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
June 30, 2004
[ ] Transition Report Under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from to
Commission File Number: 000-49690
MCKENZIE BAY INTERNATIONAL, LTD.
(Exact Name of Small Business Issuer as Specified in Its Charter)
Delaware 51-0386871
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
975 Spaulding Avenue SE
Grand Rapids, Michigan 49546
(Address of Principal Executive Offices)
(616) 940-3800
(Issuer's Telephone Number with Area Code)
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 ___
On September 10, 2004 the registrant had outstanding 26,393,893 shares of common
stock, $.001 par value.
Transitional Small Business Disclosure Format (check one): Yes No X
===============================================================================
MCKENZIE BAY INTERNATIONAL, LTD.
INDEX TO FORM 10-QSB
Page
Number
-------------
Part I. Financial Information
Item 1. Financial Statements...................................................1
Condensed Consolidated Balance Sheets as
of June 30, 2004 and September 30,2003,......................................1
Consolidated Statements of Loss for the
three and nine months ended June 30, 2004 and 2003..........................2
Consolidated Statements of Cash Flows for
the nine months ended June 30, 2004 and 2003.................................3
Notes to Condensed Consolidated Financial Statements.........................6
Item 2. Management's Discussion and Analysis or Plan of Operation............15
Item 3. Controls and Procedures..............................................19
Part II. Other Information
Item 2. Changes in Securities and Small Business Issuer
Purchases of Equity Securities.......................................20
Item 6. Exhibits and Reports on Form 8-K.....................................20
Signatures....................................................................24
Certifications................................................................25
================================================================================
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A Development-Stage Company)
Condensed Consolidated Balance Sheets
(Unaudited)
(Amounts stated In US dollars)
June 30, September 30,
2004 2003
----------- -----------
ASSETS (Unaudited)
Current:
Cash and cash equivalents $ 47,571 $ 49,208
Accounts receivable 89,576 262,979
Prepaid expenses and deposits 54,873 145,441
Deferred issue costs (note 5) 280,000 -
----------- -----------
Total current assets 472,020 457,628
Reclamation cash bond 338,685 338,685
Property and equipment 77,702 76,263
----------- -----------
Total assets $ 888,407 $ 872,576
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Bank indebtedness $ 103,660 $ 83,463
Accounts payable and accrued liabilities 2,063,793 2,162,934
Current portion of long-term debt 157,763 32,945
----------- -----------
Total current liabilities 2,325,216 2,279,342
Long-term and other liabilities:
Long-term debt 932,274 1,074,651
Reclamation and closure liabilities 250,000 250,000
Redeemable capital stock 91,975 252,175
----------- -----------
Total long-term and other liabilities 1,274,249 1,576,826
Stockholders' equity (deficit):
Capital stock
75,000,000 shares of common stock
authorized, $0.001 par value;
26,210,648 and 25,229,958 shares
issued and outstanding 24,722 23,649
Additional paid in capital 19,414,998 16,781,788
Accumulated deficit (21,902,255) (19,564,758)
Accumulated other comprehensive income(loss) (248,523) (224,271)
----------- -----------
Total stockholders' deficit (2,711,058) (2,983,592)
----------- -----------
Total liabilities and stockholders' deficit $ 888,407 $ 872,576
=========== ===========
(See accompanying notes to condensed consolidated financial statements)
1
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
(Amounts dtated in US dollars)
<table>
<s> <c> <c> <c> <c> <c>
Cumulative
Three months ended Nine months ended from inception
June 30, June 30, on August 23,
2004 2003 2004 2003 1996
---------- ----------- ---------- ---------- ---------------
Revenue $ - $ - $ - $ - $ 12,825
---------- ----------- ---------- ---------- ---------------
Expenses:
Research, development and exploration 74,816 597,515 164,477 959,323 7,867,749
General administration 99,642 31,183 295,511 261,479 1,448,446
Reorganization costs - - - - 102,914
Wages and benefits 16,818 27,509 85,246 172,179 1,231,240
Management wages and benefits 166,717 173,272 1,199,698 655,176 3,552,498
Professional fees 166,984 143,845 419,712 724,799 1,994,673
Advertising, promotion and travel 46,704 22,078 112,858 115,473 936,459
Amortization 4,382 5,716 12,472 16,825 401,314
Interest and bank charges 12,551 37,863 46,003 37,863 205,805
Interest on long-term debt 3,402 7,924 4,623 10,953 94,797
--------- ---------- --------- --------- --------------
592,016 1,046,905 2,340,600 2,954,070 17,835,895
--------- ---------- --------- --------- --------------
Loss before the following: (592,016) (1,046,905) (2,340,600) (2,954,070) (17,823,070)
Write-down of assets - - - - (1,626,821)
Write-off of incorporation and
reorganization costs - - - - (49,137)
Write-down of marketable securities - - - (32,731) (1,104,214)
Gain on sale of marketable securities - 9,367 - 2,026 (138,028)
Interest income - 212 3,103 1,820 31,000
--------- ---------- -------- ---------- -------------
Net loss before mining taxes and cumulative
effect of change in accounting principle
for SFAS 142 (592,016) (1,037,326) (2,337,497) (2,982,955) (20,710,270)
Current mining tax recovery - 13,927 - 52,991 141,000
--------- ---------- --------- --------- ------------
Net loss before cumulative effect of change
in accounting principle for SFAS 142 (592,016) (1,023,399) (2,337,497) (2,929,964) (20,569,270)
Cumulative effect of change in accounting
principle for SFAS 142 - - - (146,972) (146,972)
--------- ---------- --------- ---------- -------------
