U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB/A
(Mark One)
AMENDMENT NO.1
[ x ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended:
June 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from
to
Commission file number 0-17232
FACT CORPORATION
(Exact name of small business issuer as specified in its charter)
COLORADO | 84-0888594 |
(State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) |
821 Highway 33
Freehold, NJ 07728
(Address of principal executive offices)
(732) 780-9132
(Issuer’s telephone number)
(Former name, former address and former fiscal year, if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X
No
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the last practicable date:
16,770,117 shares of Class A common stock, no par value, as of August 16, 2004
Transitional Small Business Disclosure Format (check one):
Yes
No X
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-QSB and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the six month periods ended June 30, 2004 and 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2004. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-KSB for the year ended December 31, 2003.
Page | |
Unaudited Consolidated Financial Statements | |
Consolidated Balance Sheets | F-2 to F-3 |
Consolidated Statements of Operations | F-4 |
Consolidated Statements of Cash Flows | F-5 to F-6 |
Consolidated Statements of Stockholders’ Equity | F-7 to F-8 |
Notes to Unaudited Consolidated Financial Statements | F-9 to F-10 |
F-1
FACT CORPORATION Consolidated Balance Sheets | |||||||||||
June 30, 2004 (Unaudited) | December 31, 2003 (Note 1) | ||||||||||
ASSETS | |||||||||||
Current Assets | |||||||||||
Cash | 159,297 | 53,273 | |||||||||
Inventory | 323,503 | 58,288 | |||||||||
Accounts receivable | 68,043 | 119,308 | |||||||||
Prepaid expenses and deposits | 27,621 | 26,512 | |||||||||
Total Current Assets | 578,464 | 257,381 | |||||||||
Investment in Texas T Companies | 65,519 | 80,080 | |||||||||
Investment in Australian Oil and Gas | 7,812 | 13,521 | |||||||||
Property and Equipment | |||||||||||
Intellectual property | 2,770,678 | 2,770,678 | |||||||||
Oil & gas leases (net of accumulated depletion of $0 for 2004 and 2003) (Full Cost Method) | 10,026 | 10,026 | |||||||||
Real Property (net of accumulated depreciation of $285,743) | 2,508,595 | 2,633,771 | |||||||||
Office equipment and computers (net of accumulated depreciation of $15,246) | 9,497 | 12,988 | |||||||||
Total Property and Equipment | 5,298,796 | 5,427,463 | |||||||||
Total Assets | 5,950,591 | 5,778,445 | |||||||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
Current Liabilities | |||||||||||
Accounts payable and accrued expenses | 609,597 | 340,307 | |||||||||
Accounts payable (related parties) | 244,119 | 256,157 | |||||||||
Loans payable (related parties) | 927,151 | 4,635 | |||||||||
Loan payable | 319,508 | 727,210 | |||||||||
Current portion of long-term debt and acquisition cost | 187,502 | 188,209 | |||||||||
Total Current Liabilities | 2,287,877 | 1,516,518 | |||||||||
Long Term Liabilities | |||||||||||
Acquisition cost payable | 2,004,972 | 2,060,228 | |||||||||
Future site restoration | 3,266 | 3,067 | |||||||||
Loans payable (related parties) | - | 654,164 | |||||||||
Long-term debt | 1,693,407 | 1,397,678 | |||||||||
Total Liabilities | 5,989,522 | 5,631,655 | |||||||||
Commitments and contingencies | |||||||||||
The accompanying notes are an integral part of these unaudited financial statements
F-2
FACT CORPORATION Consolidated Balance Sheets | ||||||
June 30, 2004 (Unaudited) | December 31, 2003 (Note 1) | |||||
Stockholders' Equity | ||||||
Class A Common Stock - authorized 100,000,000 shares of no par value; 16,745,117 and 4,652,337 issued and outstanding as at March 31, 2004 and December 31, 2003. | 8,412,634 | 7,807,855 | ||||
Class C Common Stock – authorized 2,000,000 shares of no par value; Nil issued and outstanding as at March 31, 2004 and 2,000,000 issued and outstanding as of December 31, 2003. | - | 540,000 | ||||
Class A Common stock warrants | 47,985 | 54,638 | ||||
Accumulated deficit | (8,459,833) | (8,195,307) | ||||
Accumulated other comprehensive (loss) | (39,717) | (60,396) | ||||
Total Stockholders' Equity | (38,931) | 146,790 | ||||
Total Liabilities and Stockholders' Equity | 5,950,591 | 5,778,445 | ||||
The accompanying notes are an integral part of these unaudited financial statements
F-3
