Check whether the issuer is not required to file reports pursuant to Section 13
or 15(d) of the Exchange Act. [ ]
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 and 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 [ ]
Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
is not contained in this form, and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
Aggregate market value of the voting stock held by non-affiliates of the
registrant as of October 12, 2007: $1,103,930
Number of outstanding shares of the registrant's par value $0.001 common stock,
as of June 30, 2007: 45,171,681
Armor Electric Inc. is a Florida corporation; its principal executive office is
located at 201 Lomas Santa Fe, Suite #420, Solana Beach, CA 92075.
You should keep in mind the following points as you read this Annual Report on
Form 10-KSB:
o the terms "we", "us", "our", "Armor", "Armor Electric", or the
"Company" refer to Armor Electric Inc. and its subsidiary; and
o our fiscal year ends on June 30; references to fiscal 2007 and fiscal
2006 and similar constructions refer to the fiscal year ended on June 30 of the
applicable year.
This Annual Report on Form 10-KSB contains statements which, to the
extent they do not recite historical fact, constitute "forward looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Forward looking statements are used under the captions "Business," "Management's
Discussion and Analysis of Financial Condition and Plan of Operation," and
elsewhere in this Annual Report on Form 10-KSB. You can identify these
statements by the use of words like "may," "will," "could," "should," "project,"
"believe," "anticipate," "expect," "plan," "estimate," "forecast," "potential,"
"intend," "continue," and variations of these words or comparable words. Forward
looking statements do not guarantee future performance and involve risks and
uncertainties. Actual results may differ substantially from the results that the
forward looking statements suggest for various reasons, including those
discussed under the caption "Risks Related to Our Business." These forward
looking statements are made only as of the date of this Annual Report on Form
10-KSB. The Company expressly disclaims any obligation or undertaking to release
publicly any updates or revisions to any forward-looking statements contained
herein to reflect any change in the Company's expectations with regard thereto
or any change in events, conditions or circumstances on which any statement is
based. This discussion should be read together with the financial statements and
other financial information included in this Form 10-KSB.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
HISTORY
Armor Electric Inc. ("we," "us," "Armor" or the "Company") was incorporated in
Florida in 1998 under the name Armor Software, Inc. having the stated purpose of
engaging in any lawful practice or activity. Shortly thereafter, the Company's
name was changed to Armor Enterprises, Inc. The Company was formed with the
purpose of developing privacy encryption software for the Internet. The Company
was unable to raise enough capital to finance its research and development of
the software. After efforts to develop the business failed, all efforts were
abandoned in mid 2000. The Company then began to consider and investigate
potential business opportunities.
3
In 2004, we acquired Nova Electric Systems Inc. ("Nova"), which owns rights to
certain technologies for the production of electronic propulsion and battery
power systems for electric powered vehicles. Thereafter, the Company's name was
changed to Armor Electric Inc. We are now engaged in further development of
these technologies.
The Company's principal executive offices are located at: 201 Lomas Santa Fe,
Suite #420, Solana Beach, CA 92075 and its telephone number is (858) 720 - 0354.
The Company maintains a website at www.armorelectric.com.
BUSINESS
The Company, through its subsidiary Nova, is in the business of developing the
distribution rights to electric vehicle and electric propulsion systems. The
contracts entered into by Nova are described below.
In April 2004 Nova entered into an agreement with Nu Age Electric Inc. ("Nu
Age") under which Nu Age assigned to Nova all its rights relating to the
manufacture and sale of electrically powered vehicles pursuant to agreements
between Nu Age and Hero/Majestic Auto Limited ("Hero"). The agreements between
Nu Age and Hero are as follows:
First, an agreement for the production of Hero Mountain bicycles and scooters,
which Nu Age is to adapt to an electric power system. Under this agreement, Nu
Age is to supply certain prototype vehicle units to Hero, and the parties have
agreed to jointly engineer and test and build these prototypes to demonstration
quality standards. Under the agreement, once these prototypes are completed to
certain standards, Hero would be responsible for manufacturing the vehicles in
its plant in India and Nu Age would have the exclusive right to market and sell
these vehicles in the United States, Latin America and Europe.
Second, an agreement to produce electric powered children's toys. Nu Age
currently has several electric powered toys in a variety of development stages
and will jointly develop these toys with Hero. Hero would manufacture and test
the products in India with anticipated sales to the United States, Latin America
and Europe.
Third, an agreement to establish a Joint Venture Company for the purpose of
developing and marketing integrated electric propulsion systems for two and
three wheeled vehicles. Under this Agreement, the parties are to establish a
Joint Venture company to combine Nu Age's technological and business expertise
with Hero's manufacturing capabilities to produce vehicles with integrated
electric propulsion systems and market the vehicles to the Hero's established
client base, while building new markets.
4
INDUSTRY BACKGROUND
The electric propulsion and power system industry is not a new one, but one that
has demonstrated limited commercial success to date. While there are many
companies producing electrical products and batteries, there are very few doing
both, and fewer still focused on market development and need satisfaction.
Nova's differentiating factor is that, along with its alliance partner, Nu Age,
it is not only developing new technologies, but also developing unique and
proprietary systems and products based upon specific market opportunities. Its
strength is in its approach to the industry, market development via market needs
satisfaction and "Purpose Driven Engineering".
MARKET SEGMENTS
While there are many possible applications of our electrical propulsion systems,
we plan to focus on four specific market segments. These segments have been
selected because they are large, stable, diverse, and consistent while offering
revenue potential.
Our analysis has been global in nature in order to take advantage of developing
governmental trends by region. Many of the developing nations' governments are
in the process of legislating the migration from fossil fuels to renewable
energy in the near future, and several are establishing subsidy programs. These
regions offer us a variety of prospective partners for strategic alliances, who
are motivated to gain a head start on their competition to bring products to
their markets that employ this renewable energy.
We plan to partner with leaders in their segments by region who will provide a
synergistic relationship that enhances our capability and their exposure to
exterior markets.
TRANSPORTATION SEGMENT
This market is global, stable, and has the potential to produce significant
revenues. The Nova technology specifically addresses this market. This market is
our initial focus because of the multiple possible uses of many of the products.
For example, two and three wheeled vehicles are the principal form of
transportation in some areas while these same vehicles are used for recreation
in other regions. Nova has executed letters of intent and begun discussions for
joint ventures with a major manufacturer of these products. We plan to enter
this market from two directions:
o Through joint ventures with manufacturers of two and three wheeled
vehicles such as electric scooters and cycles. Scooters and cycles
might include anything from stand-up scooters to small off- highway
motorcycles. These vehicles represent the major form of transportation
for many developing nations. These same countries are actively
migrating away from two and four stroke engines, which currently propel
these vehicles worldwide.
o Through the parts market, by developing electrical components and
battery systems. The components designed could then be used by
manufacturers of Hybrid vehicles or as replacement and after market
parts for other products.
5
RECREATION, LEISURE AND RIDING TOYS SEGMENT
We have entered into negotiations with representatives from major manufacturers
of these products in Asia and Europe to develop products designed to fill the
market for riding toys in the 7-14 year age bracket. They include a series of
small electric powered motorcycles with full suspension, cushioned seats, and
pneumatic tires. With a top speed of 15 MPH; we believe these products will fill
the gap between the `Power Wheels' type toy vehicles and youth motorcycles.
