UNITED
STATES
Securities
and Exchange Commission
Washington,
D.C. 20549
FORM
10-KSB-A
AMENDMENT
NO. 1
x
ANNUAL
REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
fiscal year ended June 30, 2006
o
TRANSITION
REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For
the
transition period from _________________ to __________________
Commission
File No. 000-15260
Element
21 Golf Company
(Name
of
Small Business Issuer in its Charter)
|
Delaware
|
|
88-0218411
|
|
(State
or Other Jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer I.D. No.)
|
200
Queens Quay East, Unit #1, Toronto, Ontario, Canada, M5A
4K9
(Address
of Principal Executive Offices)
Registrant’s
Telephone Number: 416-362-2121
Not
Applicable
(Former
name and former address, if changed since last Report)
Securities
Registered under Section 12(b) of the Exchange Act: None.
Securities
Registered under Section 12(g) of the Exchange Act: Common Stock, one-cent
($0.01) Par Value
Check
whether the issuer is not required to give reports pursuant to Section 13 or
15(d) of the Exchange Act. o
Check
whether the Issuer (1) filed all reports required to be filed by Section 13
or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the Registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes o No
x
Check
if
disclosure of delinquent filers in response to Item 405 of Regulation S-B is
not
contained in this form, and no disclosure will be contained, to the best of
Registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10- KSB or any amendment
to
this Form 10-KSB. o
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
Issuer’s
revenues for its most recent fiscal year: June 30, 2006 = $51,569
As
of
October 12, 2006 there were approximately 91,874,457 shares of our common voting
stock held by non-affiliates having a market value of approximately $17,088,649
on such date. Without asserting that any director or executive officer of the
issuer, or the beneficial owner of more than five percent of the issuer’s common
stock, is an affiliate, the shares of which they are the beneficial owners
have
been deemed to be owned by affiliates solely for this calculation.
As
of
October 12, 2006, there were 99,630,554 shares of common stock of the Issuer
outstanding.
EXPLANATORY
NOTE: THIS 10-KSB-A (AMENDMENT NO. 1) TO ELEMENT 21 GOLF COMPANY’S FORM 10-KSB
IS BEING FILED IN ORDER TO REPLACE THE FORM 10-KSB FILED ON OCTOBER 13, 2006
IN
ITS ENTIRETY AS SUCH FORM WAS FILED INADVERTENTLY PRIOR TO ITS COMPLETION.
ONLY
THE INFORMATION SET FORTH IN THIS AMENDMENT NO.1 TO FORM 10-KSB SHOULD BE RELIED
UPON AS THE INFORMATION CONTAINED IN THE COMPANY’S ORIGINALLY FILED FORM 10-KSB
WAS INCOMPLETE.
Element
21 Golf Company
10-KSB
for the Year Ended June 30, 2006
Table
of Contents
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PART
I
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|
1
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|
ITEM
1.
|
DESCRIPTION
OF BUSINESS
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1
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|
ITEM
4.
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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17
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PART
II
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18
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ITEM
5.
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MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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18
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ITEM
6.
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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21
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ITEM
7.
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FINANCIAL
STATEMENTS
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27
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|
ITEM
8.
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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27
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|
ITEM
8A
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CONTROLS
AND PROCEDURES
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27
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ITEM
8B
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OTHER
INFORMATION
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28
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PART
III
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28
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ITEM
9.
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DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH
SECTION
16(a) OF THE EXCHANGE ACT
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28
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ITEM
10.
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EXECUTIVE
COMPENSATION
|
30
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|
ITEM
11.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
|
32
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ITEM
12.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
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35
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ITEM
14.
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PRINCIPAL
ACCOUNTANT FEES AND SERVICES
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37
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Signatures
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31
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Financial
Statements
|
F-1
|
PART
I
CAUTIONARY
STATEMENT REGARDING
FORWARD-LOOKING
INFORMATION
Under
the
Private Securities Litigation Reform Act of 1995, companies are provided with
a
“safe harbor” for making forward-looking statements about the potential risks
and rewards of their strategies. Forward-looking statements often include the
words “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate” or similar
expressions. In this Form 10-KSB, forward-looking statements also
include:
| · |
statements
about our business plans;
|
| · |
statements
about the potential for the development and public acceptance of
new
products;
|
| · |
estimates
of future financial performance;
|
| · |
predictions
of national or international economic, political or market conditions;
|
| · |
statements
regarding other factors that could affect our future operations or
financial position; and
|
| · |
other
statements that are not matters of historical
fact.
|
These
statements may be found under “Management’s Discussion and Analysis or Plan of
Operations” and “Description of Business” as well as in this Form 10-KSB
generally. Our ability to achieve our goals depends on many known and unknown
risks and uncertainties, including changes in general economic and business
conditions. These factors could cause our actual performance and results to
differ materially from those described or implied in forward-looking
statements.
These
forward-looking statements speak only as of the date of this Form 10-KSB. We
believe it is in the best interest of our investors to use forward-looking
statements in discussing future events. However, we are not required to, and
you
should not rely on us to, revise or update these statements or any factors
that
may affect actual results, whether as a result of new information, future events
or otherwise. You should carefully review the risk factors described in other
documents we file from time to time with the Securities and Exchange Commission,
and also review our Quarterly Reports on Form 10-QSB.
ITEM
1. DESCRIPTION
OF BUSINESS
Business
Development.
Element
21 Golf Company (the “Company,” “E21,” “we,” “us” or terms of similar meaning)
was originally formed as OIA, Inc., a Delaware corporation, in 1986. In 1992,
the Company changed its name to Biorelease Corp., and was engaged in the
business of biotechnology from 1992 through 1995. From mid-1995 through
September 2001, the Company sponsored a number of early-stage
ventures.
In
June
2001, the Company changed its name from Biorelease Corp. to BRL Holdings,
Inc.
Effective
November 9, 2001, we acquired 100% of the outstanding common stock of AssureTec
Systems, Inc., a Delaware corporation (“Systems”), in a stock-for-stock
transaction. We issued 6,354,000 shares of restricted common stock and converted
outstanding options to acquire 4,750,000 shares of Systems common stock into
options to acquire 4,750,000 shares of the Company’s common stock.
On
April
1, 2002, we exchanged 2,852,000 shares of Systems common stock that had been
issued in connection with the Systems acquisition for
5,704,000 shares of our common stock,
from
substantially all the founders and consultants from whom our interest in Systems
was initially acquired. In addition, options to acquire 4,750,000 shares of
our
common stock then held by these individuals were cancelled. As a result of
these
transactions and the issuance of additional shares of Systems to employees
upon
the exercise of stock options, our ownership of Systems decreased to 34.2%
of
Systems as of June 30, 2003.
On
June
12, 2002 we incorporated Tech Ventures, Inc. (now named AssureTec Holdings,
Inc.
or “AssureTec”) and transferred all our assets and liabilities to AssureTec in
exchange for 100% ownership of AssureTec common stock. At that time, our only
business was the business of AssureTec.
In
September, 2002, we
acquired 100% of the outstanding common stock of Element 21 Golf Company, a
Delaware corporation (“Element 21”), in exchange
for
42,472,420 restricted shares of our common stock (“the
Acquisition”). We also converted
options
to acquire 6,432,000 shares of Element 21 common stock into options to acquire
6,432,000 shares of our common stock. This Acquisition has been accounted for
as
a “reverse” acquisition using the purchase method of accounting, as the
shareholders of Element 21 owned
a
majority of the outstanding stock of
our
Company immediately following the Acquisition. Following the Acquisition, we
changed our name to Element 21 Golf Company.
We
now
own approximately 5.1% of the issued and outstanding stock of AssureTec, which,
as a result of a share exchange with the prior stockholders of Systems, now
owns
100% of the outstanding stock of Systems. We have agreed to distribute these
shares on a pro rata basis to our shareholders of record as of October 4, 2002
(excluding shareholders who received shares of our common stock in connection
with the Acquisition). We anticipate that this distribution will occur as soon
as possible after all appropriate documentation has been prepared and filed
with
the Securities and Exchange Commission.
During
the fiscal year of 2006, the Company issued an aggregate of 12,143,313 shares
of
common stock to consultants as payment for services rendered.
Recent
Events
On
July
31, 2006 (the “Initial Closing Date”), the Company agreed to a $4 million equity
financing by entering into two Series B Convertible Preferred Stock Subscription
Agreements (each a “Subscription Agreement” and collectively the “Subscription
Agreements”) with each of Clearline Capital, LLC and Vladimir Goryunov (each a
“Purchaser” and collectively, the “Purchasers”). Each Subscription Agreement
provides for the sale by the Company to the applicable Purchaser of 117,648
shares of the Company’s Series B Convertible Preferred Stock, par value $0.10
per share (the “Series B Preferred Stock”), and warrants to purchase an
aggregate of 17,647,059 shares of the Company’s common stock, in exchange for
and in consideration of an aggregate investment by each Purchaser of $2 million
in cash (each Purchaser’s “Investment Amount”), which amount is to be invested
by each Purchaser in two equal $1 million installments, the first of which
occurred on the Initial Closing Date and the second of which will occur at
a
subsequent closing to occur on or before November 30, 2006 (the “Subsequent
Closing”, and the date of such Subsequent Closing, the “Subsequent Closing
Date”); provided that the Company satisfies the necessary condition precedent to
the Subsequent Closing as described below.
