NOTES
TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
AS
OF SEPTMBER 30, 2007 and 2006
|
NOTE
1
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES AND
ORGANIZATION
|
(A)
Basis of Presentation
The
accompanying unaudited condensed financial statements have been prepared
in
accordance with accounting principles generally accepted in The United States
of
America and the rules and regulations of the Securities and Exchange Commission
for interim financial information. Accordingly, they do not include all the
information necessary for a comprehensive presentation of financial position
and
results of operations.
It
is
management's opinion, however that all material adjustments (consisting of
normal recurring adjustments) have been made which are necessary for a fair
financial statements presentation. The results for the interim period are
not
necessarily indicative of the results to be expected for the year.
(B) Organization
Alliance
Recovery Corporation (a development stage company) (the “Company”) was
incorporated under the laws of the State of Delaware on November 6, 2001.
The
Company is developing resource recovery technologies and strategies to convert
industrial and other waste materials into fuel oil, gases and other valuable
commodities.
Activities
during the development stage include developing the business plan and raising
capital.
(C) Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting
principles, management is required to make estimates and assumptions that
affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues
and
expenses during the reported period. Actual results could differ from those
estimates.
(D) Cash
and Cash Equivalents
For
purposes of the cash flow statements, the Company considers all highly liquid
investments with original maturities of three months or less at the time
of
purchase to be cash equivalents. The Company at times has cash in excess
of FDIC
insurance limits and places its temporary cash investments with high credit
quality financial institutions. At September 30, 2007, the Company did not
have
any balances that exceeded FDIC insurance limits.
(E)
Property and Equipment
Property
and equipment are stated at cost, less accumulated depreciation. Expenditures
for maintenance and repairs are charged to expense as incurred. Depreciation
is
provided using the straight-line method over the estimated useful life of
five
years.
(F) Stock-Based
Compensation
Effective
January 1, 2006, the Company adopted SFAS No. 123R “Share-Based
Payment”(“SFAS 123R”), a revision to SFAS No. 123 “Accounting for
Stock-Based Compensation”(“SFAS 123”). Prior to the adoption of SFAS 123R the
Company accounted for stock options in accordance with APB Opinion No. 25
“Accounting for Stock Issued to Employees” (the intrinsic value method), and
accordingly, recognized no compensation expense for stock option
grants.
Under
the
modified prospective approach, the provisions of SFAS 123R apply to new awards
and to awards that were outstanding on January 1, 2006 that are subsequently
modified, repurchased or cancelled. Under the modified prospective approach,
compensation cost recognized in the year ended December 31, 2006 includes
compensation cost of all share-based payments granted prior to, but
not yet vested as of January 1, 2006, based on the grant -date fair value
estimated in accordance with the original provisions of SFAS 123, and the
compensation costs for all share-based payments granted subsequent to January
31, 2006, based on the grant-date fair value estimated in accordance with
the
provisions of SFAS 123R. Prior periods were not restated to reflect the impact
of adopting the new standard.
(G) Loss
Per Share
Basic
and
diluted net loss per common share is computed based upon the weighted average
common shares outstanding as defined by Financial Accounting Standards No.
128,
“Earnings Per Share.” As of September 30, 2007 and 2006, 1,948,647 and
3,032,752; respectively of common share equivalents were anti-dilutive and
not
used in the calculation of diluted net loss per share.
(H) Business
Segments
The
Company operates in one segment and therefore segment information is not
presented.
(I) Long-Lived
Assets
The
Company accounts for long-lived assets under the Statements of Financial
Accounting Standards Nos. 142 and144 “Accounting for Goodwill and Other
Intangible Assets” and “Accounting for Impairment or Disposal of Long-Lived
Assets” (“SFAS No. 142 and 144”). In accordance with SFAS No. 142 and 144,
long-lived assets, goodwill and certain identifiable intangible assets held
and
used by the Company are reviewed for impairment whenever events or changes
in
circumstances indicate that the carrying amount of an asset may not be
recoverable. For purposes of evaluating the recoverability of long-lived
assets,
goodwill and intangible assets, the recoverability test is performed using
undiscounted net cash flows related to the long-lived assets.
(J) Recent
Accounting Pronouncements
In
September 2006, the FASB issued SFAS No. 157, “
Fair Value
Measurements
”. The objective of SFAS 157 is to increase consistency and
comparability in fair value measurements and to expand disclosures about
fair
value measurements. SFAS 157 defines fair value, establishes a framework
for
measuring fair value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies under other
accounting pronouncements that require or permit fair value measurements
and
does not require any new fair value measurements. The provisions of SFAS
No. 157
are effective for fair value measurements made in fiscal years beginning
after
November 15, 2007. The adoption of this statement is not expected to have
a
material effect on the Company's future reported financial position or results
of operations.
