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
December 31, 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
Ada, Michigan 49301
(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 February 14, 2005 the registrant had outstanding 28,679,580 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..............................................F-1
Condensed Consolidated Balance Sheets as
of December 31, 2004 and September 30,2004,.............................F-1
Condensed Consolidated Statements of Loss for the
three months ended December 31, 2004 and 2003...........................F-2
Condensed Consolidated Statements of Cash Flows for
the three months December 31, 2004 and 2003.............................F-3
Notes to Condensed Consolidated Financial Statements.....................F-5
Item 2. Management's Discussion and Analysis or Plan of Operation........2
Item 3. Controls and Procedures..........................................6
Part II. Other Information
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......6
Item 6. Exhibits and Reports on Form 8-K.................................7
Signatures................................................................8
===============================================================================
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts stated in U.S. dollars)
ASSETS
December 31, September 30,
2004 2004
(Unaudited)
--------- --------
Current:
Cash and cash equivalents $ 9 $ 562,250
Refundable taxes and other receivables 194,333 86,696
Prepaid expenses and deposits 187,521 200,896
Reclamation cash bond 338,685 338,685
Deferred issue and finance costs (note 4 & 5) 648,025 359,724
-------- --------
Total current assets 1,368,573 1,548,251
Property and equipment 31,840 31,580
Other assets 37,519 35,590
-------- ---------
Total assets $1,437,932 $1,615,421
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current:
Bank indebtedness (note 10) $ 104,479 $ 102,264
Accounts payable and accrued liabilities (note 9) 3,489,771 2,380,916
Convertible promissory notes, net of discount (note 4) 594,295 643,944
Current portion of long-term debt 475,567 219,740
Reclamation and closure liabilities 287,167 350,000
Redeemable common stock (note 3) 86,775 86,775
---------- ----------
Total current liabilities 5,038,054 3,783,639
Long-term liabilities:
Long-term debt 940,564 1,084,763
---------- ----------
5,978,618 4,868,402
---------- ----------
Commitments and Contingencies
Stockholders' equity (deficit):
Common stock - $0.001 par value (note 3):
75,000,000 shares authorized,
26,569,858 and 26,407,393 shares
issued and outstanding 24,980 24,818
Additional paid in capital 21,130,193 20,133,739
Deficit accumulated during the development stage (25,151,008) (23,020,986)
Accumulated other comprehensive income (loss) (544,851) (390,552)
------------ ------------
Total stockholders' deficit (4,540,686) (3,252,981)
------------ ------------
Total liabilities and stockholders' deficit $ 1,437,932 $ 1,615,421
============ ============
(See accompanying notes)
<page>F-1
<table>
<caption>
<c> <s> <s>
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONDENSED CONSOLIDATED STATEMENTS OF LOSS
(Unaudited)
(Amounts stated in U.S. dollars)
Cumulative
from
inception
on August 23,
Three months ended 1996
December 31, to December 31
2004 2003 2004
Revenue -------- -------- --------------
$ - $ - $ 12,825
-------- -------- --------------
Expenses (other income):
Exploration 21,144 22,608 7,298,515
Research and development, net 892,776 23,177 2,198,627
General administration 81,732 84,348 1,571,594
Wages and benefits 12,070 31,799 1,192,882
Management wages and benefits 159,545 110,258 3,658,421
Professional fees 217,845 57,923 2,501,129
Promotion and travel 60,624 35,437 1,061,879
Depreciation 1,834 4,046 406,096
Interest and finance charges (note 8) 682,453 16,517 1,116,398
Write-down of assets - - 1,626,821
Write-off of incorporation and
reorganization costs - - 152,051
Write-down of marketable securities - - 1,104,214
Loss on sale of marketable securities - - 138,028
Gain on sale property and equipment - - (26,806)
Interest income - (44) (28,000)
----------- ----------- ------------
Loss before income and mining taxes and
cumulative effect of change in
accounting principle for SFAS 142 (2,130,023) (386,069) (23,959,024)
Income and mining taxes recovery - - 141,000
------------ ----------- -------------
Net loss before cumulative effect of
change in accounting principle
for SFAS 142 $(2,130,023) $ (386,069) $(23,818,024)
------------ ------------ --------------
Cumulative effect of change in accounting
principle for SFAS 142 - - (146,972)
------------ ------------ --------------
Net loss $(2,130,023) $ (386,069) $(23,964,996)
