Valcent Products Inc.
(A Development Stage Company)
Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
June 30, 2007
| Index | Page |
| | |
| Interim Consolidated Financial Statements | |
| | |
| Interim Consolidated Balance Sheets | 2 |
| | |
| Interim Consolidated Statements of Operations and Deficit | 3 |
| | |
| Interim Consolidated Statements of Cash Flows | 4 |
| | |
| Notes to Interim Consolidated Financial Statements | 5-19 |
NOTICE OF NO AUDITOR REVIEW OF INTERIM FINANCIAL STATEMENTS
Under National Instrument 51-102, Part 4, subsection 4 3(3)(a), in an auditor has not performed a review of the interim financial statements, they must be accompanied by a notice indicating that the financial statements have not been reviewed by an auditor.
The accompanying unaudited financial statements of the Company have been prepared by and are the responsibility of the Company’s management.
The Company’s independent auditor has not performed a review of these financial statements in accordance with the standards established by the Canadian Institute of Chartered Accountants for a review of the interim financial statements by an entity’s auditor.
/s/ F. George Orr
F. George Orr
Chief Financial Officer and Director
Valcent Products Inc.
(A Development Stage Company)
Interim Consolidated Balance Sheets
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
| | | June 30 | | | March 31 | |
| | | 2007 | | | 2007 | |
Assets |
| | | | | | | |
Current | | | | | | |
| Cash and cash equivalents | | $ | 759,613 | | | $ | 314,972 | |
| Accounts receivable (Note 6) | | | 304,153 | | | | 462,055 | |
| Prepaid expenses (Note 5) | | | 182,427 | | | | 285,690 | |
| Inventories (Note 8) | | | 1,302,256 | | | | 1,236,808 | |
| | | | 2,548,449 | | | | 2,299,525 | |
| Restricted cash (Note 12) | | | 107,643 | | | | 117,327 | |
| Property and equipment (Note 3) | | | 359,958 | | | | 348,487 | |
| Investment in Joint Venture (Note 7) | | | 198,357 | | | | - | |
| Product license (Note 4) | | | 1,306,075 | | | | 1,306,075 | |
| | | | | | | | | |
| | | $ | 4,520,482 | | | $ | 4,071,414 | |
| | | | | | | | | |
Liabilities and Shareholders' Deficiency |
| | | | | | | | | |
Current | | | | | | | | |
| Accounts payable and accrued liabilities | | $ | 441,457 | | | $ | 169,650 | |
| Current portion of long-term debt (Note 12) | | | 13,584 | | | | 13,451 | |
| Promissory note payable | | | 105,930 | | | | 115,460 | |
| Due to related parties (Note 10) | | | 859,441 | | | | 930,175 | |
| Convertible notes (Note 9) | | | 4,943,893 | | | | 5,301,129 | |
| | | | 6,364,305 | | | | 6,529,865 | |
| | | | | | | | | |
| Long-term debt (Note 12) | | | 176,118 | | | | 195,663 | |
| | | | 6,540,423 | | | | 6,725,528 | |
| | | | | | | | | |
Shareholders' Deficiency | | | | | | | | |
| Share capital (Note 13) | | | 9,263,342 | | | | 7,836,903 | |
| Contributed surplus (Note 13(e)) | | | 3,340,758 | | | | 3,253,333 | |
| Conversion component of convertible notes (Note 9) | | | 4,167,190 | | | | 4,167,190 | |
| Share subscriptions (Note 13) | | | 51,277 | | | | - | |
| Accumulated deficit from prior operations | | | (3,237,370 | ) | | | (3,237,370 | ) |
| Accumulated deficit during the development stage | | | (15,605,138 | ) | | | (14,674,170 | ) |
| | | | (2,019,941 | ) | | | (2,654,114 | ) |
| | | $ | 4,520,482 | | | $ | 4,071,414 | |
| | | | | | | | | |
| Going concern (Note 1) and commitments (Notes 4,5,9,11,12,13, and 14) | | | | | |
| | | | | | | | | |
| On behalf of the board | | | | | | | | |
"Glen Kertz" Director "F. George Orr" Director | |
| | | | | | | | | |
| See Notes to the Consolidated Financial Statements |
Valcent Products Inc.
(A Development Stage Company)
Interim Consolidated Statements of Operations and Deficit
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
| | | | | | | |
| | | For the Three Months Ended June 30, | |
| | | 2007 | | | 2006 | |
Expenses | | | | | | |
| Product development | | $ | 444,260 | | | $ | 630,547 | |
| Advertising and media development | | | 339,895 | | | | - | |
| Investor relations | | | 159,017 | | | | 101,078 | |
| Stock based compensation | | | 87,425 | | | | 50,605 | |
| Interest | | | 80,117 | | | | 63,635 | |
| Professional fees | | | 54,788 | | | | 135,635 | |
| Office and miscellaneous | | | 38,845 | | | | 25,239 | |
| Travel | | | 37,483 | | | | 27,380 | |
| Rent | | | 21,265 | | | | 14,347 | |
| Filing and transfer agent | | | 10,847 | | | | 7,076 | |
| Depreciation and amortization | | | 8,009 | | | | 6,405 | |
| Interest on long-term debt | | | 1,869 | | | | - | |
| Convertible note issuance costs | | | - | | | | 186,801 | |
| Non-cash financing expense | | | - | | | | 1,084,194 | |
Loss from Operations | | | 1,283,819 | | | | 2,332,942 | |
Other Income | | | | | | | | |
| Foreign exchange (gains) | | | (352,851 | ) | | | (95,706 | ) |
Net loss | | | 930,968 | | | | 2,237,236 | |
| Deficit during the development stage, beginning | | | 14,674,170 | | | | 3,734,599 | |
| Deficit during the development stage, ending | | $ | 15,605,138 | | | $ | 5,971,835 | |
| | | | | | | | | |
Loss per share - basic | | $ | 0.03 | | | $ | 0.13 | |
Weighted average number of common | | | | | | | | |
shares outstanding | | | 32,134,177 | | | | 16,830,767 | |
| | | | | | | | | |
| See Notes to the Interim Consolidated Financial Statements |
Valcent Products Inc.
