Cirmaker Technology Corporation
No. 8, Lane 377, Chung Cheng Road, Feng Yeh Li, Yang Mei
Taoyuan 326, Taiwan
Republic of China
December 9, 2005
BY EDGAR
- --------
Mr. David R. Humphrey
Branch Chief
100 F Street N.E.
Securities and Exchange Commission
Washington, D.C. 20549
RE: CIRMAKER TECHNOLOGY CORPORATION
FORM 10 KSB FOR FISCAL YEAR ENDED DECEMBER 31, 2004
COMMISSION FILE NUMBER 333-70156
Dear Mr. Humphrey:
This letter is being filed in response to comments from the staff (the
"Staff") of the Securities and Exchange Commission (the "Commission")
transmitted by letter dated November 16, 2005 to Ms. Hong Juin Chang of Cirmaker
Technology Corporation (the "Company") with respect to the above referenced
filing.
As comments 2, 3 and 5 of the Staff require the Company to file an amended
Form 10-KSB (the "Amended Form 10-KSB"), attached to this filing as Appendix A
are the proposed changed pages for the Amended Form 10-KSB.
For the convenience of the Staff, each of the Staff's comments is included
and is followed by the corresponding response of the Company.
FINANCIAL STATEMENTS
- --------------------
REPORT OF THE INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM, PAGE F-3
- ---------------------------------------------------------------------
1. WE NOTE THAT YOUR AUDITORS ARE LOCATED IN UTAH. IT APPEARS THAT A
SIGNIFICANT PORTION OF YOUR ASSETS, LIABILITIES, REVENUES AND EXPENSES
RELATE TO OPERATIONS LOCATED IN TAIWAN. PLEASE TELL US HOW THE AUDIT OF THE
David R. Humphrey
December 9, 2005
Page 2
OPERATIONS IN TAIWAN, INCLUDING THE ASSOCIATED ASSETS AND LIABILITIES, WAS
CONDUCTED. YOUR RESPONSE SHOULD INCLUDE A DISCUSSION OF THE FOLLOWING:
o WHETHER ANOTHER AUDITOR WAS INVOLVED IN THE AUDIT OF THE TAIWANESE
OPERATIONS. IF SO, PLEASE TELL THE NAME OF THE FIRM AND INDICATE
WHETHER THEY ARE REGISTERED WITH THE PUBLIC COMPANY ACCOUNTING
OVERSIGHT BOARD (PCAOB). ADDITIONALLY, PLEASE TELL US HOW YOUR U.S.
AUDITOR ASSESSED THE QUALIFICATIONS OF THE OTHER AUDITOR AND THE OTHER
AUDITOR'S KNOWLEDGE OF US GAAP AND PCAOB STANDARDS;
o WHETHER YOUR U.S. AUDITOR PERFORMED ALL THE REQUIRED AUDIT PROCEDURES
WITHIN THE UNITED STATES OR WHETHER A PORTION OF THE AUDIT WAS
CONDUCTED BY YOUR U.S. AUDITOR WITHIN TAIWAN;
o THE PERCENTAGE OF YOUR TOTAL ASSETS, LIABILITIES, REVENUES AND
EXPENSES THAT RELATE TO YOUR OPERATIONS LOCATED IN TAIWAN FOR EACH
PERIOD PRESENTED.
Response: The Company's US audit firm at the time, Child, Sullivan &
Company (now Child, Van Wagner & Bradshaw PLLC) used no other audit firm to
assist in the audit. The Company's US auditor does a great deal of audit work in
Asia, and their auditors were personally on site in Taiwan to perform the audit
field work. Their on-site audit team consisted of their full-time employees from
Utah, their contract employees from Hong Kong, and a mandarin speaking audit
manager who they regularly contract from another PCAOB registered firm located
in Utah. In addition to the audit staff on site, the engagement partner visited
and toured the facilities, met with management, and reviewed the on-site audit
work being performed. Management's understanding is that most of the auditor's
upper level reviews and final clean-up were performed in the US, but the
majority of required audit procedures were performed in Taiwan.
The Staff is correct in its assessment that a majority of the Company's
assets, liabilities, revenues and expenses are located in Taiwan. The
percentages, as of December 31, 2004, are: assets, 95.9%; liabilities, 83.8%;
revenues, 90.0%; and expenses, 45.3%.
