FORM 10-QSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________
Quarterly Report Under Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 2004
Commission File Number 000-22236
FARADAY FINANCIAL, INC.
-----------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 33-0565710
------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
175 South Main, Suite 1240, SLC, UT 84111
------------------------------------------
(Address of principal executive offices)
(Zip Code)
(801) 502-6100
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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.
[X] Yes [ ] No
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Class Outstanding as of August 19, 2004
------------ ---------------------------------
Common Stock 2,318,000
PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheet
(Unaudited)
ASSETS
June 30,
2004
------------------
CURRENT ASSETS
Cash in bank $ 368,777
Cash in escrow 35,000
Employee Advances 27,865
Accrued interest receivable 25,074
------------------
Total Current Assets 456,716
------------------
PROPERTY AND EQUIPMENT
Furniture & equipment, net 14,240
Less - accumulated depreciation (877)
------------------
Total Property and Equipment 13,363
------------------
OTHER ASSETS
Note receivable (Note 2) 670,000
------------------
Total Other Assets 670,000
------------------
TOTAL ASSETS $ 1,140,079
==================
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 16,152
Accrued liabilities (Note 2) 256,828
Convertible debt related parties (Note 2) 1,484,531
------------------
Total Current Liabilities 1,757,511
------------------
Total Liabilities 1,757,511
------------------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock, $0.001 par value, 20,000,000 shares
Authorized 3,113,400 issued, 2,318,000 outstanding 3,113
Capital in excess of par value 118,189
Treasury shares at cost (59,375)
Other comprehensive loss -
Deficit accumulated during the development stage (679,359)
------------------
Total Stockholders' Equity (Deficit) (617,432)
------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,140,079
==================
The accompanying notes are an integral part of these consolidated financial statements.
2
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations and Other Comprehensive Income
(Unaudited)
From
Inception on
June 11,
For the Three Months Ended, 1992
June 30, through
--------------------------- June 30,
2004 2003 2004
----------- ----------- -----------
REVENUES $ 86,742 $ - $ 86,742
EXPENSES
Depreciation expense 712 - 877
General and administrative 286,088 7,349 417,123
----------- ----------- -----------
Total Expenses 286,800 7,349 418,000
----------- ----------- -----------
LOSS FROM OPERATIONS (200,058) (7,349) (331,258)
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Loss on sale of securities - (60,366) (311,004)
Gain on legal settlement (Note 2) - - 184,767
Interest income 18,006 - 33,573
Interest expense (44,385) (18,969) (255,437)
----------- ----------- -----------
Total Other Income (Expenses) (26,379) (79,335) (348,101)
----------- ----------- -----------
NET LOSS (226,437) (86,684) (679,359)
----------- ----------- -----------
OTHER COMPREHENSIVE LOSS
Change in marketable securities - (547,487) -
----------- ----------- -----------
Total Other Comprehensive Loss - (547,487) -
----------- ----------- -----------
COMPREHENSIVE LOSS $ (226,437) $ (634,171) $ (679,359)
=========== =========== ===========
BASIC LOSS PER SHARE $ (0.09) $ (0.03)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,318,000 3,000,000
=========== ===========
The accompanying notes are an integral part of these consolidated financial statements.
3
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
(Unaudited)
From
Inception on
June 11,
For the Three Months Ended, 1992
June 30, through
------------------------------ June 30,
2004 2003 2004
------------ ------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (226,437) $ (86,684) $ (679,359)
Adjustments to reconcile net loss to used by operating activities:
Depreciation & amortization expense 712 - 1,148
Common stock issued for services 113,400 - 113,400
Expenses paid with note payable - - 1,656
Loss on sale of securities - 60,366 311,004
Gain on legal settlement - - (184,767)
Changes in operating assets and liabilities:
Increase in cash in escrow (30,000) - (35,000)
(Increase) decrease in interest receivable (18,006) - (25,074)
Increase in accounts receivable - related (27,865) - (27,865)
Increase in accounts payable 802 - 16,152
Increase in current liabilities and accrued interest 44,385 18,969 256,828
Net Cash (Used) Provided by Operating Activities (143,009) (7,349) (251,877)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Organization costs - - (271)
Purchase of fixed assets - - (14,240)
Purchase of securities - - (500,000)
Sale of securities - 7,594 259,585
Issuance of note receivable (170,000) - (670,000)
------------ ------------ ------------
Net Cash (Used) Provided by Investing Activities (170,000) 7,594 (924,926)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash - - 5,746
Purchase of treasury shares (25,000) - (59,375)
Proceeds from contribution of capital - - 500
Proceeds from convertible notes 565,000 - 1,775,295
Principal payments on convertible notes - - (176,586)
------------ ------------ ------------
Net Cash Provided by Financing Activities 540,000 - 1,545,580
------------ ------------ ------------
NET INCREASE IN CASH 226,991 245 368,777
CASH AT BEGINNING OF PERIOD 141,786 - -
------------ ------------ ------------
CASH AT END OF PERIOD $ 368,777 $ 245 $ 368,777
============ ============ ============
The accompanying notes are an integral part of these consolidated financial statements.