(A Development Stage Company)
Interim Consolidated Statements of Cash Flows
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
| | | For the Three Months Ended June 30, | |
| | | 2007 | | | 2006 | |
Cash provided by (used in) | | | | | | |
Operating activities | | | | | | |
| Net loss for period | | $ | (930,968 | ) | | $ | (2,237,236 | ) |
| Items not involving cash | | | | | | | | |
| Investor relations | | | 114,266 | | | | - | |
| Stock based compensation | | | 87,425 | | | | 50,605 | |
| Interest | | | 80,117 | | | | - | |
| Professional fees | | | 9,000 | | | | - | |
| Depreciation and amortization | | | 8,009 | | | | 6,405 | |
| Non-cash financing expense | | | - | | | | 1,084,194 | |
| Convertible note issuance costs | | | - | | | | 186,801 | |
| Foreign exchange gain | | | (352,851 | ) | | | (95,706 | ) |
| Changes in non-cash working | | | | | | | | |
| capital items | | | 183,495 | | | | (426,722 | ) |
| | | | (801,507 | ) | | | (1,431,659 | ) |
Investing activities | | | | | | | | |
| Investment in Joint Venture | | | (198,357 | ) | | | - | |
| Property and equipment | | | (19,480 | ) | | | (14,932 | ) |
| | | | (217,837 | ) | | | (14,932 | ) |
Financing activities | | | | | | | | |
| Advances from related parties | | | - | | | | 369,997 | |
| Proceeds from issuance of common shares | | | 1,415,436 | | | | 737,828 | |
| Proceeds from share subscriptions | | | 51,277 | | | | - | |
| Repayment of long-term debt | | | (2,728 | ) | | | - | |
| Proceeds from issuance of convertible notes | | | - | | | | 646,783 | |
| | | | 1,463,985 | | | | 1,754,608 | |
| Increase in cash during year | | | 444,641 | | | | 308,017 | |
Cash and cash equivalents | | | | | | | | |
Beginning of period | | | 314,972 | | | | 12,773 | |
End of period | | $ | 759,613 | | | $ | 320,790 | |
Supplemental Cash Flow Information | | | | | | | | |
| Shares issued for investor relations / public | | | | | | | | |
| relations services (Note 13) | | $ | 103,263 | | | $ | - | |
| Shares issued for financial consulting services | | | | | |
| (Note 13) | | $ | 11,003 | | | $ | - | |
| | | | | | | | | |
| See Notes to the Interim Consolidated Financial Statements |
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
1. | Financial Statement Presentation, Nature of Business, and Ability to Continue as a Going Concern |
While the information presented in the accompanying interim financial statements is unaudited, it includes all adjustments which are, in the opinion of management, necessary to present fairly the financial position, results of operations and cash flows for the interim periods presented. These interim financial statements follow the same accounting policies and methods of their application as the March 31, 2007 annual financial statements. They do not, however, conform in all respects to the requirements of Canadian generally accepted accounting principles (“GAAP”) for annual statements and as such these statements should be read in conjunction with our March 31, 2007 annual financial statements.
Valcent Products Inc. (the “Company”) was incorporated under the Alberta Business Corporations Act on January 19, 1996. The Company had previously been pursuing various business opportunities and effective March 24, 2004 discontinued those operations.
During the year ended March 31, 2006, the Company acquired a license to certain proprietary technology (Note 4). The development of these products has been the Company’s primary business. The Company considers its development stage operations to have commenced during fiscal 2006. During the year ended March 31, 2006, the Company also formed a wholly owned Nevada corporation, Valcent USA, Inc. to conduct operations in the United States. In turn Valcent USA, Inc. incorporated Valcent Management, LLC, a wholly-owned limited liability company under the laws of Nevada, to serve as the general partner in Valcent Manufacturing Ltd., a limited partnership also formed by Valcent USA, Inc. under the laws of Texas, wherein Valcent USA, Inc. serves as its limited partner.
During the year ended March 31, 2007, the Company incorporated Valcent Products EU Limited in England to conduct future anticipated operations in Europe.
These interim consolidated financial statements have been prepared in accordance with GAAP applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business.
These conditions raise substantial doubt about the Company’s ability to continue as a going concern. These interim consolidated financial statements do not include any adjustments that might arise from this uncertainty.
As at June 30, 2007, the Company had accumulated losses during the development stage of $15,605,138, total accumulated losses of $18,842,508 and a working capital deficiency of $3,815,856. The continuation of the Company is dependent upon the economic development and sales of the products underlying its product license as well as obtaining financing into the long term. While the Company is expending its best efforts to achieve the above plans, there is no assurance that any such activity will generate funds that will be available for operations.