2. ALTHOUGH THE REPORT ISSUED ON THE DECEMBER 31, 2003 FINANCIAL STATEMENTS IS
DATED PRIOR TO MAY 24, 2004, THE INCLUSION OF THE REPORT IN THE DOCUMENT
FILED IN APRIL 2005 CONSTITUTES A REISSUANEE OF THE REPORT AS OF THE DATE
THE FORM 10-KSB WAS FILED- PLEASE NOTE THAT LIVINGSTON, WACHTELL, AND CO.
LLP IS CURRENTLY REGISTERED WITH THE PCAOB. PLEASE SEE THE REGISTRATION
WEBSITE AT HTTP://WWW.PCAOBUS.ORG/REGISTRATION/REGISTERED_PUBLIC_ACCOUNTING
_FIRMS.PDF. PLEASE ALSO NOTE THAT A NON-REGISTERED FIRM MAY ELECT TO FOLLOW
PCAOB STANDARDS. AS SUCH, PLEASE FILE AN AMENDED FORM 10-KSB WITH AN
OPINION UPDATED FOR THE APPROPRIATE LANGUAGE OBTAINED FROM YOUR PREVIOUS
ACCOUNTANT, LIVINGSTON, WACHTELL, AND CO., LLP
Response: The Company will file this report with the Amended Form 10-KSB.
CONSOLIDATED STATEMENTS OF CASH FLOWS, PAGE F-7
- -----------------------------------------------
3. PLEASE REVISE YOUR PRESENTATION OF CHANGES IN LONG TERM DEBT FROM THE NET
PRESENTATION TO THE GROSS PRESENTATION AS REQUIRED BY PARAGRAPHS 11-13 OF
SFAS 95
David R. Humphrey
December 9, 2005
Page 3
Response: In the Amended Form 10-KSB, the Company has revised its
presentation of changes in long term debt in the Consolidated Statements of Cash
Flow from the net presentation to the gross presentation.
NOTE 1 - ORGANIZATION, NATURE OF OPERATIONS, AND BUSINESS ACQUISITION
- ---------------------------------------------------------------------
OTHER STOCK TRANSACTIONS, PAGE F-1L
- -----------------------------------
4. WE NOTE FROM DISCLOSURE HERE AND THROUGHOUT YOUR FILING THAT YOU HAVE
ISSUED SHARES OF COMMON STOCK AND/OR WARRANTS FOR SERVICES SEVERAL TIMES
DURING 2003 AND 2004. SUPPLEMENTALLY PROVIDE US WITH A TABLE DETAILING EACH
ISSUANCE OF EQUITY INSTRUMENTS FOR SERVICES. THIS TABLE SHOULD INCLUDE THE
DATE, DESCRIPTION OF SERVICE, NUMBER OF UNITS AND TYPE OF EQUITY INSTRUMENT
ISSUED, TOTAL VALUE, HOW SUCH VALUE WAS DETERMINED, AND HOW SUCH VALUE
COMPARED WITH THE MARKET VALUE ON THE DATE OF ISSUANCE. IN ADDITION, YOUR
DISCLOSURE SHOULD BE REVISED TO INDICATE HOW YOU DETERMINED THE VALUE OF
THE EQUITY INSTRUMENTS AND HOW THIS VALUE COMPARED TO THE MARKET VALUE ON
THE DATE OF GRANT.
Response: Please see the requested table attached hereto as Appendix B.
Notes 1 and 9 regarding stock transactions have been updated to disclose the
determination of value and its comparison to market value on the dates of grant.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- ----------------------------------------------------
EARNINGS PER SHARE. PAGE F-17
- -----------------------------
5. PLEASE REVISE YOUR DISCLOSURE RELATED TO EARNINGS PER SHARE TO INCLUDE THE
NUMBER OF POTENTIALLY ANTI-DILUTIVE SHARES- REFER TO THE GUIDANCE IN
PARAGRAPH 40(C) OF SFAS 128.
Response: In the Amended Form 10-KSB, the disclosure has been revised to
indicate 7,100,000 potentially anti-dilutive shares, as well as the fully
diluted denominator as 34,500,443.
