FALCON RIDGE DEVELOPMENT, INC,
Consolidated Balance Sheet
December 31, 2007 and September 30, 2007
| Assets | | | | | | |
| | | (unaudited) | | | | |
| | | | | | | |
| Cash | | $ | 2,559 | | | $ | 74,521 | |
| Fixed assets, net of accumulated depreciation | | | 52,176 | | | | 32,787 | |
| Real estate held for development and sale | | | 3,176,205 | | | | 3,175,984 | |
| | | | | | | | | |
| Total assets | | $ | 3,230,940 | | | $ | 3,283,292 | |
| | | | | | | | | |
| Liabilities and Shareholders' Deficit | | | | | | | | |
| | | | | | | | | |
| Liabilities | | | | | | | | |
| | | | | | | | | |
| Accounts payable | | $ | 489,608 | | | $ | 444,523 | |
| Notes payable related parties | | | 1,136,074 | | | | 1,136,074 | |
| Note payable | | | 1,360,000 | | | | 1,350,000 | |
| Retainage payable | | | 90,000 | | | | 90,000 | |
| Accrued interest | | | 162,840 | | | | 120,216 | |
| Accrued expenses | | | 8,637 | | | | 2,587 | |
| Shareholder payable | | | 2,000 | | | | — | |
| Preferred Shares subject to manadatory redemption | | | 485,000 | | | | 485,000 | |
| | | | | | | | | |
| Total liabilities | | | 3,734,159 | | | | 3,628,400 | |
| | | | | | | | | |
| Shareholders' deficit | | | | | | | | |
| Warrants issued for services | | | (674,857 | ) | | | | |
| Preferred stock,Class A .0001 par value, | | | | | | | | |
| 400,000 shares authorized, 160,000 shares issued and | | | | | | | | |
| outstanding | | | 400,000 | | | | 400,000 | |
| Common stock, $0.001 par value, 900,000,000 shares | | | | | | | | |
| authorized, 18,459,337 shares issued and | | | | | | | | |
| outstanding | | | 18,809 | | | | 18,459 | |
| Additional paid-in capital | | | 3,070,404 | | | | 2,013,447 | |
| Accumulated deficit | | | (3,317,575 | ) | | | (2,777,014 | ) |
| | | | | | | | | |
| Total Liabilities and Shareholders' Deficit | | | (503,219 | ) | | | (345,108 | ) |
| | | | | | | | | |
| | | $ | 3,230,940 | | | $ | 3,283,292 | |
See accompanying notes to consolidated financial statements
FALCON RIDGE DEVELOPMENT, INC.
Consolidated Statement of Operations
(Unaudited)
| | | | | | | |
| | | Three Months | | | Three Months | |
| | | ended | | | ended | |
| | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| | | | | | | |
| Net sales | | $ | 47,310 | | | $ | - | |
| | | | | | | | | |
| Cost of goods sold | | | 18,950 | | | | - | |
| Selling, general and administrative expenses | | | 565,792 | | | | 153,934 | |
| Total operating expenses | | | 584,742 | | | | 153,934 | |
| Other income: | | | | | | | | |
| | | | | | | | | |
| Loss before provision for income taxes | | | 537,432 | | | | 153,934 | |
| Income taxes | | | - | | | | - | |
| | | | | | | | | |
| Net Loss | | $ | 537,432 | | | $ | 153,934 | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Loss per share | | $ | - | | | $ | - | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| Weighted average number of shares outstanding | | | 18,459,337 | | | | 3,117,642 | |
FALCON RIDGE DEVELOPMENT, INC.
Consolidated Statements of Cash Flows
(Unaudited)
| | | Three Months | | | Three Months | |
| | | ended | | | ended | |
| | | December 31, | | | December 31, | |
| | | 2007 | | | 2006 | |
| Cash flows from operating activities: | | | | | | |
| Net income/loss | | $ | (537,432 | ) | | $ | (153,934 | ) |
| Adjustments to reconcile net loss to net cash | | | | | | | | |
| Stock issued for services | | | 157,500 | | | | — | |
| Warrants expensed | | | 264,570 | | | | | |
| used by operating activities: | | | | | | | | |
| Depreciation | | | 2,394 | | | | 1,577 | |
| Changes in operating assets and liabilities, | | | | | | | | |
| | | | | | | | | |
| Real estate held for development and sale | | | (221 | ) | | | (100,851 | ) |
| Accounts payable | | | 45,083 | | | | 131,550 | |
| | | | | | | | | |
| Accrued interest | | | 42,624 | | | | — | |
| Accrued liabilities | | | 6,050 | | | | 16,235 | |
| Stock based compensation | | | | | | | 10,250 | |
| Net cash (used in) provided by | | | | | | | | |
| operating activities | | | (19,432 | ) | | | (95,173 | ) |
| | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | |
| | | | | | | | | |
| Acquisition of fixed assets | | | (21,783 | ) | | | — | |
| | | | | | | | | |
| Net cash used in | | | | | | | | |
| investing activities | | | (21,783 | ) | | | — | |
| | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | |
| Increase (Decrease) in related party notes payable | | | — | | | | 51,366 | |
| Increase (Decrease) notes payable | | | 10,000 | | | | 200,000 | |
| Proceeds from shares to be issued | | | 2,000 | | | | — | |
| | | | | | | | | |
Net cash from financing activities | | | 12,000 | | | | 251,366 | |
| | | | | | | | | |
| | | | | | | | | |
| Net change in cash | | | (29,215 | ) | | | 156,193 | |
| | | | | | | | | |
| Cash: | | | | | | | | |
| Beginning of period | | | 74,521 | | | | 3,754 | |
| | | | | | | | | |
| End period | | $ | 45,306 | | | $ | 159,947 | |
| | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | |
| Cash paid during the year for: | | | | | | | | |
| Income taxes | | $ | — | | | $ | — | |
| Interest | | $ | 5,200 | | | $ | 29,778 | |
| | | | | | | | | |
| SIGNIFICANT NON-CASH ACTIVITIES | | | | | | | | |
| | | | | | | | | |
| Warrants issued | | $ | 899,809 | | | $ | - | |
| Stock issued for services | | | 157,500 | | | | - | |
| | | | | | | | | |
| Total non-cash activities | | $ | 1,057,309 | | | $ | - | |