On
the
Initial Closing Date, each Purchaser invested $1 million in the Company in
return for 58,824 shares of Series B Preferred Stock and two warrants (the
terms
of which are more fully described below) to purchase an aggregate of 8,823,530
shares of common stock. The Subscription Agreements obligate each Purchaser
to
invest the remaining $1 million of its Investment Amount (each Purchaser’s
“Additional Investment Amount”) in the Company no later than November 30, 2006,
subject only to the Company converting at least 80% of the aggregate outstanding
principal amount evidenced by those certain convertible promissory notes issued
by the Company between February 2006 and July 31, 2006 (collectively, the
“Promissory Notes”) into shares of common stock prior to the Subsequent Closing
Date. In exchange for each Purchaser’s Additional Investment Amount, the Company
will issue to each Purchaser an additional 58,824 shares of Series B Preferred
Stock and two additional warrants (the terms of which are more fully described
below) to purchase an aggregate of an additional 8,823,529 shares of common
stock.
On
the
Initial Closing Date the Company granted each Purchaser (i) one warrant to
purchase 3,750,000 shares of common stock at an exercise price of $0.22 per
share in the event the warrant is exercised on or prior to July 31, 2007, and
$0.28 per share in the event the warrant is exercised on or after August 1,
2007, and (ii) one warrant to purchase 5,073,530 shares of common stock at
an
exercise price of $0.28 per share (each an “Initial Warrant”, and collectively,
the “Initial Warrants”). Assuming that the conditions precedent to the
Subsequent Closing are satisfied, on the Subsequent Closing Date, the Company
will grant each Purchaser (i) one additional warrant to purchase 3,750,000
shares of common stock at an exercise price of $0.22 per share in the event
the
warrant is exercised on or prior to July 31, 2007, which increases to $0.28
per
share in the event the warrant is exercised on or after August 1, 2007, and
(ii)
one additional warrant to purchase 5,073,530 shares of common stock at an
exercise price of $0.28 per share (each a “Subsequent Warrant”, collectively,
the “Subsequent Warrants” and collectively with the Initial Warrants, the
“Warrants”). The Warrants expire on January 31, 2009. The exercise prices of the
Warrants are subject to adjustment in the event of certain dilutive issuances,
stock dividends, stock splits, share combinations or other similar
recapitalization events. The Warrants may only be exercised by the payment
of
the applicable exercise price to the Company in cash, no cashless exercise
is
permitted.
The
terms of the Initial Warrants and the Subsequent Warrants are
identical.
Business
of the Issuer
Element
21 was formed on September 18, 2002 to acquire partially-developed golf
technology and to design, develop and bring to market golf club shafts and
golf
heads made from a patented scandium alloy exclusively licensed to the Company
(the “E21 Alloy”). The active ingredient in the E21 Alloy is Scandium, which is
element No. 21 in the Periodic Table of Elements. E21 Alloy shafts are believed
to exhibit properties that out-perform titanium with a higher strength-to-weight
ratio of up to 25% and a specific density advantage of 55%. The E21 Alloy is
lighter, stronger and more cost effective than titanium. This advanced metal
technology was originally developed in the former Soviet Union for military
applications during the 1970s. Scandium alloys have been used in
intercontinental ballistic missiles, jet aircraft, the Mir space station and
most recently, in the International Space Station. The Company is attempting
to
commercialize Scandium’s use in golf shafts and golf heads. During the past
year, we solidified our sales and marketing strategies and initiated an
international public relations event that has generated coverage in over 100
publications worldwide. Our team was bolstered by the hiring of addition golf
executives, including industry veteran Bill Dey, who was hired to run the
company’s golf program. E21’s Eagle One shafts made their first appearance on
the PGA Tour and were tested by a large number of PGA Tour professionals and
are
now in play on the tour on regular basis. In addition, the Company received
over
150 applications to distribute E21 golf equipment.
In
September, 2002, Element 21 acquired from Dr. Nataliya Hearn, our current Chief
Executive Officer, and David Sindalovsky, a consultant to the Company (the
“Assignors”), the exclusive right to use, produce and sell the E21 Alloy for
golf club shafts and golf heads. Although these rights do not cover all mixes
of
scandium alloy, the Company believes that any scandium alloy outside the range
of its patent-protected rights cannot be used to produce golf club shafts or
heads in an economically feasible manner. Upon completion of the Acquisition,
the previous officers and directors of the Company resigned and Dr. Hearn became
the Company’s President/ CEO and a Director and Jim Morin and Gerald Enloe also
became Directors. Mr. Morin also served as Vice President and Chief Financial
Officer of the Company prior to his resignation from the Board on July 31,
2006.
To
date,
the Company has operated solely through strategic consultants and without
full-time employees. Consultant Nataliya Hearn, PhD, who is our CEO and
President, is based in Toronto, Canada, and oversees the Company’s engineering,
alloy supply and production. Consultant David Sindalovsky is responsible for
material sourcing, manufacturing and production path developments, and
supervising the engineering and design of the golf club components. Bill Dey,
who joined the Company in January, 2006, as Executive Vice President and General
Manager, is an accomplished golf industry executive who has been involved in
the
industry since the late 1980’s. John Grippo, a consultant to the Company who was
appointed as the Company’s Chief Financial Officer in March, 2006, has over 15
years experience as a CFO for public and private companies ranging in size
up to
$250 million in annual revenues. This past year, the Company also retained
the
services of Mark Myrhum as Senior Designer. Mr. Myrhum has been providing club
design solutions to the golf industry for more than 15 years. Golf clubs
designed by Mr. Myrhum have been played by U.S. and British Open champions,
Masters and PGA champs, top-ranked PGA players and leading LPGA and Senior
PGA
money winners. After an 8-year career as the Principle Engineer and Chief
Designer for Wilson Golf, Mark Myrhum started MCM Golf, Inc. in 1996. His
clients have included Wilson Sporting Goods, McHenry Metals, Carbite Golf,
MasterGrip, Tour Edge and others. After earning a Bachelors of Science degree
in
Engineering Mechanics from the University of Wisconsin-Madison, Mr. Myrhum's
career began at NASA Ames Research Center and the Goodyear Tire and Rubber
Company. Consultant Howard
Butler, PhD, is one of the world’s leading golf designers. Dr. Butler has done
extensive design work on the various types of clubs incorporating the Company’s
advanced scandium technology as well as laboratory testing and informal player
testing and assessments. Consultant Stephen Meldrum has 17 years senior
executive experience in international sales and licensing, and is handling
investor relations for the Company.
Additionally,
several sales executives have been retained as consultants tasked with business
development and building retail distribution channels. Professional player
relations are handled by Andy Harris.
The
Company believes that this structure is advantageous because it allows the
Company to avoid having large marketing, administrative and development
organizations in order to be responsive to fluctuations in the marketplace
that
have plagued other start-up golf companies.
The
Company has a strategic supply agreement with an affiliate of Kamensk-Uralsky
Metallurgical Works Joint Stock Company, located in a number of locations in
Russia, also known as OAO KUMZ. Under this agreement, concentrated scandium
will
be produced to the specification of the Company by the KUMZ affiliate. KUMZ
will
also transfer the latest innovations in scandium alloys to the Company as they
become available. KUMZ is a well-established, diversified producer of aluminum,
aluminum alloys and products for aerospace, shipbuilding, automotive, and other
industries. KUMZ is also the world’s largest facility specializing in scandium
alloy products.
Work in
scandium initially began 20-25 years ago with the development of scandium
aerospace alloys for fighter aircraft.
The
second strategic partner of the Company is Yunan Aluminum, which is in the
business of manufacturing precision tubing for outdoor recreation and sporting
markets. Yunan Aluminum was established in 1979 in South Korea, and now
manufactures, for parties other than the Company, about 80,000 pounds per month
of high quality products made of high strength aluminum alloys. In August 2003
the company reached an agreement with Yunan Aluminum to produce E21
Alloy
golf shafts and club components exclusively for the Company in South Korea.
Pan
Osprey, a Chinese manufacturer of OEM golf equipment specializing in high-end
golf clubs manufactured under license for some of the leading brand names in
golf, will manufacture a full line of clubs with proprietary designs from
Element 21's design labs when the Company begins commercial production of its
clubs, of which there can be no assurance. The planned lineup includes drivers,
fairway woods, a full range of irons, wedges, hybrid clubs, and putters.
Pursuant to the Company’s exclusive manufacturing agreement with Pan Osprey, the
Company will provide the raw materials from which Pan Osprey will manufacture
a
full line of clubs under the E21 brand name. The Company is also seeking to
expand its manufacturing capabilities in China to include other top tier
production facilities.
Golf
Products
We
believe that E21 Alloy golf products have outstanding potential in the industry
based on several factors:
| · |
Results
of player and robotic testing indicate E21 Alloy’s improved performance
over leading titanium clubs, and
|
| · |
Improved
distance and less dispersion, allowing longer more accurate results,
which
are impossible to achieve with current metals.
|
The
interest in the E21 Alloy has been supported by several performance and
marketing features:
| · |
The
E21 Alloy is strategically incorporated into the production of metal
woods, irons and putters can result in heads with a larger “sweet spot”
for more consistency and accuracy;
|
| · |
If
increased club head size is not required, the reduced density and
improved
strength allows flexibility in placing perimeter weighting that can
affect
the trajectory (flight path) of the
ball;
|
| · |
The
E21 Alloy is softer than titanium providing superior feel and workability
for the player;
|
| · |
The
E21 Alloy is lower in cost and easier to fabricate than
titanium;
|
| · |
The
specific yield strength advantage of the E21 Alloy over steel and
high-end
aluminum alloys enables the design of shafts at substantially reduced
weight and higher performance;
|
| · |
The
homogeneous nature of the E21 Alloy allows for consistent shaft
production, a problem inherent with graphite
shafts.
|
During
the early part of this past fiscal year, we completed the design and development
of several golf new products. These products included irons, wedges, putters,
hybrid clubs and a driver.