In
February 2007, the Financial Accounting Standards Board (FASB) issued SFAS
No.
159, “
The Fair Value Option for Financial Assets and Financial Liabilities
-
Including an Amendment of FASB Statement No. 115
”.This statement permits
entities to choose to measure many financial instruments and certain other
items
at fair value. Most of the provisions of SFAS No. 159 apply only to entities
that elect the fair value option. However, the amendment to SFAS No. 115
“
Accounting for Certain Investments in Debt and Equity Securities
” applies
to all entities with available-for-sale and trading securities. SFAS No.
159 is
effective as of the beginning of an entity's first fiscal year that begins
after
November 15, 2007. Early adoption is permitted as of the beginning of a fiscal
year that begins on or before November 15, 2007, provided the entity also
elects
to apply the provision of SFAS No. 157, “
Fair Value
Measurements”.
The adoption of this statement is not expected to
have a material effect on the Company's financial statements.
|
NOTE
2
|
PROPERTY
AND EQUIPMENT
|
Property
and equipment at September 30, 2007 were as follows:
|
Computer
|
|
$
|
11,166
|
|
|
Less
accumulated depreciation
|
|
|
(8,096
|
)
|
|
|
|
|
|
|
|
|
|
$
|
3,070
|
|
|
|
|
|
|
|
During
the three and nine months ended September 30, 2007 and 2006 and for the period
from November 6, 2001 to September 30, 2007, the Company recorded depreciation
expense of $558, $1,675, $558, $1,675 and $8,096 respectively.
|
Note
Amount
|
|
$
|
25,000
|
|
|
Discount
|
|
|
(37
|
)
|
|
Net
|
|
$
|
24,963
|
|
In
December 2006, an investor loaned the Company a total of $25,000. The note
is
unsecured, due one year from the date of issuance and is non interest bearing
for the first nine months, then accrues interest at a rate of 6% per annum
for
the remaining three months. The Company imputed interest on the non interest
bearing portion of the notes at a rate of 6% per annum. At September 30,
2007
the Company recorded a discount on the notes of $1,500 and amortized $1,463
of
the discount as interest expense.
|
NOTE
4
|
NOTES
PAYABLE - RELATED
PARTY
|
In
June
2006, a director of the Company loaned the Company $100,000. The loan bears
a
rate of interest of 8% per annum and is payable twelve months from the date
of
issuance. In addition the Company issued the director warrants to purchase
100,000 shares of common stock with an exercise price of $1.50 per share
for one
year from the date of the note. The loan is unsecured and was due June 28,
2007.
The note was extended until June 28, 2008. In December 2006, the
Director loaned the Company an additional $50,000. The loan bears a rate
of
interest of 8% per annum and is payable eighteen months from the date of
issuance. In January 2007 a director of the Company loaned the Company $50,000.
The loan bears interest at a rate of eight percent per annum. The loan is
unsecured and due July 31, 2008. As of September 30, 2007, the Company has
an
outstanding balance under the three note agreements of $200,000 and recorded
accrued interest expense of $16,513 related to these three notes.
|
NOTE
5
|
CONVERTIBLE
NOTES PAYABLE - RELATED
PARTY
|
|
Note
Amount
|
|
$
|
90,000
|
|
|
Discount
|
|
|
(1,265
|
)
|
|
Net
|
|
$
|
88,735
|
|
In
May
2007, a Director of the Company loaned the Company $50,000. The loan bears
a
rate of interest of 8% per annum and is payable twenty-four months from
the date
of issuance. The holder of the note has the right to convert the note into
common stock of the Company at the market value on the date of conversion
but
not at a price less than $.20 per share of common stock. In addition
the Company issued the director warrants to purchase 25,000 shares of common
stock with an exercise price of $1.00 per share for two years from the
date of
the note. The loan is unsecured and due May 17, 2009.The fair value of
the
warrants was estimated on the grant date using the Black-Scholes option
pricing
model with the following weighted average assumptions: expected dividend
yield
0%, volatility 103%, risk-free interest rate of 4.87%, and expected warrant
life
of two years. The value of the warrants on the date of issuance was $837.