2. | Significant Accounting Policies |
These financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). The significant accounting policies used in these interim consolidated financial statements are as follows:
| a) | Principles of consolidation |
These financial statements include the accounts of Valcent Products Inc., its wholly owned subsidiary Valcent USA, Inc., Valcent USA, Inc.’s wholly owned subsidiary Valcent Management, LLC and the limited partnership, Valcent Manufacturing Ltd., in which Valcent Management, LLC is the general partner and Valcent USA, Inc. is the limited partner, and Valcent Products EU Limited (together “the Company”). All inter-company transactions and balances have been eliminated.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
2. | Significant Accounting Policies (continued) |
| b) | Product development costs |
The Company expenses all costs related to product development until such time as the economic viability of the product is demonstrated and thereafter will capitalize and expense such development costs over the expected economic useful life of the product. Any revenue derived from the test marketing and development of products is netted against product development costs.
| c) | Cash and cash equivalents |
Securities with original maturities of three months or less are considered to be cash equivalents.
Inventories are valued at the lower of cost and net realizable value, with cost being determined on an average cost basis.
The Company amortizes its leasehold improvements on a straight-line basis over the life of the lease. Computer equipment and furniture and fixtures are depreciated under the declining balance method as to 30% and 20%, respectively. During the year of acquisition, depreciation is 50% of amounts otherwise determinable.
| f) | Foreign currency transactions and translation |
Amounts denominated in US dollars have been translated into Canadian dollars as follows:
| i. | Monetary assets and liabilities, at the year end exchange rates; |
| ii. | Non-monetary assets and liabilities, at exchange rates approximating those prevailing on the dates of the transactions; and |
| iii. | Revenue and expense items, at the average rate of exchange by quarter. |
Gains and losses arising from this translation of foreign currency are included in net loss.
The preparation of financial statements in conformity with Canadian generally accepted accounting principles 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 year. Significant estimates include the carrying amounts of inventories, product license, equipment and leaseholds, rates of amortization and depreciation, the allowance for doubtful accounts, the variables used to calculate the fair value of stock-based compensation, the variables used to calculate non-cash financing expenses, and the determination of the valuation allowance for future income tax assets. While management believes the estimates are reasonable, actual results could differ from those estimates and would impact future results of operations and cash flows.
Basic loss per share computations are based on the weighted average number of common shares issued and outstanding during the year. Diluted loss per share is calculated using the treasury stock method, however, has not been presented as the effects of outstanding options and warrants are anti-dilutive.
| i) | Stock based compensation |
The Company accounts for stock based compensation expense using the fair value based method with respect to all stock-based payments to directors, employees and non-employees, including awards that are direct awards of stock and call for settlement in cash or other assets, or stock appreciation rights that call for settlement by the issuance of equity instruments. Under this method, stock-based payments are recorded as an expense over the vesting period or when the awards or rights are granted, with a corresponding increase to contributed surplus under shareholders’ deficiency. When stock options are exercised, the corresponding fair value is transferred from contributed surplus to share capital.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
2. | Significant Accounting Policies (continued) |
| j) | Non-monetary consideration |
In situations where share capital is issued or received, as non-monetary consideration and the fair value of the asset received, or given up is not readily determinable, the fair market value (as defined) of the shares is used to record the transaction. The fair market value of the shares issued, or received, is based on the trading price of those shares on the date of the agreement to issue shares as determined by the Board of Directors.
| | | | | | Accumulated | | | | |
| | | | | | Depreciation / | | | Net Book | |
| | | Cost | | | Amortization | | | Value | |
| | | March 31, 2007 | | | March 31, 2007 | | | March 31, 2007 | |
| | | | | | | | | | |
| Leasehold improvements | | $ | 20,991 | | | $ | 11,180 | | | $ | 9,811 | |
| Computer equipment | | | 34,985 | | | | 13,798 | | | | 21,187 | |
| Furniture and fixtures | | | 51,941 | | | | 9,692 | | | | 42,249 | |
| Land | | | 275,240 | | | | - | | | | 275,240 | |
| | | $ | 383,157 | | | $ | 34,670 | | | $ | 348,487 | |
| | | | | | | | | | | | | |
| | | | | | | Accumulated | | | | | |
| | | | | | | Depreciation / | | | Net Book | |
| | | Cost | | | Amortization | | | Value | |
| | | June 30, 2007 | | | June 30, 2007 | | | June 30, 2007 | |
| | | | | | | | | | | | | |
| Leasehold improvements | | $ | 20,991 | | | $ | 13,279 | | | $ | 7,712 | |
| Computer equipment | | | 46,294 | | | | 16,908 | | | | 29,386 | |
| Furniture and fixtures | | | 60,113 | | | | 12,493 | | | | 47,620 | |
| Land | | | 275,240 | | | | - | | | | 275,240 | |
| | | $ | 402,638 | | | $ | 42,680 | | | $ | 359,958 | |
| | | | | | | | | | | | | |
On July 29, 2005, the Company completed a licensing agreement (the “Agreement”) for the exclusive worldwide marketing rights to a Skincare System, a Duster, a Garden Kit and a right of first offer on future products developed by Pagic LP (“Pagic”), formerly MK Enterprises LLC, a private company with a director in common.
In conjunction with the Agreement, the Company agreed to issue Pagic and its assigns 20 million common shares at a deemed cost of $1,306,075, based on the historical cost of the license, of which 11,611,975 shares were issued during the period ended June 30, 2006 and the balance during the period ended June 30, 2007. Included in the 20 million shares issued for the license were 9,428,205 shares that were issued to parties that became related parties to the Company.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
4. | Product License (continued) |
As part of the Agreement, the Company paid Pagic, during the period ended June 30, 2006, a $153,037 license fee and costs of $153,038 related to the development of the products. The Company also agreed to pay Pagic and its assigns royalties as to US$10 per Skincare System unit sold, US$2 per Duster sold and 4.5% of the net sales of the Garden Kit. In addition, the Company has agreed to pay a royalty of 3% of net sales related to ancillary product sales from these products. For future products developed by Pagic, which the Company elects to acquire the rights to, it has agreed to pay a royalty of 4.5% of net sales of the new product plus 3% of net sales from ancillary product sales (Note 7). In order to keep the products under license, the Company has agreed to a minimum royalty schedule per product for each of the Skincare System, Duster and Garden Kit and their related ancillary products of US$37,500 for the second license year beginning April 1, 2007 and US$50,000 per year thereafter. For any new products acquired they will be subject to minimum royalties of US$50,000 per year beginning April 1, 2007. To keep the overall master license in good standing the Company has agreed that beginning April, 1, 2007, in the second license year and hereafter, the total of royalties plus all other fees paid to Pagic shall be at least US$400,000 per year.
