
) |
|
$ |
(128,358 |
) |
|
$ |
(63,620 |
) |
|
$ |
(63,620 |
) |
|
$ |
(20,169 |
) |
|
$ |
(156,268 |
) |
|
$ |
(32,874 |
) |
|
$ |
(1,599,342 |
) |
Amortization
of beneficial conversion features discount and warrant
discount
|
|
|
669,025 |
|
|
|
|
|
|
|
10,072 |
|
|
|
|
|
|
|
(32,816 |
) |
|
|
167,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,169 |
|
|
|
|
|
|
|
38 |
|
|
|
833,775 |
|
Stock
based compensation expense-employee
|
|
|
414,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,412 |
|
|
|
|
|
|
|
171,520 |
|
|
|
171,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,791,360 |
|
Stock
based compensation expense-consultant
|
|
|
439,909 |
|
|
|
|
|
|
|
1,557,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,022 |
|
|
|
|
|
|
|
3,171,049 |
|
(Decrease)
increase in warrant liability
|
|
|
(427,991 |
) |
|
|
(1,469,800 |
) |
|
|
(1,008,033 |
) |
|
|
|
|
|
|
|
|
|
|
12,580 |
|
|
|
(905,054 |
) |
|
|
(905,054 |
) |
|
|
(107,900 |
) |
|
|
(107,900 |
) |
|
|
|
|
|
|
(8,754 |
) |
|
|
|
|
|
|
(4,927,906 |
) |
Increase
in beneficial conversion feature liaiblity
|
|
|
(637,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(555,929 |
) |
Write-off
of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
(380,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380,440 |
) |
Accounts
payable
|
|
|
312,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,987 |
|
|
|
345,725 |
|
Accrued
expenses
|
|
|
159,581 |
|
|
|
|
|
|
|
576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
735,581 |
|
Cash
and cash equivalents
|
|
|
102,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
102,755 |
|
Part
I, Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations.
The
information in this quarterly report on Form 10-Q contains forward-looking
statements. These forward-looking statements involve risks and
uncertainties, including statements regarding our capital needs, business
strategy and expectations. Any statements contained in this report
that are not statements of historical facts may be deemed to be forward-looking
statements. In some cases, you can identify forward-looking
statements by terminology such as may, will, should, expect, plan, intend,
anticipate, believe, estimate, predict, potential or continue, the negative of
such terms or other comparable terminology. Actual events or results
may differ materially from those events or results included in the
forward-looking statements. In evaluating these statements, you
should consider various factors, including the risks outlined from time to time
in the reports we file with the Securities and Exchange
Commission. Some, but not all, of these risks include, among other
things:
|
·
|
our
inability to obtain the financing we need to continue our
operations;
|
|
·
|
changes
in regulatory requirements that adversely affect our
business;
|
|
·
|
loss
of our key personnel; and
|
|
·
|
risks
over which we have no control, such as the general global downturn in the
economy which may adversely affect spending by government
agencies.
|
We do not
intend to update forward-looking statements. You should refer to and
carefully review the information in future documents we file with the Securities
and Exchange Commission.
Overview
Sionix
Corporation (referred to as “the Company”, “we”, “us” or “our”) is a development
stage company as defined in Statement of Financial Accounting Standards (“SFAS”)
No. 7, Accounting and
Reporting by Development Stage Enterprises . The Company is
based in Anaheim, California. Its business is the design, development
and marketing of automatic water filtration systems primarily for small water
districts. The Company received an order for two water filtration
systems in June, 2008. The Company anticipates that the
water treatment systems will be manufactured and delivered within the next few
months. Subsequent to the delivery of the water treatment systems, revenue will
be recognized and the Company will no longer meet the definition of a
development stage company.
Until
additional orders and customer deposits are received, we anticipate that most of
our capital needs will need to be funded by debt or equity
financing. To date we have earned no revenues.
Application
of Critical Accounting Policies and Estimates
The
preparation of our financial statements in accordance with U.S. GAAP requires
management to make judgments, assumptions and estimates that affect the amounts
reported. A critical accounting estimate is an assumption about highly uncertain
matters and could have a material effect on the consolidated financial
statements if another, also reasonable, amount were used or a change in the
estimate is reasonably likely from period to period. We base our assumptions on
historical experience and on other estimates that we believe are reasonable
under the circumstances. Actual results could differ significantly from these
estimates. There were no changes in accounting policies or significant changes
in accounting estimates during the three and six months ended March 31, 2009.
Management believes the following critical accounting policies reflect its more
significant estimates and assumptions.
Revenue
Recognition. Although the Company has yet to complete sales, it plans to follow
the guidance provided by SAB 104 for recognition of revenues. The Company does
not plan to recognize revenue unless there is persuasive evidence of an
arrangement, title and risk of loss has passed to the customer, delivery has
occurred or the services have been rendered, the sales price is fixed or
determinable and collection of the related receivable is reasonably assured. In
general, the Company plans to require a deposit from a customer before a unit is
fabricated and shipped. It is the Company's policy to require an
arrangement with its customers, either in the form of a written contract or
purchase order containing all of the terms and conditions governing the
arrangement, prior to the recognition of revenue. Title and risk of loss will
generally pass to the customer at the time of delivery of the product to a
common carrier. At the time of the transaction, the Company will assess whether
the sales price is fixed or determinable and whether or not collection is
reasonably assured. If the sales price is not deemed to be fixed or
determinable, revenue will be recognized as the amounts become due from the
customer. The Company does not plan to offer a right of return on its products
and the products will generally not be subject to customer acceptance rights.
The Company plans to assess collectability based on a number of factors,
including past transaction and collection history with a customer and the
creditworthiness of the customer. The Company plans to perform ongoing credit
evaluations of its customers' financial condition. If the Company determines
that collectability of the sales price is not reasonably assured, revenue
recognition will be deferred until such time as collection becomes reasonably
assured, which is generally upon receipt of payment from the customer. The
Company plans to include shipping and handling costs in revenue and cost of
sales.
Support
Services. The Company plans to provide support services to customers primarily
through service contracts, and it will recognize support services revenue
ratably over the term of the service contract or as services are
rendered.
Warranties. The
Company's products are generally subject to warranty, and related costs will be
provided for in cost of sales when revenue is recognized. Once the Company has a
history of sales, the Company's warranty obligation will be based upon
historical product failure rates and costs incurred in correcting a product
failure. If actual product failure rates or the costs associated with fixing
failures differ from historical rates, adjustments to the warranty liability may
be required in the period in which determined.
Allowance
for Doubtful Accounts. The Company will evaluate the adequacy of its allowance
for doubtful accounts on an ongoing basis through detailed reviews of its
accounts and notes receivables. Estimates will be used in determining
the Company's allowance for doubtful accounts and will be based on historical
collection experience, trends including prevailing economic conditions and
adverse events that may affect a customer's ability to repay, aging of accounts
and notes receivable by category, and other factors such as the financial
condition of customers. This evaluation is inherently subjective because
estimates may be revised in the future as more information becomes available
about outstanding accounts.
Inventory
Valuation. Inventories will be stated at the lower of cost or market, with costs
generally determined on a first-in first-out basis. We plan to utilize both
specific product identification and historical product demand as the basis for
determining excess or obsolete inventory reserve. Changes in market conditions,
lower than expected customer demand or changes in technology or features could
result in additional obsolete inventory that is not saleable and could require
additional inventory reserve provisions.
Goodwill
and other Intangibles. Goodwill and intangible assets with indefinite lives will
be tested annually for impairment in accordance with the provisions of Financial
Accounting Standards Board Statement No. 142 “Goodwill and Other Intangible
Assets” (FAS 142). We will use our judgment in assessing whether assets may have
become impaired between annual impairment tests. We perform our annual test for
indicators of goodwill and non-amortizable intangible asset impairment in the
fourth quarter of our fiscal year or sooner if indicators of impairment
exist.