Robotic
and player testing was carried out and a limited volume of product was ordered
in late 2005. E21’s irons and hybrids clubs both won Player’s Choice Awards
given out in the spring of 2006 by Golfing Magazine.
In
December our new E21 Alloy driver received approval from the United States
Golf
Association (USGA). Subsequent robotic testing conducted at an independent
laboratory demonstrated repeatedly that the E21 Alloy driver was approximately
3
times more accurate than titanium drivers. The average dispersion for E21’s
driver was less than 7 yards off center compared to 22 yards for the titanium
drivers tested E21's driver, which has a much larger ball response hitting
area,
produced the lowest recorded angle of deviation off-center of just 1.6 degrees
compared to 4.2 degrees for titanium driver heads.
In
March
2005, the Company began test marketing full iron sets to retailers and golf
pro
shops. In April 2005, the Company entered into an agreement with The GolfWorks
for the sale of the Company’s E21 Alloy metal shafts for irons, utility clubs
and wedges. The GolfWorks has been providing club makers and other golf
equipment experts with a complete complement of proprietary club head designs,
and a full selection of brand name shafts and grips for more than 25
years.
Golf
Shafts
E21
Alloy
golf shafts provide the light weight and flexibility of graphite with the
favorable playing characteristics of steel. Steel dominates the shaft market
for
irons, while graphite is the most popular shaft material for metal woods.
Graphite shafts are generally more expensive than steel, and golfers often
experience inconsistency from club to club due to reproducibility problems
inherent with graphite. The Company has produced prototype E21 Alloy shafts
with
several flex strengths that have been tested initially with irons and accepted
as complying with the rules of golf by the United States Golf Association.
In
an
effort to bring the Company’s shafts to the PGA Tour, E21 retained the services
of Andy Harris as its PGA Tour Director. During the year Mr. Harris attended
most PGA Tour events providing custom fitted E21 shafts to over 30 PGA Tour
players. To date several players have used E21 shafts in official PGA,
Nationwide and Champions Tour events.
We
believe E21 Alloy shafts show improved performance in a number of respects
to
graphite and stainless steel shafts. E21 Alloy's inherent metallurgical
properties combined with a proprietary 25-step seamless production process
results in a shaft that is nearly perfectly symmetrical, unlike graphite and
stainless steel shafts. Many golf customers do not realize that steel shafts
are
welded creating a seam or spine that is not visible to the eye. The difference
in the tube wall thickness at the point of welding creates an imbalance, which
affects the consistency of shots. Similarly, the production process for graphite
shafts also results in inconsistencies through the shaft with similar associated
problems. The Company believes that the E21 Alloy provides greater accuracy
and
improved consistency from club to club.
The
tests
conducted by Golf Labs Inc. on behalf of the Company showed remarkable 10-20
yard distance improvement when E21 Alloy shafts are tested against the best
Graffaloy graphite and True Temper steel shafts. Of
even
greater significance were the test results that showed superior accuracy
afforded by this new E21 Alloy technology. The dispersion pattern of shots
hit
with a robotic arm yielded a dispersion factor that was 250% smaller than
popular steel and graphite shafts, when measured by the total square footage
of
the footprint of hit balls and their dispersion off-center. Although testing
results cannot predict actual performance with certainty, the Company believes
that these test results are meaningful.
Concurrent
with the development of the overall shaft design, the Company has developed
a
shock absorbing system under the trademark ShockBlokTM
which
redirects shaft vibration back into the club head, generating an added energy
kick for extra distance and reducing the amount of vibration transfer to the
player's hands. Golfing
has a negative effect on the body. High shock energy transferred by the steel
shafts to the player’s hands during a round of golf creates fatigue. For
frequent golfers, this can lead to stress injuries to a player’s hands, wrist,
elbows or shoulders, much like ‘tennis elbow’. According to an analysis
commissioned by a consultant to the Company, Dr. Howard Butler, along with
two
orthopedic physicians, during a typical round of golf, the extra energy
transmitted to the hands of a golfer using steel shafts is 300% higher than
the
E21 Alloy shafts. The Company also believes that most users of its shafts would
immediately notice the superior shock absorption and that the E21 Alloy also
contributes to a measurably superior feel as compared with steel and graphite
clubs.
The
market for golf shafts was estimated by Golfdatatech to be close to 30 million
units in the US and 60 million units worldwide in 1999. Golfdatatech estimates
that the size of the market for high performance premium shafts that the
Company’s E21 Alloy shafts will initially be targeting represents approximately
27 million units worldwide.
The
Company is currently test marketing shafts designed for irons through the
Clubmakers and GolfWorks catalogues and website. Design and engineering of
shafts for all other club heads (drivers, wedges, hybrids and putters) is
complete and limited production runs are currently being tested.
Clubhead
Designs and Features
The
Company has completed the design and engineering process for a full line of
clubs, from drivers to putters. Under the guidance of Mark Myrhum
and David Sindalovsky, design improvements are being made to streamline mass
production of the various golf components. Prototypes of these various clubs
are
now undergoing testing, and production tooling is well underway. The golf shafts
have undergone lab testing, including testing with a robotic arm at
Golf
Laboratories, Inc. in San Diego.
These
tests conducted to date have demonstrated favorable results for our E21 Alloy
clubs as compared with competitive products, including greater distance,
significant improvements in accuracy and consistency, and the “feel” of the
clubs themselves. Although test results cannot predict actual performance
results, the Company believes these test results are meaningful.
The
E21
driver has one of the most responsive face areas of any driver on the market,
and because the head and shaft are
both
made of the same patented E21 Alloy, the energy passes from the head to the
shaft at the same frequency, providing the golfer with a fully “harmonized” golf
club. This harmonization is a unique feature of the E21 golf clubs and has
been
trademarked as E21’s True Contact Signature™ Shots are consistently both “off
the centerline” and “along the centerline” giving the golfer a very tight,
concise landing pattern resulting in a high level of control and repeatability.
The E21 Alloy club head also creates less ball spin at the point of impact
for
greater
distance.
The
Company believes its club will be distinctly recognizable due to its unique
design features that include a louvered effect on the crown plate of the club.
These features create a corrugated effect that provides additional strength
to
the clubhead design and allows more freedom to move weight to strategic points
within the sole of the clubhead to improve distance and accuracy. As with any
object moving at a high speed, louvers provide aerodynamic stabilization
benefits. The Company used advanced modeling software to optimize clubhead
design.
The
Company’s Low Gravity LogicTM
irons
have a cavity back design with a hollow body filled with a patented high rebound
aerospace polymer insert that transfers more energy to the ball for livelier
performance and maintains a low center of gravity. The head geometry is designed
to leverage maximum performance from E21 Alloy shafts. The clubs also feature
variable face thickness with over six square inches of playing surface to
maximize the sweet spot of the clubface. A large sole plate helps the player
avoid hitting the ball fat. The mass of the head is closely aligned with the
launch angles delivered by the shaft during contact with the ball. To maximize
this benefit, the crown is back slanted by 15°.
The
clubs
are designed to allow professional club makers and PGA tour players to fine-tune
the club to their unique preferences. This is accomplished by removing the
E21
insignia on the back of the club, gaining access to a tubular
weight port
to add
up to 28 grams of additional weight to the clubhead while maintaining
its low
center of gravity.
The
E21
line of wedges includes clubs with 52 degree, 56 degree and 60 degree lofts
that
also feature the revolutionary new Eagle One shafts made from E21's patented
alloy.
The
wedges use E21’s patented new Contact Signature Tuned System (CST
SystemTM)
that
uses advanced modeling software to calculate and match the club head performance
to E21’s advanced E21 Alloy shafts in order to provide enhanced head
responsiveness. Through
an optimum balance of launch angle and spin rate, E21 has developed what it
believes are easy-to-hit wedges that provide improved feel, accuracy and
consistency from club to club. These wedges with the E21 shafts will offer
players a greater spin rate with a higher launch angle enabling them to stop
the
ball on the green.
The
muscle back design, with Twin Peaks elongated on the center axis of the club
back, offers a solid feel with an extremely consistent ball flight and
trajectory. This peaked muscle back design actually raises the center of gravity
behind the sweet spot for more carry distance on center hit shots. This design
acts to focus the transfer of energy into the sweet spot of the club face.
An
additional benefit from the element gated Twin Peaks design is its ability
to
track straight through sand or turf by controlling the displacement of the
ground beneath the club as contact is being made with the golf
ball.
The
weighted sole plate affords the capability to cut through even the worst rough,
and get the ball up in the air. Simultaneously, the
leading edge radius
insures a true contact signature with the ball even from a poor
lie.
Element
21’s first putter is a traditional and proven Newport design. The new putter
incorporates the advanced properties of the E21 Alloy in both the shaft and
head
of the new putter. The putter head incorporates an E21 Alloy insert, which
is
milled for superior contact with the ball. The E21 Alloy’s superior strength to
weight ratio over existing golf metals has allowed E21 to redistribute weight
in
the head of the putter to create a larger sweet spot, which in turn provides
substantial forgiveness on mis-hits.
The
E21
Alloy in both the shaft and putter head take advantage of the E21 Alloy’s soft
feel and spin reduction, which translates to reduced ball “skid” upon contact
with the ball, and allows the ball to begin rolling more quickly and easily
off
the face of the club. The Company believes that these features provide enhanced
distance control and a more accurate ball trajectory. Initial player testing
of
these new clubs has provided very positive feedback on the improved “feel” that
the putter provides over competitive offerings.