During the year ended March 31, 2007, the Company entered into two investor relations service agreements whereby it issued 160,000 common shares at a deemed cost of US$0.45 per share and 400,000 common shares at a deemed cost of US$0.64 per share. The deemed cost per share was determined by the trading price of the Company’s shares on the date the Company entered into the agreements. The amount in prepaid expenses represents the unearned portion of the prepaid service agreements.
Accounts receivable consists of $27,552 Value Added Tax and Goods and Services Tax collectible, trade receivables of $71,841, and $204,760 in amounts owed by Global Green related to the Company’s Joint Venture (subsequently collected).
7. | Global Green Joint Venture |
On October 2, 2006, the Company entered into a letter agreement with Pagic, West Peak Ventures of Canada Limited (“West Peak”) and Global Green whereby Global Green agreed to fund the next phase of the development of our High Density Vertical Bio-Reactor technology (the “GGS Agreement”). Pursuant to the GGS Agreement, the Company and Global Green established a commercial joint venture named “Vertigro”, in which Global Green has agreed to provide up to US$3,000,000 in funding to continue the research and development of the Bio-Reactor technology, construct a working prototype of the Bio-Reactor and develop the technology for commercial uses. The Company is obligated to provide product support, research and development, and the non-exclusive use of the Company’s warehouse and land near El Paso, Texas, as necessary for which Global Green has agreed to reimburse the Company as part of its US$3,000,000 commitment. Until such time as the joint venture has fully repaid the US$3,000,000, Global Green will have an 80% joint venture interest, leaving the Company with a 20% carried joint venture interest, both subject to an aggregate product license royalty of 0.9% to Pagic and West Peak. Once the joint venture has repaid Global Green the US$3,000,000, Global Green’s interest will be reduced to 70% and the Company will retain a 30% non-carried interest, both subject to an aggregate product license royalty of 4.5% to Pagic and West Peak.
As at June 30, 2007, Global Green had incurred and paid a total of US$3,000,000 in costs related to the GGS Agreement and at that date, the Joint venture had also further incurred an additional $409,520. Joint venture related costs exceeding the aggregate of US$3,000,000 are funded on a 50/50% basis by Global Green and the Company. As a result, the Company’s portion of amounts it has contributed in the amount of $204,760 has been capitalized.
On July 9, 2007, effective June 25, 2007, the parties to the GGS Agreement entered into the Vertigro Algae Stakeholders Letter of Agreement (the “Global Green Joint Venture”), which replaced the GGS Agreement. Pursuant to the new agreement, each of Global Green and the Company will hold a 50% interest in the Global Green Joint Venture, subject to an aggregate 4.5% royalty to Pagic and West Peak. The Global Green Joint Venture covers the Bio-Reactor and any subsequent related technologies for the commercial scale products of algae based biomass for all industrial commercial and retail applications including but not limited to bio-fuel, food, health, pharmaceutical, animal and agricultural feeds.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
As at June 30, 2007, inventories consisted of finished goods inventory of 10,877 units of Nova Skin care Systems with an aggregate value of $555,456 and raw materials and work in progress inventory of $746,800.
Details of the convertible notes are as follows:
| | | Three Months Ended June 30, 2007 | | | Year Ended March 31, 2007 | |
| | | | | | | |
| Opening balance, | | $ | 5,301129 | | | $ | 1,565,069 | |
| Issued | | | | | | | 4,772,962 | |
| Interest and penalties | | | 80,117 | | | | 600,206 | |
| Conversion component of convertible notes | | | | | | | (4,167,190 | ) |
| Debt discount | | | | | | | 2,530,082 | |
| Foreign exchange adjustment | | | (437,353 | ) | | | 0 | |
| Ending balance | | $ | 4,943,893 | | | $ | 5,301,129 | |
| | | | | | | | | |
Convertible Note Continuity:
| | | US $ | | | CND $ | |
| | | Balance | | | | | | Balance | | | Balance | |
| | | March 31, | | | Interest | | | June 30, | | | June 30, | |
| Date of Issue | | 2007 | | | | | | 2007 | | | 2007 | |
| | | | | | | | | | | | | |
| July/August 2005 (Note 9a) | | $ | 316,957 | | | $ | 3913 | | | $ | 320,870 | | | $ | 339,898 | |
| April 2006 (Note 9b) | | | 509,641 | | | | 10,473 | | | | 520,114 | | | | 550,957 | |
| April 2006 (Note 9c) | | | 81,169 | | | | 1,598 | | | | 82,767 | | | | 87,675 | |
| December 2006 (Note 9d) | | | 1,539,229 | | | | 29,918 | | | | 1,569,147 | | | | 1,662,197 | |
| January 2007 (Note 9e) | | | 2,144,316 | | | | 29,918 | | | | 2,174,234 | | | | 2,303,166 | |
| | | $ | 4,591,312 | | | $ | 75,820 | | | $ | 4,667,132 | | | $ | 4,943,893 | |
| A. | US$1,277,200 July – August 2005 Convertible Note |
To provide working capital for product development, during July and August, 2005, the Company issued one year, unsecured US$1,277,200 8% per annum convertible notes and stock purchase warrants whereby for each US$0.75 in convertible note purchased the holder received one class A warrant which will entitle the holder to purchase an additional common share at US$0.50 until July 25, 2008 and August 5, 2008 and one class B warrant which will entitle the holder to purchase an additional common share at US$1.00 until July 25, 2008 and August 5, 2008.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
9. | Convertible Notes (continued) |
The holders of the convertible notes may elect to convert the notes into common shares of the Company at the lesser of (i) 70% of the average of the five lowest closing bid prices for the common stock for the ten trading days prior to conversion and (ii) US$0.55. Accrued and unpaid interest may be converted into common shares of the Company at US$0.50 per share. The Company may, subject to notice provisions and the common shares trading above US$1.50 per share for more than twenty consecutive trading days, elect to payout the notes and interest due by paying 130% of the amount due under the notes plus interest. The common stock purchase warrants carry a “net cashless” exercise feature allowing the holder thereof, under certain limited circumstances, to exercise the warrants without payment of the stated exercise price, but rather solely in exchange for the cancellation of that number of common shares into which such warrants are exercisable (the “Cashless Conversion Feature”). As a result of the issuance of the warrants in conjunction with the convertible notes, the Company recorded a non cash financing expense of $1,328,337.
