April 30, 2007
Mr. Larry Spirgel
Assistant Director
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Reliant Home Warranty Corporation
Form 10-KSB for Fiscal Year Ended December 31, 2006
Filed April 3, 2007
File No. 0-29827
Dear Mr. Spirgel:
This letter is in response to your comment letter dated April 23, 2007
concerning the above referenced filing for Reliant Home Warranty Corp. (the
"Company"). The following paragraphs address your comments. The paragraph
numbers cross reference the comments in your letter.
1. We supplementally confirm to you that there were no changes in our internal
control over financial reporting made during the fourth quarter
that materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. We will file an amended Form
10-KSB/A to disclose the aforementioned. Also, we will provide the future
disclosure required by 308(c) of Regulation S-B in future filings
2. We will file amended Form 10-KSB to include an audit opinion for the year
ended December 31, 2005.
3. We will file amended Form 10-KSB to identify on the face of each statement
that we are a development stage company.
4. We will file amended Form 10-KSB to label the loan payable on our balance
sheet as loan payable to "related party."
5. We will amend Form 10-KSB to comply with SFAS 91 in respect to mortgage
loan fees earned and related costs incurred. The revenue recognition,
accounting policy note on page F-7 will be revised to state that mortgage
loan fees and related loan costs are offset, and the net amount is deferred
and amortized over the lives of the loans. During 2006, the Company
received mortgage loan fees of $18,680 related to the closing of three
mortgage notes and incurred costs of an approximate equal amount to secure
loans to finance the mortgage notes. The 2006 statement of operations will
be revised to reduce revenues and operating expenses each by $18,680.
6. The fourth quarter write-off of the $4.3 million value assigned to the
warrant issued to Laurus was reflected in loan cost amortization expense
(debit equity account - Common Stock Purchase Warrants for $4,299,266 and
credit expense account - Loan Cost Amortization for $4,299,266). During the
second and third quarters of 2006, the Company had charged $5,356,034 to
amortization expense to completely write-off capitalized loan costs related
to the Laurus financing. The fourth quarter write-off to reduce
amortization expense was appropriate as the issuance of the warrant in June
2006 was deemed a nullity. We will amend Form 10-KSB to indicate in note 4
on page F-11 where the write-off has been reflected.
A copy of our proposed amended Form 10-KSB/A with marked changes is enclosed for
your review.
In connection with our responses to your comments, the Company acknowledges
that: the Company is responsible for the adequacy and accuracy of the disclosure
in this filing; staff comments or changes to disclosure in response to staff
Mr. Larry Spirgel
April 30, 2007
Page 2
comments do not foreclose the Commission from taking any action with respect to
the filing; and the Company may not assert staff comments as a defense in any
proceedings initiated by the Commission or any person under the federal
securities laws of the United States.
Please call me at 416-445-9500 if you have any questions.
Sincerely,
/s/ Steve Hamilton
- -------------------------
Steve Hamilton
Chief Financial Officer
Enclosure.
*****DRAFT FOR SEC REVIEW - NOT AN OFFICIAL FILING*****
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
RELIANT HOME WARRANTY CORPORATION
FORM 10-KSB/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 2006
-----------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from __________ to ____________
Commission files number 000-29827
---------
RELIANT HOME WARRANTY CORPORATION
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
Florida 65-0656668
- ------------------------------- -----------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
Suite 250, 350 Bay Street
Toronto, Ontario M5H 2S6
------------------------------------
(Address of principal executive offices)
416 445-9500
---------------------------------------
(Issuer's telephone number)
APPICABLE ONLY TO CORPORATE ISSUERS
STATE THE NUMBER OF SHARES OUTSTANDING OF EACH OF THE ISSUER'S CLASSES OF COMMON
EQUITY, AS OF THE LATEST PRACTICABLE DATE: March 31, 2007 - 97,849,002
---------------------------
Explanatory Note
This Amendment No. 1 on Form 10-KSB/A amends the Annual Report of Reliant Home
Warranty Corporation for the year ended December 31, 2006, originally filed with
the Securities and Exchange Commission on April 3, 2007. The Company is filing
this amendment to:
1. Provide addition disclosure that there were no changes in our internal
control over financial reporting that occurred during the fourth quarter
that has materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting,
2. Include an audit opinion for the year ended December 31, 2005.
3. Identify on the face of each statement that we are a development stage
company.
4. Label our loan payable on our balance sheet as loan payable to "related
party."
5. Revise the revenue recognition, accounting policy note 2 on page F-7 to
state that in accordance with FAS 91, mortgage loan fees and related loan
costs are offset, and the net amount is deferred and amortized over the
lives of the loans, and revise the 2006 statement of operations to reduce
revenues and operating expenses each by $18,680.
6. Indicate in note 4 on pg F-11 that the fourth quarter write-off of the
$4,299,266 value assigned to the warrant issued to Laurus was reflected in
loan cost amortization expense.
TABLE OF CONTENTS
Page
PART I
Item 1 Description of the business 3
Item 2 Description of Real Property 9
Item 3 Legal Proceeding 9
Item 4 Submission of matters to vote of security holders 9
PART II
Item 5 Market for Common Equity, Related Stockholders Matters & Small Business 10
Issue Purchases of Equity Securities
Item 6 Management's Discussion & Analysis or Plan of Operation 11
Item 7 Financial Statements 12
Item 8 Changes & Disagreements with Accountants on Accounting & Financial 12
disclosure
Item 8A Control & Procedures 12
Item 8B Other Information 13
PART III
Item 9 Directors and Executive Officers of Registrant 13
Item 10 Executive Compensation 16
Item 11 Security Ownership of Certain Beneficial Owners and Management and Related 17
Stockholder Matters
Item 12 Certain Relationship and Related Transactions 18
Item 13 Exhibits 18
Item 14 Principal Accountant Fees and Service 19
-2-
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements" within the meaning of Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934. For example, statements included in this report regarding our financial
position, business strategy and other plans and objectives for future
operations, and assumptions and predictions about future product demand, supply,
manufacturing, costs, marketing and pricing factors are all forward-looking
statements. When Reliant uses words like "intend," "anticipate," "believe,"
estimate," "plan" or "expect," Reliant is making forward-looking statements.
Reliant believes that the assumptions and expectations reflected in such
forward-looking statements are reasonable, based on information available to
Reliant on the date hereof, but Reliant cannot assure you that these assumptions
and expectations will prove to have been correct or that we will take any action
that we may presently be planning. Reliant has disclosed certain important
factors that could cause Reliant's actual results to differ materially from
Reliant's current expectations elsewhere in this report. You should understand
that forward-looking statements made in this report are necessarily qualified by
these factors. Reliant is not undertaking to publicly update or revise any
forward-looking statement if Reliant obtains new information or upon the
occurrence of future events or otherwise.
PART I
ITEM 1 DESCRIPTION OF BUSINESS
Company History
Reliant Home Warranty Corporation ("the Company") was incorporated in the State
of Florida on December 18, 1995 as Ronden Vending Corp. On December 24, 1996,
the Company incorporated a wholly owned subsidiary called Ronden Acquisition
Inc, a Florida corporation. Ronden Acquisition, Inc then merged with Video Home
Shopping, Inc., (a Tennessee corporation), and Ronden Acquisition, Inc. was the
surviving Florida Corporation. In 1996, Video Home Shopping, Inc. operated a
network marketing and distribution business which offered a wide range of
products and services to consumers through the medium of video tape. Subsequent
to the merger the Company suspended the network marketing and distribution
operations of Video Home Shopping, Inc of Tennessee.
On January 9, 1997, articles of merger were filed for the Company as the
surviving corporation of a merger between the Company and its wholly owned
subsidiary Ronden Acquisition, Inc. This step completed the forward triangular
merger between Video Home Shopping, Inc., Ronden Acquisition, Inc. and the
Company.
On January 9, 1997, articles of amendment were filed to change the name of the
Company from Ronden Vending Corp to VHS Network Inc (VHSN). On April 9, 1997,
the Company incorporated VHS Acquisition, Inc. as a wholly owned subsidiary.
In April 1997, the Company was restructured by way of a reverse take-over
involving its wholly owned subsidiary, VHS Acquisition, Inc., a Florida company,
and VHS Network, Inc., a Manitoba and Canadian controlled Private Corporation.
On April 12, 2000, the Company acquired all the outstanding common shares of
China eMall Corporation, an Ontario private company. This represented a 100%
voting interest in China eMall Corporation. The Company functioned as an
-3-
e-commerce company that provided Internet marketing and information services to
facilitate trade between Chinese and western businesses and consumers. On
September 5, 2003, the Company divested its interest in China email by selling
all the outstanding common shares of China email for a nominal amount ($2.00)
On May 6, 2001, the Company entered into an agreement and plan of reorganization
(the "Agreement") with Branson Holdings, Inc. ("Branson") to acquire all the
issued and outstanding shares of Branson. On July 26, 2001 VHSN terminated its
agreement with Branson.
