Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2010
OR
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o |
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TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
COMMISSION FILE NUMBER 333-148346
Genesis Fluid Solutions Holdings, Inc.
(Exact Name of small business issuer as specified in its charter)
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Delaware
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98-0531496 |
(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
830 Tender Foot Hill Road #301, Colorado Springs, CO 80906
(Address of principal executive offices) (Zip Code)
Issuers telephone Number: (719) 210-6646
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such
files). Yes o No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of large accelerated
filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act.
(Check one):
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company þ |
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(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes o No þ
As of August 6, 2010 the issuer had 17,751,500 outstanding shares of Common Stock.
PART
I
ITEM
1. FINANCIAL STATEMENTS
Genesis Fluid Solutions Holdings, Inc. and Subsidiary Index to
Condensed Consolidated Financial Statements
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Page |
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Financial Statements |
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F-2 |
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F-3 |
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F-4 |
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F-6 |
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F-7 |
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F-1
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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June 30, 2010 |
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December 31, 2009 |
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(Unaudited) |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
3,685,528 |
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$ |
4,873,912 |
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Accounts receivable |
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129,089 |
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Costs in excess of billings on uncompleted contracts |
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26,377 |
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59,506 |
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Prepaid expenses and other current assets |
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26,153 |
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185,273 |
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Total current assets |
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3,867,147 |
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5,118,691 |
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Property and equipment, net |
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699,180 |
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719,469 |
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Other assets |
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350 |
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Total assets |
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$ |
4,566,677 |
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$ |
5,838,160 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Warrant derivative liability |
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$ |
843,791 |
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$ |
804,718 |
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Accrued expenses |
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418,043 |
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476,800 |
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Billings in excess of costs on uncompleted contracts |
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200,109 |
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201,219 |
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Accounts payable |
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157,600 |
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82,206 |
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Equipment payable |
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84,795 |
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84,795 |
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Loan payable |
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68,076 |
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68,076 |
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Settlement due to vendor |
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33,867 |
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84,667 |
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Obligations under capital leases |
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15,249 |
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59,216 |
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Note payable |
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12,500 |
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Notes payable related parties |
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14,575 |
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Convertible notes payable |
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10,000 |
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Total current liabilities |
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1,834,030 |
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1,886,272 |
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Commitments and contingencies (See Note 9) |
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Stockholders equity: |
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Preferred stock, $0.001 par value; 25,000,000 shares authorized,
zero shares issued and outstanding |
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Common stock, $0.001 par value; 100,000,000 shares authorized,
17,751,500 and 17,668,500 issued and outstanding, respectively |
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17,752 |
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17,669 |
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Additional paid-in capital |
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10,219,974 |
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10,152,118 |
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Accumulated deficit |
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(7,505,079 |
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(6,217,899 |
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Total stockholders equity |
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2,732,647 |
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3,951,888 |
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Total liabilities and stockholders equity |
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$ |
4,566,677 |
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$ |
5,838,160 |
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The
accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-2
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
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For the Three |
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For the Three |
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For the Six |
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For the Six |
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Months Ended |
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Months Ended |
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Months Ended |
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Months Ended |
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June 30, 2010 |
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June 30, 2009 |
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June 30, 2010 |
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June 30, 2009 |
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Revenues |
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$ |
129,089 |
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$ |
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$ |
129,089 |
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$ |
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Cost of revenues |
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129,089 |
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129,089 |
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Gross profit (See Note 4) |
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Operating expenses: |
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Selling, general and administrative |
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420,165 |
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506,802 |
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1,108,691 |
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715,827 |
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Total operating expenses |
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420,165 |
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506,802 |
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1,108,691 |
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715,827 |
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Operating loss |
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(420,165 |
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(506,802 |
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(1,108,691 |
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(715,827 |
) |
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Other income (expense): |
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Interest income |
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3,783 |
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8,127 |
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Change in warrant derivative liability |
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423,067 |
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(39,073 |
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Liquidated damages expense |
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(68,250 |
) |
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(136,500 |
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Loss on disposals of property and equipment |
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(65 |
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(65 |
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Interest expense |
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(4,790 |
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(123,349 |
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(10,178 |
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(264,883 |
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Total other income (expense), net |
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353,745 |
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(123,349 |
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(177,689 |
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(264,883 |
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Loss before income taxes |
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(66,420 |
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(630,151 |
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(1,286,380 |
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(980,710 |
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Income tax expense |
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(800 |
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Net loss |
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(66,420 |
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(630,151 |
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(1,287,180 |
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(980,710 |
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Other comprehensive income: |
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Gain on foreign currency translation, net of income tax of $0 |
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(2,783 |
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(1,343 |
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Total other comprehensive income, net of income taxes |
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(2,783 |
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(1,343 |
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Comprehensive loss |
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$ |
(66,420 |
) |
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$ |
(632,934 |
) |
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$ |
(1,287,180 |
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$ |
(982,053 |
) |
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Net loss per share basic and dilulted |
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$ |
(0.00 |
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$ |
(0.06 |
) |
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$ |
(0.07 |
) |
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$ |
(0.09 |
) |
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Weighted average number of common shares basic and diluted |
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17,751,500 |
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11,419,780 |
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17,715,732 |
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10,713,812 |
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The accompanying notes are an integral part of these unaudited condensed consolidated
financial statements.