We intend to build several prototype vehicles that appeal to the mid-youth and
young adult markets. Both of these existing markets have sales in the millions
of units per year. Our products will offer a medium power level, without the
safety issues involved with high speed, flammable fuels, and hot exhaust pipes.
The young adult products will include a range of unique scooters and
high-powered electric go-karts. We have established a relationship with the
leading operator of indoor go-cart tracks in Europe, where current legislation
requires migration to electric propulsion for these venues. We anticipate using
our partnership with our manufacturer of two and three wheeled vehicles to make
the frames for our go-karts, thereby expanding their product lines while
avoiding the high cost of manufacture in Europe.
DEFENSE SEGMENT
The defense industry offers opportunities in many areas, including funding for
research and development. This market has proven itself to have the most profit
potential. Further, the defense industry is actively seeking the type of
technology that Nova has developed. The challenge of the defense industry is the
lead-time to execute contracts and receive payment in a timely manner. While
this market can produce a large revenue flow, it can present cash-flow issues.
While many of the products from other segments overlap the defense segment,
these are high-end units with high performance standards due to the requirements
for ruggedized equipment. It will be necessary to form alliances with
manufacturing partners who are already certified for production of military
products. This will not only reduce our lead-time to enter this market but
provide our partner with additional line items for their existing government
contracts.
INDUSTRIAL/UTILITY SEGMENT
We plan to introduce several product lines of Hybrid Utility Vehicles. These
vehicles will be the first of their kind. They will include small ATV Quad type
units, industrial lift platforms, and small two passenger light cargo trucks.
Key distinguishing features will be the ability to drive in hybrid gas/electric
mode, and then operate as a portable generator to fill power needs at remote
sites. These units could have equipment such as welders, saws, drills, and other
tools powered from the on-board source. Power could be used with or without the
rotating supply using an inverter. This allows indoor operation within the
limits of the battery capacity. Another interesting feature will be an optional
PTO (Power Take Off). This will allow these vehicles to link to an array of
towed attachments such as lawn mowers, spreaders, and other agricultural
devices.
6
COMPETITION
Once we begin producing products, we believe our main competition will be the
array of existing electric motors and vehicles on the market. In our industry,
companies typically focus on the development of a product, and then build their
company around that product. The market is well established and these companies
are introducing new products regularly.
Nova's competitive advantage is in our approach to the market and our "Purpose
Driven Engineering(TM)" propulsion systems design. It is not our intent to be
the first to market with a specific product, although we may be. It is, however,
Nova's intent to provide the most efficient and cost effective solutions to the
market needs identified by product.
While Nova products may prove to be superior and have the additional benefit
over current propulsion systems of being environmentally friendly, there are
still issues of market acceptance and penetration to overcome. By seeking
strategic alliances with proven leaders in diverse markets, we plan to
demonstrate that our solutions are superior to existing products. Our goal is
not to establish ourselves in the market, but rather to partner with established
global market leaders by providing them with a significant competitive
advantage.
In January, 2006 we entered into a Joint Venture Agreement with Nu Pow'r, LLC
("Nu Pow'r"), under which Nu Pow'r contributed its proprietary technology in
electric propulsion systems technology developed by its electrical engineers to
the Joint Venture, while we are responsible for the initial capitalization of
the Joint Venture as well as providing additional capital as necessary until the
Joint Venture can sustain itself from revenues derived from its business
activities. The formation agreement includes commitments for contributions from
both companies. Although interim financial reporting by us gave effect to the
completion and operation of the JVC, in fact, the operating agreement and other
attributes were never formalized or agreed to and a bank account for the JVC was
never established. Accordingly, the parties have recently agreed to ignore the
existence of the JVC retroactive to its inception, and to operate without it
until such time as a formal operating agreement is established and all other
issues are resolved satisfactorily.
We believe our competitive advantage is in our business approach. We do not
attempt to eliminate the competitors from the market, but rather partner with
them as we enter into a new era of propulsion system design. Using NU POW'R's
"Purpose Driven Engineering(TM)" design concept we are poised to be the solution
providers to the established global market leaders.
RISKS RELATED TO OUR BUSINESS
An investment in our shares is highly speculative and involves a significant
degree of risk. Prospective investors should carefully consider the following
risk factors, in addition to the other information set forth herein, prior to
purchasing any of our shares. The following risk factors do not purport to be a
complete explanation of the risks involved in our business.
7
WE HAVE NEVER GENERATED ANY REVENUES.
Although we have been in business for several years, we have never generated any
revenues from operations. We have been in a development stage since inception,
and have yet to manufacture products for sale to customers, either directly or
indirectly. All of our working capital has been generated by sales of securities
and loans from affiliates.
WE HAVE A HISTORY OF OPERATING LOSSES, WHICH MAY CONTINUE.
We have a history of losses and may continue to incur operating and net losses
for the foreseeable future. We incurred a net loss of $1,377,327
for the year ended June 30, 2007 and a net loss of $824,099 for the year ended
June 30, 2006. As of June 30, 2007 our accumulated deficit was
$2,437,119. We have not achieved profitability on a quarterly or on an annual
basis. We may not be able to generate revenues or reach a level of revenue to
achieve profitability.
WE ARE IN DEFAULT UNDER CONVERTIBLE DEBENTURES, INCLUDING INTEREST, LIQUIDATED
DAMAGES AND OTHER PENALTIES TOTALING $1,052,475 AS OF JUNE 30, 2007, AND COSTS
AND EXPENSES CONTINUING TO ACCRUE.
In 2006 we issued Convertible Debentures in the amount of $539,000,
collateralized by all of our assets. We have received notices of default from
three of the holders of the Convertible Debenture, accompanied by threats to
file lawsuits and foreclose on our assets. The notices seek to accelerate the
indebtedness represented by the Convertible Debentures, and seek various
penalties, late fees and costs. We are unable to repay the Convertible
Debentures and related costs and expenses, and unless we are unable to reach a
settlement or other compromise with the holders of the Convertible Debentures or
locate additional financing, the holders may foreclose on our assets.
OUR FUTURE FINANCIAL RESULTS, INCLUDING OUR EXPECTED REVENUES, ARE UNPREDICTABLE
AND DIFFICULT TO FORECAST.
If we begin to generate revenues, it is likely that our revenues, expenses and
operating results will fluctuate from quarter to quarter, which could increase
the volatility of the price of our Common Stock. We expect that our operating
results will continue to fluctuate in the future due to a number of factors,
some of which are beyond our control. These factors include:
o Our ability, thus far unproven, to sell our products, either
directly or indirectly, or generate licensing revenues.
o If we receive orders for products, our ability to complete
those orders in a timely fashion.
o The costs we would incur in manufacturing products.
o The costs of marketing our products, including customer
relations and warranty repairs.
Due to all of these factors, our operating results may fall below the
expectations of investors, which could cause a decline in the price of our
Common Stock.
8
WE WILL NEED TO RAISE ADDITIONAL CAPITAL TO MEET OUR BUSINESS REQUIREMENTS IN
THE FUTURE AND SUCH CAPITAL RAISING MAY BE COSTLY, DIFFICULT OR IMPOSSIBLE TO
OBTAIN AND, IF OBTAINED COULD SUBSTANTIALLY DILUTE CURRENT STOCKHOLDERS'
OWNERSHIP INTERESTS.