Legal
Contingencies. From time to time we may be a defendant in litigation. As
required by Financial Accounting Standards Board Statement No. 5 “Accounting for
Contingencies” (FAS 5), we are required to determine whether an estimated loss
from a loss contingency should be accrued by assessing whether a loss is deemed
probable and the loss amount can be reasonably estimated, net of any applicable
insurance proceeds. Estimates of potential outcomes of these contingencies are
developed in consultation with outside counsel. While this assessment is based
upon all available information, litigation is inherently uncertain and the
actual liability that may be incurred to fully resolve litigation cannot be
predicted with any assurance of accuracy. Final settlement of these matters
could possibly result in significant effects on our results of operations, cash
flows and financial position.
Warrant
Liability. The Company calculates the fair value of warrants and options using
the Black Sholes valuation model. Assumptions used in the calculation include
the risk free interest rate, volatility of the stock price, and dividend yield.
Estimates used in the calculation include the expected term of the warrants or
options.
Restatement
for the Six Months Ended March 31, 2008
Subsequent
to filing Form 10-QSB for the six months ended March 31, 2008, the Company
determined that the beneficial conversion feature discounts and warrant
discounts related to the issuance of the convertible notes payable were not
properly accounted for, and certain warrants and options were omitted. As a
result, the Company recorded the following adjustments.
2001 Executive Officers
Stock Option Plan
In
October 2000, the Company amended its employment agreements with each of the
executive officers. A result of the amendments was that the Company adopted
the 2001 Executive Officers Stock Option Plan. The plan has reserved 7,576,680
shares of Common Stock and has issued options to purchase 7,034,140 shares of
Common Stock that expire 5 years from the date of issuance.
Balance
Sheet
On the
grant date, the Company applied FASB 133, paragraph 6 to determine if the
options were within the scope and definition of a derivative. The options: had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the options
were determined to be derivatives. Emerging Issue Task Force, paragraphs 7 and 8
were then applied to determine the classification. These paragraphs state that
contracts
that require settlement in shares are equity instruments. EITF 00-19, paragraph 9 was
applied to determine the value of the options. This paragraph states that
contracts that require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair value.
In accordance with EITF 00-19, the options were recorded in additional paid-in
capital at fair value on the date of issuance.
The
Company began the analysis for the restatement as of and for the fiscal year
ended September 30, 2007 by applying FASB 133, paragraph 6 to ascertain if
the options remained derivatives as of September 30, 2007. All of the criteria
in the original analysis were met, and the options were determined to be within
the scope and definition of a derivative. EITF 00-19, paragraph 19 was applied
next, which states that if a company is required to obtain shareholder approval
to increase the company’s authorized shares in order to net-share or physically
settle a contract, share settlement is not controlled by the company, and the
contract is required to be classified as a liability. EITF 00-19, paragraph 10
was then applied. Paragraph 10 states that if classification changes as the
result of an event, the contract should be reclassified as of the date of the
event at fair value. The event responsible for the change in classification was
the issuance of the $1,025,000 Convertible Bridge Notes on July 17,
2007.
In
accordance with EITF 00-19, the options were reclassified as of July 17, 2007
from additional paid-in capital to warrant liabilities on the balance sheet, at
the fair value of $2,271,879. The value was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
5.02%; volatility of 219.89%; dividend yield of 0%; and an expected term
of 3.67 years.
EITF
00-19, paragraph 9 was then applied, which states that all contracts classified
as liabilities should be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
The
Company began the analysis for the restatement by applying FASB 133, paragraph 6 to ascertain if
the options remained derivatives as of March 31, 2008. All of the criteria in
the original analysis were met, and the options were determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the options was determined to be $457,114 as of March 31, 2008 and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 3 years.
The
decrease in the fair value of the options was $766,474 for the three months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.
The
decrease in the fair value of the options was $1,469,800 for the six months
ended March 31, 2008, and recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Operations
EITF
00-19, paragraph 9 was applied which requires all contracts classified as
liabilities to be measured at fair value, with changes in fair value reported in
earnings as long as the contracts remain classified as liabilities.
The
change in the fair value of the options for the three months ended March 31,
2008 was $766,474 and included in decrease in warrant liability in the other
income (expense) section of the statement of operations.
The
change in the fair value of the options for the six months ended March 31, 2008
was $1,469,800 and included in decrease in warrant liability in the other income
(expense) section of the statement of operations.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the options of
$1,469,800.
Advisory Board
Compensation
On
October 1, 2004, the Company formed an advisory board consisting of four
members. Each member was to receive $5,000 monthly from October 1, 2004 to
February 22, 2007 for a total of $576,000, convertible by the advisory board
members into 11,520,000 shares of Common Stock at a rate of $0.05 per share. On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of Common Stock in exchange for warrants
exercisable at $0.25 per share. The Company determined that the accrued expense,
embedded beneficial conversion feature, embedded beneficial conversion feature
discount, and related amortization expense were not recorded at the date of
issuance, or prior to the restatement of the financial statements as of March
31, 2008, no payments have been made to any advisory board members, there has
been no conversion by any Advisory Board members of the accrued liability into
shares of Common Stock, and no warrant has been exercised.
Balance
Sheet
The
Company began the analysis for the restatement by applying paragraph 6 of
Financial Accounting Standard Board (FASB) Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities, to ascertain if the
embedded beneficial conversion features were derivatives at the date of
issuance. The embedded beneficial conversion features had one or more underlings
and one or more notional amounts; required no initial investment; and required
or permitted net settlement. Therefore, the embedded beneficial conversion
features were determined to be within the scope and definition of a derivative
at the date of issuance. Next, FASB 133, paragraph 12 was applied to determine
if the embedded beneficial conversion features should be separated from the
accrued expense. The Company determined that the economic characteristics of the
embedded beneficial conversion features are not clearly and closely related to
the accrued expense; the embedded beneficial conversion features and accrued
expense are not remeasured at fair value at each balance sheet date; and a
separate contract with the same terms would be a derivative pursuant to FASB
133, paragraphs 6-11. Therefore, the embedded beneficial conversion features
were separated from the accrued expense to determine the classification and
valuation. EITF 00-19, paragraphs 7 and 8 were applied to determine the
classification. Paragraph 7 states that contracts which require net-cash
settlement are liabilities, and paragraph 8 states that contracts which give the
counterparty (advisory board members) a choice of net-cash settlement or
settlement in shares are liabilities. Therefore, the embedded conversion
features were determined to be liabilities. EITF 00-19, paragraph 9 was applied
to determine the value. Paragraph 9 of EITF 00-19 states all contracts
classified as liabilities should be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The fair
value of the monthly embedded beneficial conversion features was determined to
be $576,000 as of September 30, 2007, and was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
4.05%; volatility of 126.94%; dividend yield of 0%; and an expected term of 2.08
to 4.42 years.
On
December 13, 2007 the advisory board members agreed to forfeit the ability to
convert their compensation into shares of common stock in exchange for warrants.
As a result, the beneficial conversion feature of $576,000 and the unamortized
beneficial conversion feature discount of $195,560 were written off for a net of
$380,440.
The
beneficial conversion features discount amortization was $15,104 for the three
and six months ended March 31, 2008, which increased accrued
expenses.
Statement
of Operations
EITF
00-19, paragraph 9 was applied which requires all contracts classified as
liabilities to be measured at fair value, with changes in fair value reported in
earnings as long as the contracts remain classified as liabilities.
There was
no increase in the fair value of the beneficial conversion features for the
three or six months ended March 31, 2008.
The
beneficial conversion feature discount amortization was determined to be $15,104
and has been included in general and administrative expenses in the operating
expenses section of the statement of operations for the three and six months
ended March 31, 2008.