NOTE 9 - STOCKHOLDERS' EQUITY
- -----------------------------
STOCK OPTIONS AND WARRANTS, PAGE F-23
- -------------------------------------
6. WE NOTE THAT, FROM NOVEMBER 2004 THROUGH FEBRUARY 2005, YOU ISSUED 25 4/5
UNITS COMPRISED OF 25,000 SHARES OF COMMON STOCK, 25,000 WARRANTS TO
PURCHASE COMMON STOCK VESTING OVER THREE YEARS AND A 10% CONVERTIBLE NOTE
IN THE AMOUNT OF $25,000 CONVERTIBLE AT $0.25 PER SHARE FOR TOTAL PROCEEDS
OF $645,000 OR $25,000 PER UNIT. WITH REGARD TO THIS ISSUANCE, PLEASE
PROVIDE US WITH YOUR ANALYSIS OF THESE INSTRUMENTS UNDER EITF 00-19 AND
EITF 00-27. INCLUDE IN YOUR RESPONSE A TABLE AND DISCUSSION DETAILING THE
FOLLOWING:
o THE DATE OF SALE OF EACH UNIT;
David R. Humphrey
December 9, 2005
Page 4
o THE MARKET VALUE OF THE COMMON STOCK AT THE DATE OF SALE;
o HOW YOU DETERMINED THE FAIR VALUE OF THE COMPONENTS OF EACH UNIT;
o HOW SUCH FAIR VALUE COMPARED TO THE MARKET VALUE ON THE DATE OF GRANT;
o HOW YOU DETERMINED THE APPROPRIATE CLASSIFICATION (LIABILITY OR
EQUITY) FOR THE WARRANTS;
o HOW YOU EVALUATED BOTH THE WARRANTS AND THE CONVERTIBLE DEBENTURE FOR
ANY BENEFIT ON CONVERSION;
o THE AMOUNT OF SUCH BENEFIT;
o HOW YOU RECORDED SUCH BENEFIT, IF ANY; AND
o THE EFFECTIVE INTEREST RATE OR RANGE OF EFFECTIVE INTEREST RATES
RELATED TO THE CONVERTIBLE DEBENTURES ISSUED IN CONJUNCTION WITH THESE
TRANSACTIONS.
WE MAY HAVE FURTHER COMMENT ON YOUR RESPONSE.
Response: Please see the requested table and disclosure attached hereto as
Appendix C.
NOTE 11 - INCOME TAXES, PAGE F-26
- ---------------------------------
7. WE NOTE THAT YOU HAVE INCURRED SIGNIFICANT OPERATING LOSSES, NET LOSSES AND
NEGATIVE OPERATING CASH FLOWS IN RECENT YEARS, AND HAVE AN ACCUMULATED
DEFICIT AS OF DECEMBER 31, 2004 AND JUNE 30, 2005. WE ALSO NOTE THAT AS OF
DECEMBER 31, 2004, YOU HAVE PRESENTED $706,323 OF NET DEFERRED TAX ASSETS
IN YOUR BALANCE SHEET FOR WHICH NO VALUATION ALLOWANCE WAS PROVIDED.
FORMING A CONCLUSION THAT A VALUATION ALLOWANCE IS NOT NEEDED IS DIFFICULT
WHEN THERE IS NEGATIVE EVIDENCE SUCH AS CUMULATIVE LOSSES IN RECENT YEARS,
AS THE WEIGHT GIVEN TO THE POTENTIAL EFFECT OF EVIDENCE SHOULD BE
COMMENSURATE WITH THE EXTENT TO WHICH IT CAN BE OBJECTIVELY VERIFIED. IN
THIS REGARD, YOUR HISTORY OF RECENT LOSSES WOULD APPEAR TO REQUIRE A FULL
VALUATION ALLOWANCE AGAINST DEFERRED TAX ASSETS. PLEASE TELL US HOW YOU
DETERMINED THAT DEFERRED TAX ASSETS WERE RECOVERABLE IN LIGHT OF THE
HISTORY OF LOSSES. IN THE ALTERNATIVE, IF AFTER RECONSIDERING THE EVIDENCE
AVAILABLE YOU DETERMINE THAT A FULL VALUATION WAS NECESSARY, PLEASE AMEND
YOUR FINANCIAL STATEMENTS ACCORDINGLY. REFER TO PARAGRAPHS 23 AND 25 OF
SFAS 109.
Response: Management believes that the operating subsidiary in Taiwan will
more likely than not generate taxable income sufficient to realize the benefits
of the deferred tax assets. The deferred tax assets shown on the balance sheet
are specific to Taiwan, and a full valuation allowance was made for deferred
taxes in the U.S.