The
Element 21 Alloy’s Evolution in the Golf Industry
The
Company derives its name from the 21st
element
in the “Periodic Table of the Elements,” which is the unique metal “scandium”
(the beginning of a new millennium). Scandium, when mixed with other metals,
has
a higher strength-to-weight ratio than titanium, graphite, steel or aluminum
alloys. The rights to develop other products not related to the golf industry
were retained by the Assignors solely for their own benefit. All applications
of
scandium to golf products that are covered by the Assignors’ patents have been
acquired by the Company.
In
August
2003, the Company finalized its golf shaft design criteria through the use
of
the most advanced CAD/CAM computer software programs available. These systems
are used by the major aerospace companies to produce aircraft such as the
Advanced Tactical Fighter, America’s fighter jet for the 21st
century.
Utilizing the designs created and analyzed with this software, the Company’s
Korean manufacturer can produce golf shafts to the exacting standards of
advanced aerospace products. The manufacturer has capacity to process in excess
of 100,000 pounds of material per month which equates to approximately 450,000
golf shafts. The manufacturer has negotiated a $50,000 credit line with
preferential payment terms to begin full production of E21’s golf shafts. In
return, the Company has purchased and provided to the manufacturer the
semi-automatic testing and calibration equipment necessary to produce high
quality golf products on a full production basis.
In
April
2004, the Company announced the full implementation of a new Linear Forging
Process, a proprietary method utilized in the mass product ion of E21 Alloy
golf
shafts. The unique “Linear Forging Process” utilizes a pulsed energy system in
matching the structures’ natural frequency resonance to elongate the metals
grains with the least dimensional change to the golf shaft’s design. The
process’ secondary benefit is in providing aligned straightness. All of these
benefits are realized in just a few seconds, which results in high production
rates and significant cost reduction in an otherwise labor-intensive
operation.
In
September 2005, the Company completed negotiations with Pan Osprey Golf
Apparatus
Co,
Limited,
a Chinese manufacturer of high-end golf equipment that manufactures golf clubs
under license for a number of leading OEMs. The Company will provide Pan Osprey
with the raw materials, as well as the necessary knowledge transfer, to properly
work with this advanced metal alloy.
To
date,
the Company has produced a test inventory of E21 Alloy shafts under the E21
brand name, and Eagle One sub brand. The shafts are currently available for
sale
through catalog and online via the Golfworks, a company that sells wholesale
parts to club makers around the world. The Company is also pursuing the possible
development of traditional retail channels of distribution.
With
the
proceeds from its recently completed financings, the Company intends to commence
the production and roll-out of its proprietary E21 Alloy metal wood driver
with
an E21 Alloy shaft to be sold to the retail golfer through a direct marketing
program. Ultimately, the complete lineup of clubs will be made available through
traditional retail channels of distribution. In the alternative, the Company
may
choose to license its products to other OEMs rather than develop the E21 brand
name on its own.
Element
21’s Competitive Advantage
We
believe that we have a competitive advantage in our industry for the following
reasons:
| 1. |
License
and supply agreements for scandium metal alloys in place.
|
| 2. |
Longtime
association with the world’s largest producer of the highest quality
scandium master alloy.
|
| 3. |
Strategic
association with the world’s largest producer of scandium products, which
has over 20 years of experience in producing scandium metal alloy
billet,
extruded products, and forged products. Lowest production costs due
to
location, size, and experience, as well as the advantage of waste
control
during the production process.
|
| 4. |
Experienced
team of alloy developers, processing specialists, production specialists,
light metal sports equipment designers, and product marketing
specialists.
|
| 5. |
Knowledge
and association with several production paths of semi-finished and
finished scandium products.
|
| 6. |
Consulting
agreements with leading golf product development and marketing
experts.
|
| 7. |
Growing
demand for high performance golf
products.
|
| 8. |
Added
value to an OEM’s golf club products providing for a longer and more
accurate golf shots as tested against steel and graphite shafts
manufactured by Royal Precision, Apollo, AldilaR,
UST, PenleyR,
True TemperR
and GrafalloyR.
|
| 9. |
Advanced
proprietary clubhead designs that take full advantage of the unique
properties of the E21 Alloy, and offer superior performance to existing
alternatives.
|
| 10. |
Significant
barriers to entry due to the complex nature of working with scandium,
and
patent protection for golf
applications.
|
| 11. |
Trademarked
ShockBlokTM
shock reduction system in E21 Alloy
shafts.
|
Scandium
Metal - “Element 21”
Scandium,
a little-known element, was developed primarily in secret aerospace programs
in
the former Soviet Union. It was used as an additive to traditional aluminum
alloys to create the highest strength scandium metal alloys and alloys with
significantly enhanced weldability. These super-alloys were used in missiles
and
MIG-29 aircraft and are currently used in MIG-31 and Sukhoi-27 aircraft. We
believe that the rights we have acquired from the Assignors cover scandium
metal
alloys that have achieved the highest “strength-to-weight ratio” for golf
applications.
Scandium
is most often found in nature as an oxide in relatively low concentrations,
from
5 to 100 parts per million. It is rarely concentrated in nature due to its
lack
of affinity to combine with the common ore-forming anions. Therefore, it is
usually derived as a by-product from uranium and other mineral leaching
operations. The cost of scandium is directly related to the relatively high
cost
of processing and its lack of widespread use in commercial products. It has
not
been commercially mined in the United States or Europe because only small
quantities have been used, primarily in high intensity halide lamps, lasers,
electronics, high tech ceramics, and research applications.
However,
in the former Soviet Union, scandium has been produced in significantly larger
quantities since it was an additive to traditional aluminum alloys to produce
ultra high strength scandium metal alloys for military aerospace uses. In
Russia, there is now less scandium production due to reduced military spending.
Currently however, Russia still possesses the world’s largest stockpile of pure
scandium oxide, which is available to the Company through the rights it acquired
from Assignors. When the current supply is exhausted, scandium can be obtained
through reactivating production of various waste streams of already identified
ore processing sites in Russia. In addition, several possible North American
scandium production sites have also been identified, if there is sufficient
demand to justify the investment.
History
of Commercial Scandium Metal Alloys
Scandium
metal alloys for sports applications were developed using the expertise of
Russian and Ukrainian scientific institutes. To date, more than 75 tons of
scandium metal master alloy have been sold for the production of over 2,500,000
pounds of final product, including several sports products, and for a variety
of
civil and government funded transportation related development
programs.
In
1997,
Easton Sports’ baseball and softball bats constituted the first production of a
large-scale scandium alloy sports product. The ultra light high-strength Easton
bats, known as the Scandium/Sc 7000 Redline series, quickly became the most
successful new product launch in Easton’s 75-year history. To date, the Company
believes that Easton has sold in excess of $1 billion of scandium metal alloy
baseball and softball bats. Easton then produced a weldable scandium metal
alloy
for use in bicycle frames, and handle bars. Both products have been highly
successful and the frame is now considered one of the lightest in the industry
and used by many top-racing teams. In addition to baseball bats and bicycle
frames, scandium golf shafts, metal wood drivers, putters, lacrosse sticks,
bicycle seat posts and handlebars and hockey stick prototypes have been
developed.
E21
Alloy - Product Advantages
The
E21
Alloy has advantages over other high strength aluminum and titanium alloys
and
composite materials, especially in heavily drawn and worked
products:
| · |
Up
to 50% strength increase over high-strength aluminum
alloys;
|
| · |
Over
20% specific strength advantage over titanium
alloys;
|
| · |
Significant
cost and design advantages over composite
materials;
|
| · |
Reduction
and elimination of surface
re-crystallization;
|
| · |
Increase
in weldability and weld strength;
|
| · |
Increase
in weld fatigue life of 200%;
|
| · |
Reduction
and elimination of hot-cracking in
welds;
|
| · |
Increased
plasticity, durability, and
formability.
|
Sports
Equipment
As
athletes and marketers demand improvement in sports equipment, designers push
material limitations when using existing metals and alloys. Most aluminum
products in the sports market today have alloy development origins from the
1930s, while other high-performance alloys were developed in the 1960s. Titanium
and composite materials have replaced aluminum in some sporting goods; however,
these materials are more expensive and more difficult to process. Consequently,
they have found major acceptance only in the highest end of the
market.
Our
objective is to develop and market new golf products with E21 alloys which
can
provide measurable advantages over existing high-end aluminum alloys, stainless
steel, titanium and composite materials.
Sales
and Marketing
This
product development effort has provided the Company with several sales and
marketing options. These options include the sale of semi-finished products
to
other original equipment manufacturers (OEMs), the sale of finished heads to
OEMs, and/or the Company’s own direct sale of branded E21 Alloy golf products to
the market place.
Currently,
E21 Alloy shafts are available to club makers and fabricators through the
Clubmakers and Golfworks
catalogues and web sites. Some initial inroads have also been made on a limited
basis to retail golf chains. As a product line unfolds, the Company will more
aggressively pursue the development of additional retail channels and sales
strategies.
As
the
various club designs and shafts are being updated, testing of these updated
products using a robotic arm will allow the company to validate the performance
improvements available through this advanced material design, and provide
documentation necessary to make substantive claims regarding the performance
of
the E21 lineup of clubs. It is anticipated that this testing will be conducted
on a regular basis at Golf Labs Inc. in San Diego.
E21
is
focused on attracting key retailers to carry its products, and for this reason
the Company’s previous plan to use an infomercial to introduce its products has
been postponed.
