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EXCEL - IDEA: XBRL DOCUMENT - PACIFIC SANDS INCFinancial_Report.xls
EX-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. - PACIFIC SANDS INCpacificexh321.htm
EX-31.1 - CHIEF EXECUTIVE OFFICER CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - PACIFIC SANDS INCpacificexh311.htm
EX-31.2 - CHIEF FINANCIAL OFFICER CERTIFICATION OF PERIODIC FINANCIAL REPORT PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - PACIFIC SANDS INCpacificexh312.htm


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 

FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 
For the quarterly period ended 
  December 31, 2014
 
OR

o
TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from ___________________________ to ___________________________

Commission file number 000-29483
 
(Exact Name of Registrant as specified in its charter)

Nevada
88-0322882
(State or Other Jurisdiction of Incorporation or Organization) 
(IRS Employer Identification No.) 
 

4611 Green Bay Road
Kenosha, WI
53144
(Address of Principal Executive Offices)
(Zip Code)

Issuer’s Telephone Number, Including Area Code:  (262) 925-0123
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 o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  o    No x  
 
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)
 
 Large accelerated filer o
 Accelerated filer  o
 Non-accelerated filer o
 Smaller reporting company  x
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   Yes o   No x
  
The number of shares outstanding of each of the issuer's classes of common equity, as of February 13, 2015 are as follows:
 
Class of Securities
Shares Outstanding
Common Stock, $0.001 par value
74,391,386
 
 
 

 
 
TABLE OF CONTENTS
 
PART I  FINANCIAL INFORMATION
   
Page
     
 Item 1. 
Financial Statements
3
     
 
Balance Sheets as of December 31, 2014,  (unaudited) and June 30, 2014
3
     
 
Statements of Operations for the Three and Six Months Ended December 31, 2014, and 2013 (unaudited)
4
     
 
Statements of Cash Flows for the Six Months Ended December 31, 2014, and 2013 (unaudited)
5
     
 
Notes to Financial Statements (unaudited)
6
     
 Item 2.
Management Discussion and Analysis of Financial Condition and Results of Operations
16
     
 Item 3.
Quantitative and Qualitative Disclosures About Market Risk
19
     
 Item 4.
Controls and Procedures
20
     
PART II  OTHER INFORMATION
     
 Item 1.
LEGAL PROCEEDINGS
21
     
 Item 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
21
     
 Item 3.
DEFAULTS UPON SENIOR SECURITIES
21
     
 Item 4.
MINE SAFETY DISCLOSURES
21
     
 Item 5.
OTHER INFORMATION
21
     
 Item 6.
 SIGNAT  EXHIBITS
22
     
 SIGNATURES 
22

 
2

 


PACIFIC SANDS, INC.
BALANCE SHEETS
DECEMBER 31, 2014, AND JUNE 30, 2014
 
ASSETS
 
 
   
December 31,
2014
   
June 30,
2014
 
Current assets:
 
(Unaudited)
       
Cash and cash equivalents
 
$
15,492
   
$
266,190
 
Trade receivables, net of allowances for doubtful accounts of $25,000 and $11,425
   
182,086
     
344,562
 
Inventories
   
270,624
     
259,423
 
Other current assets
   
126,791
     
17,835
 
Total Current Assets
   
594,993
     
888,010
 
                 
Property and equipment, net
   
238,484
     
191,255
 
Other Assets
   
2,468
     
2,820
 
                 
Total Assets
 
$
835,945
   
$
1,082,085
 
                 
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
                 
Current liabilities:
               
Accounts payable
 
$
508,177
   
$
411,313
 
Customer Deposits
   
20,000
     
-
 
Accrued expenses
   
50,016
     
54,111
 
Deferred rent expenses
   
-
     
8,800
 
Current portion of notes payable and capital leases, less debt discount of $53,968 and $55,790
   
309,943
     
346,815
 
Embedded conversion derivative liability
   
118,917
     
68,298
 
                 
Total Current Liabilities
   
1,007,053
     
889,337
 
                 
 Notes payable, less current portion
   
244,580
     
230,123
 
Total Liabilities
   
1,251,633
     
1,119,460
 
                 
                 
Stockholders' deficit
               
Preferred series A stock (1,000,000 shares authorized, 0 shares issued and outstanding)
   
-
     
-
 
Common stock (200,000,000 shares authorized, 72,682,746 and 66,811,354 shares issued and outstanding.)
   
