Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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x
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QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the quarterly period ended
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March 31, 2011
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OR
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the transition period from ___________________________ to ___________________________
Commission file number 000-29483
Pacific Sands, Inc.
(Exact Name of Registrant as specified in its charter)
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Nevada
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88-0322882
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(State or Other Jurisdiction of Incorporation or Organization)
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(IRS Employer Identification No.)
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1509 Rapids Drive
Racine, WI
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53404
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(Address of Principal Executive Offices)
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(Zip Code)
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Issuer’s Telephone Number, Including Area Code: (262) 619-3261
N/A
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
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 larger accelerated filer, an accelerated filer, a non-accelerated or a smaller reporting company. See the definition 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 x
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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 ¨ No Q
The number of shares outstanding of each of the issuer's classes of common equity, as of May 13, 2011 are as follows:
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Class of Securities
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Shares Outstanding
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Common Stock, $0.001 par value
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60,566,831
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TABLE OF CONTENTS
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PART I FINANCIAL INFORMATION
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Page
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Item 1.
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Financial Statements
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3
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Balance Sheets as of March 31, 2011 (unaudited) and June 30, 2010
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3
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||
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Statements of Operations for the Three and Nine Months Ended March 31, 2011 and 2010 (unaudited)
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4
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Statements of Cash Flows for the Three and Nine Months Ended March 31, 2011 and 2010 (unaudited)
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5
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Notes to Financial Statements (unaudited)
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7
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Item 2.
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Management Discussion and Analysis of Financial Condition and Results of Operations
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14
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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17
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Item 4.
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Controls and Procedures
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18
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PART II OTHER INFORMATION
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|||
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Item 1.
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LEGAL PROCEEDINGS
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19
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Item 2.
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UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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19
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Item 3.
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DEFAULTS UPON SENIOR SECURITIES
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19
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Item 5.
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OTHER INFORMATION
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20
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Item 6.
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EXHIBITS
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20
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SIGNATURES
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20
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EX-31.1 (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
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EX-31.2 (Certifications required under Section 302 of the Sarbanes-Oxley Act of 2002)
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EX-32.1 (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)
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EX-32.2 (Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002)
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PACIFIC SANDS, INC.
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||||||||
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BALANCE SHEETS
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||||||||
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MARCH 31, 2011 AND JUNE 30, 2010
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ASSETS
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March 31, 2011
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June 30, 2010
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|||||||
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Current assets:
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(Unaudited)
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|||||||
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Cash and cash equivalents
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$
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101,950
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$
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203
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||||
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Trade receivables, net of allowances for doubtful accounts of $5,251 and $9,373
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294,359
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145,121
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||||||
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Inventories
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157,620
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102,099
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||||||
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Other current assets
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19,289
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10,257
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||||||
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Total Current Assets
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573,218
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257,680
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||||||
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Property and equipment, net
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39,068
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44,379
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||||||
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Total Assets
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$
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612,286
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$
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302,059
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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||||||||
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Current liabilities:
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||||||||
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Accounts payable
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$
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178,442
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$
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171,558
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||||
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Accrued expenses
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124,877
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226,979
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||||||
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Current portion of notes payable and capital leases
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218,431
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200,602
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||||||
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Total Current Liabilities
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521,750
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599,139
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||||||
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Notes payable and capital leases - net of discount of $3,029 and $7,572, less current portion
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222,530
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1,050,842
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Total Liabilities
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744,280
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1,649,981
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||||||
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Stockholders' deficit
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||||||||
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Common stock (100,000,000 shares authorized, 67,107,268 and 51,236,886 shares issued, and 60,498,081 and 44,627,699 shares outstanding)
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67,107
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51,237
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Additional paid in capital
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5,307,572
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4,209,807
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Treasury stock, at cost
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(132,030
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)
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(132,030
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)
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Accumulated deficit
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(5,374,643
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)
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(5,476,936
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)
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Total Stockholders' Deficit
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(131,994
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)
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(1,347,922
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)
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||||
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Total Liabilities and Stockholders' Deficit
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$
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612,286
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$
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302,059
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||||
See accompanying notes.
3
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PACIFIC SANDS, INC.
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STATEMENTS OF OPERATIONS
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||||||||||||||||
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FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2011 AND 2010
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||||||||||||||||
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(UNAUDITED)
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||||||||||||||||
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Three months ended
March 31,
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Nine months ended
March 31,
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|||||||||||||||
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2011
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2010
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2011
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2010
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|||||||||||||
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Net sales
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$
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430,529
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$
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262,742
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$
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1,039,932
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$
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782,165
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||||||||
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Cost of sales
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266,224
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94,612
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568,076
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342,018
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||||||||||||
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Gross profit
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164,305
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168,130
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471,856
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440,147
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||||||||||||
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Selling and administrative expenses
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187,943
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153,040
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523,939
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492,233
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||||||||||||
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Impairment of intangible asset
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-
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-
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-
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877,854
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||||||||||||
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Loss from operations
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(23,638
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)
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15,090
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(52,083
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)
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(929,940
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)
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|||||||||
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Other expense
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||||||||||||||||
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Interest expense
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(24,366
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)
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(18,292
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)
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(92,118
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)
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(56,902
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)
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||||||||
| Gain on debt settlement | 233,000 | - | 233,000 | - | ||||||||||||
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Other income
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13,494
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-
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13,494
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-
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||||||||||||
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222,128
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(18,292
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)
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154,376
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(56,902
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)
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|||||||||||
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Income (loss) before income taxes
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198,490
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(3,202
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)
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102,293
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(986,842
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)
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||||||||||
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Income taxes
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-
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-
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-
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-
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||||||||||||
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Net income (loss)
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$
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198,490
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$
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(3,202
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)
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$ |
102,293
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$
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(986,842
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) | ||||||
| Earnings per share: | ||||||||||||||||
| Basic | $ | 0.004 | $ | (0.000 | ) | $ | 0.002 | $ | (0.023 | ) | ||||||
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Diluted
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$
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0.004
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$
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(0.000
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)
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$
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0.002
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$
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(0.023
|
) | |||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 54,954,737 | 43,581,940 | 48,440,911 | 43,556,519 | ||||||||||||
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Diluted
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56,207,737
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43,581,940
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50,024,176
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43,556,519
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||||||||||||
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See accompanying notes.