In
January 2006, E21 reported on its plans to drive a golf ball into orbit around
the Earth in celebration of the 35th anniversary of Alan B. Shepard Jr’s.
historic Apollo 14 Mission. Through the collaborative efforts of six nations
and
members of NASA, Canadian and Russian space agencies and the Rocket Building
Corporation Energia, every single record for distance in the golf industry
will
be shattered when one of the International Space Station’s astronauts will hit
an E21 golf ball around the world - using an E21, pure gold plated club. In
July
2006, a Flight Safety Certificate was signed by NASA approving the event for
Thanksgiving 2006. E21 expects that the event will continue to generate
international media coverage and interest from golfers around the world which
will in turn assist in the sale of E21 products in the future.
During
this past fiscal year, the Company contracted with two important international
distributors for the sale of its products in Australia and Europe. Headquartered
in Hamburg, Germany, Golf Professional Service GMBH (GPS) began selling E21
products in Germany, Austria, Switzerland, Spain and Portugal this summer.
GPS
has been marketing golf products in Europe and currently sells to over 1,200
pro
shops and retail outlets. In the summer edition of Golf House Golf Equipment
Catalogue, GPS placed an E21 driver on the full back cover of the catalogue's
customer address label side, calling the "Shock" Driver a Sensation. In
Australia and New Zealand, E21 also contracted with Power Sports International
(PSI). With their head office and warehouse located in Queensland, PSI has
13
sales representatives in South Australia, New South Wales, Queensland, Tasmania,
Northern Territory, Victoria, Western Australia and New Zealand. PSI is setting
up an extensive advertising program including the placement of ads in three
major golf publications, as well as in local press and state magazines. PSI
will
also be establishing a major Demo Day program with their agents, and will be
implementing a Tour program on the popular Australian PGA Tour.
Based
on
interest in the Company’s products from retailers, other golf companies and club
and shaft manufacturers in Asia, E21 management devised its future sales and
marketing strategy. Because E21 is in control of alloy production, product
manufacturing, patent protection, product design, and sales and marketing it
has
implemented a three-tiered marketing strategy that it feels will maximize
profits while maintaining control over its proprietary E21 Alloy. The
three-tiered strategy targets:
| · |
Retail
Sales -- equipment sales to a variety of domestic and international
retailers;
|
| · |
Component
Sales -- the selective sale of shafts and heads to other golf club
companies; and
|
| · |
Technology
Licensing -- limited licenses to off-shore golf component manufacturers.
|
In
preparation for sales, the Company established a new call-in and customer
service center, full assembly facilities, warehousing, and shipping and
receiving capabilities in March 2006. All business data generated can be
integrated into a comprehensive computerized tracking / database management
solution. This integrated system provides access to key information specific
to
running large-scale operations tailored to our needs as a golf company. The
Company has created a very cost-effective solution that will be highly scalable
in order to manage future growth.
Scandium
Raw Material Supply
The
raw
material that goes into production of the E21 Alloy comes from scandium oxide,
which has about 60% scandium metal content. Scandium oxide is used in the
production of “master alloy,” which is then added to nine other metals and other
alloy ingredients to create a concentration of approximately 0.001% - 10.00
%
scandium in the final alloy used in products. This is known as the E21 Alloy,
which has the technical advantages needed for production of high performance
equipment for sports, transportation, military and aerospace applications and
are the subject of the Assignors’ patents.
Because
of the experience and access to economic supply of scandium raw materials and
experience with the scandium alloys, the Company will initially rely on KUNZ
and
Yunan as sole suppliers and reprocessors of its precursor materials. However,
through its consultants, over time and with additional resources, of which
there
is no assurance, the Company intends to develop an independent resource for
supplying these materials and services.
Status
of Any Publicly Announced New Product or Service
The
Company’s web site, at
www.e21golf.com,
contains
its most recent press releases and financial reports as well as independent
test
results of the Company’s shafts against the leading high-performance golf shafts
in the world. For additional information or earlier press releases go to any
website’s financial bulletin board for Element 21 Golf Company (formerly BRL
Holdings, Inc. (OTCBB EGLF). None of the information contained on the Company’s
website is incorporated in this Form 10-KSB.
Competitive
Business Conditions
All
major
manufacturers of golf clubs, shafts and related equipment will be major
competitors of our planned business operations, and all have greater resources,
marketing capabilities and name recognition than we do. However, the Company
believes that it would be impossible for a competitor to use scandium alloys
in
golf club production without infringing on the two US patents exclusively
licensed to E21. The marketing and branding of the E21 Alloy has also received
a
high volume of world-wide media coverage, due to the upcoming golf shot from
the
International Space Station.
Sources
and Availability of Raw Materials
The
Company has a strategic supply agreement with an affiliate of OAO KUMZ. Under
this agreement, concentrated scandium alloy shall be produced to the
specification of the Company by the KUMZ affiliate. KUMZ also will transfer
the
latest innovations in scandium alloys to the Company as they become available.
KUMZ is a well-established, diversified producer of aluminum, aluminum alloys
and products for aerospace, shipbuilding, automotive, and other industries.
KUMZ
is also the world’s largest facility specializing in scandium alloy products.
Scandium work initially began 20-25 years ago with the development of scandium
aerospace alloys for fighter aircraft.
The
second strategic partner of the Company is Yunan Aluminum, which is in the
business of manufacturing precision tubing for outdoor recreation and sporting
markets. Yunan Aluminum was established in 1979 in South Korea, and now
manufactures, for customers other than the Company, about 80,000 pounds per
month of high quality products made of high strength aluminum alloys. Yunan
Aluminum intends to reprocess, in South Korea, alloy concentrate shipped by
KUNZ
on behalf of the Company and also intends to produce E21Alloy golf shafts
exclusively for the Company.
Shift
from Development to Sales
The
Company’s golf products are new to the market. The Company’s main focus is
shifting from the development to actual sales of scandium golf clubs. While
the
market is large, we cannot be sure that the Company’s products
will
achieve general market adoption. As of the date of this report, we have not
raised funds sufficient to significantly penetrate the golf market, although
our
recent financing will allow sufficient inventory production to supply key
retailers and introduce the E21 Alloy golf clubs to consumers across North
America.
Patents,
Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor
Contracts
The
Company does not hold direct title to any patents. However, when it acquired
Element 21, it acquired the exclusive right to use, produce and sell a specified
range of scandium alloy for golf club shafts and golf heads. Although these
rights do not cover all mixes of scandium alloy, the Company believes that
any
scandium alloy outside the range of its patent protected rights cannot be used
to produce golf club shafts or heads in an economically feasible manner. The
golf applications under these patent rights acquired by us in the Element 21
Acquisition are U. S. Patent Nos. 5,597,529 issued on January 28, 1997, and
5,620,662, issued on April 15, 1997, initially filed by Ashurst Technologies,
Inc. and acquired on January 7, 2001 by Nataliya Hearn and David Sindalovsky.
Need
for any Government Approval of Principal Products or
Services
We
believe there is no need for any government approval or regulation of our
products. The game of golf in the United States is regulated by the USGA. To
date the Company’s products are in compliance with USGA regulations. There may
be a need to comply with certain trade agreements with our strategic partners
outside of the United States of America.
Effects
of Existing or Probable Governmental Regulations
Sarbanes-Oxley
Act
On
July
30, 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (the
“Sarbanes-Oxley Act”). The Sarbanes-Oxley Act imposes a wide variety of
regulatory requirements on publicly held companies and their insiders. Many
of
these requirements will affect us. For example:
| · |
Our
chief executive officer and chief financial officer must now certify
the
accuracy of all of our periodic reports that contain financial
statements;
|
| · |
Our
periodic reports must disclose our conclusions about the effectiveness
of
our disclosure controls and procedures;
and
|
| · |
We
may not make any loan to any director or executive officer and we
may not
materially modify any existing
loans.
|
The
Sarbanes-Oxley Act has required us to review our current procedures and policies
to determine whether they comply with the Sarbanes-Oxley Act and the new
regulations promulgated there under. We will continue to monitor our compliance
with all future regulations that are adopted under the Sarbanes-Oxley Act and
will take whatever actions are necessary to ensure that we are in
compliance.
Penny
Stock
Our
common stock is “penny stock” as defined in Rule 3a51-1 of the Securities and
Exchange Commission (“SEC”). Penny stocks are stocks:
| · |
with
a price of less than five dollars per share;
|
| · |
that
are not traded on a “recognized” national exchange;
|
| · |
whose
prices are not quoted on the NASDAQ automated quotation system; or
|
| · |
in
issuers with net tangible assets less than $2,000,000, if the issuer
has
been in continuous operation for at least three years, or $5,000,000,
if
in continuous operation for less than three years, or with average
revenues of less than $6,000,000 for the last three years.
|
Section
15(g) of the Exchange Act and Rule 15g-2 of the Securities and Exchange
Commission require broker/dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain
a
manually signed and dated written receipt of the document before making any
transaction in a penny stock for the investor’s account. You are urged to obtain
and read this disclosure carefully before purchasing any of our shares.
Rule
15g-9 of the Securities and Exchange Commission requires broker/dealers in
penny
stocks to approve the account of any investor for transactions in these stocks
before selling any penny stock to that investor. This procedure requires the
broker/dealer to:
| · |
get
information about the investor’s financial situation, investment
experience and investment goals;
|
| · |
reasonably
determine, based on that information, that transactions in penny
stocks
are suitable for the investor and that the investor can evaluate
the risks
of penny stock transactions;
|
| · |
provide
the investor with a written statement setting forth the basis on
which the
broker/dealer made his or her determination; and
|
| · |
receive
a signed and dated copy of the statement from the investor, confirming
that it accurately reflects the investors’ financial situation, investment
experience and investment goals.
|
Compliance
with these requirements may make it harder for our stockholders to resell their
shares.