The
Company will amortize the value over the term of the note. In June, 2007
the
Mother of the Director loaned the Company an additional $40,000. The loan
bears
a rate of interest of 8% per annum and is payable twenty-four months from
the
date of issuance. The holder of the note has the right to convert the note
into
common stock of the Company at the market value on the date of conversion
but
not at a price less than $.20 per share of common stock. The loan is unsecured
and due July 3, 2009. The fair value of the warrants was estimated on the
grant date using the Black-Scholes option pricing model with the following
weighted average assumptions: expected dividend yield 0%, volatility 103%,
risk-free interest rate of 4.87%, and expected warrant life of two years.
The
fair value of the warrants on the date of issuance was $669. The Company
will
amortize the value over the term of the note. As of September 30, 2007
the
Company recorded and accrued interest expense of $2,306 and amortization
expense
of $241 related to these two notes.
|
NOTE
6
|
CONVERTIBLE
NOTES PAYABLE
|
|
Note
Amount
|
|
$
|
100,001
|
|
|
Discount
|
|
|
(6,380
|
)
|
|
Net
|
|
$
|
93,621
|
|
In
July
2007, a third party loaned Company loaned the Company $100,001. The loan
bears a
rate of interest of 8% per annum and is payable twenty-four months from
the date
of issuance. The holder of the note has the right to convert the note into
common stock of the Company at the market value on the date of conversion
but
not at a price less than $.20 per share of common stock. In addition
the Company issued the director warrants to purchase 100,001 shares of
common
stock with an exercise price of $1.00 per share for two years from the
date of
the note. The loan is unsecured and due July 5, 2009.The fair value of
the
warrants was estimated on the grant date using the Black-Scholes option
pricing
model with the following weighted average assumptions: expected dividend
yield
0%, volatility 111%, risk-free interest rate of 4.99%, and expected warrant
life
of two years. The fair value of the warrants on the date of issuance was
$7,291.
The Company will amortize the value over the term of the note. As of
September 30, 2007 the Company recorded and accrued interest expense of
$1,907
and amortization expense of $911 related to the note.
|
NOTE
7
|
EQUITY
SUBJECT TO RESCISSION
|
Common
stock sold prior to July, 2005 pursuant to the Company's private placement
offer
may be in violation of the requirements of the Securities Act of 1933. In
October 2005, the Company became aware that the private placement offers
made
prior to July 1, 2005 may have violated federal securities laws based on
the
inadequacy of the Company's disclosures made in its offering documents for
the
units concerning the lack of unauthorized shares. Based on potential violations
that may have occurred under the Securities Act of 1933, the Company made
a
rescission offer to investors who acquired the Company's common stock prior
to
July 1, 2005. As such, the proceeds of $1,084,823 from the issuance of 1,986,646
shares of common stock through July 1, 2005 have been classified outside
of
equity in the balance sheet and classified as common stock subject to
rescission.
During
2002, the Company received cash and subscriptions receivable of $148,000
for
296,000 units consisting of one share of common stock and one common stock
warrant exercisable for a period of one year after an effective Registration
Statement is approved at an exercise price of $1.00 ($0.50 per share). Such
amounts have been recorded as equity subject to rescission as of September
30,
2007.
During
2003, the Company received cash and a subscription receivable of $661,323
for
1,322,646 units consisting of one share of common stock with one common stock
warrant exercisable for a period of one year after an effective Registration
Statement is approved at an exercise price of $1.00 ($0.50 per share). Such
amounts have been recorded as equity subject to rescission as of September
30,
2007.
During
the year ended December 31, 2004, the Company received cash of $92,500 for
185,000 units consisting of one share of common stock with one common stock
warrant exercisable for a period of one year after an effective Registration
Statement is approved at an exercise price of $1.00 per share ($0.50 per
share).
Such amounts have been recorded as equity subject to rescission as of September
30, 2007.
In
2005,
the Company sold a total of 183,000 shares of common stock to nine individuals
for cash of $183,000 ($1.00per share). Such amounts have been recorded as
equity
subject to rescission as of September 30, 2007.
|
NOTE
8
|
STOCKHOLDERS'
EQUITY
|
(A) Common
Stock Issued to Founders
During
2001, the Company issued 8,410,000 shares of common stock to founders for
services with a fair value of $84,100 ($0.01 per share).
(B) Common
Stock and Warrants Issued for Cash
During
2001, the Company received subscriptions receivable of $105,064 for 7,687,800
shares of common stock ($0.0137 per share).
During
the year ended December 31, 2004, the Company collected $159,782 of
subscriptions receivable.