Foreign Currency translation adjustment (154,299) (109,347) (544,851)
------------ ------------ --------------
Comprehensive loss $(2,284,322) $ (495,416) $(24,509,847)
============ ============ ==============
Basic and diluted loss per share (note 6):
Net loss $ (0.08) $ (0.02)
============= ============
(See accompanying notes)
</table>
<page>F-2
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A development-stage company)
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Amounts stated in U.S. dollars)
<table>
<caption>
<s> <c> <c>
Cumulative
from
inception
on August 23,
Three months ended 1996
December 31, to December 31
2004 2003 2004
----------- ---------- ---------------
Operating activities:
Net loss $ (2,130,023) $ (386,069) $(23,964,996)
Adjustments to reconcile net loss to net cash used in
operating activities:
Cumulative effect of change in accounting principle - - 146,972
Depreciation 1,834 4,046 406,096
Amortization of debt discount and deferred finance cost 626,804 - 722,363
Expenses settled through issuance of common stock - - 1,930,842
Capitalized interest on convertible notes payable - - 2,571
Reclamation and closure costs - - 350,000
Write-down of assets - - 1,626,821
Write-off of incorporation and reorganization costs - - 49,137
Write-down of marketable securities - - 1,104,214
Loss on sale of marketable securities - - 138,028
Gain on sale of property and equipment - - (26,806)
Stock-based payment 2,025 57,125 2,507,115
Net change in working capital items:
Refundable taxes and other receivables (117,503) 152,983 (193,951)
Deferred finance charges and issue costs 38,323 - 14,059
Prepaid expenses and deposits 13,375 41,038 (112,773)
Accounts payable and accrued liabilities 1,024,103 (74,624) 3,271,782
Reclamation and closure liability (62,833) - (62,833)
------------ ------------ ------------
Net cash used in operating activities (603,895) (205,501) (12,091,359)
------------ ------------ ------------
Investing activities:
Purchase of marketable securities - - (1,767,835)
Proceeds on sale of property and equipment - - 100,000
Proceeds on sale of marketable securities - - 525,593
Purchase of reclamation cash bond - - (338,685)
Purchase of property and equipment 1,527 - (2,081,648)
Incorporation and reorganization costs - - (81,769)
Acquisition of business, net of cash acquired - - (31,286)
------------ ------------ ------------
Net cash provided by (used by) investing activities 1,527 - (3,675,630)
------------ ------------ ------------
<page>F-3
Financing activities:
Issuance of notes payable $ - $ - $ 350,000
Increase (decrease) of bank indebtedness (2,670) 18,945 89,156
Proceeds from issuance of convertible debt and warrants - - 1,121,505
Payment of financing fees and issue costs (17,500) - (117,500)
Issuance of long-term debt - - 137,435
Repayment of capital lease obligation - (9,604) (137,435)
Repayment of government assistance (51,894) - (51,894)
Receipt of repayable government assistance 78,890 - 1,164,520
Proceeds from sale of common stock 42,000 168,370 13,357,558
Proceeds from sale of stock options - - 33,160
Redemption of redeemable common stock - - (37,500)
Purchase of common stock for treasury - - (149,622)
------------ ------------ ------------
Net cash provided by financing activities 48,826 182,661 15,759,383
------------ ------------ ------------
Effect of foreign currency exchange rate
changes on cash and equivalents (8,699) 594 7,615
------------ ------------ ------------
Net decrease in cash and cash equivalents (562,241) (22,246) 9
Cash and cash equivalents, beginning of period 562,250 49,208 -
------------ ------------ ------------
Cash and cash equivalents, end of period $ 9 $ 26,962 $ 9
============ =========== =============
Supplemental information:
Cash paid for interest $ 7,120 $ 2,750 $ 199,388
Issuance of common stock in lieu of payment of issue
costs 270,000 - 550,000
Issuance of common stock in lieu of repurchasing
redeemable common stock - - 170,000
Issuance of options in lieu of repurchasing
redeemable common stock - - 605,210
Issuance of common stock in lieu of payment
of notes payable - - 356,424
Conversion of notes payable into common stock - - 25,626
Repurchase of common stock in settlement of
accounts receivable - - 11,300
(See accompanying notes)
</table>
<page>F-4
MCKENZIE BAY INTERNATIONAL, LTD. and subsidiaries
(A Development Stage Company)
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
December 31, 2004
(Amounts stated in U.S. dollars unless indicated otherwise)
1. Nature of operations
McKenzie Bay International, Ltd. and subsidiaries (Company) is a development
stage company with no operations. The Company's primary business activity is
the development of wind powered alternative energy systems.