Net loss $ (592,016) $(1,023,399) $(2,337,497) $(3,076,936) $ (20,716,242)
---------- ---------- ----------- ---------- --------------
Comprehensive loss (note 7) (536,974) (1,088,715) (2,361,749) (3,218,116) (20,964,765)
Basic and diluted loss per share: Net loss
before cumulative effect of change in
accounting principle $ (0.02) $ (0.04) $ (0.09) $ (0.12)
Cumulative effect of change in accounting
principle - - - (0.01)
--------- -------- ---------- ----------
Net loss $ (0.02) $ (0.04) $ (0.09) $ (0.13)
========= ======== ========== ==========
Weighted average shares outstanding 26,082,842 24,341,914 25,691,524 23,916,382
========== ========== ========== ==========
(See accompanying notes to condensed consolidated financial statements)
</table>
2
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A development-stage company)
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
(Amounts stated in US dollars)
<table>
<s> <c> <c> <c>
Cumulative
Nine months ended from inception
June 30, on August 23,
2004 2003 1996
---------- ---------- ---------------
Operating activities:
Net loss $(2,337,497) $ (3,076,936) $ (20,716,242)
Items not affecting cash:
Cumulative effect of change in accounting principle - 146,972 146,972
Amortization 12,472 16,825 401,314
Expenses settled through issuance of common stock - 286,518 1,805,662
Capitalized interest on convertible notes payable - - 2,571
Reclamation and closure costs - - 250,000
Write-down of assets - - 1,626,821
Write-down of marketable securities - 32,731 1,104,214
Write-off of incorporation and reorganization costs - - 49,137
Loss on sale of marketable securities - (140) 138,028
Stock-based compensation 794,467 324,614 2,466,608
Net change in non-cash working capital related to
operations:
Accounts receivable 172,329 (149,648) (33,287)
Inventories - 19,562 -
Prepaid expenses and deposits 90,568 138,891 (4,389)
Accounts payable and accrued liabilities (139,319) 1,241,150 1,996,884
---------- ---------- --------------
Net cash used in operating activities (1,406,980) (1,019,461) (10,765,708)
---------- ---------- --------------
Investing activities:
Purchase of marketable securities - - (1,767,835)
Purchase of reclamation cash bond - - (338,685)
Purchase of property and equipment (13,974) (11,080) (2,071,980)
Proceeds - sale of marketable securities - 50,910 (525,593)
Incorporation and reorganization costs - - (81,769)
Business acquisition - Dermond - - (31,286)
---------- ---------- --------------
Net cash (used in) provided by investing activities (13,974) 39,830 (3,765,962)
---------- ---------- --------------
Financing activities:
Issuance of notes payable - - 350,000
Increase in bank indebtedness 19,775 1,694 96,971
Increase in convertible notes payable - 200,000 23,055
Issuance of long-term debt - - 137,435
Repayment of long-term debt (29,529) (26,785) (134,019)
Receipt of repayable government assistance 4,795 77,259 931,425
Proceeds from sale of common stock 1,424,401 748,399 13,302,058
Proceeds on sale of options - - 33,160
Redemption of redeemable capital stock - - (37,500)
Purchase of common stock for treasury - - (149,622)
---------- ---------- --------------
Net cash provided by financing activities 1,419,442 1,000,567 14,552,964
----------- ---------- --------------
Effect of foreign currency
exchange rate changes on cash and equivalents (125) 7,848 26,277
---------- ---------- --------------
Net increase (decrease) in cash and cash
equivalents (1,637) 28,784 47,571
Cash and cash equivalents, beginning of period 49,208 45,325 -
---------- ---------- --------------
Cash and cash equivalents, end of period $ 47,571 $ 74,109 $ 47,571
========== ========== ==============
Supplemental non-cash financing activities:
Issuance of common stock in lieu of payment
of issue costs $ 280,000 $ - $ 280,000
Issuance of common stock in lieu of requiring
the Company to repurchase redeemable capital stock 60,000 - 170,000
Issuance of options in lieu of requiring Company
to repurchase redeemable capital stock - - 605,210
Issuance of common stock in lieu of payment of notes
payable - - 356,424
Conversion of notes payable into capital stock - - 25,626
Repurchase of capital stock in settlement of
accounts receivable - 11,300 11,300
---------- ---------- -------------
$ 340,000 $ 11,300 $ 1,448,560
========== ========== =============
(See accompanying notes to condensed consolidated financial statements)
</table>
3
MCKENZIE BAY INTERNATIONAL LTD. and subsidiaries
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
JUNE 30, 2004
(Amounts stated in US dollars unless indicated otherwise)
1. Nature of operations
The Company is a development stage company with no operations. The Company has
interests in a vanadium/titanium deposit, wind turbine technology and a diamond
mine. The Company was incorporated in Delaware on August 17, 1998 under the
name Decker Organic Systems, Inc.
2. Accounting policies
The accompanying consolidated financial statements have been prepared in
accordance with United States generally accepted accounting principles ("US
GAAP") and reflect the following significant accounting policies:
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-QSB. Accordingly,
they do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the
opinion of management, all adjustments (consisting of normal recurring entries)
considered necessary for a fair presentation have been included. The
accompanying financial statements should be read with Notes to Consolidated
Financial Statements included in the Company's Annual Report of Form 10-KSB for
the fiscal year ended September 30, 2003. The balance sheet at September 30,
2003 has been derived from the audited financial statements at that date but
does not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. Operating
results for the three-months and nine-months periods ended June 30, 2004 are not
necessarily indicative of the results of operations that may be expected for the
year ending September 30, 2004.