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4
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PACIFIC SANDS, INC.
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STATEMENTS OF CASH FLOWS
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||||||||
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FOR THE NINE MONTHS ENDED MARCH 31, 2011 AND 2010
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||||||||
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(UNAUDITED)
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||||||||
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2011
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2010
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|||||||
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Cash flows from operating activities
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||||||||
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Net income (loss)
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$
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102,293
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$
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(986,842
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)
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Adjustments to reconcile net loss to net cash used in operating activities -
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||||||||
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Depreciation and amortization
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13,579
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18,152
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||||||
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Amortization of debt discount
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4,543
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21,486
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||||||
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Impairment of intangible asset
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-
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877,854
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||||||
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Common shares issued for services and compensation
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32,900
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2,000
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||||||
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Common shares issued for interest
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45,107
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-
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||||||
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Gain on settlement of debt obligation
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(233,000
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)
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-
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|||||
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Changes in assets and liabilities -
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||||||||
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Trade accounts receivable
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(149,238
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)
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5,619
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|||||
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Inventories
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(55,521
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)
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(23,432
|
) | ||||
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Other assets
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(9,032
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)
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(5,073
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)
|
||||
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Accounts payable and other current liabilities
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2,825
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74,440
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||||||
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Net Cash Used in Operating Activities
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(245,544
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)
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(15,796
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)
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||||
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Cash flows from investing activities
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||||||||
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Purchases of equipment
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(8,268
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)
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(8,572
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)
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||||
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Net Cash Used in Investing Activities
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(8,268
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)
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(8,572
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)
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||||
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Cash flows from financing activities
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||||||||
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Proceeds from common stock issued
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397,832
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8,930
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||||||
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Proceeds from notes payable
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20,568
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73,238
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||||||
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Repurchase of common stock
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(5,832
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)
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-
|
|||||
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Repayment of notes payable and long term obligations
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(57,009
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)
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(62,834
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)
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||||
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Net Cash Provided by Financing Activities
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355,559
|
19,334
|
||||||
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Net increase (decrease) in cash and cash equivalents
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101,747
|
(5,034
|
) | |||||
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Cash and cash equivalents:
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||||||||
|
Beginning of period
|
203
|
7,144
|
||||||
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End of period
|
$
|
101,950
|
$
|
2,110
|
||||
5
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PACIFIC SANDS, INC.
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||||||||
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STATEMENTS OF CASH FLOWS
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||||||||
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FOR THE NINE MONTHS ENDED MARCH 31, 2011 AND 2010
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||||||||
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(UNAUDITED)
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||||||||
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2011
|
2010
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|||||||
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Supplemental disclosures of cash flow information:
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||||||||
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Cash paid during the period for:
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||||||||
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Interest
|
$
|
26,419
|
$
|
26,509
|
||||
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Income taxes
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$
|
-
|
$
|
-
|
||||
|
Supplemental disclosure of non cash financing and investing activities
|
||||||||
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Conversion of debt to equity
|
$
|
546,747
|
$
|
28,871
|
||||
|
Conversion of accrued interest to equity
|
$
|
16,710
|
$
|
-
|
||||
|
Conversion of accrued compensation and professional fees to equity
|
$
|
94,632
|
$
|
-
|
||||
See accompanying notes.
6
PACIFIC SANDS, INC
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Pacific Sands, Inc., have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules of the Securities and Exchange Commission (“SEC”), and should be read in conjunction with the audited financial statements and notes thereto contained in Pacific Sands, Inc’s Annual Report filed with the SEC on Form 10-K for the year ended June 30, 2010. In the opinion of management, all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of financial position and the results of operations for the interim periods presented have been reflected herein. The results of operations for interim periods are not necessarily indicative of the results to be expected for the full year. Notes to the financial statements which would substantially duplicate the disclosure contained in the audited financial statements for fiscal 2010 as reported elsewhere in this Form 10-Q have been omitted.
2. DESCRIPTION OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business - Pacific Sands, Inc. with the right to do business as Natural Water Technologies (the "Company" or “Pacific Sands”) was incorporated in Nevada on July 7, 1994. Pacific Sands develops, manufactures, markets and sells a range of nontoxic, environmentally friendly cleaning and water-treatment products based on proprietary blended botanical, nontoxic and natural chemical technologies. The Company’s products have applications ranging from water maintenance (spas, swimming pools, fountains, decorative ponds) to cleaning (nontoxic household and industrial) and pet care.