The
beneficial conversion feature of $576,000 and the beneficial conversion feature
discount of $195,560 were written off for a net of $380,440 and has been
included in the other income (expense) section of the statement of income
(operations) for the three and six months ended March 31, 2008.
Statement
of Cash Flows
Changes
in the statement of cash flows were the result of the amortization of the
beneficial conversion features discount of $15,104, and the net write off of
beneficial conversion feature and beneficial conversion feature discount of
$380,440 on the statement of operations.
Warrants Related to 2004
Stock Purchase Agreement
Under the
terms of a 2004 Stock Purchase Agreement, the Company issued warrants to
purchase 1,463,336 shares of Common Stock at an exercise price of $0.03 which
expire from February 9, 2007 to August 25, 2007. The Company determined that the
warrants and related expense were not recorded at the date of issuance or prior
to the restatement and there has been no exercise of the warrants into shares of
Common Stock.
Balance
Sheet
The
Company began the analysis by applying FASB 133, paragraph 6 to determine if
the warrants were within the scope and definition of a derivative at the date of
issuance. The warrants: had one or more underlings, and one or more notional
amounts; required no initial investment; and required or permitted net
settlement. Therefore, the warrants were determined to be derivatives at the
date of issuance. EITF 00-19, paragraphs 7 and 8 were then applied to determine
classification. These paragraphs state that contracts
which require settlement in shares are equity instruments. EITF 00-19, paragraph 9 was
applied to determine the value of the options. Paragraph 9 of EITF 00-19 states
that contracts which require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the warrants was determined to be $24,366 at the date of issuance which
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.21% to 2.14%; volatility of 141.91%
to 170.27%; dividend yield of 0% and an expected term of 5 years. The
warrants were considered an expense prior to October 1, 2006. Therefore, $24,366
was recorded to additional paid-in capital and deficit accumulated during
development stage.
EITF
00-19, paragraph 19 was applied next. Paragraph 19 states that if a company is
required to obtain shareholder approval to increase the company’s authorized
shares in order to net-share or physically settle a contract, share settlement
is not controlled by the company and the contract is required to be classified
as a liability. EITF 00-19, paragraph 10 was then applied. This paragraph states
that if classification changes as the result of an event, the contract should be
reclassified as of the date of the event at fair value. The event responsible
for the change in classification was the issuance of the
$1,025,000 Convertible Bridge Notes on July 17, 2007.
In
accordance with EITF 00-19, the warrants were reclassified as of July 17, 2007
from additional paid-in capital to warrant liabilities on the balance sheet at
the fair value of $70,029, which was calculated using the Black Sholes valuation
model with the following assumptions: risk free rate of return of 5.02%;
volatility of 219.89%; dividend yield of 0%; and an expected term of .08
years.
EITF
00-19, paragraph 9 was also applied in the analysis. Paragraph 9 states that all
contracts classified as liabilities must be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities.
The fair
value of the warrants was $0 as of September 30, 2007, due to their
expiration.
The
decrease in the fair value of the warrants was $70,029 for the year ended
September 30, 2007, which was recorded to warrant liability and accumulated
deficit during development stage as of March 31, 2008.
Statement
of Operations
There was
no change in the fair value of the warrants for the three months ended March 31,
2008, due to their expiration.
Statement
of Cash Flows
There was
no change in the statement of cash flows for the three months ended March 31,
2008.
Beneficial Conversion
Features
As of
March 31, 2008, the Company had Convertible Bridge Notes outstanding totaling
$1,811,000 which were issued between October 17, 2006 and July 17, 2007. The
bridge notes included an embedded beneficial conversion feature that allowed the
holders of the convertible notes to convert their notes into shares of Common
Stock at rates between $0.01 and $0.22. The bridge notes mature between June 17,
2008 and December 31, 2008. The bridge notes accrue interest at rates between 8%
and 10%, and any accrued but unpaid interest is also convertible by the holder
of the bridge notes into shares of Common Stock at the same rate.
Balance
Sheet
The
Company began the analysis for the restatement as of and for the six months
ended March 31, 2008 by applying FASB 133, paragraph 6 to ascertain if
the embedded beneficial conversion features remained derivatives subsequent to
the date of issuance. All of the criteria in the original analysis were met, and
the embedded beneficial conversion features issued were determined to be within
the scope and definition of a derivative. FASB 133, paragraph 12 was applied to
determine if the embedded beneficial conversion features should be separated
from the convertible bridge notes. All of the criteria in the original analysis
were met, and the embedded beneficial conversion features were separated from
the convertible bridge notes. EITF 00-19, paragraphs 7 and 8 were applied to
determine the classification. Paragraph 7 states that contracts which require
net-cash settlement are liabilities, and paragraph 8 states that contracts which
give the counterparty (holders of the convertible notes) a choice of net-cash
settlement or settlement in shares are liabilities. Therefore the embedded
conversion features were determined to be liabilities. The change in the
determination of the classification from equity to a liability was based on the
rights of the holders of the convertible notes to convert the notes into shares
of Common Stock. Therefore, share settlement is not controlled by the Company.
EITF 00-19, paragraph 9 was applied to determine the value of the embedded
beneficial conversion features. Paragraph 9 states that all contracts classified
as liabilities must be measured at fair value at each balance sheet date, with
changes in fair value reported in earnings and disclosed in the financial
statements as long as the contracts remain classified as
liabilities.
The fair
value of the monthly embedded beneficial conversion features was determined to
be $874,882 as of March 31, 2008, which was calculated using the Black Sholes
valuation model with the following assumptions: risk free rate of return of
1.56%; volatility of 72.53%; dividend yield of 0%; and an expected term
of .08 to .33 years.
The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.
The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
beneficial conversion features liability on the balance sheet.
The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, which increased convertible
notes.
The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, which increased convertible notes.
Statement
of Operations
The
beneficial conversion features were analyzed in accordance with EITF 00-19,
paragraph 9 which requires all contracts classified as liabilities to be
measured at fair value, with changes in fair value reported in earnings as long
as the contracts remain classified as liabilities.
The
decrease in the fair value of the beneficial conversion features was determined
to be $347,850 for the three months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.
The
decrease in the fair value of the beneficial conversion features was determined
to be $555,929 for the six months ended March 31, 2008, and was recorded in
increase (decrease) in beneficial conversion features liability, in the other
income (expense) section of the statement of operations.
The
amortization of the beneficial conversion features discount was $285,610 for the
three months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.
The
amortization of the beneficial conversion features discount was $573,646 for the
six months ended March 31, 2008, and was recorded in interest expense in the
other income (expense) section of the statement of operations.
Statement
of Cash Flows
Changes
in the statement of cash flows for the three months ended March 31, 2008 were
the result of the decrease in the fair value of the beneficial conversion
features liability of $347,850 and the amortization of the beneficial conversion
features discounts of $285,610 on the statement of operations.
Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the fair value of the beneficial conversion features
liability of $555,929 and the amortization of the beneficial conversion features
discounts of $573,646 on the statement of operations.
Warrants related to
$1,025,000 of Convertible Bridge
Notes
On July
17, 2007 the Company completed an offering of $1,025,000 of convertible notes to
a group of institutional and accredited investors which included warrants to
purchase 2,795,454 shares of Common Stock (2,329,546 shares of Common
Stock to holders of the convertible bridge notes, 465,908 shares of Common Stock
as a placement fee) at an exercise price of $0.50 per share. An amendment to the
convertible notes dated March 13, 2008 reduced the exercise price to $0.30 per
share.