The financial statements of the Company have been prepared on the basis of the
Company continuing as a going concern, which contemplates the realization of
assets and the payment of liabilities in the ordinary course of business. Should
the Company be unable to continue as a going concern, it may be unable to
realize the carrying value of its assets and to meet its liabilities as they
become due.
The Company suffered recurring losses and has a deficiency in assets that raise
substantial doubt about its ability to continue as a going concern. The
Company's continued existence is dependent upon its ability to raise additional
capital and generate profits. Although management believes that it will be
successful at raising additional capital in the short-term and will have
profitable operations in the long-term, there are no firm commitments as of the
date of these financial statements.
As discussed in note 4, the Company may be required to repurchase shares, at the
option of the holders, for an amount of $91,975.
The accompanying financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets and classification of
liabilities that might be necessary should the Company be unable to continue as
a going concern.
(b) Consolidation
These financial statements include the activities of the Company and its wholly-
owned subsidiaries, Lac Dore Mining Inc. (formerly McKenzie Bay Resources Ltd.),
Great Western Diamond Company, DERMOND INC. (formerly Experts Conseils Dermond
Inc.), WindStor Power Company and a 62.5% interest in Ptarmigan Energie Inc.
All intercompany balances and transactions have been eliminated in
consolidation.
(c) New accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" (FIN 46). FIN 46 requires a variable interest entity
to be consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns or both. FIN 46 also
requires disclosures about variable interest entities that a company is not
required to consolidate but in which it has a significant variable interest. The
consolidation requirements of FIN 46 apply immediately to variable interest
entities created after January 31, 2003. In addition, FIN 46, as amended in
December 2003 (FIN 46R), will be effective by public entities for periods ending
after March 15, 2004. The adoption of this interpretation and its revision did
not have a material impact on the Company's financial position or results of
operations.
(d) Stock based compensation plan
i. The Company has stock-based compensation plans which are described in
note 4. The Company uses the fair value method of accounting for all stock
options granted to non-employees in accordance with the provisions of SFAS 123
and the intrinsic value method for those granted to employees in conformity with
Accounting Principles Board Opinion No. 25 and its related interpretation and
allowed by SFAS 123. Under the fair value based method, compensation cost
attributable to awards is measured at the date of the grant and recognized over
the vesting period in operating expense. No compensation cost is recorded for
all other stock-based employee compensation awards and consideration paid by
employees on the exercise of stock options is recorded as capital stock.
ii. Fair value disclosure
SFAS 123 encourages but does not require companies to include in compensation
cost the fair value of stock options granted to employees. A company that does
not adopt the fair-value method must disclose the cost of stock compensation
awards, at their fair value, on the date the award is granted. This fair value
was estimated using the Black-Scholes model with assumptions of a 4.5 to 10
years expected term, 105% to 115% volatility, interest rates ranging from 3.04%
to 4.58% and an expected dividend yield of 0%. Had the compensation cost for
stock options issued to employees, officers and directors been determined based
on the fair value at the grant date consistent with SFAS No. 123, the Company's
net loss, loss per share and stock based compensation would have been as
follows:
5
Three months ended Nine months ended
June 30, June 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net loss, as reported $(592,016) $(1,023,399) $(2,337,497) $(3,076,936)
Add: Stock-based
employee compensation
expense included in
reported net income,
net of related tax
effects 6,443 13,066 739,326 270,343
Deduct: Total
stock-based employee
compensation expense
determined under fair
value based method for
all awards, net of
related tax effects (21,539) (78,750) (1,952,634) (1,341,539)
-------- ----------- ----------- -----------
Pro forma net loss (607,112) (1,089,083) (3,550,805) (4,148,132)
========= =========== =========== ===========
Basic and diluted
earning per share:
As reported $ (0.02) $ (0.04) $ (0.09) $ (0.13)
Pro forma $ (0.02) $ (0.04) $ (0.14) $ (0.17)
3. Goodwill and other intangible assets
SFAS 142 requires that goodwill no longer be amortized, but instead be tested
for impairment at least annually. The Company has completed their SFAS 142
transitional impairment review and determined that the goodwill ("excess cost of
investment over net assets acquired") of $146,972 associated with the fiscal
2002 acquisition of DERMOND INC. should be reduced to $0. The fair value of the
reporting unit (DERMOND INC.) was determined using the present value of expected
future cash flows and other valuation measures. The $146,972 non-cash charge is
reflected as a cumulative effect of an accounting change in the accompanying
Consolidated Statements of Loss for the nine-month period ended June 30, 2003.
6
4. Capital stock
Authorized -
75,000,000 common stock, par value $0.001 per share
Issued -
Common Paid in
Shares stock capital Total
---------- ------- ----------- -----------
Balance, September 30, 2003 25,229,958 $23,741 $16,942,618 $16,966,359
Common stock issued for:
Cash 132,286 132 168,238 168,370
Stock options, compensation - - 54,896 54,896
---------- ------ ---------- ----------
Balance December 31, 2003 25,362,244 23,873 17,165,752 17,189,625
Common stock issued for:
Cash and other 34,503 35 81,966 82,001
Exercise of warrants 185,600 186 302,014 302,200
Exercise of options 58,800 59 60,941 61,000
Stock options, compensation - - 726,442 726,442
Expiry of redemption right - - 38,601 38,601
Cancellation of treasury stock (92,000) (92) (160,830) (160,922)
---------- ------ ----------- ----------
Balance, March 31, 2004 25,549,147 $ 24,061 $18,214,886 $18,238,947
Common stock issued for:
Expenses and accounts
payable settled
through issuance of
common stock 124,428 124 279,876 280,000
Cash and other 378,973 379 494,251 494,630
Exercise of warrants 185,100 158 316,042 316,200
Stock options, compensation - - 6,443 6,443
Expiry of redemption right - - 103,500 103,500
---------- ------ ----------- ----------
Balance, June 30, 2004 26,210,648 $ 24,722 $ 19,414,998 $19,439,719
========== ====== =========== ==========
Share-based incentive plans
As of June 30, 2004, the Company has the following three stock-based incentive
plans. Each plan permits the issuance of up to 2,500,000 options.