In February of 2008, the Company acquired Natural Choices Home Safe Products, LLC (“Natural Choices”), a developer and manufacturer of environmentally friendly cleaning and laundry products. The acquisition added dozens of new products to the Pacific Sands portfolio of earth, health, pet and kid-friendly offerings, including Oxy-Boost™ an oxygen-bleach based, chlorine-free bleach alternative. The Company now has a large selection of oxygen- bleach based formulations available both for retail distribution under its ecoone®, e-2 elemental earth® and Natural Choices™ brands as well as for contract manufacturing and re-label.
The Company markets and sells its product lines directly, over the Internet and through pool, spa, hardware, specialty and other retail outlets in the US, Canada and Europe. The products are also sold via Pacific Sands distributors, manufacturers’ representatives and internationally established pool and spa industry distribution networks. The Company’s products are also sold through numerous popular pool and spa websites. The Company’s Natural Choices branded products are sold in numerous retail outlets around the country and in Europe as well as dozens of the top environmentally-oriented websites.
Inventories - Inventories are stated at the lower of cost or market on the first-in, first-out (FIFO) basis.
Depreciation and Amortization - For financial reporting purposes, depreciation and amortization of property and equipment has been computed over estimated useful lives of two to seven years primarily using the straight-line method. Depreciation and amortization charges totaled $13,579 and $18,152 during the nine months ended March 31, 2011 and 2010, respectively.
Revenue Recognition - Revenue is recognized when the related products are shipped.
7
PACIFIC SANDS, INC
NOTES TO FINANCIAL STATEMENTS
Income Taxes - The Company uses the asset and liability method in accounting for income taxes. Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The temporary differences relate primarily to net operating loss carryforwards and deferred compensation charges. A valuation allowance is recorded for deferred tax assets when it is more likely than not that some or all of the deferred tax assets will not be realized through future operations.
The income tax accounting process for uncertainty in income taxes prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. A company must determine whether it is "more-likely-than-not" that a tax position will be sustained upon examination, including resolution of any related appeals or litigation procedures, based on the technical merits of the position. Once it is determined that a position meets the more-likely-than-not recognition threshold, the position is measured to determine the amount of benefit to recognize in the financial statements. Management's review of the Company’s possible tax positions at March 31, 2011 and June 30, 2010 did not result in any positions requiring disclosure. Should the Company need to record interest and/or penalties related to uncertain tax positions, or other tax authority assessments, it would classify such expenses as part of the income tax provision.
Accounts Receivable - The Company makes judgments as to the collectability of trade and other accounts receivable based on historic trends and future expectations. Management estimates an allowance for doubtful receivables, which reflects its current assessment of the collectability of the receivables. Management believes that the current specific and general receivable reserves aggregating $5,251 are adequate as of March 31, 2011.
Basic and Diluted Net Earnings (Loss) Per Share - Basic net earnings (loss) per share is based upon the weighted average number of common shares outstanding. Dilutive convertible shares have been included in the computation of the weighted average number of shares outstanding for dilutive net earnings per common share. Dilutive shares and stock options have not been included in the computation of net loss per common share, as the effect would be antidilutive.
Use of Accounting Estimates - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Reclassifications - Certain reclassifications have been made in prior year’s financial statements to conform to classification used in the current year. The reclassifications from selling and administrative expenses to cost of sales does not change total operating loss or net loss for any period presented.
Statement of Cash Flows - For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with an initial maturity of three months or less to be cash equivalents.
Recent Accounting Pronouncements –
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying financial statements.
8
PACIFIC SANDS, INC
NOTES TO FINANCIAL STATEMENTS
3. GOING CONCERN
The accompanying financial statements have been presented assuming that the Company will continue as a going concern. This basis of accounting contemplates the recovery of the Company's assets and the satisfaction of its liabilities in the normal course of business. Through March 31, 2011, the Company has incurred cumulative losses of $5,374,643. The Company's successful transition to attaining profitable operations is dependent upon obtaining financing adequate to fulfill its development, marketing and sales activities and achieving a level of revenues adequate to support the Company's cost structure. Management's plan of operations anticipates that the cash requirements of the Company for the next twelve months will be met by obtaining capital through the sale of common stock, debt financings and from current operations. However, there is no assurance that the Company will be able to fully implement its plan in order to generate the funds needed on a going concern basis.