Balance
Sheet
The
Company began the analysis for the restatement of the financial statements as of
and for the six months ended March 31, 2008 by applying FASB 133, paragraph 6 to ascertain if
the warrants issued remained derivatives as of March 31, 2008. All of the
criteria in the original analysis were met, and the warrants issued were
determined to be within the scope and definition of a derivative. EITF 00-19,
paragraph 19 was applied next to determine classification. Paragraph 19 states
that if a company is required to obtain shareholder approval to increase the
company’s authorized shares in order to net-share or physically settle a
contract, share settlement is not controlled by the company, and the contract is
required to be classified as a liability. EITF 00-19, paragraph 9 was applied to
determine the value of the warrants. Paragraph 9 states that all contracts
classified as liabilities must be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The fair
value of the warrants was determined to be $135,950 as of March 31, 2008, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%; dividend
yield of 0%; and an expected term of 4.17 to 4.25 years.
The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded by decreasing warrant
liabilities on the balance sheet by $185,827 ($143,242 related to the holders of
the convertible bridge notes, and $42,585 related to the placement fee).
The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded by decreasing warrant liabilities
on the balance sheet by $363,982 ($268,470 related to the holders of the
convertible bridge notes, and $95,512 related to the placement fee).
The
amortization of the warrant discount was $213,353 for the six months ended March
31, 2008, which increased convertible notes.
Statement
of Operations
EITF
00-19, paragraph 9 was applied which requires all contracts classified as
liabilities to be measured at fair value, with changes in fair value reported in
earnings as long as the contracts remain classified as liabilities.
The
decrease in the fair value of the warrants was determined to be $185,827 for the
three months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.
The
decrease in the fair value of the warrants was determined to be $363,982 for the
six months ended March 31, 2008, and recorded in decrease in warrants in the
other income (expense) section of the statement of operations.
The
increase in the amortization of the warrant discount of $30,065 is included in
interest expense in the other income (expense) section of the statement of
operations.
Statement
of Cash Flows
Changes
in the statement of cash flows for the six months ended March 31, 2008 were the
result of the decrease in the amount of $363,982 in the fair value of the
warrants at the date of issuance on the statement of operations, and the
increase in the amortization of the warrant discount of $30,065 on the balance
sheet.
Warrant Issued to
Consultant
On
December 19, 2007, the Company entered into a one year Consulting Agreement with
Mark Maron pursuant to which Mr. Maron was appointed as Special Adviser to the
Company. As compensation for his services, the Company granted Mr. Maron a five
year warrant to purchase up to 8,539,312 shares of the Company’s Common Stock at
an exercise price of $0.25 per share. As per the terms of the warrant agreement,
the right to purchase 340,000 shares of Common Stock is not exercisable until
the notes dated June 6, 2007 (Convertible Notes 2 as discussed in Note 6 to our
financial statements) are eligible for conversion into shares of Common
Stock. The warrant was not issued from the 2001 Executive
Officers Stock Option Plan.
Balance
Sheet
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
warrant was within the scope and definition of a derivative at the date of
issuance. The warrant had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the warrant was determined to be a derivative at the date
of issuance. In order to determine how to classify the warrant, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments.
In order to determine the value of the warrant, the Company followed the
guidance of EITF 00-19, paragraph 9, which states that contracts which require
the company to deliver shares as part of a physical settlement or net-share
settlement should be initially measured at fair value.
The fair
value of the warrant was determined to be $1,448,321 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.26%, expected volatility of 98.01%,
dividend yields of 0% and expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the warrant by applying FASB 133, paragraph 6 to ascertain if
the warrant remained a derivative as of December 31, 2007. All of the criteria
in the original analysis were met, and the warrant issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9 was also
applied, which states that contracts classified as liabilities should be
measured at fair value at each balance sheet date, with changes in fair value
reported in earnings and disclosed in the financial statements as long as the
contracts remain classified as liabilities.
The fair
value of the warrant was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.
The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.
The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Operations
The
decrease in the fair value of the warrant was $972,165 for the three months
ended March 31, 2008, and was recorded by decreasing the warrant liability on
the balance sheet.
The
decrease in the fair value of the warrant was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the warrant of
$905,054.
Option Issued to Chief
Executive Officer
On
December 19, 2007, the Company entered into a one year Employment Agreement with
Richard H. Papalian pursuant to which Mr. Papalian had been appointed as the
Company’s Chief Executive Officer. As compensation for his services, the Company
granted to Mr. Papalian a five year option to purchase up to 8,539,312 shares of
the Company’s Common Stock at an exercise price of $0.25 per share. As per the
terms of the stock option agreement, the right to purchase 340,000 shares of
Common Stock is not exercisable until the notes dated June 6, 2007 (Convertible
Notes 2 as discussed in Note 6 to our financial statements) are eligible for
conversion into shares of Common Stock. These options were not issued from the
2001 Executive Officers Stock Option Plan. On the grant date, the
Company applied FASB 133, paragraph 6 to determine if
the option was within the scope and definition of a derivative. The option had
one or more underlings and one or more notional amounts, required no initial
investment, and required or permitted net settlement. Therefore, the option was
determined to be a derivative. In order to determine how to classify the option,
the Company followed the guidance of EITF 00-19, paragraphs 7 and 8, which state
that contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments.
In order to determine the value of the option, the Company applied EITF 00-19,
paragraph 9, which states that contracts that require the company to deliver
shares as part of a physical settlement or net-share settlement should be
initially measured at fair value.
Balance
Sheet
The fair
value of the option was determined to be $1,448,321 at the date of issuance, and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 3.26%; volatility of 98.01%; dividend
yield of 0%; and an expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the option as of March 31, 2008 by applying FASB 133, paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by a company, the contract is
required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the option was determined to be $543,267 as of March 31, 2008, and was
calculated using the Black Sholes valuation model with the following
assumptions: risk free rate of return of 1.56%; volatility of 72.53%;
dividend yield of 0%; and an expected term of 4.67 years.
The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Operations
The
decrease in the fair value of the option was $972,165 for the three months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
The
decrease in the fair value of the option was $905,054 for the six months ended
March 31, 2008, and was recorded by decreasing the warrant liability on the
balance sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$905,054.
Option Issued to
Director
On
December 13, 2007, the Company’s Board of Directors approved the issuance to a
director of a five year option to purchase a total of 1,000,000 shares of the
Company’s common stock at an exercise price of $0.25 per share.
Balance
Sheet
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
option was within the scope and definition of a derivative at the date of
issuance. The option had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the option was determined to be a derivative at the date
of issuance. In order to determine how to classify the option, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the option, the
Company followed the guidance of EITF 00-19, paragraph 9, which states that
contracts which require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the option by applying FASB 133, paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option was determined to be within the
scope and definition of a derivative. EITF 00-19, paragraph 8 was applied which
states that if share settlement is not controlled by the company, the contract
is required to be classified as a liability. Paragraph 9, which states that
contracts classified as liabilities should be measured at fair value at each
balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the option was determined to be $63,620 as of March 31, 2008, using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Operations
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.
Option Issued to Chief
Financial Officer
On
December 13, 2007, the Company’s Board of Directors approved the issuance to the
Chief Financial Officer of a five year option to purchase a total of 1,000,000
shares of the Company’s common stock at an exercise price of $0.25 per
share.
Balance
Sheet
The
Company followed the guidance of FASB 133, paragraph 6, to determine if the
option was within the scope and definition of a derivative at the date of
issuance. The option had one or more underlings and one or more notional
amounts, required no initial investment and required or permitted net
settlement. Therefore, the option was determined to be a derivative at the date
of issuance. In order to determine how to classify the option, the Company
followed the guidance of EITF 00-19, paragraphs 7 and 8, which state that
contracts that require
net-cash settlement (including a requirement to net cash settle the contract if
an event occurs and if that event is outside the control of the company) are
liability instruments. In order to determine the value of the option, the
Company followed the guidance of EITF 00-19, paragraph 9, which states that
contracts which require the company to deliver shares as part of a physical
settlement or net-share settlement should be initially measured at fair
value.