We will need to raise additional capital in the future, which may not be
available on reasonable terms or at all. The raising of additional capital may
dilute our current stockholders' ownership interests and negatively affect our
results of operations if such capital is raised through the issuance of
derivatives, as we have in the past. Our income from operations will not be
sufficient to achieve our business plan. We will need to raise additional funds
through public or private debt or equity financings to meet various objectives
including, but not limited to:
o pursuing growth opportunities, including more rapid expansion;
o acquiring complementary businesses;
o making capital improvements to improve our infrastructure;
o hiring qualified management and key employees;
o developing new products, accessories and services;
o responding to competitive pressures; and
o complying with regulatory requirements.
Any additional capital raised through the sale of equity or equity backed
securities may dilute current stockholders' ownership percentages and could also
result in a decrease in the fair market value of our equity securities, because
our assets would be owned by a larger pool of outstanding equity. The terms of
those securities issued by us in future capital transactions may be more
favorable to new investors, and may include preferences, superior voting rights
and the issuance of warrants or other derivative securities, which may have a
further dilutive effect.
Furthermore, any additional debt or equity financing that we may need may not be
available on terms favorable to us, or at all. The registration rights
agreements we entered into with the holders of the Convertible Debentures
generally provide that we will not, without the prior written consent of the
holders, offer or sell additional equity securities. In addition, negative
covenants in the purchase agreements limit our ability to raise additional
capital, including through the incurrence of debt or liens on our properties or
the issuance of equity securities that include registration rights. These
negative covenants may impair our ability to raise additional capital. If we are
unable to obtain required additional capital, we may have to curtail our growth
plans or cut back on existing business and, further, we may not be able to
continue operating if we do not generate sufficient revenues from operations
needed to stay in business.
We may incur substantial costs in pursuing future capital financing, including
investment banking fees, legal fees, accounting fees, securities law compliance
fees, printing and distribution expenses and other costs. We may also be
required to recognize non-cash expenses in connection with certain securities we
issue, such as convertible notes and warrants, which may adversely impact our
financial condition.
9
OUR AUDITORS HAVE INDICATED THAT OUR INABILITY TO GENERATE SUFFICIENT REVENUE
RAISES SUBSTANTIAL DOUBT AS TO OUR ABILITY TO CONTINUE AS A GOING CONCERN.
Our audited financial statements for the period ended June 30, 2007 were
prepared on a going concern basis in accordance with United States generally
accounting principles. The going concern basis of presentation assumes that we
will continue in operation for the foreseeable future and will be able to
realize our assets and discharge our liabilities and commitments in the normal
course of business. However, our auditors have indicated that our inability to
generate sufficient revenue raises substantial doubt as to our ability to
continue as a going concern. In the absence of significant revenues and profits,
we are seeking to raise additional funds to meet our working capital needs,
principally through the additional sales of our securities or debt financings.
However, we cannot guarantee that will be able to obtain sufficient additional
funds when needed, or those funds, if available, will be obtainable on terms
satisfactory to us. In the event that these plans can not be effectively
realized, there can be no assurance that we will be able to continue as a going
concern.
WE INTEND TO EXPAND OUR OPERATIONS AND INCREASE OUR EXPENDITURES IN AN EFFORT TO
GROW OUR BUSINESS. IF WE ARE UNABLE TO ACHIEVE OR MANAGE SIGNIFICANT GROWTH AND
EXPANSION, OR IF OUR BUSINESS DOES NOT GROW AS WE EXPECT, OUR OPERATING RESULTS
MAY SUFFER.
Our business plan anticipates continued additional expenditure on development,
manufacturing and other growth initiatives. We may not achieve significant
growth. If achieved, significant growth would place increased demands on our
management, accounting systems, network infrastructure and systems of financial
and internal controls. We may be unable to expand associated resources and
refine associated systems fast enough to keep pace with expansion, especially to
the extent we expand into multiple facilities at distant locations. If we fail
to ensure that our management, control and other systems keep pace with growth,
we may experience a decline in the effectiveness and focus of our management
team, problems with timely or accurate reporting, issues with costs and quality
controls and other problems associated with a failure to manage rapid growth,
all of which would harm our results of operations.
10
WE EXPECT INTENSE COMPETITION IN OUR INDUSTRY.
Once we begin marketing products, we expect that many of our competitors will
be large, diversified manufacturing companies with significant expertise in the
development and manufacturing of electric motors and vehicles. These competitors
will have significantly greater name recognition and financial and other
resources. We cannot assure you that we will succeed in the face of strong
competition from these companies.
CERTAIN ASPECTS OF OUR INDUSTRY ARE SUBJECT TO GOVERNMENT REGULATION
Electric motors and vehicles are regulated by a number of federal, state and
local agencies, in the United States and abroad. The changing regulatory
environment, including changes in water quality standards, could adversely
affect our business or make our products obsolete.
YOU MAY HAVE DIFFICULTY TRADING OUR COMMON STOCK AS THERE IS A LIMITED PUBLIC
MARKET FOR SHARES OF OUR COMMON STOCK.
Our Common Stock is currently quoted on the NASD's OTC Bulletin Board under the
symbol "ARME.OB." There is a limited public market for our Common Stock. As a
result, a stockholder may find it difficult to dispose of, or to obtain accurate
quotations of the price of, our Common Stock. This severely limits the liquidity
of our Common Stock, and would likely have a material adverse effect on the
market price for our Common Stock and on our ability to raise additional
capital. An active public market for shares of our Common Stock may not develop,
or if one should develop, it may not be sustained.
APPLICABLE SEC RULES GOVERNING THE TRADING OF "PENNY STOCKS" MAY LIMIT THE
TRADING AND LIQUIDITY OF OUR COMMON STOCK WHICH MAY AFFECT THE TRADING PRICE OF
OUR COMMON STOCK.
Our Common Stock is currently quoted on the NASD's OTC Bulletin Board. Stocks
such as ours which trade below $5.00 per share are considered "PENNY STOCKS" and
subject to SEC rules and regulations which impose limitations upon the manner in
which such shares may be publicly traded. These regulations require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the associated risks. Under these
regulations, certain brokers who recommend such securities to persons other than
established customers or certain accredited investors must make a special
written suitability determination regarding such a purchaser and receive such
purchaser's written agreement to a transaction prior to sale. These regulations
have the effect of limiting the trading activity of our Common Stock and
reducing the liquidity of an investment in our Common Stock.
WE DO NOT ANTICIPATE DIVIDENDS TO BE PAID ON OUR COMMON STOCK, AND STOCKHOLDERS
MAY LOSE THE ENTIRE AMOUNT OF THEIR INVESTMENT.
A dividend has never been declared or paid in cash on our Common Stock, and we
do not anticipate such a declaration or payment for the foreseeable future. We
expect to use future earnings, if any, to fund business growth. Therefore,
stockholders will not receive any funds absent a sale of their shares. We cannot
assure stockholders of a positive return on their investment when they sell
their shares, nor can we assure that stockholders will not lose the entire
amount of their investment.
11
YOU MAY EXPERIENCE DILUTION OF YOUR OWNERSHIP INTERESTS BECAUSE OF THE FUTURE
ISSUANCE OF ADDITIONAL SHARES OF OUR COMMON STOCK.