On December 1, 2001, the Company acquired all the outstanding common shares of
TrueNet Enterprise Inc., an Ontario private company. On September 22, 2003, the
Company changed its name to Dialex Minerals Inc. and completed a reverse split
of its issued and outstanding common shares on the basis of ten (10) common
shares for one (1) new common share.
On February 9, 2004, the Company completed a transaction acquiring all the
outstanding shares of Condor Diamond Corp. an Ontario private company.
On February 2, 2005, pursuant to a Stock Exchange Agreement and a registration
statement filed on Form 14-3 with the Securities and Exchange Commission, the
Company changed its name from Dialex Minerals Inc. to Reliant Home Warranty
Corporation. The Company undertook a reverse split of its outstanding common
shares on the basis of one (1) new share for twenty-two (22) old shares thereby
reducing its outstanding common shares from 44,438,786 to 2,019,945.
On March 16, 2005, Sandro Sordi in Trust acquired control of the Company, by
acquiring a majority of its issued and outstanding shares through the execution
of a share purchase agreement with Condor Gold Corp and RTO Zarex Ltd.
Effective March 23, 2005 and prior to the approval of the Stock Exchange
Agreement, the former directors of the Corporation, Alexander Stewart, Wallace
Stonehouse, Kirk Boyd, Stephen Stewart and Neil Novak, resigned upon the
appointment of new directors, Kevin Hamilton, Valeri Guilis, Boyd Soussana and
the Honorable John Roberts. Paul Burden became a Director in April, 2006. On
March 24, 2005, pursuant to the Stock Exchange Agreement, The BSA Group Limited
("BSA"), in trust for the shareholders of 1604494 Ontario Inc., an Ontario
private company, acquired control of the Company by acquiring from treasury
76,000,000 shares of the Company in exchange for all of the issued and
outstanding shares of 1604494 Ontario Inc. The total amount of issued and
outstanding shares in the Company as a result increased to 78,019,945.
Coincident with the establishment of its home warranty insurance business, the
Company divested all of issued and outstanding shares, of Condor Diamond Corp.,
the Company's wholly-owned subsidiary, to Condor Gold Corp., in consideration of
the return of any and all liabilities owing by the Company to Condor Gold Corp.
On April 21, 2005, the Company entered into a Letter of Intent with Creditorlife
Inc respecting the comprehensive marketing of the Company's proprietary line of
products.
On May 21, 2005, the Company entered into a comprehensive Letter of Intent with
Brit Insurance respecting the full reinsurance by Brit of the Company's range of
products.
On June 20, 2005, the Company entered into a comprehensive Letter of Intent with
Dundee Securities respecting Dundee's acting as the Company's fiscal advisor.
-4-
On August 26, 2005, the board of Directors of the Corporation accepted the
resignation of its President and Chairman Kevin Hamilton and appointed one of
its existing directors, Boyd Soussana, as its new President and CEO.
On January 1, 2006, the board of Directors of the Corporation accepted the
resignation of its Treasurer and Director, Val Guilis, and appointed Steve
Hamilton as its Treasurer and Director.
In April 2006, the Board of Directors of the Corporation appointed Paul Burden
as one of its Directors.
OPERATIONS MANAGEMENT DISCUSSION AND ANALYSIS
The Company has changed the nature of its business and now is preparing to
operate a fully integrated mortgage enterprise.
The Company used the 24 month period ending December 31, 2006 to further develop
and ultimately complete its proprietary in house computerized residential
mortgage documentation and processing systems. Work is now complete. This
intensive effort resulted in an array of one time legal accounting, investment
advisory costs.
Meetings were held throughout 2006 with Brit Insurance in order to finalize and
adapt their highly successful underwriting and risk management business model to
the North American legal and residential mortgage environment. This process is
now complete. The Company incorporated and organized its wholly owned insurance
subsidiary Reliant Insurance SCC in Barbados during 2005. It is presently
seeking to capitalize the subsidiary. Its registration with Barbadian
authorities has been granted on a conditional basis. Launch of the Company's
programs is expected during the second quarter of 2007. First revenue is
expected to be generated at that time.
The Company expanded its administrative staff and relocated its' operational and
executive offices to 350 Bay Street, Toronto.
GOALS AND OBJECTIVES
The Company is engaged in marketing a series of proprietary non-prime mortgage
suite of products.
CASH REQUIREMENTS
The Company intends to meet its cash requirements through a combination of
operational cash flow as well as sales of its securities.
RISK FACTORS
An investment in the Company's common stock is speculative in nature and
involves a high degree of risk. One should carefully consider the following
risks and the other information contained in this prospectus before investing in
the common stock offered hereby. The price of the Company's common stock could
-5-
decline due to any of these risks, and one could lose all or part of an
investment. You also should refer to the other information included in this
prospectus, including the financial statements and related notes.
If any of the events described below were to occur, the Company's business,
prospects, financial condition or results of operations or cash flow could be
materially adversely affected. When it is said that something could or will have
a material adverse effect on it, it means that it could or will have one or more
of these effects.
THE COMPANY HAD OPERATING LOSSES IN THE FISCAL YEARS ENDED DECEMBER 31, 2005 AND
2006.
The Company had a net loss of $3,430,343 for the year ended December 31, 2006
(2005-$938,752). This raises doubt as to the Company's ability to continue as a
going concern. Its operations are subject to the risks and competition inherent
in the establishment of a business enterprise. There can be no assurance that
future operations will be profitable. The Company may not achieve its business
objectives and the failure to achieve such goals would have an adverse impact on
it.
THE COMPANY WILL NEED TO RAISE ADDITIONAL FUNDS IN THE FUTURE FOR ITS OPERATIONS
AND IF IT IS UNABLE TO SECURE SUCH FINANCING, IT MAY NOT BE ABLE TO SUPPORT ITS
OPERATIONS.
It will need additional funds to develop its operations. It may seek additional
capital through
o an offering of its equity securities,
o an offering of debt securities, or
o by obtaining financing through a bank or other entity.
The Company has not established a limit as to the amount of debt it may incur
and it has not adopted a ratio of its equity to debt allowance. If it needs to
obtain additional financing, the financing may not be available from any source,
or may not be available on terms acceptable to it. Any future offering of
securities may not be successful. The Company may not be able to continue to
operate if it is unable to obtain additional capital when needed.
THE LOSS OF KEY EMPLOYEES MAY ADVERSELY AFFECT THE COMPANY'S GROWTH OBJECTIVES.
The Company's success in achieving its growth objectives depends upon the
efforts of its senior management. Loss of the services of any of these
individuals may have a material adverse effect on its business, financial
condition and results of operations. The Company can give no assurance that it
will be able to maintain and achieve its growth objectives should it lose any or
all of these individuals' services.
RELIANT HAS LIMITED EXPERIENCE SELLING OR MARKETING PROGRAMS.
Significant capital expenditures, management resources and time will be required
to establish and develop an in-house marketing and sales force with technical
expertise. It cannot be assured that Reliant will be able to establish or
maintain relationships with third party collaborators or develop in-house sales
and distribution capabilities. To the extent that Reliant depends on third
parties for marketing and distribution, any revenues Reliant receives will
depend upon the efforts of such third parties, as well as the terms of its
-6-
agreements with such third parties, which cannot be predicted at this stage of
development. There is no assurance that such efforts will be successful. In
addition, Reliant cannot assure that it will be able to market and sell its
programs in the United States or overseas.
DEVELOPMENTS BY COMPETITORS MAY RENDER OUR PRODUCTS OR TECHNOLOGIES OBSOLETE OR
NON-COMPETITIVE.
Reliant will compete against fully integrated insurance companies and smaller
companies that are collaborating with larger insurance companies and government
agencies, such as CHMC. In addition, many of these competitors, either alone or
together with their collaborative partners, operate larger development programs
or have substantially greater financial resources than Reliant does, as well as
more experience in:
o developing programs;
o undertaking pre-launch testing and other trails;
o obtaining regulatory approvals;
o launching, marketing and selling similar programs.
Large insurance companies pursuing different but related fields represent
substantial competition. Many of these organizations have substantially greater
capital resources, larger marketing staffs, longer history in obtaining
regulatory approvals than Reliant does. These organizations also compete with
Reliant to attract qualified personnel, parties for acquisitions, joint ventures
or other collaborations.
THE COMPANY MAY, IN THE FUTURE, ISSUE ADDITIONAL SHARES OF ITS COMMON STOCK
WHICH WOULD REDUCE INVESTORS PERCENT OF OWNERSHIP AND MAY DILUTE ITS SHARE
VALUE.
The Company's Certificate of Incorporation authorizes the issuance of
200,000,000 shares of common stock, par value $.001 per share, and 25,000,000
shares of preferred stock. The future issuance of all or part of its remaining
authorized common stock may result in substantial dilution in the percentage of
its common stock held by then existing shareholders. The Company may value any
common or preferred stock issued in the future on an arbitrary basis. The
issuance of common stock for future services or acquisitions or other corporate
actions may have the effect of diluting the value of the shares held by its
investors, and might have an adverse effect on any trading market for its common
stock.
