UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
(x) QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2006
OR
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to ______
Commission file number 0-29463
RIVER CAPITAL GROUP, INC.
(Exact name of small business issuer as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
51-0392750
(IRS Employer Identification No.)
Suite 312, 7 Reid Street, Hamilton Bermuda HM11
(Address of principal executive offices)
441-296-6006
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes (X) No ( )
Indicate by checkmark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act) Yes ( ) No (X)
Number of shares outstanding of the registrant's common stock as of November 3,
November 3, 2006 was 26,452,275.
Transitional Small Business Disclosure Format (check one): Yes ( ) No (X)
Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
INDEX TO FINANCIAL STATEMENTS
Balance Sheet at
September 30, 2006 (unaudited) 3
Statements of Operations
for the Nine and Three Months ended September 30, 2006
and 2005 (unaudited) 4
Statements of Cash Flows for
for the Nine Months ended September 30, 2006
and 2005 (unaudited) 5
Selected Notes to the Financial
Statements September 30, 2006 (unaudited) 6
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 12
PART II - OTHER INFORMATION
Item 1. Legal Proceedings. 12
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. 12
Item 3. Defaults Upon Senior Securities. 12
Item 4. Submission of Matters to a Vote of Security Holders. 12
Item 5. Other Information. 12
Item 6. Exhibits. 13
SIGNATURES
RIVER CAPITAL GROUP, INC. AND SUBSIDIARY
BALANCE SHEET
(UNAUDITED
September 30, 2006
------------------
ASSETS
Cash $ 298,521
------------------
Total current assets 298,521
------------------
Total assets $ 298,521
==================
LIABILITIES AND STOCKHOLDERS' DEFICIT
Accounts payable and accrued expenses $ 76,580
Accounts payable to related parties 133,822
Convertible notes 280,283
------------------
Total current liabilities 490,685
------------------
Stockholders' deficit:
Common stock, $.001 par value, 50,000,000 shares
authorized: 26,432,275 shares issued and outstanding 26,432
Additional paid-in capital 1,940,015
Retained deficit (2,158,611)
------------------
Total stockholders' deficit (192,164)
------------------
Total liabilities and stockholders' deficit $ 298,521
==================
The accompanying notes are an integral part of these financial statements.
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RIVER CAPITAL GROUP, INC. AND SUBSIDIARY
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the nine For the nine For the three For the three
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2006 2005 2006 2005
-------------- -------------- ------------- -------------
Revenue $ - $ - $ - $ -
-------------- -------------- ------------- -------------
Total revenue - - - -
-------------- -------------- ------------- -------------
Expenses:
Selling general and administrative 550,600 291,704 115,748 70,320
-------------- -------------- ------------- -------------
Total operating expenses 550,600 291,704 115,748 70,320
-------------- -------------- ------------- -------------
Total operating loss (550,600) (291,704) (115,748) (70,320)
-------------- -------------- ------------- -------------
Other income (expense):
Miscellaneous income - 62 - -
Interest income 905 - 905 -
Interest expense (126,998) (13,093) (97,448) (9,820)
-------------- -------------- ------------- -------------
(126,093) (13,031) (97,448) (9,820)
-------------- -------------- ------------- -------------
Net loss $ (676,693) $ (304,735) $ (213,196) $ (80,140)
============== ============== ============= =============
Net loss per share - basic and diluted $ (0.03) $ (0.05) $ (0.01) $ (0.01)
============== ============== ============= =============
Weighted average shares outstanding 25,934,665 6,234,770 26,407,275 6,226,455
============== ============== ============= =============
The accompanying notes are an integral part of these financial statements.
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RIVER CAPITAL GROUP, INC. AND SUBSIDIARY
STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the nine For the nine
months ended months ended
September 30, September 30,
2006 2005
----------------- -----------------
Cash flows from operating activities:
Net loss $ (676,693) $ (304,735)
----------------- ------------------
Adjustments to reconcile net loss to net
cash provided (used) by operating activities:
Stock given for compensation 256,250 89,950
Discount on convertible notes 106,498 7,760
Changes in operating assets and liabilities:
(Increase) decrease in due from related party - 963
Increase (decrease) in accounts payable 41,536 7,917
Increase (decrease) in accounts payable to related parties 9,929 58,810
----------------- ------------------
Total adjustments 414,213 165,400
----------------- ------------------
Net cash used by operations (262,480) (139,335)
----------------- ------------------
Cash flows from financing activities:
Proceeds from convertible notes 300,000 200,000
----------------- ------------------
Net cash provided by financing activities 300,000 200,000
----------------- ------------------
Net increase (decrease) in cash 37,520 60,665
Cash at beginning of period 261,001 95,554
----------------- ------------------
Cash at end of period $ 298,521 $ 156,219
================= ==================
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest $ - $ -
================= ==================
Income taxes $ - $ -
================= ==================
The accompanying notes are an integral part of these financial statements.