Reporting
Obligations
Section
14(a) of the Exchange Act requires all companies with securities registered
pursuant to Section 12(g) of the Exchange Act to comply with the rules and
regulations of the Securities and Exchange Commission regarding proxy
solicitations, as outlined in Regulation 14A. Matters submitted to stockholders
of our Company at a special or annual meeting thereof or pursuant to a written
consent will require our Company to provide our stockholders with the
information outlined in Schedules 14A or 14C of Regulation 14; preliminary
copies of this information must be submitted to the Securities and Exchange
Commission at least 10 days prior to the date that definitive copies of this
information are forwarded to our stockholders.
We
are
also required to file annual reports on Form 10-KSB and quarterly reports on
Form 10-QSB with the Securities Exchange Commission on a regular basis, and
will
be required to timely disclose certain material events (e.g., changes in
corporate control; acquisitions or dispositions of a significant amount of
assets other than in the ordinary course of business; and bankruptcy) in a
Current Report on Form 8-K.
You
may
read and copy any materials filed with the SEC at the SEC’s Public Reference
Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information on the operation of the Public Reference Room by calling the SEC
at
1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding issuers that file
electronically with the SEC at www.sec.gov .
Small
Business Issuer
The
integrated disclosure system for small business issuers adopted by the SEC
in
Release No. 34-30968 and effective as of August 13, 1992, substantially modified
the information and financial requirements of a “Small Business Issuer,” defined
to be an issuer that has revenues of less than $25,000,000; is a U.S. or
Canadian issuer; is not an investment company; and if a majority-owned
subsidiary, the parent is also a small business issuer; provided, however,
an
entity is not a small business issuer if it has a public float (the aggregate
market value of the issuer’s outstanding securities held by non-affiliates) of
$25,000,000 or more. We are deemed to be a “small business issuer.”
Research
and Development Expenses during Past Two Fiscal Years
During
the fiscal years ended 2006 and 2005 there were no research and development
costs incurred by the Company. Research and development costs do not include
unallocated consulting fees paid to consultants, nor development of production
and manufacturing paths. We anticipate that research and development funds
will
be required with respect to our planned business operations of the development
manufacture and sale of E21 Alloy golf clubs.
To
date,
the Company has relied on its consultants and their existing infrastructure
to
develop its initial products and has reflected these costs as operating costs.
We anticipate increased spending related to research and development during
fiscal year 2007.
Costs
and Effects of Compliance with Environmental Laws
Neither
we nor any of our subsidiaries
have yet
reached the stage of development where environmental issues have arisen;
however, we cannot yet determine what, if any, of these types of regulations
will affect our planned business operations of the development, manufacture
and
sale of E21 Alloy golf clubs.
Further,
because the existing agreements with KUNZ and Yunan do not require the Company
to retain responsibility for any environmental compliance and/or impact, the
Company believes it has no significant exposure to environmental compliance
nor
any other governmental regulation or oversight
Number
of Employees
As
of
September 30, 2006 we have
no
employees with all individuals instead engaged as consultants to the Company.
The key individuals include:
| · |
Nataliya
Hearn, PhD, our CEO and President, is based in Toronto, Canada and
oversees day to day operations of the Company including financing,
administration and engineering.
|
| · |
John
Grippo, CPA, our CFO, is based in Scarsdale, New York, and oversees
the
financial aspects of the Company.
|
| · |
Bill
Dey, Executive Vice President, is based in Toronto, Canada, and operates
as the Company’s General Manager and is responsible for all aspects of the
Company’s sales and marketing
strategy.
|
| · |
David
Sindalovsky, based in Toronto, Canada, is responsible for material
sourcing, manufacturing, engineering and the Company’s relationship with
strategic partners in Asia and
Russia.
|
| · |
Mark
Myrhum operates as the company’s Senior Designer and is the main liaison
with Chinese manufacturers.
|
| · |
Andy
Harris is responsible for PGA tour presence and PGA player relations.
|
| · |
Joe
Wieczorek of The Media Group develops golf related publications and
exposure for the Company’s
products.
|
| · |
Howard
Butler of The Golf Science provides R&D design, engineering and
modeling services to the Company.
|
This
consultant structure allows the Company to avoid having large fixed-cost
marketing, administrative and development organizations in order to be
responsive to fluctuations in the marketplace that have plagued other start-up
golf companies.
ITEM
2. DESCRIPTION OF PROPERTY
In
April
2006, the Company moved into new offices at 200 Queens Quay East, Unit #1,
Toronto, Canada. The new space is leased from Queens Quay Investments, Inc.
for
a three year lease. The lease calls for monthly payments of $1,927 plus GST
for
finished offices measuring a total of approximately 1,927 square feet.
The
Company’s inventory is currently managed by Horton’s and Sons, located in
Markham, Canada. Horton’s will manage E21’s call-in and customer service center
(including credit checks), and also provides complete assembly facilities,
warehousing, and shipping and receiving capabilities.
ITEM
3. LEGAL
PROCEEDINGS
We
are
not a party to any pending legal proceedings, our property is not the subject
of
a pending legal proceeding and to the knowledge of our management, no
proceedings are presently contemplated against us by any federal, state or
local
governmental agency.
Further,
to the knowledge of our management, no director or executive officer is party
to
any action in which any has an interest adverse to us.
ITEM
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
The
Company held a Special Meeting of Stockholders (the “Special Meeting”) on May 8,
2006.
At
the
Special Meeting, the Company’s shareholders voted on a proposal to amend the
Company’s Amended Certificate of Incorporation to increase the number of
authorized shares of our common stock from 100 million to 300 million shares.
(The Certificate of Amendment is attached as Annex A to the Company’s Proxy
Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
filed
on April 7, 2006.) The shareholders voted to approve the proposal by a vote
of:
168,745,480 shares for and 2,767,613 shares against with no shares abstaining
from voting.
In
addition, at the Special Meeting, the Company’s shareholders voted on a proposal
to authorize the Board of Directors, in its discretion, to amend the Company’s
Amended Certificate of Incorporation to effect a reverse stock split of our
outstanding shares of common stock. (The Certificate of Amendment is attached
as
Annex B to the Company Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934 filed on April 7, 2006.) The shareholders voted
to approve the proposal by a vote of: 163,440,185 shares for and 7,802,908
shares with no shares abstaining from voting.
In
addition, at the Special Meeting, the Company’s shareholders voted on a proposal
to authorize the Board of Directors, in its discretion, to approve the Element
21 Golf Company 2006 Equity Incentive Plan (“Plan”) and to authorize 20,000,000
shares of the Company’s common stock for issuance thereunder. (The Plan is
attached as Annex C to the Company’s Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934 filed on April 7, 2006.) The shareholders
voted to approve the Plan by a vote of: 129,997,800 shares for and 4,177,143
shares against. A total of 37,068,150 shares abstained from voting or were
broker non-votes.
PART
II
ITEM
5. MARKET
FOR COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market
Information
There
has
never been any established trading market for our shares of common stock and
there is no assurance that a trading market will develop. Our common stock
is
presently quoted on the Over-the-Counter Bulletin Board (“OTCBB”) of the
National Association of Securities Dealers under the symbol “EGLF” as reflected
below. No assurance can be given that any market for our common stock will
develop in the future or be maintained. If an established trading market ever
develops in the future, the sale of our common stock pursuant to Rule 144 of
the
Securities and Exchange Commission, or otherwise, by members of our management
or others may have a substantial adverse impact on any such market.
The
range
of high and low bid quotations for our common stock during each of the last
two
fiscal years and the most recent interim quarter is shown below. Prices shown
in
the table represent inter-dealer quotations, without adjustment for retail
markup, markdown, or commission, and do not necessarily represent actual
transactions.
| |
High
|
Low
|
|
Fiscal
Year Ended June 30, 2005
|
|
|
|
First
Quarter
|
$0.11
|
$0.07
|
|
Second
Quarter
|
$0.10
|
$0.08
|
|
Third
Quarter
|
$0.09
|
$0.06
|
|
Fourth
Quarter
|
$0.06
|
$0.06
|
|
Fiscal
Year Ended June 30, 2006
|
|
|
|
First
Quarter
|
$0.14
|
$0.04
|
|
Second
Quarter
|
$0.11
|
$0.06
|
|
Third
Quarter
|
$0.43
|
$0.08
|
|
Fourth
Quarter
|
$0.24
|
$0.14
|
| |
|
|
|
Interim
Period Ended October 11, 2006
|
$0.20
|
$0.17
|
Holders
The
number of record holders of our common stock as of September 30, 2006 was
approximately 1,866 registered shareholders.
This
number does not include an undetermined number of stockholders whose shares
are
held in brokerage accounts or by other nominee holders.
Dividends
We
effected a two-for-one stock split in the form of a stock dividend on all our
outstanding shares of common stock (including shares issued in connection with
the Acquisition) on the record date of October 4, 2002, which also resulted
in
similar adjustments to all of our shares of common stock underlying our
outstanding options. Except as otherwise indicated herein, all share and per
share data reflected in this Annual Report has been retroactively restated
to
reflect this dividend.
We
also
resolved to effect, by exemption from registration under the Securities Act
of
1933, as amended (the “Securities Act”) or by registration under the Securities
Act, a spin-off of our interests in AssureTec Holdings, Inc. to our shareholders
of record as of October 4, 2002 (excluding shareholders who received shares
of
the Company’s common stock in connection with the Acquisition of Element 21).