2. Accounting policies
(a) Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States 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, 2004. The balance sheet at
September 30, 2004 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-month period ended December 31, 2004 are not
necessarily indicative of the results of operations that may be expected for the
year ending September 30, 2005.
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 has suffered recurring losses and has a deficiency in assets that
raise substantial doubt about our ability to continue as a going concern. The
Company's continued existence is dependent upon its ability to raise additional
capital and generate profits. However, management believes that it will be
successful at raising additional capital in the short-term and will have
profitable operations in the long-term.
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.
<page>F-5
(b) Consolidation
These financial statements include the activities of the Company and its wholly-
owned subsidiaries, Lac Dore Mining Inc., Great Western Diamond Company, 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
On December 16, 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123 (revised 2004),
Share- Based Payment. The new statement replaces existing requirements under
SFAS No. 123, Accounting for Stock-Based Compensation, and eliminates the
ability to account for share-based compensation transactions using APB Opinion
No. 25, Accounting for Stock Issued to Employees. As a result, compensation
cost relating to share-based payment transactions will be measured based on the
fair value of the equity or liability instruments issued. This Statement does
not change the accounting for similar transactions involving parties other than
employees. Publicly traded companies must apply this Standard as of the
beginning of the first interim or annual period that begins after June 15, 2005,
while those that file as small business issuers must comply as of the beginning
of the first interim or annual reporting period that begins after December 15,
2005. This Statement applies to all awards granted after the required effective
date and to awards modified, repurchased, or cancelled after that date. The
cumulative effect of initially applying this Statement, if any, is recognized as
of the required effective date. The Company has not completed its evaluation of
the impact of adopting the new statement on its consolidated financial
statements, but anticipates that additional compensation costs will be recorded
if the use of options for employee and director compensation continues.
(d) Stock-based Payment
The Company has stock-based compensation plans which are described in note 3.
The Company uses the fair value method of accounting for all stock options and
common shares issued to non-employees for services in accordance with the
provisions of SFAS 123 and the intrinsic value method for stock options granted
to employees, officers and directors in conformity with Accounting Principles
Board Opinion No. 25 and its related interpretation as 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 as is
the case under the intrinsic value method when exercise price is lower than the
current market price at the date of the grant.
<page>F-6
Had the compensation cost for stock options issued to employees, officers and
directors been determined based on the fair value method consistent with SFAS
No. 123, the Company's net loss and loss per share would have been as follows
for the periods ended December 31, 2004 and 2003:
Three months ended
December 31,
2004 2003
---------------- -----------------
Net loss, as reported $(2,130,023) $(386,069)
---------------- -----------------
Add: Stock-based employee
compensation expense included
in reported net loss $ 2,025 $ 6,442
Deduct: Total stock-based
employee compensation expense
determined under the fair value
method for all awards, (808,308) (920,761)
--------------- ------------------
Pro forma net loss $(2,936,306) $(1,300,388)
=============== ==================
Basic and diluted loss per share:
As reported $ (0.08) $ (0.02)
Pro forma (0.11) (0.05)
The fair value of options was estimated as of the date of grant using the Black-
Scholes option-pricing method with the following weighted average assumptions
for the periods ended December 31, 2004 and 2003:
Three months ended
December 31,
2004 2003
----- ------
Risk-free interest rate 4.06% 3.10%
Expected average life 9.19 7.25
Dividend yield - -
Volatility 128% 115%
Fair values of option grants per share $1.15 $1.09
[e] Reclassification
Certain amounts from the prior year have been reclassified to conform to the
current year presentation.
<page>F-7
3. Common stock
The following table summarizes the activity related to common stock for the
three months ended December 31, 2004.
<table>
<caption>
<s> <c> <c>
Additional
Shares Common stock paid in capital Total
----------------------------------------------------------
Balance, September 30, 2004 26,407,393 $ 24,818 $20,133,739 $20,158,557
Common shares issued
for cash ($1.18 Wt.
Avg./share ) 42,481 42 40,066 40,108
Common shares issued
for services ($2.25 Wt.