4
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
From
Inception on
June 11,
For the Three Months Ended, 1992
June 30, through
------------------------------ June 30,
2004 2003 2004
------------ ------------ ------------
SUPPLEMENTAL SCHEDULE OF CASH FLOW
ACTIVITIES
NON-CASH INVESTING AND FINANCING
ACTIVITIES:
Common stock issued for debt paid
on behalf of the Company $ - $ - $ 1,656
Distribution of assets in payment of
convertible debt $ - $ - $ 114,178
Common stock issued for services $ 113,400 $ - $ 113,400
CASH PAID FOR:
Interest $ - $ - $ -
Taxes $ - $ - $ -
The accompanying notes are an integral part of these consolidated financial statements.
5
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Three Months Ended June 30, 2004 and 2003
NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying unaudited condensed consolidated financial statements
have been prepared by the Company pursuant to the rules and regulations
of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the
United States of America have been condensed or omitted in accordance
with such rules and regulations. The information furnished in the
interim condensed consolidated financial statements include normal
recurring adjustments and reflects all adjustments, which, in the
opinion of management, are necessary for a fair presentation of such
financial statements. Although management believes the disclosures and
information presented are adequate to make the information not
misleading, it is suggested that these interim condensed consolidated
financial statements be read in conjunction with the Company's most
recent audited financial statements and notes thereto included in its
March 31, 2004 Annual Report on Form 10-KSB. Operating results for the
three months ended June 30, 2004 are not necessarily indicative of the
results that may be expected for the year ending March 31, 2005.
NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES
Notes Payable and Agreement with NutraCea
In December 2000, the Company entered into a merger agreement with
NutraCea (formerly NutraStar Incorporated). The merger was contingent
on a $500,000 loan from Faraday to NutraCea. As of March 2001, the
Company had secured investors and advanced $500,000 to NutraCea. By
April 2001 the Company determined that the merger plans were
terminated. The $500,000 that had been advanced to NutrCea was due
within 90 days and bore interest 12%. The note carried an optional
conversion feature in which the Company could convert the principal and
accrued interest into common stock of NutraCea at a rate of $1.00 per
share. The notes also carried a mandatory conversion feature as
follows: in the event that NutraCea merged into a public company or
issued shares pursuant to its initial public offering of common stock,
the outstanding principal and accrued interest was to be converted into
common stock of NutraCea at the lesser of a) $1.00 per share, b) the
average share price over the initial 10 day trading period less 20%, or
c) the price per share of common stock offered in a private placement
at the time of mandatory conversion.
Investors advanced the $500,000 with the understanding that following
either a merger with NutraCea or NutraCea's merger with another public
company, the amounts would be converted to equity in the newly merged
corporation. However, no written agreements were signed formalizing the
nature or the terms of the advances. Management of the Company believes
that accounting for the investors' advance of $500,000 to NutraCea on
behalf of Faraday as notes payable is the most accurate way to report
the transaction. The Company recorded $71,791, $67,740 and $56,102 of
interest expense related to these notes payable at 12% per annum for
the years ended March 31, 2004, 2003 and 2002.