The Company currently is preparing the documentation necessary to implement
this
distribution.
At
a
Special Meeting of the Company’s stockholder on May 8, 2006, the stockholders
approved a resolution unanimously adopted by the Board of Directors to authorize
a series of 19 separate amendments to the Company's Certificate of Incorporation
in order to effect a reverse stock split of the outstanding shares of the
Company's common stock at each ratio of a minimum of 1 for 2, a maximum of
1 for
20, and at a ratio equal to 1 for each whole number between 2 and 20. The Board
of Directors was thereby given the discretion to unilaterally determine an
appropriate stock split ratio within a range of 1 for 2 and 1 for 20 and to
give
effect to the corresponding amendment of the Company's Certificate of
Incorporation which effects such stock split and to abandon each other amendment
adopted relating to the reverse stock split. Because the aggregate number of
shares of common stock would be reduced as a result of the reverse stock split,
if and when effected, the monetary per share value of each remaining share
of
common stock would increase and we anticipate that the number of holders of
the
Company’s common stock would decrease as a result of fractional shares created
by the reverse stock split. Consequently, any cash dividends that were to be
paid per share would increase proportionately on a per share basis as compared
to the cash dividend paid prior to the reverse stock split.
We
have
not paid any cash dividends on our common stock, and it is not anticipated
that
any cash dividends will be paid in the foreseeable future. The Board of
Directors intends to follow a policy of using retained earnings, if any, to
finance our growth. The declaration and payment of dividends in the future
will
be determined by the Board of Directors in light of conditions then existing,
including our earnings, if any, financial condition, capital requirements and
other factors.
Recent
Sales of Unregistered Securities
During
the three months ended September 30, 2005, the Company issued an aggregate
of
11,281,265 shares of common stock to twenty-four consultants in consideration
for services rendered in the aggregate amount of $779,539. The Company also
sold
warrants to purchase 1,000,000 shares of its common stock at a price of $0.08
per warrant, realizing proceeds of $80,000. The exercise price for shares
purchased under this warrant is $.15 per share. The shares and warrants were
issued in reliance on exemptions from registration pursuant to Section 4(2)
of
the Securities Act of 1933, as amended.
In
February 2006, the Company issued a warrant to purchase 1,000,000 shares of
the
Company's common stock at a price of $0.01 as part of the Company's repayment
of
outstanding indebtedness to a creditor of the company. The warrants vested
immediately and are exercisable for a three year period from the date of
issuance.
Between
January 17 and March 6, 2006, the Company issued 10% Convertible Promissory
Notes in the aggregate principal face amount of $540,000 to 15 individual
investors. Each such investor also received three separate warrants (a warrant
exercisable for one year, a warrant exercisable for two years, and a warrant
exercisable for three years) to purchase shares of the Company's common stock
entitling the investor to invest an amount equal to the investor’s investment in
the Notes in additional shares of the Company's common stock subject to certain
price adjustments. The Notes mature one year after issuance and accrue interest
at an annual interest rate equal to 10% per annum, payable at
maturity.
Between
May 5 and June 29th, 2006, the Company issued 10% Convertible Promissory Notes
in the aggregate principal face amount of $623,000 to 16 individual investors.
Each such investor also received warrants, exercisable for one year, to purchase
shares of the Company's common stock entitling the investor to invest an amount
equal to 150% of the investor’s investment in the Notes in additional shares of
the Company's common stock subject to certain price adjustments. The Notes
mature one year after issuance and accrue interest at an annual interest rate
equal to 10% per annum, payable at maturity.
In
May
2006 the Company issued an aggregate of 2,113,556 shares of newly designated
Series A Convertible Preferred Stock in order to settle outstanding debts owed
to officers and consultants of the Company (a portion of which were unpaid
consulting fees) in the aggregate amount of $2,113,556. The shares of Series
A
Convertible Preferred Stock are convertible at the option of the holder at
any
time after issuance. Each share of Series A Convertible Preferred Stock is
convertible into that number of shares of common stock of the Company as is
equal to the original issue price of shares of Series A Convertible Preferred
Stock, or $1.00, divided by the conversion price which is initially equal to
$0.255 and is subject to adjustment in certain cases. Each share of Series
A
Convertible Preferred Stock carries with it the right to fifty
votes.
As
described above in Item 1 under the heading “Recent Events”, on July 31, 2006
(the “Initial Closing Date”), the Company sold an aggregate of 117,648 shares of
Series B Convertible Preferred Stock (the “Series B Preferred Stock”) and issued
warrants to purchase an aggregate of 17,647,060 shares of common stock for
an
aggregate purchase price of $2,000,000. The Company paid 15% commissions to
Futon Investment Ltd. in connection with its issuance of shares of Series B
Preferred Stock and the accompanying warrants. The shares of Series B Preferred
Stock are convertible into shares of Common Stock at the election of the
Purchasers. Each share of Series B Preferred Stock is initially convertible
into
100 shares of Common Stock, with such conversion ratio subject to adjustment
in
the event of dilutive issuances, stock splits, combinations, certain dividends
and distributions, and mergers, reorganizations or other similar
recapitalization events. The warrants may be exercised in whole or in part
for
shares of Common Stock by payment by the Purchasers of the applicable exercise
price in cash prior to the expiration of the warrants on January 31,
2009.
All
of
the above
securities issuances were made upon reliance on the exemption from the
Securities Act registration requirements contained in Section 4(2) of the
Securities Act of 1933 and pursuant to Regulation D promulgated thereunder.
The
Company relied on the following facts in determining that the offer and sale
of
the above listed securities qualified for the exemption provided by Rule
506:
| o |
The
offer and sale satisfied the terms and conditions of Rule 501 and
502
under the Securities Act; and
|
| o |
Pursuant
to Rule 506 under the Securities Act, no more than 35 purchasers
purchased
any of the securities offered, as determined in accordance with Rule
501(e) under the Securities Act.
|
.
Securities
Authorized for Issuance Under Equity Compensation Plans
|
Equity
Compensation Plan Information
|
|
Plan
Category
|
Number
of Securities to be Issued Upon Exercise of Outstanding Options,
Warrants
and Rights
|
Weighted-Average
Exercise Price of Outstanding Options, Warrants and Rights
|
Number
of Securities Remaining Available for Future Issuance under Equity
Compensation Plans (Excluding Securities Reflected in Column
(a))*
|
| |
(a)
|
(b)
|
(c)
|
|
Equity
compensation plans approved by security holders
|
0
|
N/A
|
20,000,000
|
|
Equity
compensation plans not approved by security holders
|
5,012,800
|
$0.203
|
N/A
|
|
Total
|
5,012,800
|
|
20,000,000
|
|
*
At June 30, 2006
|
|
|
|
ITEM
6. MANAGEMENT’S
DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
Fiscal
2006 has been a transitional year for the Company - from development stage
status to sales of actual products. As of the beginning of fiscal 2006, the
Company required financing in order to produce inventory required to supply
retail channels in North America. Through July 2006, the Company was able to
secure funding from several sources in the aggregate amount of approximately
$5.15 million. These financings allowed the Company to continue its efforts
to
develop distribution channels for its upcoming products. The Company has
established a sales structure with internal and field sales representatives,
who
manage current sales and has been actively building the foundation of sales
and
distribution systems for the Company’s products. To date, the Company has
introduced its products through golf shows, catalogue sales though the GolfWorks
publication, advertisings with the Professional Club Builder’s Society and
various other publications managed by the Media Group. Subject to raising
necessary additional funds, of which there can be no assurance, we intend to
introduce our E21 Alloy shafted driver and similar metal headed woods built
with
our Element 21 shaft technology, through retail sales and manufacturing of
components to the OEMs.
Fiscal
2006 Compared to Fiscal 2005
During
fiscal year 2006, we had $51,569 in revenues as compared to $65,635 in revenues
during fiscal year 2005. During fiscal year 2006, our costs of sales
were $25,722.
During
fiscal year 2006, our general and administrative costs were $3,566,192.
These general and administrative costs primarily consist of marketing costs,
including trade shows, legal and accounting expenses necessary to maintain
the
Company’s reporting requirements to be a publicly traded entity, and consulting
fees which was satisfied through the issuance of our common stock. During fiscal
2005, general and administrative expenses aggregated $1,378,439 and consisted
primarily of marketing costs, including trade shows, legal and accounting
expenses necessary to maintain the Company’s reporting requirements to be a
publicly traded entity, consultant compensation of $500,000 and consulting
fees
valued at $288,000, which was satisfied through the issuance of our common
stock. Net loss for fiscal 2006 was $4,496,095 ($0.05 per share) as compared
to
a net loss of $1,352,931 ($0.02 per share) for fiscal 2005. The increase in
net
loss is largely attributable to an increase in consulting costs.
Liquidity
and Capital Resources
From
our
inception through the end of fiscal year 2005, our primary source of funds
has
been the proceeds from private offerings of our common stock and advances from
Dr. Hearn, other consultants, related parties and loans from
stockholders. The
Company’s need to obtain capital from outside investors
is
expected to continue until we are able to achieve
profitable operations, if ever. There is no assurance that management will
be
successful in fulfilling all or any elements of its plans. The failure to
achieve these plans will have a material adverse effect on our Company’s
financial position, results of operations and ability to continue as a going
concern. As noted in our auditor’s report dated October 13, 2006, there is
substantial doubt about our Company’s ability to continue as a going
concern.