In conjunction with this financing, the Company paid consultants an amount equal to 10% of the gross proceeds, which was included in investor relations during the period ended March 31, 2007 and issued 425,735 common shares at a deemed value of $285,242. There are 255,440 finders A warrants outstanding, whereby the holders have the right to purchase 255,440 common shares at US$0.50 per share until August 5, 2008 and 425,733 finders B warrants whereby the holders shall have the right to purchase 425,733 common shares at US$0.75 per share until August 5, 2008. During the period ended March 31, 2006, convertible notes of US$999,700 and interest totaling US$150,122 were converted to 3,372,471 common shares. A total of US$82,200 in registration penalties incurred in the period ended March 31, 2007 were converted to a new convertible debenture in the same amount on April 6, 2006 (Note 9c).
| B. | US$551,666 April 2006 Convertible Note |
On April 6, 2006, the Company consummated a private offering transaction with and among a syndicated group of institutional investors, pursuant to which we issued, in the aggregate, US$551,666 in 8% per annum convertible notes and three year warrants to acquire (i) up to 735,555 shares of our common stock at a price per share of US$0.50, and (ii) up to an additional 735,555 shares of our common stock at a price per share of US$1.00. Subject to certain limitations, the principal amount of the notes, together with any accrued interest may be converted into shares of our common stock at the lesser of (i) 70% of the average of the five lowest closing bid prices for our common stock for the ten trading days prior to conversion, or (ii) US$0.55. The convertible notes carry a redemption feature which allows us to retire them, in whole or in part, for an amount equal to 130% of that portion of the face amount being redeemed, but only in the event that our common shares have a closing price of US$1.50 per share for at least twenty consecutive trading days and there has otherwise been no default. The common stock purchase warrants carry a Cashless Conversion Feature.
In conjunction with these private offering transactions, the Company paid consultants (i) US$55,166 cash, representing 10% of the gross proceeds realized, (ii) 183,886 shares of common stock, (iii) three-year warrants to purchase up to 110,320 shares of common stock at a price per share of US$0.50 and (iv) three year warrants to purchase up to 183,867 shares of common stock at a price per share of US$0.75. During the period ended March 31, 2007, convertible notes of US$148,670 and interest totaling US$86,422 totals were converted to 538,520 common shares.
| C. | US $82,200 April 2006 penalty Convertible Note |
On April 6, 2006, and in conjunction with certain private placements, we reached a verbal agreement with the group of institutional and other investors, wherein we agreed to convert US$82,200 in accrued penalties associated with the July 25, 2005 through August 5, 2005 convertible notes into US$82,200 convertible penalty notes carrying terms similar to the July 25, 2005 through August 5, 2005 convertible notes and an aggregate of 109,600 warrants.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
9. | Convertible Notes (continued) |
Each of these warrants entitles the holder to purchase additional common shares for three years at a price of US$0.75 per share. During the period ended March 31, 2007, a total of $24,363 in note principal note interest was converted into 56,166 common shares.
| D. | US$1,500,000 December 2006 Convertible Note |
On December 1, 2006, the Company accepted subscriptions of US$1,500,000 towards a private placement of 8% per annum convertible notes and three year warrants to acquire (i) up to an aggregate of 2,000,000 shares of our common stock at US$0.50 per share until December 1, 2009, and (ii) up to an additional 2,000,000 shares of our common stock at US$1.00 per share until December 1, 2009. Subject to certain limitations, the principal amount of the notes, together with any accrued interest may be converted into shares of our common stock at the lesser of (i) seventy percent (70%) of the average of the five lowest closing bid prices for our common stock for the ten trading days prior to conversion, or (ii) US$0.55. The convertible notes carry a redemption feature which allows us to retire them, in whole or in part, for an amount equal to 130% of that portion of the face amount being redeemed, but only in the event that our common shares have a closing price of US$1.50 per share for at least twenty consecutive trading days and there has otherwise been no default. The common stock purchase warrants may be exercised on a cashless basis.
| E. | US$2,000,000 January 2007 Convertible Note |
On January 29, 2007, the Company completed a private placement comprised of $2,000,000 convertible promissory notes. The convertible notes will mature on December 11, 2008 and carry interest at six percent (6%) per annum. The notes are convertible into “Units” at the note holder’s discretion at a conversion price of US$0.50 per Unit. Each “Unit” consists of one Valcent common share and one share purchase warrant to purchase an additional common share at US$0.70 per share until December 11, 2008. The notes and any accrued interest are callable by the Company at any time after December 11, 2007 by providing thirty days written notice to the note holders. Interest on the notes will be compounded annually and be cumulative until the earlier of either the date the Company achieves pre-tax earnings or the end of the term. At the discretion of the note holder, interest on the notes is payable in either cash or units at US$0.50 per unit. The Company is obligated to file a resale registration statement on the underlying securities within four months of closing which it has failed to do. As a result of the failure to file the registration statement the Company has recorded penalties of US$120,000 as of March 31, 2007.