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RIVER CAPITAL GROUP, INC. AND SUBSIDIARY
SELECTED NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2006
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States of America
for interim financial information and with the instructions of Form 10-QSB and
Item 310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by accounting principles generally accepted
in the United States of America for complete financial statements. The
preparation requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amount of revenues and expenses during the reporting period. Actual results may
differ from these estimates. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the nine-month period
ended September 30, 2006 are not necessarily indicative of the results that may
be expected for the year ending December 31, 2006.
For further information, refer to the financial statements and footnotes thereto
included in the Company's annual report on Form 10-KSB for the year ended
December 31, 2005 as filed with the Securities and Exchange Commission.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of all
liabilities in the normal course of business.
As of September 30, 2006, the Company had an accumulated deficit of $2,158,611.
During the nine months ended September 30, 2006 the Company suffered a loss of
$676,693. These factors raise substantial doubt about the Company's ability to
continue as a going concern.
Management's plan to alleviate this going concern issue is to raise capital and
commence the business operations of the newly acquired insurance company. The
Company's continued existence is dependent upon management funding operations
and raising sufficient capital. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
NOTE 3 - ACQUISITION OF RIVER CAPITAL HOLDINGS LIMITED
On December 30, 2005, River Capital Group, Inc., a Delaware corporation ("River
Group") and River Capital Holdings Limited, a Barbados corporation ("River
Holdings") reached a share exchange agreement pursuant to which River Holdings
transferred 100% of the capital stock of River Holdings in exchange for
19,135,820 shares of common stock, $0.001 par value per share, of River Group
("River Group Common Stock"). Due to the amount of shares issued, upon
completion of the Share Exchange, River Holdings and its shareholders had voting
control of River Group.
NOTE 4 - DUE TO RELATED PARTY
A company owned by a director received management and administrative fees
totaling $75,000 and $108,000 for the nine months ended September 30, 2006 and
2005, respectively. An additional $19,418 and $37,352 was received as
reimbursement of direct out of pocket travel and other expenses for the nine
months ended September 30, 2006 and 2005, respectively. A total of $133,822 was
due to the related party as of September 30, 2006.
NOTE 5 - CONVERTIBLE NOTES AND WARRANTS
On May 23, 2005, the Company entered into a Subscription Agreement with several
accredited investors (the "Subscribers") pursuant to which the Company agreed to
sell, and the Subscribers agreed to purchase in the
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aggregate, up to $200,000 principal amount of convertible notes and five-year
warrants to purchase 400,000 shares of common stock at $0.75 per share. A total
of $23,280 was ascribed to the warrants, valued at estimated fair market value
at the date of the warrants issuance. On May 31, 2006 a modification to the
agreement was entered into whereby the due date of the notes was extended to May
23, 2007 and the five-year warrants were repriced at $0.35 per share. The
repricing resulted in a further discount to the notes of $142,206 (the ascribed
value of the warrants valued at estimated fair market value of the Company's
common stock at the date of the warrants repricing). On June 30, 2006, the
Company issued an additional $300,000 principal amount of convertible notes and
five-year warrants to purchase 525,000 shares of common stock at $0.35 per
share. In connection with this transaction, 20,000 shares of the Company's
common stock were issued in payment of legal services rendered. A total of
$174,309 was ascribed to the warrants, valued at estimated fair market value at
the date of the warrants issuance. The resulting discount to all of the
convertible notes will be amortized to interest expense over the remaining life
of the convertible notes. Amortization of the discount amounted to $106,498 for
the nine months ended September 30, 2006.