6
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Three Months Ended June 30, 2004 and 2003
NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
Notes Payable and Agreement with NutraCea (Continued)
On December 13, 2001, the Company reached a settlement agreement with
NutraCea. The agreement states that NutraCea borrowed a total of
$500,000 from the Company pursuant to a series of promissory notes
bearing interest at 12% per annum and due and payable 90 days from the
date of issuance. The outstanding principal and accrued but unpaid
interest on the date of the settlement was $551,797. Per the terms of
the agreement the Company and NutraCea released, settled and disposed
of any and all claims, demands and disputes of any kind between them,
including, but not limited to, any disputes connected with the proposed
terminated merger. NutraCea settled their debt to Faraday of $500,000
principal and $51,797 accrued interest in exchange for 735,730 shares
of NutraCea Preferred Stock per the terms of the agreement.
The agreement also stipulates that failure on the part of NutraCea to
file a Registration Statement on For SB-2 or a substantially equivalent
registration that is declared effective by the Securities and Exchange
Commission by June 30, 2002 will result in conversion of the 735,730
Preferred Shares to the same number of Common Shares of NutraCea.
NutrCea failed to register the Preferred Shares with the Securities and
Exchange Commission on or before June 30, 2002, and therefore, NutraCea
was obligated to convert the 735,730 Preferred Shares to 735,730 Common
Shares.
On July 16, 2002, a Complaint was filed against NutraCea by the Company
in the United States District Court, for the District of Utah (Case No
02-CV-00959). The Company filed the lawsuit when NutraCea failed to
meet the terms set forth in the settlement agreement. NutraCea did file
a registration statement with the Securities and Exchange Commission on
June 4, 2002, however, such registration statement had not been
declared effective as of June 30, 2002 as required by the settlement
agreement. As discussed previously, in the event that NutraCea failed
to affect a registration statement by June 30, 2002, NutraCea's Chief
Executive Officer, Ms. Patricia McPeak, was to transfer to the Company
an additional 735,730 pre-reverse split shares of her common stock and
become personally liable to the Company for the original $500,000 debt
amount plus 12% interest per annum. The lawsuit also seeks to award the
Company any attorney's fees and other costs related to this matter.
On August 29, 2002, NutraCea filed a motion to dismiss the Complaint
filed by the Company due to lack of personal jurisdiction for both
NutraCea and Ms. McPeak. On November 27, 2002, NutraCea's motion to
dismiss was denied as to both NutraCea and Ms. McPeak. An alternative
settlement agreement was reached on December 10, 2003, whereby the suit
was dismissed and the Company shall be guaranteed payment on any
deficiency upon the sale of their common stock.
On September 18, 2003 the Company converted its existing 735,730
preferred shares of NutraCea to 735,730 shares of NutraCea common
stock. Also, in September of 2003 per the terms of the new settlement
agreement NutraCea transferred an additional 735,730 shares of its
common stock to the Company. NutraCea also paid deferred dividends to
the Company as of September 18, 2003 in the form of 1,301,692 shares of
its common stock.
7
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Three Months Ended June 30, 2004 and 2003
NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
Notes Payable and Agreement with NutraCea (Continued)
The new settlement agreement also states that the Company has until
September 18, 2004 to sell the NutraCea common stock, and in the event
the Company is unable to realize $551,797 plus any legal fees the
Company incurred as of September 18, 2003 through the sale of its
2,774,772 shares of NutraCea common stock (735,730 preferred shares
converted to common plus the additional 735,730 common shares and
1,301,692 shares granted in payment of dividends) that NutraCea shall
have 90 days from the date that the Company demonstrates that through
its best efforts it has not been able to realize $551,797 plus legal
fees through the sale of its NutraCea common stock, to transfer to the
Company additional NutraCea common shares to make up any deficiency
between the actual sales price obtained by the Company after it has
sold all of its NutraCea shares and the amount of $551,797 plus legal
fees.
In addition, should the Company choose not to sell any portion of its
NutraCea common stock prior to September 18, 2004, the value of any
portion of its NutraCea common stock still remaining shall be credited
against the original $551,797. Furthermore, should the value of the
common stock exceed the $551,797, the Company is entitled to keep the
excess. It is the full intention of the Company to distribute the stock
awards from the settlement on a pro rata basis to each investor.
As of March 31, 2004 the Company has distributed a total of 73,735
shares of NutraCea common stock valued at $114,178 directly to the
investors. The Company accounted for the transaction as a reduction to
the principal amount of the notes.