See accompanying notes to consolidated financial statements
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(1) Summary of Significant Accounting Policies
Organization, Shell Merger and Principles of Consolidation
Organization
Falcon Ridge Development, Inc. ("FRDI" or the "Company") is engaged in the real estate industry and acquires tracts of raw land and develops them into residential lots for sale to homebuilders. In addition, FRDI plans to expand its operations into the homebuilding business. These operations are predominantly located in the City of Rio Rancho, New Mexico and Belen, New Mexico. Since inception, the Company has developed one property known as Sierra Norte.
Going Concern
The Company experienced significant operating losses during the three ended December 31, 2007 and 2006, of $540,561 and $153,934 respectively. The Company has a working capital deficit and implementation of its business plan is dependent upon its ability to raise additional capital. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management believes that it will be successful in raising additional capital and that it has assets available to securitize debt should the Company look to borrow. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of the recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue in existence.
Shell Merger
On May 20, 2005, Sierra Norte LLC ("SNLLC") exchanged certificates representing 100 percent of its equity securities for 100,000,000 shares of the common stock of Pocketspec Technologies, Inc. (PTI), a public shell company. The acquisition has been treated as a recapitalization of SNLLC, a New Mexico limited liability company, with PTI the surviving legal entity. Since PTI had, prior to the merger, minimal assets, (consisting of cash) and no operations, the recapitalization has been accounted for as the sale of 37,265,372 shares of common stock for the net assets of PTI. After the closing of the acquisition, there were 137,265,372 shares of common stock of the Company issued and outstanding. PTI was incorporated under the laws of Colorado in 1998. In June 2005, PTI changed its domicile to Nevada and its name to Falcon Ridge Development Inc.
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
SNLLC was deemed to be the acquirer (for accounting purposes) in the reverse acquisition and, consequently, the assets and liabilities and historical operations that are reflected in the accompanying financial statements are those of SNLLC and are recorded at the historical cost basis of SNLLC.
In connection with the merger, PTI sold to a group of its shareholders, PTI's color comparison devices business in exchange for an indemnification from liabilities by these investors. These shareholders assumed the color comparison devices business including its liabilities. The sale was consummated between related parties. Accordingly, the sale was booked as a capital transaction and no gain or loss on the transaction was recorded.
Since incorporation in 1998, PTI has conducted three businesses. Originally PTI was in the retail arts and crafts industry. PTI then transitioned into the real estate development business, where it acquired and developed real estate properties for its own account, primarily in Colorado. Finally, PTI became a technology company. In 1999, PTI filed a registration statement on Form 10-SB with the U.S. Securities and Exchange Commission to become a reporting company under Section 12G of the Securities and Exchange Act of 1934.
Principles of Consolidation
The consolidated financial statements include the accounts of Falcon Ridge Development, Inc. and its wholly owned subsidiaries SNLLC and Spanish Trails LLC (STLLC) (together, the "Company"). Intercompany transactions and balances have been eliminated in the consolidation.
Use of Estimates
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, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Revenue Recognition on Sales of Real Estate
The profit on sales of real estate is accounted for in accordance with the provisions of SFAS No. 66, "Accounting for Sales of Real Estate." The Company recognizes revenue from the sale of real estate at the time the sale is closed and the title is transferred from the Company to the buyer.
Cash and Cash Equivalents
The Company considers all highly liquid securities with original maturities of three months or less when acquired to be cash equivalents. The Company had no cash equivalents at December 31, 2007 and 2006.
Real Estate Held for Sale
The carrying value of land and development includes the initial acquisition costs of land, improvements thereto, and other costs incidental to the acquisition or development of land. These costs are allocated to properties on a relative sales value basis and are charged to costs of sales as specific properties are sold. Due to the nature of the business, land and development costs have been classified as an operating activity on the consolidated statement of cash flows.
Impact credits received from the negotiated settlement with the City of Rio Rancho are offset against land development costs.
The company reviews the fair value less costs to sell of land under development at the end of each reporting cycle and where the carrying value of the asset is not recoverable and exceeds its fair value an impairment loss will be recognized.