FACT CORPORATION Consolidated Statements of Operations (Unaudited) | ||||||||
For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||
2004 | 2003 | 2004 | 2003 | |||||
Revenues | ||||||||
Petroleum & natural gas (net of royalties) | $ | 513 | $ | 2,847 | $ | 1,019 | $ | 26,689 |
Italian Crème sales | 76,206 | - | 76,206 | - | ||||
Functional food premix | 206,871 | 102,375 | 533,284 | 139,500 | ||||
Consulting fees | 8,775 | - | 11,700 | - | ||||
Rental income | 11,354 | 44,239 | 80,951 | 88,834 | ||||
303,719 | 149,461 | 703,160 | 255,023 | |||||
Costs and Expenses | ||||||||
Petroleum & natural gas related cost (including depletion) | 542 | 5,477 | 374 | 17,491 | ||||
Functional food premix | 98,204 | 69,237 | 291,123 | 99,999 | ||||
Italian Crème costs | 87,198 | - | 87,198 | - | ||||
Legal | 16,262 | 79,448 | 43,533 | 101,276 | ||||
Consulting fees | 52,173 | 77,855 | 118,876 | 275,468 | ||||
Fees settled by the issuance of shares | 30,000 | 1 | 30,000 | 16,423 | ||||
Depreciation and amortization | 22,235 | 19,396 | 44,987 | 38,928 | ||||
Gain on disposition of assets | (337) | (34,811) | (337) | (34,811) | ||||
Write down bad debts | 3,500 | - | 3,500 | - | ||||
Administrative expenses | 54,298 | 42,498 | 143,265 | 249,968 | ||||
Equity in loss of Texas T Petroleum Ltd. | 182 | 31,357 | 48,480 | 34,407 | ||||
364,257 | 290,458 | 810,999 | 799,149 | |||||
(Loss) from operations | (60,538) | (140,997) | (107,839) | (544,126) | ||||
Other income and expenses | ||||||||
Other Income | 1,469 | - | 1,624 | - | ||||
Interest income | 22,375 | 19,222 | 43,295 | 39,959 | ||||
Interest expense | (108,872) | (99,134) | (201,606) | (200,751) | ||||
(85,028) | (79,912) | (156,687) | (164,792) | |||||
Provision for income taxes | - | - | - | - | ||||
Net (Loss) | $ | (145,566) | $ | (220,909) | $ | (264,526) | $ | (708,918) |
Net (Loss) per Common Share | $ | (.01) | $ | (0.03) | $ | (0.02) | $ | (0.09) |
Weighted Average Number of Common Shares Used in Calculation | 16,757,617 | 7,947,691 | 16,757,617 | 7,947,691 | ||||
Other comprehensive income | ||||||||
Net loss | $ | (145,566) | $ | (220,909) | $ | (264,526) | $ | (708,918) |
Foreign currency translation adjustment | (10,858) | 38,272 | 32,236 | 71,416 | ||||
Unrealized profit (loss) on marketable securities | (5,065) | 16,903 | (11,557) | - | ||||
Total other comprehensive income | $ | (161,489) | $ | (187,637) | $ | (243,847) | $ | (637,502) |
The accompanying notes are an integral part of these unaudited financial statements
F-4
FACT CORPORATION Consolidated Statements of Cash Flows (Unaudited) | ||||
Six months ended | ||||
June 30, 2004 | June 30, 2003 (Note 1) | |||
Cash From Operating Activities: | ||||
(Loss) from continuing operations | $ | (264,526) | $ | (708,918) |
Reconciling adjustments | ||||
Depreciation and amortization | 44,801 | 41,329 | ||
Equity in Texas T Petroleum Ltd | 289 | 34,407 | ||
Services paid by Stock Issuance | 30,000 | 16,423 | ||
Changes in operating assets and liabilities | ||||
Accounts receivable | 51,265 | (76,794) | ||
Prepaid expenses and deposits | (1,109) | 198,845 | ||
Inventory | (265,215) | (36,237) | ||
Gain on sale of securities | (337) | - | ||
Accretion expense | 199 | - | ||
Gain of sale of oil and gas assets | - | (24,821) | ||
Gain on acquisition of oil and gas leases | - | (9,990) | ||
Accounts payable and accrued expenses | 257,252 | 99,275 | ||
Net Cash Flows From Operating Activities | (147,381) | (466,481) | ||
Cash From Investing Activities: | ||||
Proceeds from sale of securities | 8,705 | - | ||
Leasehold improvements | (14,022) | - | ||
Acquisition of property and equipment | (752) | (10,095) | ||
Proceeds from sale of oil and gas assets | - | 112,080 | ||
Proceeds from (payments to) loans receivable | - | (15,727) | ||
Net Cash Flows From Investing Activities | (6,069) | 86,258 | ||
Cash From Financing Activities: | ||||
Loan proceeds | 393,872 | 375,809 | ||
Repayment of long term debt | (22,253) | (13,952) | ||
Proceeds from loans payable (related parties) | 267,714 | 93,610 | ||
Loan reductions | (390,089) | (37,360) | ||
Acquisition cost payable | (55,256) | - | ||
Sales of common stock (net of offering costs) | 19,600 | 9,000 | ||
Capital contribution by an officer | 6,916 | 2,428 | ||
Net Cash Flows From Financing Activities | 220,504 | 429,535 | ||
Foreign currency translation adjustment | 38,970 | 44,743 | ||
Net change in cash and cash equivalents | 106,024 | 4,569 | ||
Cash at beginning of period | 53,273 | 26,744 | ||