Avg./share) 119,984 120 269,880 270,000
Stock options issued
for compensation - - 2,025 2,025
Value of beneficial
conversion feature of
convertible promissory note - - 568,661 568,661
(note4)
Fair value of warrants
issued to private placement
agent for convertible
promissory note - - 115,822 115,822
- --------------------------------------------------------------------------------------
Balance, December 31, 2004 26,569,858 $ 24,980 $21,130,193 $21,155,173
======================================================================================
</table>
The net cash proceeds from the above sale of common stock was recorded in
"Refundable tax credits and other receivables" in the accompanying condensed
consolidated balance sheet as the cash amount was not received until January 4,
2005.
(a) Share-based incentive plans
The Company has three share based incentive plans, each being limited so that
the options to acquire no more than 2,500,000 common shares per plan may be
outstanding at any one time.
Each plan permits the issuance of up to 2,500,000 options.
(i) Under the 2001 Employee Incentive Stock Option Plan, options may be
granted at an exercise price equal to the market price on the date of the grant.
All options expire no later than ten years from the grant date. In the event an
option is granted to an employee who owns 10% or more of the voting power of
common stock of the Company, the purchase price of each share shall be 110% of
the market price on the date of grant and the expiration date of the option
shall be no more than five years from the date of grant of such option. As of
December 31, 2004, options to purchase an aggregate of 725,000 common shares
have been issued under this plan.
<page>F-8
(ii) 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 date of the grant. The options expire
ten years from the date of grant. As of December 31, 2004, options to purchase
an aggregate of 2,080,000 common shares have been issued under this plan.
(iii) Under the 2001 Directors Non-Qualified Stock Option Plan, options may be
granted to directors of the Company or certain non-employees for terms of up to
ten years at an exercise price as determined by the administrator on the date of
the grant. The options vest over three years. As of December 31, 2004, options
to purchase an aggregate of 1,709,584 common shares have been issued under this
plan.
The following tables contain information with respect to all options granted by
the Company, in addition to those granted under the preceding incentive plans:
Weighted average
exercise price
Shares US$/share
------------ ---------------
Options outstanding, September 30, 2004 13,632,817 $1.08
Granted 924,167 $1.33
Options outstanding, December 31, 2004 14,556,984 $1.10
Outstanding options Exercisable options
--------------------- ------------------------
Weighted Weighted Weighted
Average average average
life price price
Price Shares (years) US$/share Shares US$/share
------ -------- ------- ---------- --------- ----------
0.74 300,000 2.70 $0.74 - $ -
1.00 10,971,917 4.25 1.00 10,391,917 1.00
1.22-1.25 617,400 2.88 1.24 467,400 1.25
1.30-1.50 2,059,167 6.84 1.37 1,434,167 1.39
1.88 525,000 8.75 1.88 525,000 1.88
2.00-3.00 83,500 3.59 2.63 83,500 2.63
---------- -----------
14,556,984 12,901,984
========== ==========
(b) Stock warrants
As at December 31, 2004, the following warrants for the purchase of common stock
are outstanding:
Number
of warrants
--------------
Outstanding, September 30, 2004 2,153,980
Issued 150,000
Expired (190,625)
- ---------------------------------------------
Outstanding, December 31, 2004 2,113,355
==============================================
The warrants outstanding at December 31, 2004, can be exercised at prices
ranging from $1.07 to $3.00. The expiration dates of the warrants range from
February 14, 2005 to September 7, 2006.
<page>F-9
(c) Redeemable common stock
The Company has granted to the holders of an aggregate of 26,700 outstanding
common shares the right to require the Company to repurchase the shares at a
price of $3.25 per share. If the holders exercise their rights, the Company
will be obligated to pay, as of December 31, 2004 or gradually over this
fiscal year, a maximum amount of $86,775.
4. Convertible promissory notes
On August 13, 2004, the Company borrowed $500,000 from 13 lenders and issued its
12% convertible promissory notes in that aggregate amount. The notes and
interest were due and payable on the 14th day of November 2004. If, however, a
registration statement filed by the Company under the Securities Act of 1933 to
register the shares which may be obtained by the lenders upon conversion of the
notes has been declared effective by the Securities and Exchange Commission
(SEC) by that date, the maturity date of the notes would be extended for a
period of 90 days from the date the registration statement was declared
effective and the lenders can convert the notes into a total of 666,667 shares
of common stock during the 90 day period. 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. Interest is due
upon the conversion of the promissory notes to shares of common stock or when
the promissory notes are due.