In
2005,
the Company sold a total of 183,000 shares of common stock to nine individuals
for cash of $183,000 ($1.00 per share).
By
the
year ended December 31, 2005 the Company collected $42,774 of subscription
receivables.
(C) Common
Stock and Warrants Issued for Services
During
April 2002, the Company entered into an agreement with a consultant to provide
services for a period of one year. The agreement called for compensation
of
100,000 units with a fair value of $50,000 based on recent cash offerings
($0.50
per share). The Company recorded $16,667 and $33,333 of consulting expense
for
the years ended December 31, 2003 and 2002, respectively. As of December
31,
2006, the warrants have expired.
During
May 2002, the Company entered into an agreement with a consultant to provide
services for a period of two months. The agreement called for compensation
of
12,710 units, each unit consists of one share of common stock and one common
stock warrant exercisable at $1.00 per share for a period of two years. The
units had a fair value of $6,355 based on recent cash offerings. The Company
recorded consulting expense of $6,355 for the year ended December 31, 2002
($0.50 per share). As of December 31, 2006, the warrants have
expired.
During
July 2002, the Company entered into an agreement with a consultant to provide
services for a period of one year. The agreement called for compensation
of
100,000 units, each unit consists of one share of common stock and one common
stock warrant exercisable at $1.00 per share for a period of two years. The
units had a fair value of $50,000 based on recent cash offerings ($0.50 per
share). The Company recorded $22,917 and $27,083 of consulting expense for
the
years ended December 31, 2002 and 2003, respectively.
During
January 2004, the Company entered into a consulting agreement with a consultant
to provide management and public relations services. The agreement calls
for the
consultant to provide services for a period of one year and the consultant
to
receive: 200,000 shares of common stock warrants to purchase 100,000 shares
of
common stock at an exercise price of $5.00 for a period of three years, and
an
option to purchase 100,000 shares of common stock at an exercise price of
$7.50
for a period of three years. The common stock has a fair value of $100,000
based
on recent cash offerings and will be amortized over the life of the agreement
($0.50 per share). For the years ended December 31, 2005 and 2004, the Company
has recognized consulting expense of $4,158 and $95,842, respectively under
the
agreement. As of June 30, 2007, the warrants have expired.
In
January 2005, the Company entered into a consulting agreement with a consultant
to provide management and public relations services. The agreement calls
for the
consultant to provide services for a period of one year and the consultant
to
receive compensation of $2,000 per month. In addition the Company sold the
consultant 300,000 shares of common stock for cash proceeds of $300 and recorded
the fair value of the common stock of $149,700. The fair value of the common
stock will be recognized over the term of the agreement. For the year ended
December 31, 2005 the Company has recognized consulting expense of $143,463
under the agreement. For the year ended December 31, 2006 the Company recognized
consulting expense of $6,237 under the agreement.
In
March
2007, the Company entered into a consulting agreement with a consultant to
provide management and public relations services. The agreement calls for
the
consultant to provide services for a period of one year and the consultant
to
receive compensation of $4,000 per month. In addition the Company sold the
consultant 300,000 shares of common stock for cash proceeds of $300 and recorded
the fair value of the common stock of $153,000. The fair value of the common
stock will be recognized over the term of the agreement. The Company has
also
agreed to pay the public relation firm a 5% finder fee for any business or
capital raise derived from its relationship with the public relations firm.
The
fair value of the common stock will be recognized over the term of the
agreement. For the three and nine months ended September 30, 2007 the Company
recorded an expense of $38,175 and $87,023 under this agreement.
In
July 2007, the Company
entered into a consulting agreement with a consultant to provide public
relations services. The agreement calls for the consultant to provide services
for a period of four months and the consultant to receive compensation of
333,334 shares of common stock with the fair value of the common stock of
$100,000 ($.30 per share). The fair value of the common stock will be amortized
over the term of the agreement. For the three and nine months ended September
30, 2007 the Company recorded an expense of $17,500 and $17,500 under this
agreement.
(D)
Common Stock and Warrants Issued for Conversion of Notes
Payable
Between
October and December 2005 three investors and a director loaned the Company
a
total of $205,000. The notes are unsecured, due one year from the date of
issuance and are non interest bearing for the first nine months, then accrued
interest at a rate of 6% per annum for the remaining three months. The
Company imputed interest of $12,300 on the non interest bearing portion of
the
notes at a rate of 6% per annum. On July 21, 2006, the
Company amended four promissory notes (the “Amended Notes”)
originally executed on October 7, 2005 in favor of Lewis Martin, James E.
