Middle East North Africa - Financial Network (MENAFN) - Edgar Online - (EDG = 10Q, 10K) - Tuesday, August 16, 2011
10-Q: FARM LANDS OF GUINEA, INC.
(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD-LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS", "INTENDS", "WILL", "HOPES", "SEEKS", "ANTICIPATES", "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
Unless the context otherwise requires, the "Company", "we," "us," and "our," refer to (i) Farm Lands of Guinea, Inc.; (ii) Farm Lands of Guinea Ltd. ("FLG"), and (iii) Land & Resources of Guinea SA ("Land & Resources").
Overview
The Company was incorporated under the name Kryptic Entertainment Inc. on October 11, 2007 in the State of Nevada. Effective April 1, 2011, the Company changed its name to Farm Lands of Guinea, Inc.
On February 28, 2011, we consummated a share exchange with stockholders of FLG (the "FLG Stockholders") whereby FLG Stockholders transferred 100% of the outstanding ordinary shares of FLG held by them, in exchange for an aggregate of 7,801,000 newly issued shares of our Common Stock representing approximately 86.7% of our then issued and outstanding Common Stock.
On February 28, 2011, we entered into and consummated transactions pursuant to a Subscription Agreement (the "Subscription Agreement") with certain investors whereby the investors agreed to and did purchase for an aggregate of $1.0 million an aggregate of 50,000 Units with each Unit comprised of four (4) shares of Common Stock, Series A Warrant to purchase one (1) share of Common Stock at an exercise price of $7.50 per share and Series B Warrant (together with Series A Warrant, the "Warrants") to purchase one (1) share of Common Stock at an exercise price of $10.00 per share.
The share exchange and the private placement resulted in (i) a change in control of the Company with the shareholders of FLG owning approximately 86.7% of issued and outstanding shares of common stock of the Company, (ii) FLG becoming a wholly-owned subsidiary of the Company, (iii) Land & Resources becoming an indirect 90% owned subsidiary of the Company, and (iv) appointment of certain nominees of FLG as directors and officers of the Company and resignation of Shan Qiang as sole director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer of the Company.
FLG was incorporated in the British Virgin Islands as a Business Company on August 9, 2010. FLG through its 90%-owned subsidiary, Land & Resources, a limited liability company organized under the laws of the Republic of Guinea on September 14, 2010 ("Guinea"), intends to engage in rehabilitation and farming of land in Guinea. The Ministry of Agriculture of Guinea holds the 10% ownership stake in Land & Resources.
Land & Resources is a development stage agricultural company in Guinea. It intends to engage in acquiring and consolidating farm land and operations in Guinea and rehabilitating them back into production using modern agricultural techniques and practices. Land & Resources currently plans to develop 8,815 hectares in the villages of N'Dema and Konindou to grow maize and soybeans in rotation as a pilot program for the development of 98,400 hectares lying to the south and east of Saraya. The rotation will be one year of maize followed by two years of soya.
The total assets of the Company as reported on a GAAP basis for the nine months of the fiscal year 2011 and for the fiscal year 2010 do not include certain lease rights. We believe that such lease rights provide useful information to assess the business of the Company, because it provides investors with a view of the Company's operations from management's perspective. Inclusion of the lease rights in the Company's total assets is a non-GAAP measure and should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
Should the Company value the lease rights under IFRS, the reconciliation would be as follows; Project development costs under GAAP $67,655; Valuation of lease rights under IFRS $59,000,000; Potential revaluation arising $58,932,345
The Republic of Guinea is a former French colony. It is a West African country on the North Atlantic Ocean, bordering Senegal, Mali, Ivory Coast, Liberia, Sierra Leone and Bissau. It is part of the emerging African reformation chain and now presents the optimum timing opportunity for investment in agriculture.
Since independence in 1958, much of the arable land in the Republic of Guinea has been neglected. The once vibrant agricultural sector has largely disappeared. The Ministry of Agriculture has therefore been examining ways to regenerate vast areas of scrubland and make it suitable for modern methods of agriculture. Recognizing that Guinea's climate is suitable for the production of a number of crops including Soya, the Ministry of Agriculture has been seeking partners to assist it in developing this aspect of Guinea's resources.