8. AS A RELATED MATTER, WE NOTE THAT, IN NOTE 11, YOU DISCUSS U.S. AND
TAIWANESE NET OPERATING LOSS CARRYFORWARDS AND INDICATE THAT THESE HAVE
BEEN FULLY RESERVED. SUPPLEMENTALLY CLARIFY THIS APPARENT DISCREPANCY.
David R. Humphrey
December 9, 2005
Page 5
Response: In the amended Form 10-KSB, Note 11 of the financial statements
has been revised to clarify the full valuation allowance for U.S. operating loss
carryforwards only. Management believes it is more likely than not that the
Taiwanese subsidiary will generate taxable income sufficient to realize the
deferred tax assets prior to their expiration.
FORM 10-QSB FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2005
- --------------------------------------------------------
9. WE NOTE FROM THE DISCLOSURE RELATED TO THE 25 4/5 UNITS ISSUE FROM NOVEMBER
2004 THROUGH FEBRUARY 2005 AND FROM THE DECEMBER 31, 2004 BALANCE SHEET
THAT APPROXIMATELY $520,000 OF 180 DAY CONVERTIBLE NOTES WERE ISSUED AS OF
DECEMBER 31, 2004. WE ALSO NOTE FROM YOUR BALANCE SHEET PRESENTATION IN
THIS FORM 10-QSB THAT THE FULL ISSUANCE OF $645,000 CONVERTIBLE NOTES IS
STILL OUTSTANDING. SUPPLEMENTALLY EXPLAIN TO US THE FACTS AND CIRCUMSTANCES
SURROUNDING THE NON-CONVERSION OF AT LEAST $520,000 OF THESE NOTES AS IT
APPEARS THE LATEST MATURITY DATE WOULD BE JUNE 30, 2005.
Response: The note conversion feature was not automatic or mandatory. The
lenders opted to retain the debentures for future collection rather than convert
them to equity in Cirmaker.
The Company acknowledges that (a) it is responsible for the adequacy and
accuracy of the disclosure in the filings; (b) Staff comments or changes to
disclosure in response to Staff comment in the filings reviewed by the Staff do
not foreclose the Commission from taking any action with respect to the filing;
and (c) the Company may not assert Staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities laws of
the United States.
If you would like to discuss any of the responses to the Staff's comments
or if you would like to discuss any other matters, please contact the
undersigned at 886-3-282-1006 or our counsel George Wang at (212) 603-2062.
Very truly yours,
/s/ Hong Juin Chang
Hong Juin Chang
Appendix A
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LIVINGSTON, WACHTELL & CO., LLP
Certified Public Accountants
29 Broadway, 25th Floor New York, NY 10006-3208
Tel 212-480-0200 o Fax 212-480-1321 o www.lwccpa.com
Established 1919
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
-------------------------------------------------------
To the Board of Directors
Cirmaker Technology Corporation
Taoyuan, Taiwan
We have audited the accompanying consolidated balance sheet of Cirmaker
Technology Corporation (formerly Wrestle-Plex Sports Entertainment Group, Ltd.)
and subsidiaries as of December 31, 2003, and the related consolidated
statements of operations and comprehensive loss, changes in stockholders' equity
and cash flows for the year ended December 31, 2003. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits 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, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Cirmaker Technology Corporation (formerly Wrestle-Plex Sports Entertainment
Group, Ltd.) and subsidiaries as of December 31, 2003 and the consolidated
results of its operations and comprehensive loss, changes in stockholders'
equity and its consolidated cash flows for the year ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Livingston, Wachtell & Co., LLP
LIVINGSTON, WACHTELL & CO., LLP
New York, New York
March 6.2004
April 18, 2005
F-3
CIRMAKER TECHNOLOGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended
December 31,
-----------------------------
2004 2003
------------ ------------
Cash flows from operating activities:
Net loss $ (2,417,884) $ (1,600,359)
Adjustments to reconcile net loss to
net cash provided by (used in) operations:
Depreciation and amortization 529,032 498,529
Provision for losses on receivables 122,442 84,969
Inventory reserves 27,606 5,808
Impairment loss on equity investments - 650,482
Stock and warrants issued for services 944,023 400,000
Minority interest (359,760) 45,962
Loss on asset disposal 346,911 -
Gain on equity investment (214,263)
Other, net (445,526) 167,307
Changes in operating assets and liabilities:
Trade receivables (405,190) (1,002,274)
Inventory (763,380) 951,702
Other current assets (110,841) (122,114)
Trade payables (274,655) (1,162,898)
Accrued liabilities and taxes payable (312,698) 714,055
------------ ------------
Net cash used in operations (3,334,183) (368,831)
Cash flows from investing activities:
Change in restricted cash (76,435) (21,324)
Purchase of property and equipment (325,754) (579,361)
