FACT CORP - FORM 10-Q - November 21, 2011

Attached files

file	filename
EX-32.2 - CERTIFICATION - FACT CORP	ex322.htm
EXCEL - IDEA: XBRL DOCUMENT - FACT CORP	Financial_Report.xls
EX-32.1 - CERTIFICATION - FACT CORP	ex321.htm
EX-31.1 - CERTIFICATION - FACT CORP	ex311.htm
EX-31.2 - CERTIFICATION - FACT CORP	ex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended September 30 , 2011

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the transition period from __________ to __________

000-17232
Commission File Number

FACT CORPORATION
(Exact name of registrant as specified in its charter)

Colorado	84-0888594
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

11 Railroad Place, Belleville, New Jersey	07109
(Address of principal executive offices)	(Zip Code)

732-922-0911
(Registrant’s telephone number, including area code)

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

	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 [X] No [ ]

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	[ ]	Accelerated filer	[ ]

Non-accelerated filer	[ ]	Smaller reporting company	[X]
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes [ ] No [ ]

APPLICABLE ONLY TO CORPORATE ISSUERS

61,537,789 common shares outstanding as of November 15, 2011

(Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.)

FACT CORPORATION

TABLE OF CONTENTS

		Page
	PART I – Financial Information
Item 1.	Financial Statements	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	5
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	8
Item 4T.	Controls and Procedures	8

	PART II – Other Information
Item 1.	Legal Proceedings	8
Item 1A.	Risk Factors	8
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8
Item 3.	Defaults Upon Senior Securities	8
Item 4.	(Removed and Reserved)	9
Item 5.	Other Information	9
Item 6.	Exhibits	9
	Signatures	10

PART I

ITEM 1. FINANCIAL STATEMENTS

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 210 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the nine month period ended September 30, 2011, are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2011. For further information refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

	Page
Interim Condensed Consolidated Financial Statements ( unaudited prepared by management)
Interim Condensed Consolidated Balance Sheets ( unaudited prepared by management)	F-2
Interim Condensed Consolidated Statements of Operations and Comprehensive Loss ( unaudited prepared by management)	F-3
Interim Condensed Consolidated Statements of Cash Flows ( unaudited prepared by management)	F-4
Notes to Interim Condensed Consolidated Financial Statements ( unaudited prepared by management)	F-5 to F-16

FACT CORPORATION

INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Stated in US Dollars)

(UNAUDITED – PREPARED BY MANAGEMENT)

F-1

FACT CORPORATION

INTERIM CONDENSED CONSOLIDATED BALANCE SHEET

(Unaudited– prepared by Management)

ASSETS	September 30, 2011			December 31, 2010
Current Assets
Cash	$	31,417		$	323,198
Accounts receivable		124,174			200,371
Inventory		129,278			79,045
Prepaid expense		56,542			1,695
Total Current Assets		341,411			604,309
Vehicle, net of depreciation		90,154			-
Intellectual property		314,097			500,875
Total Assets	$	745,662		$	1,105,184

Liabilities and Stockholders' Deficiency
Current Liabilities
Accounts payable and accrued liabilities	$	491,488		$	576,563
Advances from related parties		228,102			853,715
Customer deposits		54,717			-
Short-term loans from related parties		45,837			67,559
Short-term loans		96,820			387,538
Current portion of long-term debt and other long-term obligations		269,034			219,620
Total current liabilities		1,185,998			2,104,995
Long-term debt, net of discount		45,034			140,617
Convertible notes payable, net of discount		311,943			1,579,113
Other long-term obligations		901,280			1,115,469
Total Liabilities		2,444,255			4,940,194

Stockholders' Deficiency
Class A Common stock – no par value per share; Shares authorized: 100,000,000; 61,537,789 and 19,238,912 shares issued and outstanding as at September 30, 2011 and December 31, 2010 respectively		27,549,076			23,317,356
Additional paid in capital		581,839			999,789
Accumulated other comprehensive income		91,535			96,755
Accumulated deficit		(29,921,043	)		(28,248,910	)
Total Stockholders' Deficiency		(1,698,593	)		(3,835,010	)
Total Liabilities and Stockholders' Deficiency	$	745,662		$	1,105,184

The accompanying notes form an integral part of these interim condensed consolidated financial statements.

F-2

FACT CORPORATION

CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

	3 Months Ended				9 Months Ended
		Sept. 30, 2011		Sept. 30, 2010		Sept. 30, 2011		Sept. 30, 2010
Revenue:
Net sales	$	759,423	$	180,566		$	1,682,006	$	557,527
Rental income		-		4,134			-		47,198
Total revenue		759,423		184,700			1,682,006		604,725
Cost of sales		616,091		134,659			1,371,896		439,599
Gross profit		143,332		50,041			310,110		165,126

Operating expenses:
Professional fees		16,000		12,114			58,642		31,349
Depreciation		63,384		62,337			187,903		187,010
Marketing and advertising expense		22,840		68,341			104,133		80,375
Research and development expense		-		10,944			-		45,478
General and administrative		179,887		176,635			593,670		491,664
Total operating expense		282,111		330,371			944,348		835,876

Loss from operations		(138,779)		(280,330)			(634,238)		(670,750)
Gain on debt forgiveness		124,673		-			127,915		12,276
Loss on debt settlement		(969,230)		-			(969,230)		-
Interest expense		(53,745)		(44,934)			(196,580)		(127,569)
Net loss	$	(1,037,081)	$	(325,264)		$	(1,672,133)	$	(786,043)

Per common share data, basic and diluted:
Net loss	$	(0.03)	$	(0.02)		$	(0.07)	$	(0.04)
Weighted average number of Class A common shares outstanding, basic and diluted		37,176,512		18,796,328			25,286,267		18,794,021

Comprehensive income:
Net loss	$	(1,037,081)	$	(325,264)		$	(1,672,133)	$	(786,043)
Foreign currency translation adjustments		1,117		(1,930)			(5,220)		(2,343)
Total comprehensive income	$	(1,035,964)	$	(327,194)		$	(1,677,353)	$	(788,386)

The accompanying notes form an integral part of these interim condensed consolidated financial statements.