-6-
SHARES ELIGIBLE FOR FUTURE SALE MAY ADVERSELY AFFECT THE MARKET.
As of December 31, 2006, the Company had 88,849,002 shares of its Common Stock
issued and outstanding 25,933,844, of which were free trading. The balance is
restricted from trading being deemed part of a "Control Block" of the Company.
Rule 144 provides, in essence, that a person holding "restricted securities" for
a period of one year may sell only an amount every three months equal to the
greater of (a) one percent of a company's issued and outstanding shares, or (b)
the average weekly volume of sales during the four calendar weeks preceding the
sale. The amount of "restricted securities" which a person who is not an
affiliate of our company may sell is not so limited, since non-affiliates may
sell without volume limitation their shares held for two years if there is
adequate current public information available concerning our company. In such an
-7-
event, "restricted securities" would be eligible for sale to the public at an
earlier date. The sale in the public market of such shares of Common Stock may
adversely affect prevailing market prices of our Common Stock.
As of March 6, 2006, approximately 20,940,000 of the Company's shares of Common
Stock ceased to be deemed "restricted securities" under Rule 144 and became free
trading. As of March 1, 2006, the Company issued an additional 8,000,000 shares
of free trading Common Stock to two unrelated parties pursuant to an S-8 filed
with the Securities and Exchange Commission.
SINCE THE COMPANY HAS NOT PAID ANY DIVIDENDS ON ITS COMMON STOCK AND DOES NOT
INTEND TO DO SO IN THE FORESEEABLE FUTURE, A PURCHASER OF ITS COMMON STOCK WILL
ONLY REALIZE AN ECONOMIC GAIN ON HIS OR HER INVESTMENT FROM AN APPRECIATION, IF
ANY, IN THE MARKET PRICE OF THE COMPANY'S COMMON STOCK.
The Company has never paid, and has no intentions in the foreseeable future to
pay, any cash dividends on its common stock. Therefore an investor in its common
stock, in all likelihood, will only realize a profit on its investment if the
market price of the Company's common stock increases in value.
THE MARKET PRICE OF RELIANT COMMON STOCK MAY FLUCTUATE SIGNIFICANTLY.
The market price of Reliant's common stock may fluctuate significantly in
response to factors, some of which are beyond its control, such as:
o the announcement of new programs or program enhancements by Reliant's
competitors; o developments concerning regulatory approvals; o variations in
Reliant's and Reliant's competitors' results of operations; o changes in
earnings estimates or recommendations by securities analysts o developments in
the general insurance or mortgage industry.
Further, the stock market, in general, and the market for general insurance
companies, in particular, has experienced extreme price and volume fluctuations.
Continued market fluctuations could result in extreme volatility in the price of
Reliant's common stock, which could cause a decline in the value of Reliant's
common stock. One should also be aware that price volatility might be worse if
the trading volume of Reliant's common stock is low. Reliant has not paid, and
do not expect to pay, any cash dividends because Reliant anticipates that any
earnings generated from future operations will be used to finance Reliant's
operations and as a result, one will not realize any income from an investment
in Reliant common stock until and unless one sells ones shares at a profit.
TRADING OF RELIANT'S COMMON STOCK IS LIMITED.
Trading of Reliant's common stock is currently conducted on the National
Association of Securities Dealers' Over-the-Counter Bulletin Board, or "OTC-BB."
The liquidity or Reliant's securities has been limited, not only in terms of the
number of securities that can be bought and sold at a given price, but also
through delays in the timing of transactions and reduction in security analysts;
and the media's coverage of Reliant.
-8-
These factors may result in lower prices for Reliant's common stock than might
otherwise be obtained and could also result in a larger spread between the bid
and asked prices for Reliant's common stock. Currently, there are approximately
110 holders of record of Reliant's common stock.
THE APPLICATION OF THE "PENNY STOCK REGULATION" COULD ADVERSELY AFFECT THE
MARKET PRICE OF THE COMPANY'S COMMON STOCK
The Company's securities may be deemed a penny stock. Penny stocks generally are
equity securities with a price of less than $5.00 per share other than
securities registered on certain national securities exchanges or quoted on the
NASDAQ Stock Market, provided that current price and volume information with
respect to transactions in such securities is provided by the exchange or
system. Our securities may be subject to "penny stock rules" that impose
additional sales practice requirements on broker-dealers who sell such
securities to persons other than established customers and accredited investors
(generally those with assets in excess of $1,000,000 or annual income exceeding
$200,000 or $300,000 together with their spouse). For transactions covered by
these rules, the broker-dealer must make a special suitability determination for
the purchase of such securities and have received the purchaser's written
consent to the transaction prior to the purchase. Additionally, for any
transaction involving a penny stock, unless exempt, the "penny stock rules"
require the delivery, prior to the transaction, of a disclosure schedule
prescribed by the Commission relating to the penny stock market. The
broker-dealer also must disclose the commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements must be sent disclosing recent price
information on the limited market in penny stocks. Consequently, the "penny
stock rules" may restrict the ability of broker-dealers to sell the Company's
securities and may have the effect of reducing the level of trading activity of
its common stock in the secondary market. The foregoing required penny stock
restrictions will not apply to the Company's securities if such securities
maintain a market price of $5.00 or greater. The Company can give no assurance
that the price of its securities will reach or maintain such a level.
UNCERTAINTY AS TO THE CONTINUATION OF THE COMPANY AS A GOING CONCERN
The audited financial statements of the Company for the fiscal year ended
December 31, 2006, reflect an accumulated net loss of $4,377,550. These
conditions raise substantial doubt about the Company's ability to continue as a
going concern if sufficient additional funding is not acquired or alternative
sources of capital developed to meet the Company's working capital needs.
ITEM 2 DESCRIPTION OF REAL PROPERTY
Reliant does not own any real property. Reliant currently works out of rented
office space located at Suite 250, 350 Bay Street, Toronto. Reliant believes
that this arrangement is adequate for its current and immediately foreseeable
operating needs. Reliant does not have any policies regarding investments in
real estate, securities or other forms of real or personal property outside of
that required to carry on its business operations.
-9-
ITEM 3 LEGAL PROCEEDINGS
From time to time, Reliant may be involved as a plaintiff or defendant in
various legal actions arising in the normal course of business. Reliant does not
anticipate any material liability as a result of such litigation.
ITEM 4 SUBMISSIONS OF MATTERS TO VOTE OF SECURITY HOLDERS
NONE
PART II
ITEM 5 MARKETS FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND SMALL
BUSINESS ISSUER PURCHASES OF EQUITY SECURITIES
MARKET INFORMATION
Reliant's common stock has been quoted on the OTC Bulletin Board under the
symbol "RHWC" since February 14, 2005, prior to which, its securities were
traded on the OTC Bulletin Board under the symbol "DLXM". Prior to which, they
traded on the National Quotation Bureau's Pink Sheets. The following table sets
forth the range of high and low bid quotations of the Company's common stock for
the periods indicated. The prices represent inter-dealer quotations, which do
not include retail markups, markdowns or commissions, and may not represent
actual transactions.
Quarter High $ Low $
- ------- ------ -----
Fiscal Year - 2005
First Quarter* 0.880 0.100
Second Quarter* 0.870 0.100
Third Quarter 0.570 0.270
Fourth Quarter 0.510 0.210
Fiscal Year - 2006
First Quarter 0.840 0.140
Second Quarter 0.350 0.150
Third Quarter 0.180 0.060
Fourth Quarter 0.290 0.090
* Before reverse stock split
As of March 31, 2006 Reliant had 97,849,002 of its common stock outstanding. The
number of registered holders of record of common shares was approximately 167.
-10-
DIVIDENDS
Reliant has never declared or paid a cash dividend on its capital stock. Reliant
intends to retain future earnings, if any, to finance the expansion of its
business and does not expect to declare or pay any cash dividends in the
foreseeable future.
POST PERIOD EVENT
During January 2007, the company issued 9,000,000 free trading Common shares
from its treasury pursuant to the exemption from share registration provided by
Section SB-8 of the Securities Act 1933 to Julian Brown, a Bahamian resident &
consultant. The common shares so issued were in consideration of services
rendered and to be rendered by Mr. Brown pursuant to consulting agreement
entered into by the Company and Mr. Brown. Mr. Brown provided a combination of
consulting, marketing and technical support services to the Company on respect
of the launch of its activities in the Caribbean basis and South America.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
General
The following discussion is intended to provide an analysis of Reliant's
financial condition and should be read in conjunction with Reliant's audited
financial statements and the related footnotes. The matters discussed in this
section that is not historical or current facts deal with potential future
circumstances and developments. Such forward-looking statements include, but are
not limited to, the development plans for the Company's growth, trends in the
results of the Company's development, anticipated development plans, operating
expenses and the Company's anticipated capital requirements and capital
resources. The Company's actual results could differ materially from the results
discussed in the forward-looking statements.