On September 7, 2004, the Company borrowed $598,450 from ten lenders and issued
its 12% convertible promissory notes in that aggregate amount. The terms of the
notes and the issuance of warrants in connection with the notes are
substantially the same as those of the loans of August 13, 2004, except that the
notes are convertible into 746,867 shares of common stock and lenders received
warrants for the purchase of an aggregate amount of 873,300 shares of common
stock on or before September 7, 2006, at $1.42 per share.
On November 15, 2004, the registration statement which included the shares
obtainable by the lender upon conversion of the promissory notes, was declared
effective by the SEC. Accordingly, the lenders rights to conversion will expire
on February 13, 2004, and the promissory notes not converted will be due. As of
December 31, 2004, none of the promissory notes have been converted into common
shares and no warrants have been exercised.
The 12% promissory notes and warrants were recorded at their relative fair
values. The fair value assigned to the warrants of $529,789 was estimated using
the Black Scholes option-pricing model. The intrinsic value of the conversion
feature at the date the promissory notes were issued was $568,661, after taking
into account the fair value of the warrants. These amounts have been recorded
as debt discount, with an offsetting increase to additional paid-in capital.
The debt discount is being amortized as additional non-cash interest expense
over the life of the debt using the effective interest method. Total
amortization for the period ended December 31, 2004 is $275,418, and the
unamortized discount is $179,088 at December 31, 2004. On February 4, 2005,
$775,000 of promissory notes was converted into 1,033,341 common shares. The
remaining promissory notes will either be repaid by the company or, at the
option of the lenders, will be converted to common shares.
<page>F-10
The Company also incurred $100,000 of costs in connection with the issuance of
the convertible promissory notes. These costs have been deferred and are being
amortized on a basis that approximates the interest method over the expected
term of the related debt. Accumulated amortization related to the deferred
finance costs at December 31, 2004, was approximately $74,207.
5. Standby equity distribution agreement
On April 6, 2004, the Company entered into a Standby Equity Distribution
Agreement (SEDA) with Cornell Capital Partners, L.P (Cornell Capital Partners).
Under the Agreement and subject to its terms and conditions, the Company may
require Cornell Capital Partners to purchase newly issued common shares from the
Company, for a maximum total purchase price of $15 million over a 24-month
period, less certain fees and expenses. The amount of any advance (periodic
sale of stock) may not exceed $625,000 and the Company may not request advances
if the shares to be issued in connection with such advances would result in
Cornell Capital Partners owning more than 9.9% of the Company's then outstanding
common stock. The Company incurred $550,000 in issue costs related to the
signing of the Agreement. These costs were settled through the issuance of
224,412 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 Agreement.
Under the terms of the SEDA, the Company will pay 5% of the proceeds to Cornell
Capital Partners as a fee and $500 each sale to the escrow agent for services.
Additionally, the Company will pay 10% of the proceeds to the placement agent
as a fee and issue warrants to the agent to purchase the Company's common stock
equal to the number of the Company's common stock issued in each advance.
6. Basic and diluted loss per common share
Three months ended
December 31,
2004 2003
--------------------------------
Net loss $(2,130,023) $ (386,069)
Total weighted average number
of common shares outstanding 26,467,847 25,321,191
- ----------------------------------------------------------------
Net loss per common share $ (0.08) $ (0.02)
=================================
The following outstanding common stock equivalents were excluded from the
computation of diluted net loss per share attributable to common stockholders as
they had an anti-dilutive effect:
<page>F-11
Three months ended
December 31,
2004 2003
------------------------------
Shares issuable upon exercise of stock options 14,556,984 13,681,617
Shares issuable upon exercise of warrants 2,113,355 975,905
Shares issuable upon conversion of promissory notes 1,413,533 -
7. Interest and Finance charges
Interest and finance charges consist of the following:
Three months ended
December 31,
2004 2003
----------- ------------
Amortization of the fair value of
warrants issued for placement fees $ 59,198 $ -
Amortization of debt discount
related to the intrinsic value of
the beneficial conversion feature
of the convertible promissory notes 238,257 -
Amortization of deferred finance
charges and issue costs Paid 53,931 -
Amortization of debt discount related
to warrants issued in connection with
the convertible promissory notes 275,418 -
Interest paid on convertible promissory notes 30,667
Other interest 24,982 16,517
------------ -----------
$ 682,453 $ 16,517
============= ===========
8. Related party transactions
The Company has retained a law firm to perform legal services for which the
Company has incurred total expenditures of $41,469 for the three months ended
December 31, 2004 ($21,499 for the three months ended December 31, 2003). A
director of the Company is a partner in that law firm. At December 31, 2004 and
September 30, 2004, $164,237 and $122,768 resulting from these legal services
are included in accounts payable and accrued liabilities, respectively.