F-3

FACT CORPORATION

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited– prepared by Management)

	9 Months Ended
	Sept. 30, 2011		Sept. 30, 2010
Cash flows from operating activities:
Net loss	$	(1,672,133)	$	(786,043)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		187,903		187,010
Amortization of discounts and premiums		56,506		16,337
Accrued interest		102,872		103,342
Loss on debt settlement		969,230		-
Gain on debt forgiveness		(127,915)		-
Shares issued for consulting services		153,278		-
Stock-based compensation		4,172		58,582
Changes in operating assets and liabilities:
Accounts receivable		77,616		51,137
Inventory		(50,233)		(136,528)
Prepaid expenses and other current assets		(65,410)		(4,618)
Customer deposits		54,717		-
Accounts payable and accrued liabilities		284,959		298,475
Net cash used in operating activities		(24,438)		(212,306)

Cash flows from investing activities:
Purchase of vehicle		(91,279)		-
Net cash used in investing activities:		(91,279)		-

Cash flows from financing activities:
Additions to short-term loan from related parties		-		48,147
Additions to short-term loans		188,274		257,862
Repayments of short-term loans		(201,875)		-
Proceeds from issuance of unit private placements		-		22,500
Reduction to acquisition cost payable		(166,071)		(128,554)
Net cash provided (used) by financing activities		(179,672)		199,955

Effect of foreign exchange on transactions		3,608		(1,216)

Net increase (decrease) in cash		(291,781)		(13,567)
Cash at beginning of year		323,198		45,736
Cash and cash equivalents at end of year	$	31,417	$	32,169

Supplemental disclosure of cash flow information:
Interest paid	$	27,279	$	-
Income taxes paid (refund)		-		-

Supplemental schedule of non-cash financing:
Common stock issued for debt settlement for 8% convertible notes with accrued interest	$	1,508,208	$	-
Common stock issued for debt settlement for short term loan with accrued interest		451,145		-
Common stock issued for debt settlement for short term loan – related parties with accrued interest		74,329		-
Common stock issued for debt settlement for accounts payable		29,072		-
Common stock issued for debt settlement for advances from related parties		844,936		-
Total	$	2,907,690	$	-

The accompanying notes form an integral part of these interim condensed consolidated financial statements.

F-4

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 1 – Operations and Organization:

Organization

The Company was incorporated under the laws of the State of Colorado on August 3, 1982 as Capital Reserve Corporation for the purpose of operating as a financial services holding company. The Company commenced operations soliciting various life, accident and health insurance policies in three states in the U.S. until October 1994 when it could no longer meet certain requirements to continue operations. The Company carried out various other operations between 1995 and the close of fiscal 1998, all of which operations had ceased by early 1999.

In 1999, the Company's principal place of business moved to Canada. In December 1999, the Company formed a wholly-owned subsidiary, Capital Reserve Canada Limited, an Alberta corporation ("Capital Canada"), to locate and acquire producing oil and gas assets in Canada. This subsidiary was divested in fiscal year 2004 by way of a distribution of shares to the shareholders of the Company.

On November 7, 2001, the Company entered into a Share Exchange Agreement with the shareholders of Food and Culinary Technology Group Inc. (“FACT Group”), a Nevada corporation, whereby all of the issued and outstanding shares of FACT Group were exchanged for 2,000,000 shares of the Company’s Class C common stock (Note 2) and FACT Group became a wholly-owned subsidiary.

On February 8, 2002, the Company changed its name to FACT Corporation.

On July 23, 2002, the Company formed a wholly-owned subsidiary, Wall Street Real Estate Limited (“WSRE”), an Alberta corporation. WSRE purchased from the Company, certain commercial real estate located at 1528-1530 9th Avenue S.E., Calgary, Alberta, Canada. This commercial property was divested during fiscal 2005. During the fiscal year ended December 31, 2010, WSRE ceased commercial leasing operations.

As of September 30, 2011, the Company has two wholly-owned subsidiaries, FACT Group and WSRE. FACT Products Inc., a Nevada corporation, a company that currently has operations in the international supplement markets, was incorporated in November 2001 and is a wholly-owned subsidiary of FACT Group.

Operations - Functional Food Business

The Company entered the functional food industry in November 2001 with the acquisition of FACT Group. During the fiscal year ended December 31, 2002, FACT Group commenced sales of products manufactured from its proprietary functional food formulations. During 2010 FACT Group expanded its product portfolio to include a line of retail bake mixes under its Nutrition First brand. Additionally in August 2010, FACT Group reactivated its dormant subsidiary FACT Products Inc. to market and sell a line of natural supplement products to the international marketplace under both branded and private label formats. All revenues in the current fiscal year were derived from these ongoing operations in the food and natural product supplements industry. The Company is expanding its operations in fiscal 2011 to include branded ready to eat bakery snack formats under its Nutrition First TM brand.

The Company, through its subsidiaries continues to pursue further commercial and retail supply and licensing contracts for its existing and newly developed lines of functional food formulations, bakery premixes and natural supplement products. The core focus of all the Company’s products is “better for you” with a focus on First in Fiber TM across the bakery segment and natural supplement products across the natural products channel.

F-5

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 1 – Operations and Organization (Continued):

Preparation of Interim Financial Statements

The accompanying unaudited interim condensed consolidated financial statements of FACT Corporation (the “Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim consolidated financial information and pursuant to the rules and regulations of the SEC. Accordingly, they do not include all the information and footnotes required by GAAP for complete consolidated financial statements. However, management believes that the disclosures made are adequate to make the information not misleading. Management has evaluated subsequent events through the date the financial statements were issued.

In the opinion of management, all adjustments necessary to present fairly the financial position as of September 30, 2011, and the results of operations, and cash flows presented herein have been included in the financial statements. All such adjustments are of a normal and recurring nature. The unaudited interim consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the SEC on April 15, 2011.

Reclassification

Certain prior year amounts have been reclassified for consistency with the current period presentation. These reclassifications had no effect on the reported results of operations. During the most recently completed nine month period ended September 30, 2011, the Company determined to consolidate certain line items on its statements of operations to one line item entitled “General and administrative expenses”.

Note 2– Recent Accounting Pronouncements

In June 2011, the Financial Accounting Standards Board issued guidance related to the financial statement presentation of other comprehensive income (OCI). The guidance requires that OCI be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. This new guidance is effective for fiscal years, and interim periods, beginning after December 15, 2011. Adoption of this guidance only impacts presentation and disclosure of OCI, with no impact on the Company’s results of operations, financial position or cash flows.

Note 3 - Acquisition of Food and Culinary Technology Group Inc. (“FACT”), Intellectual Property, and Issuance of Class C Common Stock

On November 20, 2001, the Company acquired all of the issued and outstanding shares of FACT Group in exchange for 2,000,000 shares of the Company’s Class C common stock. The acquisition is treated as an asset acquisition and the Class C shares issued upon the acquisition have been valued based on an analysis of FACT Group’s future cash flows, discounted at a rate of 20% to present day and impaired at a rate of 50% to account for the high risk factor associated with the nature of the start-up of operations in a relatively unknown category of the food market, functional foods. The assets acquired consist principally of certain intellectual property, formulas, patent rights and other intangible assets. The value attributed to the Class C common shares is $490,374, which amount has been amortized annually on a straight line basis over a period of 10 years commencing December 2003, following the successful completion of two years of revenue generating operations.