Under the 2001 Employee Incentive Stock Option Plan, options may be granted at
an exercise price equal to the market price on the grant date. All options
expire no later than ten years from the grant date. If an option is granted to
an employee who owns 10% or more of the Company's voting stock, the purchase
price of each share shall be 110% of the fair market value on the grant date and
the expiration date shall not exceed five years after the grant date.
Under the 2001 Employee Non-Qualified Stock Option Plan, options may be granted
to employees or certain non-employees at an exercise price as determined by the
administrator of the plan on the grant date. All options expire ten years after
the date of grant.
7
Under the 2001 Directors Non-Qualified Stock Option Plan, options may be granted
to directors of the Company or certain non-employees for terms up to ten years
at an exercise price as determined by the administrator on the grant date.
The following tables contain information with respect to all options granted by
the Company:
Weighted
average
exercise
price
per
Shares share
-------------- -------------
Options outstanding,
September 30, 2003 13,131,617 $ 1.04
Granted 550,000 $ 1.89
-------------- -------------
Options outstanding,
December 31, 2003 13,681,617 $ 1.08
Exercised (58,800) $(1.04)
Expired (100,000) $(1.00)
-------------- --------------
Options outstanding,
March 31, 2004 13,522,817 $ 1.08
Exercised - -
Expired - -
============== =============
Options outstanding,
June 30, 2004 13,522,817 $1.08
============== =============
Outstanding options Exercisable options
- ---------------------------------- ---------------------------------
Weighted Weighted
average average
price price
Shares per share Shares per share
-------- --------- -------- -----------
$0.74 300,000 $ 0.74 - $ -
$1.00 10,971,917 1.00 10,341,917 1.00
$1.25 467,400 1.25 467,400 1.25
$1.30 - $1.50 1,175,000 1.38 775,000 1.42
$1.88 525,000 1.88 525,000 1.88
$2.00 - $3.00 83,500 2.63 83,500 2.63
---------- ----------
13,522,817 12,192,817
========== ==========
(a) Stock warrants
As at June 30, 2004 the following warrants are outstanding:
8
Number
of warrants
-----------
Outstanding at September 30, 2003 952,619
Issued during the quarter 66,143
Expired during the quarter (42,857)
--------
Outstanding at December 31, 2003 975,905
Issued during the quarter 15,730
Exercised during the quarter (185,600)
--------
Outstanding, March 31, 2004 806,035
Issued during the quarter 186,550
Expired during the quarter (158,100)
--------
Outstanding, June 30, 2004 834,485
========
The warrants outstanding can be exercised at prices ranging from $1.75 to $3.00.
The expiration dates of the warrants range from July 13, 2004 to May 19, 2006.
(b) Redeemable capital stock
The Company has 28,300 common shares outstanding that have certain rights
attached permitting the holder to require the Company to repurchase these
shares. If the holders exercise their rights, the Company would be obligated to
pay, as of June 30, 2004 or gradually over the next two years, a maximum amount
of $91,975. This right requires a repurchase at prices increasing in time from
$2.50 to $3.25.
5. Deferred issue costs
On April 6, 2004 the Company entered into a Standby Equity Distribution
Agreement with Cornell Capital Partners, L.P. Under the agreement and subject
to its terms and conditions, the Company may require Cornell Capital Partners,
L.P. to purchase newly issued common shares from the Company, to a maximum
market value of $15 million, over a 24-month period, less certain fees and
expenses. For the quarter ended June 30, 2004, the Company incurred $280,000 in
issue costs related to the signing of the Standby Equity Distribution Agreement
with Cornell Capital Partners, L.P. These costs were settled through the
issuance of 124,428 of common shares at $2.25 per share, which represented the
volume weighted average trading price of the Company's shares on the signing
date of the agreement. These costs have been deferred and will be treated as a
reduction to the proceeds from the shares issued under the Standby Equity
Distribution Agreement with Cornell Capital Partners, L.P.
In addition to the above costs, under the terms of the Standby Equity
Distribution Agreement a further payment of $270,000 will be due on the
fulfillment of the terms and conditions of the agreement.
6. Kelsey Lake Diamond Mine
The Company is actively seeking a partner or purchaser to take over the Kelsey
Lake mine. If the Company is unable to find a partner or purchaser in 2004,
Great Western Diamond intends to close the Kelsey Lake mine permanently and
initiate mine reclamation.