Corn-like Maize is a staple food in Guinea. According to data collected by the Ministry of Agriculture of Guinea, there is currently a national shortfall of 500,000 tons of this product which to date has been filled with importation from international markets. Local production is carried out by farmers and does not involve use of fertilizer, mechanized tools and machinery. As a result, the yields of the crop are poor and well below the needs of the local market.
Bean crop Soya is not in significant production in Guinea. There is currently a substantial consumption shortfall in home produced cooking oil for which manufactured Soya or soybeans is particularly well suited. The shortfall is compensated for by importing Soya derived oil from international markets. The three major regions where Soya is grown profitably are the United States of America, Brazil, and Argentina. Each of them suffers local disadvantages. Farmers in the United States face first world costs. The Brazilians have to cope with vast distances and poor roads. In Argentina, the government retains 35% of the gross yield at no charge. By contrast, the government of the Republic of Guinea actively promotes rather than penalizes production.
In addition to its core business plan to engage in farming business in Guinea, on October 25, 2010 Land & Resources signed a Protocol d'Accord with the Ministry of Agriculture of Guinea under which it undertook obligations to survey and map additional underutilized land in Guinea estimated to be up to 1.5 million hectares of combined area and prepare it for disposal under 99-year leases. In consideration thereof, the Ministry of Agriculture has agreed to grant Land and Resources exclusive marketing rights with a commission of 15% being payable on closed sales.
During the three months ended June 30, 2011, the Company completed the exploration and mapping of Saraya property comprising 98,400 hectares of Option Land.
Results of Operations
We did not have any revenues during the three and nine month periods ended June 30, 2011.
We incurred operating expenses of $129,388 and $825,627 for the three and nine month periods ended June 30, 2011, respectively. Our operating expenses primarily consisted of Administrative Expenses.
The Company realized a net loss from continuing operations of $142,378 and $898,475 for the three and nine month periods ended June 30, 2011, respectively.
Liquidity and Capital Resources
The Company does not currently have sufficient resources to cover on-going expenses and expansion. As of June 30, 2011, the Company had cash of $107,407 and current liabilities of $405,436. We plan on raising additional funds from investors to implement our business model. In the event we are unsuccessful, this will have a negative impact on our operations. Our owners have previously provided funding for working capital needs and our expectation is that they will continue to do so.
If the Company cannot find sources of additional financing to fund its working capital needs, the Company will be unable to obtain sufficient capital resources to operate our business. We cannot assure you that we will be able to access any financing in sufficient amounts or at all when needed. Our inability to obtain sufficient working capital funding will have an immediate material adverse effect upon our financial condition and our business.
Our operations used $845,156 in cash since inception in August 2010. The cash was provided to us by our owners.
The Company subsequent to the close of the quarter, accepted a Subscription Agreement on August 8, 2011, for a total of $1,000,000 and expects to receive the net cash proceeds within 30 days. The Company, on August 9, 2011, agreed to subscribe for $500,000 of ordinary shares in the capital of AIM Investments PLC, and expects to remit the cash within 30 days.
Critical Accounting Policies
Development stage entity
The Company is considered a development stage entity, as defined in FASB ASC 915, because since August 2010 it has not commenced operations that have resulted in significant revenue and the Company's efforts have been devoted primarily to activities related to raising capital.
Going concern
As shown in the accompanying financial statements, the Company had limited cash, a deficit working capital, an accumulated deficit, a total deficit, and a net loss through June 30, 2011, which raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amount and classification of liabilities that might be necessary in the event the Company cannot continue in existence. Management intends to seek new capital from owners and related parties to provide needed funds.
Derivative Liability
Effective July 31, 2009, the Company adopted ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity's own stock. On February 28, 2011, the Company sold units to investors which consisted of four (4) shares of the Company's common stock, one (1) Series A warrant and one (1) Series B warrant.