Cash at end of period | $ | 159,297 | $ | 31,313 |
The accompanying notes are an integral part of these unaudited financial statements
F-5
Supplemental disclosure of cash flow information: | ||||
Interest paid | $ | 201,606 | $ | 200,751 |
Income taxes paid | $ | - | $ | - |
The accompanying notes are an integral part of these unaudited financial statements
F-6
FACT CORPORATION Consolidated Statements of Shareholders’ Equity | |||||||||||||||||
Class A Common Stock | Class C Common Stock | Warrants | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||
Balance at December 31, 2002 | 1,958,960 | $ | 6,708,630 | 2,000,000 | $ | 540,000 | 438,281 | $ | 338,498 | $ | (7,191,033) | $ | (172,114) | $ | 223,981 | ||
Issue of shares to settle accounts payable | 193,819 | 52,331 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 52,331 | ||||||||
Issue of shares to retire loans payable | 1,506,781 | 406,831 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 406,831 | ||||||||
Issue of shares for services | 614,559 | 229,688 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 229,688 | ||||||||
Issue of shares for acquisition | 10,000 | 2,800 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 2,800 | ||||||||
Capital Contribution by Officer | ¾ | 17,436 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 17,436 | ||||||||
Stock issuances related to private placements | 368,218 | 50,623 | ¾ | ¾ | 368,218 | 38,777 | ¾ | ¾ | 89,400 | ||||||||
Issue of option for services | ¾ | 8,135 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 8,135 | ||||||||
Elimination of shares of FACT Corporation held by Texas T Petroleum Ltd. | ¾ | 8,744 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 8,744 | ||||||||
Foreign currency translation adjustment | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 89,584 | 89,584 | ||||||||
Unrealized gain on marketable securities | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 22,134 | 22,134 | ||||||||
Cancellation/expiry of warrants | 322,637 | ¾ | ¾ | (424,523) | (322,637) | ¾ | ¾ | ¾ | |||||||||
Net loss for the year | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | (1,004,274) | ¾ | (1,004,274) | ||||||||
Balance at December 31, 2003 | 4,652,337 | 7,807,855 | 2,000,000 | 540,000 | 381,976 | 54,638 | (8,195,307) | (60,396) | 146,790 | ||||||||
#
FACT CORPORATION Consolidated Statements of Shareholders’ Equity | |||||||||||||||||
Class A Common Stock | Class C Common Stock | Warrants | Accumulated Deficit | Accumulated Other Comprehensive Income (Loss) | Total Shareholders’ Equity | ||||||||||||
Shares | Amount | Shares | Amount | Shares | Amount | ||||||||||||
Stock issuances related to private placements | 72,593 | 10,393 | ¾ | ¾ | 72,593 | 9,209 | ¾ | ¾ | 19,602 | ||||||||
Capital Contribution by Officer | ¾ | 6,916 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 6,916 | ||||||||
Elimination of shares of FACT Corporation held by Texas T Petroleum Ltd. | ¾ | 1,609 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 1,609 | ||||||||
Foreign currency translation adjustment | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 32,236 | 32,236 | ||||||||
Unrealized loss on marketable securities | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | (11,557) | (11,557) | ||||||||
Cancellation/expiry of warrants | ¾ | 15,861 | ¾ | ¾ | (13,758) | (15,861) | ¾ | ¾ | ¾ | ||||||||
Conversion of Class C shares to Class A common shares at ratio of 6 for 1 | 12,000,000 | 540,000 | (2,000,000) | (540,000) | ¾ | ¾ | ¾ | ¾ | ¾ | ||||||||
Stock issuances related to services | 25,000 | 30,000 | ¾ | ¾ | ¾ | ¾ | (264,526) | ¾ | (264,526) | ||||||||
Net loss for the period ended June 30, 2004 | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | ¾ | 30,000 | ||||||||
Balance at June 30, 2004 | 16,749,930 | 8,412,634 | ¾ | ¾ | 440,811 | 47,986 | (8,459,833) | (39,717) | (38,931) | ||||||||
F-8
FACT Corporation
Notes to Financial Statements
For the Six Months Ended June 30, 2004
Note 1 - Management's Statement
The financial statements included herein have been prepared by FACT Corporation (the “Company”) without audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in the financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the December 31, 2003, audited financial statements and the accompanying notes included in the Annual Report on Form 10-KSB. While management believes the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year.