Interest
The Company capitalizes interest costs to real estate held for resale during development and construction. Capitalized interest is charged to cost of sales as the related lots are delivered to the buyer.
Fixed Assets and Depreciation
Fixed assets are recorded at cost. Expenditures that extend the useful lives of assets are capitalized. Repairs, maintenance and renewals that do not extend the useful lives of the assets are expensed as incurred. Depreciation is provided on the straight-line method over the following estimated useful lives: software, 5 years ; equipment, 5 years.
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Earnings (loss) per Common Share
Basic net income per share is computed by dividing the net income available to common shareholders (the numerator) for the period by the weighted average number of common shares outstanding (the denominator) during the period. The computation of diluted earnings is similar to basic earnings per share, except that the denominator is increased to include the number of additional common shares that would have been outstanding if potentially dilutive common shares had been issued.
At December 31, 2007, there was no variance between basic and diluted loss per share as the convertible preferred stock outstanding, if converted, would be anti-dilutive.
Impairment or Disposal of Long-Lived Assets
The Company evaluates real estate projects and other long-lived assets on an individual basis for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" and SFAS 67 “Accounting for Costs and Initial Rental Operations of Real Estate Projects.” An asset is considered impaired if its carrying amount exceeds the future net cash flow the asset is expected to generate or its net realizable value. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair market value. We assess the recoverability of our real estate projects, long-lived and intangible assets by determining whether the unamortized balances can be recovered through undiscounted future net cash flows of the related assets. The amount of impairment, if any, is measured based on projected discounted future net cash flows. When impairment exists the carrying value of the asset will be reduced by an allowance for the amount of the impairment. There is no impairment in 2007 or 2006.
Advertising Expenses
The Company expenses advertising expenses as incurred. Advertising expense for the three months ended December 31, 2007 and 2006 were $715 and $3,011 respectively.
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Stock-based Compensation
The Company adopted Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based Payment (SFAS 123R), effective January 1, 2006. SFAS 123R requires the recognition of the fair value of stock-based compensation in net income. The Company has elected the modified prospective transition method for adopting SFAS 123R. Under this method, the provisions of SFAS 123R apply to all awards granted or modified after the date of adoption. In addition, the unrecognized expense of awards not yet vested at the date of adoption, determined under the original provisions of SFAS 123, shall be recognized in net income in the periods after the date of adoption. The Company had no unvested awards at December 31, 2007 and 2006 respectively.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for deferred tax assets that are not expected to be recovered from future operations.
In tax year December 31, 2005, the Company operated as a partnership through May 20, 2005 and as a "c" corporation for the period May 21, 2005 through December 31, 2005 and therefore was exempt from taxation; instead, its earnings and losses are included in the personal returns of the members and taxed depending on the individual's personal tax situation. The Company is the sole member of its two subsidiaries and consequently includes their activity in its return on a consolidated basis. The Company has a tax loss of approximately $1,037,829 which is available to reduce taxable income in future years. Use of the loss will expire in 2027.
Financial Instruments and Concentration of Credit Risk
The carrying amounts of the Company's financial assets and liabilities, including cash, accounts payable, and preferred shares with mandatory redemption at December 31, 2007, approximate fair value because of the short maturity of these instruments. The carrying amount of the Company's notes payable approximates fair value at December 31, 2007, since the notes are at floating rates or fixed rates that approximate current market rates for notes with similar risks and maturities.
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
For the three month period ending December 31, 2007 $35,903 or 75.8% of the Company's sales were from ten homebuilders and the remaining $10,575 or 24.2% came from the Realty division.
Preferred Shares subject to mandatory redemption
The features of our Series B Preferred Stock and determined that it falls within SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Due to redemption features of the securities, the preferred shares are being classified as a liability in these financial statements. The securities give the holder the option of a net cash settlement or a settlement in common share based on a conversion rate. The value of the liability is fixed at the stated value of $485,000. However, the number of common shares into which the preferred shares are convertible is inversely related to changes in the Company’s common stock. Although the potential conversion could conceivably require the Company to issue a number of shares in excess of its authorized limit, the Company does not believe that its liability recorded at December 31, 2007, associated with the Series B preferred stock is appropriate in that such obligation would not exceed the aggregate stated value.
New Accounting Standards
SFAS No. 151, "Inventory Costs," is effective for fiscal years beginning after June 15, 2006. This statement amends the guidance in Accounting Research Bulletin ("ARB") No. 43, Chapter 4, Inventory Pricing, to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). The adoption of SFAS 151 did not have a material impact on the Company's financial statements.
SFAS No. 152, "Accounting for Real Estate Time-Sharing Transactions," is effective for fiscal years beginning after June 15, 2005. This statement amends SFAS No. 66, Accounting for Sales of Real Estate, to reference the financial accounting and reporting guidance for real estate time-sharing transactions that is provided in American Institute of Certified Public Accountants Statement of Position 04-2, Accounting for Real Estate Time-Sharing Transactions. The adoption of SFAS No. 152 did not have a material impact on the Company's
financial statements.