The convertible notes are secured by a security interest in all of the assets of
River Capital. The convertible notes include the following terms:
Interest at the greater of (i) the prime rate plus 4% per annum or
(ii) 10%, payable quarterly beginning August 1, 2005;
Term of one year, but the note may be prepaid at 110% of the
principal only if an insurance license shall have been granted to
River Reinsurance Limited and River Reinsurance Limited shall have
become a subsidiary of River Capital;
Convertible at any time by the holders into shares of River Capital
common stock at a price equal to $0.50; and
Anti-dilution protections. River Capital has granted a one-time
demand registration right to register the resale of the shares issuable
upon conversion of the notes and the shares issuable upon exercise of
the warrants.
NOTE 6 - STOCKHOLDERS' EQUITY
In May 2004, the stockholders of the Company adopted a Stock Option Plan (the
"Plan"). Under the Plan, stock options may be granted at an exercise price not
less than the fair market value of the Company's common stock at the date of
grant. Options may be granted to key employees and other persons who contribute
to the success of the Company. The Company has reserved 2,540,728 shares of
common stock for the Plan. This number automatically shall be adjusted annually
at the beginning of the Company's fiscal year to a number equal to 10% of the
number of shares of the Company issued and outstanding at the end of the
Company's last completed fiscal year. During the nine months ended September 30,
2006, the Company did not issue any employee stock options nor did any employee
stock options vest. As of September 30, 2006, options to purchase:
(i) 275,000 shares at a price of $2.00 per share had been granted
pursuant to the Plan. The options are exercisable through February 5,
2009; and
(ii) 350,000 shares at a price of $0.50 per share had been granted
pursuant to the Plan. The options are exercisable through October 31,
2007.
The Company had accounted for its employee stock option plans under the
intrinsic value method, in accordance with the provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees" and related interpretations. Compensation expense related to the
granting of employee stock options is recorded over the vesting period only if,
on the date of grant, the fair value of the underlying stock exceeds the
option's exercise price. The Company has adopted the disclosure-only
requirements of SFAS No. 123, "Accounting For Stock-Based Compensation," which
allows entities to continue to apply the provisions of APB No. 25 for
transactions with employees and provide pro forma net loss and pro forma loss
per share disclosures for employee stock grants made as if the fair value based
method of accounting in SFAS No. 123 had been applied to these transactions.
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In December 2002, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 148 "Accounting for
Stock-Based Compensation-Transition and Disclosure" which amends SFAS No. 123
"Accounting for Stock-Based Compensation."
Had the Company determined compensation expense of employee stock options based
on the estimated fair value of the stock options at the grant date, consistent
with the guidelines of SFAS 123, its net loss would have been increased to the
pro forma amount indicated below:
Nine months ended Nine months ended
September 30, 2006 September 30, 2005
------------------ ------------------
Net (loss):
As reported $ (676,693) $ (304,735)
Stock--based employee compensation
expense related to stock options determined
under fair value method - -
Amounts charged to expense - -
------------------ ------------------
Pro forma according to SFAS 123 $ (676,693) $ (304,735)
================== ==================
Net income applicable to common
Stockholder per share:
As reported $ (0.03) $ (0.05)
================== ==================
Pro forma according to SFAS 123 $ (0.03) $ (0.05)
================== ==================
NOTE 7 - INCOME TAXES
The Company had available at September 30, 2006 net operating loss carryforwards
for federal and state tax purposes of approximately $2,158,000, which could be
applied against taxable income in subsequent years through 2026. The deferred
tax asset for net operating losses was approximately $740,000 and $472,000 as of
September 30, 2006 and 2005, respectively, and a full valuation allowance was
recorded since realization is uncertain.
Reconciliation of the differences between income taxes computed at the federal
and state statutory tax rates and the provision for income taxes for the nine
months ended September 30, 2006 and 2005 are approximately as follows:
Nine Months Nine Months
Ended ended
September 30, September 30,
2006 2005
---- ----
Income tax loss at federal statutory tax rate -34.00% -34.00%
State tax, net of federal benefit -3.63% -3.63%
Valuation allowance 37.63% 37.63%
--------------------------------------
Provision for taxes - -
======================================
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The Company's deferred tax assets are as follows:
September 30 September 30
2006 2005
---- ----
Net Operating Loss $ 740,000 $ 472,000
Valuation allowance (740,000) (472,000)
------------------------------------
Net deferred tax assets $ - $ -
====================================
NOTE 8 - COMMITMENTS AND CONTINGENCIES
From time to time, the Company may be involved in various claims and legal
actions arising in the ordinary course of business. In the opinion of
management, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
FORWARD-LOOKING STATEMENTS AND INFORMATION
The Company is including the following cautionary statement in this Form 10-QSB
for any forward-looking statements made by, or on behalf of, the Company.