72,682
     
66,811
 
Additional paid in capital
   
6,001,174
     
5,710,231
 
Accumulated deficit
   
(6,489,544)
     
(5,814,417)
 
Total Stockholders' Equity
   
(415,688)
     
(37,375)
 
                 
Total Liabilities and Stockholders' Equity
 
$
835,945
   
$
1,082,085
 
 
See accompanying notes.

 
3

 
 
PACIFIC SANDS, INC.
STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2014, AND 2013
(UNAUDITED)
 
   
Three months ended
December 31,
   
Six months ended
December 31,
 
   
2014
   
2013
   
2014
   
2013
 
                                 
Net sales
 
$
831,677
   
$
727,732
   
$
1,317,722
   
$
1,265,085
 
Cost of sales
   
500,173
     
    431,821
     
801,536
     
749,030
 
                                 
Gross profit
   
331,504
     
295,911
     
516,186
     
516,055
 
                                 
Selling and administrative expenses
   
447,623
     
347,627
     
1,041,086
     
556,419
 
                                 
Loss from operations
   
(116,119)
     
(51,716)
     
(524,900)
     
(40,364)
 
                                 
Other income (expense)
                               
Other income
   
727
     
300
     
1,270
     
709
 
Gain (loss) on derivative liability
   
(12,776)
     
-
     
8,101
     
-
 
Interest expense
   
(90,167)
     
(10,158)
     
(159,598)
     
(21,121)
 
                                 
Loss before income taxes
   
(218,335)
     
(61,574)
     
(675,127)
     
(60,776)
 
                                 
Income taxes
   
-
     
-
     
-
     
-
 
 
Net loss
 
$
(218,335)
   
$
(61,574)
   
$
(675,127)
   
$
(60,776)
 
                                 
Loss per share:
                               
Basic
 
$
*
   
$
*
   
$
(.01)
   
$
*
 
Diluted
 
$
*
   
$
*
   
$
(.01)
   
$
*
 
                                 
Weighted average shares outstanding:
                               
Basic     71,973,054       64,397,085       71,239,631       64,481,868  
Diluted     71,973,054       64,397,085       71,239,631       64,481,868  
 
*Less than $.01
See accompanying notes.
 
 
4

 
 
PACIFIC SANDS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2014, AND 2013
(UNAUDITED)
             
   
2014
   
2013
 
Cash flows from operating activities:
           
Net loss
 
$
(675,127)
   
$
(60,776)
 
Adjustments to reconcile net loss to net cash provided by (used in) operating activities -
               
Depreciation and amortization
   
35,540
     
31,942
 
Accretion of debt discount
   
71,823
     
-
 
Stock options
   
63,478
     
31,739
 
Common shares issued for interest
   
45,333
     
-
 
Common shares issued for services
   
99,722
     
-
 
Deferred Rent
   
(8,800)
     
(8,800)
 
(Gain) loss on derivative
   
(8,101)
     
-
 
Changes in assets and liabilities -
               
Trade accounts receivable
   
162,476
     
(38,787)
 
Inventories
   
(11,201)
     
(20,830)
 
Other assets
   
(11,883)
     
(2,329)
 
Deferred Revenue
   
20,000
     
-
 
Accounts payable and other current liabilities
   
92,769
     
105,367
 
                 
  Net Cash Provided by (Used in) Operating Activities
   
(123,971)
     
37,526
 
                 
Cash flows from investing activities:
               
     Purchases of equipment
   
(10,316)
     
(15,831)
 
     Prepaid brand development and other costs
   
(96,720)
     
-
 
  Net Cash Used in Investing Activities
   
(107,036)
     
(15,831)
 
                 
Cash flows from financing activities:
               
Convertible notes payable
   
70,000
     
-
 
Proceeds from notes payable
   
159,640
     
140,957
 
Repayment of notes payable and long term obligations
   
(249,331)
     
(239,476)
 
                 
  Net Cash Provided by (Used in) Financing Activities
   
(19,691)
     
(98,519)
 
                 
Net decrease in cash and cash equivalents
   
(250,698)
     
(76,824)
 
                 
Cash and cash equivalents:
               
Beginning of period
   
266,190
     
90,040
 
                 
End of period
 
$
15,492
   
$
13,216
 
 
See accompanying notes.
 