9
<table>
<s> <c> <c> <c> <c> <c>
7. Comprehensive loss Cumulative
from
Three months ended Nine Months ended inception on
June 30, June 30, August 23,
2004 2003 2004 2003 1996
------------ ----------- ------------ ----------- -----------
Net loss $ (592,016) $ (1,023,399) $(2,337,497) $(3,076,936) $(20,716,242)
Foreign currency
translation
adjustment $ 55,042 $ (65,316) $ (24,252) $ (141,180) $ (248,523)
Comprehensive
loss $ (536,974) $ (1,088,715) $(2,361,749) $(3,218,116) $(20,964,765)
========= =========== =========== =========== ============
</table>
7. Net loss per common share
Basic net loss per common share has been computed based upon the weighted
average number of shares of common stock outstanding during the periods. Diluted
loss per share has not been presented, as it would be anti-dilutive. The
computation of net loss per share is reflected in the following schedule:
<table>
<s> <c> <c> <c> <c>
Computation of Net Loss Three Months ended June 30, Nine Months ended June 30,
Per Common Share 2004 2003 2004 2003
- ----------------------- ------------ -------------- ------------ -----------
Net Loss $ (592,016) $ (1,023,399) $ (2,337,497) $ (3,076,936)
Total Weighted Average
Number of Common
Shares and Equivalents 26,082,842 24,341,914 25,691,524 23,916,382
----------- ---------- ---------- ----------
Net Loss per
Common Share $ (0.02) $ (0.04) $ (0.09) $ (0.13)
=========== ========== ========== ==========
</table>
10
9. Related party transactions
The Company has retained a law firm to perform legal services for which Company
has incurred a total expenditure of $33,984 for services for the three months
and $92,145 for the nine months ended June 30, 2004 ($4,350 for three months and
$74,164 for nine months ended June 30, 2003). A director of the Company is a
partner in that law firm. The transactions were valued at the exchange amount,
which is the amount of consideration agreed to by the related parties. As of
June 30, 2004 an amount of $102,440 ($42,018 as of June 30, 2003) resulting from
these transactions is included in accounts payable and accrued liabilities.
10. Commitments and Contingencies
The Company has provided to a creditor 50% lien on the reclamation bond on
deposit with the state of Colorado with payment being made in the event that the
Great Western Diamond Company is sold and the deposit returned.
As a result of exploration work performed at the Lac Dore Vanadium/Titanium
Project, the Company has a potential environmental liability in the range of
$15,000 to $30,000. This liability will not be incurred if the project goes
into production. As management believes that the project will go into
production, the amount has not been accrued in the financial statements.
Royalty Agreements
The Company has entered into a royalty agreement that will pay 2.5% of Dermond
wind turbine sales to the former owners of DERMOND INC.
Bank indebtedness and other loans
The bank indebtedness of a subsidiary company, Great Western Diamond Company,
carries interest at 8% per annum and is secured by the assets of Great Western
Diamond Company.
The bank indebtedness of a subsidiary company, DERMOND INC., carries interest at
7.5% per annum and is secured by an assignment of the subsidiary's refundable
research and development tax credit.
In addition to the above, the assets of Great Western Diamond Company have been
pledged to secure certain of the accounts payable of Great Western Diamond
Company.
In the normal course of business, the Company and its subsidiaries are parties
to various legal claims, actions and complaints and various other risks. It is
not possible to predict with certainty whether or not the Company and its
subsidiaries will ultimately be successful in any of these legal matters or, if
not, what the impact might be. However, the Company's management does not expect
that the results in any of these legal proceedings will have a material adverse
effect on the Company's results of operations, financial position or cash flows.
11. Subsequent events
On August 16, 2004, the Company dismissed Deloitte & Touche LLP as its auditor
and signed an engagement letter with BDO Seidman, LLP for these services. The
Company and Deloitte & Touche LLP did not have disagreements within the meaning
of item 304 of Regulation S-B or any matter of accounting principles or
practices, financial disclosure, or auditing scope or procedure, nor were there
any events required to be reported by Item 304(a)(1)(iv)(B) of Regulation S-B
during Deloitte & Touche LLP's engagement.
On August 13, 2004 the Company borrowed $500,000 from thirteen lenders and
issued its 12% promissory notes in that aggregate amount. The promissory notes
are convertible into shares of the Company's common stock at $0.75 per share and
are payable on November 15, 2004 if not sooner converted. The Company also
issued warrants to the lenders for the purchase of an aggregate of 750,000
shares of the Company's common stock on or before August 13, 2006 at $1.07 per
share. The Company has agreed to register the shares underlying the promissory
notes and the warrants under the Securities Act of 1933 for public sale by the
holders. The lenders' rights of conversion of the promissory notes commences on
the date that the shares are so registered and expires ninety days thereafter.
Although the Company intends to shortly file a registration statement under the
Securities Act of 1933 which will include the shares underlying the promissory
notes and the warrants, the shares will not be registered under that Act until
the registration statement is declared effective by the Securities and Exchange
Commission. There can be no assurance that the registration statement will be
so declared effective on or before November 15, 2004.
On September 7, 2004, the Company borrowed $593,750 from ten lenders. The terms
of the loans and the issuance of warrants in connection with the loans are
substantially the same as those of the loans of August 13, 2004 except that (a)
the conversion price of the promissory notes is approximately $0.795 per share
and (b) the lenders received warrants for the purchase of aggregate of 873,300
shares of the Company's common stock on or before September 7, 2006 at $1.42 per
share.
Item 2. Management's Discussion and Analysis or Plan of Operation.
Development of WindStor
We have continued development of the WindStorSM ("WindStor") system, a renewable
energy generation, storage and distribution system for "urban" and "remote"
locations, and DERMOND INC.'s Vertical Axis Wind Turbine, DWTSM ("DWT"), during
the quarter ended June 30, 2004. Additional DWT and WindStor Research and
Development ("R&D") work has been funded primarily through funds provided to
DERMOND INC. by various local, provincial and federal grants and loans from
Canadian sources, and working capital. WindStor related R&D expenditures for
the June 30, 2004 quarter were approximately $138,000.
During the quarter, we also continued the assembly of a team of equipment
suppliers, service providers and financing sources to complete development and
begin the intended commercialization and operation of DWTs and WindStor Systems.