The management of the Company believes that the accompanying unaudited financial statements contain all adjustments (including normal recurring adjustments) necessary to present fairly the operations and cash flows for the periods presented.
Note 2 – Summary of Significant Accounting Policies
Organization and Operations
The Company was incorporated under the laws of the State of Colorado on August 3, 1982. At June 30, 2004, the Company has four wholly owned subsidiaries, Wall Street Real Estate Ltd., Wall Street Investments Corp., Capital Reserve Canada Limited and Food and Culinary Technology Group, Inc. (“FACT Group”). FACT Products Inc. (formerly FACT Bread Company Inc.) is a wholly owned subsidiary of FACT Group, Inc.
The Company and its subsidiary Wall Street Real Estate Ltd. own and lease real property in the City of Calgary, Alberta, Canada. The Company's subsidiary Capital Reserve Canada Limited owns a minority interest in a producing oil and gas property located in Colorado and development oil and gas leases in Montana. The Company is currently in the process of spinning off its subsidiary, Capital Reserve Canada Limited. The Company's primary operations are the business of FACT Group and its subsidiary FACT Products Inc. in Freehold, New Jersey, including the supply and license of functional food formulations to various manufacturers, ingredient distributors and food service clients, as well as the sale of its branded line of non-dairy whipped toppings.
Note 3 – Loans Payable (related parties)
Loans Payable from various related parties have the following terms at June 30, 2004 and December 31, 2003 respectively:
Loans Payable from various related parties have the following terms:
Repayment terms | Interest rate | June 30, 2004 | December 31, 2003 | |||
Demand | 10% | 125,436 | - | |||
No terms | None | 10,775 | 4,635 | |||
Less than 12 months | 18% | 790,940 | - | |||
$ | 927,151 | $ | 4,635 |
Loan payable of $790,940 is secured by liens on the Company's commercial properties, as well as the Company's accounts receivable and investments. The loan is convertible into the Company's common
F-9
FACT Corporation
Notes to Financial Statements
For the Six Months Ended June 30, 2004
stock at the rate of $1.60 until maturity, December 31, 2004. Interest is payable monthly on the last day of each month until maturity, at which time principal and all accrued and unpaid interest shall be due and payable. If the shares underlying the debenture are registered by the Company with the SEC in an effective registration statement and the market price of the Company’s Class A Common Stock exceeds $4.00 for a ten (10) day period of time, the balance of this debenture and all accrued and unpaid interest thereon will automatically convert into shares of Class A Common Stock.
Note 4 – Other Events
On February 5, 2004, certain terms relating to the conversion rights of the Company's Class C common stock into shares of the Company's Class A common stock were revised by amendment to the Articles of Incorporation, which was approved by holders of the Class C common stock holding a majority of the outstanding shares of such class. The amended terms allowed for the conversion of shares of Class C common stock upon the election of the holders of such shares. On February 10, 2004, all Class C holders elected to convert their 2.0 million shares of Class C common stock into 12.0 million shares of the Company's Class A common stock. Such shares were issued on April 9, 2004, but have been reflected in the Company’s issued and outstanding share capital as of the date of approval.