In connection with this financing the Company has paid consultants US$108,000 in cash and issued 135,000 warrants exercisable at US$0.50 per unit, with each unit consisting of one common share and one share purchase warrant to purchase a further common share at US$0.70 per share until December 11, 2008.
| F. | Warrant Exercise Price Reduction and Registration Penalty Interest |
Certain of the July and August 2005 and the April 6, 2006 convertible notes contained registration rights whereby the Company agreed to pay a penalty of 2% for every thirty days after a required filing and registration effective dates plus a reduction in the warrant price of certain of the warrants issued of US$0.10. As a result of the Company not filing its registration statement until April 27, 2006, the Company incurred penalties which have been included in interest expense. An aggregate of 3,407,372 previously issued share purchase warrants relating to certain of the July and August 2005 and the April 6, 2006 convertible notes have reduced exercise prices from US$0.50, US$0.75, and US$1.00 to US$0.40, US$0.65, and US$0.90, respectively. The registration statement has subsequently been declared effective.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
10. | Related Party Transactions |
Amounts due from related parties are non interest bearing and have no specific terms of repayment. Related party transactions not disclosed elsewhere in these financial statements are as follows:
| a) | During the period ended June 30, 2007, the Company paid or accrued $74,652 (2006 $92,718) for product development, research, and consulting services provided by the Company’s President and director to his related company and incurred royalties payable of $4,027 (2006 - $0) pertaining to product sales; |
| b) | During the three months ended June 30, 2007, the Company accrued $9,000 (2006 - $6,000) for professional fees provided by the Company’s Chief Financial Officer and director and owed a total of $52,500 to this director as at June 30, 2007. At June 30, 2007, the Company also owed $57,364 to a company with this director in common; |
| c) | As of June 30, 2007 we have obtained aggregate unsecured loan advances in an amount totaling $749,578 from West Peak and its principal shareholder, who beneficially owns greater than 5% of our common shares; |
| d) | During the three months ended June 30, 2007, the Company incurred approximately $67,802 (2006 - $0) in fees and expenses to a private advertising firm with a director in common; and |
| e) | During the three months ended June 30, 2007, the Company paid $18,113 (2006 - $0) to a director of the Company for consulting services rendered. |
Commitments not disclosed elsewhere in these financial statements are as follows:
On June 28, 2005, Valcent Manufacturing, Ltd. leased office and development space in El Paso, Texas, under a three-year lease at a cost of US$3,170 per month. There are 11 months remaining on the lease as at June 30, 2007.
On December 12, 2006, the Company entered into a Public Relations Agreement with a third party to provide public relations services to the Company. The agreement requires the Company to issue 25,000 restricted common shares in advance of each quarter during the course of the agreement’s one year term for a total of 100,000 restricted common shares at a deemed price of US$0.45 per common share, the payment of approved expenses, and monthly fees ranging from US$4,250 to US$5,250 per month. During the three month period ended June 30, 2007, 25,000 shares were issued pursuant to this agreement and an additional 25,000 have been issued subsequently.
On April 1, 2007, the Company entered into an agreement with a third party to provide investor relations and financial services for an eight month term from April 1, 2007 through December 31, 2007. The agreement provides for the following:
a) payment of US$15,000;
b) US$3,000 in compensation per month payable quarterly;
c) a further US$2,000 payable monthly in common shares;
d) share options to purchase 500,000 shares at US$.60 exercise price that vest quarterly over a two year period; and
e) the issuance of 12,500 common shares at a deemed price of US$0.80 per share.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
At June 30, 2007, the Company’s long-term debt outstanding was as follows:
| | | June 30, 2007 | |
| Prime plus 0.25% (2007 -8.50%) bank loan repayable in monthly instalments of US $2,336 including interest, due September 28, 2011, secured by a first charge on land and $107,643 of cash | | $ | 189,702 | |
| Less: Current portion | | | 13,584 | |
| | | $ | 176,118 | |
Unlimited number of common shares without par value
Unlimited number of preferred shares without par value – None issued
| (b) | Issued and outstanding: |
The common share issuances consisted of the following transactions:
| | | Number of | | | | |
| | | Shares | | | Amount | |
Balance at March 31, 2006 | | | 15,787,835 | | | $ | 4,099,870 | |
| Product license purchase agreement | | | 8,388,025 | | | | 419,401 | |
| Consulting agreement with investor/public relations firms | | | 705,000 | | | | 460,614 | |
| Bonus to director | | | 100,000 | | | | 52,708 | |
| Private placement | | | 1,534,165 | | | | 1,028,266 | |
| Shares issued for financial consulting fees | | | 183,886 | | | | 107,681 | |
| Convertible debenture conversion of principle and interest | | | 3,967,157 | | | | 1,668,363 | |
Balance as of March 31, 2007 | | | 30,666,068 | | | | 7,836,903 | |
| Private placement | | | 2,113,332 | | | | 1,409,595 | |
| Conversion of convertible debenture | | | 111,293 | | | | - | |
| Consulting agreement with investor/public relations firms | | | 37,500 | | | | 23,381 | |
Balance as of June 30, 2007 | | | 32,928,193 | | | $ | 9,269,879 | |
| | | | | | | | | |
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
13. | Share Capital (continued) |
During the period ended June 30, 2007, the Company:
| i) | Completed a private placement of units whereby a total of 2,113,332 units were issued at US$0.60 per unit. Each unit consists of one common share and one-half common share purchase warrant to purchase an additional common share at US$0.75 for a two year term. |
Of the warrants issued, 833,333 expire on April 24, 2009, and 223,333 on May 24, 2009.