The fair
value of the option was determined to be $171,520 at the date of issuance and
was calculated using the Black Sholes valuation model with the following
assumptions: risk free interest rate of 3.22%, expected volatility of 99.86%,
dividend yield of 0% and expected term of 5 years.
The
Company then applied EITF 00-19, paragraph 9, which states that all contracts
classified as liabilities are to be measured at fair value at each balance sheet
date, with changes in fair value reported in earnings and disclosed in the
financial statements as long as the contracts remain classified as
liabilities.
The
Company analyzed the option by applying FASB 133, paragraph 6 to ascertain if
the option remained a derivative as of March 31, 2008. All of the criteria in
the original analysis were met, and the option issued was determined to be
within the scope and definition of a derivative. EITF 00-19, paragraph 8 was
applied which states that if share settlement is not controlled by the company,
the contract is required to be classified as a liability. Paragraph 9, which
states that contracts classified as liabilities should be measured at fair value
at each balance sheet date, with changes in fair value reported in earnings and
disclosed in the financial statements as long as the contracts remain classified
as liabilities, was also applied.
The fair
value of the option was determined to be $63,620 as of March 31, 2008 using the
Black Sholes valuation model with the following assumptions: risk free rate
of return of 1.56%; volatility of 72.53%; dividend yield of 0%; and an expected
term of 4.67 years.
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Operations
The
decrease in the fair value of the option was $113,845 for the three months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
The
decrease in the fair value of the option was $107,900 for the six months ended
March 31, 2008, and recorded by decreasing the warrant liability on the balance
sheet.
Statement
of Cash Flows
The
change in the statement of cash flows for the six months ended March 31, 2008
was the result of the change in the fair value of the option of
$107,900.
Table 1 –
2008
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant
Issued
|
|
|
|
|
|
|
|
|
|
|
|
10%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to
Consultant
|
|
|
|
|
|
Warrant Issued to Director
|
|
|
Financial
Officer
|
|
|
Subordinated Notes Payable
|
|
|
to $750,000 Stock Issuance
|
|
|
Other
|
|
|
|
|
Balance
Sheet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalent
|
|
$ |
102,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
151 |
|
|
$ |
102,755 |
|
Accounts
payable
|
|
|
470,137 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,987 |
|
|
|
503,124 |
|
Accrued
expenses
|
|
|
1,847,254 |
|
|
|
|
|
|
576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,423,254 |
|
Convertible
Notes, net
|
|
|
1,306,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
12,913 |
|
|
|
206,465 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,525,971 |
|
10%
subordinated notes payable
|
|
|
332,182 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,169 |
|
|
|
|
|
|
38 |
|
|
|
352,389 |
|
Warrant
liability
|
|
|
974,632 |
|
|
|
457,114 |
|
|
|
549,672 |
|
|
|
|
|
|
|
|
|
|
36,522 |
|
|
|
128,358 |
|
|
|
128,358 |
|
|
|
63,620 |
|
|
|
63,620 |
|
|
|
|
|
|
|
156,268 |
|
|
|
|
|
|
|
2,558,164 |
|
Beneficial
conversion feature
liability
|
|
|
857,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
874,882 |
|
Additional
paid-in capital
|
|
|
12,815,792 |
|
|
|
(2,271,879 |
) |
|
|
(269,848 |
) |
|
|
(45,663 |
) |
|
|
473,797 |
|
|
|
135,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,837,605 |
|
Deficit
accumulated during development
stage
|
|
|
(19,149,208 |
) |
|
|
1,814,765 |
|
|
|
(855,824 |
) |
|
|
45,663 |
|
|
|
(503,914 |
) |
|
|
(378,393 |
) |
|
|
(128,358 |
) |
|
|
(128,358 |
) |
|
|
(63,620 |
) |
|
|
(63,620 |
) |
|
|
(20,169 |
) |
|
|
(156,268 |
) |
|
|
(32,874 |
) |
|
|
(19,620,178 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations (for the three months ended March 31,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$ |
395,890 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
165,022 |
|
|
$ |
32,540 |
|
|
$ |
593,452 |
|
Research
and development
|
|
|
328,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
329,028 |
|
Interest
expense
|
|
|
(492,546 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,677 |
|
|
|
(78,022 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,169 |
) |
|
|
|
|
|
|
|
|
|
|
(574,060 |
) |
Decrease
(increase) in warrant
liability
|
|
|
273,778 |
|
|
|
766,474 |
|
|
|
983,628 |
|
|
|
|
|
|
|
|
|
|
|
(36,522 |
) |
|
|
972,165 |
|
|
|
972,165 |
|
|
|
113,845 |
|
|
|
113,845 |
|
|
|
|
|
|
|
8,754 |
|
|
|
|
|
|
|
4,168,132 |
|
Increase
in beneficial conversion feature
liability
|
|
|
364,944 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,204 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
347,740 |
|
Basic
and dilutive loss per share
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Operations (for the six months ended March 31,
2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative
|
|
$ |
1,526,663 |
|
|
|
|
|
|
$ |
1,557,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,033,412 |
|
|
$ |
1,033,412 |
|
|
$ |
171,520 |
|
|
$ |
171,520 |
|
|
|
|
|
|
$ |
165,022 |
|
|
$ |
32,540 |
|
|
$ |
5,691,794 |
|
Research
and development
|
|
|
565,598 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
334 |
|
|
|
565,932 |
|
Interest
expense
|
|
|
(906,150 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,816 |
|
|
|
(167,287 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(20,169 |
) |
|
|
|
|
|
|
|
|
|
|
(1,060,790 |
) |
Decrease
(increase) in warrant
liability
|
|
|
427,991 |
|
|
|
1,469,800 |
|
|
|
1,008,033 |
|
|
|
|
|
|
|
|
|
|
|
(12,580 |
) |
|
|
905,054 |
|
|
|
905,054 |
|
|
|
107,900 |
|
|
|
107,900 |
|
|
|
|
|
|
|
8,754 |
|
|
|
|
|
|
|
4,927,906 |
|
Increase
in beneficial conversion feature
liability
|
|
|
637,688 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,759 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
555,929 |
|
Write-off
of beneficial conversion
feature
|
|
|
|
|
|
|
|
|
|
|
380,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
380,440 |
|
Basic
and dilutive loss per share
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statement
of Cash Flows (for the six months ended March 31, 2008)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,077,833 |
) |
|
$ |
1,469,800 |
|
|
$ |
(169,232 |
) |
|
|
|
|
|
$ |
(48,943 |
) |
|
$ |
(179,867 |
) |
|
$ |
(128,358 |
) |
|
$ |
(128,358 |
) |
|
$ |
(63,620 |
) |
|
$ |
(63,620 |
) |
|
$ |
(20,169 |
) |
|
$ |
(156,268 |
) |
|
$ |
(32,874 |
) |
|
$ |
(1,599,342 |
) |
Amortization
of beneficial conversion features discount and warrant
discount
|
|
|
669,025 |
|
|
|
|
|
|
|
10,072 |
|
|
|
|
|
|
|
(32,816 |
) |
|
|
167,287 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,169 |
|
|
|
|
|
|
|
38 |
|
|
|
833,775 |
|
Stock
based compensation expense-
employee
|
|
|
414,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,033,412 |
|
|
|
|
|
|
|
171,520 |
|
|
|
171,520 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,791,360 |
|
Stock
based compensation expense-
consultant
|
|
|
439,909 |
|
|
|
|
|
|
|
1,557,705 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,008,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,022 |
|
|
|
|
|
|
|
3,171,049 |
|
(Decrease)
increase in warrant liability
|
|
|
(427,991 |
) |
|
|
(1,469,800 |
) |
|
|
(1,008,033 |
) |
|
|
|
|
|
|
|
|
|
|
12,580 |
|
|
|
(905,054 |
) |
|
|
(905,054 |
) |
|
|
(107,900 |
) |
|
|
(107,900 |
) |
|
|
|
|
|
|
(8,754 |
) |
|
|
|
|
|
|
(4,927,906 |
) |
Increase
in beneficial conversion feature
liaiblity
|
|
|
(637,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81,759 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(555,929 |
) |
Write-off
of beneficial conversion feature
|
|
|
|
|
|
|
|
|
|
|
(380,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380,440 |
) |
Accounts
payable
|
|
|
312,738 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,987 |
|
|
|
345,725 |
|
Accrued
expenses
|
|
|
159,581 |
|
|
|
|
|
|
|
576,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
735,581 |
|
Cash
and cash equivalents
|
|
|
102,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151 |
|
|
|
102,755 |
|
Results
of Operations
Three
Months Ended March 31, 2009 Compared To Three Months Ended March 31,
2008
Revenues
for the three months ended March 31, 2009 and 2008 were
zero. Although we received an order and deposit for two water
treatment systems during the 2008 fiscal year, revenue from this order has not
been recognized because the units have not been completed and delivered. The
Company incurred operating expenses of $499,935 during the three months ended
March 31, 2009, a decrease of $464,474 or approximately 48%, as compared to
$964,409 for the three months ended March 31, 2008. General and
administrative expenses were $314,055 during the three months ended March 31,
2009, a decrease of $313,169 or approximately 49%, as compared to $627,224 for
the three months ended March 31, 2008. The decrease in general and
administrative expenses contributed to the significant decrease in operating
expenses. During the three months ended March 31, 2008, warrants having a
relative fair value of $165,022 were issued to the purchasers of common stock
and classified as general and administrative expenses. Research and development
expenses were $178,265 during the three months ended March 31, 2009, a decrease
of $150,763 or approximately 46%, as compared to $329,028 for the three months
ended March 31, 2008. The decrease in research and development
expenses resulted primarily from the reallocation of personnel for the design of
the two water treatment systems ordered during the 2009 fiscal
year.