Also during the year ended March 31, 2004 the Company sold 347,743
shares of the NutraCea common stock and distributed the proceeds to the
investors. The total amount distributed to the investors was $259,585
and was accounted for as a reduction to the principal amount of the
notes.
The Company plans to distribute the remaining shares of the NutraCea
stock or the proceeds from the sales of the stock to investors until
the remaining principal and accrued interest is paid in full. At June
30, 2004 the remaining principal balance of these notes was $209,531.
The Company has recorded accrued interest of $217,940 as of June 30,
2004.
Notes Payable, Notes Receivable and Agreement with VIB.TV
The Company, Video Internet Broadcasting Corporation (VIB) and Homenet
Utah, Inc. ("Homenet"), a wholly owned subsidiary of the Company, have
entered into a Merger Agreement whereby Homenet may be merged into VIB
("Merger") with VIB to be the surviving corporation. The separate
existence of Homenet would cease if the Merger becomes effective.
Consummation of the Merger is subject to various conditions including
satisfactory resolution of the potential VIB liabilities and no VIB
shareholders exercising dissenters rights. Notwithstanding the
foregoing, Homenet may waive such conditions to closing as it deems
appropriate. In addition, as part of the Merger, VIB's name will be
changed to HomeNet Communications, Inc.
8
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Three Months Ended June 30, 2004 and 2003
NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
Notes Payable, Notes Receivable and Agreement with VIB.TV (Continued)
Upon closing of the Merger Agreement, each share of VIB capital stock
that is issued and outstanding immediately prior to the closing will be
converted into 1.0903 shares of the Company's common stock and all
previously outstanding shares of VIB capital stock shall no longer be
outstanding and shall automatically be canceled and shall cease to
exist. All other securities convertible into or exercisable for shares
of VIB capital stock, including but not limited to stock options,
convertible debt and warrants and issued by the Company prior to the
effective date of the Merger, shall become, without further action,
convertible into or exercisable for the number of shares of Company
common stock determined by using the 1.0903 conversion factor. VIB
currently has 2,184,939 shares of common stock outstanding, 350,550
shares of preferred stock outstanding, options exercisable for an
additional 424,000 shares of stock and other convertible securities
that are convertible under terms that are in dispute. It is expected
that (assuming conversion of all VIB convertible securities and
settlement of the contingent obligations on anticipated terms of which
there can be no assurance) the Company would be issuing approximately
3,312,826 shares its common stock on a fully diluted basis in
connection with the Merger. In addition, there is a possibility that
the Company may create a class of preferred stock that would be issued
to some of the holders of VIB securities that are convertible into VIB
preferred stock. However, the exact number of shares and the number and
form of the convertible securities to be issued is still subject to
agreement.
In connection with the proposed merger between Faraday and VIB, the
parties entered into a loan agreement, pursuant to which Faraday has
lent VIB a principal amount of $670,000 as of June 30, 2004.
To obtain the financing needed for the loan agreement between Faraday
and VIB, Faraday entered into loan agreements with several investors.
During March 2004, the Company issued convertible debentures to finance
its loan to VIB. The debentures accrue interest at 12% per annum and
are due six months from the original date of the notes. Principal and
interest not paid when due shall bear interest at the rate of 18% per
annum. The notes are convertible at any time at the option of the
holder into shares of the Company's common stock at the rate of one
share of common stock for every $1.00 in principal and accrued interest
that is converted. In addition, the notes have attached common stock
purchase warrants to acquire 100 shares of common stock at an exercise
price of $1.50 per share for every one thousand dollars in principal
lent by the lender.
In determining whether an instrument includes a beneficial conversion
option, the Emerging Issues Task Force reached a consensus that the
effective conversion price based on the proceeds received for or
allocated to the convertible instrument should be used to compute the
intrinsic value, if any, of the embedded conversion option. As a result
of this consensus, an issuer should first allocate the proceeds
received in a financing transaction that includes a convertible
instrument to the convertible instrument and any other detachable
instruments included in the exchange (such as detachable warrants) on a
relative fair value basis. Then, the Issue 98-5 model should be applied
to the amount allocated to the convertible instrument, and an effective
conversion price should be calculated and used to measure the intrinsic
value, if any, of the embedded conversion option.