The 2,000,000 shares of the Company’s Class C common stock that were issued on November 20, 2001, were convertible into a total of 12,000,000 shares of the Company’s Class A common stock. On August 6, 2003, the Company completed a 4 for 1 reverse split which impacted its Class A common stock. The consolidation did not impact the Class C holders, and as a result an amount of $288,000, which represents the award benefit to the holders of the Class C common stock at the date of the reverse split, discounted at a rate of 80% due to the illiquidity in the market for the Company’s Class A common shares, was expensed in the fiscal year ended December 31, 2003. As of February 11, 2004, all of the holders of the Company’s Class C common stock elected to convert all of their shares into shares of Class A common stock. During the second quarter of fiscal 2004, the Class C common stock was canceled and a total of 12,000,000 shares of Class A common stock were issued.

F-6

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 3 – Acquisition of Food and Culinary Technology Group Inc. (“FACT Group”), Intellectual Property and Issuance of Class C Common Stock (Continued):

Prior to the acquisition, FACT Group had entered into an agreement to acquire certain intellectual property, formulas, patent rights and other intangible assets (the “Intellectual Property”) owned by F.A.C.T. Group LLC, a New Jersey limited liability company (the “LLC”), for $2,000,000 to be paid in cash pursuant to terms described herein and by the issuance of shares of FACT Group’s common stock.

In August 2003, the Company and the member owners of LLC entered into a Settlement Agreement to resolve certain disputes and claims that had arisen between the parties. As a result, the parties agreed that the following consideration would be paid in connection with the acquisition of the Intellectual Property:

a.	Royalty payments shall be paid to the LLC calculated on the sale of bakery and pasta products at a rate of $0.05 per pound of premix sold until a total of $2,000,000 has been paid.

b.	FACT Group is obligated to make minimum royalty payments each year. For 2011, the minimum amount of royalty payments to be made is $219,620. For 2012, the amount increases by 30% to $285,506. In 2013, all remaining royalties become due and payable.

c.	An additional royalty payment of $20,000 was made to the LLC in 2003.

Additional consideration of up to $233,333 to be paid to two (2) of the LLC’s member owners in monthly payments over the period of time commencing on September 1, 2003 through December 2006. Such amount was to be decreased in the event that such member owners personally earned more than a certain amount in any of the stated years or if the amount of royalty payments was in excess of $150,000 in any year. The amounts paid to the LLC owners with respect to this provision were expensed annually as consulting fees. At the close of fiscal 2006, the Company fulfilled the requirements under this provision and a total of $177,686 had been paid as additional consideration.

ASC 350, “Goodwill and Other Intangible Assets” addresses financial accounting and reporting: (1) at the date of acquisition of goodwill and intangible assets apart from goodwill acquired other than in a business combination and (2) all goodwill and intangible assets apart from goodwill subsequent to their acquisition. A principal requirement of this statement is to determine the useful lives of intangible assets and amortize or not amortize the intangible assets accordingly. Intangible assets apart from goodwill with finite lives are to be amortized over their useful lives to their residual value, if any, whereas goodwill and intangible assets apart from goodwill with indefinite lives are not to be amortized. Another principal requirement of this statement relates to impairment of intangible assets. This statement, in its entirety, became effective for the Company on January 1, 2002. Certain provisions of the statement were effective July 1, 2001 since the intangible assets were acquired after that date. Management believes that currently the intangible assets have a ten-year useful life, and the intangible assets are being amortized over ten years.

Note 4 – Accounts Receivable:

The Company’s accounts receivable consists solely of trade receivables totaling $124,174 as at September 30, 2011 and $200,371 as of December 31, 2010.

Note 5 - Prepaid expense and Customer deposits

The Company records payments received from customers before product is delivered as customer deposits in the consolidated balance sheets. The Company records payments made to vendors before product is received as prepaid expense in the consolidated balance sheets.

F-7

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 6 – Property, plant and equipment:

In July 2011, the Company’s subsidiary WSRE purchased a vehicle for use in the Company’s planned promotional activities across the United States.

The Company recorded the vehicle purchase at cost. Depreciation is computed using the straight-line method over the 10 year estimated useful life of the asset. The estimated salvage value of the vehicle used for calculations is 30% of the cost.

As of September 30, 2011, property, plant and equipment consists of the following:

	Sept. 30, 2011 $			Dec. 31, 2010 $
Vehicle		91,279			-
Less: depreciation		(1,125	)		-
Vehicle, net of depreciation		90,154			-

Note 7 – Convertible bonds:

8% unsecured convertible notes due 2012:

(a)

On September 11, 2009, the Company entered into debt settlement agreements with certain of its creditors to settle a total of $1,304,172 by way of convertible loan agreements. The loans extended for a period of three years, expiring in 2012; with interest payable annually at 8% per annum, compounded monthly. The loans were unsecured and were convertible for a period of one year from the date of issue into shares of the Company’s Class A common stock at a deemed price of $0.15 per share, for a total issuance of 8,694,481 shares, if converted. During the third quarter of 2010, the Company renegotiated the term of convertibility of the loans and a two year extension for conversion on the same terms was granted.

During the month of July 2011, the Board of Directors and the holders of the 8% unsecured convertible bonds entered into negotiations to settle the outstanding balance of the bonds effective July 31, 2011 including all unpaid interest as at that date by way of shares of the Company’s common stock at a discount to the current trading price of the Company’s common stock. On August 3, 2011, the Company approved the settlement of the principal and interest outstanding as of July 31, 2011, totaling $1,508,208 by way of the issuance of 20,109,437 Class A shares of common stock at a deemed price of $0.075 per share to the bond holders or their designees. The market value of the common stock on the issuance date was $0.10, and as a result the Company recorded a loss on the debt settlement of $502,736 which is included in Other Expenses. The unamortized discount of $22,348 as at July 31, 2011, the settlement date, was recorded against additional paid in capital.

A discussion of the application of the accounting standards for the convertible bonds up to the settlement date of July 31, 2011 is provided below.

Applying the accounting standards for convertible bonds effective in fiscal 2009, the convertible bonds are recorded using the fair market value of a comparative straight bond with all the similar features other than the convertible feature. The difference between fair market value and bond principle is recorded as an unamortized bond discount and will be amortized through the life of the bond which is 3 years, or up until the date of settlement. The effective interest rate used on the liability component was 10% per annum, compounded monthly, which was the best estimate by management. This rate was used to accrue interest expense as the standards required.