 
5

 
 
PACIFIC SANDS, INC.
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 2014, AND 2013
(UNAUDITED)
 
   
2014
   
2013
 
Supplemental disclosures of cash flow information:
           
Cash paid during the period for:
           
 Interest
 
$
48,201
   
$
20,557
 
 Income taxes
 
$
-
   
$
-
 
                 
Supplemental disclosure of non-cash financing and investing activities
               
                 
      Conversion of debt to equity
 
$
88,280
   
$
-
 
      Acquisition of stock for note payable
 
$
-
   
$
31,000
 
      Capital lease for equipment
 
$
72,453
   
$
-
 
 
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, 2014  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 2014 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") 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.

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 product 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.

 
7

 
 
PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS

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 $35,540 and $31,942 during the six months ended December 31, 2014, and 2013, respectively.

Revenue Recognition - Revenue is recognized when the related products are shipped unless the customer is under a bill-and-hold arrangement. Under a bill-and-hold arrangement revenue is recognized when the product is manufactured, invoiced and set aside in a specifically designated finished goods area. Upon invoicing under this arrangement ownership has passed to the buyer with no residual warranty obligation or right of return. All customers under a bill-and-hold arrangement have committed to purchases and have specifically requested they be on a bill-and-hold arrangement. In all cases goods are transferred to a designated finished goods fulfillment location under a fulfillment arrangement and are complete and ready for shipment. These bill-and-hold goods are either privately labeled or set aside exclusively for the customers use.

Advertising and Promotional Costs - Advertising and promotion costs are expensed as incurred.

Income Taxes – The Company adopted section 740 of the FASB Accounting Standards Codification. The Company accounts for income taxes under Section 740-10-30 of the FASB Accounting Standards Codification, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.  Under this method, deferred tax assets and liabilities are based on the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.  Deferred tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets will not be realized.  Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.  The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the Statement of Operations in the period that includes the enactment date.

Section 740-10-25 addresses the determination of whether tax benefits claimed or expected to be claimed on a tax return should be recorded in the financial statements.  Under Section 740-10-25, the Company may recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by the taxing authorities, based on the technical merits of the position.  The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than fifty (50) percent likelihood of being realized upon ultimate settlement.  Section 740-10-25 also provides guidance on de-recognition, classification, interest and penalties on income taxes, accounting in interim periods and requires increased disclosures.  The Company had no material adjustments to its liabilities for unrecognized income tax benefits and does not believe there are uncertain tax positions according to the provisions of Section 740-10-25.
 
The Company’s income tax returns for the year’s ending June 30, 2014, 2013, and 2012, are subject to examination by the IRS and related states, generally for three years after filed.

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 $25,000 are adequate as of December 31, 2014.
 
 
8

 
 
PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
 
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 and stock options are not included in the computation of the weighted average number of shares outstanding for dilutive 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.
  
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 – In May 2014, the FASB issued Accounting Standards Update No. 2014-09, Revenue from Contracts with Customers (ASU 2014-09), which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP.
 
The standard is effective for annual periods beginning after December 15, 2016, and interim periods therein, using either of the following transition methods: (i) a full retrospective approach reflecting the application of the standard in each prior reporting period with the option to elect certain practical expedients, or (ii) a retrospective approach with the cumulative effect of initially adopting ASU 2014-09 recognized at the date of adoption (which includes additional footnote disclosures).  We are currently evaluating the impact of our pending adoption of ASU 2014-09 on our consolidated financial statements and have not yet determined the method by which we will adopt the standard in 2017.