Going Concern
Reliant is in the process of developing, and exploiting its proprietary
financial systems and "know how". The Company has not yet generated much revenue
or any profit from its operations. Its continued existence and its ability to
continue as a growing concern are dependent upon its ability to obtain
additional capital or debt to fund its operations.
Results of Operations for the Years Ended December 31, 2006 and 2005
We have a history of operating losses and virtually no revenue from operations.
We continued to develop our proprietary home warranty program which we plan to
launch during the next fiscal year. Operating expenses increased from $128,752
for 2005 to $3,430,343 for 2006. During 2006, we incurred significant
consulting, legal and other operating expenses related to the Laurus deal and
developing our mortgage program. In addition, interest expense totaled $124,261
for 2006. Our 2005 net loss of $933,417 relates primarily to discontinued
operations of $810,000. Since our inception, we have accumulated losses of
$4,377,550. All non-essential costs have been eliminated in an effort to reduce
operating losses.
-11-
Liquidity and Capital Resources
Our principal financing sources have been through the issuance of common stock
and advances and loans from related parties and others. During 2006, loan
proceeds totaled $1,552,133 and stock issuance proceeds totaled $1,109,476.
These cash inflows were offset by cash outflows of $1,958,748 for operations,
$457,137 for mortgage loans and $6,358 for loan repayments. For 2005, loan
proceeds totaled $82,004 and $76,501 was used in operations.
At December 31, 2006, we had a working capital deficit of $1,481,078 compared to
a working capital deficit of $156,372 at December 31, 2005.
Critical Accounting Policies and Estimates
The critical accounting policies used by the Company are described in Note 2 to
the financial statements. The preparation of our financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
financial statement date and the reported amounts of sales and expenses during
the reporting periods. Actual amounts could differ material from those
estimates.
Recent Accounting Pronouncements
Recent accounting pronouncements that may impact the Company are disclosed in
Note 2 to the financial statements.
Off-Balance Sheet Arrangements
None.
ITEM 7. FINANCIAL STATEMENTS
Our financial statements are filed herewith immediately following the signature
pages.
ITEM 8 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
NONE
ITEM 8A CONTROLS & PROCEEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains a system of controls and procedures designed to provide
reasonable assurance as to the reliability of the financial statements and other
disclosures included in this report, as well as to safeguard assets from
unauthorized use or disposition. Within 90 days prior to the filing of this
report, the Company's Chief Executive Officer and Chief Financial Officer have
reviewed and evaluated the effectiveness of the design and operation of the
Company's disclosure controls and procedures with the assistance and
participation of other members of management. Based upon that evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are effective for
gathering, analyzing and disclosing the information the Company is required to
-12-
disclose in the reports it files under the Securities Exchange Act of 1934
within the time periods specified in the SEC's rules and forms.
CHANGES IN INTERNAL CONTROLS
The Company has not made any changes to its internal control during the fourth
quarter that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting. The Company has not
identified any significant deficiencies or material weaknesses or other factors
that could significantly affect these controls, and therefore, no need for
corrective action to be taken.
ITEM 8B OTHER INFORMATION
None
PART III
ITEM 9 DIRECTORS, EXECUTIVE OFFICERS, OF REGISTRANT
Directors, Executive Officers, Promoters, and Control Persons
Reliant's directors and executive officers as at March 31, 2007, are as follows:
Name Age Title
- ---- --- -----
Boyd Soussana 45 President, CEO, Director
Hon. John Roberts 73 Director
Paul Burden 52 Director and CFO
Stephen Hamilton 53 Senior Vice President
Reliant's directors will hold office until the next annual meeting of The
Company or until their successors are duly elected and qualified. Reliant's
executive officers serve at the pleasure of the Board of Directors. Set forth
below is a summary description of the principal occupation and business
experience of Reliant's directors and executive officers for at least the last
five years.
Boyd Soussana President Director
- ------------- ------------------
Founder of Creditor Life, Chairman, CEO, Director of several Public and private
corporations
The Honourable John Roberts P.C. Director
- -------------------------------- --------
Former Secretary of State of Canada, Privy Counselor, Doctor of Philosophy
(Ph.D), Director of several public companies and not for profit entities
Paul Burden Chief Financial Officer Director
- ----------- --------------------------------
Steven Hamilton Senior Vice President
- --------------- ---------------------
Former banker and consumer loans officer
Kevin Hamilton Former CEO Director
- -------------- -------------------
Founder of Company, Developer of Real Estate in Eastern Canada, Retired Officer
in Canadian Forces, resigned as an officer and director in May of 2005.
-13-
Val Guilis resigned as an officer and director on January 1, 2006.
CHANGES IN SECURITIES
On September 5, 2003, the Company announced that it would conduct a reverse
split of its issued and outstanding shares on the basis of 10 common shares for
one new common share. The Company at that date had 37,345,268 common shares
issued and outstanding, after the reverse split there were 3,734,526 common
shares issued and outstanding. On February 9, 2004, the Company issued
34,000,000 common shares for the acquisition of 100% of the issued and
outstanding common shares of Condor Diamond Corp.
On March 3, 2004, the Company authorized the issuance of 6,004,426 S-8 shares
pursuant to debt settlement agreements totaling $428,875. On February 2, 2005,
Company undertook a reverse split of its outstanding common shares on the basis
of one (1) new share for twenty-two (22) old shares reducing its outstanding
common shares from 44,438,786 to 2,019,945 prior to the acquisition of 1604494
Ontario Inc.
On March 24, 2005, the Company issued 76,000,000 shares for the acquisition of
100% of the issued and outstanding common shares of 1604494 Ontario Inc., an
Ontario private company, and pursuant to a Stock Exchange Agreement (the "Stock
Exchange Agreement"), The BSA Group Limited ("BSA"), in trust, acquired control
of the Company, Reliant Home Warranty Corporation by acquiring from treasury
76,000,000 shares of the Corporation in exchange for all of the issued and
outstanding shares of 1604494 Ontario Inc it held in trust. As of that date, the
Company has a total of 78,019,945 issued and outstanding common shares.
Therefore the shareholders of 1604494 Ontario Inc. have acquired ninety-seven
point four percent (97.4%) of the issued and outstanding common shares of the
Company.
Kevin Hamilton acquired beneficial ownership of 20,085,667 common shares in the
capital of the Company, which he is deemed to beneficially own through a
corporation, Galaxy Galleria Inc. This total represents 25.7 % of the issued and
outstanding consolidated common shares of the Company. These common shares of
the Company were issued to Kevin Hamilton further to the Stock Exchange
Agreement through which Kevin Hamilton exchanged one common share of 1604494
Ontario Inc. for each one common share of the Company. RS Atlantic Holdings Inc.
a private company acquired ownership of 18,921,220 common shares in the capital
of the Company, the total of which represents 24.2 % of the issued and
outstanding consolidated common shares of the Company. These common shares of
the Company were issued to RS Atlantic Holdings Inc further to the Stock
Exchange Agreement through which RS Atlantic Holdings Inc exchanged one common
share of 1604494 Ontario Inc. for each one common share of the Company.
HS Holdings Inc. a private company acquired ownership of 18,753,113 common
shares in the capital of the Company, the total of which represents 24.0 % of
the issued and outstanding consolidated common shares of the Company. These
common shares of the Company were issued to HS Holdings Inc further to the Stock
Exchange Agreement through which HS Holdings Inc exchanged one common share of
1604494 Ontario Inc. for each one common share of the Company. The total amount
of issued and outstanding shares in the Company thereby increased to 78,019,782
On March 1, 2006, the board of directors approved the issuance of 8,000,000 of
its common shares, in consideration of consulting service to Harvey E. Moss and
Leslie N. Moss.
-14-
On June 8, 2006, the Company entered into a Security and Purchase Agreement with
Laurus Master Fund Ltd. ("Laurus") pursuant to which the Company issued to
Laurus a Secured Revolving Note (the "Note") in the aggregate principal amount
of $25 million and a warrant to purchase up to 36,128,286 shares of the
Company's common stock at a price of $.001 per share (the "Warrant").
As the Company did not have a sufficient number of authorized but un-issued
common shares to issue upon the full exercise of the Warrant, it obtained
shareholder and State of Florida approval to increase its authorized number of
common shares from 100 to 200 million shares.
The Company agreed to use the proceeds of the Note solely for the purposes of
funding certain mortgage loans to its customers, except for $1,056,768 that the
Company paid to Laurus Capital Management, LLC, the investment advisor to Laurus
and to other third parties as reimbursement for their due diligence and legal
fees and expenses incurred in connection with the transaction. These costs,
which were paid from draws on the Note, were capitalized as loan costs. The Note
was secured by substantially all assets of the Company. In addition the
76,000,000 shares of common stock issued by the Company with its 2005 reverse
merger were pledged as security for the Note.