On April 27, 2004, the Company issued a total of 25,000 Class A common shares at a value of $1.20 per share in consideration for consulting services provided to the Company totaling $30,000.
Subsequent to the quarter ended June 30, 2004 the Company entered into a loan agreement in the total amount of $250,000 with International Securities Group Inc., which is owned by a member of the Company’s Board of Directors, W. Scott Lawler. Due to the fact that this is a related party loan, the terms of such loan have not yet been determined by the independent members of the Company’s Board of Directors. The Company expects to finalize the terms prior to the end of the third quarter of the current fiscal year.
F-10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Plan of Operation
At present, based on current operations, the Company does not have sufficient cash and liquid assets to satisfy its cash requirements on a monthly basis. While the Company does generate income from sales of functional premix, a line of branded non-dairy crèmes, rental income and negligible income from producing oil and gas properties on a monthly basis, these proceeds are not sufficient to meet the Company's current consolidated monthly overhead, which includes the on-going business of three operational subsidiaries. The Company will require a projected amount totaling $3,018,000 to cover its anticipated overhead, which includes projected inventory and costs of goods sold of $2,038,000 for the upcoming twelve-month period. Revenues generated from operations (excluding oil and gas operations and real estate operations) are expected to contribute approximately $3,104,000 in gross revenues and offset operational overhead by approximately $1,049,000. The Company anticipates the sale of both of its commercial real estate properties prior to the close of fiscal 2004, and therefore has not included potential revenues generated from these properties to offset overhead expenditures in its forward looking twelve month forecast. However, operational overhead related to the real estate operations has been included in our calculation of forecasted expenditures. While the Company has projected gross revenues from its food operations of approximately $3,104,000 over the upcoming twelve months, such projections are subject to numerous factors that are beyond our control. Projected operational costs and overhead of $3,018,000 include $1,719,000 for inventory and premix costs associated with the Company’s functional foods business, $318,000 associated with costs and inventory associated with the sale of our branded non-dairy whipped topping, $125,000 in start up costs for our “at-home” line of premixes and snack bars intended to be sold over the Internet and $856,000 in general operating expenses relating to the Company and all of its existing subsidiaries. The Company will be required to raise up to $421,000 to meet its projected operational costs should revenues realized during the current fiscal year to date remain consistent and should the Company not be successful in achieving its projected gross revenues. The Company expects that it will be able to obtain additional equity and/or debt financing to meet this need, or that proceeds will be derived from the sale of its commercial real estate properties.
The Company entered into a purchase agreement for one of its commercial properties prior to the end of fiscal 2003, with an anticipated closing date of May 31, 2004, however, completion of the sale of this property was conditional upon the building being fully leased at the time of the closing. As at the anticipated closing date, however, the building had not achieved a 100% occupancy rate, and the sale was not concluded. Presently the commercial property has a 21% vacancy rate and remains listed for sale at an asking price of $2,700,000 CDN. The Company has also listed one of two condominium units comprising its second commercial property for sale at an asking price of $455,000. While there is no certainty the Company will be able to sell either property, funds contributed from either sale would substantially meet any shortfall in general operating expenses. The Company may alternatively be required to locate additional sources for financing, and also intends to contact investors that have previously provided funds to the Company.
The Company’s budget of $856,000 in general operating expenses includes the expenditure of approximately $347,000 over the next twelve months on ongoing product refinement, technical support, the development of second and third generation functional formulations, advertising and marketing and the start-up of its “at-home” Internet sales program, including amounts paid to employees and consultants retained for the purposes of providing research and development support. The Company does not intend to participate in any further development of its existing oil and gas properties and has commenced the spin off of Capital Canada, which it expects will be concluded during the third quarter of 2004.
Included in the cash requirements noted above of $3,018,000 over the next twelve months is an amount of $699,000 with respect to the operations of FACT Group, exclusive of inventory requirements and forecasted costs of goods sold. From the date of acquisition in November 2001 to June 30, 2004, the Company has funded a total of $777,151 (exclusive of associated interest charges) to FACT Group in respect of its ongoing operational expenses.
2
Should it be required, and if the Company is able to negotiate favorable terms, the Company may look to raise funds in excess of the current cash requirement by way of debt or equity financing in order to accelerate its growth. The Company is currently assessing strategic joint ventures with complementary businesses in order to enhance and support its current operational objectives.