Other
income (expense) totaled $(299,646) during the three months ended March 31,
2009, a decrease of $4,132,694 or approximately 108%, as compared to $3,833,048
for the three months ended March 31, 2008. The Company earned interest income of
$277 during the three months ended March 31, 2009, a decrease of $89 or 24%, as
compared to $366 during the three months ended March 31, 2008. The
Company incurred interest expense of $63,758 during the three months ended March
31, 2009, a decrease of $490,307 or approximately 88%, as compared to $554,065
for the three months ended March 31, 2008. The significant interest expense we
incurred during the three months ended March 31, 2008 was due primarily to the
amortization of the beneficial conversion features discount and warrant discount
of the convertible debt securities, while during the three months ended March
31, 2009 there was a decrease in outstanding debt principal, which resulted in
lower interest expenses. Decrease (increase) in warrant liability was $(219,981)
during the three months ended March 31, 2009, an increase of $4,388,114 or
approximately 105%, as compared to $4,168,133 during the three months ended
March 31, 2008. The increase in warrant liability was due to the increase
in the trading price of our Common Stock, resulting in a higher Black Sholes
valuation model valuation calculation of the warrant liability. Decrease in
beneficial conversion features liability was $347,780 during the three months
ended March 31, 2008. The decrease in beneficial conversion features liability
was due to the expiration of the expected term of the beneficial conversion
features of our convertible debt. During the three months ended March 31, 2009
the Company recorded a loss on settlement of debt of $16, 184 related to the
conversion of notes payable and accrued interest into Common Stock. During the
three months ended March 31, 2008 the Company recorded a loss on lease
termination for $129,166 related to the termination of lease. There were no
comparable expenses recorded during the three months ended March 31,
2009.
As a
result of these items, net loss for the three months ended March 31, 2009 was
$(799,581), a decrease of $3,668,220 or approximately 128% over the net
income of $2,868,639 for the three months ended March 31,
2008.
Six
Months Ended March 31, 2009 Compared To Six Months Ended March 31,
2008
Revenues
for the six months ended March 31, 2009 and 2008 were zero. Although
we received an order and deposit for two water treatment systems during the 2008
fiscal year, revenue from this order has not been recognized because the units
have not been completed and delivered. The Company incurred operating expenses
of $1,337,224 during the six months ended March 31, 2009, a decrease of
$4,936,816 or approximately 79%, as compared to $6,274,040 for the six months
ended March 31, 2008. General and administrative expenses were
$964,891 during the six months ended March 31, 2009, a decrease of $4,726,903 or
approximately 83%, as compared to $5,691,794 for the six months ended March 31,
2008. The decrease in general and administrative expenses contributed
to the significant decrease in operating expenses. The significant general and
administrative expenses incurred during the six months ended March 31, 2008 were
primarily due to the issuance of warrants having a fair value of $5,010,748.
During the six months ended March 31, 2009, the Company issued warrants having a
fair value of $238,244. Research and development expenses were $357,229 during
the six months ended March 31, 2009, a decrease of $208,703 or approximately
37%, as compared to $565,932 for the six months ended March 31,
2008. The decrease in research and development expenses resulted
primarily from the reallocation of personnel for the design of the two water
treatment systems ordered during the 2009 fiscal year.
Other
income totaled $1,486,548 during the six months ended March 31, 2009, a decrease
of $3,189,050 or approximately 68%, as compared to $4,675,598 for the six months
ended March 31, 2008. The Company earned interest income of $3,868 during the
six months ended March 31, 2009, an increase of $2,589 or 202%, as compared to
$1,279 during the six months ended March 31, 2008. The Company
incurred interest expense of $158,523 during the six months ended March 31,
2009, a decrease of $902,267 or approximately 85%, as compared to $1,060,790 for
the six months ended March 31, 2008. The significant interest expense we
incurred during the six months ended March 31, 2008 was due primarily to the
amortization of the beneficial conversion features discount and warrant discount
of the convertible debt securities, while during the six months ended March 31,
2009 there was a decrease in outstanding debt principal, which resulted in lower
interest. Decrease in warrant liability was $1,631,387 during the six months
ended March 31, 2009, a decrease of $3,296,519 or approximately 67%, as compared
to $4,927,906 during the six months ended March 31, 2008. The reduction of
decrease in warrant liability was due to the increase in the trading price of
our Common Stock, resulting in a higher Black Sholes valuation model valuation
calculation of the warrant liability. Decrease in beneficial
conversion features liability was $26,000 during the six months ended March 31,
2009, a decrease of $529,929 or approximately 95%, as compared to $555,929 for
the six months ended March 31, 2008. The reduction of decrease in beneficial
conversion features liability was due to the amortization expiration of the
expected term of the beneficial conversion features of our convertible debt.
During the six months ended March 31, 2009 the Company recorded a loss on
settlement of debt of $16,184 related to the conversion of notes payable and
accrued interest into Common Stock. During the three months ended March 31, 2008
the Company recorded a loss on lease termination for $129,166 related to the
termination of lease. During the six months ended March 31, 2008 the
Company recorded a write-off of beneficial conversion feature and discount of
$380,440 related to the advisory board compensation. There were no
comparable expenses recorded during the six months ended March 31,
2009.
As a
result of these items, net income for the six months ended March 31, 2009 was
$149,324, a decrease of $1,748,666 or approximately 109% over the net
loss of $1,599,342 for the six months ended March 31, 2008.