F-3
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 2010
(Unaudited)
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Additional |
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Total |
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Common Stock |
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Paid-In |
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Accumulated |
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Stockholders |
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Shares |
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Amount |
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Capital |
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Deficit |
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Equity |
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Balance, December 31, 2009 |
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17,668,500 |
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$ |
17,669 |
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$ |
10,152,118 |
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$ |
(6,217,899 |
) |
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$ |
3,951,888 |
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Common shares issued to consultant per settlement |
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83,000 |
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83 |
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41,417 |
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41,500 |
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Stock option expense |
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17,972 |
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17,972 |
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Liability paid by officer on behalf of Company |
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8,467 |
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8,467 |
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Net loss |
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(1,287,180 |
) |
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(1,287,180 |
) |
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Balance, June 30, 2010 |
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17,751,500 |
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$ |
17,752 |
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$ |
10,219,974 |
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$ |
(7,505,079 |
) |
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$ |
2,732,647 |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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For the Six |
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For the Six |
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Months Ended |
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Months Ended |
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June 30, 2010 |
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June 30, 2009 |
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Cash flows from operating activities: |
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Net loss |
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$ |
(1,287,180 |
) |
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$ |
(980,710 |
) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation |
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59,472 |
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Depreciation of property and equipment |
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44,642 |
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63,970 |
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Change in warrant derivative liability |
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39,073 |
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Loss on disposal of property and equipment |
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65 |
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Amortization of patents |
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2,207 |
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Stock-based loan fees |
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33 |
|
Changes in operating assets and liabilities: |
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Increase in accounts receivable |
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(129,089 |
) |
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Increase in inventories |
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(12,061 |
) |
Decrease in costs in excess of billings on uncompleted contracts |
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33,129 |
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Decrease in prepaid expenses and other current assets |
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159,120 |
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60,468 |
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(Increase) decrease in other assets |
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(350 |
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2,001 |
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Increase in accounts payable |
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75,394 |
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73,471 |
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(Decrease) increase in accrued expenses |
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(58,757 |
) |
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241,933 |
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Decrease in billings in excess of costs on uncompleted contracts |
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(1,110 |
) |
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Decrease in settlement due to vendor |
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(42,333 |
) |
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Net cash
used in operating activities |
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(1,107,924 |
) |
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(548,688 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(66,333 |
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Proceeds from sale of property and equipment |
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41,915 |
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Patent costs |
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(9,259 |
) |
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Net cash
used in investing activities |
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(24,418 |
) |
|
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(9,259 |
) |
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|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Capital contributions received |
|
|
|
|
|
|
507,841 |
|
Principal payments on notes payable |
|
|
(10,000 |
) |
|
|
(116,720 |
) |
Principal payments on secured note payable |
|
|
|
|
|
|
(100,006 |
) |
Proceeds from notes payable related parties |
|
|
|
|
|
|
141,000 |
|
Proceeds from convertible notes payable |
|
|
|
|
|
|
600,000 |
|
Principal payments on notes payable related parties |
|
|
(2,075 |
) |
|
|
(121,000 |
) |
Principal payments on capital leases |
|
|
(43,967 |
) |
|
|
(27,502 |
) |
|
|
|
|
|
|
|
Net cash
(used in) provided by financing activities |
|
|
(56,042 |
) |
|
|
883,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash |
|
|
|
|
|
|
(1,343 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(1,188,384 |
) |
|
|
324,323 |
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period |
|
|
4,873,912 |
|
|
|
9,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
3,685,528 |
|
|
$ |
333,399 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-5
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
For the Six |
|
|
For the Six |
|
|
|
Months Ended |
|
|
Months Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
7,519 |
|
|
$ |
106,376 |
|
|
|
|
|
|
|
|
Income taxes paid |
|
$ |
800 |
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Reclassification of note payable related party to note payable |
|
$ |
12,500 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Liability paid by officer on behalf of Company |
|
$ |
8,467 |
|
|
$ |
|
|
|
|
|
|
|
|
|
Conversion of convertible notes payable to common stock |
|
$ |
|
|
|
$ |
642,878 |
|
|
|
|
|
|
|
|
Conversion of accrued interest payable to notes payable |
|
$ |
|
|
|
$ |
131,322 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-6
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Note 1. Nature of Operations and Basis of Presentation
Overview
Genesis Fluid Solutions Holdings, Inc. (Holdings or the Company) is an environmental
company that supplies a Rapid Dewatering System (RDS) technology for dredged material,
including fine-grained sediment, for lake and waterway restoration. The Companys
subsidiary, Genesis Fluid Solutions, Ltd (Genesis Ltd), was incorporated on
October 26, 2005 under the laws of the State of Colorado.
On October 30, 2009, Genesis Ltd. entered into and consummated an Agreement of Merger
and Plan of Reorganization (the Merger Agreement) with Holdings, an inactive
publicly-held company, and Genesis Fluid Solutions Acquisition Corp. (Acquisition
Sub), which was Holdings newly formed, wholly-owned Delaware subsidiary. Upon closing
of the transaction contemplated under the Merger Agreement (the Merger), Acquisition
Sub merged with and into Genesis Ltd., and Genesis Ltd., as the surviving corporation,
became a wholly-owned subsidiary of Holdings. On October 30, 2009, the Company changed
its name to Genesis Fluid Solutions Holdings, Inc.
At the closing of the Merger, each share of Genesis Ltd. common stock that was issued
and outstanding immediately prior to the closing of the Merger was exchanged for ten
shares of Holdings common stock. This transaction was treated as a recapitalization of
Genesis Ltd. with 1,160,000 common shares deemed issued to the pre-merger stockholders
of Holdings. Subsequent to the merger, but prior to the same day closing of the first
traunche of a private placement of common stock and warrants, the stockholders of
Genesis Ltd. had approximately 89% voting control of the Company. The accounting
effects of the recapitalization are reflected retroactively for all periods presented in
the accompanying unaudited condensed consolidated financial statements and footnotes.
Basis of Presentation
The interim condensed consolidated financial statements included herein have been
prepared by the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission (the SEC). In the opinion of the Companys
management, all adjustments (consisting of normal recurring adjustments and
reclassifications and non-recurring adjustments) necessary to present fairly our results
of operations for the three and six months ended June 30, 2010 and 2009, our cash flows
for the six months ended June 30, 2010 and 2009, and our financial position as of June
30, 2010 have been made. The results of operations for such interim periods are not
necessarily indicative of the operating results to be expected for the full year.
Certain information and disclosures normally included in the notes to the annual
consolidated financial statements have been condensed or omitted from these interim
condensed consolidated financial statements. Accordingly, these interim condensed
consolidated financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in our Annual Report on Form 10-K for
the fiscal year ended December 31, 2009, as filed with the SEC on April 15, 2010. The
December 31, 2009 balance sheet is derived from those statements.
All references to outstanding shares, options, warrants and per share information have
been adjusted to give effect to the recapitalization effective October 30, 2009.
Note 2. Significant Accounting Policies
Use of Estimates
Our unaudited condensed consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United States (GAAP). These
accounting principles require us to make certain estimates, judgments and assumptions.
We believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at
the time that these estimates, judgments and assumptions are made. These estimates,
judgments and assumptions can affect the reported amounts of assets and liabilities as
of the date of our unaudited condensed consolidated financial statements as well as the
reported amounts of revenues and expenses during the periods presented. Our unaudited
condensed consolidated financial statements would be affected to the extent there are
material differences between these estimates and actual results. In many cases, the
accounting treatment of a particular transaction is specifically dictated by GAAP and
does not require managements judgment in its application. There are also areas in
which managements judgment in selecting any available alternative would not produce a
materially different result. Significant estimates include the valuation of accounts
receivable and allowance for doubtful accounts, estimates of depreciable lives and
valuation of property and equipment, valuation of derivatives, valuation of payroll tax
contingencies, valuation of share-based payments, and the valuation allowance on
deferred tax assets.
F-7
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Principles of Consolidation
The condensed consolidated financial statements include the accounts of Holdings and its
wholly-owned subsidiary Genesis Ltd. All significant inter-company balances and
transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all short-term highly liquid investments with an original maturity
at the date of purchase of three months or less to be cash equivalents. There were no
cash equivalents at June 30, 2010.
Fair Value Measurements
The Company has adopted the provisions of ASC Topic 820 Fair Value Measurements and
Disclosures. ASC Topic 820 defines fair value as used in numerous accounting
pronouncements, establishes a framework for measuring fair value and expands disclosure
of fair value measurements. Excluded from the scope of ASC Topic 820 are certain
leasing transactions accounted for under ASC Topic 840, Leases. The exclusion does
not apply to fair value measurements of assets and liabilities recorded as a result of a
lease transaction but measured pursuant to other pronouncements within the scope of ASC
Topic 820.
Net Loss Per Share
Basic net loss per share is computed by dividing the net loss by the weighted average
number of shares of common stock outstanding during the periods presented. Diluted net
loss per common share is computed using the weighted average number of common shares
outstanding for the period, and, if dilutive, potential common shares outstanding during
the period. Potential common shares consist of the incremental common shares issuable
upon the exercise of stock options, stock warrants, convertible debt instruments or
other common stock equivalents.
Options to purchase 3,222,000 common shares and warrants to purchase 3,520,000 common
shares were outstanding during the three and six months ended and at June 30, 2010, but
were not included in the computation of diluted loss per share because the effects would
have been anti-dilutive. These options and warrants may dilute future earnings per
share.
Reclassifications
Certain amounts in the accompanying 2009 condensed consolidated financial statements
have been reclassified to conform to the 2010 presentation.
Accounting for Derivatives
The Company evaluates its options, warrants or other contracts to determine if those
contracts or embedded components of those contracts qualify as derivatives to be
separately accounted for under ASC Topic 815, Derivatives and Hedging. The result of
this accounting treatment is that the fair value of the derivative is marked-to-market
each balance sheet date and recorded as a liability. In the event that the fair value
is recorded as a liability, the change in fair value is recorded in the statement of
operations as other income (expense). Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and then that
fair value is reclassified to equity. Equity instruments that are initially classified
as equity that become subject to reclassification under ASC Topic 815 are reclassified
to liability at the fair value of the instrument on the reclassification date.
Recently Issued Accounting Standards
In January 2010, the FASB issued ASU 2010-06, Fair Value Measurements and Disclosures
(Topic 820): Improving Disclosures about Fair Value Measurements. This update provides
amendments to Topic 820 that will provide more robust disclosures about (1) the
different classes of assets and liabilities measured at fair value, (2) the valuation
techniques and inputs used, (3) the activity in Level 3 fair value measurements, and (4)
the transfers between Levels 1, 2, and 3. The adoption of ASU 2010-06 did not have a
material impact on the Companys consolidated results of operations or financial
condition.
F-8
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
In February 2010, the FASB issued ASU 2010-09, Subsequent Events (Topic 855):
Amendments to Certain Recognition and Disclosure Requirements. This update addresses
both the interaction of the requirements of Topic 855, Subsequent Events, with the
SECs reporting requirements and the intended breadth of the reissuance disclosures
provision related to subsequent events (paragraph 855-10-50-4). The amendments in this
update have the potential to change reporting by both private and public entities,
however, the nature of the change may vary depending on facts and circumstances. The
adoption of ASU 2010-09 did not have a material impact on the Companys consolidated
results of operations or financial condition.
In April 2010, the FASB issued ASU No. 2010-13, Compensation Stock Compensation.
This update will clarify the classification of an employee share based payment award
with an exercise price denominated in the currency of a market in which the underlying
security trades. This update will be effective for the first fiscal quarter beginning
after December 15, 2010, with early adoption permitted. The Company does not expect the
provisions of ASU 2010-13 to have a material effect on the Companys consolidated
results of operations or financial condition.
Note 3. Going Concern
As reflected in the accompanying condensed consolidated financial statements for the six
months ended June 30, 2010, the Company had a net loss of $1,287,180 and cash used in
operations of $1,107,924. At June 30, 2010, the Company had an accumulated deficit of
$7,505,079. In addition, the Company has had limited revenue generating activities in
2010. These matters raise substantial doubt about the Companys ability to continue as
a going concern. At June 30, 2010, the Company had working capital of $2,033,117, which
includes a warrant derivative liability of $843,791. Management plans to utilize its
working capital to implement its business plan. The Company is also exploring
opportunities to increase its revenues, including the licensing of its technology and/or
the acquisitions of companies in the environmental business. The condensed consolidated
financial statements do not include any adjustments relating to the recovery of the
recorded assets or the classification of the liabilities that might be necessary should
the Company be unable to implement its business plan and continue as a going concern.
Note 4. Costs In Excess of Billings (Billings in Excess of Costs) On Uncompleted
Contracts
Costs in excess of billings on uncompleted contracts (calculated on an individual
contract basis) represent accumulated contract costs that exceeded billings and/or cash
received on uncompleted contracts.
At June 30, 2010 and December 31, 2009, costs in excess of billings on uncompleted
contracts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Costs on uncompleted contracts |
|
$ |
43,467 |
|
|
$ |
76,596 |
|
Less: Billings and/or cash receipts on uncompleted
contracts |
|
|
(17,090 |
) |
|
|
(17,090 |
) |
|
|
|
|
|
|
|
Costs in excess of billings on uncompleted contracts |
|
$ |
26,377 |
|
|
$ |
59,506 |
|
|
|
|
|
|
|
|
Billings in excess of costs on uncompleted contracts (calculated on an individual
contract basis) represents billings and/or cash received that exceed accumulated
contract costs on uncompleted contracts.