Faraday issued $1,275,000 of convertible debt with a par amount of
$1,275,000 and 127,500 warrants. The convertible debt is convertible at
a conversion price of $1 per share (holder would receive 1 share of
stock for each dollar of debt or 1,275,000 shares of the Company's
common stock). Using the black-scholes model, the 127,500 warrants have
no value. The Company has recorded accrued interest of $38,887
associated with the convertible debentures.
9
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Three Months Ended June 30, 2004 and 2003
NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued)
Notes Payable, Notes Receivable and Agreement with VIB.TV (Continued)
The Company has determined that the embedded conversion option within
the debt instrument is not beneficial (has no intrinsic value) to the
holder.
Notes payable, convertible debentures and notes payable - related
parties consist of the following as of June 30, 2004:
Unsecured notes payable to shareholders of the Company
due on demand, payable through the issuance of or
proceeds from the sale of shares of NutraCea common
stock Interest is computed at a rate of 12% per annum. $ 209,531
Unsecured convertible notes payable to shareholders of
the Company due September 2004, convertible at the
holders option to common stock of the Company at a
ratio of one share per each dollar of outstanding
principal and interest. Interest is computed at at a
rate of 12% per annum. 1,275,000
----------
Total Notes payable, notes payable - related parties and
Convertible Debentures Payable $1,484,531
==========
Interest expense on the above debt amounted to $44,385 for the three
months ended June30, 2004. Accrued interest was $256,878 at June 30,
2004.
NOTE 3 - OUTSTANDING STOCK PURCHASE WARRANTS
Under FASB Statement 123, the Company estimates the fair value of each
stock purchase warrant at the grant date by using the Black-Scholes
option pricing model with the following weighted average assumptions
used for grants, respectively; dividend yield of zero percent; expected
volatility of 108%; risk-free interest rate of 4.5 percent and expected
life of 6 months, for the three months ended June 30, 2004. As of June
30, 2003 there were no stock purchase warrants outstanding.
Had compensation cost for the Company's stock options granted to
directors and employees been based on the fair value as determined by
the Black-Scholes option pricing model at the grant date under the
accounting provisions of SFAS No. 123, the Company would have recorded
an additional expense of $-0- for the three months ended June 30, 2004.
As the value of the warrants is $-0- the Company's net loss would not
have been changed.
10
FARADAY FINANCIAL, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
For the Three Months Ended June 30, 2004 and 2003
NOTE 3 - OUTSTANDING STOCK PURCHASE WARRANTS (Continued)
A summary of the status of the Company's stock warrants as of June 30,
2004 and changes during the period ended June 30, 2004 is presented
below:
Weighted Weighted
Options Average Average
and Exercise Grant Date
Warrants Price Fair Value
-------- --------- ----------
Outstanding, March 31, 2003 - $ - $ -
Granted 71,000 1.50 -
Expired/Canceled - - -
Exercised - - -
--------- --------- --------
Outstanding, March 31, 2004 71,000 $ 1.50 $ -
Granted 481,500 1.50 -
Expired - - -
Exercised - - -
--------- --------- --------
Outstanding, June 30, 2004 552,500 1.50 -
Exercisable, June 30, 2004 552,500 $ 1.50 $ -
========= ========= ========
NOTE 4 - GOING CONCERN
The Company's financial statements are prepared using accounting
principles generally accepted in the United States of America
applicable to a going concern, which contemplates the realization of
assets and liquidation of liabilities in the normal course of business.
The Company has not yet established an ongoing source of revenues
sufficient to cover its operating costs and allow it to continue as a
going concern. The ability of the Company to continue as a going
concern is dependent on the Company obtaining adequate capital to fund
operating losses until it becomes profitable. If the Company is unable
to obtain adequate capital, it could be forced to cease operations.
In order to continue as a going concern, develop a reliable source of
revenues, and achieve a profitable level of operations the Company will
need, among other things, additional capital resources. Management's
plans to continue as a going concern include raising additional capital
through sales of common stock. However, management cannot provide any
assurances that the Company will be successful in accomplishing any of
its plans.
The ability of the Company to continue as a going concern is dependent
upon its ability to successfully accomplish the plans described in the
preceding paragraph and eventually secure other sources of financing
and attain profitable operations. The accompanying financial statements
do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
11
Item 2. Management's Discussion and Analysis or Plan of Operation.