The Company used the Black-Scholes option valuation model to calculate the "fair
value" of the Warrant and the corresponding capitalized loan costs. The
assumptions used in the calculation were: expected term of 90 days, volatility
of 219.8%, and interest rate of 4.47% and yield of zero. The expected term was
based on the requirements of the Security & Purchase Agreement. The expected
volatility was based on the historical volatility of the Company's common stock
over a one year period preceding the transaction. The dividend yield of zero was
based on the fact that the Company had never paid cash dividends and had no
intention to pay cash dividends. The risk free interest rate was derived from
average US treasure rates.
The following table summarized the capitalized loan costs:
Fees paid to Laurus Capital Management, LLC $ 915,000
Fees paid to other third parties (primarily legal fees) 141,768
1,056,768
Value of Warrant issued to Laurus 4,299,266
----------
$ 5,356,034
In September 2006, the Company was notified by Laurus that given a changed
investment climate, it did not intend to proceed with and advance any further
monies under the Note. As a result of the decision of Laurus not to proceed with
the transaction, the Company wrote off the capitalized loan costs in September
2006.
The Company and Laurus entered into negotiations respecting the resolution of
the relationship created by the Security and Purchase Agreement. The results of
these negotiations, which allowed the Company to proceed with its business,
ultimately led to the Company in December 2006 issuing 2,190,944 of its
restricted common shares to Laurus in consideration of Laurus discharging the
$1,056,768 debt and releasing its secured position and claims against Company.
In addition, Laurus retained the rights to the 36,128,286 common shares from the
Warrant; however, it is prevented from selling such shares without the consent
of the Company. The Company has no intention of allowing Laurus to sell the
shares and its shareholders are proceeding with legal action to nullify the
Warrant. Significant fourth quarter 2006 adjustments were recorded by the
Company related to the Laurus transaction including the write-off of the Laurus
debt, the issuance of common shares to Laurus, and the write-off of the
$4,299,266 value that was originally ascribed to the Warrant.
-15-
In August 2006, the Company issued 4,000,000 restricted common shares in
consideration of consulting fees incurred in connection with a financing
transaction that did not materialize. These shares in the opinion of counsel
were issued in error are a nullity and therefore are not reflected as part of
the Company's outstanding capital.
In November 2006, Main Street Capital LLC, as agent for the Company, obtained
subscriptions for two tranches of the Company's restricted common shares from an
aggregate of 14 individuals. These restricted common shares were issued by the
Company from its treasure pursuant to Section 144 of the Securities Act 1933 and
subject to certain statutory restrictions from transfer. The issuance of 638,276
shares for this transactions occurred in January 2007.
ITEM 10 EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation
paid to or accrued by the Officers and Directors of Reliant for services
rendered to Reliant during the last year.
=======================================================================================================
SUMMARY COMPENSATION TABLE
=======================================================================================================
Name & Principal Other Annual Underlying All Other
Position(s) year salary Bonus Compensation options Compensation
- ---------------------- ---- ------ ---------- ------------ --------------- -------------
Boyd Soussana 2006 $ 40,897 $0 $0 $0 $0
Chairman and CEO 2005 $0 $0 $0 $0 $0
Hon. John Roberts 2006 $0 $0 $0 $0 $0
Director (__) 2005 $0 $0 $0 $0 $0
Kevin Hamilton 2006 $0 $0 $0 $0 $0
Consultant 2005 $0 $0 $0 $0 $0
Paul Burden 2006 $0 $0 $0 $0 $0
Director and CFO 2005 $0 $0 $0 $0 $0
Steve Hamilton 2006 $104,929 $0 $0 $0 $0
Senior Vice President 2005 $0 $0 $0 $0 $0
(1) "SARs" or "Stock appreciation right" means a right granted by the
Corporation, as compensation for services rendered, to receive a payment of cash
or an issue or transfer of securities based wholly or in part on changes in the
trading price of publicly traded securities of the Corporation.
(2) "LTIP " or "long term incentive plan" means any plan which provides
compensation intended to serve as incentive for performance to occur over a
period longer than one financial year, but does not include option or stock
appreciation right plans or plans for compensation through restricted shares or
restricted share units.
-16-
Section 16(a) of the Exchange Act requires Reliant's executive officers and
directors, and persons who beneficially own more than ten percent of Reliant's
equity securities, to file reports of ownership and changes in ownership with
the Securities and Exchange Commission. Officers, directors and greater than 10%
percent shareholders are required by SEC regulation to furnish Reliant with
copies of all Section 16(a) forms they file.
Based on its review of the copies of such forms received by it, Reliant believes
that during the year ended December 31, 2006 all such filing requirements
applicable to its officers and directors were complied with.
Benefit Plans
Reliant does not have any pension plan, profit sharing plan, or similar plans
for the benefit of its officers, directors or employees. However, Reliant may
establish such plans in the future.
OPTION GRANTS IN FISCAL YEAR 2006
Reliant granted no options to its officers or directors to purchase shares of
our common stock during the fiscal year ended December 31, 2006:
Director and Officer Indemnification and Limitations on Liability
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to directors, officers, and controlling persons of Reliant pursuant
to the foregoing provisions, or otherwise, Reliant has been advised that in the
opinion of the Commission such indemnifications is against public policy as
expressed in the Securities Act and, is, therefore, unenforceable. Reliant has
no indemnification agreements with persons who are directors, officers or
employees of Reliant.
ITEM 11 SECURITIY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information as of the date of this Report
regarding the beneficial ownership of Reliant's common stock held by each of its
executive officers and directors, individually and as a group and by each person
who beneficially owns in excess of five percent of the common stock. The number
of shares of common stock beneficially owned by each person or entity is
determined under the rules promulgated by the SEC. Under those rules, beneficial
ownership includes any shares as to which the person or entity has sole or
shared voting power or investment power and shares which that person or entity
has the right to acquire within sixty days after December 31, 2005. The
inclusion in this section of any shares deemed beneficially owned does not
constitute an admission by that person of beneficial ownership of those shares.
Reliant believes that the individuals listed below have the sole power to vote
and dispose of the number of shares set forth opposite their respective names
unless otherwise indicated.
-17-
Number of shares Percent of
of common stock common stock
beneficially beneficially
Name of owned or right owned or right
Beneficial Owner to direct vote(* to direct vote (*)
- --------------------- ----------------------- -------------------
Boyd Soussana 0 0.0%
Hon. John Roberts 0 0.0%
Paul Burden 0 0.0%
Val Guilis (2) 0 0.0%
Steve Hamilton 0 0.0%
Kevin Hamilton (1 0 0.0%
All officers and directors
As a Group (3 persons) 0.0%
(1) Resigned as President and Director during May 2005. (2) Resigned as CFO and
Director on January 1, 2006.
ITEM 12 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Galaxy Galleria Inc. is a significant shareholder of Reliant. Kevin Hamilton is
a significant shareholder of Galaxy Galaria Inc., a director and it's Chief
Executive Officer. Mr. Hamilton was a director and the Chief Executive Officer
of Reliant until he resigned during May 2005.
ITEM 13 EXHIBITS
(a) The following documents are filed as part of this Annual Report on Form
10-KSB:
(1) Financial Statements
(2) Exhibits
Exhibit No. Description
- ----------- -----------
31.1 Rule 13a-14(a)/15d14(a) Certifications of Principal Executive
Officer
31.2 Rule 13a-14(a)/15d14(a) Certifications of Principal Financial
and Accounting Officer
32.1 Section 1350 Certifications of Principal Executive Officer
32.2 Section 1350 Certifications of Principal Financial and
Accounting Officer
-18-
ITEM 14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth fees billed to us by our SF Partnerships LLP and
Berman Hopkins Wright & LaHam, CPAs and Associates LLP our principal accountants
during the fiscal years ended December 31, 2005 and December 31, 2006 for:
December 31, 2005 December 31, 2006
----------------- -------------------
(i)Audit Fees $17,000 $22,000
(ii)Audit Related Fees $0 $0
(iii)Tax Fees $1,669 $0
(iv)All Other Fees $0 $0
Audit Fees. The aggregate fees billed by Reliant's principal accountants, for
professional services rendered for the audit of our annual financial statements
for the last two fiscal years and for the reviews of the financial statements
included in our Quarterly Reports on Form 10-QSB during the last two fiscal
years.
Audit-Related Fees: Reliant did not engage its principal accountants to provide
assurance or related services during the last two fiscal years.
Tax Fees: The aggregate fees billed by Reliant's principal accountants for tax
compliance, tax advice and tax planning services rendered to Reliant during the
last two fiscal years All Other Fees: Reliant did not engage its principal
accountants to render services to us during the last two fiscal years, other
than as reported above.