At June 30, 2010 and December 31, 2009, billings in excess of costs on uncompleted
contracts consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Billings and/or cash receipts on uncompleted contracts |
|
$ |
215,000 |
|
|
$ |
215,000 |
|
Less: Costs on uncompleted contracts |
|
|
(14,891 |
) |
|
|
(13,781 |
) |
|
|
|
|
|
|
|
Billings in excess of costs on uncompleted contracts |
|
$ |
200,109 |
|
|
$ |
201,219 |
|
|
|
|
|
|
|
|
During June 2010, one of the contracts the Company had been working on was canceled at
the customers request. Since the Company had not yet mobilized to the project site,
under the terms of the contract, the Company could invoice and the customer would pay
only the Companys out-of-pocket costs through the date of cancellation. Accordingly,
the Company recognized $129,089 of revenue and $129,089 of cost of revenues during the
three and six months ended June 30, 2010.
F-9
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Note 5. Accrued Expenses
Accrued expenses consisted of the following at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Payroll and related benefits |
|
$ |
196,355 |
|
|
$ |
288,945 |
|
Separation agreement |
|
|
70,000 |
|
|
|
70,000 |
|
Accrued interest |
|
|
14,838 |
|
|
|
12,180 |
|
Other |
|
|
136,850 |
|
|
|
105,675 |
|
|
|
|
|
|
|
|
Total |
|
$ |
418,043 |
|
|
$ |
476,800 |
|
|
|
|
|
|
|
|
The Company has accrued payroll and estimated related taxes, including estimated
penalties and interest, to various taxing authorities, including the Internal Revenue
Service, that pertain to various years of service. At June 30, 2010 and December 31,
2009, estimated penalties and interest in the amounts of $63,709 were included in
payroll and related benefits in the above table.
Note 6. Fair Value Measurements
The estimated fair value of certain financial instruments, including cash and cash
equivalents, accounts receivable and current liabilities, are carried at historical cost
basis, which approximates their fair values because of the short-term nature of these
instruments.
The accounting standard for fair value measurements provides a framework for measuring
fair value and requires expanded disclosures regarding fair value measurements. Fair
value is defined as the price that would be received for an asset or the exit price that
would be paid to transfer a liability in the principal or most advantageous market in an
orderly transaction between market participants on the measurement date. The accounting
standard established a fair value hierarchy which requires an entity to maximize the use
of observable inputs, where available. This hierarchy prioritizes the inputs into three
broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active
markets for identical assets or liabilities. Level 2 inputs are quoted prices for
similar assets and liabilities in active markets or inputs that are observable for the
asset or liability, either directly or indirectly through market corroboration, for
substantially the full term of the financial instrument. Level 3 inputs are
unobservable inputs based on the Companys own assumptions used to measure assets and
liabilities at fair value. An asset or liabilitys classification within the hierarchy
is determined based on the lowest level input that is significant to the fair value
measurement.
Assets and liabilities measured at fair value on a recurring and non-recurring basis
consisted of the following at June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Carrying |
|
|
|
|
|
|
Value at |
|
|
Fair Value Measurements at June 30, 2010 |
|
|
|
June 30, 2010 |
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
Liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant derivative liability |
|
$ |
843,791 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
843,791 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of activity of Level 3 liabilities for the six months ended
June 30, 2010:
|
|
|
|
|
Balance at December 31, 2009 |
|
$ |
804,718 |
|
Change in fair value |
|
|
39,073 |
|
|
|
|
|
Balance at June 30, 2010 |
|
$ |
843,791 |
|
|
|
|
|
Changes in fair value of the warrant derivative liability are included in other income
(expense) in the accompanying condensed consolidated statements of operations.
F-10
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
The Company estimates the fair value of the warrant derivative liability utilizing the
Black-Scholes option pricing model, which is dependent upon several variables such as
the expected warrant term, expected volatility of our stock price over the expected
warrant term, expected risk-free interest rate over the expected warrant term, and the
expected dividend yield rate over the expected warrant term. The Company believes this
valuation methodology is appropriate for estimating the fair value of the warrant
derivative liability. The following table summarizes the assumptions the Company
utilized to estimate the fair value of the warrant derivative liability at June 30,
2010:
|
|
|
Assumptions |
|
June 30, 2010 |
Expected term (years) |
|
1.3 2.5 |
Expected volatility |
|
135.9% |
Risk-free interest rate |
|
0.32% 0.61% |
Dividend yield |
|
0.00% |
The expected warrant term is based on the remaining contractual term. The expected
volatility is based on historical volatility. The risk-free interest rate is based on
the U.S. Treasury yields with terms equivalent to the expected term of the related
warrant at the valuation date. Dividend yield is based on historical trends. While the
Company believes these estimates are reasonable, the fair value would increase if a
higher expected volatility was used, or if the expected dividend yield increased.
There were no changes in the valuation techniques during the three months ended June 30,
2010.
Note 7. Notes Payable
Notes payable consisted of the following at June 30, 2010 and December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Notes payable |
|
$ |
12,500 |
|
|
$ |
|
|
Convertible notes payable |
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
Totals |
|
|
12,500 |
|
|
|
10,000 |
|
Less: Current maturities |
|
|
(12,500 |
) |
|
|
(10,000 |
) |
|
|
|
|
|
|
|
Amount due after one year |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
Activities pertaining to notes payable for the six months ended June 30, 2010, were as
follows:
|
|
|
|
|
|
|
For the |
|
|
|
Six Months |
|
|
|
June 30, 2010 |
|
Beginning balance convertible notes payable |
|
$ |
10,000 |
|
Principal payments |
|
|
(10,000 |
) |
Reclassification from notes payable related parties |
|
|
12,500 |
|
|
|
|
|
Ending balance notes payable |
|
$ |
12,500 |
|
|
|
|
|
The weighted average interest rate for notes payable outstanding as of June 30, 2010 was
15%.