The Company anticipates that its subsidiary FACT Group will hire an additional one to three employees during the upcoming twelve months should the functional foods business meet projected operational and revenue targets. The Company will also look to retain one additional employee to assist in corporate development and financial operations.
Results of Operations
Comparison of quarters ended June 30, 2004 and 2003
For the six month periods ended June 30, 2004 and 2003 the Company incurred operating losses of $107,839 and $544,126 respectively. June 30, 2004 losses include a substantial reduction in consulting fees from $275,468 (2003) to $118,876 (2004) predominantly due to a reduction in the number of technical and administrative consultants retained by FACT Group, Inc. and a decrease in promotional and investor relations activities over the respective periods. Administrative expenses for the respective periods were also substantially decreased and totaled $143,265 (2004) and $249,968 (2003). During the six months ended June 30, 2004, the Company generated revenues from sales of petroleum and natural gas, rental income, consulting income and sales of functional food premixes and whipped toppings totaling $703,160. Revenues for the same six months in 2003 consisted of limited premix sales, as well as sales of petroleum and natural gas and rental income totaling $255,023. Revenues from sales of petroleum and natural gas during the six months ended June 30, 2004 of $1,019 were substantially decreased compared to $26,689 over the six months ended June 30, 2003. This decrease was due to the Company's divestiture of its primary oil and gas revenue generating property with the effective date for the sale being the April 2003 production month. The Company’s subsidiary still holds a marginal, producing oil and gas property which accounts for the diminutive revenue from oil and gas operations. Associated production costs were also substantially decreased over the respective six month periods from $17,491 (2003) to 374 (2004). Rental income remained relatively constant over the comparative six month periods totaling $88,834 (2003) and $80,951 (2004). The reduction in rental income over the comparative three month periods ending June 30, 2004 and 2003 is attributable to a credit against rent for all tenants during the month of April 2004 resulting from a reimbursement of over-charged operating expenses from the fiscal year ended 2003. Functional food premix sales were substantially increased during the six month period ended June 30, 2004 totaling $533,284 versus sales of $139,500 during the same six months in fiscal 2003, and represent the majority of the Company’s revenue stream. The Company also generated sales from its new line of non-dairy whipped toppings during the six months ended June 30, 2004 totaling $76,206, as compared to sales of $0 for the same six month period in fiscal 2003.
Other income and expenses include comparable interest expenses over the six month periods totaling $201,606 (2004) and $200,751 (2003).
Other costs and expenses over the six months ended June 30, 2004 reflect the recorded equity in the Company’s ownership of Texas T Petroleum Ltd., which decreased over the respective six month periods with an equity loss of $48,480 reported at June 30, 2004 as compared to a loss of $34,407 recorded at June 30, 2003.
Net losses for the two completed periods ended June 30, 2004 and 2003 were $264,526 (2004) and $708,918 (2003) respectively.
3
Liquidity and Capital Resources
Summary of Working Capital and Stockholders' Equity
As of June 30, 2004, the Company had negative working capital of $1,709,413 and negative Stockholders' Equity of $38,931 compared with negative working capital of $1,259,137 and Stockholders' Equity of $146,790 as of December 31, 2003. The Company's working capital has decreased as a result of the addition to current liabilities of loans that had previously been allocated as long term debts and increased accounts payable predominantly related to an increase in inventory. Stockholders' Equity declined predominantly as a result of the operating losses for the period. Additionally, the Company was unable to obtain additional capital investment in amounts sufficient to fund operating losses and cash used as described in our financial statements.
Financing activities during the six month period resulted in an increase to long term loans payable of $393,872 from figures reported at the year ended December 31, 2003 as a result of a second mortgage obtained on certain of the Company's commercial real estate properties and other related party loans. The majority of proceeds from the loan were used to retire a current loan in the amount of $387,000, which was due and payable. Additionally the Company obtained funds totaling $247,015 from related parties and $19,600 through sales of its common stock to private investors during the most recent six month period. Accounts payable and accrued liabilities increased by $247,252 over the period as a result of additions to inventory, associated freight and brokerage fees and certain product development work. The Company also expended $14,022 in leasehold improvements for one of its commercial real estate properties and $752 for the acquisition of a new computer for its Freehold, NJ office. Accounts receivable decreased over the respective periods as a result of timely collections of customer accounts and a decrease in product sales during the most recently completed three month period.
The Company was unable to obtain additional capital investment in amounts sufficient to fund operating losses and cash used as described in our financial statements for the period ended June 30, 2004.