Forward-looking statements include statements concerning plans, objectives,
goals, strategies, expectations, future events or performance and underlying
assumptions and other statements which are other than statements of historical
facts. Certain statements contained herein are forward-looking statements and,
accordingly, involve risks and uncertainties which could cause actual results or
outcomes to differ materially from those expressed in the forward-looking
statements. The Company's expectations, beliefs and projections are expressed in
good faith and are believed by the Company to have a reasonable basis, including
without limitation, management's examination of historical operating trends,
data contained in the Company's records and other data available from third
parties, but there can be no assurance that management's expectations, beliefs
or projections will result or be achieved or accomplished.
INTRODUCTION
For the year ended December 31, 2005, the Company's auditors, in Note 3 of the
Financial Statements, have noted that there is substantial doubt about the
Company's ability to continue as a going concern. The Company's existence is
dependent upon management funding operations and raising sufficient capital. At
this point in time it is impossible to state an amount of additional funding
which the Company believes would remove the going concern opinion.
The Company has yet to receive revenues from the reinsurance business. The
Company has neither a history of earnings nor has it paid dividends. The Company
is unlikely to realize earnings or pay dividends in the immediate or foreseeable
future.
There is no assurance that the Company's acquisition will be profitable. The
Company may not be able to obtain additional funds needed for working capital
and operations.
The following discussion provides information with respect to the Company's
results of operations, liquidity, and capital resources on a comparative basis
for the nine months ended September 30, 2006 and 2005, respectively, and should
be read in conjunction with the Financial Statements and related notes appearing
elsewhere in this report.
NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 2005
RESULTS OF OPERATIONS
Operational expenses during the nine months ended September 30, 2006 and 2005 of
$550,600 and $291,704, respectively, consisted primarily of reasonable expenses
incurred to effect the acquisition of, and subsequent management of River
Holdings and professional fees necessary to complete certain corporate filings
with the SEC. For the nine months ended September 30, 2006 and 2005, operational
expenses included professional fees of $41,957 and $44,575, respectively. For
the nine months ended September 30, 2006 and 2005 operational expenses included
charges of $106,207 and $145,352, respectively, for reasonable expenses incurred
to effect the acquisition and subsequent management of River Holdings and
non-cash charges of $256,250 and $89,950, respectively, relating to the issuance
of certain stock and stock options. Interest expense, in connection with the
$500,000 principal amount of convertible notes and five-year warrants to
purchase 925,000 shares of common stock at $0.35 per share (including the
resulting discount to the convertible notes) amounted to $126,998 and $13,093
for the nine months ended September 30, 2006 and 2005, respectively.
Accordingly, the Company incurred losses of $676,693 and $304,735 for the nine
months ended September 30, 2006 and 2005, respectively.
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THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2005
RESULTS OF OPERATIONS
Operational expenses during the three months ended September 30, 2006 and 2005
of $115,748 and $70,320, respectively, consisted primarily of reasonable
expenses incurred to effect the acquisition of, and subsequent management of
River Holdings and professional fees necessary to complete certain corporate
filings with the SEC. For the three months ended September 30, 2006 and 2005,
operational expenses included professional fees of $3,378 and $20,614,
respectively. For the three months ended September 30, 2006 and 2005 operational
expenses included charges of $7,983 and $48,722, respectively, for reasonable
expenses incurred to effect the acquisition and subsequent management of River
Holdings. Interest expense in connection with the $500,000 principal amount of
convertible notes and five-year warrants to purchase 925,000 shares of common
stock at $0.35 per share (including the resulting discount to the convertible
notes) amounted to $97,448 and $9,820 for the three months ended September 30,
2006 and 2005, respectively. Accordingly, the Company incurred losses of
$213,196 and $80,140 for the three months ended September 30, 2006 and 2005,
respectively.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2006, the Company had a working capital deficit of $192,164, as
compared to a working capital deficit of $88,236 at December 31, 2005.
Net cash used in operating activities was $262,480 for the nine months ended
September 30, 2006, as compared to $139,335 for the nine months ended September
30, 2005. The primary use of cash from operations in 2006 was to fund operations
relating to the business transaction with River Capital Limited.