Note 8. Notes Payable Related Party
Notes payable related party consisted of the following at June 30, 2010 and December
31, 2009:
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Notes payable related parties |
|
$ |
|
|
|
$ |
14,575 |
|
Less: Current maturities |
|
|
|
|
|
|
(14,575 |
) |
|
|
|
|
|
|
|
Amount due after one year |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-11
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Activities pertaining to notes payable related parties for the six months ended June
30, 2010, were as follows (See also Note 12):
|
|
|
|
|
|
|
For the |
|
|
|
Six Months |
|
|
|
June 30, 2010 |
|
Beginning balance |
|
$ |
14,575 |
|
Principal payments |
|
|
(2,075 |
) |
Reclassification to note payable |
|
|
(12,500 |
) |
|
|
|
|
Ending balance |
|
$ |
|
|
|
|
|
|
Note 9. Commitments and Contingencies
Settlement Due to Vendor
On May 27, 2008, Eagle North America, Inc. (Eagle), which provided certain equipment
and consulting services to the Company, filed suit against the Company and Michael
Hodges, Chief Executive Officer and Director, for monies owed pursuant to an equipment
lease agreement between Eagle and the Company. Eagle claimed damages of $152,103. The
Company made counter claims against Eagle for breach of certain representations and
warranties, alleged damages related to the performance and operation of certain leased
equipment and losses incurred as a result of its inadequate operation and maintenance of
approximately $280,000. The Company and Eagle entered mediation in November 2008. On
June 26, 2009, the parties entered into a settlement agreement pursuant to which Eagle
dismissed its claims against the Company, and the Company dismissed its claims against
Eagle. Pursuant to the settlement agreement, the Company is required to pay Eagle the
aggregate sum of $152,000, payable as follows: (i) $25,000 within thirty days of the
settlement, and (ii) thereafter 15 equal installments of $8,467 commencing August 26,
2009. As of June 30, 2010, the remaining balance due under the settlement due to vendor
was $33,867. Eagle is currently disputing that the Company is current with these
payments. See also legal matter below and Notes 10 and 13.
Registration Rights
As part of a private placement, we have agreed to file a resale registration statement
with the SEC covering all shares of our common stock included within the Units sold in
the Offering and underlying any warrants as well as the shares underlying the Placement
Agent warrants, on or before the date which is 90 days after the final closing date of
the Private Placement or the termination date, whichever occurs later (the Filing
Deadline). We will maintain the effectiveness of the resale registration statement
from the effective date through and until twelve (12) months after the final closing
date, unless all securities registered under the registration statement have been sold
or are otherwise able to be sold pursuant to Rule 144. We have agreed to use
commercially reasonable efforts to have the resale registration statement declared
effective by the SEC as soon as possible and, in any event, within 180 days after the
final closing date of the Private Placement or the termination date, whichever occurs
later (the Effectiveness Deadline). In addition, if the registration statement is not
effective, then the investors in the Offering are permitted to piggy-back onto other
registration statements that are filed by the Company, with certain exceptions. One of
these exceptions is in connection with a registration statement filed to register the
sale of certain shares held in escrow in connection with the Merger. We are obligated
to pay to investors in the Offering a fee of 1% per month of the investors investment,
payable in cash for each month: (i) in excess of the Filing Deadline that the
registration statement has not been filed; and, (ii) in excess of the Effectiveness
Deadline that the registration statement has not been declared effective; provided,
however, that the Company shall not be obligated to pay any liquidated damages if the
Company is unable to fulfill its registration obligations as a result of rules,
regulations, positions or releases issued or actions taken by the SEC pursuant to its
authority with respect to Rule 415, provided the Company registers at that time the
maximum number of shares of common stock permissible upon consultation with the staff of
the SEC. The maximum potential penalty under the registration rights agreement is 10%,
which amounts to $682,500. On March 29, 2010, the Company defaulted on the Filing
Deadline of the Registration Rights Agreement as the Company had not yet filed a
registration statement covering the securities issued in the private placement.
Accordingly, the Company accrued liquidated damages of 1% in accordance with the Private
Placement. On April 15, 2010, the registration statement was filed with the SEC thereby
curing the default of the Filing Deadline and eliminating any future potential
liquidated damages pertaining to the Filing Deadline. On June 27, 2010, the Company
defaulted on the Effectiveness Deadline of the Registration Rights Agreement as the
registration statement covering the securities issued in the private placement had not
yet become effective. Accordingly, the Company accrued additional liquidated damages of
1% in accordance with the Private Placement.
F-12
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Legal Matters
From time to time, we may be involved in litigation relating to claims arising out of
our operations in the normal course of business. As of June 30, 2010, other than what is
described in this section, Legal Matters, there were no pending or threatened lawsuits
that could reasonably be expected to have a material effect on our results of
operations.
In September 2006, the Company entered into a five-year exclusive license agreement with
an entity located in the Netherlands (the Entity) to complete projects and develop the
revenues and marketing presence of the Company in the Netherlands, France, and Germany.
Though never consummated, it was the intent of the parties to enter into a joint
venture. The parties completed one project, which has become the subject of a dispute.
Each party has alleged certain damages and defenses as a result of the project.
However, the parties are working together to resolve the matter. In order to conduct
the project completed with the Entity, the Company relocated certain RDS equipment from
the United States to the Netherlands. The RDS equipment transferred is currently under
the control of the Entity, and is part of the dispute between the parties described
above. As of June 30, 2010, no formal legal claim had been filed with any jurisdiction
by either party.
The former chief financial officer of the Company has claimed breach of his separation
agreement. The Company has made certain counterclaims. On or about May 28, 2010, both
the Company and Genesis Ltd. were served with a Summons and Complaint in the state of
Colorado. A court date has been set for April 18, 2011 (see Note 12).
On February 15, 2010, the Company entered into an agreement with a vendor for the vendor
to perform marketing services. On March 2, 2010, the Company terminated its agreement
with the vendor. On March 23, 2010, the vendor filed suit for breach of contract
claiming amounts owed of approximately $41,000. The Company disputes this claim and
intends to rigorously defend its position.
On or about July 8, 2010, Eagle gave Genesis notice of breach and default of the June
26, 2009 settlement agreement and a demand of payment for approximately $160,000.
Genesis disputes Eagles allegations and intends to defend its position. See heading
Settlement due to Vendor under this footnote for additional information.
Note 10. Stockholders Equity
Common Stock
As the Companys stock is very thinly traded and the public float is less than 10% of
the total shares outstanding, management does not deem the market price per share to be
representative of the fair value of the Companys common stock. Thus, for the purpose
of valuing and recording equity transactions during the three and six months ended June
30, 2010, the Company continued to utilize a stock price of $0.50 per share obtained
from an independent certified valuation report of the value of its common stock as of
October 30, 2009.