The following discussion and analysis provides information which
management believes is relevant to an assessment and understanding of the
Company's consolidated results of operations and financial condition. The
discussion should be read in conjunction with the consolidated financial
statements and notes thereto.
Plan of Operation
The Company has no business operations, and very limited assets or
capital resources. The Company's business plan is to seek one or more potential
business ventures that, in the opinion of management, may warrant involvement by
the Company. The Company recognizes that because of its limited financial,
managerial and other resources, the type of suitable potential business ventures
which may be available to it will be extremely limited. The Company's principal
business objective will be to seek long-term growth potential in the business
venture in which it participates rather than to seek immediate, short-term
earnings. In seeking to attain the Company's business objective, it will not
restrict its search to any particular business or industry, but may participate
in business ventures of essentially any kind or nature. It is emphasized that
the business objectives discussed are extremely general and are not intended to
be restrictive upon the discretion of management.
The Company will not restrict its search for any specific kind of
firms, but may participate in a venture in its preliminary or development stage,
may participate in a business that is already in operation or in a business in
various stages of its corporate existence. It is impossible to predict at this
stage the status of any venture in which the Company may participate, in that
the venture may need additional capital, may merely desire to have its shares
publicly traded, or may seek other perceived advantages which the Company may
offer. In some instances, the business endeavors may involve the acquisition of
or merger with a corporation which does not need substantial additional cash but
which desires to establish a public trading market for its common stock.
Proposed Transaction With Video Internet Broadcasting Corporation
("VIB")
In furtherance of the Company's plan of operation, the Company, VIB and
Homenet Utah, Inc. ("Homenet"), a wholly owned subsidiary of the Company, have
entered into a Merger Agreement whereby Homenet may be merged into VIB
("Merger") with VIB to be the surviving corporation. The separate existence of
Homenet would cease if the Merger becomes effective. Consummation of the Merger
is subject to various conditions including satisfactory resolution of the
potential VIB liabilities and no VIB shareholders exercising dissenters rights.
Notwithstanding the foregoing, Homenet may waive such conditions to closing as
it deems appropriate. In addition, as part of the Merger, VIB's name will be
changed to HomeNet Communications, Inc. There can be no assurance that such
contingencies will be satisfied, that the Merger Agreement will be closed, that
the combined business operations will prove successful or that the transaction
will prove to be favorable for the shareholders of the Company.
Upon closing of the Merger Agreement, each share of VIB capital stock
that is issued and outstanding immediately prior to the closing will be
converted into 1.0903 shares of the Company's common stock and all previously
outstanding shares of VIB capital stock shall no longer be outstanding and shall
automatically be canceled and shall cease to exist. All other securities
convertible into or exercisable for shares of VIB capital stock, including but
not limited to stock options, convertible debt and warrants and issued by the
Company prior to the effective date of the Merger, shall become, without further
action, convertible into or exercisable for the number of shares of Company
common stock determined by using the 1.0903 conversion factor. VIB currently has
2,184,939 shares of common stock outstanding, 350,550 shares of preferred stock
12
outstanding, options exercisable for an additional 424,000 shares of stock and
other convertible securities that are convertible under terms that are in
dispute. It is expected that (assuming conversion of all VIB convertible
securities and settlement of the contingent obligations on anticipated terms of
which there can be no assurance) the Company would be issuing approximately
3,312,826 shares its common stock on a fully diluted basis in connection with
the Merger. In addition, there is a possibility that the Company may create a
class of preferred stock that would be issued to some of the holders of VIB
securities that are convertible into VIB preferred stock. However, the exact
number of shares and the number and form of the convertible securities to be
issued is still subject to agreement.
In connection with the proposed Merger, the Company and VIB entered
into a loan agreement, pursuant to which the Company has lent VIB a principal
amount of $670,000 as of June 30, 2004. VIB is in difficult financial
circumstances and there can be no assurance that VIB will be able to repay the
amounts lent.
Liquidity and Capital Resources
We used net cash for operating activities of $143,009 during the three
months ended June 30, 2004. As of June 30, 2004, we have $456,716 in current
assets, $1,757,511 in current liabilities and a working capital (deficit) of
($1,300,795). Our current liabilities include $256,828 in accrued liabilities,
an obligation in the amount of $209,531 payable on demand, unsecured convertible
promissory notes in the amount of $1,275,000 that are due and payable in full in
September 2004 and $16,152 in accounts payable.