Pre-Approval Policies and Procedures: Reliant's Board of Directors has the sole
authority to appoint or replace Reliant's independent auditor. Reliant's Board
is directly responsible for the compensation and oversight of the work of its
independent auditor (including resolution of disagreements between management
and the independent auditor regarding financial reporting) for the purpose of
preparing or issuing an audit report or related work. Reliant's independent
auditor is engaged by, and reports directly to, it's Board.
Reliant's Board pre-approves all auditing services and permitted non-audit
services (including the fees and terms thereof) to be performed for Reliant by
Reliant's independent auditor, subject to the de minimis exceptions for
non-audit services described in Section 10A(i)(1)(B) of the Exchange Act, all of
which are approved by our Board prior to the completion of the audit. In the
event pre-approval for such auditing services and permitted non-audit services
cannot be obtained as a result of inherent time constraints in the matter for
which such services are required, the Chairman of the Board may pre-approve such
services, and will report for ratification such pre-approval to Reliant's Board
at its next scheduled meeting.
SIGNATURES
- --------------------------------------------------------------------------------
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RELIANT HOME WARRANTY CORPORATION
Date April 2, 2007 /s/ Boyd Soussana
---------------------------------
(Signature) Boyd Soussana
President, Chief Executive Officer
Date April 2, 2007 /s/ Steve Hamilton
---------------------------------
(Signature) Steve Hamilton
Senior Vice President
-19-
Index
Financial Statements
Report of Independent Registered Public Accounting Firm F-2
Report of Independent Registered Public Accounting Firm F-3
Consolidated Balance Sheet at December 31, 2006 F-4
Consolidated Statements of Operations for the years ended December 31,
2006 and 2005 and for the period from inception to December 31, 2006 F-5
Consolidated Statements of Changes in Shareholders' Equity (Deficit) for the
years ended December 31, 2006 and 2005 for the period from
inception to December 31, 2006 F-6
Consolidated Statements of Cash Flows for the years ended December 31,
2006 and 2005 and for the period from inception to December 31, 2006 F-7
Notes to Consolidated Financial Statements F-8
F-1
Report of Independent Registered Public Accounting Firm
To The Board of Directors of Reliant Home Warranty Corporation
We have audited the accompanying consolidated balance sheet of Reliant Home
Warranty Corporation (the "Company"), a development stage company, as of
December 31, 2006 and the related consolidated statements of operations, changes
in shareholders' equity (deficit) and cash flows for the year then ended and for
the period from January 1, 2006 to December 31, 2006 for the period from
inception to December 31, 2006 amounts included in the consolidated statements
of operations and cash flows for the year ended December 31, 2006. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The consolidated financial statements of the Company for the year
ended December 31, 2005 and for the period from inception to December 31, 2005
were audited by other auditors, whose report dated March 31, 2006 on those
statements included an explanatory paragraph describing conditions that raised
substantial doubt about the Company's ability to continue as a going concern.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Reliant Home
Warranty Corporation as of December 31, 2006, and the results of its operations,
changes in shareholders' equity (deficit) and cash flows for the year then ended
and for the period from January 1, 2006 to December 31, 2006 for the period
from inception to December 31, 2006 amounts included in the consolidated
statements of operations and cash flows for the year ended December 31, 2006 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company is in the development stage, has sufficient
recurring losses from operations and has negative working capital. These
conditions raise substantial doubt about its ability to continue as a going
concern. Management's plans in regard to these matters are also described in
Note 7. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/S/ Berman Hopkins Wright & Laham, CPAs and Associates, LLP
Winter Park, Florida
March 30, 2007
F-2
Report of Independent Registered Public Accounting Firm
To The Stockholders and Board of Directors
ofReliant Home Warranty Corporation
We have audited the accompanying consolidated statements of operations,
stockholders' deficit and cash flows of Reliant Home Warranty Corporation (a
Florida corporation in the development stage) for the year ended December 31,
2005 and for the cumulative period from January 21, 2004 (date of inception)
through December 31, 2005. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, these financial statements referred to above present fairly, in
all material respects, the results of operations and cash flows of Reliant Home
Warranty Corporation for the year ended December 31, 2005 and for the cumulative
period from January 21, 2004 (date of inception) through December 31, 2005 in
conformity with accounting principles generally accepted in the United States of
America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 7 to the
financial statements, the Company is in the development stage and has incurred
losses from operations, and has negative working capital, which raises
substantial doubt about its ability to continue as a going concern. Management's
plans regarding these matters are also described in Note 7. The financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
/s/ SF PARTNERSHIP, LLP
- - - - - - - - - - - - - - - - - - - - -
CHARTERED ACCOUNTANTS
Toronto, Canada
March 31, 2006
F-3-
Reliant Home Warranty Corporation
(a development-stage company)
Consolidated Balance Sheet
December 31, 2006
Assets
Current assets
Cash $ 247,813
Prepaid expenses and other current assets 80,534
-----------
Total current assets 328,347
Mortgage receivable 457,137
Other assets 5,149
-----------
Total other assets 462,286
-----------
Total assets $ 790,633
===========
Liabilities
Current Liabilities
Accounts payable & accrued liabilities $ 199,134
Mortgage payable 434,652
Loan payable to related party 1,031,142
Due to related parties 154,497
-----------
Total current liabilities 1,819,425
Commitments & contingencies
Shareholders' Deficit
Common stock
$0.001 par value; 200,000,000 shares authorized
88,849,002 shares issued and outstanding 88,849
Stock subscription receivable (25,646)
Additional paid-in capital 3,283,139
Accumulated deficit during the development stage (4,377,550)
Accumulated other comprehensive loss 2,416
-----------
Total shareholders' deficit (1,028,792)
-----------
Total liabilities and shareholders' deficit $ 790,633
===========
The accompanying notes are an integral part of these financial statements
F-4
Reliant Home Warranty Corporation
(a development-stage company)
Consolidated Statements of Operations
For the Years ended December 31, 2006 and 2005 and
Cumulative from the Period January 21, 2004 (date of inception)
through December 31, 2006
Cumulative from
Inception through
2006 2005 December 31, 2006
------------- ------------- -------------
Revenue $ -- $ -- $ --
------------- ------------- -------------
Operating expenses:
Consulting fees 1,615,806 69,758 1,687,870
Laurus fees 1,056,768 -- 1,056,768
Wages & salaries 253,805 -- 253,805
Professional fees 212,487 36,711 253,041
General & administrative expenses 167,216 22,283 191,805
------------- ------------- -------------
Total Operating Expenses 3,306,082 128,752 3,443,289
------------- ------------- -------------
Loss from operations (3,306,082) (128,752) (3,443,289)
Interest expense (124,261) -- (124,261)
------------- ------------- -------------
Loss from operations before income taxes (3,430,343) (128,752) (3,567,550)
Provision for income taxes -- -- --
------------- ------------- -------------
Loss from continuing operations (3,430,343) (128,752) (3,567,550)
Discontinued operations -- (810,000) (810,000)
------------- ------------- -------------
Net loss $ (3,430,343) $ (938,752) $ (4,377,550)
============= ============= =============
Foreign currency translation adjustments 8,447 5,335 2,416
------------- ------------- -------------
Comprehensive loss $ (3,421,896) $ (933,417) $ (4,375,134)
============= ============= =============
Net loss per common share - basic and diluted $ (0.04) $ (0.01)
Weighted average number of shares
outstanding during the period - basic 84,981,285 77,560,483
outstanding during the period - diluted 105,371,496 77,560,483
------------- -------------
The accompanying notes are an integral part of these financial statements
F-5
Reliant Home Warranty Corporation
(a development-stage company)
Consolidated Statements of Shareholders' Equity (Deficit)
For the Periods from January 21, 2004 (date of
inception) through December 31, 2006
Accumulated Accumulated Total
Stock Additional Other Deficit During Shareholders
Common Stock Subscription Paid-In Comprehensive Development Equity
Shares Par Value Receivable Capital Income (Loss) Stage (Deficit)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance January 21, 2004 (date of
inception) 2,019,782 $ 2,020 $ -- $ 12,955 $ -- $ -- $ 14,975
----------- ----------- ----------- ----------- ----------- ----------- -----------
Foreign currency translation -- -- -- -- (696) -- (696)
Net loss 2004 -- -- -- -- -- (8,455) (8,455)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2004 2,019,782 2,020 -- 12,955 (696) (8,455) 5,824
----------- ----------- ----------- ----------- ----------- ----------- -----------
Shares issued for acquisition
of 1604494 Ontario Inc 76,000,000 76,000 -- 705,891 -- -- 781,891
Foreign currency translation -- -- -- -- (5,335) -- (5,335)
Net loss 2005 -- -- -- -- -- (938,752) (938,752)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2005 78,019,782 78,020 -- 718,846 (6,031) (947,207) (156,372)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Shares issued for consulting
service 8,000,000 8,000 -- 1,432,000 -- -- 1,440,000
Shares issued to Laurus 2,167,987 2,168 -- 1,056,102 -- -- 1,058,270
Shares issued to Laurus 22,957 23 -- 11,183 -- -- 11,206
Shares issued 638,276 638 (25,646) 65,008 -- -- 40,000
Foreign currency translation -- -- -- -- 8,447 -- 8,447
Net loss 2006 -- -- -- -- -- (3,430,343) (3,430,343)
----------- ----------- ----------- ----------- ----------- ----------- -----------
Balance December 31, 2006 88,849,002 $ 88,849 $ (25,646) $ 3,283,139 $ 2,416 $(4,377,550) $(1,028,792)
=========== =========== =========== =========== =========== =========== ===========
The accompanying notes are an integral part of these financial statements
F-6
Reliant Home Warranty Corporation
(a development-stage company)
Consolidated Statements of Cash Flows
For the Years ended December 31, 2006 and 2005
and Cumulative from the Period January 21, 2004 (date of
inception) through December 31, 2006
Cumulative from
Inception through
2006 2005 December 31, 2006
----------- ----------- -----------------
Cash Flows from Operating Activities:
Net loss $(3,430,343) $ (938,752) $(4,377,550)
Adjustments to reconcile net loss to net cash used
by perating activities:
Shares issued for consulting fee 1,440,000 -- 1,440,000
Discontinued operations -- 810,000 810,000
Change in working capital accounts:
Prepaid expenses (80,534) -- (80,534)
Accounts payable & accrued liabilities 112,119 52,249 199,134
Other assets 10 -- (5,149)
----------- ----------- -----------
Net cash used by operating activities (1,958,748) (76,503) (2,014,099)
----------- ----------- -----------
Cash Flow from Investing Activities:
Mortgage receivable loans (457,137) -- (457,137)
----------- ----------- -----------
Cash Flow from Financing Activities:
Loan proceeds 1,037,500 -- 1,037,500
Payments on loan (6,358) -- (6,358)
Mortgage payable loan proceeds 434,652 -- 434,652
Proceed from sale of shares 1,109,476 -- 1,096,342
Proceeds from related company loans 79,981 82,004 154,497
----------- ----------- -----------
Net cash provided operating activities 2,655,251 82,004 1,701,140
----------- ----------- -----------
Net Increase in Cash: 239,366 5,501 245,397
Foreign exchange on cash balances 8,447 (5,501) 2,416
----------- ----------- -----------
247,813 -- 247,813
Cash - beginning period -- -- --
----------- ----------- -----------
Cash - end of period $ 247,813 $ -- $ 247,813
=========== =========== ===========
Supplemental disclosures:
Interest paid $ 97,254 $ -- $ 97,254
Income tax paid $ -- $ -- $ --
The accompanying notes are an integral part of these financial statements.