In the future, we may issue our authorized but previously unissued equity
securities, resulting in the dilution of the ownership interests of our present
stockholders. We may issue additional shares of our Common Stock or other
securities that are convertible into or exercisable for Common Stock in
connection with hiring or retaining employees, future acquisitions, future sales
of our securities for capital raising purposes, or for other business purposes.
The future issuance of any such additional shares of our Common Stock or other
securities may create downward pressure on the trading price of our Common
Stock. There can be no assurance that we will not be required to issue
additional shares, warrants or other convertible securities in the future in
conjunction with any capital raising efforts, including at a price (or exercise
prices) below the price at which shares of our Common Stock are currently quoted
on the OTC Bulletin Board.
WE MAY INFRINGE THE INTELLECTUAL PROPERTY RIGHTS OF OTHERS. The industry in
which we plan to operate has many participants that own, or claim to own,
proprietary intellectual property. In the past we have received, and in the
future may receive, claims from third parties alleging that we or our partners
may violate their intellectual property rights. Rights to intellectual property
can be difficult to verify and litigation may be necessary to establish whether
or not we have infringed the intellectual property rights of others. In many
cases, these third parties are companies with substantially greater resources
than us, and they may be able to, and may choose to, pursue complex litigation
to a greater degree than we could. Regardless of whether these infringement
claims have merit or not, we may be subject to the following:
o We may be liable for potentially substantial damages, liabilities and
litigation costs, including attorneys' fees;
o We may be prohibited from further use of the intellectual property
and may be required to cease selling our products that are subject to the claim;
o We may have to license the third party intellectual property,
incurring royalty fees that may or may not be on commercially reasonable terms.
In addition, there is no assurance that we will be able to successfully
negotiate and obtain such a license from the third party;
o We may have to develop a non-infringing alternative, which could be
costly and delay or result in the loss of sales. In addition, there is no
assurance that we will be able to develop such a non-infringing alternative; and
o We may be required to indemnify our customers for certain costs and
damages they incur in such a claim.
In the event of an unfavorable outcome in such a claim and our
inability to either obtain a license from the third party or develop a
non-infringing alternative, then our business, operating results and financial
condition may be materially adversely affected and we may have to restructure
our business.
12
Absent a specific claim for infringement of intellectual property, from
time to time we have and expect to continue to license technology, intellectual
property and software from third parties. There is no assurance that we will be
able to maintain our third party licenses or obtain new licenses when required
and this inability could materially adversely affect our business and operating
results and the quality and functionality of our products. In addition, there is
no assurance that third party licenses we execute will be on commercially
reasonable terms.
ITEM 2. DESCRIPTION OF PROPERTY
The Company owns no real property. It conducts all of its business from a leased
facility in Solana Beach, California. The office space is provided by the
Company's President for $670 per month. The Company believes the current
facility will meet the Company's needs until we are in production.
ITEM 3. LEGAL PROCEEDINGS
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fiscal year
ended June 30, 2007.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
HISTORY
Armor Electric, Inc. ("Armor", "the Company", "we", "us", "our"), formerly Armor
Enterprises, Inc. and Armor Software, Inc., is in the development stage as
defined in Financial Accounting Standards Board Statement No. 7. We are a
Florida corporation, formed on June 5, 1998. Since inception we have had no
operations. Armor was formed with the purpose of developing privacy encryption
software for the Internet. After efforts to develop the business failed, the
business was abandoned in mid 2000. Since then we have devoted our time and
finances in the development of new research and development (R&D) technology for
electric motorized vehicles. Our fiscal year end is June 30.
BASIS OF PRESENTATION
On April 27, 2004 we acquired all of the issued and outstanding shares of common
stock of Nova Electric Systems, Inc. (Nova, or the Company) a development stage
Nevada Corporation, formed October 29, 2003, in exchange for 21 million
restricted shares of common stock of Armor, pursuant to Section 368 (a) (1) (B)
of the Internal Revenue Code, which provides for a tax-free exchange.
This stock exchange transaction, which is treated as a recapitalization of Nova
for accounting purposes, resulted in a change of control wherein the financial
statements included herein are those of the acquired company, Nova, the
accounting parent, consolidated with, Armor, Nova's accounting subsidiary, as
required for proper financial presentation purposes only. For legal purposes,
Armor is the parent and Nova is the subsidiary.
At the date of the stock exchange, all of the net assets of Armor were acquired
by Nova at fair value which equaled Armor's book value. For presentation
purposes certain prior period amounts have been reclassified for comparative
purposes. Nova's fiscal year end is also June 30.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements as of and for the years ended June 30,
2007 and 2006, include the accounts of Armor Electric, Inc. and Nova Electric
Systems, Inc., after elimination of all inter-company accounts and transactions.
CASH EQUIVALENTS
We consider all highly liquid investments with the original maturities of three
months or less to be cash equivalents.
F-10
GOING CONCERN
Our consolidated financial statements have been presented on the basis that we
are a going concern, which contemplates the realization of assets and the
satisfaction of liabilities in the normal course of business. We have sustained
operating losses since our inception. As of June 30, 2007 we have a deficit in
working capital and stockholders' equity.
Our ability to continue in existence is dependent on our ability to develop
additional sources of capital, and to achieve profitable operations. We
presently have several electric vehicle prototypes in the hands of prospective
customers for testing and consideration for viability of the products which may
lead to production pursuant to our business plan. In the meantime we plan to
pursue additional private placements of our common stock. The accompanying
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
INCOME TAXES
The Company uses the liability method of accounting for income taxes pursuant to
Statement of Financial Accounting Standards Board Opinion No. 109. Under this
method, deferred income taxes are recorded to reflect the tax consequences in
future periods of temporary differences between the tax basis of assets and
liabilities and their financial amounts at year-end.
CONSOLIDATED TAX RETURNS
Nova Electric Systems, Inc. has elected to file consolidated income tax returns
with its parent Armor Electric Systems, Inc.
EARNINGS (LOSS) PER COMMON SHARE
Basic loss per common share has been calculated based upon the weighted average
number of common shares outstanding during the period in accordance with the
Statement of Financial Accounting Standards Statement No. 128, "Earnings per
Share". All shares issued at nominal value have been considered outstanding
since inception. The computation of loss per common share does not assume
exercise of outstanding warrants as the result would be antidilutive.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting periods. Actual results could differ from those estimates
and assumptions.
F-11
FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, disclosures about fair
value of financial instruments, defines the fair value of a financial instrument
as the amount at which the instrument could be exchanged in a current
transaction between willing parties. The carrying values of the Company's
financial instruments, which consists of current assets and liabilities
including long-term debt approximate fair values due to either the short-term
maturities of such instruments or current market rates for similar long-term
debt obligations.
RESEARCH AND DEVELOPMENT
We expense research and development expense until such time that Beta testing
has been completed, at which point incurred costs are capitalized. All R&D is
performed on a contract basis.
STOCK BASED COMPENSATION
On January 1, 2006, the Company adopted SFAS No. 123 (R) "Share-Based Payment"
which requires the measurement and recognition of compensation expense for all
share-based payment awards made to include employees and directors including
employee stock options and employee stock purchases related to an Employee Stock
Purchase Plan based on the estimated fair values.