On March 19, 2010, the Company entered into a settlement agreement with an individual
that had been engaged in 2009 to perform financial advisory services for the Company.
As a result of the settlement, the Company issued 83,000 shares of the Companys common
stock having a fair value of $41,500.
During May 2010, a stockholder of the Company paid $8,467 to a vendor (as part of a
settlement) on behalf of the Company (See Note 9). This payment was treated as
additional paid-in capital.
F-13
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Common Stock Warrants
A summary of the Companys warrant activity during the six months ended June 30, 2010 is
presented below:
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|
|
|
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|
|
Weighted |
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Weighted |
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Average |
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Average |
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Remaining |
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Aggregate |
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No. of |
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Exercise |
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Contractual |
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Intrinsic |
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Warrants |
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Price |
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Term |
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Value |
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Balance Outstanding, December 31,
2009 |
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3,520,000 |
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$ |
1.98 |
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Granted |
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$ |
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Exercised |
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$ |
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Forfeited |
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$ |
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Expired |
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$ |
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Balance Outstanding, June 30, 2010 |
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3,520,000 |
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$ |
1.98 |
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2.4 |
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$ |
1,840,625 |
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|
Exercisable, June 30, 2010 |
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3,520,000 |
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$ |
1.98 |
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2.4 |
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$ |
1,840,625 |
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Stock Incentive Plan and Stock Option Grants to Employees and Directors
The Company recorded compensation expense of $17,972 for the six months ended June 30,
2010, in connection with employee stock options.
A summary of the Companys stock option activity during the six months ended June 30,
2010 is presented below:
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Weighted |
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Weighted |
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Average |
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Average |
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Remaining |
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Aggregate |
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No. of |
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Exercise |
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Contractual |
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Intrinsic |
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Options |
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Price |
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Term |
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Value |
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Balance Outstanding, December 31, 2009 |
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3,222,000 |
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$ |
0.94 |
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Granted |
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$ |
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Exercised |
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$ |
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Forfeited |
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$ |
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Expired |
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$ |
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|
|
|
|
|
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|
|
Balance Outstanding, June 30,2010 |
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3,222,000 |
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|
$ |
0.94 |
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9.3 |
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$ |
5,025,900 |
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Exercisable, June 30, 2010 |
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1,852,000 |
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$ |
0.90 |
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9.3 |
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$ |
2,963,200 |
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The Company expects all non-contingent outstanding employee stock options to eventually
vest.
As of June 30, 2010, there were total unrecognized compensation costs related to
nonvested share-based compensation arrangements of $279,365, all of which shall be
recognized upon the satisfaction of stipulated performance milestone contingencies.
Other Stock-Based Option Awards to Nonemployees
On July 30, 2008, as part of a secured promissory note, the Company granted an option to
purchase, for a period of one year after the repayment of the loan and interest (which
occurred on August 31, 2009), shares of common stock of the Company, up to a total of
the amount of the note, interest paid on the note and a premium of $40,000
(approximately $280,000 in total), at a rate of $1 per share. As of June 30, 2010, the
option has not yet been exercised.
F-14
GENESIS FLUID SOLUTIONS HOLDINGS, INC. AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2010
(Unaudited)
Note 11. Concentrations
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentration of credit
risk consist of cash and cash equivalents. Cash and cash equivalents are deposited in
the local currency in two financial institutions in the United States. The balance, at
any given time, may exceed Federal Deposit Insurance Corporation insurance limits. As
of June 30, 2010 and December 31, 2009, there was $3,400,383 and $4,508,514,
respectively, in excess of insurable limits.
Note 12. Related Party Transactions
On June 17, 2008, the Company entered into a loan agreement with Jack Speer, who was
then a member of the Genesis Ltd. board of directors, for $5,000. The note bore 4.29%
interest and was due on June 17, 2018. The note was unsecured, not convertible and
required accrued and unpaid interest to be paid at the termination of the loan. In
September 2008, the Company paid Mr. Speer $2,925 which was recorded as a reduction of
the outstanding principal balance. In January 2010, principal and accrued interest on
this note was paid in full.
On August 9, 2007, the Company entered into a loan agreement with Michael Whaley, the
former Chief Financial Officer of the Company, for $50,000. The note originally bore an
annual interest rate of 20 percent, which was later amended to 80 percent, and
subsequently (in combination with his separation) was revised to a 15 percent interest
rate, and was due on November 5, 2007. The note does not have a conversion feature and
is unsecured. Accrued and unpaid interest is due at maturity date of the loan. During
2008, $37,500 had been repaid under the note. At June 30, 2010 and December 31, 2009,
$12,500 of principal plus accrued interest was due on the note. As Mr. Whaley is no
longer a related party, this loan has been reclassified to notes payable on the
accompanying condensed consolidated balance sheet as of June 30, 2010. On September 17,
2009, Michael Whaley, the former chief financial officer of the Company, resigned. As
part of his separation agreement and in exchange for mutual releases, the Company is
required to deliver the following to Mr. Whaley after completion of the Merger in 2009:
(i) $40,000 in cash, (ii) 30,000 shares of common stock of the Company, and (iii)
payment of all amounts due under his loan agreement. As of June 30, 2010, all of the
amounts due under the separation agreement were outstanding as the separation agreement
is in dispute, and a court date has been set for April 18, 2011 (See Note 9).
Note 13. Subsequent Events
In preparing these unaudited condensed consolidated financial statements, the Company
has evaluated events and transactions for potential recognition or disclosure through
the issuance date.
See Note 9 for update on legal matters relating to a settlement due to vendor.
F-15
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ITEM 2. |
|
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
Forward-Looking Statements
The information in this report contains forward-looking statements. All statements other than
statements of historical fact made in this report are forward looking. In particular, the
statements herein regarding industry prospects and future results of operations or financial
position are forward-looking statements. These forward-looking statements can be identified by the
use of words such as believes, estimates, could, possibly, probably, anticipates,
projects, expects, may, will, or should or other variations or similar words. No
assurances can be given that the future results anticipated by the forward-looking statements will
be achieved. Forward-looking statements reflect managements current expectations and are
inherently uncertain. Our actual results may differ significantly from managements expectations.
The following discussion and analysis should be read in conjunction with our unaudited
condensed consolidated financial statements, included herewith. This discussion should not be
construed to imply that the results discussed herein will necessarily continue into the future, or
that any conclusion reached herein will necessarily be indicative of actual operating results in
the future. Such discussion represents only the best present assessment of our management.