Liquidity
and Capital Resources
The
Company had cash and cash equivalents of $25,613 at March 31, 2009. The
Company’s source of liquidity has been the sale of its securities and deposits
received from orders for two water treatment systems. The Company expects to
receive additional orders for water treatment systems but if it does not receive
additional orders or if these orders do not satisfy its capital needs, the
Company expects to sell its securities or obtain loans to meet its capital
requirements. On May 13, 2009, the Company entered into a letter of
understanding regarding the issuance of a total of $300,000 in principal amount
of notes payable of which notes having a principal value of $35,000 will mature
on May 22, 2009 and notes having a principal value of $265,000 will mature on
August 21, 2009. The notes will include a provision that will permit the
holders, upon the occurrence of a default, to convert the outstanding principal
and unpaid accrued interest into shares of Common Stock at $0.10 per
share. The securities being offered will not be or have not been
registered under the Securities Act of 1933, as amended, and may not be offered
or sold in the United States absent registration or an applicable exemption from
registration requirements. There can be no assurance that sales of the
Company’s securities or the sale of its water treatment systems, if such sales
occur, will provide sufficient capital for its operations or that the Company
will not encounter unforeseen difficulties that may deplete its capital
resources more rapidly than anticipated. As of March 31, 2009, a total of
$2,476,389 in principal and accrued interest related to certain promissory notes
issued by the Company was due. The Company has not yet paid the notes
and no demand for payment has been made.
Operating
Activities
During
the six months ended March 31, 2009, the Company used $1,194,429 of cash in
operating activities. Non-cash adjustments included $15,104 for
depreciation, $27,094 for amortization of warrant and beneficial conversion
feature, and $16,184 for loss on settlement of debt. Cash provided by
operating activities included $12,230 in other current assets, $4,600 in other
assets, $92,508 in accounts payable, $189,486 in accrued liabilities, and
$200,000 in customer deposits. Cash used in operating activities included
$608,565 for inventory, $1,631,387 for warrant liability, and $26,000 for
beneficial conversion feature liability. Stock based compensation to
nonemployees was $248,752.
During
the six months ended March 31, 2008, the Company used $896,996 of cash in
operating activities. Non-cash adjustments included $16,314 for depreciation,
$833,775 for amortization of warrant and beneficial conversion
feature, $129,166 for loss on termination of lease, $380,440 for write-off
of beneficial conversion features, and $138,375 for accrual of liquidating
damages. Cash provided by operating activities included $345,724 in accounts
payable, and $174,508 in accrued liabilities. Cash used in operating
activities included $33,650 for other current assets, $4,927,906 for warrant
liability, and $555,929 for beneficial conversion features liability. Stock
based compensation to employees was $1,791,360 and stock based compensation to
nonemployees was $3,171,049.
Investing
Activities
During
the six months ended March 31, 2009, the Company acquired $5,546 of property and
equipment. During the six months ended March 31, 2008, the Company acquired
$29,164 of property and equipment.
Financing
Activities
During
the six months ended March 31, 2009, the Company received $5,000 for the
purchase of common stock.
During
the six months ended March 31, 2008 the Company used $656,404 in financing
activities. Cash provided from financing activities for the six months
ended March31, 2008 consisted proceeds of $425,000 from the issuance of 10%
subordinated notes payable and $283,000 for the purchase of Common Stock. Cash
used in financing activities for the six months ended March 31, 2008 included a
payment of $5,000 toward a note payable, payments of $27,336 toward notes
payable under an equity line of credit, and payments totaling $19,260 to
officers for loans made to us.
On March
31, 2009, the Company had cash and cash equivalents of $25,613. The sole source
of liquidity has been borrowings from affiliates and the sales of our
securities. While the Company has a commitment for $300,000 in financing through
the sale of promissory notes, this amount is not likely to be adequate to
finance the Company’s operations through the end of its fiscal
year. Furthermore, there is no certainty that the Company will be
able to generate revenues from operations during the fiscal year. As of March
31, 2009, the Company had an accumulated deficit of $21,869,332. We expect that
our future operating results will continue to be subject to many of the
problems, expenses, delays and risks, which we often cannot control, inherent in
the establishment of a developmental business enterprise.
Off-Balance Sheet
Arrangements
We have
no off-balance sheet arrangements, special purpose entities or financing
partnerships.
Capital
Expenditures
The
Company currently has no commitments for capital expenditures.
Material
Trends, Events or Uncertainties
We are
not certain how the current economic downturn may affect our
business. Because of the global recession, government agencies and
private industry may not have the funds to purchase our water treatment
systems. It may also be more difficult for us to raise capital in the
current economic environment. Other than as discussed herein, the Company does
not know of any material trends, events or uncertainties that may impact its
operations in the future.
Going
Concern Opinion
The
accompanying financial statements have been prepared 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 March 31, 2009, the Company has incurred
cumulative losses of $21,869,332 including net income for the six months ended
March 31, 2009 of $149,324. As the Company has limited cash flow from
operations, its ability to transition from a development stage company to an
operating company is entirely dependent upon obtaining adequate financing to pay
for its overhead, research and development activities, and acquisition of
production equipment. It is unknown when, if ever, the Company will achieve a
level of revenues adequate to support its costs and expenses. In order for the
Company to meet its basic financial obligations, including rent, salaries, debt
service and operations, it plans to undertake additional equity or debt
financing. Because of the Company’s history and current debt levels, there is
considerable doubt that the Company will be able to obtain financing. The
Company’s ability to meet its cash requirements for the next twelve months
depends on its ability to obtain such financing. Even if financing is obtained,
any such financing will likely involve additional fees and debt service
requirements, which may significantly reduce the amount of cash the Company will
have for its operations. Accordingly, there is no assurance that the Company
will be able to implement its plans.
The
Company expects to continue to incur substantial operating losses for the
foreseeable future, and it cannot predict the extent of the future losses or
when it may become profitable, if ever. It expects to incur increasing sales and
marketing, research and development and general and administrative expenses.
Also, the Company has a substantial amount of short-term debt, which will need
to be repaid or refinanced, unless it is converted into equity. As a result, as
it begins to generate revenues from operations, those revenues will need to be
significant in order to cover current and anticipated expenses. These factors
raise substantial doubt about the Company's ability to continue as a going
concern unless it is able to obtain substantial additional financing in the
short term and generate significant revenues over the long term. If the Company
is unable to obtain financing, it would likely discontinue
operations.
As
mentioned in Notes 7 and 8, the Company has convertible notes and subordinated
notes payable that have matured. The Company is in the process of renegotiating
the terms of the notes with the note holders to extend the maturity date. If the
Company is unsuccessful in extending the maturity date, the Company may not be
able to continue as a going concern.
Part
I, Item 3. Quantitative and Qualitative Disclosures about Market
Risk.
As a
smaller reporting company, we are not required to provide this
disclosure.
Part
I, Item 4T. Controls and Procedures.
(a)
Disclosure Controls and Procedures
Regulations
under the Securities Exchange Act of 1934 require public companies to maintain
“disclosure controls and procedures,” which are defined to mean a company’s
controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that it files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported,
within the time periods specified in the Commission’s rules and
forms.
We
conducted an evaluation, with the participation of our Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures as of the period covered by this
report. Based on that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that as of March 31, 2009, our disclosure
controls and procedures were not effective at the reasonable assurance level due
to the material weaknesses described below.
A
material weakness is a control deficiency (within the meaning of the Public
Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or
combination of control deficiencies that result in more than a remote likelihood
that a material misstatement of the annual or interim financial statements will
not be prevented or detected. Management has identified the following
three material weaknesses in our disclosure controls and
procedures:
1. We
do not have written documentation of our internal control policies and
procedures. Written documentation of key internal controls over
financial reporting is a requirement of Section 404 of the Sarbanes-Oxley
Act. Management evaluated the impact of our failure to have written
documentation of our internal controls and procedures on our assessment of our
disclosure controls and procedures and has concluded that the control deficiency
that resulted represented a material weakness.