SFAS No. 123(R), "Share-Based Payment," replaces SFAS No. 123, "Accounting for Stock-Based Compensation," and supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees." This statement requires that the compensation cost relating
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
to share-based payment transactions be recognized in the financial statements. The Company is required to apply this statement in the first interim period that begins after December 15, 2005. The adoption of SFAS No. 123(R) did not have a material impact on the Company's financial.
SFAS No. 153, "Exchanges of Non-monetary Assets" - an amendment of APB Opinion No. 29, is effective for fiscal years beginning after June 15, 2005. This statement addresses the measurement of exchange of non-monetary assets and eliminates the exception from fair-value measurement for non-monetary exchanges
of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Non-monetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. The adoption of SFAS No. 153 did not have a material impact on the Company's financial statements.
FIN No. 46(R) revised FIN No. 46, "Consolidation of Variable Interest Entities," requiring the consolidation by a business of variable interest entities in which it is the primary beneficiary. The adoption of FIN No. 46 did not have an impact on the Company's financial statements.
The EITF reached a consensus on Issue No. 04-8, "The Effect of Contingently Convertible Debt on Diluted Earnings Per Share" ("EITF 04-8"), which addresses when the dilutive effect of contingently convertible debt instruments should be included in diluted earnings (loss) per share. EITF 04-8 is effective for reporting periods ending after December 15, 2004. The adoption of EITF 04-8 did not have an impact on diluted earnings (loss) per share.
(2) Related Party Transactions
The Company conducts its operations in a building rented by an affiliate. During the three months ended December 31, 2007 and 2006, the Company recorded rent expense of $16,500 and $15,750, respectively. At December 31, 2007 the Company owed rent and utilities in the amount of $ 36,683, which is included in accounts payable.
The Company's affiliate pays certain expenses on its behalf. The Company reimburses these expenses paid on its behalf by the affiliate at actual cost. Overhead expenses and indirect labor incurred by the affiliate are allocated to the Company based on management-approved estimates of time and effort. The Company reviews the estimated rate from time-to-time.
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
Indebtedness to related parties consisted of the following at December 31, 2007:
| Note payable to Karen Duran &/or Fred Montano, interest at Published Prime plus 3%, principal and interest payable in monthly installments of $20, 000.00 plus interest. | | | |
| | $ | 1,136,074.40 | |
| | |
(3) Fixed Assets
Fixed assets consist of the following at December 31, 2007:
| | | Cost | | | Accumulated Depreciation | |
| | | | | | | |
| Computer Software & Hardware | | $ | 56,845 | | | $ | 8,660 | |
| Equipment | | | 7,981 | | | | 3,990 | |
| | | | | | | | | |
| Total | | $ | 64,825 | | | $ | 12,650 | |
| | | | | | | | | |
Depreciation expense is included in selling, general and administrative expenses in the accompanying financial statements. For the three months ended December 31, 2007 and 2006 the Company recorded depreciation expense of $2,394 and $1,577 respectively.
(4) Real Estate Operations
The Company completed development of Sierra Norte I and II subdivisions in Rio Rancho, New Mexico in 2006. The Company is in the process of developing approximately 139 acres of raw land in the Belen, New Mexico referred to as "Spanish Trails." Spanish Trails consists of land platted into approximately 517 home sites. Home sites will be sold to different builders or developed by the Company.
Real estate held for resale, consists of the following at December 31, 2007:
| | | | | |
Real estate held for development and sale | | | | |
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(5) Note Payable
Note payable consists of the following at December 31, 2007:
| | | | |
| | | | |
Note payable Gerry Berg, with interest at 12 percent six (6) month note with converstion rights at 50% of bid price at time of converstion. | | $ | 10,000 | |
Note payable Freedom Financial Note amount $200,000.00, interest payable at 10% per annum, converstion rights at renewable with 2% renewal fee, Converstion option at $0.75 | | $ | 200,000 | |
| | | | | |
| Note payable Metro Loan Corp, with interest at 12 percent interest only payments in monthly installments of $11,100.00 collateralized by a First Mortgage due 2008 | | | | |
| Total financing under the agreement is $1,150,000.00 | | $ | 1,150,000 | |
Note payable Karen Duran and/or Fred Montano, with interest at Prime as stated in Wall Street Journal plus 3 percent payments in monthly installments of $20,000.00 plus accrued interest collateralized by a Second Mortgage due 2008 | | $ | 1,136,074.40 | |
Total | | $ | 2,496,074 | |
| | | | | |
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(6) Warrants
On October 8, 2007, the Company issued 2,000,000 warrants with an estimated value of $ 899,809 to Redwood Consulting LLC. The warrants have an exercise price of $0.50 per share, the warrants become exercisable either twelve months after the underlying common stock issuable in the exercise of these warrants is declared registered and effective by the SEC in the companies current SEC registration statement; or 5:30 P.M.Pacific Daylight Savings Time on October 8, 2015. The warrants expire 5:30 PM Pacific Daylight Savings Time on October 8, 2015, or twelve months after becoming exercisable or. The Company has recorded consulting fees relating to these options of $ 221,823. As of the date of this report, none of the warrants have vested.