One of the Directors has advanced $50,000 to the Company as an unsecured loan
with no set terms of repayment, bearing interest at 10%. At December 31, 2004,
$50,712 (including accrued interest of $712) is included in accounts payable and
accrued liabilities.
9. Commitments and Contingencies
The Company has provided to a creditor a 50% lien on the reclamation bond on
deposit with the state of Colorado with payment being made in the event that
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 accompanying 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 (and current employees) of DERMOND INC.
Bank indebtedness and other loans
The bank indebtedness of DERMOND INC. in the amount of $94,986 as of December
31, 2004 ($90,101 as of September 30, 2004), carries interest at 7.5% per annum
and is secured by an assignment of DERMOND INC.'s refundable research and
development tax credit.
The bank indebtedness of Great Western Diamond Company in the amount of $9,492
as of December 31, 2004 ($12,163 as of September 30, 2004), carries interest at
8% per annum and is secured by the assets of Great Western Diamond Company.
In addition to the above, the assets of Great Western Diamond Company have been
pledged to secure certain accounts payable of $239,882 as of December 31, 2004.
On January 19, 2005, the Company settled the amounts due by issuing 65,000
common shares valued at $74,750. The Company will recognize a $165,132 gain on
the settlement of the payable in the quarter ended March 31, 2005.
Legal
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.
10. Subsequent events
On January 10, 2005, the Company borrowed $1,000,000 from Cornell Capital
Partners and issued a promissory note to Cornell Capital Partners in that
amount. At the same time, the Company placed 1,000,000 shares of common stock
in escrow with an escrow agent designated by Cornell Capital Partners and the
Company deposited with the escrow agent 19 requests for advances under the
Standby Equity Distribution Agreement, each in the amount of $50,000 and one
such advance in the amount of $75,479.45.The escrow agent has agreed to release
the requests to Cornell Capital Partners every seven days beginning January 17,
2005. Upon the release of each request, the appropriate number of the Company's
shares held in escrow will be issued to Cornell Capital Partners.
The promissory note issued to Cornell Capital Partners bears interest at the
annual rate of 12% and is payable on or before June 4, 2005. Proceeds from the
sale of the shares issued to Cornell Capital Partners will be utilized in
payment of outstanding amounts under the promissory note. In the event that
during the life of the promissory note, the proceeds from the sales of the
escrowed shares are insufficient to repay all amounts due, the Company will
immediately place in escrow such number of additional shares of its common stock
of which the proceeds of the sale of such shares shall be sufficient to repay
all amounts due under the promissory note. There is no limit on the number of
shares the Company may be required to issue to Cornell Capital Partners to
satisfy our obligation under the promissory note. Any decline in the market
price of our shares will increase the number of shares the Company would
otherwise be required to issue to Cornell.
Subsequent to December 31, 2004, Lac Dore Mining Inc.did not remit scheduled
quarterly repayments due under two separate interest free loan agreements with
the Government of Canada. As a result, a default has occurred that would give
the lender the right to demand immediate repayment of all amounts due. As of
the date of these financial statements, the lender has not demanded repayment
nor has it agreed to a revised schedule of payments proposed by the Company
which would cure the default. Accordingly, the Company has recorded the entire
principal due under these two loans as a current liability in the accompanying
condensed consolidated balance sheet.
<page>F-12
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, we are calling the
WindStor Wind Turbine ("WWT"), during the quarter ended December 31, 2004.
On October 27, 2004 we completed the installation and commissioning of a 100kW
WWT prototype at the Universite du Quebec en Abitibi-Temiscamingue, in Rouyn-
Noranda, Quebec Canada. Completion and installation of the WWT prototype and
additional WWT 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. Testing of the WWT began immediately upon commissioning. In early
November 2004, we began engineering a 200kW WWT and intend to build a prototype
for a rooftop installation in 2005. If the 100 kW and 200kW prototypes perform
as anticipated, and we have the requisite funding, we intend to have WWTs
manufactured for commercial introduction.