Our working capital requirements for the foreseeable future will vary
based upon a number of factors, including the costs associated with any
potential acquisition, including the proposed transaction with VIB, and other
factors that may not be foreseeable at this time. We believe that we will need
at least $5,000,000 in funding for then next twelve months if the Merger is
closed. We have no commitments to provide additional funding and there can be no
assurance that we will be able to obtain additional funding on satisfactory
terms or at all. If we do not receive the needed funding, we will not be able to
execute our business plan.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our financial condition,
changes in financial condition, revenues or expenses, results of operations,
liquidity, capital expenditures or capital resources that is material to
investors.
Recent Accounting Pronouncements
The Company has not adopted any new accounting policies that would have
a material impact on the Company's financial condition, changes in financial
conditions or results of operations.
Critical Accounting Policies
The carrying value of the Company's cash equivalents and accounts
payable approximate fair values due to their short-term nature. The carrying
value of the Company's investments equals their fair value, which is based upon
quoted prices in active markets.
The Company follows the provisions of SFAS 115 regarding marketable
securities. The Company`s securities investments that are bought and held
principally for the purpose of selling them in the near term are classified as
trading securities. Trading securities are recorded at fair value on the balance
sheet in current assets, with the change in fair value during the period
included in earnings.
13
Securities investments that the Company has the positive intent and
ability to hold to maturity are classified as held-to-maturity securities and
recorded at amortized cost in investments and other assets. Securities
investments not classified as either held-to-maturity or trading securities are
classifies as available-for-sale securities. Available-for-sale securities are
recorded at fair value in investments and other assets on the balance sheet,
with the change in fair value during the period excluded from earnings and
recorded net of tax as a separate component of equity. All marketable securities
held by the Company have been classified as available-for-sale securities.
Under FASB Statement 123, the Company estimates the fair value of each
stock purchase warrant at the grant date by using the Black-Scholes option
pricing model with the following weighted average assumptions used for grants,
respectively; dividend yield of zero percent; expected volatility of 108%;
risk-free interest rate of 4.5 percent and expected life of 6 months, for the
year ended March 31, 2004. As of March 31, 2003 and 2002 there were no stock
purchase warrants outstanding.
Forward-Looking Statements
When used in this Form 10-QSB or other filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized officer of the Company's executive officers, the words
or phrases "would be", "will allow", "intends to", "will likely result", "are
expected to", "will continue", "is anticipated", "estimate", "project", or
similar expressions are intended to identify "forward-looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995.
The Company cautions readers not to place undue reliance on any
forward-looking statements, which speak only as of the date made, and advises
readers that forward-looking statements involve various risks and uncertainties.
The Company does not undertake, and specifically disclaims any obligation to
update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statement.
Item 3. Controls and Procedures
The Company has evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
June 30, 2004 pursuant to Exchange Act Rule 13a-15(e). Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective in timely
alerting them to material information relating to the Company required to be
included in the Company's periodic SEC filings. There have been no significant
changes in internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation.
14
PART II -- OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.
Between March and June, 2004, the Company entered into loan agreements
with eight accredited and sophisticated investors whereby the Company borrowed
$1,275,000 in funds from these investors. Maven Properties, Ltd., an entity
controlled by Frank J. Gillen, lent $60,000 of these funds and Badger
Investments, LLC, an entity controlled by Shauna Badger, lent $200,000 of these
funds. The loans accrue interest at 12% per annum and are due six months from
the effective date of the loan. Principal and interest not paid when due bear
interest at the rate of 18% per annum. The notes are convertible at any time at
the option of the holder into shares of the Company's common stock at the rate
of one share of common stock for every $1.00 in principal and accrued interest
that is converted. In addition, lenders received warrants to acquire 100 shares
of common stock at an exercise price of $1.50 per share for every one thousand
dollars in principal lent by the lender. The Company did not use an underwriter
in connection with these transactions and the transactions were exempt from
registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506
as promulgated thereunder.
In April 2004, the Company issued warrants exercisable for 100,000
shares of common stock to five HMG employees who are employed as telemarketers.