The Company adopted SFAS No. 123(R) using the modified prospective transition
method for awards made to employee and directors, which required the application
of the accounting standard as of January 1, 2006. The accompanying consolidated
financial statements as of and for the year ended June 30, 2007 reflect the
impact of SFAS No. 123(R). In accordance with the modified prospective
transition method, the Company's accompanying consolidated financial statements
for the prior periods have not been restated, and do not include the impact of
SFAS No. 123(R). During the years ended June 30, 2007 and 2006, the Company
granted 3,100,000 and -0- stock options to employees or directors, respectively.
DERIVATIVES
The Company occasionally issues financial instruments that contain an embedded
instrument. At inception, the Company assesses whether the economic
characteristics of the embedded derivative instrument are clearly and closely
related to the economic characteristics of the financial instrument (host
contract), whether the financial instrument that embodies both the embedded
derivative instrument and the host contract is currently measured at fair value
with changes in fair value reported in earnings, and whether a separate
instrument with the same terms as the embedded instrument would meet the
definition of a derivative instrument.
If the embedded derivative instrument is determined not to be clearly and
closely related to the host contract, is not currently measured at fair value
with changes in fair value reported in earnings, and the embedded derivative
instrument would qualify as a derivative instrument, the embedded derivative
instrument is recorded apart from the host contract and carried at fair value
with changes recorded in current-period earnings.
F-12
The Company determined that all embedded items associated with financial
instruments at this time do not qualify for derivative treatment, nor should
those be separated from the host.
NOTE 2 - CONTRIBUTED CAPITAL
Capital contributed by management during the years ended June 30, 2007 and 2006,
for the fair value of rent totaled $8,040 and $6,100, respectively.
NOTE 3 - RELATED PARTY TRANSACTIONS
As of June 30, 2007, the Company paid $333,795 towards its commitment to pay a
$650,000 advance royalty to Nu Age Electric, Inc., in connection with the
acquisition of certain marketing rights, of which $10,000 was paid during the
current year and $323,795 was paid during the prior years. Advance royalties are
classified as a contra equity account since the amount paid is to a shareholder
of Armor.
In addition to the above, Nu Age also received from us $12,500 for finder's fees
for arranging two private placements in the current year. These fees were
deducted from paid in capital and are being treated as stock offering costs.
An affiliate owned by the President of the Company, Pinstripe Financial, LLC,
loaned $273,557 to the Company as of June 30, 2007. There were no proceeds of
this loan provided during the current year. This debt is collateralized by a
second position on all of the assets of the Company and is payable with interest
at 18 percent per annum, due on July 1, 2008, see note 9 for further discussion.
The same affiliate above also loaned us in the current year, $55,000. On
September 18, 2006 this new loan was paid in full with the issuance of 550,000
units, which includes one share of the Company's common stock and one warrant to
purchase an additional share of common stock. The shares were valued at $ 0.10
per share, and the warrants have a conversion price of $0.15 per share with an
expiration date of September 18, 2008. We have reserved shares of unissued
common stock for warrant exercises. These shares also have restrictions attached
to them on their resale, pursuant to the Stock Purchase Agreement, along with
certain restrictions for subsequently issued shares. The detachable warrant
was valued at $28,278 using Black-Scholes option pricing
model using the following assumptions: stock price volatility of 114.00%, risk
free rate of return of 5.05%; dividend yield of 0%, and a 2.0 year term, and has
been included in paid in capital as an allocation of the proceeds attributed to
the sale of the related common stock.
In addition to related party transactions included elsewhere, one shareholder's
law firm, which is the Company's SEC legal and general corporate counsel, was
issued 900,000 free trading shares during the current year pursuant to filing a
Form S-8 on January 21, 2005, to be held in escrow by him against future
F-13
services. These shares were issued at a value of $87,750. During the current
year the law firm redeemed all escrowed shares totaling 1,430,000 with a value
of $114,200 which was applied against the account payable to them as of June 30,
2006, of $50,150 and current year's billings of $60,050. We valued all issuances
of escrowed shares at market on the date of issuance, and created a contra
equity account to provide for the amount receivable there from. As escrowed
shares are sold into the open market by the law firm, we reduced the originally
assigned value of the shares from the contra equity account, and applied that
amount as a reduction of the amount owing to the law firm. Any gain or loss on
the sale of the escrowed shares is considered a gain or loss by the law firm,
since they were in control of the sale of the escrowed shares, not us. On June
18, 2007, this law firm resigned.
During the year ended June 30, 2006, we capitalized a deferred financing cost in
connection with the convertible debentures of April 24, 2006, which fees
originated from the aforementioned law firm. During the current year we
amortized the remaining balance of $30,638, resulting in an unamortized balance
of zero at June 30, 2007.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENT
On April 23, 2007, we negotiated a binding license agreement with Nu Pow'r, see
Note 8. We agreed to provide 500,000 shares of common stock for this consulting
service by registered them on Form S-8 dated February 16, 2005. We issued
250,000 shares on April 23, 2007 upon the consulting agreement being signed and
when all the ancillary agreements and contracts are complete we shall be issue
the remaining 250,000 shares. We valued the shares issued at $15,000, and
recorded the expense as a consulting fee. The term of the consulting agreement
is for six months. Either party may cancel the agreement with a thirty day
notice. The balance of the 250,000shares have not been issued since the
remaining contracts have not been finalized
NOTE 5 - THE EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS
Below is a listing of the most recent accounting standards and their effect on
the Company.
SFAS 156
In March 2006, the FASB issued SFAS 156, ACCOUNTING FOR SERVICING OF FINANCIAL
ASSETS ("SFAS 156"), amending SFAS 140, ACCOUNTING FOR TRANSFERS AND SERVICING
OF FINANCIAL ASSETS AND EXTINGUISHMENTS OF LIABILITIES. SFAS 156 permits
entities the choice between either the amortization method or the fair value
measurement method for valuing separately recognized servicing assets and
liabilities. SFAS 156 is effective for fiscal years beginning after September
15, 2006; early adoption is permitted as of the beginning of an entity's fiscal
year, provided the entity has not yet issued financial statements for any
interim period of that fiscal year. We believe the adoption of SFAS 156 will not
have an impact on our financial statements.
F-14
SFAS 157
In September 2006, the FASB issued SFAS 157, FAIR VALUE MEASUREMENTS ("SFAS
157"). SFAS 157 provides guidance on the application of fair value measurement
objectives required in existing GAAP literature to ensure consistency and
comparability. Additionally, SFAS 157 requires additional disclosures on the
fair value measurements used. SFAS 157 is effective for fiscal years beginning
after November 15, 2007. We believe the adoption of SFAS 157 will not have a
material impact on its financial statements
SFAS 158
Also in September 2006, the FASB issued SFAS 158, EMPLOYERS' ACCOUNTING FOR
DEFINED BENEFIT PENSION AND OTHER POSTRETIREMENT PLANS, AN AMENDMENT OF FASB
STATEMENTS NO. 87, 88, 106, AND 132(R) ("SFAS 158"). SFAS 158 requires companies
to recognize the overfunded or underfunded status of a defined benefit
post-retirement plan as an asset or liability in their balance sheet and to
recognize changes in that funded status in the year in which the changes occur
through comprehensive income. The statement's provisions related to the
recognition of the funded status of a defined benefit postretirement plan and
required disclosures are effective for fiscal years ending after December 15,
2006. The requirement to measure plan assets and the benefit obligation as of
the date of the employer's fiscal year-end statement of financial position is
effective for fiscal years ending after December 15, 2008. The provisions of
SFAS 158 does not have a material effect on our financial statements as we
currently have no defined benefit plan.