 
9

 
 
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 December 31, 2014, the Company has incurred cumulative losses of $6,489,544.  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 December 31, 2014, and June 30, 2014, consisted of the following:
 
   
December 31,
2014
   
June 30,
2014
 
Raw materials
 
$
228,961
   
$
219,222
 
Finished goods
   
41,663
     
40,201
 
Total
 
$
270,624
   
$
259,423
 

5.               PROPERTY AND EQUIPMENT
 
Property and equipment at December 31, 2014, and June 30, 2014, consisted of the following:
 
   
December 31,
2014
   
June 30,
2014
 
Furniture
 
$
35,997
   
$
35,997
 
Manufacturing equipment
   
287,349
     
210,483
 
Office equipment
   
55,543
     
54,435
 
Leasehold improvements
   
90,116
     
85,320
 
Computer software
   
52,150
     
52,150
 
Less accumulated depreciation and amortization
   
(282,670)
     
(247,130)
 
Property and equipment, net
 
$
238,484
   
$
191,255
 
 
 
10

 

PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS

6.               ACCRUED EXPENSES
 
Accrued expenses at December 31, 2014, and June 30, 2014, consisted of the following:
 
   
December 31,
2014
   
June 30,
2014
 
Accrued compensation
 
$
40,742
   
$
37,295
 
Accrued payroll withholding taxes and penalties
   
1,791
     
3,354
 
Accrued employee health insurance
   
206
     
386
 
Accrued sales tax
   
12
     
-
 
Accrued interest
   
7,265
     
13,076
 
Total
 
$
50,016
   
$
54,111
 
 
7.               NOTES PAYABLE AND CAPITAL LEASE OBLIGATIONS

Long term obligations at December 31, 2014, and June 30, 2014, consisted of the following:
 
   
December 31,
2014
   
June 30,
2014
 
Promissory note – unrelated parties
   
35,000
     
53,800
 
Convertible notes (3)
   
121,000
     
63,000
 
Notes payable – stockholders
   
220,000
     
304,000
 
Promissory note – related party
   
-
     
65,000
 
Note payable – former executive officer
   
31,424
     
55,863
 
Promissory Note – Kenosha Area Business Alliance
   
82,980
     
91,065
 
Note payable – Capital Access (1)
   
60,420
     
-
 
Capital Lease (2)
   
57,667
     
-
 
Debt discount
   
(53,968)
     
(55,790)
 
Total obligations
   
554,523
     
576,938
 
Less current maturities
   
(309,943)
     
(346,815)
 
 Total long-term liabilities
 
$
244,580
   
$
230,123
 
 
 
11

 
 
The scheduled annual maturities for notes payable and capital lease obligations are as follows for the years ending December 31,
 
2015
 
$
309,943
 
2016
   
187,110
 
2017
   
28,430
 
2018
   
20,242
 
2019
   
8,798
 
2020 and thereafter
   
-
 

(1) The Company issued a short term note payable for $120,840 to support current operations. This note bears 21.9% annual interest and matures on May 13, 2015. Under the terms of this agreement daily payments of $1,004 are required. The balance as of December 31, 2014 was $60,420.

(2) The Company entered into a capital lease agreement for new manufacturing equipment. The lease has a $1 purchase option upon maturity. The lease agreement was for $72,453. This note requires monthly payments of $2,466. This lease bears 18.4% annual interest and matures on July 7, 2017.

(3) The Company issued two convertible notes during the three months ended September 30, 2014 for a total of $70,000. The fair value of the conversion features are calculated at the time of issuance and the Company discounts the debt and records a derivative liability for the calculated value using a Black-Scholes option-pricing model. Changes in the fair value of the derivative liability thereafter are recorded in other income (expense) in the statement of operations. Upon conversion of the convertible debt to stock, the Company reclassifies the related embedded conversion derivative liability to paid-in capital. The Company recognizes expense for accretion of the convertible debentures discount over the term of the note. The Company has considered the provision of ASC 480, Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal converted to a variable number of the Company’s common shares.

Debt Discount – Costs incurred with parties who are providing short-term financing, which include the fair value of an embedded derivative conversion, are reflected as a debt discount and are amortized over the life of the related debt. When the debt is repaid, the related debt discount is recorded as additional interest expense and the related derivative liability is relieved into additional paid in capital.