The fair value of these options was estimated at the date of grant using the Black-Scholes option-pricing model with dividend yield of 0%; expected volatility of 169%; risk-free interest rate of 4.12%; and expected life of 8 years.
A summary of stock option and warrant activity for all plans follows:
| Outstanding Options | | Options Outstanding | | | Warrants Outstanding | | | Exercise Price | |
| Granted | | | - | | | | 2,000,000 | | | $ | 0.50 | |
| Exercised | | | - | | | | - | | | | | |
| Canceled | | | - | | | | - | | | | | |
| Balance, December 31, 2007 | | | - | | | | 2,000,000 | | | $ | 0.50 | |
| | | | | | | | | | | | | |
Following is a summary of the status of fixed options and warrants outstanding at December 31, 2007: |
| | Outstanding Options and Warrants | Exercisable Options and Warrants |
| Exercise Price Range | Number | Weighted Average Remaining Contractual Life | Weighted Average Exercise Price | Number Exercisable | Weighted Average Exercise Price |
| $ 0.50 | 2,000,000 | 7.8 years | $ 0.50 | - | $ 0.00 |
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(7) Income Taxes
A reconciliation of U.S. statutory federal income tax rate to the effective rate follows for the three month period ending December 31, 2007:
| | | 20.000 | % |
| State income tax rate | | | 4.80 | % |
| Net operating loss for which no tax benefit is currently available | | | -24.800 | % |
| | | | | |
| | | | 0.00 | % |
For the three month period ending December 31, 2007 the company estimated that the company would have a loss for income taxes purposes and therefore reported no provision.
(8) Shareholders' Deficit
Preferred Stock
On July 20, 2005, the Company established Series A Convertible Preferred Shares and authorized 400,000 shares. The preferences are as follows:
| | · | Shares are non-cumulative with a preference over common shares if and when a dividend is declared. |
| | · | Shares are convertible into common stock at any time on the basis of 100 common shares for 1 share of preferred stock. This conversion rate is subject to adjustments for forward or reverse splits or other capitalizations. The option was of no intrinsic benefit, at the commitment date, to the preferred shareholder. |
| | · | Shares have a priority over common shares and other convertible preferred shares upon liquidation. |
| | · | Shares are callable at any time by the Company at the original purchase price. The Preferred Shareholders will have thirty days thereafter to convert to common stock. |
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(9) Preferred Shares subject to mandatory redemption
The features of our Series B Preferred Stock and determined that it falls within SFAS 150 “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”. Due to redemption features of the securities, the preferred shares are being classified as a liability in these financial statements. The securities give the holder the option of a net cash settlement or a settlement in common share based on a conversion rate. The value of the liability is fixed at the stated value of $485,000. However, the number of common shares into which the preferred shares are convertible is inversely related to changes in the Company’s common stock. Although the potential conversion could conceivably require the Company to issue a number of shares in excess of its authorized limit, the Company does not believe that its liability recorded at December 31 2007, associated with the Series B preferred stock is appropriate in that such obligation would not exceed the aggregate stated value.
On April 15, 2006, the Company established Series B Convertible Preferred Shares and authorized 400,000 shares. The preferences are as follows:
| | · | Shares are non-cumulative with a preference over common shares if and when a dividend is declared. |
| | · | Investor will receive a dividend of 12% per annum payable monthly for a period of eighteen months from the date of purchase. |
| | · | Shares are convertible into common stock at any time on the basis of 75% of the average current bid price for the preceding 20 days of the Company's receipt of notice to convert. This conversion rate is subject to adjustments for forward or reverse splits or other capitalizations. The option was of no intrinsic benefit, at the commitment date, to the preferred shareholder. |
| | · | Shares have a priority over common shares upon liquidation. |
| | · | Shares are callable by the Company at any time after 12 months of issuance of Preferred B shares at the original purchase price. The Preferred Shareholders will have sixty days thereafter to convert to common stock. The shares will be repurchased after eighteen months for the original issue price. |
FALCON RIDGE DEVELOPMENT, INC.
Notes to Consolidated Financial Statements
(Unaudited)
(10) Subsequent events
On February 5, 2008 the Company issued 10,000,000 restricted shares at $0.10 to Fred Montana for his services valued at $1,000,000.
On February 5, 2008 the Company issued 10,000,000 restricted shares at $0.10 to Karen Duran for her services valued at $1,000,000.
On February 5, 2008 the Company issued 115,000 restricted shares at $0.10 to Gerry Berg for his services valued at $11,500.
On February 5, 2008 the Company issued 250,000 restricted shares at $0.10 to Troy Duran for his services valued at $25,000.
On February 5, 2008 the Company issued 250,000 restricted shares at $0.10 to Sebastian Ramirez for his services valued at $25,000.
On February 5, 2008 the Company issued 2,250,000 restricted shares at $0.10 to Periscope for consulting services valued at $225,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
The following discussion of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and notes thereto included in Item 1 in this Quarterly Report on Form 10-QSB. This item contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from those indicated in such forward-looking statements.