Purchase of equity investments - (1,187,710)
Proceeds on sale of property and equipment 623,755 -
Proceeds on sale of equity investments 788,992 -
Other investing activities - (218,509)
------------ ------------
Net cash used in investing activities 1,010,558 (2,006,904)
Cash flows from financing activities:
Proceeds from cash overdraft 1,274,771 -
Proceeds from (repayments of) bank notes (1,426,454) 1,620,590
Proceeds from due to related party 312,844 272,978
Proceeds from long-term debt 2,125,282 66,000
Repayments of long-term debt (578,092) (259,296)
Proceeds from sale of common stock - 500,000
Issuance costs from sale of common stock - (26,690)
Proceeds from the issuance of debentures 520,000 -
------------ ------------
Net cash provided by financing activities 2,228,351 2,173,582
Effect of rate changes on cash (106,832) 60,557
Decrease in cash and cash equivalents (202,106) (141,596)
Cash and cash equivalents, beginning of period 237,125 378,721
------------ ------------
Cash and cash equivalents, end of period $ 35,019 $ 237,125
============ ============
Supplemental disclosures of cash flow information:
Cash paid for interest $ 295,870 $ 266,507
============ ============
Cash paid for income taxes $ - $ 182,155
============ ============
The accompanying notes are an integral part
of the consolidated financial statements.
F-7
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
EARNINGS (LOSS) PER SHARE
The Company accounts for earnings per share under the provisions of
Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per
Share, which requires a dual presentation of basic and diluted earnings per
share. Basic earnings per share excludes dilution and is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding for the period. Due to net losses in
both periods presented, diluted earnings per share is not presented because
its effect would be antidilutive. If all outstanding warrants and options
were to be exercised, an additional 7,100,000 common shares would be
issued, bringing the denominator used in fully diluted earnings per share
to 34,500,443.
ADVERTISING COSTS
The Company expenses all advertising costs as incurred. The Company
expensed approximately $77,261 and $64,000 in advertising costs, which were
included in sales and marketing expenses, for years 2004 and 2003,
respectively.
STOCK-BASED COMPENSATION
The Company accounts for stock-based compensation for employees using the
intrinsic value method prescribed in Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees, and other
interpretations. Accordingly, compensation cost for the stock, stock
options or other similar instruments, granted to employees is measured as
the excess, if any, of the quoted market price of the Company's common
stock at the measurement date (generally, the date of grant) over the
amount an employee must pay to acquire the stock.
The Company accounts for stock-based compensation for non-employees under
Statement of Financial Accounting Standard No. 123, Accounting for
Stock-Based Compensation ("SFAS No. 123"). SFAS No. 123 requires that
options, warrants, and similar instruments which are granted to
non-employees for goods and services be recorded at fair value on the grant
date. Fair value is generally determined under an option pricing model
using the criteria set forth in SFAS No. 123. The Company is subject to the
pro forma disclosure requirements for stock-based compensation for
employees.
F-17
11. INCOME TAXES (Continued)
The provision for income taxes was estimated as follows:
2004 2003
---- ----
Taiwan 25% tax on current earnings $ - $ -
Taiwan 10% tax on undistributed earnings - 58,080
Taiwan investment tax credit and other - (17,561)
---------- ---------
Total payable currently $ - $ 40,519
---------- ---------
Deferred income tax expense (credit) - net
Taiwan $ (246,889) $ 85,379
U.S. federal (514,563) (442,070)
U.S. federal valuation allowance 514,563 442,070
---------- ----------
Total deferred $ (246,889) $ 85,379
---------- ----------
Total income taxes $ (246,889) $ 125,898
========== ==========
The Taiwan tax system imposes a 25% corporate income tax on all corporate
earnings. In addition, any undistributed current earnings, on a tax basis,
of Cirmaker Taiwan can be subject to an additional 10% corporate income tax
if the earnings are not distributed before a specific time. At December 31,
2004, there are no undistributed earnings that are subject to this
additional 10% corporate income tax. Cirmaker Taiwan's corporate tax
returns through 2002 have been reviewed and approved by the Taiwan Tax
Authority. Cirmaker Taiwan also collects and pays a 5% value - added tax
("VAT") on certain sales and purchases.