Warrants exercisable for 75,000 of these shares expired before they were
exercised. These warrants are exercisable at $1.50 per share. The Company did
not use an underwriter in connection with these transactions and the
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 as promulgated thereunder.
In April 2004, the Company issued warrants exercisable for a total of
100,000 shares of common stock to the Company's two directors as compensation
for services rendered. The warrants are exercisable at $1.50 per share. The
Company did not use an underwriter in connection with these transactions and the
transactions were exempt from registration pursuant to Section 4(2) of the
Securities Act of 1933 and Rule 506 as promulgated thereunder.
In June 2004, the Company issued 48,000 shares of its common stock to
Frank J. Gillen and Shauna Badger in consideration for the cancellation of
$24,000 in accrued salary obligations owed to these officers and it issued
65,400 shares of its common stock to Frank J. Gillen in consideration for the
cancellation of $65,400 in accrued expenses owed to him. In addition, in June
2004 the Company issued warrants to purchase 300,000 shares of the Company's
common stock at $1.50 per share to several accredited and sophisticated
individuals in consideration for their guarantee of a $1,500,000 line of credit
with a bank for the benefit of the Company and VIB. The Company did not use an
underwriter in connection with these transactions and the transactions were
exempt from registration pursuant to Section 4(2) of the Securities Act of 1933
and Rule 506 as promulgated thereunder.
15
Item 6. Exhibits and Reports on Form 8-K.
(a) INDEX TO EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
3(i).1 Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 of the Company's Form 10-SB, File No.
0-22236)
3(ii).1 Bylaws of the Company (Incorporated by reference to Exhibit
3.2 of the Company's Form 10-SB, File No. 0-22236)
10.1 Settlement Agreement by and between the Company and NutraCea,
dated December 10, 2002 (Incorporated by reference to Exhibit
10.1 of the Company's Form 10-KSB, dated March 31, 2004).
10.2 Loan Agreement by and between the Company and Video Internet
Broadcasting Corporation, dated February 18, 2004
(Incorporated by reference to Exhibit 10.2 of the Company's
Form 10-KSB, dated March 31, 2004).
10.3 Security Agreement by and between the Company and Video
Internet Broadcasting Corporation, dated March 12, 2004
(Incorporated by reference to Exhibit 10.3 of the Company's
Form 10-KSB, dated March 31, 2004).
10.4 Intellectual Property Security Agreement by and between the
Company and Video Internet Broadcasting Corporation, dated
March 12, 2004 (Incorporated by reference to Exhibit 10.4 of
the Company's Form 10-KSB, dated March 31, 2004).
10.5 Amendment Number One to the Agreements by and between the
Company and Video Internet Broadcasting Corporation, dated
April 21, 2004 (Incorporated by reference to Exhibit 10.5 of
the Company's Form 10-KSB, dated March 31, 2004).
10.6 Amendment Number Two to the Agreements by and between the
Company and Video Internet Broadcasting Corporation, dated May
1, 2004 (Incorporated by reference to Exhibit 10.6 of the
Company's Form 10-KSB, dated March 31, 2004).
10.7 Form of Loan Agreement by and between the Company and Lenders
whereby the Company borrowed the principal amount of $765,000
(Incorporated by reference to Exhibit 10.7 of the Company's
Form 10-KSB, dated March 31, 2004).
10.8 Form of Loan Agreement by and between the Company and Lenders
whereby the Company borrowed the principal amount of $445,000
(Incorporated by reference to Exhibit 10.8 of the Company's
Form 10-KSB, dated March 31, 2004).
10.9 Employment Agreement with Frank J. Gillen (Incorporated by
reference to Exhibit 10.9 of the Company's Form 10-KSB, dated
March 31, 2004).
10.10 Employment Agreement with Shauna Badger (Incorporated by
reference to Exhibit 10.10 of the Company's Form 10-KSB, dated
March 31, 2004).
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EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
10.11 Agreement and Plan of Merger, by and between the Company,
Homenet Utah, Inc. and Video Internet Broadcasting, Inc.,
dated August 2, 2004.
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002
32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
None
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.
FARADAY FINANCIAL, INC.
(Registrant)
Date: August 19, 2004 By /s/ Frank J. Gillen
-----------------------------
Frank J. Gillen
Director, President, Chief
Executive Officer and Chief
Financial Officer
17