Within the unit subscription agreement, subscribers of the units are given anti-dilution protection for a period of twenty-four (24) months. In the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than 130% of $5.00, the subscriber will be compensated with additional shares of the Company's common stock so that the average per share purchase price of the purchased securities owned by the subscriber on the date of the lower price issuance plus such additional shares issued to the subscriber is equal to the lower price per share. As a result, the Company has determined that the anti-dilution feature is not considered to be solely indexed to the Company's own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the anti-dilution feature of the units and recorded a derivative liability.
The fair value of the derivative liability was calculated using a Lattice Model that values the compound embedded derivatives based on future projections of the various potential outcomes. The assumptions that were analysed and incorporated into the model included the conversion feature with the full ratchet and weighted average anti-dilution reset, expectations of future stock price performance and expectations of future issuances. Probabilities were assigned to various scenarios in which the reset provisions would go into effect and weighted accordingly.
The total fair value of the anti-dilutive feature issued on February 28, 2011, amounting to $129,422 has been recognized as a derivative liability on the date of issuance with all future changes in the fair value of this anti-dilutive feature being recognized in earnings in the Company's statement of operations under the caption "Other income (expense) - Gain (loss) on derivative liability" until such time as the anti-dilution provision expires. The total cash proceeds of $1,000,000 were first applied to the derivative with the remaining $653,804 being allocated to the 200,000 common shares, $111,434 being allocated to the Series A warrants and $105,340 being allocated to the Series B Warrants. The common stock and warrants were valued as described in the following note.
ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as an other income or expense item. The Company's only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the above units. At June 30, 2011, the Company revalued the warrants and determined that, during the nine months ended June 30, 2011, the Company's derivative liability increased by $72,848 to $202,270. The Company recognised a corresponding loss on derivative liability in conjunction with this revaluation.
Issuance of Common Stock & Warrants
On February 28, 2011, the Company entered into and consummated transactions pursuant to a Subscription Agreement with certain investors whereby the investors agreed to and did purchase for an aggregate of $1 million an aggregate of 50,000 units with each unit comprised of four (4) shares of common stock, Series A Warrant to purchase one (1) share of common stock at an exercise price of $7.50 per share and Series B Warrant to purchase one (1) share of common stock at an exercise price of $10.00 per share.
The warrants were valued using the Black Scholes model using the following assumptions: stock price at valuation, $3.40; strike price, $7.50-$10.00; risk free rate 2.13%; 3 year term; and volatility of 140%. The Company attributed $111,434 related to the Series A warrants and $105,340 related to the Series B warrants of the total $1,000,000 of cash proceeds associated with the transaction to the warrants based on the relative fair value of the warrants. After applying the fair market values of the derivative liability and each set of warrants, the remaining $653,804 was attributed to the 200,000 shares of common stock.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Aug 16, 2011
10-Q: FARM LANDS OF GUINEA, INC.
(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
CERTAIN STATEMENTS IN THIS REPORT, INCLUDING STATEMENTS IN THE FOLLOWING DISCUSSION, ARE WHAT ARE KNOWN AS "FORWARD-LOOKING STATEMENTS", WHICH ARE BASICALLY STATEMENTS ABOUT THE FUTURE. FOR THAT REASON, THESE STATEMENTS INVOLVE RISK AND UNCERTAINTY SINCE NO ONE CAN ACCURATELY PREDICT THE FUTURE. WORDS SUCH AS "PLANS", "INTENDS", "WILL", "HOPES", "SEEKS", "ANTICIPATES", "EXPECTS "AND THE LIKE OFTEN IDENTIFY SUCH FORWARD-LOOKING STATEMENTS, BUT ARE NOT THE ONLY INDICATION THAT A STATEMENT IS A FORWARD-LOOKING STATEMENT. SUCH FORWARD-LOOKING STATEMENTS INCLUDE STATEMENTS CONCERNING OUR PLANS AND OBJECTIVES WITH RESPECT TO THE PRESENT AND FUTURE OPERATIONS OF THE COMPANY, AND STATEMENTS WHICH EXPRESS OR IMPLY THAT SUCH PRESENT AND FUTURE OPERATIONS WILL OR MAY PRODUCE REVENUES, INCOME OR PROFITS. NUMEROUS FACTORS AND FUTURE EVENTS COULD CAUSE THE COMPANY TO CHANGE SUCH PLANS AND OBJECTIVES OR FAIL TO SUCCESSFULLY IMPLEMENT SUCH PLANS OR ACHIEVE SUCH OBJECTIVES, OR CAUSE SUCH PRESENT AND FUTURE OPERATIONS TO FAIL TO PRODUCE REVENUES, INCOME OR PROFITS. THEREFORE, THE READER IS ADVISED THAT THE FOLLOWING DISCUSSION SHOULD BE CONSIDERED IN LIGHT OF THE DISCUSSION OF RISKS AND OTHER FACTORS CONTAINED IN THIS REPORT AND IN THE COMPANY'S OTHER FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. NO STATEMENTS CONTAINED IN THE FOLLOWING DISCUSSION SHOULD BE CONSTRUED AS A GUARANTEE OR ASSURANCE OF FUTURE PERFORMANCE OR FUTURE RESULTS.