Liquidity
The Company anticipates it will require approximately $421,000 over the next twelve months to fully implement its existing business model, which includes significant marketing efforts, the continued development and refinement of functional food formulations and products, a consumer awareness and public relations campaign, concepts for development, manufacturing and distribution of a line of our own master brand food products via the Internet, expanded management resources and support staff, and other day to day operational activities. The Company may require additional funds over the next six years to assist in realizing its goals should it not achieve anticipated bench marks over the 2004, 2005 and 2006 fiscal years. The amount and timing of additional funds required can not be definitively stated as at the date of this report and will be dependent on a variety of factors. As of the filing of this report, the Company has been successful in raising funds required to meet our existing revenue shortfall for the funding of our operations. Funds have been raised through private loans, equity financing and conventional bank debt. The Company anticipates revenues generated from its functional food business will greatly reduce the requirement for additional funding; however, we can not be certain the Company will be successful in achieving revenues from those operations. Furthermore the Company cannot be certain that we will be able to raise any additional capital to fund our ongoing operations.
Sources of Working Capital
During the six months ended June 30, 2004 the Company's primary sources of working capital have come from sales of functional premix, non-dairy whipped toppings and rental income from its commercial rental properties, as well as the net proceeds from loans in the amount of $247,015 and the sale of common stock with net proceeds totaling $19,600.
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The Company is actively pursuing the divestiture of its real estate and completion of a spin-off of its operational subsidiary, Capital Canada, as well as the liquidation of all marketable and non-marketable securities. On March 6, 2003 the Company announced the pending distribution of all of the issued and outstanding shares of its wholly owned subsidiary, Capital Canada, to the existing shareholders of the Company on the basis of one (1) share of Capital Canada for every five (5) shares of the Company. Holders of the Company's Class C common stock do not have the right to participate in this distribution. As of June 30, 2004 Capital Canada is in debt to the Company in the amount of $634,381, the repayment of which amount, and any subsequent amounts to the date of the spin-off, will be recorded as account receivable on the balance sheet of the Company, repayment of which will be negotiated by the Boards of the Company and Capital Canada, once Capital Canada has an independent Board of Directors in place.
The Company anticipates this transaction will close during the third quarter of fiscal 2004, and that repayment terms for the amount due can be finalized at that time. The Company will look to establish the most aggressive repayment plan available during negotiation with Capital Canada's independent Board. Additionally, concurrent with the spin off of Capital Canada, the Company will lose certain incremental income from two real estate leases entered into between Capital Canada and two third parties, which income is currently realized through consolidation of Capital Canada's operations for purposes of Fact's financial reporting. The Company does not expect this loss in incremental income to greatly impact its financial position.
ITEM 3. CONTROLS AND PROCEDURES
The Company's sole executive officer, Ms. Jacqueline Danforth, who serves as the Company's principal executive officer and principal accounting officer, has implemented the Company's disclosure controls and procedures to ensure that material information relating to the Company is made known to Ms. Danforth. Ms. Danforth has evaluated the effectiveness of the Company's disclosure controls and procedures as of June 30, 2004 (the “Evaluation Date”).
Based on such evaluation, Ms. Danforth has concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in alerting her on a timely basis to material information relating to the Company that is required to be included in our reports filed or submitted under the Securities Exchange Act of 1934. Moreover, there were no significant changes in internal controls or in other factors that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.
PART II – OTHER INFORMATION
ITEM 1.
LEGAL PROCEEDINGS
In our annual report for the fiscal year ended December 31, 2003 on Form 10-KSB, we provided details regarding litigation involving a group of food scientists from whom our subsidiary, Food and Culinary Technology Group Inc. (“FACT Group”), the formulas on which FACT Group has created its functional food pre-mixes. On August 14, 2003, FACT Corp. reached a settlement with the Plaintiffs in the legal matter pending in the Superior Court of the State of New Jersey. As a result of this settlement, the formulas to the pre-mixes and other intellectual property were immediately released to FACT Corp. The purchase price for the intellectual property remains at $2 million, to be paid in the form of royalties on a per pound of product sold by FACT Group. FACT Group will pay a maximum of $207,500 in additional income to two of the plaintiffs over the next 3 and 1/2 years, the payments commenced on November 2003. The Plaintiffs will be prohibited from competing with FACT Group for 5 years, must keep all trade secrets confidential and provide training for FACT Group's new technical support personnel.