Forward-Looking Statements
This Quarterly Report on Form 10-QSB and the documents incorporated herein by reference contain forward-looking statements that have been made pursuant to the provisions of the Private Securities Litigation Reform Act of 1995. Such forward-looking statements are based on current expectations, estimates, and projections about our industry, management beliefs, and certain assumptions made by our management. Words such as "anticipates," expects," "intends," "plans," "believes," "seeks," "estimates," variations of such words, and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and are subject to certain risks, uncertainties, and assumptions that are difficult to predict; therefore, actual results may differ materially from those expressed or forecasted in any such forward-looking statements. Unless required by law, we undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events, or otherwise. However, readers should carefully review the risk factors set forth in other reports and documents that we file from time to time with the Securities and Exchange Commission, particularly our Annual Reports on Form 10-KSB and any Current Reports on Form 8-K.
Overview and History
We are a Nevada corporation with two subsidiaries, Sierra Norte, LLC ("Sierra Norte") and Spanish Trails, LLC ("Spanish Trails"). We are in the real estate industry and acquire tracts of raw land and develop them into residential lots for sale to homebuilders. We plan to expand our operations in 2007 into homebuilding on our Spanish Trails lots. Our executive offices are located in the Albuquerque, New Mexico area.
On May 20, 2005, we completed a reverse acquisition transaction. We acquired Sierra Norte, a New Mexico limited liability company, which thereby became our wholly-owned subsidiary. Sierra Norte is a land development company in the Albuquerque, New Mexico area. Formerly we were a technology company which was in the business of developing and marketing color comparison devices. We acquired Spanish Trails on July 6, 2005 as discussed below.
As a result of the Sierra Norte acquisition, the former security holders of Sierra Norte acquired a majority of our outstanding shares of common stock. For accounting purposes, Sierra Norte has been deemed to be the acquirer in the acquisition and, consequently, the assets, liabilities and historical operations that are reflected in our financial statements are those of Sierra Norte, which are recorded at the historical cost basis of Sierra Norte. The reverse acquisition was consummated under Colorado law pursuant to an Agreement and Plan of Reorganization dated May 20, 2005.
On July 6, 2005, we entered into an exchange of securities whereby we acquired 100% of the ownership of Spanish Trails, in exchange for the issuance of a total of 614,882,069 (pre-reverse split) of our common shares. As a result of the Spanish Trails acquisition, the former security holders of Spanish Trails acquired a majority of our outstanding shares of common stock, but we did not have a change of control because the owners of a majority of Spanish Trails were the executive officers and majority shareholders of the Company. After the exchange, 752,262,441 (pre-reverse split) shares of common stock were issued and outstanding.
Also, on July 6, 2005 we reincorporated our company to Nevada from Colorado and changed our name to Falcon Ridge Development Inc., after shareholder approval. In connection with the name change, we changed to a new trading symbol, FLRD.BB.
On August 16, 2006 we affected a 1 for 200 reverse split of our common stock. This reduced the outstanding shares from 752,262,441 to 3,761,312 and we changed our trading symbol to FCNR.BB.
Our Spanish Trails project is progressing through local real estate governmental clearance toward final approval of our platting plan. We anticipate the process should be completed by mid-2008. When our platting plan receives final approval, we will be able to begin construction of the first phase of development of approximately 517 lots for single family homes. Considerable up front costs in any real estate platting project must first be incurred and paid for, thus in the early stages of our real estate projects significant amounts of capital can be required until platting occurs, and lots are improved and sold. Predictably, greater revenues will be achieved as soon as a portion of the lots are improved and sold. When the lot development has been completed and accepted by the Valencia County, New Mexico, engineers and construction of the lots completed, the sale of those lots will be funded and closed. It is also our intention to initiate a home building division on some of the remaining developed Spanish Trails project lots not sold to homebuilders. We expect to have initial models open in the Spring of 2008. The sale of homes and, consequently, the pace of construction, will be determined by the rate of market absorption.
Results of Operations
Three Month Period Ending December 31, 2007 Compared to Three Month Period Ending December 31, 2006
We had revenue of 47,310 for the three month period ending December 31, 2007 compared to revenues of $-0- for the three months ending December 31, 2006. This increase was primarily attributable to our mortgage division. The Mortgage division was incorporated in the State of New Mexico and its Certificate of Organization was issued on or about August 3, 2007 under the name Falcon Ridge Investments, LLC. It has been operating since as a wholly owned subsidiary of Falcon Ridge Development, Inc. We are in the process of exploring how to expand personel, locations and liscensing in other States.
Our costs of sales for the three month period ending December 31, 2007 was $18,950 compared to costs of sales of $-0- for the three month period ending December 31, 2006. Our selling, general and administrative expenses for the three month period ending December 31, 2007 were $584,742, compared to selling, general and administrative expenses of $153,934 for the three month period ending December 31, 2006. The major components of these expenses are consulting fees, salaries, payroll taxes and professional fees. Since late in the second quarter of the prior year we have expensed and increased amount of indirect payroll which results in a general increase in general and administration expenses. We have significantly expanded our operations as a public company in 2007. This is reflected in the increased overhead.
Our principal source of revenue in the near term is expected to be from 139 acres of land we own in the Spanish Trails project, which is being developed as discussed above. In this development, we plan to build homes as well as develop and construct the community. The timeframe over which developed lots and or homes will be sold may be several years. We are negotiating on properties in other States for future growth of the company.