Unless the context otherwise requires, the "Company", "we," "us," and "our," refer to (i) Farm Lands of Guinea, Inc.; (ii) Farm Lands of Guinea Ltd. ("FLG"), and (iii) Land & Resources of Guinea SA ("Land & Resources").
Overview
The Company was incorporated under the name Kryptic Entertainment Inc. on October 11, 2007 in the State of Nevada. Effective April 1, 2011, the Company changed its name to Farm Lands of Guinea, Inc.
On February 28, 2011, we consummated a share exchange with stockholders of FLG (the "FLG Stockholders") whereby FLG Stockholders transferred 100% of the outstanding ordinary shares of FLG held by them, in exchange for an aggregate of 7,801,000 newly issued shares of our Common Stock representing approximately 86.7% of our then issued and outstanding Common Stock.
On February 28, 2011, we entered into and consummated transactions pursuant to a Subscription Agreement (the "Subscription Agreement") with certain investors whereby the investors agreed to and did purchase for an aggregate of $1.0 million an aggregate of 50,000 Units with each Unit comprised of four (4) shares of Common Stock, Series A Warrant to purchase one (1) share of Common Stock at an exercise price of $7.50 per share and Series B Warrant (together with Series A Warrant, the "Warrants") to purchase one (1) share of Common Stock at an exercise price of $10.00 per share.
The share exchange and the private placement resulted in (i) a change in control of the Company with the shareholders of FLG owning approximately 86.7% of issued and outstanding shares of common stock of the Company, (ii) FLG becoming a wholly-owned subsidiary of the Company, (iii) Land & Resources becoming an indirect 90% owned subsidiary of the Company, and (iv) appointment of certain nominees of FLG as directors and officers of the Company and resignation of Shan Qiang as sole director, Chief Executive Officer, Chief Financial Officer, Secretary and Treasurer of the Company.
FLG was incorporated in the British Virgin Islands as a Business Company on August 9, 2010. FLG through its 90%-owned subsidiary, Land & Resources, a limited liability company organized under the laws of the Republic of Guinea on September 14, 2010 ("Guinea"), intends to engage in rehabilitation and farming of land in Guinea. The Ministry of Agriculture of Guinea holds the 10% ownership stake in Land & Resources.
Land & Resources is a development stage agricultural company in Guinea. It intends to engage in acquiring and consolidating farm land and operations in Guinea and rehabilitating them back into production using modern agricultural techniques and practices. Land & Resources currently plans to develop 8,815 hectares in the villages of N'Dema and Konindou to grow maize and soybeans in rotation as a pilot program for the development of 98,400 hectares lying to the south and east of Saraya. The rotation will be one year of maize followed by two years of soya.
The total assets of the Company as reported on a GAAP basis for the nine months of the fiscal year 2011 and for the fiscal year 2010 do not include certain lease rights. We believe that such lease rights provide useful information to assess the business of the Company, because it provides investors with a view of the Company's operations from management's perspective. Inclusion of the lease rights in the Company's total assets is a non-GAAP measure and should not be considered a substitute for, or superior to, measures of financial performance prepared in accordance with GAAP.