2. We
do not have sufficient segregation of duties within accounting functions, which
is a basic internal control. Due to our size and nature, segregation
of all conflicting duties may not always be possible and may not be economically
feasible. However, to the extent possible, the initiation of
transactions, the custody of assets and the recording of transactions should be
performed by separate individuals. Management evaluated the impact of
our failure to have segregation of duties on our assessment of our disclosure
controls and procedures and has concluded that the control deficiency that
resulted represented a material weakness.
3. We
do not have review and supervision procedures for financial reporting functions.
The review and supervision function of internal control relates to the accuracy
of financial information reported. The failure to review and supervise could
allow the reporting of inaccurate or incomplete financial information. Due to
our size and nature, review and supervision may not always be possible or
economically feasible. Management evaluated the impact of our
significant number of audit adjustments and has concluded that the control
deficiency that resulted represented a material weakness.
To
address these material weaknesses, management performed additional analyses and
other procedures to ensure that the financial statements included herein fairly
present, in all material respects, our financial position, results of operations
and cash flows for the periods presented.
(b)
Changes in internal control over financial reporting
During the quarter covered by
this report, there was no change in our internal control over financial
reporting that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
Part
II, Item 1. Legal Proceedings.
Not
applicable.
Part
II, Item 1A. Risk Factors.
As a
smaller reporting company we are not required to provide this
information.
Part
II, Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds.
On
January 19, 2009, the Company issued 166,666 shares of common stock in exchange
for $25,000 in principal owed to holders of our convertible notes. We relied on
section 3(9) of the Securities Act of 1933 to issue the securities inasmuch as
the notes were exchanged by us with our existing security holders exclusively,
and no commission or other remuneration was paid or given directly or indirectly
for soliciting the exchange.
On
February 17, 2009, the Company issued 200,000 shares of common stock in exchange
for $30,000 in principal owed to holders of our convertible notes. We relied on
section 3(9) of the Securities Act of 1933 to issue the securities inasmuch as
the notes were exchanged by us with our existing security holders exclusively,
and no commission or other remuneration was paid or given directly or indirectly
for soliciting the exchange.
On
February 24, 2009, the Company issued 1,000,000 shares of common stock in
exchange for $150,000 in principal owed to holders of our convertible notes. We
relied on section 3(9) of the Securities Act of 1933 to issue the securities
inasmuch as the notes were exchanged by us with our existing security holders
exclusively, and no commission or other remuneration was paid or given directly
or indirectly for soliciting the exchange.
On March
25, 2009, the Company issued 2,129,600 shares of common stock in exchange for
$18,000 in principal and $3,301 in accrued interest owed to holders of our
convertible notes. We relied on section 3(9) of the Securities Act of 1933 to
issue the securities inasmuch as the notes were exchanged by us with our
existing security holders exclusively, and no commission or other remuneration
was paid or given directly or indirectly for soliciting the
exchange.
On March
30, 2009, the Company issued 2,123,025 shares of common stock in exchange for
$5,000 cash, $7,000 in principal, $1,816 in accrued interest, $75,000 of
liquidated damages, and $28,400 of late fees owed to holders of our convertible
notes. We relied on section 3(9) of the Securities Act of 1933 to issue the
common stock for principal, interest, liquidated damages and late fees inasmuch
as the notes were exchanged by us with our existing security holders
exclusively, and no commission or other remuneration was paid or given directly
or indirectly for soliciting the exchange. We relied on section 4(2)
of the Securities Act of 1933 to issue the common
stock in exchange for cash, as the common stock was issued without any
form of general solicitation or general advertising and the acquirers were
accredited investors.
On March
30, 2009, we issued options to three individuals to purchase a total of
3,833,650 shares of our Common Stock at $0.15 per share. The options
expire five years from the date of grant. We relied on section 4(2)
of the Securities Act of 1933 to issue the options , as the
options were issued without any form of general solicitation or general
advertising and the each of the acquirers occupied
an insider status relative to us that afforded him effective access to the
information registration would otherwise provide.
Part
II, Item 3. Defaults upon Senior Securities.
Between
October 2006 and February 2007 we issued Secured Convertible Promissory Notes in
the aggregate principal amount of $750,000. These notes were due to
be paid on the earlier of the first anniversary of the date of issuance, an
Event of Default (as defined in the note) or on the closing of any equity
financing in which we received gross proceeds of at least $2.5
million. Payment of these notes became due on the first anniversary
of the date of issuance. We have not paid the notes and, as of May
15, 2009, we owed a total of $523,333 in principal and $108,932 in accrued
interest.
On June
6, 2007 we issued Convertible Promissory Notes in the aggregate principal amount
of $86,000. These notes became due and payable upon the earlier of
(i) the occurrence of an Event of Default or (ii) the Maturity Date unless,
prior to such time, the notes were converted into shares of our common
stock. “Maturity Date” is defined in these notes as a business day
that is not sooner than December 31, 2008, as the holder of the note may specify
in written notice delivered to us not less than 30 days prior to such specified
date. No holder has given us written notice of a Maturity Date,
however, we have determined that an Event of Default may have occurred under the
provisions of the notes defining an Event of Default. As of May 15,
2009 we owed a total of $8,000 in principal and $3,261 in accrued
interest.
On July
17, 2007 we issued Subordinated Notes Payable in the aggregate principal amount
of $1,025,000. We were required to pay the principal and accrued
interest monthly in cash or in shares of our common stock. We have
not paid these notes in accordance with their terms and, as of May 15, 2009, we
owed a total of $250,000 in principal and $37,776 in accrued
interest.
In
January 2008 we completed an offering of $425,000 in principal amount of
Subordinated Debentures to a group of institutional and accredited
investors. The Subordinated Debentures bear interest at the rate of
10% per annum, principal and interest were due to be paid monthly and they
matured on December 31, 2008. We did not repay the Subordinated
Debentures in accordance with their terms and, as of May 15, 2009, we owed a
total of $425,000 in principal and $58,658 in accrued interest.
Part
II, Item 4. Submission of Matters to a Vote of Security
Holders.
During
the quarter ended March 31, 2009, no matters were submitted to a vote of
security holders.
Part
II, Item 5. Other Information.
On March
30, 2009, we issued 3,833,650 options to purchase Common Stock at $0.15 per
share to 2 executive officers and an employee, all of whom were related to
each other. The options expire five years from the date of grant. The
options were determined to have a fair value of $232,483 using the Black Sholes
valuation model. Rodney Anderson, our interim Chief Executive
Officer, received 1,380,114 options to purchase our Common Stock, Joe
Anderson, an employee and Mr. Anderson’s son, received 1,495,124 options to
purchase our Common Stock, and Robert Hasson, our interim Chief Financial
Officer, received 958,412 options to purchase our Common Stock.
Part II, Item
6. Exhibits.
Exhibit
No.
|
Description
of Exhibit
|
|
|
3.1
|
Articles
of Incorporation(1)
|
|
|
3.2
|
Bylaws(1)
|
|
|
10.1
|
Option
agreement issued to Rodney Anderson on March 30, 2009*
|
|
|
10.2
|
Option
agreement issued to Joe Anderson on March 30, 2009*
|
|
|
10.3
|
Option
agreement issued to Robert Hasson on March 30, 2009*
|
|
|
31.1
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
|
|
|
31.2
|
Certification
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002*
|
|
|
32
|
Certification
pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002*
|
|
|
* Filed
herewith.
(1)
Incorporated by reference from our Current Report on Form 8-K filed with the
Securities and Exchange Commission on July 15, 2003 as file number
002-95626-D.
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
May
20, 2009
|
|
|
|
SIONIX
CORPORATION
|
|
|
|
|
By:
|
/s/ Rodney Anderson
|
|
|
Rodney
Anderson, Interim Chief Executive Officer
|
|
|
|
|
By:
|
/s/ Robert Hasson
|
|
|
Robert
Hasson, Interim Chief Financial
Officer
|