The Company paid consultants $6,160 in cash relating to the issuance.
| ii) | Issued 25,000 common shares at US$0.45 per common share pursuant to a contract whereby a Company is to provide public relations services to the Company for a term of one year (Note 11). |
| iii) | Issued 12,500 common shares at US$0.80 per common share pursuant to a contract whereby a Company is to investor relations and financial consulting services to the Company for a term of one year (Note 11); and |
| iv) | Issued 111,293 common shares relating to a convertible debenture conversion pertaining to a prior period. |
Details of the status of the Company's stock options as at June 30, 2007 are as follows:
| | | | | Weighted |
| | | | | Average |
| | | Number | | Exercise |
| | | of Options | | Price |
| | | | | |
| Options Outstanding, March 31, 2006 | | | 1,425,000 | | US$0.67 |
| Granted | | | 3,010,000 | | US$0.59 |
| Expired or Forfeited | | | (600,000 | ) | US$0.61 |
| Options Outstanding, March 31, 2007 and June 30, 2007 | | | 3,835,000 | | US$0.58 |
| Options Exercisable, June 30, 2007 | | | 3,135,000 | | US$0.58 |
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
13. | Share Capital (continued) |
| (c) | Stock options (continued) |
As at June 30, 2007 the following share purchase options were outstanding:
| | | US $ | | | | |
| | | Exercise | | | Number of Shares | |
| Expiry Date | | Price | | | June 30, 2007 | |
| | | | | | | |
| March 22, 2009 | | $ | 0.60 | | | | 500,000 | |
| November 10, 2009 | | $ | 0.60 | | | | 650,000 | |
| March 1, 2010 | | $ | 1.00 | | | | 75,000 | |
| April 9, 2010 | | $ | 0.80 | | | | 50,000 | |
| June 30, 2010 | | $ | 0.60 | | | | 260,000 | |
| February 21, 2011 | | $ | 0.57 | | | | 300,000 | |
| December 13, 2011 | | $ | 0.55 | | | | 1,550,000 | |
| December 13, 2011 | | $ | 0.60 | | | | 100,000 | |
| March 21, 2012 | | $ | 0.60 | | | | 350,000 | |
| | | | | | | | 3,835,000 | |
Pursuant to the Company’s 1996 Incentive Stock Option Plan (the “Plan”), as amended, a total of 10% of the Company’s issued common shares are reserved for the granting of stock options. The Plan provides that the terms of the options and the option price shall be fixed by the Directors, subject to any price restrictions or other requirements imposed by any exchange where the Company lists its common shares. The Plan also provides that no options shall be granted to any person except on the recommendation of the Board of Directors and that no option may be granted for a period in excess of five years. During the period ended June 30, 2006, the Company instituted a new stock option plan applicable to residents of the United States (the “US Plan”) whereby options may be issued under this plan to acquire up to an aggregate number of shares, which when combined with options granted under the Plan equal to 10% of the issued number of common shares. The terms of the options and the option price of the US Plan are to be fixed by the Directors, subject to a limitation that no one individual may be granted options to receive greater than 5% of the issued number of common shares.
On December 14, 2006, the Company replaced its existing Canadian and US stock option plans with a new single stock option plan (the “2006 Plan). The 2006 Plan allows for share options to be issued to company employees, directors, officers, and consultants on both a qualified and non-qualified basis. The aggregate number of shares of common stock as to which options and bonuses may be granted from time to time under the 2006 Plan shall not exceed 20% (the “Plan Maximum”) of the Company’s issued and outstanding shares of common stock. The Company’s new stock option plan provides that the terms of the options and the option prices shall be fixed by the board of directors or committee, and subject to the requirements of the exchange on which our common shares are traded, or any other governing regulatory body, at the time of exercise. Options granted shall expire after a period of five years or terminate three months after the recipient ceases to be our employee.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
13. | Share Capital (continued) |
| (c) | Stock options (continued) |
All options previously granted from the Company’s previous Plan and US Plan were acknowledged, ratified and form an equal number of option grants under like terms and conditions in the 2006 Plan. As at June 30, 2007, 3,835,000 options had been granted of which 3,135,000 share options had vested.
During the three months ended June 30, 2007, the Company:
| i) | Granted a consultant and a director/consultant, 700,000 share options exercisable at US$0.55 per share until December 13, 2011 under the non-qualified 2006 Plan, of which 475,000 have vested; |
| ii) | Granted employees and consultants 260,000 options exercisable at US$0.60 per share until June 30, 2010 of which all have vested; |
| iii) | Granted an employee 250,000 options exercisable at US$0.80 per share until April 9, 2010 of which 200,000 were forfeited and 50,000 have vested; |
| iv) | Granted employees, directors and consultants a total of 950,000 options exercisable at US$0.55 to US$0.60 per share until December 13, 2011 of which 850,000 have vested; |
| v) | Granted employees and consultants a total of 350,000 options exercisable at US$0.60 per share until March 21, 2012 of which all have vested; and |
| vi) | Granted a consultant a total of 500,000 options exercisable at US$0.60 per share until March 22, 2009 of which 75,000 will vest quarterly beginning on April 1, 2007. |
The Company applied the fair value method in accounting for its stock options granted to directors, officers and consultants by using the Black-Scholes option pricing model.