Should the Company value the lease rights under IFRS, the reconciliation would be as follows; Project development costs under GAAP $67,655; Valuation of lease rights under IFRS $59,000,000; Potential revaluation arising $58,932,345
The Republic of Guinea is a former French colony. It is a West African country on the North Atlantic Ocean, bordering Senegal, Mali, Ivory Coast, Liberia, Sierra Leone and Bissau. It is part of the emerging African reformation chain and now presents the optimum timing opportunity for investment in agriculture.
Since independence in 1958, much of the arable land in the Republic of Guinea has been neglected. The once vibrant agricultural sector has largely disappeared. The Ministry of Agriculture has therefore been examining ways to regenerate vast areas of scrubland and make it suitable for modern methods of agriculture. Recognizing that Guinea's climate is suitable for the production of a number of crops including Soya, the Ministry of Agriculture has been seeking partners to assist it in developing this aspect of Guinea's resources.
Corn-like Maize is a staple food in Guinea. According to data collected by the Ministry of Agriculture of Guinea, there is currently a national shortfall of 500,000 tons of this product which to date has been filled with importation from international markets. Local production is carried out by farmers and does not involve use of fertilizer, mechanized tools and machinery. As a result, the yields of the crop are poor and well below the needs of the local market.
Bean crop Soya is not in significant production in Guinea. There is currently a substantial consumption shortfall in home produced cooking oil for which manufactured Soya or soybeans is particularly well suited. The shortfall is compensated for by importing Soya derived oil from international markets. The three major regions where Soya is grown profitably are the United States of America, Brazil, and Argentina. Each of them suffers local disadvantages. Farmers in the United States face first world costs. The Brazilians have to cope with vast distances and poor roads. In Argentina, the government retains 35% of the gross yield at no charge. By contrast, the government of the Republic of Guinea actively promotes rather than penalizes production.
In addition to its core business plan to engage in farming business in Guinea, on October 25, 2010 Land & Resources signed a Protocol d'Accord with the Ministry of Agriculture of Guinea under which it undertook obligations to survey and map additional underutilized land in Guinea estimated to be up to 1.5 million hectares of combined area and prepare it for disposal under 99-year leases. In consideration thereof, the Ministry of Agriculture has agreed to grant Land and Resources exclusive marketing rights with a commission of 15% being payable on closed sales.
During the three months ended June 30, 2011, the Company completed the exploration and mapping of Saraya property comprising 98,400 hectares of Option Land.
Results of Operations
We did not have any revenues during the three and nine month periods ended June 30, 2011.
We incurred operating expenses of $129,388 and $825,627 for the three and nine month periods ended June 30, 2011, respectively. Our operating expenses primarily consisted of Administrative Expenses.
The Company realized a net loss from continuing operations of $142,378 and $898,475 for the three and nine month periods ended June 30, 2011, respectively.
Liquidity and Capital Resources
The Company does not currently have sufficient resources to cover on-going expenses and expansion. As of June 30, 2011, the Company had cash of $107,407 and current liabilities of $405,436. We plan on raising additional funds from investors to implement our business model. In the event we are unsuccessful, this will have a negative impact on our operations. Our owners have previously provided funding for working capital needs and our expectation is that they will continue to do so.
If the Company cannot find sources of additional financing to fund its working capital needs, the Company will be unable to obtain sufficient capital resources to operate our business. We cannot assure you that we will be able to access any financing in sufficient amounts or at all when needed. Our inability to obtain sufficient working capital funding will have an immediate material adverse effect upon our financial condition and our business.
Our operations used $845,156 in cash since inception in August 2010. The cash was provided to us by our owners.
The Company subsequent to the close of the quarter, accepted a Subscription Agreement on August 8, 2011, for a total of $1,000,000 and expects to receive the net cash proceeds within 30 days. The Company, on August 9, 2011, agreed to subscribe for $500,000 of ordinary shares in the capital of AIM Investments PLC, and expects to remit the cash within 30 days.