We believe that we will require funds of approximately $800,000 to complete the
design stage, construct and install a 200kW prototype of the WWT, and test both
the 100 and 200kW prototypes. If we are able to obtain the funds, we intend to
utilize them as follows:
ANTICIPATED
REQUIRED TIME PERIOD
USE FUNDS FOR USE OF FUNDS
- ------------------------------------------------------------------
Design & Engineering Completion $200,000 3 months
Prototype Construction $300,000 3 months
Installation and Commissioning $100,000 1 month
Testing $200,000 3 months
WindStor related R&D expenditures for the December 31, 2004 quarter were
approximately $862,025. Total R&D expenditures for the quarter were $892,776.
WindStor R&D was largely related to the construction and installation of a 100
kW WWT prototype at the Universite du Quebec en Abitibi-Temiscamingue, in Rouyn-
Noranda, Quebec Canada.
We intend to retain ownership of the WindStor installations and sell the
electricity generated by WWTs to WindStor customers. 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, we
intend to allocate them as follows:
<page>2
USES 2005
- ---------------------------------------------------------------------------
Cash Used For Operations $ 2,500,000
Engineer, construct, test WindStor prototypes and ongoing R&D $ 2,500,000
Capital Expenditures - WindStor Projects $28,000,000
Repayment of Long Term Debt $ 500,000
Working capital, funding availability $ 4,500,000
- --------------------------------------------------------------------------
TOTAL $38,000,000
============
As of February 14, 2005 we have entered into agreements with 19 potential users
of WindStor systems. The agreements allow for us to conduct wind testing of
installation sites for DWTs to determine whether WindStor could be economically
viable. We intend to utilize a third party to assistance us in determining
whether WindStor can be economically viable at particular sites. Irrespective of
the results and price structure, none of the potential users is under any
obligation to purchase or lease any products from us.
15 companies in the United States have entered into sales agent agreements with
us that provide for a payment to them in the event that one or more WindStors
are sold or leased through their efforts. The payment will consist of 5% of
WindStor's installed cost payable within 60 days of installation of a system,
exclusive of taxes and transportation. Certain of the agents will also receive
a 2% "carried equity interest" in each WindStor system they sell. Each of the
agents has represented to us that it has expertise in the sale and promotion of
energy products.
On November 15, 2004 our SB-2 Registration Statement was declared effective by
the SEC. We registered 25,343,244 shares of Common Stock to be used primarily
in conjunction with a $15 million Standby Equity Distribution Agreement with
Cornell Capital Partners, LP of April 6, 2004. We also issued 119,984 share of
our common stock to Cornell Capital Partners to satisfy the second half of a
commitment fee for the Standby Equity Distribution Agreement.
Effective on December 22, 2004, our shares became authorized for quotation on
the OTC Bulletin Board under the symbol "MKBY."
On December 30, 2004, we sold 42,481 shares of our common stock to Cornell
Capital Partners for $50,000 pursuant to the Standby Equity Distribution
Agreement.
<page>3
Lac Dore Mining Co.
If funding becomes available, we intend to continue the development of vanadium
refining technologies. The next phase of development has been planned at a cost
of approximately $1 million and is scheduled to begin in 2005. A portion of the
cost includes the operating costs associated with a sample product unit ("SPU")
constructed by SGS Lakefield Research at its facility in Lakefield, Ontario
Canada to produce customer samples of various vanadium chemicals and continue
research and development on additional possible products. As is the case with
our other proposed business activities, unless we can obtain sufficient capital
we will not be able to proceed.
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.
We believe that is unlikely that funding will become available to significantly
explore the Lac Dore deposit in the foreseeable future.
Cash Requirements for 2005 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 anticipated cash requirements for administrative costs for the fiscal year
ending September 30, 2005 (including direct support of subsidiary operations)
are as follows:
USE AMOUNT
- ----------------------------------------------
Employee salaries $2,321,000
Professional costs (includes
consultants, outside
accountants, independent
auditors and legal counsel) $1,276,000
General and administrative (includes
lease obligations, travel and
other administrative costs) $1,042,000
<page>4
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 January 12, 2005.
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 and other Employment related activities
Currently, we have 8 fulltime employees. DERMOND will need to add a number of
employees in anticipation of successful WWT and WindStor prototype testing.
Additions include, project managers, mechanical, aeronautic and electrical
engineers and administrative personnel. WindStor Power Co. intends to add
project managers 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 December 31, 2004, and other periodic reports filed with the SEC including
those disclosed in our Annual Report on Form 10-KSB for the fiscal year ended
September 30, 2004 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.