There is no provision for U.S. income taxes included on a consolidated
basis since the Company has incurred a net operating loss in the U.S. At
December 31, 2004, the Company has a net operating loss carryforward of
$1,980,000 in the U.S., which may be available to offset future taxable
income through 2024. Additionally, at December 31, 2004, the Company has a
net operating loss carryforward in Taiwan of $1,198,360, which it expects
to apply in 2005 and thereafter. The U.S. deferred tax asset, based on a
tax rate of 34% was $673,200, for which the Company has recorded a full
valuation allowance.
F-27
Appendix B
----------
Equity instruments issued for services
OTCBB
Date Description Number Type Value Determination Closing
- -------- --------------------------- --------- -------------- --------- -------------------------- -------
03/21/03 Consulting services 500,000 Common shares $ 355,000 $.71 per share based on $ 2.45
related to finding and value of services received
arranging the reverse
merger
12/29/03 Employee management services 2,500,000 Options $ 400,000 Intrinsic value of $.16 $ 0.51
exercisable per share ($.51 - $.35)
at $.35
12/29/03 Employee management services 2,000,000 Options $ - Intrinsic value of $.01 $ 0.51
exercisable per share ($.51 - $.50)
at $.50 not deemed material
04/02/04 Consulting services 585,443 Common shares $ 345,443 $.59 per share based on $ 0.48
then current market quotes
07/27/04 Consulting services 487,000 Common shares $ 146,100 $.30 per share based on $ 0.30
then current market quotes
11/19/04 Bridge loan financing 170,000 Common shares $ 34,000 $.20 per share based on $ 0.20
arrangement then current market quotes
11/19/04 Bridge loan financing 170,000 Warrants $ 28,730 $.169 per share based on
arrangement exercisable Black Scholes model
for 3 years
at $.25
11/19/04 Conversion feature of bridge 680,000 Warrants $ 52,700 $.0775 per share based on
loan financing arrangement exercisable Black Scholes model
in 6 months
at $.25
12/20/04 Bridge loan financing 350,000 Common shares $ 91,000 $.26 per share based on
arrangement then current market quotes $ 0.26
12/20/04 Bridge loan financing 350,000 Warrants $ 78,610 $.2246 per share based on
arrangement exercisable Black Scholes model
for 3 years
at $.25
12/20/04 Conversion feature of bridge 1,400,000 Warrants $ 167,440 $.1196 per share based on
loan financing arrangement exercisable Black Scholes model
in 6 months
at $.25
Appendix C
----------
CRKT
Sale of Debentures
Value each Value each Value each Fair Value Fair Value Fair Value Fair Value Fair Value Total
10% 6 month 3 year Common 10% 6 month 3 year Common Fair
Date # Sold Debentures Warrants Warrants Stock Debentures Warrants Warrants Stock Value
- ---------- ------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- -------
11/19/2004 170,000 1 0.0775 0.1690 0.20 170,000 52,700 28,730 34,000 285,430
12/20/2004 350,000 1 0.1196 0.2246 0.26 350,000 167,440 78,610 91,000 687,050
------- ------- ------- ------- -------
2004 TOTAL 520,000 220,140 107,340 125,000 972,480
2/15/2005 125,000 1 0.1051 0.2060 0.24 125,000 52,550 25,750 30,000 233,300
[TABLE CONTINUED]
Black Sholes Assumptions
--------------------------------------
Amount Finance Strike Share Interest
Date Received Cost Price Price Volatility Rate
11/19/2004 111,278 174,152 0.25 0.20 168.0% 3.2%
12/20/2004 271,824 415,226 0.25 0.26 168.0% 3.2%
-------- --------
2004 TOTAL 383,102 589,378
2/15/2005 233,300 0.25 0.24 168.0% 3.2%
The economics of these instruments is that they are simply a bridge
financing for a six month period of time. The value of the beneficial conversion
feature, estimated using the Black Scholes valuation model with the assumptions
included in the table, was recorded as part of the cost of the financing. The
fair value of the beneficial conversion was measured at the date of issuance,
and charged to expense consistent with other types of financing costs.
Accordingly, $589,378 was included in general and administrative expenses for
the year ended December 31, 2004.