At the time of filing our Form 10-KSB, the written version of the settlement agreement had not yet been executed due to ongoing negotiations of a particular issue. The parties resolved the issue and executed the settlement agreement in June 2004.
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ITEM 2.
CHANGES IN SECURITIES
Pursuant to a consulting agreement between the Company and John Demoleas, the Company issued a total of 25,000 restricted Class A common shares on April 27, 2004.
This issuance of shares was exempt from registration pursuant to Rule 506 of Regulation D. Neither we nor any person acting on our behalf offered or sold these securities by any form of general solicitation or general advertising. The shares sold are restricted securities and the certificate representing these shares has been affixed with a standard restrictive legend, which states that the securities cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom. The purchaser represented to us that he was purchasing the securities for his own account and not for the account of any other persons. The purchaser was provided with written disclosure that the securities have not been registered under the Securities Act of 1933 and therefore cannot be sold without registration under the Securities Act of 1933 or an exemption therefrom.
ITEM 3.
DEFAULT UPON SENIOR SECURITIES
Not Applicable
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
ITEM 5.
OTHER INFORMATION
During the month of July 2004, we received a loan International Securities Group, Inc. in the amount of $250,000. International Securities Group is a related party due to the fact that it is owned by W. Scott Lawler, who is a member of our Board of Directors. The terms of this loan have not been determined yet as they are being reviewed by the independent members of our Board of Directors. We intend to finalized the terms before the end of the third quarter of the current fiscal year and report them in the quarterly report for such period.
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
a.
Exhibits and Index of Exhibits – see Exhibit Index below
b.
Reports on Form 8-K: None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
FACT CORPORATION
Date: September 8, 2004
By:/s/ Jacqueline Danforth_____
Name: Jacqueline Danforth
Title: President and Director
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EXHIBITS:
REGULATION S-B NUMBER | EXHIBIT | REFERENCE | |
3.1 | Articles of Incorporation, as amended | Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1990. | |
3.2 | Amended Bylaws | Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1994. | |
3.3 | Articles of Amendment to Articles of Incorporation, filed with the State of Colorado Secretary of State on November 26, 2001. | Incorporated by reference to the Exhibits previously filed with FACT Corporation’s Annual Report for Form 10-KSB for the fiscal year ended December 31, 2002. | |
3.4 | Articles of Amendment to Articles of Incorporation, filed with the State of Colorado Secretary of State on February 8, 2002 | Incorporated by reference to the Exhibits previously filed with FACT Corporation’s Annual Report for Form 10-KSB for the fiscal year ended December 31, 2002. | |
10.1 | Management Agreement with Mr. Loder | Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1998. | |
10.2 | Lease Agreement dated January 15, 2000 by and between Capital Reserve Canada Limited and 319835 Alberta Ltd. | Incorporated by reference to Exhibit 10.14 previously filed with Capital Reserve Corporation's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. | |
10.3 | Purchase and Sale Agreement dated March 1, 2000 by and between Capital Reserve Canada Limited and Stone Canyon Resources Limited | Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation's Annual Report on Form 10-KSB for the fiscal year ended December 31, 1999. | |
10.4 | Consulting Agreement dated April 24, 2000 by and between Capital Reserve Corporation and W. Scott Lawler | Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation's Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000. |
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10.5 | Share Exchange Agreement dated November 20, 2001 by and between Capital Reserve Corporation, Food and Culinary Technology Group, Inc. and Shareholders of Food and Culinary Technology Group, Inc. | Incorporated by reference to the Exhibits previously filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001. | |
10.6 | Lease and Option to Purchase Agreement dated by and between Capital Reserve Corporation and 5 Crowns Investment Corp. | Incorporated by reference to the Exhibits previously filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2001. | |
10.7 | Fourth Amendment to the Share Exchange Agreement dated February 2, 2004. | Incorporated by reference to the Exhibits previously filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. | |
10.8 | Amended and Restated Shareholders Agreement dated February 2, 2004 | Incorporated by reference to the Exhibits previously filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. | |
10.9 | Mortgage between FACT Corporation and 948783 Alberta Inc. dated March 17, 2004 | Incorporated by reference to the Exhibits previously filed with the Registrants Annual Report on Form 10-KSB for the fiscal year ended December 31, 2003. | |
31 | Rule 13a -14(a)/15d-14(a) Certification | Filed herewith | |
32 | Section 1350 Certification | Filed herewith |
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