F-7-
RELIANT HOME WARRANTY CORPORATION
(a development-stage company)
Notes to Financial Statements
December 31, 2006 and 2005
1. Organization and Development Activities
Organization
Reliant Home Warranty Corporation (the "Company"), formerly Dialex
Minerals, Inc., was incorporated in the State of Florida on December 18,
1995, under the trade name of Ronden Vending Corp. On March 24, 2005, the
Company entered into a stock exchange agreement with BSA Group Limited, as
trustee for the stockholders of 1604494 Ontario Inc., an Ontario
corporation, which was incorporated on January 21, 2004. Under this
agreement, the Company exchanged 76,000,000 common shares for 100% of the
issued and outstanding shares of 1604494 Ontario Inc. As a result of the
stock exchange, the Company obtained control over 1604494 Ontario Inc.
Legally, the Company is the parent of 1604494 Ontario Inc.; however, as a
result of the stock exchange, control of the combined companies passed to
the shareholders of 1604494 Ontario Inc., which for accounting purposes was
deemed to be the acquirer under a reverse merger. As such, the accompanying
financial statements present the financial position and results of
operations and cash flows of 1604494 Ontario Inc. under the name of the
Company. The reverse merger was recorded as a recapitalization of the
Company, with the net assets of the 1604494 Ontario Inc. and the Company
brought forward at their historical values as of January 21, 2004. The
costs associated with the reverse merger were expensed as incurred.
Development Stage Activities
Upon completion of the reverse merger, the Company changed the nature of
its business and now offers a proprietary line of home value warranty
programs, designed for sale to purchasers of residential real estate
primarily single family homes and condominiums. The Company is currently a
development stage company as defined under FAS No. 7. As required for
development enterprises, the statements of operations, cash flows and
changes in shareholders' equity (deficit) are presented on a cumulative
basis from inception. Prior to January 21, 2004, the Company was involved
in a number of businesses, including consumer video products and
e-commerce.
2. Significant Accounting Policies
Principles of Consolidation
The consolidated financial statements for the periods presented include the
accounts of the Company and its wholly owned subsidiary Reliant Home
Mortgage Canada, Inc. All inter-company transactions and balances have been
eliminated in consolidation.
Cash and Equivalents
Cash and cash equivalents consist of cash on hand and cash deposited with
financial institutions, including money market accounts. For the purposes
of the statement of cash flows, the Company considers all highly liquid
debt and other instruments with an original maturity of three months or
less to be cash equivalents.
Revenue Recognition
Revenue for warranty contracts will be deferred and recognized in income on
a straight line basis over the contract period except in those
circumstances in which sufficient historical evidence indicates that the
cost of performing services under the contract are incurred on other than a
straight line basis. In those circumstances, revenue will be recognized
over the contract period in proportion to the costs expected to be incurred
in performing services under the contract. Losses are recognized on
warranty contracts if the sum of expected costs of providing services under
the contracts exceeds the related unearned revenue. In accorcdance with FAS
91, mortgage loan fees and related loan costs are offset, and the net amoun
is deferred and amortized over the lives of the loans.
Use of Estimates
Preparation of financial statements in accordance with accounting
principles generally accepted in the United States of America requires
F-8-
RELIANT HOME WARRANTY CORPORATION
Notes to Financial Statements
December 31, 2006 and 2005
management to make estimates and assumptions that affect the amounts
reported in the financial statements and related notes to financial
statements. These estimates are based on management's best knowledge of
current events and actions the Company may undertake in the future. Actual
results may ultimately differ from estimates, although management does not
believe such changes will materially affect the financial statements in any
individual year.
Fair Value of Financial Instruments
The carrying amounts reported in the accompanying financial statements for
cash and equivalents, mortgage notes and notes payable approximate fair
values because of the immediate or short-term maturities of the financial
instruments and because the prevailing interest rates on the instruments
are market rates.
Net Loss per Share
Basic net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding for the
period. Diluted net loss per share is calculated by dividing net loss for
the period by the weighted-average number of common shares outstanding
during the period, increased by potentially dilutive common shares.
Potentially dilutive securities for the period ended December 31, 2006
consist of the 36,128,286 shares of common stock under Warrant (see note
3). There were no potentially dilutive diluted securities for the period
prior to 2006.
Equity Compensation
The Company enters into transactions in which goods or services are the
consideration received for the issuance of equity instruments. In
accordance with FAS No. 123(R), "Accounting for Stock-Based Compensation",
the value of these transactions are measured and accounted for based on the
fair value of the equity instrument issued or the value of the services,
whichever is more reliably measurable. The services are expensed in the
periods during which the services are rendered.
Foreign Currency Translation
The Company accounts for foreign currency translation pursuant to FAS No.
52, "Foreign Currency Translation". The Company's functional currency is
the Canadian dollar. All assets and liabilities are translated into United
States dollars using the exchange rates prevailing at the end of the year.
Revenues and expenses are translated using the average exchange rates
prevailing throughout the year. Unrealized foreign exchange amounts
resulting from translations at different rates according to their nature
are included in accumulated other comprehensive income. Realized foreign
currency transaction gains and losses are recognized in operations.
Comprehensive Loss
The Company reports comprehensive loss in accordance with FAS No. 130,
Reporting Comprehensive Income. The components of comprehensive loss
include foreign currency translation adjustments.
Income Taxes
The Company accounts for income taxes in accordance with FAS No. 109,
"Accounting for Income Taxes" using the asset and liability approach, which
requires recognition of deferred tax liabilities and assets for the
expected future tax consequences of temporary differences between the
carrying amounts and the tax basis of such assets and liabilities. The
Company has approximately $3.5 million in net operating losses as of
December 31, 2006, and a valuation allowance equal to the tax benefit of
the accumulated net operating losses has been established since it is
uncertain that future taxable income will be realized during the applicable
carry-forward periods. The net operating loss carryforwards may be limited
under change of control provisions of taxing authorities.
F-9
RELIANT HOME WARRANTY CORPORATION
(a development-stage company)
Notes to Financial Statements
December 31, 2006 and 2005
Recent Accounting Pronouncements
In July 2006, the FASB issued FIN 48, Accounting for Uncertainty in Income
Taxes-an interpretation of FASB Statement No. 109. FIN 48 prescribes a
comprehensive financial statement model of how a company should recognize,
measure, present, and disclose uncertain tax positions that the Company has
taken or expects to take in its income tax returns. FIN 48 requires that
only income tax benefits that meet the "more likely than not" recognition
threshold be recognized or continue to be recognized on the effective date.