<page>5
Item 3. Controls and Procedures.
We maintain controls and procedures designed to ensure that information required
to be disclosed in the reports that we file or submit under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the rules and forms of the Securities and Exchange
Commission. Based upon their evaluation of those controls and procedures
performed as the end of the period covered by this report, our chief executive
officer and the principal financial officer concluded that our disclosure
controls and procedures were adequate. 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 December 31, 2004 that were not registered under the Securities
Act of 1933.
On October 1, 2004, we granted options to purchase 624,167 shares of common
stock to the nine directors of McKenzie Bay International Ltd., the five
directors of Lac Dore Mining, Inc. and the four directors of DERMOND, INC in
exchange for services rendered. The options are exercisable until September 30,
2114 at $1.35 per share.
On November 15, 2004, we issued 119,984 shares of common stock to Cornell
Capital Partners, LP for the second half of the commitment fee due in accordance
with the Standby Equity Distribution Agreement as more completely described in
our Annual Report on Form 10-KSB for the fiscal year ended September 30, 2004.
The shares were valued at $270,000 calculated as of the date the agreement was
signed.
On November 15, 2004, we issued warrants to purchase 150,000 shares of common
stock to Spencer Clarke LLC for services provided. Warrants for the purchase of
75,000 shares are exercisable until August 13, 2006 at $1.07 per share and the
remaining warrants are exercisable until September 7, 2006 at $1.42 per share.
On December 6, 2004 we granted an option for the purchase of 150,000 shares to
each of Messrs. Bakeman and Westerholm under our 2001 Employee Incentive Stock
Option Plan exercisable at $1.22 and $1.35 per share, respectively. One-third
of the option amount of shares became immediately exercisable when the options
were granted. An additional one-third may be acquired on or after December 6,
2005 and the remaining shares may acquired on and after December 6, 2006. Mr.
Bakeman's option expires on December 5, 2014 and Mr. Westerholm's option expires
on December 5, 2009.
<page>6
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) We did not receive any "offering proceeds" within the meaning of Rule
463 under the Securities Act of 1933 during the period covered by this report.
(c) During the quarter ended December 31, 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.
Item 6. Exhibits.
EXHIBIT
NUMBER DESCRIPTION
- ------ -------------
2.1 Share Purchase Agreement between McKenzie Bay International,
Ltd. and Jacquelin Dery, Laurent Mondou and Experts Conseils
Dermond Inc. of February 12, 2002. Previously filed as an
exhibit to Amendment No. 2 to our registration statement on Form
10-SB and incorporated herein by reference.
3.1 Certificate of Incorporation, as amended. Previously filed as an
exhibit to our registration statement on Form 10-SB and
incorporated herein by reference.
3.2 Bylaws. Previously filed as an exhibit to our registration
statement on Form 10-SB and incorporated herein 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 incorporated herein 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 incorporated herein 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 incorporated herein by reference.
Previously filed as an exhibit to our Quarterly Report on Form
10-QSB for the quarterly period year ended June 30, 2004 and
incorporated herein by reference.
4.6 Promissory Note and Warrant issued on August 13, 2004, letter of
August 16, 2004 amending certain terms and "Debenture" setting
forth certain terms. Previously filed as an exhibit to our
Quarterly Report on Form 10-QSB for the quarterly period ended
June 30, 2004 and incorporated herein by reference.
<page>7
4.7 Promissory Note and Warrant issued on September 7, 2004 and
"Debenture" setting forth certain terms. Previously filed as an
exhibit to our Quarterly Report on Form 10-QSB for the quarterly
period ended June 30, 2004 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. ++
++ Filed herewith.
(b) Reports on Form 8-K
We filed the following Current Reports on Form 8-K during the quarter ended
December 31, 2004:
Date of Report Item(s) Reported
-------------- ----------------
November 01, 2004 8.01
December 22, 2004 8.01
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: February 14, 2005
By: /s/ Gary L. Westerholm
----------------------
Gary L. Westerholm
President, Chief Executive Officer and Director(Principal Executive Officer)
Date: February 14, 2005
By: /s/ Gregory N. Bakeman
--------------------
Gregory N. Bakeman
Treasurer, Chief Financial Officer
and Director (Principal Financial and Accounting Officer)
<page>8