On April 19, 2004, in response to an invitation, we submitted a "Request for
Qualifications" of our WindStor Team to World Trade Center Properties, LLC, an
affiliate of Silverstein Properties, Inc, for development, installation,
operation and maintenance of a "Vertical Wind Farm" to be located in the upper
section of the Freedom Tower.
On April 27, 2004, we announced the signing of six additional sales agency
agreements with companies that intend to introduce the WindStor system to their
customers. We have nine Agents who intend to represent us in presenting the
WindStor system to their clients across the USA. The six additional Agents are:
S4i LLC, Grand Rapids, Michigan; MTI Lighting Specialists, Inc, Brighton,
Michigan; Diversified Property Services, Southfield, Michigan; Thompson &
Associates, Carmichael, California; New Found Energy, LLC, Carmichael,
California, and; Dan Beauchamp & Associates, Inc., Ann Arbor, Michigan.
On June 17, 2004 we announced the signing of an Agreement with the University of
Quebec Abitibi- Temiscamingue ("UQAT") in Rouyn-Noranda, Quebec, Canada for the
installation of a full WindStor system including; a 100 kilowatt DWT, a battery,
system integrator and a diesel generator. UQAT will function as a long term,
combined R&D facility and demonstration installation, primarily targeting off-
grid, remote access applications. The Agreement calls for UQAT's engineering
department and DERMOND INC. to participate in the evaluation, analysis and
research of the WindStor system and DWT, testing and identification of future
improvements. UQAT representatives have expertise in education and research in
the field of applied sciences. The WindStor installation will be on UQAT
grounds. Site preparation has begun and all components have been ordered.
To complete development of WindStor, we believe that we will require additional
funds of approximately $700,000. DERMOND INC. has arranged for an additional
$340,000 in grants and loans, requiring us to fund $360,000 in addition to the
loans to complete the expected costs to construct, install and test the DWT and
WindStor. We have received conditional commitments from Canadian governmental
agencies for additional grants and loans. Certain of the Canadian funding
programs require that we co-invest or provide a commitment to fund. Because we
do not know if we can satisfy the Canadian investment conditions, we do not know
if we will receive any of the additional funds from those sources. Other than a
conditional commitment from Cornell Capital Partners, LP as described in our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003, we
have received no commitments for the balance of the requisite funds and there
can be no assurance that we will be successful in obtaining those funds. If we
do not obtain all of the requisite funds, we will not be able to produce or sell
any DWTs or WindStor.
We intend to retain ownership of the WindStor installations and sell the
electricity generated by DWTs to WindStor users. We believe, with successful
testing of WindStor, that WindStor installations will provide adequate cash flow
to allow for debt to be a component of each installation's financial structure.
We will, however, require significant amounts of funds in order to install
WindStor and for general and administrative expenses. If we are successful in
obtaining funds to be utilized in connection with WindStor, including funds from
Canadian governmental agencies, we intend to allocate them as follows:
Build DWT/WindStor Prototype $ 700,000
Marketing of DWT/WindStor $17,141,000
Exploration of Lac Dore deposit $1,000,000
Working capital and other corporate purposes $2,000,000
-----------
TOTAL $20,841,000
===========
Nine entities have expressed interest in commercial installations of WindStor.
Prior to any installation of WindStor we must be satisfied that adequate wind
power exists at the respective location to provide sufficient electricity
production from a DWT to create an economically feasible WindStor facility, all
regulatory issues must be resolved, site plans must be approved, we must obtain
adequate financial resources, we must successfully obtain working prototypes and
pricing terms must be agreed upon by prospective customers.
Lac Dore Mining Co.
If funding becomes available, we intend to continue research and development of
the vanadium recovery and refining technology developed for us during the
preliminary feasibility study of the Lac Dore deposit. The next planned step is
operation of a Sample Product Unit ("SPU") planned for construction by SGS
Lakefield Research at their facilities in Lakefield, Ontario, Canada. This
facility would be used to advance vanadium refining processes and produce and
provide small samples of high-purity vanadium chemicals to potential customers.
We believe that is unlikely that funding will become available to significantly
explore the Lac Dore deposit in the foreseeable future.
The planned cost to operate the SPU is $1 million over a 16-month period.
Although grants and/or loans may be available to us for part of the cost, we
have not assumed or relied upon their availability.
If results from the SPU project are successful and demand for the chemicals
provided to potential customers of Lac Dore Mining Co. are sufficient to warrant
additional exploration, we intend to build a larger production facility, called
the Development Production Pilot Plant ("DPPP"). The cost to build the DPPP has
been estimated to be approximately $10 million. No allocation of capital for
the DPPP has been planned at this time.
Our plans for Lac Dore are dependent upon a number of events coming together
successfully, including, but not limited to, an adequate demand for high-purity
vanadium, our ability to raise between $280 and $350 million to build and
operate the mine and refinery, our ability to find and hire management and
employees to operate the mine and refinery and successful permitting of the mine
and refinery to be built and operated. At a minimum, we believe contemplation
of the building of Lac Dore is several years into the future.
Cash Requirements for 2004 Fiscal Year Administrative Costs
To date our activities have been funded primarily through the sale of equity
securities and financial assistance from Canadian governmental agencies in the
form of loans and grants. As noted above, we must obtain substantial additional
capital to engage in our proposed businesses.
Our cash requirements for administrative costs for the fiscal year ending
September 30, 2004 (including direct support of subsidiary operations) are as
follows:
Use Amount
- -------------------------- ------------
Employee salaries $600,000
Professional costs
(includes consultants,
outside accountants,
independent auditors
and legal counsel) $1,400,000
General administrative
(includes lease obligations,
travel and other administrative
costs) $450,000
Neither McKenzie Bay nor our subsidiaries are able to continue development and
administrative functions for more than a few months unless additional funding
becomes available.