SFAS 159
In February 2007, the FASB issued SFAS 159, THE FAIR VALUE OPTION FOR FINANCIAL
ASSETS AND FINANCIAL LIABILITIES FAIR VALUE MEASUREMENTS ("SFAS 159"). SFAS No.
159 permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. Unrealized gains and losses on items for which the fair value option has
been elected are reported in earnings. SFAS No. 159 does not affect any existing
accounting literature that requires certain assets and liabilities to be carried
at fair value. SFAS No. 159 is effective for fiscal years beginning after
November 15, 2007. The Company is currently evaluating the impact of adopting
SFAS No. 159 on our financial statements.
FIN 48
In June 2006, the FASB issued FIN 48, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES-AN INTERPRETATION OF FASB STATEMENT NO. 109, ACCOUNTING FOR INCOME TAXES
("FIN 48"), which clarifies the accounting for uncertainty in income taxes. FIN
48 prescribes a recognition threshold and measurement attribute for the
financial statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. The interpretation requires the Company to
recognize, in its financial statements, the impact of a tax position if that
position is more likely than not of being sustained on audit, based on the
technical merits of the position. FIN 48 also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods and disclosure. The provisions of FIN 48 are effective beginning January
1, 2007 with the cumulative effect of the change in accounting principle
recorded as an adjustment to opening retained earnings. We are currently
evaluating the impact of adopting FIN 48 on our financial statements.
F-15
SFAS 123-R
In December 2004, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123-R"). SFAS
No.123-R is a revision of SFAS No. 123, as amended, Accounting for Stock-Based
Compensation, and supersedes Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. SFAS No.123-R eliminates the
alternative to use the intrinsic value method of accounting that was provided in
SFAS No. 123, which generally resulted in no compensation expense recorded in
the financial statements related to the issuance of equity awards to employees.
SFAS No. 123-R requires that the cost resulting from all share-based payment
transactions be recognized in the financial statements. SFAS No. 123-R
establishes fair value as the measurement objective in accounting for
share-based payment arrangements and requires all companies to apply a
fair-value-based measurement method in accounting for generally all share-based
payment transactions with employees.
The adoption of these new Statements is expected to have a material effect on
the Company's financial position, results of operations, and cash flows in
future periods.
NOTE 6 - LIQUIDATING DAMAGES
The Company agreed to file a registration statement on form SB-2 to register the
shares underlying its four convertible debentures. A provision of the
Registration Rights Agreement was for Armor to pay liquidating damage of 2% per
month for up to 12 months on the outstanding principal in the event the
registration statement did not become effective as of August 30, 2006 for three
debt holders, and November 4, 2006 for the fourth one, which it did not. The
Company voluntarily withdrew its registration statement on Form SB-2 after
comments were received from the Securities and Exchange Commission. As of June
30, 2007 a total of $95,985 was accrued as liquidating damages, and has been
included in debt servicing costs and expenses at June 30, 2007 (Note 9).
NOTE 7 - RESEARCH AND DEVELOPMENT
We expense research and development costs as they are incurred. During the years
ended June 30, 2007 and 2006, we expensed a total of $104,568 and $505,841
respectively relating to vehicle prototypes and electric propulsion systems with
outside vendors. Our research and development expense in the current year
consisted of the value of 1 million shares of our restricted common stock of
$60,000, and $50,000 cash paid to the designer of our electric propulsion system
as consideration for their issuance of a perpetual international license to
manufacture and sell certain of our vehicles as further described in Note 8,
less a write-off of their prior year's accounts payable balance of $5,432.
F-16
NOTE 8 - LICENSING AGREEMENT
On March 28, 2007, we signed a working agreement with Nu Pow'r, LLC (Nu Pow'r).
Among the provisions of the agreement, Nu Pow'r grants to Armor an exclusive,
perpetual international license to market and manufacture the electric scooter,
the "extreme" electric go-kart, and the three wheeled electric pedi-cab. The
agreement does not convey to Armor the intellectual property of the Nu Pow'r
electric propulsion systems (EPS) or the Nu Pow'r energy storage systems (ESS).
Nu Pow'r will provide updates to their proprietary systems as they become
available. Nu Pow'r also agrees to provide the EPS and ESS systems to Armor at
the most favored pricing available. We also agreed to pay Nu Pow'r a 15 percent
royalty on the net profit of any of the above vehicles. In connection with the
three wheeled pedi-cab vehicle to be initially used in Mexico, when and if the
prototypes are accepted and orders for them finalized, the related BIMO contract
will be jointly owned and the net profits will be shared in the following way:
In regards to the EPS and ESS systems, Nu Pow'r will receive 65% and Armor 35%
of the net profits. In regards to the frames, Armor will receive 85% and Nu
Pow'r will receive 15% of the net profits. Nu Pow'r also agreed to a non-compete
clause to be built in and agreed to refer all potential buyers of the above
vehicles to Armor for negotiating the sale.
The agreement provides for future research and development projects, in regard
to mutually agreeing in advance to budgets, goals, and timelines of performance
and fund raising.
We agreed to pay in exchange for the above license, cash and 1 million shares of
our restricted common stock as further described in Note 7.
NOTE 9 - DEBT FINANCING
NEW CONVERTIBLE DEBENTURE - RELATED PARTY
On July 1, 2006, we formalized an agreement with the affiliate referred to in
Note 3 above, Pinstripe Financial, LLC. The affiliate is entitled, at its
option, to convert, and sell on the same day, at any time and from time to time,
until payment in full of the Debenture, totaling $273,557, or any part of the
principal amount of the Debenture is converted into shares of restricted common
stock, par value $.001 per share, at the price per share of $0.12. In addition,
we shall make annual interest payments to the affiliate, on each conversion date
(as to the principal amount being converted) and on the maturity date. The
interest shall be calculated on a 360 day basis and will accrue daily. The
Debenture holder was granted a detachable warrant to purchase 2,279,642 shares
of the Company's Common Stock at the share price of $0.16.
We determined that the detachable warrant was valued at $205,168 using
Black-Scholes option pricing model using the following assumptions: stock price
volatility of 114.00%, risk free rate of return of 5.05%; dividend yield of 0%
and a 7.0 year term. The face amount of the convertible debenture of $273,557
was proportionately allocated to the debenture and the warrants in the amount of
$68,389 and $205,168, respectively.
F-17
The total warrant value of $205,168 was accounted for as a debt discount and was
amortized and treated as interest expense over the period of expected repayment
of the debentures- a twelve month period, not the term of the convertible
debenture of 24 months, on a straight line basis, and was fully amortized by the
end of the current year.
SHAREHOLDER ADVANCES
During the current year, another affiliated company owned by our President, and
a major shareholder's company, advanced us on a short term, non-interest
bearing, unsecured basis, $130,000 and $10,000, respectively, of which $120,000
was repaid during the year to the former related parties. In addition, Pinstripe
Financial, LLC (Note 3) advanced us $2,690 on the same terms and conditions,
which is still outstanding as of June 30, 2007.