The discount on the 8% unsecured convertible bonds is amortized to interest expense using the effective interest method, over the life of the debt instrument. The carrying value of the financing was as follows as the settlement date:

F-8

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 7 – Convertible bonds (continued):

	July 31, 2011			December 31, 2010
8% unsecured convertible bonds, at face value	$	1,304,172		$	1,304,172
Less: unamortized discount		(22,348	)		(32,907	)
Carrying value	$	1,281,824		$	1,271,265

The 8% unsecured convertible bonds bear interest at the rate of 8% per year compounded monthly. Interest expense recorded related to the amortization of debt discount and interest expense at the contractual rate was as follows:

	3 Months Ended					9 Months Ended
			July 31, 2011		Sept. 30, 2010			July 31, 2011		Sept 30, 2010
Amortization of debt discount		$	1,473	$	4,285		$	10,559	$	12,546
Interest at contractual rate			9,193		27,284			62,871		80,962
		$	10,666	$	31,569		$	73,430	$	93,508

The Company did not make any payments towards principal or interest to the bond holders during the seven month period ended July 31, 2011. An amount of $204,036 in accrued interest was due and payable as at July 31, 2011 so that the total amount of principal and interest totaled $1,508,208 on the settlement date.

(b)

On September 11, 2009, the Company renegotiated an outstanding debenture due in December 2009. As a result, the Company entered into a new debenture agreement in the amount of $317,517 with Ultimate Resort Destinations Inc. (“Ultimate”). Ultimate currently holds a debenture over the shares of Food and Culinary Technology Group Inc. (FACT Group Inc.), the Company’s wholly-owned subsidiary operating in the customized nutrition solutions industry. The debenture was secured by all assets of the Company. The debenture has been rewritten for a period of three years, expiring in September 2012, with interest payable at 6% per annum. The debenture was convertible for a period of two years into the Company’s Class A common stock at a deemed price of $0.14 per share, for a total issuance of 2,267,980 shares, if converted prior to September 11, 2011. The ability to convert has expired without renewal on September 11, 2011.

Based on accounting standards on convertible bonds effective in 2009, the convertible bonds are recorded using fair market value of comparative straight bond with all the similar features, other than the convertible feature. The difference between fair market value and bond principle is recorded as an unamortized bond discount and will be amortized through the life of the bond which is 3 years. The effective interest rate on the liability component was 8% per annum which was the best estimate by management. This rate was used to accrue interest expense as the standards required.

The discount on the 6% secured convertible debenture is being amortized to interest expense using the effective interest method, over the life of the debt instrument. The carrying value of the financing is as follows:

	September 30, 2011		December 31, 2010
6% secured convertible debenture, at face value	$	317,517	$	317,517
Less: unamortized discount		(5,574)		(9,669)
Carrying value	$	311,943	$	307,848

F-9

FACT CORPORATION

Notes to the Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 7 – Convertible bonds (Continued):

The 6% secured convertible debenture bears interest at the rate of 6% per year. Interest expense recorded related to the amortization of debt discount and interest expense at the contractual rate was as follows:

	3 Months Ended					9 Months Ended
	Sept. 30, 2011		Sept. 30, 2010			Sept. 30, 2011			Sept. 30, 2010
Amortization of debt discount	$	1,395		$	1,291		$	4,095		$	3,791
Interest at contractual rate		4,801			4,802			14,249			14,249
	$	6,196		$	6,093		$	18,344		$	18,040

The Company did not make any payments towards principal or interest to the bond holder during the nine month period ended September 30, 2011. An amount of $39,093 in accrued interest remains due and payable as at September 30, 2011.

Note 8 – Accounts Payable and Accrued Liabilities

A summary of accounts payable and accrued liabilities as of September 30, 2011 and December 31, 2010 is as follows:

	September 30, 2011		December 31, 2010
Accounts payable – trade	$	448,266	$	367,813
Accounts payable – interest		39,093		179,038
Accrued liabilities		-		16,000
Payroll liabilities		4,129		13,712
	$	491,488	$	576,563

On August 3, 2011 the Company wrote off a total of $124,673 of aged accounts payable, which amount has been recorded as a gain on forgiveness of debt. In a prior period the Company negotiated with a creditor for a reduction to their outstanding account in the amount of $3,242, so that cumulative to September 30, 2011 the Company has recorded $127,915 as debt forgiveness. The Company also negotiated debt settlements with certain creditors and their assignees for amounts totaling $29,072 which were settled by the issuance of 387,629 shares of common stock at a deemed value of 0.075 per share. The market value of the common stock on the issuance date was $0.10, and as a result the Company recorded an additional loss on settlement in the amount of $9,691.

Note 9 – Line of Credit:

On December 1, 2010, the Company entered into a two-year loan agreement (the “Loan”) with a third party (the “Lender”) to secure funds for use in managing accounts receivable and supplier payments. Under the loan agreement, the Company has access to a revolving line of credit in the amount of $255,950 ($250,000 Canadian Dollars) (the “Principal Sum”) to be used for the sole purpose of retiring accounts payable associated with open receivables, on a timely basis.

As consideration for the Loan, FACT Corporation issued the Lender a total of 250,000 share purchase warrants, each warrant entitling the holder to purchase one share of the Class A common stock of the Company at a purchase price of $0.30 USD per share in year one and $0.35 USD per share in year two from the date of the Loan. In addition to the share purchase warrants the Lender was granted collateral in the form of a reservation notice to the Company’s transfer agent for 1,000,000 shares of the Company’s common stock to be immediately issued and released to the Lender upon notification of an event of default on the Loan. Upon default, all collateral which may be by the way of purchase orders or the shares will become the property of the Lender. Under the terms of the secured promissory note, should the shares be issued, the lender will have the right to sell the collateral shares and apply any proceeds against the balance until the note and any outstanding interest is paid in full.

F-10

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 9 – Line of Credit:( Continued)

Any remaining shares not required to be sold will be returned to the Company. Should the collateral not retire the loan then the Lender will have the right to pursue such other remedies of collection as may be required.

ASC Topic 470 requires the proceeds of debt issued with detachable stock purchase warrants to be allocated between the debt and stock warrants based on relative market values. The warrants, valued at $114,087 using the Black-Scholes valuation technique are included in the debt discount and are amortized over 2 years.

During the nine month period ended September 30, 2011, The Company made a partial repayment to the principal amount of the loan totaling $201,875 ($185,848 Canadian Dollars).

The carrying value of the financing is as follows:

	September 30, 2011		December 31, 2010
Line of Credit, at face value	$	62,111	$	249,950
Less: unamortized discount		(17,077)		(109,333)
Carrying value	$	45,034	$	140,617

The Company is required to accrue and pay monthly, on the first day of the following month, payments of interest only calculated on the principal sum in the amount of eight percent (8%) per annum for so long as the Loan is outstanding. On such dollar amounts that have been drawn down upon from the principal sum (herein referred to as the “Factored Amount”), the Company shall accrue for such number of days as the Factored Amount is outstanding interest at a rate of one and a half percent (1.5%) per month, which shall be payable on the first day of following month.