4. INVENTORIES
Inventories at March 31, 2011 and June 30, 2010 consisted of the following:
|
March 31,
2011
|
June 30,
2010
|
|||||||
|
Raw materials
|
$
|
121,552
|
$
|
78,998
|
||||
|
Finished goods
|
36,068
|
23,101
|
||||||
|
Total
|
$
|
157,620
|
$
|
102,099
|
||||
5. PROPERTY AND EQUIPMENT
Property and equipment at March 31, 2011 and June 30, 2010 consisted of the following:
|
March 31,
2011
|
June 30,
2010
|
|||||||
|
Furniture and office equipment
|
$
|
42,967
|
$
|
40,868
|
||||
|
Manufacturing equipment
|
63,104
|
63,104
|
||||||
|
Leasehold improvements
|
9,204
|
3,035
|
||||||
|
Computer software
|
16,577
|
16,577
|
||||||
|
131,852
|
123,584
|
|||||||
|
Less accumulated depreciation and amortization
|
(92,784
|
)
|
(79,205
|
)
|
||||
|
Property and equipment, net
|
$
|
39,068
|
$
|
44,379
|
||||
9
PACIFIC SANDS, INC
NOTES TO FINANCIAL STATEMENTS
6. ACCRUED EXPENSES
Accrued expenses at March 31, 2011 and June 30, 2010 consisted of the following:
|
March 31, 2011
|
June 30, 2010
|
|||||||
|
Accrued compensation
|
$ | 72,405 | $ | 122,185 | ||||
|
Accrued payroll withholding taxes and penalties
|
35,547 | 43,045 | ||||||
|
Accrued professional fees
|
11,975 | 37,506 | ||||||
|
Accrued interest
|
4,950 | 20,767 | ||||||
|
Accrued other
|
- | 3,476 | ||||||
|
Total
|
$ | 124,877 | $ | 226,979 | ||||
7. NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS
Notes payable at March 31, 2011 and June 30, 2010 consisted of the following:
|
March 31, 2011
|
June 30, 2010
|
|||||||
|
Dell Financial Services – line of credit
|
$ | 5,226 | $ | 9,374 | ||||
|
J.P. Morgan Chase – business line of credit
|
59,995 | 74,994 | ||||||
|
Notes payable - stockholders and directors
|
10,525 | 95,417 | ||||||
|
Notes payable – settlement obligation
|
- | 8,500 | ||||||
|
Notes payable – acquisition
|
74,650 | 642,500 | ||||||
|
Convertible notes payable – net of discount of $3,029 and $9,087
|
97,971 | 130,928 | ||||||
|
Notes payable – executive officers
|
181,558 | 271,443 | ||||||
|
Capital leases
|
11,036 | 18,288 | ||||||
| 440,961 | 1,251,444 | |||||||
|
Less current maturities
|
218,431 | 200,602 | ||||||
| $ | 222,530 | $ | 1,050,842 | |||||
On December 15, 2010, the Company issued 1,196,128 shares of common stock to settle three shareholder loans with principal balances totaling $78,512.
On December 15, 2010 the Company converted a note payable plus accrued interest due to an executive officer into 1,926,700 shares of common stock. Principal and interest converted were $89,885 and $6,450, respectively.
On December 15, 2010, holders of convertible promissory notes converted $17,500 of note plus accrued interest of $9,012 into 634,270 shares of common stock.
On March 21, 2011, the Company and the former owners of Natural Choices (“Former Owners”) entered into an Asset Purchase Agreement Payment Plan (“Payment Plan”). The Payment Plan effectively resolves all outstanding issues and obligations from an Asset Purchase Agreement dated February 8, 2008 and a First Amendment to Asset Purchase Agreement dated March 31, 2009 (together “Asset Purchase Agreement”). As of the effective date of the Payment Plan, $640,000 remained owed by the Company to the Former Owners under the Asset Purchase Agreement. Pursuant to the terms of the Payment Plan, the Former Owners received common stock and cash totaling $407,000 as full and final payment. On March 21, 2011, the Company issued to the Former Owners 3,323,500 shares of common stock having a fair market value of $332,350. Additionally, on April 9, 2011 the Company paid the Former Owners cash in the amount $74,650. Settlement of the obligations due to the Former Owners resulted in debt forgiveness for the Company in the amount of $233,000 which has been recorded as other income during the three and nine months ended March 31, 2011.
On March 31, 2011, holders of convertible promissory notes converted $26,000 of note principal plus accrued interest of $15,925 into 419,250 shares of common stock.
The scheduled annual maturities for notes payable and capital lease obligations are as follows for the years ending March 31,
|
2011
|
$
|
218,431
|
||
|
2012
|
44,001
|
|||
|
2013
|
181,558
|
10
8. STOCKHOLDERS’ DEFICIT
On September 30, 2010, the Company canceled 333,334 shares of its common stock that were previously issued to a consultant for services performed. The Company previously recorded consulting fee expense of $15,000 related to the issuance of these shares. The shares will subsequently be reissued to the consultant upon completion of contracted consulting services. Upon cancellation of the shares, the Company reclassified the fair market value of the shares of $15,000 to accrued expenses.
On December 15, 2010, pursuant to a settlement agreement dated June 30, 2010, the Company issued 549,914 shares of common stock to the former owners of Natural Choices to settle obligations for a loan payment due, accrued interest on a note payable and accrued wages in the amounts of $2,500, $14,355 and $31,438, respectively.
On December 15, 2010, the Company issued 1,103,894 shares of common stock to a related party for cash totaling $55,195.
On December 15, 2010, the Company issued 828,140 shares of common stock to two employees for cash totaling $48,597.
On December 15, 2010 the Company issued 384,000 shares of common stock to its directors for previously accrued fees and compensation in the amount of $19,200. Additionally, the Company issued the directors 216,000 shares for compensation during the six months ended March 31, 2011. The Company recorded $10,800 of compensation expense for the issuance of the shares.
On December 15, 2010, the Company issued 360,000 shares of common stock to an employee for accrued wages totaling $18,000.
On December 15, 2010, the Company issued 1,716,128 shares of common stock to settle four shareholder loans plus accrued interest totaling $85,817.