REGISTRATION STATEMENT
We filed, on Form SB-2, a registration statement on July 25, 2006, with the
Securities and Exchange Commission to register all shares and warrants
pertaining to both the equity and debt financing transactions of 2005 and 2006.
On April 12, 2007, we withdrew our registration statement which was amended on
December 27, 2006.
GRANITE FINANCIAL GROUP WAIVER AGREEMENT
On October 1, 2006, we entered into a waiver agreement with a member of the
Granite Financial Group who was one of the three secured convertible debenture
holders. In exchange for the waiving of a closing requirement for their second
installment, they were granted an additional 312,500 warrants. These warrants
have an exercise price of $ .16 per share and have an expiration date of October
1, 2013. The warrant was valued at $29,786 using the Black-Scholes option
pricing model using the following assumptions: stock price volatility of
114.00%, risk free rate of return of 5.05%; dividend yield of 0% and a 7.0 year
term.
The warrant valuation is considered a financing cost for the second installment
of Convertible Debt from the Granite Financial Group, since this was granted for
them waiving a closing requirement for a portion of the second installment. The
warrant was valued as indicated above and the amount was recorded as deferred
financing costs, which was amortized over the remaining expected debt repayment
period of 9 months ending June 30, 2007.
SHAREHOLDER ADVANCE - GRANITE
On July 1, 2006, we received an additional $50,000 from the same
shareholder/Granite note holder, as referenced above in the waiver agreement.
There was no formal paperwork formalized between us and the shareholder. As
such, we did not accrue any interest, and have treated it as an unsecured
non-interest bearing shareholder advance, along with the $22,690 of advances
from other related parties mentioned above. The Debt holder was granted a
warrant to purchase 416,667 shares of our restricted common stock at the share
price of $0.16.
F-18
We have determined that the detachable warrant was valued at $35,836 using
Black-Scholes option pricing model using the following assumptions: stock price
volatility of 114.00%, risk free rate of return of 5.05%; dividend yield of 0%
and a 7.0 year term. The face amount of the shareholder advance of $50,000 was
proportionately allocated to the debenture and the warrants in the amount of
$14,164 and $35,836, respectively
The total warrant value of $35,836 was accounted for as a debt discount which
was fully amortized by the end of the current year and treated as interest
expense over the period of expected repayment of the debt - a twelve month
period, on a straight line basis.
CONVERTIBLE DEBENTURES - LETTER OF ADJUSTMENT
On December 4, 2006, we also adjusted the Convertible debentures in force at the
time to reflect the referenced private placements in Note 12. A condition of all
the convertible debentures is that if stock is sold for a price less than the
conversion price on the face of the note, the conversion price will be adjusted
to reflect the last sale price. As a result of this, the convertible notes'
terms have changed to an exercise price of $0.10 per share instead of $0.12, and
all other terms and conditions remain in force. This change had no effect on the
valuation associated with the underlying warrants.
INCREASE IN PRINCIPAL AMOUNTS OF DEBENTURES
On April 26, 2007, the principal amount of the Granite convertible debentures
totaling $263,240 increased to $334,193 as of the anniversary date of April 26,
2007, not as a result of a default, but since the entire outstanding principal
of the loans was not paid as of that date. The principal bump up amount of
$70,953 was included in debt servicing costs and expenses at June 30, 2007
DEFAULT OF CONVERTIBLE DEBENTURES
We defaulted on all four of our convertible debentures because we failed to have
an effective Registration Statement (Form SB2) within 125 days of funding of the
debts. As such these obligations became due and payable immediately at the
option of the note holders. The loan provides for penalty interest of 18% per
annum to commence 5 days after the event of default, as well as a change in the
interest rate to 18% from the original 10.25% which we have for as of the
required dates. For the Granite Group Debentures the date of default is August
30, 2006, and for Pinstripe's debenture, the date of default is November 4,
2006. To date we have received notices of default from the three Granite note
holders as further described in Note 14.
F-19
MANDATORY DEFAULT AMOUNT
As provided for in the debenture notes there is a provision for a Mandatory
Default Amount of 130% of the total amounts outstanding on the date of default.
On the Granite notes, the additional 30% totaled $115,495, and for Pinstripe
$93,695. These amounts have been included in debt servicing costs and expenses
at June 30, 2007 and are reflected in the summary below of Secured Convertible
Debentures outstanding as of June 30, 2007.
All of our assets were pledged as collateral on these obligations. Because of
default on the debentures the note balances, accrued interest, penalty amounts,
and additional principal amounts are payable in cash at the holders' election.
These convertible debentures are guaranteed by an affiliate.
Summary of Secured Convertible Debentures
The following is a summary of the secured convertible debentures outstanding as
of June 30, 2007:
Three Granite Secured Convertible Debentures:
Original balances before additional principal increases due to default $ 263,240
Principal increases due to default 186,448
Total outstanding June 30, 2007, for Granite 449,688
Pinstripe Financial Secured Convertible Debenture:
Original balances before additional principal increases due to default 273,557
Principal increases due to default 93,694
Total outstanding June 30, 2007, for Pinstripe 367,252
Total outstanding June 30, 2007, for all four Debentures $ 816,939
|
NOTE 10 - COMMON STOCK WARRANTS
The following are warrant activities during the years ended June 30, 2007:
Total outstanding, June 30, 2006 7,481,667
Additional issuances during the year ending June 30, 2007:
2006 private placement, September 18, 2006 550,000
2006 Shareholder advance, Granite #2 416,667
2006 convertible debentures, Pinstripe 2,279,642
2006 private placement, November 9, 2006 10,000
2006 private placement, November 30, 2006 1,000,000
2006 Granite waiver agreement, October 1, 2006 312,500
2007 private placement, January 18, 2007 500,000
2007 private placement, February 5, 2007 500,000
----------
Total additional warrants for the year ending
June 30, 2007 5,568,809
----------
Total outstanding, June 30, 2007 13,050,476
==========
|
F-20
All of The warrants have "piggy-back" and demand registration rights and shall
survive for seven (7) years from the Closing Date. All of the Company's assets
and those herein after acquired are collateral on all convertible debt
securities on a first priority basis. The notes can be called should the Company
become insolvent.