At December 31, 2014, convertible notes totaled $121,000 of which $53,968 was attributable to the discount on debt. For the period ended December 31, 2014, $71,823 of the debt discount was amortized and recorded as interest expense.

At December 31, 2014, a portion of the convertible debt was converted into equity. $12,000 was converted into 600,000 shares of common stock, $11,280 is the portion of the derivative that was written off to equity and $3,518 of the debt discount was amortized and recorded as interest expense.

 
12

 
 
The following table presents the embedded conversion derivative liabilities, the Company’s only financial liabilities measured and recorded at fair value on the Company’s balance sheet on a recurring basis, and their level within the fair value hierarchy as of December 31, 2014:

   
Level 1
   
Level 2
   
Level 3
 
Embedded conversion derivative liability:
                 
December 31, 2014
  $ -     $ -     $ 118,917  

The following table reconciles for the period ended December 31, 2014, the beginning and ending balances for financial instruments that are recognized at fair value in the financial statements:

Balance at June 30, 2014
  $ 68,298  
Issued during period ending December 31, 2014
    70,000  
Reductions in fair value due to conversion of Convertible Debentures into common stock
    (11,280 )
Gain on fair value adjustments to embedded conversion derivative liabilities
    (8,101 )
Balance of embedded conversion of derivative liability as of December 31, 2014
  $ 118,917  

8.               STOCKHOLDERS’ DEFICIT

Transactions for the six months ended December 31, 2014, are as follows:     

On July 1, 2014, the Company issued 175,000 shares of common stock for $7,000 for payment of interest on a note payable.

On July 4, 2014, the Company issued 500,000 shares of common stock for $15,000 for payment of interest on a note payable.

On July 9, 2014, the Company issued 1,934,400 shares of common stock to an outside consulting company for prepayment of services to be rendered of $77,376.

On July 18, 2014, the Company issued 288,467 shares of common stock to officers of the company for $11,539 for payment of compensation.

On July 31, 2014, the Company issued 120,192 shares of common stock to an officer of the company for $4,808 for payment of compensation.

On August 8, 2014, the Company issued 1,625,000 shares of common stock to a related party for $65,000 to convert a note payable.

On October 1, 2014, the Company issued 120,000 shares of common stock to an employee for $6,000 as payment for compensation.

On October 4, 2014, the Company issued 300,000 shares of common stock for $15,000 as payment of interest on a note payable.

On November 17, 2014, the Company issued 208,333 shares of common stock for $8,333 as payment of interest on a note payable. 

On December 31, 2014, the Company issued 600,000 shares of common stock for $12,000 to convert a portion of a convertible note payable.

 
13

 
 
PACIFIC SANDS, INC.
NOTES TO FINANCIAL STATEMENTS
 
9.               LOSS PER SHARE

Basic 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
December 31,
   
Six months ended
December 31,
 
                       
   
2014
   
2013
   
2014
   
2013
 
                         
Net loss - basic
 
$
(218,335)
   
$
(61,574)
   
$
(675,127)
   
$
(60,776)
 
Interest expense on conversion of promissory notes
   
-
     
-
     
-
     
-
 
Net loss diluted
   
(218,335)
     
(61,574)
     
(675,127)
     
(60,776)
 
Weighted average shares - basic
 
 
71,973,054
   
 
64,397,085
   
 
71,239,631
   
 
64,481,868
 
Weighted average shares - diluted
 
 
71,973,054
   
 
64,397,085
   
 
71,239,631
   
 
64,481,868
 
Loss per share
                               
Basic   
 
$
  *
   
$
*
   
 $
(.01)
   
$
*
 
Diluted    
 
$
*
   
$
*
   
 $
(.01)
   
$
*
 
                                                                                        
*Less than $.01

Anti-dilutive securities not included in net loss per share calculation:

   
Six months ended December 31,
 
   
2014
   
2013
 
Stock options
    3,174,000       -  
Convertible debt
    14,400,000       -  

 
14

 
 