Schiebel, Susan Hutchison, and Walter Martin respectively (each a “Holder” and
collectively the “Holders”). The Amended Notes provide for a conversion feature
pursuant to which each Holder is entitled to convert the outstanding principal
amount into shares of the Company's common stock at a conversion rate of
$1.50
per share. In addition, upon conversion, each Holder is entitled to receive
a
warrant to purchase one-quarter of one share of our common stock exercisable
within one-year of issuance at an exercise price of $1.50 per share. On July
24,
2006, pursuant to the terms of the Amended Notes, the Holders converted the
principal amount outstanding into shares of our common stock. Based on same,
we
issued an aggregate of 136,669 shares of our common stock at a price of $1.50
per share (the “Conversion Shares”). In addition, we issued warrants with a
cashless exercise provision to purchase an aggregate of 51,250 shares of
our
common stock to the Holders exercisable within one year of issuance at a
price
per share of $1.50 (the “Conversion Warrants”). The Conversion Shares and shares
underlying the Conversion Warrants are restricted in accord with Rule 144
promulgated under the Securities Act of 1933, as amended.
Between
May and June 2007 two related parties loaned the Company a total of $90,000.
The
convertible notes are unsecured, due two years from the date of issuance
and
accrue interest at a rate of 8% per annum. In addition, the holders received
a
total of 45,000 warrants to purchase one share of our common stock exercisable
within two-year of issuance at an exercise price of $1.00 per
share.
(E)
Common Stock Warrants
The
Company issued 765,146 warrants during 2004, at an exercise price of $1.00
per
share to a consultant for services. The fair value of the warrants was
estimated
on the grant date using the Black-Scholes option pricing model as required
under
SFAS 123 with the following weighted average assumptions: expected dividend
yield 0%, volatility 0%, risk-free interest rate of 3.5%, and expected
warrant
life of one year. The fair value was immaterial and therefore no expense
was
recorded in general and administrative expense at the grant date. As of
December
31, 2006, the warrants have expired.
In
connection with the issuance of a $100,000 note payable on June 28, 2006,
the
Company issued a total of 100,000 common stock warrants with an exercise
price
of $1.50 per share. The warrants expired June 29, 2007. The fair value
of the
warrants was estimated on the grant date using the Black-Scholes option
pricing
model as required under SFAS 123R with the following weighted average
assumptions: expected dividend yield 0%, volatility 0%, risk-free interest
rate
of 5.18%, and expected warrant life of one year. The fair value was immaterial
and therefore no expense was recorded.
In
connection with the conversion of $205,000 of notes payable to common stock
on
July 24, 2006 the Company issued warrants with a cashless exercise provision
to
purchase an aggregate of 51,250 shares of our common stock to the Holders
exercisable within one year of issuance at a price per share of $1.50 (the
“Conversion Warrants”). The Conversion Shares and shares underlying the
Conversion Warrants are restricted in accordance with Rule 144 promulgated
under
the Securities Act of 1933, as amended. These warrants expired during the
quarter ended September 30, 2007
In
connection with the issuance of common stock units for cash and services,
the
Company has an aggregate of 1,948,647 and 3,032,752 warrants outstanding
at
September 30, 2007 and 2006, respectively. The Company has reserved 1,948,647
shares of common stock for the future exercise of the warrants at September
30,
2007.
(F)
Amendment to Articles of Incorporation
During
2004, the Company amended its Articles of Incorporation to provide for an
increase in its authorized share capital. The authorized capital stock increased
to 100,000,000 common shares at a par value of $0.01 per share.
(G)
Financing Agreement
On
May
29, 2007, the Company entered into an Investment Agreement. Pursuant
to this Agreement, the Investor shall commit to purchase up to
$20,000,000 of the Company's common stock over the course of thirty-six (36)
months. The amount that we shall be entitled to request from each purchase
(“Puts”) shall be equal to, at the Company's election, either (i) up to $250,000
or (ii) 200% of the average daily volume (U.S. market only) of the common
stock
for the three (3) trading days prior to the applicable put notice date,
multiplied by the average of the three (3) daily closing bid prices immediately
preceding the put date. The put date shall be the date that the Investor
receives a put notice of a draw down by us. The purchase price shall be set
at
ninety-three percent (94%) of the lowest closing bid price of the common
stock
during the pricing period. The pricing period shall be the five (5) consecutive
trading days immediately after the put notice date. There are put restrictions
applied on days between the put date and the closing date with respect to
that
particular Put. During this time, we shall not be entitled to deliver another
put notice. Further, we shall reserve the right to withdraw that portion
of the
Put that is below seventy-five percent (75%) of the lowest closing bid prices
for the 10-trading day period immediately preceding each put notice. The
Company
was obligated to pay $15,000 preparation fee for the documents. $10,000 of
which
was paid upon the execution of the agreement and $5,000 due upon the closing
of
the first put.