In the notes to our financial statements we have indicated that because we have
suffered recurring losses and have a deficiency in assets (and working capital)
there is substantial doubt about our ability to continue as a going concern.
Our auditors have included this in their report dated December 23, 2003.
There can be no assurance that we will be able to obtain adequate funding from
outside sources to fund our operations. If we are unable to obtain the
necessary funding, we will not be able to continue to operate.
Additional Employees
DERMOND will need to add a number of employees in anticipation of successful DWT
and WindStor prototype testing. Additions include, project managers,
mechanical, aeronautic and electrical engineers and administrative personnel.
McKenzie Bay intends to add administrative personnel, including a controller and
project supervisor.
Forward-Looking Statements
This Form 10-QSB contains statements that are forward-looking statements. In
some cases, you can identify forward-looking statements by terminology such as
"estimates," "anticipates," "plans," "believes," "projects," "expects,"
"intends," "predicts," "potential," "future," "may," "contemplates," "will,"
"should," "could," "would" or the negative of such terms or other comparable
terminology. These statements relate to our future operations and financial
performance or other future events. Many of the forward-looking statements are
based on current expectations, management beliefs, certain assumptions made by
our management and estimates and projections about our industry.
Forward-looking statements are not guarantees of future performance and are
subject to certain risks, uncertainties and assumptions that are difficult to
predict with respect to timing, extent, likelihood and degree of occurrence.
Therefore, actual events, results, performance or achievements may differ
materially from the events, results, performance or achievements expressed,
forecasted or contemplated by any such forward-looking statements. In addition
to factors described in this Quarterly Report on Form 10-QSB for the quarter
ended June 30, 2004, and other periodic reports filed with the Securities and
Exchange Commission, including those disclosed in our Annual Report on Form 10-
KSB for the fiscal year ended September 30, 2003 under the caption "FORWARD
LOOKING STATEMENTS AND CERTAIN RISKS ASSOCIATED WITH AN INVESTMENT IN OUR COMMON
STOCK," which disclosure is hereby incorporated by reference, could cause actual
results to differ from those described in the forward-looking statements.
Item 3. Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934) as of a date within 90 days
of the filing date of this Quarterly Report on Form 10-QSB. These individuals
have concluded that, as of the end of the period covered by this Report, our
disclosure controls and procedures were adequate and effective. There were no
significant changes in our internal control over financial reporting identified
in connection with the evaluation that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
The following information relates to equity securities we sold during the
quarter ended June 30, 2004 that were not registered under the Securities Act of
1933.
(a) On April 6, 2004, we issued 119,984 shares of common stock to Cornell
Capital Partners, LP for half of the commitment fee due in accordance with the
Standby Equity Distribution Agreement ("SEDA"), more completely described in our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003. The
shares were valued at $270,000 calculated as of the date the SEDA was signed.
On April 6, 2004, we issued 4,444 shares of common stock to Spencer Clarke, LLC
as a Placement Agent fee, in connection with the SEDA, as more completely
described in our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2003. The shares were valued at $10,000 calculated as of the date
the SEDA was signed.
On April 9, 2004, we sold 200,000 shares of common stock and warrants for the
purchase of 100,000 shares to a private investor for approximately $260,000. The
warrants are exercisable until April 8, 2006 at $2.25 per share.
On April 21, 2004, we sold 150,000 shares of common stock and warrants for the
purchase of 75,000 shares to a private investor for approximately $193,500. The
warrants are exercisable until April 20, 2006 at $2.25 per share.
On April 29, 2004, three investors exercised warrants for the purchase of an
aggregate of 158,100 shares of common stock by payment to us of approximately
$316,200.
On April 21, 2004, we sold 23,100 shares of common stock and warrants for the
purchase of 11,550 shares to a private investor for approximately $30,030. The
warrants are exercisable until April 20, 2006 at $1.75 per share.
On May 3, 2004, we issued 5,873 shares of common stock to an individual in
exchange for the cancellation of his right to require us to repurchase an
aggregate of 10,000 shares of our common stock from him at $3.00 per share.
There were no principal underwriters in connection with any of the foregoing
transactions.
We claimed exemption from registration provisions of the Securities Act of 1933
pursuant to Section 4(2) thereof and/or Rule 506 thereunder. Although we
believed that the transactions did not involve a public offering and that each
purchaser either received adequate information about us or had access, through
employment or other relationships, to such information, the exemptions may not
have been available to us.
(b) Not applicable.
(c) During the quarter ended June 30, 2004, there were no purchases by or on
behalf of us or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under
the Securities Exchange Act of 1934 of shares or other units of any class of our
equity securities.
19
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
No. Description
- ----- -------------
2.1 Share Purchase Agreement between McKenzie Bay International, Ltd. and
Jacquelin Dery, Laurent Mondou and DERMOND INC. of February 12, 2002.
Previously filed as an exhibit to Amendment No. 2 to our registration
statement on Form 10-SB and hereby incorporated by reference.
3.1 Certificate of Incorporation, as amended. Previously filed as an exhibit
to our registration statement on Form 10-SB and hereby incorporated by
reference.
3.2 Bylaws. Previously filed as an exhibit to our registration statement on
Form 10-SB and hereby incorporated by reference.
4.1 See Exhibits 3.1 and 3.2.
4.3 Specimen Stock Certificate. Previously filed as an exhibit to our Annual
Report on Form 10-KSB for the fiscal year ended September 30, 2002 and
hereby incorporated by reference.
4.4 Form of Warrant. Previously filed as an exhibit to our Annual Report on
Form 10-KSB for the fiscal year ended September 30, 2002, and hereby
incorporated by reference.