During the nine month period ended September 30, 2011, $62,111 (CAD $63,592) was drawn down upon from the principal amount.

Interest expense recorded related to the amortization of debt discount and interest expense at the contractual rate was as follows:

	3 Months Ended				9 Months Ended
	Sept. 30, 2011		Sept. 30, 2010		Sept. 30, 2011		Sept. 30, 2010
Amortization of debt discount	$	14,148	$	-	$	42,782	$	-
Interest at contractual rate		4,827		-		15,117		-
Interest at factored amount		5,725		-		13,770		-
	$	24,700	$	-	$	71,669	$	-

During the nine month period ended September 30, 2011, an amount totaling $26,260 (CAD$26,800) was paid in respect to accrued interest on the aforementioned loan. An amount of $2,627 (CAD$2,715) in accrued interest remains due and payable as at September 30, 2011.

On August 3, 2011, Jacqueline Danforth, provided collateral in the form of a second position mortgage on certain residential property in the amount of US$262,725 (CDN$250,000) as additional security in respect of a line of credit .The Board of Directors authorized the issuance of a total of 3,503,000 shares of the Company’s Class A common stock at a value of $0.075 per share, to be held in escrow for the benefit of Ms. Danforth or her assignees in the event the Company defaults on the line of credit and the collateral is seized.

F-11

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 10– Loans Payable

(a)

During the nine month period ended September 30, 2011, the Company received proceeds totaling $37,052 by way of demand loans bearing interest at 8% per annum from several arms-length parties. The Company made partial repayments towards these loans in the amount of $4,135. During the month of July 2011, the Board of Directors and the creditors entered into negotiations to settle the outstanding balance of the loans effective July 31, 2011including all unpaid interest as at that date, by way of shares of the Company’s common stock at a discount to the current trading price. As at July 31, 2011, the principal balance on the loan, including amounts advanced and repaid during the current fiscal period totaled $420,800 (December 31, 2010 - $385,038). The recorded interest expense on the aforementioned loans for the period up to the settlement date totaled $30,347 (December 31, 2010 - $11,735). On August 3, 2011, the Company approved the settlement of the principal and interest outstanding as of July 31, 2011, totaling $451,147 by way of the issuance of 6,015,302 shares of Class A common stock at a deemed price of $0.075 per share to the creditors or their designees. The market value of the common stock on the issuance date was $0.10, and as a result the Company recorded a loss on debt settlement in the amount of $150,382.

(b)

In July 2011, the Company’s subsidiary WSRE received proceeds of US $105,090 (CAD$100,000) in the form of a secured loan which funds were used to purchase a vehicle for use in the Company’s planned promotional activities across the United States. The vehicle serves as the collateral for the secured loan which has a term of two years and bears interest at a rate of 8%.

Note 11– Common stock

During the nine month period ended September 30, 2011, the Company issued:

1)	26,680 shares of Class A common stock to a consulting company for services rendered in the total amount $4,500 (Note 14) at deemed price based on the 10 day average, quarterly, before the date of issue;

2)	20,109,437 shares of Class A common stock at a deemed price of $0.075 per share in settlement of certain 8% unsecured convertible notes (Note 7);

3)	387,629 shares of Class A common stock at a deemed price of $0.075 per share in settlement of certain accounts payable. (Note 8);

4)	6,015,302 shares of Class A common at a deemed price of $0.075 per share in settlement of certain loans payable (Note 10);

5)	12,256,829 shares of Class A common stock at a deemed price of $0.075 per share in settlement of certain loans and accounts payable (Note 13); and,

6)	3,503,000 Shares to a company controlled by Jacqueline Danforth, our President and Chief Executive Officer in consideration of the provision of a second mortgage on her property to secure an operating line for the Company in the amount of $250,000.

Note 12 – Stock-Based Compensation

Issuance of stock options

On June 13, 2011, the Company granted 10,000 incentive stock options to a consultant of the Company, all of which vested on the date of grant and are exercisable into shares of Class A common stock at $0.275 per share, expiring on August 10, 2018. The fair value of the 10,000 options granted totaling $1,200, was allocated to additional paid in capital, which amount has been expensed and recorded in the Company's statement of stockholder's deficiency.

On July 18, 2011, the Company issued a total of 150,000 incentive stock options to certain consultants to the Company, which options vest ratably on a quarterly basis over the period of one year from the date of issue. The Company recognized a stock-based expense of $4,173 on this issuance. Unrecognized compensation expenses related to outstanding stock options as of September 30, 2011 were $14,863 and is expected to be recognized in the amount of $4,459 in 2011 and $10,404 in 2012, respectively.

F-12

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 12 – Stock-Based Compensation (continued):

Issuance of stock options (cont’d):

The following is a table of outstanding stock options and changes during the nine month period ended September 30, 2011. All options expire on August 10, 2018.

	Employee Options		Non-employee Options		Weighted Average Exercise Price ($)
Options outstanding, December 31, 2010		475,000		1,850,000		0.322
Options granted:
Employees		-		-		-
Non-employees		-		25,000		0.275
Options exercised		-		-		-
Options canceled		-		-		-
Options expired		-		-		-
Options outstanding, September 30, 2011		475,000		1,875,000		0.321

If not previously exercised or canceled, options outstanding at September 30, 2011 will expire as follows:

	Range of Exercise Prices				Weighted Average Exercise
	High		Low		Shares	Price
Year Ending December 31, 2018	$	0.35	$	0.27	2,350,000	$	0.321

The fair value of each option granted was computed using the Black-Scholes method using the following weighted-average assumptions:

	Nine Months ended September 30, 2011		Year ended December 31, 2010
Expected Volatility:	153.72 ~ 169.38		178.18 ~ 178.78
Risk-free interest rate:	2.26%		2.60 ~ 2.64%
Expected Dividends:		0		0
Expected Term in Years:		7		8

Note 13 – Related Party Transactions

a.	Transactions with International Securities Group Inc.

International Securities Group Inc. (“ISG”) is a company incorporated in Alberta, Canada, and up until August 3, 201, as the largest shareholder of the Company, held approximately 36% of the Company’s Class A common stock. Up until June 2011, Ms. Jacqueline Danforth, the Company’s CEO, also provided regular consulting services to ISG, and ISG provided the Company and its subsidiaries, administrative services on a monthly basis. During June 2011, ISG advised the Company it was ceasing operations and would no longer provide administrative support services. In addition, over the period September 1, 2010 to July 31, 2011 ISG leased office space to the Company on a month to month basis at a rate of $1,250 per month plus applicable taxes. ISG has also provided various loans to the Company to assist with working capital shortfalls. On August 3, 2011, the Company approved a debt settlement to settle a total of $60,496 in loans and a total of $237,500 in accounts payable by way of the issuance of 3,973,286 shares of Class A common stock at $0.075 per share to ISG or its designees. The market value of the common stock on the issuance date was $0.10 and as a result the Company recorded a loss on debt settlement in the amount of $99,334.