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 basis 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 December 31, 2014 and June 30, 2014 are as follows:
 
   
December 31,
2014
   
June 30,
2014
 
Net operating loss carryforwards
 
$
1,756,000
   
$
1,473,000
 
Deferred compensation
   
13,000
     
23,000
 
Deferred rent expense
   
-
     
4,000
 
Accounts receivable allowance
   
10,000
     
5,000
 
Valuation allowance
   
(1,779,000)
     
(1,505,000)
 
Net deferred tax asset
 
$
--
   
$
--
 
 
At December 31, 2014, the Company has net operating loss carry-forwards for Federal tax purposes of approximately $3,848,000 which, if unused to offset future taxable income, will expire in years beginning in 2018.
 
11.             Concentrations

For the period ended December 31, 2014, and December 31, 2013, the Company had two customers that represented more than 10% of the Company’s sales. For the period ended December 31, 2014, the Company’s two largest customers accounted for 38% and 33% of sales, respectively and account receivable amounts are 50% and 0%, respectively. For the period ended December 31, 2013, the Company’s two largest customers accounted for 53% and 11% of sales, respectively and account receivable amounts are 50% and 5%, respectively.
   
12.             Subsequent Events
 
On January 23, 2015, the Company converted $12,000 of its convertible debt into 674,157 shares of common stock.
 
On January 20, 2015, Judson Just stepped down as Chief Financial Officer.
 
On January 29, 2015, the Company converted $15,000 of its convertible debt into 1,034,483 shares of common stock.
 
 
15

 
 
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.

The Company markets and sells its product lines directly, 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 as well as dozens of the top environmentally-oriented websites.

 
16

 
 
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 believes the Company must continue to provide new and innovative products and branding to the consumer in order to grow its business. Research and product development activities, designed to enable sustained organic growth, continued to carry a high priority during the past fiscal year. While many of the benefits from these efforts will not be realized until future years, management believes these activities demonstrate the Company’s commitment to future growth. The Company has entered into a service agreement with an outside marketing development group in which the outside marketing development group provides the Company with consulting services to assist in enhancing the value of the Company’s current products and facilitate change and innovation for existing products branded by the Company.

Management intends to continue the aggressive marketing and sale of its products through a widening base of retail outlets, distribution centers, OEM arrangements and private label manufacturing 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, issuing convertible debt 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.
  
RESULTS OF OPERATIONS

Results for the three months ending December 31, 2014, compared to the three months ending December 31, 2013.

For the three months ended December 31, 2014, net sales were $831,677, an increase of 12% over net sales of $727,732 for the three months ended December 31, 2013. This change was due to an increase in private label product sales.

For the three months ended December 31, 2014, costs of sales were $500,173 compared to $431,821 for the same period in the previous fiscal year.  The Company’s gross margin decreased from 41% for the three months ended December 31, 2013 to 39% for the current fiscal quarter due to increases in raw material and labor costs.
 
 
17

 
 
For the three months ended December 31, 2014 and 2013, selling and general administrative expenses were $447,623 and $347,627, respectively. This 23% increase in operating expenses is due to a continued investment into sales and marketing efforts.
 
Interest expense for the three months ended December 31, 2014 was $90,167 an 89% increase from the $10,158 recorded for the three months ended December 31, 2013.  The increase in interest expense includes amortization of debt discount of $41,930 and higher rate short term debt secured to support current operations.
 
The Company recorded a net loss of $218,335 or $0.01 loss per share for the three months ended December 31, 2014 as compared to a net loss of $61,574 or less than $0.01 loss per share for the three months ended December 31, 2013.
 
Results for the six months ending December 31, 2014, compared to the six months ending December 31, 2013.

For the six months ended December 31, 2014, net sales were $1,317,722, an increase of 4% over net sales of $1,265,085 for the six months ended December 31, 2013. This was due to an increase in online sales and some smaller current private label customers,

For the six months ended December 31, 2014, cost of sales was $801,536 compared to $749,030 for the same period in the previous fiscal year.  The Company’s gross margin decreased from 41% for the six months ended December 31, 2013 compared to 39% for the current fiscal year to date. This decrease was due to increased cost of raw materials and labor.