The stock-based compensation expense was $87,425 during the three months ended June 30, 2007 (2006 - $50,605). The fair value of stock options granted as above and the issue of warrants are calculated using the following weighted average assumptions:
| | 2007 | 2006 |
| | | |
| Expected life (years) | 2 - 4 | 1 – 5 |
| Interest rate | 4.64% | 4.19% |
| Volatility | 111.90% | 105.49% |
| Dividend yield | 0.00% | 0.00% |
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
13. | Share Capital (continued) |
In conjunction with the convertible notes and private placements, the Company issued various warrants to acquire common shares, (Notes 9 and 13). The Company’s share purchase warrants as at June 30, 2007 and March 31, 2006 and the changes are as follows:
| | | Weighted |
| | Number | Average |
| | of Shares | Price |
| | | |
| Warrants outstanding and exercisable, March 31, 2006 | 4,087,021 | US$0.69 |
| Granted | 7,666,795 | US$0.74 |
| Warrants outstanding and exercisable, March 31, 2007 | 11,753,816 | US$0.73 |
| Granted | 1,056,666 | US$0.75 |
| Warrants outstanding and exercisable, June 30, 2007 | 12,810,482 | US$0.73 |
The Company applies the fair value method using the Black-Scholes option pricing model in accounting for warrants. During the period ended June 30, 2007, 1,056,666 warrants were granted, which resulted in $286,257 as the fair value of the warrants recorded in share capital.
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
13. | Share Capital (continued) |
As at June 30, 2007 the following share purchase warrants were outstanding:
| Expiry Date | Exercise Price | Number of Warrants |
| | | | |
| | | | |
| July 25, 2008 Class A | US$0.50 | 526,660 | |
| July 25, 2008 Class A | US$0.40 | 913,332 | |
| July 25, 2008 Class B | US$1.00 | 526,660 | |
| July 25, 2008 Class B | US$0.90 | 913,332 | |
| July 25, 2008 Finders A | US$0.50 | 216,000 | |
| July 25, 2008 Finders B | US$0.75 | 360,001 | |
| August 5, 2008 Class A | US$0.50 | 262,932 | |
| August 5, 2008 Class B | US$0.75 | 262,932 | |
| August 5, 2008 Finders A | US$0.50 | 39,440 | |
| August 5, 2008 Finders B | US$0.75 | 65,733 | |
| April 6, 2009 Penalty Warrants | US$0.65 | 109,600 | |
| April, 2009 Class A | US$0.40 | 735,555 | |
| April, 2009 Class B | US$0.90 | 735,555 | |
| April, 2009 Finders A | US$0.50 | 110,320 | |
| April, 2009 Finders B | US$0.75 | 183,867 | |
| May 15, 2008 Class A | US$0.80 | 833,332 | |
| June 7, 2008 Class A | US$0.80 | 270,833 | |
| August 18, 2008 Class A | US$0.80 | 430,000 | |
| May 15, 2008 Finders A | US$0.80 | 66,666 | |
| June 7, 2008 Finders A | US$0.80 | 21,666 | |
| August 18, 2008 Finders A | US$0.80 | 34,400 | |
| December 11, 2008 Finders Unit | US$0.50 | 135,000 | |
| December 1, 2009 Class A | US$0.50 | 2,000,000 | |
| December 1, 2009 Class B | US$1.00 | 2,000,000 | |
| April 23, 2009 | US$0.75 | 833,333 | |
| May 24, 2009 | US$0.75 | 223,333 | |
| | | | |
| Total | | 12,810,482 | |
Valcent Products Inc.
Notes to the Interim Consolidated Financial Statements
Unaudited and Prepared by Management
(Expressed in Canadian Dollars)
13. | Share Capital (continued) |
The Company’s contributed surplus as at June 30, 2007 March 31, 2007 are as follows:
| | | June 30, 2007 | | | March 31, 2007 | |
| | | | | | | |
| Contributed surplus, beginning of year | | $ | 3,253,333 | | | $ | 1,663,067 | |
| Non-cash financing expense | | | - | | | | 463,125 | |
| Stock based compensation | | | 87,425 | | | | 1,127,141 | |
| | | | | | | | | |
| Contributed surplus, end of year | | $ | 3,340,758 | | | $ | 3,253,333 | |
Unless otherwise noted in these financial statements, the following events occurred after June 30, 2007:
On July 11, 2007, the Company issued 105,000 common shares and 52,500 common share purchase warrants relating to US$63,000 private placement for US$0.60 units. Each warrant allows the holder to purchase an additional common at US$0.75 per share for a 24 month term.
On August 10, 2007, the Company issued a convertible term promissory note in the amount of $650,000 to a third party. The convertible notes is due November 15, 2007 with interest at the rate of 6% with both interest and principle convertible at the option of the lender at the end of term into units at the US$0.60 per unit, with each unit convertible into one common share and one half share purchase warrant with each whole share purchase warrant exercisable at US$0.75 to purchase an additional common shares. The Company is required to register for trading the securities underlying the conversion features of this convertible note by February 10, 2008 on a best efforts basis without penalty.
Pursuant to an April 1, 2007 agreement with a third party to provide investor relations and financial services through December, 2007, on August 15, 2007, the Company issued, 9,677 common shares a price of $0.62 per share (Note 11).
On August 15, 2007, the Company issued 25,000 common shares at US$0.45 per common share pursuant to a January, 2007 contract for public relations services for a term of one year (Note 11).
19