The Company's present intentions are to sell debt or equity securities to cover
our operating expenses. There is no guarantee the Company can raise additional
funds in the future.
PLAN OF OPERATION
The Company's primary strategy is to establish and grow a core reinsurance
business based on the development and acquisition of solid insurance and
reinsurance assets and businesses. The Company has no plans for capital
expenditures for the next twelve months.
To provide the cash necessary to support this growth plan for the next twelve
months and to maintain the Company's service readiness requires an ongoing
financial commitment for $10,000,000. The Company intends to raise additional
capital through the sale of equity or debt securities in the public market or
through private placements. The Company may also seek debt capital through
banking institutions or through the use of other instruments. The addition of
any capital to the Company for use as allowable capital for the purposes of
writing insurance or reinsurance business may require the approval of the
Barbados Supervisor of Insurance. There is no assurance the Company will be able
to raise such capital.
CRITICAL ACCOUNTING POLICIES
The Company's accounting policies are fully described in Note 2 of the Notes to
the Financial Statements of its Form 10-KSB. As discussed in Note 2, the
preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions about future events that affect the amounts reported in the
financial statements and accompanying notes. Future events and their effects
cannot be determined with absolute certainty. Therefore, the determination of
estimates requires the exercise of judgment. Actual results inevitably will
differ from those estimates, and such difference may be material to the
Company's financial statements. The Company believes that the following
discussion addresses its Critical Accounting Policies.
Accounting for Contingencies - The Company accrues for contingencies in
accordance with Statement of Accounting Standards ("SFAS") No. 5, "Accounting
for Contingencies," when it is probable that a liability or loss has been
incurred and the amount can be reasonably estimated. Contingencies by their
nature relate to uncertainties
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that require the Company's exercise of judgment both in assessing whether or not
a liability or loss has been incurred and estimating the amount of probable
loss.
The Company accounts for income taxes in accordance with SFAS No. 109. The
Company has provided a full valuation allowance against the assets.
The Company accounts for option issues according to FASB Statement No. 123R,
"Share-Based Payment, an Amendment of FASB Statement No. 123" ("FAS No. 123R").
FAS No. 123R requires companies to recognize in the statement of operations the
grant-date fair value of stock options and other equity-based compensation
issued to employees beginning January 1, 2006. During the nine months ended
September 30, 2006, the Company did not issue any employee stock options nor did
any employee stock options vest.
ITEM 3. CONTROLS AND PROCEDURES.
The Company has evaluated the effectiveness of the design and operation of its
disclosure controls and procedures as of September 30, 2006 (the "Evaluation
Date"). Such evaluation was conducted under the supervision and with the
participation of the Company's Chief Executive Officer ("CEO")/Chief Financial
Officer ("CFO"). Based upon such evaluation, the Company's CEO/CFO concluded
that, as of the Evaluation Date, the Company's disclosure controls and
procedures were effective. There have been no significant changes in the
Company's internal controls over financial reporting that occurred during the
Company's most recent fiscal quarter, that have materially affected, or are
reasonably likely to materially affect, the Company's internal controls over
financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
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ITEM 6. EXHIBITS.
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REGULATION
S-B NUMBER EXHIBIT
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation (1)
- --------------------------------------------------------------------------------
3.2 Certificate of Amendment to the Certificate of Incorporation (2)
- --------------------------------------------------------------------------------
3.3 Bylaws
- --------------------------------------------------------------------------------
10.1 Modification and Amendment Agreement dated June 30, 2006 (3)
- --------------------------------------------------------------------------------
31.1 Rule 15d-14(a) Certification
- --------------------------------------------------------------------------------
32.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the exhibits to the registrant's
registration statement on Form 10-SB filed on February 11, 2000.
(2) Incorporated by reference to the exhibits to the registrant's current
report on Form 8-K dated June 5, 2004 and filed on June 7, 2004.
(3) Incorporated by reference to the exhibits to the registrant's amended
current report on Form 8-K dated May 31, 2005 and filed July 7, 2006.
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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.
RIVER CAPITAL GROUP, INC.
Date: November 14, 2006 /s/ HOWARD TAYLOR
-------------------------------------------
Howard Taylor President
(Chief Executive Officer and
Chief Financial Officer)
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