F-13

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 13 – Related Party Transactions (continued)

a.	Transactions with International Securities Group Inc. (cont’d)

Details of the transactions with ISG during the nine month period ended September 30, 2011 are as follows:

Up to July 31, 2011, ISG invoiced $65,621 (2010 - $101,870) for administrative services to the Company and its subsidiaries, and $8,058 (2010 - $5,859) for office rent. As at July 31, 2011, the Settlement date, an amount totaling $237,500 in accounts payable was settled by way of the issuance of shares of common stock.

ISG funded demand loans totaling $54,559 to the Company for working capital bearing interest at a rate of 8% per annum. The accrued interest expense on these loans up to the settlement date totaled $2,535. As at the settlement date, an amount of $60,496 including principal and accrued interest was settled by way of the issuance of shares of Class A common stock.

b.	Transactions with Clifford Winsor and companies controlled by him

Clifford Winsor is a stockholder of the Company. Mr. Winsor controls Ultimate Resort Destinations Inc. and Ultimate Destinations Inc., both of whom were creditors and stockholders of the Company. On August 3, 2011, the Company approved a debt settlement to settle a total of $13,832, including accrued interest of $832, in loans payable and a total of $27,186 in accounts payable by way of the issuance of 546,906 shares of Class A common stock at $0.075 per share to Mr. Winsor or his designees. The market value of the common stock on the issuance date was $0.10, and as a result the Company recorded a loss on the debt settlement in the amount of $15,473. As at September 30, 2011 an amount totaling $488 remained due and payable to Mr. Winsor in accounts payable – related parties.

On the Settlement Date, Mr. Winsor was no longer a related party. He remains the controlling shareholder of Ultimate Resort Destinations Inc., a company that holds a debenture over certain assets of the Company (Note 7(b)).

c.	Transactions with directors and officers

Jacqueline Danforth is the CEO and a director of the Company. She provides consulting services to the Company and its subsidiaries. During the nine month period ended September 30, 2011, Ms. Danforth provided services to the Company for the invoiced amount of $75,933. On August 3, 2011, the Board of Directors of the Company approved debt settlements to settle a total of $580,248 in cumulative accounts payable due to a company controlled by Ms. Danforth as at July 31, 2011, by way of the issuance of 7,736,637 shares of Class A common stock at $0.075 per share. The market value of the common stock on the issuance date was $0.10, and as a result the Company recorded a loss on debt settlement in the amount of $193,416. Accounts payable – related party includes a total of $17,250 due to Ms. Danforth for salary accrued in August and September and certain reimbursable expenses.

On August 3, 2011, Jacqueline Danforth, provided collateral in the form of a second position mortgage on certain residential property in the amount of US$262,725 (CAD$250,000) as additional security in respect of a line of credit discussed above in Note 9. The Board of Directors authorized the issuance of a total of 3,503,000 shares of the Company’s Class A common stock at a value of $0.075 per share, to be held in escrow for the benefit of Ms. Danforth or her assignees in the event the Company defaults on the line of credit and the collateral is seized. The market value of the common stock on the issuance date was $0.10, and as a result the Company recorded additional expense in the amount of $87,575 to additional paid in capital.

F-14

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 13 – Related Party Transactions (continued)

c.	Transactions with directors and officers (cont’d):

Bryan Hunsaker, President of FACT Products Inc. and Steve Ault,Vice President – Product Development each receive an annual base salary of $80,000 with an additional $13,200 as an expense allowance for general expenses inclusive of telephone, internet and other pre-approved expense items for travel and miscellaneous activities. During the nine month period ended September 30, 2011, the Company paid a total of $69,900 to each of Mr. Hunsaker and Mr. Ault. As at September 30, 2011 an amount totaling $2,020 remained due and payable to Mr. Hunsaker in respect of expenses to be reimbursed.

H H and Company LLC, a consulting company owned by Mr. Brad Hunsaker, a director of the Company, charged the Company $45,000 for consulting services during the nine month period ended September 30, 2011. Additionally, the Company accrued $9,000 as an expense allowance for H H and Company LLC in respect of general expenses including telephone, internet, office space and other pre-approved general expense amounts. The Company did not make any payments to H H and Company LLC during the nine month period ended September 30, 2011. As at September 30, 2011, $150,000 was due and payable to H H and Company LLC.

In July 2011, Fact Products Inc. entered into a Loan Agreement with H H and Company LLC, to provide a total of up to $50,000 as an operating line of credit for use in financing trade receivables at a rate of 1.5% per month for any amount in use under the line. During the nine month period ended September 30, 2011, an amount totaling $1,019 was paid in respect to the accrued interest on the aforementioned loan. An amount of $290 in accrued interest remains due and payable as at September 30, 2011. The balance sheet reflects a total of $45,837 in respect of the amount of the credit facility in use as at September 30, 2011.

·	During the nine months ended September 30, 2011, Jacqueline Tucker, Chief Financial Officer of the Company invoiced the Company $45,000 for services provided. The Company did not make any cash payments to reduce the account, leaving $45,000 due and payable to Ms.Tucker at September 30, 2011.

·	Dr. Brian Raines, a director of the Company, is due $13,344 for consulting service rendered in 2003.

Note 14 – Commitments

Marketing agreement:

On August 17, 2010, the Company entered into a spokesperson agreement (the “Agreement”) with Hope Warshaw Associates, LLC (“Warshaw”). Under the agreement, Warshaw is a media and product representative for the Company’s products in connection with the Nutrition FirstTM product line for the consumer with diabetes, and related campaigns. The Company will pay to Warshaw an annual stipend of $18,000 consisting of quarterly payments of $3,000 paid in cash by the 15th day of the last month of each quarter, commencing September 2010, and a cash equivalent of $1,500 quarterly to be paid in shares of the Common Stock of the Company, with the unit price of the stock being calculated based on the 10 day average closing price prior to the 15th day of the last month of each calendar quarter commencing September 2010. Additionally Ms. Warshaw will charge the Company at her hourly rate for ad hoc consulting services. During the nine month period ended September 30, 2011, the Company recorded $16,550 as marketing expense in respect of this contract. 26,680 shares of Class A common stock were issued for the cash equivalent of $4,500, and $6,000 was paid in cash, leaving amount of $6,050 owing to Warshaw as of September 30, 2011. In August 2011 the Company and Ms. Warshaw extended the term of the contract for a further 1 year term.