For the six months ended December 31, 2014, and 2013, selling and general administrative expenses were $1,041,086 and $556,419, respectively, or a 47% increase. The increase is due to continued investment into sales promotion, and marketing research for brand development.

Interest expense for the six months ended December 31, 2014, was $159,598 compared to $21,121 for the six months ended December 31, 2013.  This 87% increase is a result of amortization of debt discount of $71,823 and financing of short-term debt.

The Company recorded a net loss of $675,127 or $0.01 loss per share for the six months ended December 31, 2014, compared to a net loss of $60,776 or less than $0.01 loss per share for the six months ended December 31, 2013.
 
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.
 
 
18

 
 
At December 31, 2014, the Company had current assets of $594,993 and total assets of $835,945, compared to June 30, 2014 when current assets were $888,010 and total assets were $1,082,085.
    
Current liabilities at December 31, 2014, were $1,007,053 as compared to $889,337 at June 30, 2014. Current liabilities include accounts payable, current portion of notes payable, accrued expenses, and customer deposits. The Company currently has $20,000 of customer deposits. The customer deposits represent 50% of the total order. These deposits are non-refundable since they are for custom ordered products. The Company will recognize the deposit as revenue upon completion of the order.

Non-current liabilities include a $25,000 note payable due to an unrelated party of the Company, a note payable to Kenosha Area Business Alliance for $66,064, a note payable to a shareholder for $120,000, and a capital lease for $33,516 as compared to June 30, 2014, non-current liabilities included a note payable to a former executive officer totaling $10,474, a note payable to the Kenosha Area Business Alliance totaling $74,649, a note payable to an unrelated party totaling $25,000, and a note payable to a shareholder totaling $120,000.

Net cash used by operating activities during the six months ended December 31, 2014, was $123,971 compared to $37,526 provided by operating activities during the six months ended December 31, 2013.
 
Net cash used in financing activities for the six months ended December 31, 2014, was $19,691. During the six months ending December 31, 2014, the Company received proceeds from new debt of $229,640. During the six months ended December 31, 2014, the Company repaid $249,331 of long term and short term debt. 

During the six months ended December 31, 2014, the Company used $107,036 in investing activities, representing $10,316 for the purchase of property and equipment and $96,720 used for the development, marketing, and branding of product lines for the Company.

On December 31, 2014, the Company had an accumulated deficit of $6,489,544 and total stockholders’ deficit of $415,688.
  
At December 31, 2014, the Company had negative working capital of $171,108, a decrease from the June 30, 2014, working capital of $192,748. The negative working capital is due to the company financing growth through the use of vendor credit terms and short term debt.

Total liabilities of $1,251,633 at December 31, 2014, is an increase from $1,119,460 at June 30, 2014, due to short term financing needs.

Total stockholders’ deficit of $415,688 at December 31, 2014, has increased from a deficit of $37,375 at June 30, 2014.
 
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 consistent 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.

 
19

 
 
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.
 
THE COMPANY HAS EXPERIENCED LOSSES FROM OPERATIONS SINCE COMMENCING OPERATIONS:
While the Company has not been profitable since commencing operations in 1994, for the quarter ending December 31, 2014, the Company continued to make significant investments in its branding and marketing efforts to expand the Company’s selling demographics.

POSSIBLE DIFFICULTY FINANCING PLANNED GROWTH:
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 incorrect, 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.

 
20

 
 
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.
 
Changes in Internal Control over Financial Reporting

There have not been any changes in the Company's internal control over financial reporting during the quarter ended December 31, 2014, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
 
PART II OTHER INFORMATION

Item 1 – LEGAL PROCEEDINGS

None

Item 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

Item 3 – DEFAULTS UPON SENIOR SECURITIES

None
 
Item 4 – MINE SAFETY DISCOSURES

None

Item 5 – OTHER INFORMATION

None

 
21

 

Item 6 – 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 Defintion
   
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: February 13, 2015
By:
/s/ Michael Michie                               
   
Michael Michie
Chief Executive Officer
 
 
 
 
 
22