The
Company is obligated to file a registration statement with the Securities
and
Exchange Commission (“SEC”) covering 15,000,000 shares of the common stock
underlying the Investment Agreement within 30 days after the closing date.
In
addition, the Company is obligated to use all commercially reasonable efforts
to
have the registration statement declared effective by the SEC within 90 days
after the closing date. The Company will have an ongoing obligation to register
additional shares of our common stock as necessary underlying the draw
downs.
|
NOTE
9
|
RELATED
PARTY TRANSACTIONS
|
In
June,
2006 a director of the Company loaned the Company $100,000. The loan bears
a
rate of interest of 8% per annum and is payable twelve months from the date
of
issuance. In addition the Company issued the director warrants to purchase
100,000 shares of common stock with an exercise price of $1.50 per share
for one
year from the date of the note. The loan is unsecured and was due June 28,
2007.
The note was extended until June 28, 2008. In December 2006, the
Director loaned the Company an additional $50,000. The loan bears a rate
of
interest of 8% per annum and is payable eighteen months from the date of
issuance. In January 2007 a director of the Company loaned the Company $50,000.
The loan bears interest at a rate of eight percent per annum. The loan is
unsecured and due July 31, 2008. As of September 30, 2007 the Company has
an
outstanding balance under the three note agreements of $200,000 and recorded
accrued interest expense of $16,513 related to these three notes.
In
May
2007, a Director of the Company loaned the Company $50,000. The loan bears
a
rate of interest of 8% per annum and is payable twenty-four months from
the date
of issuance. The holder of the note has the right to convert the note into
common stock of the Company at the market value on the date of conversion
but
not at a price less then $.20 per share of common stock. In addition
the Company issued the director warrants to purchase 25,000 shares of common
stock with an exercise price of $1.00 per share for two years from the
date of
the note. The loan is unsecured and due May 17, 2009.The fair value of
the
warrants was estimated on the grant date using the Black-Scholes option
pricing
model with the following weighted average assumptions: expected dividend
yield
0%, volatility 103%, risk-free interest rate of 4.87%, and expected warrant
life
of two years. The fair value of the warrants on the date of issuance was
$837.
The
Company will amortize the value over the term of the note. In June, 2007
the
Mother of the Director loaned the Company an additional $40,000. The loan
bears
a rate of interest of 8% per annum and is payable twenty-four months from
the
date of issuance. The holder of the note has the right to convert the note
into
common stock of the Company at the market value on the date of conversion
but
not at a price less than $.20 per share of common stock. The loan is unsecured
and due July 3, 2009. The fair value of the warrants was estimated on the
grant date using the Black-Scholes option pricing model with the following
weighted average assumptions: expected dividend yield 0%, volatility 103%,
risk-free interest rate of 4.87%, and expected warrant life of two years.
The
fair value of the warrants on the date of issuance was $669. The Company
will
amortize the value over the term of the note. As of September 30, 2007 the
Company recorded and accrued interest expense of $2,306 and amortization
expense
of $241 related to these two notes.
During
December 2001, the Company entered into an agreement with a consultant to
serve
as its interim President for a term of up to five years. The agreement called
for annual compensation of $250,000. The agreement expires the earlier of
December 2006 or on the effectiveness of an employment agreement and is
renewable annually after December 2006. During 2006, the Company approved
a one
year renewal of the agreement. The Company has accrued $429,718 under the
agreement to the consultant at September 30, 2007. For the Period November
6,
2001(Inception) to September 30, 2007 the Company recorded $1,458,333 of
expenses associated with this agreement.
During
2004, the Company entered into an employment agreement with a consultant
to
assume the position of Chief Executive Officer and President for a term of
five
years at an annual minimum salary of $250,000 with additional bonuses and
fringe
benefits. The agreement is to become effective upon the approval by the
Securities and Exchange Commission on the SB-2 Registration Statement. During
March 2006, the Company and the President amended the start date to begin
upon
the Company raises all or substantially all the project funding pertaining
to
the first facility. As of the date of this report, the Company has not completed
the funding. (See Note 10(A) and 12).
|
NOTE
10
|
COMMITMENTS
AND
CONTINGENCIES
|
(A) Consulting
Agreements
During
December 2001, the Company entered into an agreement with a consultant to
serve
as its interim President for a term of up to five years. The agreement called
for annual compensation of $250,000. The agreement expires the earlier of
December 2006 or on the effectiveness of an employment agreement and is
renewable annually after December 2006. During 2006, the Company approved
a one
year renewal of the agreement. The Company has accrued $429,718 under the
agreement to the consultant at September 30, 2007. For the Period November
6,
2001(Inception) to September 30, 2007 the Company recorded $1,458,333 of
expenses associated with this agreement.