Initial derecognition of amounts would be reported as a cumulative effect
of a change in accounting principle. FIN 48 is effective for fiscal years
beginning after December 15, 2006. The Company has determined that the
adoption of FIN 48 will not have a material impact on the financial
statements.
In September 2006, the SEC issued SAB No. 108, Considering the Effects of
Prior Year Misstatements when Quantifying Misstatements in Current Year
Financial Statements, which provides interpretive guidance on the
consideration of the effects of prior year misstatements in quantifying
current year misstatements for the purpose of a materiality assessment. SAB
108 is effective for fiscal years ending after November 15, 2006. The
adoption of SAB 108 did not have an impact on our financial statements.
In September 2006, the FASB issued FAS No. 157, "Fair Value Measurements",
which establishes a framework for reporting fair value and expands
disclosure about fair value measurements. FAS 157 is effective for our 2008
fiscal year. We are currently evaluating the impact of this standard on our
financial statements.
In February 2007, the FASB issued FAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities Including an Amendment of FASB
Statement No. 115. FAS 159 permits entities to choose to measure many
financial instruments and certain other items at fair value. FAS 159 is
effective for fiscal years after November 15, 2007. We are currently
evaluating the impact of adopting FAS 159 on our financial statements.
Reclassifications
Where necessary, prior period amounts have been reclassified to conform to
current period presentation. None of the reclassifications had an effect on
net loss or shareholders' equity (deficit) as previously reported.
3. Shareholders' Equity (Deficit) and Laurus Revolving Note Agreement
On February 2, 2005, the Company undertook a reverse split of its
outstanding common shares on the basis of one new share for twenty-two old
shares, thereby reducing its outstanding common shares from 44,438,768 to
2,019,782 prior to the acquisition of a subsidiary company. The reverse
split has retroactively been taken into consideration in the consolidated
financial statements and in the calculation of net loss per share.
March 24, 2005, pursuant to stock exchange agreement, BSA Group Limited in
trust for the shareholders of the Company, acquired control of 1604494
Ontario Inc. by acquiring from treasury 76,000,000 common shares of the
Company in exchange for all the issued and outstanding shares of 1604494
Ontario Inc.
On March 1, 2006, the board of directors approved the issuance of 8,000,000
of its common shares, in consideration of consulting service to Harvey E.
Moss and Leslie N. Moss.
On June 8, 2006, the Company entered into a Security and Purchase Agreement
with Laurus Master Fund Ltd. ("Laurus") pursuant to which the Company
issued to Laurus a Secured Revolving Note (the "Note") in the aggregate
principal amount of $25 million and a warrant to purchase up to 36,128,286
shares of the Company's common stock at a price of $.001 per share (the
"Warrant").
As the Company did not have a sufficient number of authorized but un-issued
common shares to issue upon the full exercise of the Warrant, it obtained
shareholder and State of Florida approval to increase its authorized number
of common shares from 100 to 200 million shares.
The Company agreed to use the proceeds of the Note solely for the purposes
of funding certain mortgage loans to its customers, except for $1,056,768
F-10
RELIANT HOME WARRANTY CORPORATION
(a development-stage company)
Notes to Financial Statements
December 31, 2006 and 2005
that the Company paid to Laurus Capital Management, LLC, the investment
advisor to Laurus and to other third parties as reimbursement for their due
diligence and legal fees and expenses incurred in connection with the
transaction. These costs, which were paid from draws on the Note, were
capitalized as loan costs. The Note was secured by substantially all assets
of the Company. In addition the 76,000,000 shares of common stock issued by
the Company with its 2005 reverse merger were pledged as security for the
Note.
The Company used the Black-Scholes option valuation model to calculate the
"fair value" of the Warrant and the corresponding capitalized loan costs.
The assumptions used in the calculation were: expected term of 90 days,
volatility of 219.8%, and interest rate of 4.47% and yield of zero. The
expected term was based on the requirements of the Security & Purchase
Agreement. The expected volatility was based on the historical volatility
of the Company's common stock over a one year period preceding the
transaction. The dividend yield of zero was based on the fact that the
Company had never paid cash dividends and had no intention to pay cash
dividends. The risk free interest rate was derived from average US treasure
rates.
The following table summaried the capitalized loan costs:
Fees paid to Laurus Capital Management, LLC $ 915,000
Fees paid to other third parties (primarily legal fees) 141,768
-------------
1,056,768
Value of Warrant issued to Laurus 4,299,266
-------------
$ 5,356,034
In September 2006, the Company was notified by Laurus that given a changed
investment climate, it did not intend to proceed with and advance any
further monies under the Note. As a result of the decision of Laurus not to
proceed with the transaction, the Company wrote off the capitalized loan
costs in September 2006.
The Company and Laurus entered into negotiations respecting the resolution
of the relationship created by the Security and Purchase Agreement. The
results of these negotiations, which allowed the Company to proceed with
its business, ultimately led to the Company in December 2006 issuing
2,190,944 of its restricted common shares to Laurus in consideration of
Laurus discharging the $1,056,768 debt and releasing its secured position
and claims against Company. In addition, Laurus retained the rights to the
36,128,286 common shares from the Warrant; however, it is prevented from
selling such shares without the consent of the Company. The Company has no
intention of allowing Laurus to sell the shares and its shareholders are
proceeding with legal action to nullify the Warrant. Significant fourth
quarter 2006 adjustments were recorded by the Company related to the Laurus
transaction and are reflected in the accompanying financial statements.
These adjustments include the write-off of the Laurus debt, the issuance of
common shares to Laurus, and the write-off (reduction of amortization
expense) of the $4,299,266 value that was originally ascribed to the
Warrant.
In August 2006, the Company issued 4,000,000 restricted common shares in
consideration of consulting fees incurred in connection with a financing
transaction that did not materialize. These shares in the opinion of
counsel were issued in error are a nullity and therefore are not reflected
as part of the Company's outstanding capital.
In November 2006, Main Street Capital LLC, as agent for the Company,
obtained subscriptions for two tranches of the Company's restricted common
shares from an aggregate of 14 individuals for net proceeds of $65,946
after fees of $28,134.These restricted common shares were issued by the
Company from its treasure pursuant to Section 144 of the Securities Act
1933 and subject to certain statutory restrictions from transfer. The
issuance of 638,276 shares for this transactions occurred in January 2007.
4. Related Party Transactions
Due to related parties represents advances to the Company from a
shareholder/officer of the Company to fund the working capital of the
Company. The advances are non-interest bearing and have no fixed terms for
repayment.
F-11
RELIANT HOME WARRANTY CORPORATION
(a development-stage company)
Notes to Financial Statements
December 31, 2006 and 2005
In August 2006, the Company received loan proceeds of $1,037,500 under the
terms of a loan agreement with its shareholder Galaxy Galleria, Inc. This
agreement was made for the purpose of engaging Galaxy Galleria to provide
structured financing to assist the Company in bolstering its working
capital and meeting its ongoing financial obligations. The loan bears
interest at a rate of 15.1% and is payable quarterly in arrears. The
principal is due on July 18, 2007.
5. Mortgage Notes
In December 2006, the Company commenced its mortgage warranty operations
and wrote three mortgage loans totaling $457,137. The loans carry interest
rates of 7.35% to 7.85%, have terms of 25 to 50 years, are receivable in
monthly payments totaling approximately $3,300 and collateralized by real
estate. The Company financed its loans to its customers with loans from
Morban Limited totaling $434,652. Interest on the loans is payable monthly
at the prime rate plus 3%. The principal is due November and December 2007.
The loans are secured by the Company's mortgage notes with its customers.
6. Discontinued Operations
On March 24, 2005, the Company divested of all of the issued and
outstanding shares of its wholly-owned subsidiary, Condor Diamond Corp. to
Condor Gold Corp. in consideration of any and all liabilities owing by the
Company to Condor Gold Corp. and its directors and officers. The results of
the discontinued operations are reflected in the 2005 financial statements.
7. Going Concern
The accompanying financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America
with the assumption that the Company will be able to realize its assets and
discharge its liabilities in the normal course of business. The Company has
sustained net losses of $4,377,550 since inception including $3,430,343 for
the year ended December 31, 2006, and has a negative working capital
deficit of $1,491,078 at December 31, 2006, which raise substantial doubt
about the Company's ability to continue as a going concern. The Company is
dependant on successfully bringing its services to market, achieving future
profitable operations, and obtaining additional sources of financing to
sustain its operations, the outcome of which cannot be predicted at this
time. Although the Company plans to pursue additional financing, there can
be no assurance that the Company will be able to secure financing when
needed or obtain such on terms satisfactory to the Company. The
accompanying financial statements do not include any adjustments to reflect
the possible future effects on the recoverability and classification of
assets or the amounts and classification of liabilities that may result
from the possible inability of the Company to continue as a going concern.
F-12