NOTE 11 - INCOME TAXES
Deferred tax assets for income taxes as of June 30, 2007, of approximately
$638,079 were reduced to zero, after considering the valuation allowance of
$638,079, since there is no assurance of future taxable income. As of June 30,
2007 there was also a net operating loss carryforward of approximately
$1,680,956 of which $29,491 expires in 2024, $160,398 in 2025, $723,315 in 2026,
and the balance of $765,752 in 2027, if unused. The following is an analysis of
deferred tax assets as of June 30, 2007:
Deferred Valuation
Tax Assets Allowance Balance
---------- --------- ---------
Deferred tax assets at June 30, 2006 $ 335,039 $(335,039) $ -0-
Additions for the year 303,040 (303,040) -0-
--------- --------- ---------
Deferred tax assets at June 30, 2007 $ 638,079 $(638,079) $ -0-
========= ========= =========
|
The following is a reconciliation of federal income tax expense:
2007 2006
--------- ---------
Expected income tax (benefit) at
federal statutory tax rate -34% $(478,318) $(293,815)
Permanent differences 175,279 37,181
Valuation allowance 303,040 256,634
--------- ---------
Actual income tax (benefit) $ 0% $ 0%
========= =========
|
The tax effects of temporary differences which were computed at a Federal
statutory rate of 34%, that give rise to deferred tax assets as of June 30, 2007
and 2006 are as follows:
2007 2006
--------- ---------
Net operating loss carryforwards $ 260,356 $ 246,607
Amortization of deferred start-up costs 6,365 9,908
Amortization of organizational costs 68 119
Accrued management compensation 36,251 --
--------- ---------
Total gross deferred tax assets 303,040 256,634
Valuation allowance (303,040) (256,634)
---------- ----------
Net deferred tax assets, June 30 $ -0- $ -0-
========= ==========
|
F-21
NOTE 12 - EQUITY
PRIVATE PLACEMENTS
We had a placement of 1,000,000 units for $.10 per unit on November 30, 2006,
each unit consisting of one share of common stock and one stock purchase warrant
entitling the owner to acquire one share each per warrant for $.15. The warrants
expire on November 30, 2008. The gross proceeds received were $100,000, less
offering costs of $10,669, resulting in net proceeds of $89,331. The detachable
warrants were valued at $51,454 using Black-Scholes option pricing model using
the following assumptions: stock price volatility of 114.00%, risk free rate of
return of 5.05%; dividend yield of 0%, and a 7.0 year term, and has been
included in paid in capital as an allocation of the proceeds attributed to the
sale of the related common stock.
We also had a second placement of 10,000 units for $.10 per unit on November 9,
2006, each unit consisting of one share of common stock and one stock purchase
warrant entitling the owner to acquire one share each per warrant for $.15. The
warrants expire on November 9, 2008. The gross proceeds received were $1,000.
The detachable warrant was valued at $865 using Black-Scholes option pricing
model using the following assumptions: stock price volatility of 114.00%, risk
free rate of return of 5.05%; dividend yield of 0% and a 7.0 year term, and has
been included in paid in capital as an allocation of the proceeds attributed to
the sale of the related common stock.
We completed a third private placement of 250,000 units for $.10 per unit on
January 18, 2007, each unit consisting of one share of restricted common stock
and two stock purchase warrant entitling the owner to acquire one share each per
warrant for$.15 per share. The warrants expire on January 18, 2009. The gross
proceeds received were $25,000. The stock offering costs comprised of a finder's
fee to a major shareholder (Note 2)... The detachable warrant qualifies as a
derivative valued at $22,758 using the Black-Scholes option pricing model using
the following assumptions: stock price volatility of 117.36%, risk free rate of
return of 4.54%; dividend yield of 0%, and a 2 year term, and has been included
in paid in capital as an allocation of the proceeds attributed to the sale of
the related common stock.
We also completed a fourth private placement of 250,000 units for $.10 per unit
on February 5, 2007, each unit consisting of one share of common stock and two
stock purchase warrants entitling the owner to acquire one share each per
warrant at an exercise price of $.15 per share. The warrants expire on February
5, 2009. As of February 5, 2007, the net proceeds received were $25,000. . The
detachable warrant qualifies as a derivative valued at $24,750 using the
Black-Scholes option pricing model using the following assumptions: stock price
volatility of 117.36%, risk free rate of return of 4.54%; dividend yield of 0%
and a 2 year term, and has been included in paid in capital as an allocation of
the proceeds attributed to the sale of the related common stock.
F-22
The shares sold on all above placements also have restrictions attached to them
on their resale, pursuant to the Stock Purchase Agreement, along with certain
restrictions for subsequently issued shares. We have reserved shares of unissued
common stock for warrant exercises.
NOTE 13 - EMPLOYEE STOCK OPTION PLAN
On August 18, 2006, our board of directors established and made effective the
"2006 Employees/Consultants Stock Compensation Plan" ("2006 plan"). The 2006
plan provides for the direct award or sale of shares and for the grant of
options to purchase shares. The 2006 plan is intended to comply with all aspects
of the Rule 16.3 under the exchange act and qualifies under Section 422 of the
Internal Revenue code. On March 26, 2007, the board of directors granted to our
President, Vice President, and a director, 3,100,000 options to purchase from
the company a share of stock for $.07 per share with an expiration date of April
12, 2017. As of June 30, 2007, there were no shares exercised and all remain
outstanding options as of that date.
Employees Non-employees
------------------------------ -------------------------------
Weighted average Weighted average
grant date fair grant date fair
Shares value Shares value
----------- ------------- ------------ ------------
Vested at June 30, 2006 -- $ -- -- $ --
Granted 3,100,000 0.0470 100,000 0.0470
Exercised -- -- -- --
Forfeited -- -- -- --
----------- ------------- ------------ ------------
Vested at June 30, 2007 3,100,000 $ 0.0470 100,000 $ 0.0470
=========== ============= ============ ============
|
The aggregate granted shares are immediately vested at the date of granting, and
have a market value of $143,791 at the grant date which is amortized to expense
ratably over the expected exercise period. The value of these options have been
allocated over the two years and in the year ended June 30, 2007, in accordance
with SFAS 123R, we recorded a compensation expense of $19,175, which has been
reflected in paid in capital as an allocation separate from common stock. The
balance of compensation of $124,616 will be recorded over the remaining two year
term ending March 25, 2009.
F-23
The value of employee and non-employee stock warrants granted during the year
ended June 30, 2007 was estimated using the Black-Scholes model with the
following assumptions:
The year ended
June 30, 2007
-------------
Expected volatility 117.36%
Risk-fee interest rate 4.54%
Expected dividends 0
Expected forfeitures 0
Expected term (in years) 2
|
The expected volatility assumption was based upon historical stock price
volatility measured on a daily basis. The risk-free interest rate assumption is
based upon U.S. Treasury bond interest rates appropriate for the term of the
Company's employee stock options. The dividend yield assumption is based on our
history and expectation of dividend payments.
NOTE 14 - SUBSEQUENT EVENTS
RELATED PARTY LOANS
On September 5, 2007, a shareholder loaned us $10,000 and we issued a
non-negotiable promissory note. The note is unsecured, has no specified
repayment date unless certain events occur and bears interest at 10% per annum.
THREATENED LITIGATION
On July 20, 2007, we received a Notice of Default from one of the Granite
convertible note holders, and demand for payment of all outstanding amounts,
including a "mandatory default amount," plus liquidating damages, an increased
interest rate and late fees. Their claim at that date was for $265,000, which is
in excess of the $243,879 we recorded as of June 30, 2007. Our amount included
the advance by this note holder of $50,000 on June 30, 2006, Since there was no
formal loan document for this advance, we have not accrued any interest,
liquidating damages, penalty interest, etc. and have classified it as an
unsecured shareholder advance as of June 30, 2007.
In September 2007, we received a Notice of Default letter from the law firm
representing the other two Granite note holders. Among other items discussed in
the letter were included their claim to certain penalties and interest that was
at their discretion to demand. Among these are a "mandatory default amount,"
liquidating damages, increased interest percentage and late fees. A demand for
payment was included in the letter, as well as the threat of litigation. We are
in the process of responding to their concerns.
F-24