Company Overview
Genesis Fluid Solutions began operations in 1994 as a sole proprietorship owned by our
founder, Michael Hodges and was incorporated in Colorado in 2005. We are engaged in the design and
development of waterway restoration, mining, and paper mill (water) remediation technologies. Our
patented Rapid Dewatering System (RDS) removes different types of debris, sediments, and
contaminates from waterways and industrial sites, which assists in the recovery of lakes, canals,
reservoirs and harbors. The RDS system separates water from the solid materials that are dredged, a
process that is known as dewatering. Because of the scalability of the equipment, the small
footprint required, and our own real-time rapid dewatering capabilities, RDS can remove thousands
of cubic yards of sediment per day, and return clear water to waterways at rates of thousands of
gallons per minute. We believe we accomplish this at significantly lower costs than our
competitors.
Domestically, we have secured two contracts under which we will perform the work directly.
These waterway dredging projects are due to begin in 2010. Our performance under such contracts is
presently not anticipated to commence until September 2010 and October 2010, respectively, as the
projects are currently completing permitting requirements.
Results of Operations
Our revenues are derived from professional services contracts to dewater dredged material,
including fine-grained sediment, for lake and waterway restoration.
3
Three Months Ended June 30, 2010 Compared with Three Months Ended June 30, 2009
Revenues
The Company recognized revenue of $129,089 for the three months ended June 30, 2010 as
compared to no revenue for the three months ended June 30, 2009. This is primarily due to a
contract the Company had begun which was canceled at the customers request before the Company
mobilized to the project site. Under the terms of the contract, the Company could invoice and the
customer would pay only the Companys out-of-pocket costs through
the date of cancellation. The recording of the revenue during the three months ended June 30,
2010 was the result of accounting for revenues under the completed contract method whereby the
Company defers revenue until completion of the respective project. The remaining two projects we
currently have contracts for were delayed. The development of our business was further hindered by
a general lack of private and public financing for the dewatering projects to which we market and
sell our services.
Operating Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $420,165 for the three months ended June 30,
2010 as compared to $506,802 for the three months ended June 30, 2009, a decrease of 17.1%. The
decrease was primarily the result of a reduction in payroll expenses. Our selling, general and
administrative expenses consist of expenses paid for payroll and related costs, consultant and
professional fees, research and development, marketing costs, patent costs, stock-based
compensation, insurance, equipment maintenance, depreciation expense, and other general operating
costs.
We expect our costs for personnel, consultants and other operating costs to increase as we
implement our business plan. Thus, our selling, general and administrative expenses are likely to
increase significantly in future reporting periods.
Other Income (Expense)
Other income (expense) for the three months ended June 30, 2010 was $353,745 compared to
($123,349) for the three months ended June 30, 2009. The increase was primarily attributable to the
change in the warrant derivative liability of $423,067.
Net Loss
Net loss for the three months ended June 30, 2010 was $66,420 compared to a net loss of
$630,151 for the three months ended June 30, 2009. The decrease in net loss was attributable to
decreases in selling, general and administrative expenses and the recording of other income for the
change in warrant derivative liability.
Six Months Ended June 30, 2010 Compared with Six Months Ended June 30, 2009
Revenues
The Company recognized revenue of $129,089 for the six months ended June 30, 2010 as compared
to no revenue for the six months ended June 30, 2009. This is primarily due to a contract the
Company had begun which was canceled at the customers request before the Company mobilized to the
project site. Under the terms of the contract, the Company could invoice and the customer would pay
only the Companys out-of-pocket costs through the date of cancellation. The recording of the
revenue during the three months ended June 30, 2010 was the result of accounting for revenues under
the completed contract method whereby the Company defers revenue until completion of the respective
project. The remaining two projects we currently have contracts for were delayed. The development
of our business was further hindered by a general lack of private and public financing for the
dewatering projects to which we market and sell our services.
4
Operating Expenses
Selling, General and Administrative Expenses
Selling, general and administrative expenses were $1,108,691 for the six months ended June 30,
2010 as compared to $715,827 for the six months ended June 30, 2009, an increase of 54.9%. The
increase related to an
increase in professional and consultant fees and costs associated with implementing our
business plan. Our selling, general and administrative expenses consist of expenses paid for
payroll and related costs, consultant and professional fees, research and development, marketing
costs, patent costs, stock-based compensation, insurance, equipment maintenance, depreciation
expense, and other general operating costs.
We expect our costs for personnel, consultants and other operating costs to increase as we
implement our business plan. Thus, our selling, general and administrative expenses are likely to
increase significantly in future reporting periods.
Other Income (Expense)
Other income (expense) for the six months ended June 30, 2010 was ($177,689) compared to
($264,883) for the six months ended June 30, 2009, a decrease of 32.9%. The decrease was primarily
attributable to a reduction in interest expense offset by an increase in liquidated damages
expense.
Net Loss
Net loss for the six months ended June 30, 2010 was $1,287,180 compared to a net loss of
$980,710 for the six months ended June 30, 2009. The increased loss was attributable to an increase
in selling, general and administrative expenses and liquidated damages expense offset by a decrease
in interest expense.
Liquidity and Capital Resources
Net cash used in operations during the six months ended June 30, 2010 totaled $1,107,924 and
resulted primarily from the net loss incurred while expanding our business to accommodate
anticipated sales.
Net cash used in investing activities during the six months ended June 30, 2010 totaled
$24,418 and resulted from the purchase of property and equipment offset by proceeds received from
the disposals of property and equipment.
Net cash used in financing activities during the six months ended June 30, 2010 totaled
$56,042 and resulted primarily from payments on capital leases and a debt repayment.
At June 30, 2010, we had working capital of $2,033,117, including $3,685,528 in cash and cash
equivalents. We had revenue generating activities of $129,089 in the six months ended June 30,
2010. We anticipate revenue generating activities will ramp up in September 2010 as we begin to
provide services under waterway dredging contracts. Our cash used in operating activities during
the six months ended June 30, 2010 totaled $1,107,924. Our unaudited condensed consolidated
financial statements were prepared assuming that we would continue as a going concern based on our
recurring losses, accumulated deficits and negative cash flows from operations. We continue to
experience net operating losses and negative cash flows from operating activities. Our ability to
continue as a going concern is subject to our ability to generate profits and/or obtain necessary
funding from outside sources, including by the sale of our securities, or obtaining loans from
lenders, where possible. Our continued net operating losses increase the difficulty of our meeting
these goals, and our efforts to continue as a going concern may not prove successful. Nonetheless,
the Company expects that it has sufficient cash and borrowing capacity to meet its working capital
needs for at least the next 12 months.