During
April 2002, the Company entered into an agreement with a consultant to provide
services for a period of one year. The agreement called for compensation
of
100,000 units with a fair value of $50,000 based on recent cash offerings
($0.50
per share). The Company recorded $16,667 and $33,333 of consulting expense
for
the years ended December 31, 2003 and 2002, respectively.
During
May 2002, the Company entered into an agreement with a consultant to provide
services for a period of two months. The agreement called for compensation
of
12,710 units, each unit consists of one share of common stock and one common
stock warrant exercisable at $1.00 per share for a period of two years. The
units had a fair value of $6,355 based on recent cash offerings. The Company
recorded consulting expense of $6,355 for the year ended December 31, 2002
($0.50 per share).
During
June 2002, the Company entered into an agreement with a consultant to provide
services for a period of one year. The agreement called for cash payments
totaling $120,000. The Company recorded $55,000 and $65,000 of consulting
expense for the years ended December 31, 2003 and 2002,
respectively.
During
July 2002, the Company entered into an agreement with a consultant to provide
services for a period of one year. The agreement called for compensation
of
100,000 units, each unit consists of one share of common stock and one common
stock warrant exercisable at $1.00 per share for a period of two years. The
units had a fair value of $50,000 based on recent cash offerings. The Company
recorded $27,083 and $22,917 of consulting expense for the years ended December
31, 2003 and 2002, respectively ($0.50 per share). The agreement was fully
expensed as of December 31, 2003.
During
January 2004, the Company entered into a consulting agreement with a consultant
to provide management and public relations services. The agreement calls
for the
consultant to provide services for a period of one year and the consultant
to
receive: 200,000 shares of common stock, monthly retainers of $4,000, warrants
to purchase 100,000 shares of common stock at an exercise price of $5.00
for a
period of three years, and an option to purchase 100,000 shares of common
stock
at an exercise price of $7.50 for a period of three years. The common stock
has
a fair value of $100,000 based on recent cash offerings and will be amortized
over the life of the agreement ($0.50 per share) (See Note 7(A)).
In
January 2005, the Company entered into a consulting agreement with a consultant
to provide management and public relations services. The agreement calls
for the
consultant to provide services for a period of one year and the consultant
to
receive compensation of $2,000 per month. In addition the Company sold the
consultant 300,000 shares of common stock for cash proceeds of $300 and recorded
the fair value of the common stock of $149,700. The fair value of the common
stock will be recognized over the term of the agreement. For the year ended
December 31, 2005, the Company has recognized consulting expense of $143,463
under the agreement. During the year ended December 31, 2006, the Company
has
recognized consulting expense of $6,237 under the agreement.
In
March 2007, the Company entered into a consulting agreement with a consultant
to
provide management and public relations services. The agreement calls for
the
consultant to provide services for a period of one year and the consultant
to
receive compensation of $4,000 per month. In addition the Company sold the
consultant 300,000 shares of common stock for cash proceeds of $300 and recorded
the fair value of the common stock of $153,000. The fair value of the common
stock will be recognized over the term of the agreement. The Company has
also
agreed the pay the public relation firm a 5% finder fee for any business
or
capital raise derived from its relationship with the public relations firm.
The
fair value of the common stock will be recognized over the term of the
agreement. For the three and nine months ended September 30, 2007 the Company
recorded an expense of $38,175 and $87,023 under this agreement.
In
July 2007, the Company
entered into a consulting agreement with a consultant to provide public
relations services. The agreement calls for the consultant to provide services
for a period of four months and the consultant to receive compensation of
333,334 shares of common stock with the fair value of the common stock of
$100,000 ($.30 per share). The fair value of the common stock will be amortized
over the term of the agreement. For the three and nine months ended September
30, 2007 the Company recorded an expense of $17,500 and $17,500 under this
agreement.