On December 15, 2010 the Company issued 220,000 shares of common stock to a consultant to settle accrued amounts owed and fees incurred during the nine months ended totaling $11,000.
On December 15, 2010 the Company converted a note payable plus accrued interest due to an executive officer in to 1,926,700 shares of common stock. Principal and interest converted were $89,885 and $6,450, respectively.
On December 15, 2010 the Company converted $12,965 of accrued interest due to an executive officer into 259,300 shares of common stock
On December 15, 2010, holders of convertible promissory notes converted $17,500 of note plus accrued interest of $9,012 into 634,270 shares of common stock.
On February 1, 2011, the Company issued 695,000 shares of common stock to an unrelated party for cash totaling $50,040.
On March 1, 2011, the Company issued 1,714,287 shares of common stock to an unrelated party for cash totaling $120,000.
On March 21, 2011, pursuant to the terms of settlement agreement with the former owners of Natural Choices, the Company issued 3,323,500 shares of common stock. The fair market value of the shares on the date issued was $332,350.
On March 24, 2011, the Company issued 833,333 shares of common stock to an unrelated party for cash totaling $100,000.
On March 31, 2011, the Company issued 80,000 shares of common stock to its four directors. The Company recorded $10,400 of compensation expense for the issuance of the shares.
On March 31, 2011, the Company issued 70,000 shares of common stock to two consultants for services performed. The Company recorded $8,200 of consulting fee expense for the issuance of the shares.
11
PACIFIC SANDS, INC
NOTES TO FINANCIAL STATEMENTS
9. EARNINGS (LOSS) PER SHARE
Basic earnings (loss) per common share is based on the weighted average number of common shares outstanding in each period and net loss.
The following table sets forth the computation of basic and diluted loss per share.
|
Three months ended
March 31,
|
Nine months ended
March 31,
|
|||||||||||||||
|
2011
|
2010
|
2011
|
2010
|
|||||||||||||
|
|
||||||||||||||||
|
Net earnings (loss) - basic
|
$
|
198,490
|
$
|
(3,202
|
)
|
$
|
102,293
|
$
|
(986,842
|
)
|
||||||
| Interest expense on conversion of promissory notes | 1,030 | - | 9,340 | - | ||||||||||||
| Net earnings (loss) - diluted | $ | 199,520 | $ | (3,202 | ) | $ | 111,633 | $ | (986,842 | ) | ||||||
| Weighted average shares - basic | 54,954,737 | 43,581,940 | 48,440,911 | 43,556,519 | ||||||||||||
| Incremental shares outstanding assuming the conversion of dilutive convertible promissory notes | 1,267,111 | - | 1,588,265 | - | ||||||||||||
| Weighted average shares - diluted | 56,221,848 | 43,581,940 | 50,029,176 | 43,566,519 | ||||||||||||
| Earnings (loss) per share: | ||||||||||||||||
| Basic | $ | 0.004 | $ | (0.000 | ) | $ | 0.002 | $ | 0.023 | ) | ||||||
|
Diluted
|
$
|
0.004
|
$
|
(0.000
|
)
|
$
|
0.002
|
$
|
(0.023
|
)
|
||||||
Outstanding stock options were not included in the computation of diluted loss per common share for the nine month periods ended March 31, 2010 since their inclusion would have resulted in an antidilutive effect.
Anti-dilutive securities not included in the net earnings (loss) per share calculation:
|
March 31, 2011
|
March 31, 2010
|
|||||||
|
Stock options
|
- | 3,000,000 | ||||||
| Convertible notes | - | 1,385,000 | ||||||
12
PACIFIC SANDS, INC
NOTES TO FINANCIAL STATEMENTS
10. INCOME TAXES
The Company recognizes deferred tax assets and liabilities for temporary differences between the financial reporting and tax bases of its assets and liabilities. Deferred assets are reduced by a valuation allowance when deemed appropriate.
The tax effects of existing temporary differences that give rise to significant portions of deferred tax assets at March 31, 2011 and June 30, 2010 are as follows:
|
March 31, 2011
|
June 30, 2010
|
|||||||
|
Net operating loss carryforwards
|
$
|
1,330,000
|
$
|
1,373,000
|
||||
|
Deferred compensation
|
76,000
|
118,000
|
||||||
|
Accounts receivable allowance
|
2,000
|
4,000
|
||||||
|
Valuation allowance
|
(1,408,000
|
)
|
(1,495,000
|
)
|
||||
|
Net deferred tax asset
|
$
|
--
|
$
|
--
|
||||
At March 31, 2011, the Company has net operating loss carryforwards for Federal tax purposes of approximately $3,000,000 which, if unused to offset future taxable income, will expire in years beginning in 2018.