Historically, we have financed our working capital and capital expenditure requirements
primarily from notes payable and the sales of our equity securities. We may seek additional equity
and/or debt financing in order to implement our business plan. We completed a private placement,
commencing October 30, 2009 through December 29, 2009, whereby we received net proceeds of
$5,909,750, which we believe will fund our operations at least through June 2011. We do not have
any lines of credit or borrowing facilities to meet our cash needs. As a result, we may not be able
to continue as a going concern, without further financing, following June 2011. It is reasonably
possible that we will not be able to obtain sufficient financing to continue operations.
Furthermore, any additional equity or convertible debt financing will be dilutive to existing
shareholders and may involve preferential
rights over common shareholders. Debt financing, with or without equity conversion features,
may involve restrictive covenants.
5
Related Party Transactions
No related party transactions had a material impact on our operating results for the six
months ended June 30, 2010. See Notes 8 and 12 to our unaudited condensed consolidated financial
statements.
New Accounting Pronouncements
See Note 2 to our unaudited condensed consolidated financial statements for a discussion of
recently issued accounting pronouncements.
Critical Accounting Estimates
Managements discussion and analysis of financial condition and results of operations is based
upon our unaudited condensed consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of America. The
preparation of these unaudited condensed consolidated financial statements requires us to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and
expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we
evaluate our estimates and assumptions, including, but not limited to valuation of accounts
receivable and allowance for doubtful accounts, those related to the estimates of depreciable lives
and valuation of property and equipment, valuation of derivatives, valuation of payroll tax
contingencies, valuation of share-based payments, and the valuation allowance on deferred tax
assets.
Off-Balance Sheet Arrangements
Since our inception, except for standard operating leases, we have not engaged in any
off-balance sheet arrangements, including the use of structured finance, special purpose entities
or variable interest entities.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures. Under the supervision and with the participation
of our management, including our President, Chief Financial Officer and Secretary, we evaluated the
effectiveness of the design and operation of our disclosure controls and procedures (as defined in
Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of
the end of the period covered by this report. Based upon that evaluation, our President, Chief
Financial Officer and Secretary concluded that our disclosure controls and procedures as of the end
of the period covered by this report were effective such that the information required to be
disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the SECs rules and forms
and (ii) accumulated and communicated to our management to allow timely decisions regarding
disclosure. A controls system cannot provide absolute assurance, however, that the objectives of
the controls system are met, and no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting. During the most recent quarter ended June 30,
2010, there has been no change in our internal control over financial reporting (as defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
6
PART II
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in litigation relating to claims arising
out of its operations in the normal course of business. Except as described below, we are not
involved in any pending legal proceeding or litigation and, to the best of our knowledge, no
governmental authority is contemplating any proceeding to which we are a party or to which any of
our properties is subject, which would reasonably be likely to have a material adverse effect on
the Company.
On May 27, 2008, Eagle North America, Inc. (Eagle), which provided certain equipment and
consulting services to the Company, filed suit against Genesis Fluid Solutions and its chief
executive officer and director Michael Hodges for monies owed pursuant to an equipment lease
agreement between Eagle and the Company. Eagle claimed damages of $152,103.28. The Company made
counter claims against Eagle for a breach of representations and warranties and alleged damages
related to the performance and operation of certain leased equipment and losses incurred as a
result of its inadequate operation and maintenance of approximately $280,000. The two parties
entered mediation in November 2008.
On June 26, 2009, the parties entered into a settlement agreement under which Eagle dismissed
its claims against the Company, and the Company dismissed its claims against Eagle. The settlement
agreement provided that the Company was to pay Eagle the sum of $152,000 payable as follows:
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$25,000.00 within thirty days of the settlement, and |
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thereafter 15 equal installments of $8,466.67 beginning on August 26, 2009 |
On or about July 8, 2010, Eagle gave Genesis notice of breach and default of the June 26, 2009
settlement agreement and a demand of payment for approximately $160,000. Genesis disputes Eagles
allegations and intends to rigorously defend its position.
On or about March 31, 2010, the Companys registered agent for service of process in Delaware
forwarded a partial Summons and Complaint to the Company. The action appears to be pending before
the Supreme Court, New York County. We understand the service agent was served with an incomplete
Summons and Complaint, i.e., missing pages. We requested a copy of the Court file. Big Fuel
Communications, LLC seeks $41,250 in damages under various theories of recovery: breach of
contract, quantum merit and unjust enrichment, for services allegedly rendered to Genesis Fluid
Solutions. The Company disputes the plaintiffs allegations.
On or about May 24, 2010, suit was filed against the Company by Michael Whaley, the former
Chief Financial Officer of the Companys wholly owned subsidiary, in the District Court of the City
and County of Denver. Plaintiff, among other things, alleges breach of contract in connection with
a separation and release agreement entered into by the parties following Mr. Whaleys departure
from the company and is seeking a monetary judgment for more than $100,000. The Company has made
certain counterclaims. A court date has been set for April 18, 2011.
ITEM 1A. RISK FACTORS.
N/A
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
On March 19, 2010, we issued 83,000 shares of our common stock to an individual who had
provided certain consulting services to the Company valued at $41,500. The shares were issued in a
transaction that was exempt from the registration requirements of the Securities Act pursuant to
Section 4(2) of the Securities Act, which exempts transactions by an issuer not involving a public
offering.
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. RESERVED.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
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Exhibit |
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Number |
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Description of Exhibit |
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31.1 |
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Section 302 Certification of Principal Executive Officer |
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31.2 |
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Section 302 Certification of Principal Financial Officer |
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32.1 |
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Section 906 Certification of Principal Executive Officer and Principal Financial Officer |
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
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GENESIS FLUID SOLUTIONS HOLDINGS, INC.
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Date: August 6, 2010 |
By: |
/s/ Michael Hodges
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Michael Hodges |
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Chairman and Interim Chief Executive Officer
(Principal Executive Officer and Principal
Financial Officer) |
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