(B) License
Agreement
Upon
effectiveness of the employment agreement with our Chief Executive Officer
and
President, the Company will be entitled to use certain technology and know-how
that is owned by our Chief Executive Officer and President royalty free until
the end of the employment agreement. Upon termination of the employment
agreement with the Chief Executive Officer and President, the Company has
the
right to license the technology for a onetime fee. The license fee will be
negotiated by the Company and the Chief Executive Officer and will equal
the
replacement value of such technology and will be determined with reference
to
the engineer's opinion dated March 6, 2002, a copy of which is attached to
the
employment agreement (See Note 6(A)).
(C) Employment
Agreement
During
2004, the Company entered into an employment agreement with a consultant
to
assume the position of Chief Executive Officer and President for a term of
five
years at an annual minimum salary of $250,000 with additional bonuses and
fringe
benefits. The agreement is to become effective upon the approval by the
Securities and Exchange Commission on the SB-2 Registration Statement. During
March 2006, the Company and the President amended the start date to begin
upon
the Company raises all or substantially all the project funding pertaining
to
the first facility. As of the date of this report, the Company has not completed
the funding. (See Note 9(A) and 11).
(D) Rescission
Offer
Common
stock sold prior to July 1, 2005 pursuant to the Company's private placement
offer may be in violation of the requirements of the Securities Act of 1933.
In
October 2005, the Company became aware that the private placement offers
made
prior to July 1, 2005 may have violated federal and state securities laws
based
on the inadequacy of the Company's disclosures made in its offering documents
for the units concerning the lack of unauthorized shares. Under state securities
laws the investor can sue us to recover the consideration paid for the security
together with interest at the legal rate, less the amount of any income received
from the security, or for damages if he or she no longer owns the security
or if
the consideration given for the security is not capable of being returned.
Damages generally are equal to the difference between the purchase price
plus
interest at the legal rate and the value of the security at the time it was
disposed of by the investor plus the amount of any income, if any, received
from
the security by the investor. Generally, certain state securities laws provide
that no suit can be maintained by an investor to enforce any liability created
under certain state securities statues if the seller makes a written offer
to
refund the consideration paid together with interest at the legal rate less
the
amount of any income, if any, received on the security or to pay damages
and the
investor refuses or fails to accept the offer within a specified period of
time,
generally not exceeding 30 days from the date the offer is received. In
addition, the various states in which the purchasers reside could bring
administrative actions against as a result of the rescission offer.
The
remedies vary from state to state but could include enjoining us from further
violations of the subject state law, imposing civil penalties, seeking
administrative assessments and costs for the investigations or bringing suit
for
damages on behalf of the purchaser.
There
is
considerable legal uncertainty under both federal securities and related
laws
concerning the efficacy of rescission offers and general waivers with respect
to
barring claims that would be based on the failure to disclose information
described above in a private placement. The SEC takes the position that
acceptance or rejection of an offer of rescission may not bar stockholders
from
asserting claims for alleged violations of federal securities laws. Further,
under California's Blue Sky law, which would apply to stockholders resident
in
that state, a claim or action based on fraud may not be waived or prohibited
pursuant to a rescission offer. As a result, the rescission offer may not
terminate any or all potential liability that we may have in connection with
that private placement. In addition, there can be no assurance that we will
be
able to enforce the waiver we received in connection with the rescission
offer
to bar any claims based on allegations of fraud or other federal or state
law
violations that the rescission offer, may have, until the applicable statutes
of
limitations have run.
Based
on
potential violations that may have occurred under the Securities Act of 1933,
the Company made a rescission offer to investors who acquired the Company's
common stock prior to July 1, 2005. As such, the proceeds of $1,084,823 from
the
issuance of 1,986,646 shares of common stock through July 1, 2005 have been
classified outside of equity in the balance sheet and classified as common
stock
subject to rescission.
As
reflected in the accompanying financial statements, the Company is in the
development stage with no operations, a stockholders' deficiency of $1,966,290
a
working capital deficiency of $702,181 and used cash in operations from
inception of $1,764,762. This raises substantial doubt about its ability
to
continue as a going concern. The ability of the Company to continue as a
going
concern is dependent on the Company's ability to raise additional capital
and
implement its business plan. The financial statements do not include any
adjustments that might be necessary if the Company is unable to continue
as a
going concern.
Management
believes that actions presently being taken to obtain additional funding
and
implement its strategic plans provide the opportunity for the Company to
continue as a going concern.
|
NOTE
12
|
SUBSEQUENT
EVENTS
|
In
October 2007, the Company sold a total of 174,500 shares of common stock
for
gross proceeds of $24,605