F-15

FACT CORPORATION

Notes to the Interim Condensed Consolidated Financial Statements for the Nine Months Ended September 30, 2011

(Unaudited – prepared by Management)

Note 15– Subsequent Events

Subsequent to the quarter ended September 30, 2011, the Company received additional funding by way of a further line of credit in the total amount of $112,826 from an arm’s length third party

F-16

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This quarterly report contains forward-looking statements relating to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology such as "may", "should", "intends", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology. These statements are only predictions and involve known and unknown risks, uncertainties and other factors which may cause our or our industry's actual results, levels of activity or performance to be materially different from any future results, levels of activity or performance expressed or implied by these forward-looking statements.

Such factors include, among others, the following: international, national and local general economic and market conditions: demographic changes; the ability of the Company to sustain, manage or forecast its growth; the ability of the Company to successfully make and integrate acquisitions; raw material costs and availability; new product development and introduction; existing government regulations and changes in, or the failure to comply with, government regulations; adverse publicity; competition; the loss of significant customers or suppliers; fluctuations and difficulty in forecasting operating results; changes in business strategy or development plans; business disruptions; the ability to attract and retain qualified personnel; the ability to protect technology; and other factors referenced in this and previous filings.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or performance. As required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform these statements to actual results.

Given these uncertainties, readers of this Form 10-Q and investors are cautioned not to place undue reliance on such forward-looking statements. The Company disclaims any obligation to update any such factors or to publicly announce the result of any revisions to any of the forward-looking statements contained herein to reflect future events or developments. All dollar amounts stated herein are in US dollars unless otherwise indicated.

The management’s discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). The following discussion of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements for the year ended December 31, 2010 together with notes thereto. As used in this quarterly report, the terms "we", "us", "our", and the "Company" mean FACT Corporation, unless the context clearly requires otherwise.

General Overview

FACT Corporation predominantly operates in the functional food industry through its wholly-owned subsidiary, Food and Culinary Technology Group Inc., (“FACT Group”) developing, licensing and supplying turnkey functional bake mixes to customers who manufacture, distribute, and market bakery and pasta products to consumers through a variety of conventional and alternative channels including retail, food service and specialty markets. Presently the Company’s primary revenue stream is generated by FACT Group from the sale of these functional bake mixes in a wholesale format. During the fall of 2010, the Company launched a new line of products for sale in a 1 lb format both direct to the consumer via the internet and for sale in retail grocery locations in North America under its brand Nutrition First™. Presently FACT Group has secured in excess of 500 points of distribution for its new retail product line.

The Company previously had minimal operations through its wholly-owned subsidiary, Wall Street Real Estate Ltd. (“WSRE”), which generated revenues through the rental and sub-lease of office space in Calgary, Alberta. These leasing operations ceased in August 2010 when the head lease for the office space expired. Currently, WSRE has no operations, however it holds title to a recreational vehicle which was purchased to be used by FACT Group in its promotional marketing activities.

During the month of August 2010, the Company reactivated its dormant subsidiary, FACT Products Inc., in order to undertake the development of a line of nutritional supplements to be initially marketed and sold into international markets either under our own name or packaged according to customer specifications. Sales to international customers under this

division commenced in November 2010. Additionally, the Company intends to develop a line of products that are complementary to sales of our core line of mixes during fiscal 2011.

Liquidity and Capital Resources

During the most recently completed nine month period ended September 30, 2011, the Company carried increased inventory levels from $79,045 at December 31, 2010 to $129,278 at September 30, 2011. Inventory on hand increased, as a result of anticipated orders from one of the key customers for our line of commercial premix products. The Company also carries a certain amount of packaging and raw materials on hand in respect to its line of consumer focused products under its Nutrition First brand. Accounts payable - trade in total continued to reflect an increased balance as compared to year end figures from $367,813 at December 31, 2010 to $479,225 at September 30, 2011. See Note 8 to the Financial Statements.

The Company was able to successfully and timely collect accounts receivable in the period, which funds were used to reduce accounts payable and for general operating expenses, reducing accounts receivable from $200,371 at December 31, 2010 to $124,174 at the period ended September 30, 2011.

During the period, the Company received proceeds from short term loans totaling $188,274 to assist with operational shortfalls, and the purchase of a recreational vehicle for use in the Company’s marketing programs commencing fall 2011 and throughout fiscal 2012. The Company also received a further operating line of credit for amounts up to $50,000 from a company controlled by one of our officers and directors for use in expanding the business of the FACT products division. During the quarter, the Company settled a total of $2,907,690 in loans, notes and various accounts payable, including amounts received during the year, by the issuance of a total of 38,769,197 shares of the Company’s class A common stock at 0.075 per share and wrote down a total of $127,915 in aged payables, contributing substantially to a reduction in both short and long term liabilities. The Company anticipates that it will be required to continue to seek external sources of funding in order to meet our ongoing capital requirements until such time as the Company can obtain revenues in sufficient amounts to meet all inventory purchase requirements and general operating expenses. Subsequent to September 30, 2011, the Company received additional funding by way of a further line of credit in the total amount of $112,826 from an arm’s length third party for use in assisting the Company in retiring payables in a more expeditious manner.

The Company anticipates it will require between $1,500,000 and $4,000,000 over the next twelve months to successfully implement our 2011 through 2013 strategic plan, which includes significant product development and commercialization efforts, marketing studies and category analysis, marketing plans and sales efforts, a national consumer awareness and public relations campaign, concepts for development, manufacturing and distribution of a line of our own food products for specific restricted dietary needs, expanded management resources and support staff and other day to day operational activities. The Company may require additional funds beyond the $1,500,000 to $4,000,000 above, over the next three years; to assist in realizing its goals should it not achieve anticipated bench marks over the 2011, 2012 and 2013 fiscal years. The amount and timing of additional funds required cannot be definitively stated as at the date of this report and will be dependent on a variety of factors. As of the filing of this report, the Company has been successful in raising funds required to meet our existing revenue shortfall for the funding of our current operations. Funds have been raised through private loans, equity financing and conventional bank debt, as well as through the sale of certain active and passive investments. The Company anticipates revenues generated from its functional food business and its nutraceutical business will greatly reduce the requirement for additional funding; however, we cannot be certain the Company will be successful in achieving revenues from those operations. Furthermore the Company cannot be certain that we will be able to raise any additional capital to fund our ongoing operations.

The Company is actively seeking to raise such funds and has taken steps to retire debt in order to locate suitable financing sources, but at present has not yet secured the financing.