Liquidity and Capital Resources
At December 31, 2007 our cash position was $2,559.
Our net cash used in operating activities was $62,179 for the three month ending December 31, 2007, compared to net cash used by operating activities of $95,173 for the same period 2006.
Our net cash used by investing activities was $ 21,783 for the three month period ending December 31, 2007, compared to $-0- of net cash used by investing activities for the three month period ending December 31, 2007.
Our net cash provided by financing activities was $12,000 for the three month period ending December 31, 2007, compared to $251,366 of net cash provided by financing activities for the three month period ending December 31, 2007.
From time to time we need working capital when we do not have funds to pay for lot development or general and administrative expenses. During the three months ended December 31, 2007, the company had secured minor financing of $12,000 by two independent individuals to help pay some operating obligations. We cannot assure that such funding will be available in the future.
The timing of the completion of the platting of our Spanish Trails project is not certain, so we cannot assure the timing of cash flow from lot sales. Thus, we may be faced with a working capital shortage. In that event we may be required to seek financing which may not be available or, if available, it could be on terms which are cost prohibitive to us.
In addition, we now expect to begin building homes on our Spanish Trails project in mid 2008. This initiative will require working capital which we cannot assure will be available. We are pursuing debt financing for this endeavor.
Most of our costs are incurred in the initial phases of our real estate projects. Our profitability depends upon our ability to develop, manage and sell real estate projects on a timely basis and to control our costs. We expect that we will develop a more consistent pipeline of activity as we mature and, thereby, a more consistent source of revenues and profit. If we succeed in this effort and generate sufficient revenues, we will expect to be profitable. However, we cannot assure that we will be profitable.
We do not intend to pay dividends for the foreseeable future. We do not expect our revenues to be impacted by seasonal demands.
Recently Issued Accounting Pronouncements
We do not expect the adoption of any recently issued accounting pronouncements to have a significant impact on our net results of operations, financial position, or cash flows.
Critical Accounting Policies
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires us to make a number of estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. Such estimates and assumptions affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate estimates and assumptions based upon historical experience and various other factors and circumstances. We believe our estimates and assumptions are reasonable in the circumstances; however, actual results may differ from these estimates under different future conditions.
We believe that the estimates and assumptions that are most important to the portrayal of our financial condition and results of operations, in that they require our most difficult, subjective or complex judgments, form the basis for the accounting policies deemed to be most critical to us. These critical accounting policies relate to bad debts, impairment of intangible assets and long lived assets, contractual adjustments to revenue, and contingencies and litigation. We believe estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events or occurrences result in unanticipated consequences, there could impact on our future financial conditions or results of operations.
ITEM 3. CONTROLS AND PROCEDURES
Management is responsible for establishing and maintaining adequate internal control over financial reporting. As of the end of the period covered by this report, our chief executive officer and our chief financial officer evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rule 13a-15b under the Securities Exchange Act of 1934. Based on their review of our disclosure controls and procedures, they have concluded that our disclosure controls and procedures are effective in timely alerting each of them to material information relating to us that is required to be included in our periodic SEC filings. Since our Company has been acquired as a result of the Sierra Norte acquisition discussed above, and a new board and management has been installed, we have been able to timely file our Form 10-QSBs and our Form 8-Ks. Management is in the continuing process of analyzing and adopting new policies and procedures to improve the design and operations of our disclosure controls, We acknowledge that a change with respect to financial controls has been made to alert us with respect to funding provided by related parties and that the changes in disclosure controls, particularly recognizing Form 8-K events, are ongoing. We expect these changes in internal controls will have a significant effect on our disclosure controls after the evaluation date and the date of this report.
Changes to Internal Controls include a reorganization of available staff to better segregate duties, acquisition and implementation of more sophisticated accounting software and a personnel plan to hire additional accounting and administrative staff. We continue to schedule training for employees and management in critical areas to enhance their ability to perform the duties assigned to them.
(a) Disclosure Controls and Procedures
The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the Company's disclosure controls and procedures. Based upon that evaluation, the CEO and CFO concluded that as of December 31, 2007 our disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company required to be included in the Company's periodic filings with the SEC, subject to the various limitations on effectiveness set forth below under the heading, "LIMITATIONS ON THE EFFECTIVENESS OF INTERNAL CONTROLS," such that the information relating to the Company, required to be disclosed in SEC reports (i)is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms, and (ii) is accumulated and communicated to the Company's management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.
(b) Changes in Internal Controls over financial reporting
Changes in internal control over financial reporting. There has been no change in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2007 that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting.