Critical Accounting Policies
Development stage entity
The Company is considered a development stage entity, as defined in FASB ASC 915, because since August 2010 it has not commenced operations that have resulted in significant revenue and the Company's efforts have been devoted primarily to activities related to raising capital.
Going concern
As shown in the accompanying financial statements, the Company had limited cash, a deficit working capital, an accumulated deficit, a total deficit, and a net loss through June 30, 2011, which raise substantial doubt about the Company's ability to continue as a going concern. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amount and classification of liabilities that might be necessary in the event the Company cannot continue in existence. Management intends to seek new capital from owners and related parties to provide needed funds.
Derivative Liability
Effective July 31, 2009, the Company adopted ASC Topic No. 815-40 which defines determining whether an instrument (or embedded feature) is solely indexed to an entity's own stock. On February 28, 2011, the Company sold units to investors which consisted of four (4) shares of the Company's common stock, one (1) Series A warrant and one (1) Series B warrant.
Within the unit subscription agreement, subscribers of the units are given anti-dilution protection for a period of twenty-four (24) months. In the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than 130% of $5.00, the subscriber will be compensated with additional shares of the Company's common stock so that the average per share purchase price of the purchased securities owned by the subscriber on the date of the lower price issuance plus such additional shares issued to the subscriber is equal to the lower price per share. As a result, the Company has determined that the anti-dilution feature is not considered to be solely indexed to the Company's own stock and is therefore not afforded equity treatment. In accordance with ASC 815, the Company has bifurcated the anti-dilution feature of the units and recorded a derivative liability.
The fair value of the derivative liability was calculated using a Lattice Model that values the compound embedded derivatives based on future projections of the various potential outcomes. The assumptions that were analysed and incorporated into the model included the conversion feature with the full ratchet and weighted average anti-dilution reset, expectations of future stock price performance and expectations of future issuances. Probabilities were assigned to various scenarios in which the reset provisions would go into effect and weighted accordingly.
The total fair value of the anti-dilutive feature issued on February 28, 2011, amounting to $129,422 has been recognized as a derivative liability on the date of issuance with all future changes in the fair value of this anti-dilutive feature being recognized in earnings in the Company's statement of operations under the caption "Other income (expense) - Gain (loss) on derivative liability" until such time as the anti-dilution provision expires. The total cash proceeds of $1,000,000 were first applied to the derivative with the remaining $653,804 being allocated to the 200,000 common shares, $111,434 being allocated to the Series A warrants and $105,340 being allocated to the Series B Warrants. The common stock and warrants were valued as described in the following note.
ASC 815 requires Company management to assess the fair market value of certain derivatives at each reporting period and recognize any change in the fair market value as an other income or expense item. The Company's only asset or liability measured at fair value on a recurring basis is its derivative liability associated with the above units. At June 30, 2011, the Company revalued the warrants and determined that, during the nine months ended June 30, 2011, the Company's derivative liability increased by $72,848 to $202,270. The Company recognised a corresponding loss on derivative liability in conjunction with this revaluation.
Issuance of Common Stock & Warrants
On February 28, 2011, the Company entered into and consummated transactions pursuant to a Subscription Agreement with certain investors whereby the investors agreed to and did purchase for an aggregate of $1 million an aggregate of 50,000 units with each unit comprised of four (4) shares of common stock, Series A Warrant to purchase one (1) share of common stock at an exercise price of $7.50 per share and Series B Warrant to purchase one (1) share of common stock at an exercise price of $10.00 per share.
The warrants were valued using the Black Scholes model using the following assumptions: stock price at valuation, $3.40; strike price, $7.50-$10.00; risk free rate 2.13%; 3 year term; and volatility of 140%. The Company attributed $111,434 related to the Series A warrants and $105,340 related to the Series B warrants of the total $1,000,000 of cash proceeds associated with the transaction to the warrants based on the relative fair value of the warrants. After applying the fair market values of the derivative liability and each set of warrants, the remaining $653,804 was attributed to the 200,000 shares of common stock.
Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements.
Aug 16, 2011