13
Item 2. Management Discussion and Analysis of Financial Condition and Results of Operation
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. ALL FORWARD-LOOKING STATEMENTS ARE INHERENTLY UNCERTAIN AS THEY ARE BASED ON CURRENT EXPECTATIONS AND ASSUMPTIONS CONCERNING FUTURE EVENTS OR FUTURE PERFORMANCE OF THE COMPANY. READERS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH ARE ONLY PREDICTIONS AND SPEAK ONLY AS OF THE DATE HEREOF. FORWARD-LOOKING STATEMENTS USUALLY CONTAIN THE WORDS "ESTIMATE," "ANTICIPATE," "BELIEVE," "EXPECT," OR SIMILAR EXPRESSIONS, AND ARE SUBJECT TO NUMEROUS KNOWN AND UNKNOWN RISKS AND UNCERTAINTIES. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD CAREFULLY REVIEW VARIOUS RISKS AND UNCERTAINTIES IDENTIFIED BELOW, AS WELL AS THE MATTERS SET FORTH IN THE COMPANY'S ANNUAL REPORT ON 10-K FOR THE YEAR ENDED JUNE 30, 2010 AND ITS OTHER SEC FILINGS. THESE RISKS AND UNCERTAINTIES COULD CAUSE THE COMPANY'S ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN THE FORWARD-LOOKING STATEMENTS. THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE OR PUBLICLY ANNOUNCE REVISIONS TO ANY FORWARD-LOOKING STATEMENTS TO REFLECT FUTURE EVENTS OR DEVELOPMENTS.
General
Pacific Sands, Inc. (the "Company" or "Pacific Sands") was incorporated in the State of Nevada on July 7, 1994. The Company's fiscal year ends June 30. The Company is a C-Corporation for federal income tax purposes. The Company does not have subsidiaries or affiliated entities. The Company also does business as Natural Water Technologies, ecoONE Marketing Group and Natural Choices Home Safe Products (see discussion below).
The Company develops, manufactures, markets and sells a range of non-toxic, environmentally friendly cleaning and water-treatment products based on proprietary blended botanical and nontoxic chemical technologies. The Company's products have applications ranging from water installation maintenance (spas, swimming pools, fountains, decorative ponds) to cleaning (non-toxic household and industrial).
The Company has a mature, actively marketed product line known as the ecoONE® Spa Treatment system as well as ecoONE® Pool conditioner and the Pacific Sands All-Purpose Hose Filter.
In mid February of 2008, the Company acquired Natural Choices Home Safe Products, LLC (“Natural Choices”), a developer and manufacturer of environmentally friendly cleaning and laundry products. The acquisition added dozens of new products to the Pacific Sands portfolio of earth, health, pet and kid-friendly offerings, including Oxy-Boost™ an oxygen-bleach based, chlorine-free bleach alternative. The Company now has a large selection of oxygen- bleach based formulations available both for retail distribution under its ecoone®, e-2 elemental earth® and Natural Choices™ brands as well as for contract manufacturing and re-label.
The Company markets and sells its product lines directly, over the Internet and through pool, spa, hardware, specialty and other retail outlets in the US, Canada and Europe. The products are also sold via Pacific Sands distributors, manufacturers’ representatives and internationally established pool and spa industry distribution networks. The Company’s products are also sold through numerous popular pool and spa websites. The Company’s Natural Choices branded products are sold in numerous retail outlets around the country and in Europe as well as dozens of the top environmentally-oriented websites.
The Company's goal is to achieve sustained profitability through revenues achieved by marketing and sales of its nontoxic, earth, health and kid-friendly, ecoONE® Pool, Spa, Household Cleaning and other product lines.
Management intends to continue the aggressive marketing and sale of its products through direct retail and a widening base of retail outlets, distribution centers and OEM arrangements in order to achieve its goals.
The Company's ability to achieve its objectives is dependent on its ability to sustain and enhance its revenue stream and to continue to raise funds through loans, credit and the private placement of restricted securities until such time as the Company achieves sustained fiscal profitability.
To date, the Company has funded operations through a combination of revenues from the sale of its products, established credit with vendors, a bank line of credit and the sale of rule 144 stocks through private placement. The Company's failure to continue to raise adequate financing to fund operations may jeopardize its existence. (See “Liquidity and Capital Resources”)
Management knows of no additional trends or uncertainties beyond those discussed that are reasonably likely to have a material impact on the Company's short or long-term liquidity.
14
Settlement of Natural Choices Debt Obligation
On March 21, 2011, the Company and the former owners of Natural Choices (“Former Owners”) entered into an Asset Purchase Agreement Payment Plan (“Payment Plan”). The Payment Plan effectively resolves all outstanding issues and obligations from an Asset Purchase Agreement dated February 8, 2008 and a First Amendment to Asset Purchase Agreement dated March 31, 2009 (together “Asset Purchase Agreement”). As of the effective date of the Payment Plan, $640,000 remained owed by the Company to the Former Owners under the Asset Purchase Agreement. Pursuant to the terms of the Payment Plan, the Former Owners received common stock and cash totaling $407,000 as full and final payment. On March 21, 2011, the Company issued to the Former Owners 3,323,500 shares of common stock having a fair market value of $332,350. Additionally, on April 9, 2011 the Company paid the Former Owners cash in the amount $74,650. Settlement of the obligations due to the Former Owners resulted in debt forgiveness for the Company in the amount of $233,000 which has been recorded as other income during the three and nine months ended March 31, 2011.
RESULTS OF OPERATIONS
Results for the three months ending March 31, 2011 compared to the three months ending March 31, 2010.
For the three months ended March 31, 2011, net sales were $430,529, an increase of 64% over net sales of $262,742 for the three months ended March 31, 2011. This increase in sales was due to an increase in private labels orders and significant increase in branded product sales.
For the three months ended March 31, 2011, cost of sales was $266,224 compared to $94,612 for the same period in the previous fiscal year. The Company’s gross margin decreased from 64% for the three months ended March 31, 2010 to 38% for the current fiscal quarter. This decrease is due to the fact that a significant portion of the Company’s sales during the period were to private label customers which are sold at a much lower margin.