(c) Limitations on Effectiveness of Disclosure Controls and Procedures
The Company's management, including the CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting will necessarily prevent all fraud and material error. An internal control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the internal control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, control may become inadequate because of changes in conditions, and/or the degree of compliance with the policies or procedures may deteriorate.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no legal proceedings, to which we are a party, which could have a material adverse effect on our business, financial condition or operating results. However, a former attorney has filed a complaint and obtained a default judgment against us for fees and costs in the approximate amount of $ 47,000. We believe that the judgment will be reversed and we will enter into arbitration with the attorney. We have included $38,000 in these financial statements. The costs assessed by the attorney for arbitration of approximately $ 9,000 is not included.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On October 8, 2007 the Company issued 350,000 restricted shares at $0.45 to Redwood Consulting, LLC pursuant to their consulting contract valued at $ 157,500.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
a. Exhibits
Exhibit No. | | Description |
| 2.1 | | Agreement and Plan of Reorganization - Pocketspec Technologies, Inc. and Sierra Norte LLC (a) |
| 2.2 | | Acquisition Agreement - Pocketspec Technologies, Inc. and Spanish Trails, LLC (b) |
| 3.1 | | Articles of Incorporation of Falcon Ridge Development, Inc. previously filed. |
| 3.2 | | Bylaws of Falcon Ridge Development, Inc. previously filed. |
| 3.3 | | Articles of Organization of Sierra Norte, LLC previously filed. |
| 3.4 | | Operating Agreement of Sierra Norte, LLC previously filed. |
| 3.5 | | Articles of Organization of Spanish Trails, LLC previously filed. |
| 3.6 | | Operating Agreement of Spanish Trails, LLC previously filed. |
| 4.1 | | Articles of Amendment - Establishment of Series of Preferred Stock previously filed. |
| 10.1 | | Purchase Agreement - Spanish Trails, LLC and D.R. Horton* (Confidential portions of this agreement noted by *** have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934.) Previously filed. |
| 10.2 | | Promissory Note - Karen Y. Duran - Sierra Norte, LLC - May 20, 2006 - $150,000 previously filed. |
| 10.3 | | Promissory Note - Karen Y. Duran - Sierra Norte, LLC - June 1, 2006 - $200,000 previously filed. |
| 10.4 | | Promissory Note - Karen Y. Duran - Sierra Norte, LLC - June 19, 2006 - $66,000 previously filed. |
| 14.1 | | Code of Ethics previously filed. |
| 21.1 | | List of Subsidiaries previously filed. |
| 23.1 | | Consents of experts |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a)* |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a)* |
| 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 99 | | Additional Exhibits - None |
______________
* Filed herewith.
| | (a) | Filed on May 25, 2006 as Exhibit 2.1 with the Registrant's Current Report on Form 8-K and incorporated herein by reference. |
| | (b) | Filed on July 8, 2006 as Exhibit 10.19 with the Registrant's Current Report on Form 8-K and incorporated herein by reference. |
______________
None.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | Falcon Ridge Development, Inc. |
| Dated: February 18, 2008 | By: | /s/ Fred M. Montano |
| | | Fred M. Montano |
| | | President, Chief Executive Officer, and Director |
| | | |
| Dated: February 18, 2008 | By: | /s/ Karen Y. Duran |
| | | Karen Y. Duran |
| | | Vice President, Treasurer and Chief Financial Officer |
| | | |
| | | |
EXHIBIT INDEX
Exhibit No. | | Description |
| 2.1 | | Agreement and Plan of Reorganization - Pocketspec Technologies, Inc. and Sierra Norte LLC (a) |
| 2.2 | | Acquisition Agreement - Pocketspec Technologies, Inc. and Spanish Trails, LLC (b) |
| 3.1 | | Articles of Incorporation of Falcon Ridge Development, Inc. previously filed. |
| 3.2 | | Bylaws of Falcon Ridge Development, Inc. previously filed. |
| 3.3 | | Articles of Organization of Sierra Norte, LLC previously filed. |
| 3.4 | | Operating Agreement of Sierra Norte, LLC previously filed. |
| 3.5 | | Articles of Organization of Spanish Trails, LLC previously filed. |
| 3.6 | | Operating Agreement of Spanish Trails, LLC previously filed. |
| 4.1 | | Articles of Amendment - Establishment of Series of Preferred Stock previously filed. |
| 10.1 | | Purchase Agreement - Spanish Trails, LLC and D.R. Horton* (Confidential portions of this agreement noted by *** have been omitted and filed separately with the Securities and Exchange Commission pursuant to a request for confidentiality under Rule 24b-2 of the Securities Exchange Act of 1934.) Previously filed. |
| 10.2 | | Promissory Note - Karen Y. Duran - Sierra Norte, LLC - May 20, 2006 - $150,000 previously filed. |
| 10.3 | | Promissory Note - Karen Y. Duran - Sierra Norte, LLC - June 1, 2006 - $200,000 previously filed. |
| 10.4 | | Promissory Note - Karen Y. Duran - Sierra Norte, LLC - June 19, 2006 - $66,000 previously filed. |
| 14.1 | | Code of Ethics previously filed. |
| 21.1 | | List of Subsidiaries previously filed. |
| 23.1 | | Consents of experts |
| 31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15(d)-14(a)* |
| 31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15(d)-14(a)* |
| 32.1 | | Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 32.2 | | Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* |
| 99 | | Additional Exhibits - None |
______________
* Filed herewith.
| | (a) | Filed on May 25, 2006 as Exhibit 2.1 with the Registrant's Current Report on Form 8-K and incorporated herein by reference. |
| | (b) | Filed on July 8, 2006 as Exhibit 10.19 with the Registrant's Current Report on Form 8-K and incorporated herein by reference. |
______________