4.5 Form of Subscription Agreement. Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002
and hereby incorporated by reference.
4.6 Promissory Note and Warrant issued on August 13, 2004 and including letter
of August 16, 2004 amending certain terms and "Debenture" setting forth
certain terms. ++
4.7 Promissory Note and Warrant issued on September 7, 2004 and "Debenture"
setting forth certain terms. ++
10.1 Employment Agreement between DERMOND INC. and Jacquelin Dery, dated
February 12, 2002.* Previously filed as an exhibit to our Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2002 and hereby
incorporated by reference.
10.2 Royalty Agreement between McKenzie Bay International, Ltd. and Jacquelin
Dery as of February 12, 2002.* Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002
and hereby incorporated by reference.
10.3 Employment Agreement between DERMOND INC. and Lauren Mondou, dated
February 12, 2002.* Previously filed as an exhibit to our Annual Report
on Form 10-KSB for the fiscal year ended September 30, 2002 and hereby
incorporated by reference.
10.4 Royalty Agreement between McKenzie Bay International, Ltd. and Lauren
Mondou as of February 12, 2002.* Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002,
and incorporated herein by reference.
10.5 Employment Agreement between McKenzie Bay Resources, Ltd. and Michel
Garon, dated November 1, 2002.* Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2002
and hereby incorporated by reference.
10.6 2001 Employee Non-qualified Stock Option Plan.* Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2002 and hereby incorporated by reference.
10.7 Amended 2001 Directors Non-qualified Stock Option Plan.* Previously filed
as an exhibit to Amendment No. 1 to our Annual Report on Form 10-KSB for
the fiscal year ended September 30, 2002 and hereby incorporated by
reference.
10.8 2001 Employee Incentive Stock Option Plan.* Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2002, and incorporated herein by reference.
10.9 Agreement dated April 17, 2003 between McKenzie Bay Resources Ltd. and
SOQUEM Inc. terminating prior agreements. * Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2003, and incorporated herein by reference.
10.10 Employment Agreement dated March 21, 2003 between Gary L. Westerholm and
McKenzie Bay International, Ltd. * Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003,
and incorporated herein by reference.
10.11 Employment Agreement dated March 21, 2003 between Gregory N. Bakeman and
McKenzie Bay International, Ltd. * Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003,
and incorporated herein by reference.
10.12 Employment Agreement dated March 21, 2003 between John W. Sawarin and
McKenzie Bay International, Ltd. * Previously filed as an exhibit to our
Annual Report on Form 10-KSB for the fiscal year ended September 30, 2003,
and incorporated herein by reference.
10.13 Consulting Agreement as of February 15, 2003 between McKenzie Bay
Resources, Inc. (now known as Lac Dore Mining Inc.) and Savanco, (Pty)
Ltd, incorporated. Previously filed as an exhibit to our Annual Report on
Form 10- KSB for the fiscal year ended September 30, 2003, and
incorporated herein by reference.
10.14 Agreement of August 19, 2003 between McKenzie Bay International, Ltd.
Resources, Inc. and Yes International Inc. Previously filed as an exhibit
to our Annual Report on Form 10-KSB for the fiscal year ended September
30, 2003, and incorporated herein by reference.
10.15 Standby Equity Distribution Agreement as of April 6, 2004 between Cornell
Capital Partners, LP and McKenzie Bay International Ltd. Previously filed
as an exhibit to our Annual Report on Form 10-KSB for the fiscal year
ended September 30, 2003, and incorporated herein by reference.
10.16 Registration Rights Agreement as of April 6, 2004 between Cornell Capital
Partners, LP and McKenzie Bay International Ltd. Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2003, and incorporated herein by reference.
10.17 Placement Agent Agreement as of April 6, 2004 between McKenzie Bay
International Ltd. and Spencer Clarke LLC. * Previously filed as an
exhibit to our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2003, and incorporated herein by reference.
10.18 Escrow Agreement as April 6, 2004 between McKenzie Bay International Ltd.,
and Butler Gonzalez LLP. Previously filed as an exhibit to our Annual
Report on Form 10-KSB for the fiscal year ended September 30, 2003, and
incorporated herein by reference.
21.1 Subsidiaries. Previously filed as an exhibit to our Annual Report on Form
10-KSB for the fiscal year ended September 30, 2003, and incorporated
herein by reference.
31.1 Rule 13a-14(a) Certification of Gary L. Westerholm. ++
31.2 Rule 13a-14(a) Certification of Gregory N. Bakeman. ++
32.1 Certification Pursuant to 18 U.S.C. Section 1350 of Gary L. Westerholm. ++
32.2 Certification Pursuant to 18 U.S.C. Section 1350 of Gregory N. Bakeman. ++
99.1 Lac Dore Feasibility Study - Executive Summary. Previously filed as an
exhibit to Amendment No. 2 to our registration statement on Form 10-SB and
hereby incorporated by reference.
* Management contract or compensatory plan or arrangement.
++ Filed herewith.
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the quarter ended June
30, 2004:
Date of Report
Item(s) Reported
April 6, 2004 5
April 19, 2004 5
April 28, 2004 5
June 18, 2004 5
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.
McKENZIE BAY INTERNATIONAL, LTD.
Date: September 17, 2004 By: /s/ Gary L. Westerholm
----------------------
Gary L. Westerholm
President, Chief Executive Officer
and Director (Principal Executive Officer)
Date: September 17, 2004 By: /s/ Gregory N. Bakeman
----------------------
Gregory N. Bakeman
Treasurer, Chief Financial Officer
and Director (Principal Financial and
Accounting Officer)