For the three months ended March 31, 2011 and 2010, selling and general administrative expenses were $187,943 and $153,040, respectively. The increase in operating expenses is explained by additional cost incurred in moving to larger and contiguous location within the same facility. The private labels sales for the period required the hiring of addition temporary staff to meet customer expectations.
Interest expense for the three months ended March 31, 2011 was $24,366 compared to $18,292 for the three months ended March 31, 2010. The increase is due to $16,000 of interest recorded and paid on two convertible promissory notes. During the three months ended March 31, 2011, the Company amortized $1,514 of discounts of notes payable compared to $5,220 during the three months ended March 31, 2010.
During the three months ended March 31, 2011, the Company recorded other income totaling $246,494. Other income includes $233,000 of debt forgiven pursuant to the terms and conditions of a settlement agreement between the Company and the former owners of Natural Choices.
The Company recorded a net income of $198,490 or $0.004 earnings per share for the three months ended March 31, 2011 as compared to a net loss of $(3,202) or $(0.000) loss per share for the three months ended March 31, 2010.
15
Results for the nine months ending March 31, 2011 compared to the nine months ending March 31, 2010.
For the nine months ended March 31, 2011, net sales were $1,039,932, an increase of 33% over net sales of $782,165 for the nine months ended March 31, 2010. This increase in sales was due to an increase in private label product.
For the nine months ended March 31, 2011, cost of sales was $568,076 compared to $342,018during the same period in the previous fiscal year. The Company’s gross margin decreased from 56% for the nine months ended March 31, 2010 to 45% for the current fiscal year to date. This decrease is due to the fact that a significant portion of the Company’s sales during the period were to private label customers which are sold at a much lower margin.
For the nine months ended March 31, 2011 and 2010, selling and general administrative expenses were $523,939 and $492,233, respectively. The increase in operating expenses is explained by executive officers receiving a higher percentage of their previously established compensation.
During the nine months ended March 31, 2010, the Company recorded an impairment charge of $877,854 representing the entire amount of the intangible asset recorded for the acquisition of Natural Choices Home Safe Products in February 2008.
Interest expense for the nine months ended March 31, 2011 was $92,118 compared to $56,902 for the nine months ended March 31, 2010. The significant increase is due in part to additional convertible promissory notes that were issued in November 2010 totaling $56,500. Also contributing to the increase in interest expense, was $27,000 of interest recorded and paid on two convertible promissory notes. Interest expense for the nine months ended March 31, 2011 also includes $21,231 of interest accrued on notes payable due to two executive officers. During the nine months ended March 31, 2011, the Company amortized $4,543 of discounts of notes payable compared to $21,486 during the nine months ended March 31, 2010.
During the nine months ended March 31, 2011, the Company recorded other income totaling $246,494. Other income includes $233,000 of debt forgiven pursuant to the terms and conditions of a settlement agreement between the Company and the former owners of Natural Choices.
The Company recorded a net income of $102,293 or $0.002 earnings per share for the nine months ended March 31, 2011 as compared to a net loss of $(986,842) or $(0.023) loss per share for the three months ended March 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Management believes that the Company is positioned for sales growth but will require additional funding to continue operations. The Company's ability to achieve its objectives is dependent upon its ability to sustain and enhance its current revenue stream and to continue to raise funds through loans, vendor credit and the private placement of restricted securities until such time as the Company sustains fiscal profitability. To date, the Company has funded operations and expansion through a combination of revenues from the sale of its products, established credit with vendors, deferred salaries (subsequently converted to notes payable to officers), debt financings and the sale of rule 144 stock through private placement. The Company's failure to continue to raise adequate financing to fund planned expansion may jeopardize its plans for growth.
16
At March 31, 2011, the Company had current assets of $573,218 and total assets of $612,286, compared to June 30, 2010 when current assets were $257,680 and total assets were $302,059. Cash and cash equivalents at March 31, 2011 was $101,950 compared to $203 at June 30, 2010 due to consistant fund raising efforts. Higher sales resulted in an increase in accounts receivable to $294,359 at March 31, 2011 from $145,121 at June 30, 2010.
Current liabilities at March 31, 2011 were $521,750 as compared to $599,139 at June 30, 2010. Current liabilities include accounts payable, current portion of notes payable and capital lease obligations and accrued expenses. At March 31, 2011, the Company had outstanding line of credit balances totaling approximately $65,000. Current liabilities also include $11,000 of short term loans from shareholders and other related parties, $74,640 note payable due for the acquisition of Natural Choices and $57,000 in convertible promissory notes.
Non-current liabilities include approximately $41,000 of convertible debt, net of discount and $182,000 note payable due an executive officer of the Company.
During the nine months ended March 31, 2011, the Company converted $547,000 of debt to equity in the form of common stock, including a note payable due an executive officer in the amount of approximately $90,000 and $332,000 due for the acquisition of Natural Choices Home Products. Additionally, the Company converted $95,000 of accrued liabilities into common stock. This amount included accrued salaries and wages totaling $49,000.
Net cash used in operating activities during the nine months ended March 31, 2011 was $245,544 compared to $15,796 used in operating activities during the nine months ended March 31, 2010.