Results of Operations

Nine month period ended September30, 2011 as compared to the nine month period ended September 30, 2010

The following table sets forth our consolidated net revenue and gross profit from the sale of functional food premix for the periods indicated:

	Nine month periods ended September 30,
	2011			2010			Change
Net revenue from Functional food premix	$	840,057		$	557,527			50.68	%
Gross Profit on Functional food premix	$	167,098		$	117,928			41.69	%
Gross Profit Rate		19.90	%		21.15	%		(5.91)	%

Net revenue from Natural supplement products	$	841,949		$	-			-
Gross Profit on Natural supplement products	$	143,013		$	-			-
Gross Profit Rate		16.99	%		-			-

Net revenues and gross profit: Net revenues from Functional food premix for the nine month period ended September 30, 2011 increased $282,530 or 50.68%, to $840,057 from $557,527 for the same period ended September 30, 2010. The increase to net revenues is attributable to three key factors: (a) increased sales to existing customers; (b) sales of finished products to new customer accounts; and, (c) sales of our line of 1 lb Nutrition First line of mixes. Sales of commercial premixes to existing customers over the same reporting periods ended September 30, 2011 and 2010 increased 49% from $557,527 to $561,200. Sales to new customers of finished goods and Nutrition First products during the nine month period ended September 30, 2011 totaled $273,316 with no comparative sales in the prior fiscal quarter. Gross margin on sales of functional foods and products during the quarter ended September 30, 2011 totaled $167,098 as compared to $117,928 in 2010, an increase of over 41%.

In addition, FACT Products recorded sales of $841,949 during the nine month period ended September 30, 2011, with no comparative sales in the nine months ended September 30, 2010. Costs of goods sold totaled $698,937, with a gross margin of approximately 17%.

There were no revenues recorded as rental income during the nine month period ended September 30, 2011, with $47,198 being recorded during the nine months ended September 30, 2010.

Legal services: During the nine month period ended September 30, 2010, the Company received a $7,000 payment, which was released from a previously established escrow account to be applied directly against legal fees incurred from prior periods, as a result of a legal settlement concluded in 2009 with one of the plaintiffs and filed under a consent order with the courts in February 2010. As a result, the Company reported a recovery of legal fees of $2,182 in the nine month period ended September 30, 2010 compared to fees of $1,642 for the nine month period ended September 30, 2011. During the quarter ended September 30, 2011, the Company negotiated a reduction to an accounts payable related to marketing expenses and an amount of $3,242 has been recorded as other income - Gain on Forgiveness of Debt as compared to $12,276 recorded during the same nine month period in the prior fiscal year, which amount represented a negotiated reduction to certain outstanding legal bills.

General and administrative expenses: General and administrative expenses related to operations in the functional foods business increased from $185,829 for the nine month period ended September 30, 2010 to $247,362 for the same period ended September 30, 2011, while consulting fees remained consistent of $90,000. General and administrative expenses included in our total reported figures of $593,670 included $170,244 during the nine month period ended September 30, 2011 related to the operation of FACT Products representing salaries and other expenses as compared to $Nil in the prior comparative quarter.

Interest expenses: Interest expense increased during the comparative quarters from $127,569 (2010) to $196,580 (2011), as the Company secured additional funds in the form of loans to assist with operations, and the total outstanding balances on which interest expense was calculated remained higher than in prior periods.

Loss on debt settlement: $969,230 (2010 – Nil) is related to expenses incurred in respect of certain debt settlement agreements entered into during the period whereby the Company issued shares of its common stock at a deemed price of $0.075 per share to settle a total of $2,907,690 in loans, notes and accounts payable. The trading price of the Company’s common stock on the date of issue was $0.10 so that the Company was required to record an additional expense as a result of the settlement.

Marketing expense: Marketing expenses for our existing and new product lines including the maintenance of our e-commerce website and marketing and media plans involving social media and conventional marketing, totaled $104,133 for the nine months ended September 30, 2011, as compared to $80,375 for the nine month period ended September 30, 2010.

Net loss: As a result of the foregoing, our net loss for the nine month period ended September 30, 2011 increased to $1,672,133 as compared to $786,043 for the same period ended September 30, 2010.

Off- Balance Sheet Arrangements

The Company presently does not have any off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A smaller reporting company is not required to provide the information required by this Item.

ITEM 4T. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in rules and forms adopted by the Securities and Exchange Commission ("SEC"), and that such information is accumulated and communicated to management, including the Principal Executive Officer and Principal Financial Officer, to allow timely decisions regarding required disclosures. Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based upon that evaluation, our Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no changes (including corrective actions with regard to significant deficiencies or material weaknesses) in our internal controls over financial reporting that occurred during the quarter ended September 30, 2011, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

As at the date of this report the Company is not aware of any pending or contemplated legal proceedings.

ITEM 1A. RISK FACTORS

A smaller reporting company is not required to provide the information required by this Item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no unregistered sales of equity securities during the quarter that were not reported on our regulatory filings with the SEC on Form 8-K.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. (REMOVED AND RESERVED)

ITEM 5. OTHER INFORMATION

None

ITEM 6. EXHIBITS

Number		Description	Reference
3.1(i)		Articles of Incorporation, as amended	Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation’s Annual Report on Form 10-KSB for the year ended December 31, 1990
3.1(ii)		Articles of Amendment to Articles of Incorporation, filed with the State of Colorado Secretary of State on November 26, 2001	Incorporated by reference to the Exhibits previously filed with FACT Corporation’s Annual Report for Form 10-KSB for the year ended December 31, 2002
3.1(iii)		Articles of Amendment to Articles of Incorporation, filed with the State of Colorado Secretary of State on February 8, 2002	Incorporated by reference to the Exhibits previously filed with FACT Corporation’s Annual Report for Form 10-KSB for the year ended December 31, 2002
3.2		Amended Bylaws	Incorporated by reference to the Exhibits previously filed with Capital Reserve Corporation’s Annual Report on Form 10-KSB for the year ended December 31, 1994
10.1		2008 Stock Option and Stock Award Plan	Incorporated by reference to the Exhibits previously filed with FACT Corporation’s Definitive 14C on August 22, 2008
31.1		Section 302 Certification - Principal Executive Officer	Filed herewith
31.2		Section 302 Certification - Principal Financial Officer	Filed herewith
32.1		Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
32.2		Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002	Filed herewith
101.INS	XBRL Instance Document		Filed herewith
101.SCH	XBRL Taxonomy Extension Schema Document		Filed herewith
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document		Filed herewith
101.LAB	XBRL Taxonomy Extension Label Linkbase Document		Filed herewith
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document		Filed herewith
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document		Filed herewith

SIGNATURES

Pursuant to the requirements 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.

		FACT CORPORATION

Date:	November 21, 2011	By:	/s/ Jacqueline Danforth
		Name:	Jacqueline R. Danforth
		Title:	Chief Executive Officer, President (Principal Executive Officer)

Date:	November 21, 2011	By:	/s/ Jacqueline Tucker
		Name:	Jacqueline Tucker
		Title:	Chief Financial Officer (Principal Accounting Officer)

FACT CORP - FORM 10-Q - November 21, 2011

Attached files

FACT CORP Reports