Net cash provided by financing activities was $355,559 and $19,334 for the nine months ended March 31, 2011 and 2010, respectively. During the nine months ended March 31, 2011, the Company issued common stock for cash totaling $397,832. Additionally, the Company received proceeds from borrowings in the amount of $20,568 and $73,238 during the nine months ended March 31, 2011 and 2010, respectively. Debt repayments for the nine months ended March 31, 2011 totaled $57,009 compared to $62,834 during the nine months ended March 31, 2010.
At June 30, 2010, the Company had a working capital deficit of $341,459. During the first nine months of the fiscal year, that deficit was eliminated. At March 31, 2011 the Company had working capital of $51,468.
Total debt of $1,649,981 at June 30, 2010 has been reduced to $744,280 by March 31, 2011 primarily through equity issuance and extinguishment of debt.
On March 31, 2011 the Company had an accumulated deficit of $5,374,643 and total stockholders’ deficit of $131,994.
.
The Company's ability to achieve its objectives is dependent on its ability to sustain and enhance its revenue stream and to continue to raise funds through loans, credit and the private placement of restricted securities until such time as the Company achieves profitability. To date, management has been successful in raising cash on an as-needed basis for the continued operations of the Company. There is no guarantee that management will be able to continue to raise needed cash in this fashion.
The Company has no material commitments for capital expenditures at this time. The Company has no “off balance sheet” source of liquidity arrangements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
An investment in the common stock of the Company involves a high degree of risk. In addition to the other information in this report, the following risk factors should be considered carefully in evaluating the Company and its business. This Report contains forward-looking statements. All forward-looking statements are inherently uncertain as they are based on current expectations and assumptions concerning future events or future performance of the Company. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. Forward-looking statements usually contain the words "estimate," "anticipate," "believe," "plan," "expect," or similar expressions, and are subject to numerous known and unknown risks and uncertainties. In evaluating such statements, prospective investors should review carefully various risks and uncertainties identified in this report, including the matters set below and in the Company's other SEC filings. These risks and uncertainties could cause the Company's actual results to differ materially from those indicated in the forward-looking statements. The Company undertakes no obligation to update or publicly announce revisions to any forward-looking statements to reflect future events or developments.
17
THE COMPANY HAS EXPERIENCED LOSSES FROM OPERATIONS SINCE COMMENCING OPERATIONS:
With the exception of the 3rd quarter of fiscal 2010 and the 4th quarters of fiscal 2007 and 2006, the Company since commencing operations, has not been profitable on an annual or quarterly basis. The Company may not, in the future, generate sufficient revenues to achieve sustainable profitability.
POSSIBLE DIFFICULTY FINANCING PLANNED GROWTH:
The Company's present plans require an amount of expenditure and working capital. In the future the Company will require financing in addition to the cash generated from operations to fund planned growth. If additional resources are unavailable the Company may be unable to grow according to its present plan.
MANAGEMENT'S ASSUMPTIONS REGARDING THE FUTURE MARKET MAY BE FAULTY:
Management assumes there will be a continuing and increased desirability in the retail market for nontoxic, environment and health friendly products for cleaning and water treatment use. Should management's assumptions as to this increased desirability be faulty, the Company may have difficulty achieving its planned growth.
THE LOSS OF KEY PERSONNEL COULD ADVERSELY AFFECT THE COMPANY:
The Company is run by a small number of key personnel. Should the Company experience a loss of these key people due to their inability or unwillingness to continue in their present positions, the Company's business and financial results could be adversely affected.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based upon an evaluation of the effectiveness of disclosure controls and procedures, our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO") have concluded that as of the end of the period covered by this Quarterly Report on Form 10-Q our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the rules and forms of the SEC and is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure. Disclosure controls and procedures are defined as those controls and other procedures of an issuer that are designed to ensure that the information required to be disclosed by the issuer in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Act is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
18
Changes in Internal Control over Financial Reporting
As reported in our Annual Report on Form 10-K for the year ended June 30, 2010, management is aware that there is a significant deficiency in our internal control over financial reporting. The significant deficiency relates to a lack of segregation of duties due to the small number of employees involvement with general administrative and financial matters. However, management believes that compensating controls are in place to mitigate the risks associated with the lack of segregation of duties. Compensating controls include outsourcing certain financial functions to an independent contractor. Management concluded that internal controls over financial reporting were effective as of June 30, 2010.
There have not been any changes in the Company's internal control over financial reporting during the quarter ended March 31, 2011 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting
Item 1 – LEGAL PROCEEDINGS
Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Item 3 – DEFAULTS UPON SENIOR SECURITIES
None
19
Item 4 – OTHER INFORMATION
Item 5 – EXHIBITS
|
(a)
|
Exhibit Index
|
|
Exhibit
|
Description of the Exhibit
|
|
31.1
|
Chief Executive Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.2
|
Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.1
|
Chairman of the Board Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
XBRL Instance
|
|
101.SCH
|
XBRL Schema
|
|
101.CAL
|
XBRL Calculation
|
|
101.DEF
|
XBRL Definition
|
|
101.LAB
|
XBRL Label
|
|
101.PRE
|
XBRL Presentation
|
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.
|
PACIFIC SANDS, INC.
|
||
|
Dated: May 13, 2011
|
By:
|
/s/ Michael Michie
|
|
Michael Michie
Chief Executive Officer
|
||
|
Chief Financial Officer
|
||
20