During
fiscal 2006, we generated cash of $48,445 from our operations compared to
$414,754 used for fiscal 2005. During fiscal 2006, the Company’s accounts
payables decreased by $259,255 while it’s accrued expenses increased by $511,858
As of June 30, 2006, we had accrued and unpaid compensation to our officers
of
approximately $500,000. To fund our operation, our officers have advanced funds
and paid expenses on our behalf. For fiscal 2006, funds generated from financing
sources aggregated $883,148 compared
to $426,567 generated in fiscal 2005.
New
Accounting Pronouncements affecting the Company
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS 123R,
“Share-Based Payment.” This statement replaces SFAS 123, “Accounting for
Stock-Based Compensation” and supersedes Accounting Principles Board’s Opinion
No. 25 (ABP 25), “Accounting for Stock Issued to Employees.” SFAS 123R will
require us to measure the cost of our employee stock-based compensation awards
granted after the effective date based on the grant date fair value of those
awards and to record that cost as compensation expense over the period during
which the employee is required to perform services in exchange for the award
(generally over the vesting period of the award). SFAS 123R addresses all forms
of share-based payments awards, including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
In addition, we will be required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. SFAS 123R is effective for
fiscal years beginning after June 15, 2005. Therefore, we are required to
implement the standard no later than our first fiscal quarter which begins
on
March 1, 2006. SFAS 123R permits public companies to adopt its requirements
using the following methods: (1) a “modified prospective” method in which
compensation cost is recognized beginning with the effective date (a) based
on
the requirements of SFAS 123R for all share-based payments granted after the
effective date and (b) based on the requirements of SFAS 123 for all awards
granted to employees prior to the effective date of SFAS 123R that remain
unvested on the effective date; or (2) a “modified retrospective” method which
includes the requirements of the modified prospective method described above,
but also permits entities to restate their financial statements based on the
amounts previously recognized under SFAS 123 for purposes of pro forma
disclosures for either (a) all prior periods presented or (b) prior interim
periods of the year of adoption.
In
June
2005, the FASB issued Statement of Financial Accounting Standard No. 154,
Accounting
Changes and Error Corrections,
("SFAS
154"). SFAS 154 replaces Accounting Principle Bulletin No. 20 ("APB 20"), and
Statement of Financial Accounting Standard No. 3, Reporting
Accounting Changes in Interim Financial Statements
("SFAS
3"), and applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change
a
cumulative effect of changing to the new accounting principle, whereas SFAS
154
requires retrospective application to prior periods' financial statements of
a
voluntary change in accounting principle unless it is impracticable. SFAS 154
enhances the consistency of financial information between periods. SFAS 154
is
effective for fiscal years beginning after December 15, 2005. Our adoption
of
SFAS 154 is not expected to have a material impact on our results of operations
or financial position.
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(FIN
48), which, among other things, requires applying a "more likely than not"
threshold to the recognition and derecognition of tax positions. The provisions
of FIN 48 will be effective for us on July 1, 2007. We are currently evaluating
the impact of adopting FIN 48 on the financial statements, but we do not expect
its adoption to have a significant transition effect.
Critical
Accounting Policies and Estimates
The
following estimates used in the preparation of our Company’s Consolidated
Financial Statements had a significant effect on those statements.
Our
Company has established a reserve against our deferred tax asset reducing the
carrying value to $0 at June 30, 2006 and 2005.
Risk
Factors
We
have a limited operating history and a history of substantial operating losses
and we may not be able to continue our business.
We
have a
history of substantial operating losses and an accumulated deficit of
$17,212,576 as of June 30, 2006, of which $3,261,401 represents development
stage losses. For the year ended June 30, 2006, our net loss was
$4,496,095.
We have
historically experienced cash flow difficulties primarily because our expenses
have exceeded our revenues. We expect to incur additional operating losses
for
the immediate near future. These factors, among others, raise significant doubt
about our ability to continue as a going concern. If we are unable to generate
sufficient revenue from our operations to pay expenses or we are unable to
obtain additional financing on commercially reasonable terms, our business,
financial condition and results of operations will be materially and adversely
affected.
We
will need additional financing in order to continue our operations which we
may
not be able to raise.
We
will
require additional capital to finance our future operations. We can
provide no assurance that we will obtain additional financing sufficient to
meet
our future needs on commercially reasonable terms or otherwise. If we
are unable to obtain the necessary financing, our business, operating results
and financial condition will be materially and adversely affected.
We
have no employees and our success is dependent on our ability to retain and
attract consultants to operate our business and there is no assurance that
we
can do so.
As
of
June 30, 2006, as discussed above, we have no employees and utilize the services
of consultants. Our consultants are bound by non-compete provisions;
however, they are not otherwise prohibited from terminating their consulting
relationship with the Company. The loss of the knowledge and management and
industry expertise of any of these key consultants could have a material adverse
impact on our future prospects, in particular Dr. Hearn and David Sindalovsky,
who have played a key role in developing scandium technology for golf
applications. In addition, once we are sufficiently capitalized, we will need
to
recruit new executive managers and hire employees to help us execute our
business strategy and help manage the growth of our business. Competition for
executive and other skilled personnel in the golf equipment industry is intense,
and we may not be successful in attracting and retaining such personnel. Our
business could suffer if we were unable to attract and retain additional highly
skilled personnel or if we were to lose any key personnel and not be able to
find appropriate replacements in a timely manner.
Our
performance depends on market acceptance of our products and we cannot be sure
that our products are commercially viable.
We
expect
to derive a substantial portion of our future revenues from the sales of E21
alloy golf shafts that are only now entering the initial marketing phase.
Although we believe our products and technologies will be commercially viable,
these are new and untested products. If markets for our products fail
to develop further, develop more slowly than expected or are subject to
substantial competition, our business, financial condition and results of
operations will be materially and adversely affected.
We
depend on strategic marketing relationships and if we fail to maintain or
establish them, our business plan may not succeed.
We
expect
our future marketing efforts will focus in part on developing business
relationships with distributors that will market our products to their
customers. The success of our business depends on selling our products and
technologies to a large number of distributors and retail customers. Our
inability to enter into and retain strategic relationships, or the inability
to
effectively market our products, could materially and adversely affect our
business, operating results and financial condition.
Competition
from traditional golf equipment providers may increase and we may not be able
to
adequately compete.
The
market for golf shafts is highly competitive. There are a number of
other established providers that have greater resources, including more
extensive research and development, marketing and capital than we do and also
have greater name recognition and market presence. These competitors
could reduce their prices and thereby decrease the demand for our products
and
technologies. These competitors may lower their prices to compete
with us. We expect competition to intensify in the future, which
could also result in price reductions, fewer customer and lower gross
margins.
Rapidly
changing technology and substantial competition may adversely affect our
business.
Our
business is subject to rapid changes in technology. We can provide no
assurances that research and development by competitors will not render our
technology obsolete or uncompetitive. We compete with a number of
companies that have technologies and products similar to those offered by us
and
have greater resources, including more extensive research and development,
marketing and capital than we do. We can provide no assurances that
we will be successful in marketing our existing products and developing and
marketing new products in such a manner as to be effective against our
competition. If our technology is rendered obsolete or we are unable
to compete effectively, our business, operating results and financial condition
will be materially and adversely affected.
Litigation
concerning intellectual property could adversely affect our
business.
We
rely
on a combination of trade secrets, trademark law, contractual provisions,
confidentiality agreements and certain technology and security measures to
protect our trademarks, license, proprietary technology and
know-how. However, we can provide no assurance that competitors will
not infringe upon our rights in our intellectual property or that competitors
will not similarly make claims against us for infringement. If we are
required to be involved in litigation involving intellectual property rights,
our business, operating results and financial condition will be materially
and
adversely affected.
It
is
possible that third parties might claim infringement by us with respect to
past,
current or future technologies. We expect that participants in our
markets will increasingly be subject to infringement claims as the number of
services and competitors in our industry grows. Any claims, whether
meritorious or not, could be time-consuming, result in costly litigation and
could cause service upgrade delays or require us to enter into royalty or
licensing agreements. These royalty or licensing agreements might not
be available on commercially reasonable terms or at all.
Defects
in our products may adversely affect our business.
Complex
technologies such as the technologies developed by us may contain defects when
introduced and also when updates and new products are released. Our introduction
of technology with defects or quality problems may result in adverse publicity,
product returns, reduced orders, uncollectible or delayed accounts receivable,
product redevelopment costs, loss of or delay in market acceptance of our
products or claims by customers or others against us. Such problems or claims
may have a material and adverse effect on our business, financial condition
and
results of operations.
The
inability to obtain a sufficient amount of scandium or of scandium alloy would
adversely affect our business.
Although
we currently believe that we will continue to be able to have access to
sufficient amounts of scandium or scandium alloy at feasible prices, there
is no
assurance of this, and any failure to be able to obtain a sufficient supply
of
scandium at reasonable prices would have a material adverse affect on our
business.
The
large number of shares eligible for public sale could cause our stock price
to
decline.
The
market price of our common stock could decline as a result of the resale of
the
shares of common stock issuable upon conversion of our Series A Preferred Stock,
Series B Preferred Stock and outstanding convertible promissory
notes and
the
exercise of outstanding warrants or the perception that these sales could occur.
These sales also might make it more difficult for us to sell equity securities
in the future at a time and price that we deem appropriate. The
conversion of these securities into common stock will also result in substantial
dilution of the interests of our current stockholders.
Our
stock price can be extremely volatile.
Our
common stock is traded on the OTC Bulletin Board. There can be no assurance
that
an active public market will continue for the common stock, or that the market
price for the common stock will not decline below its current price. Such price
may be influenced by many factors, including, but not limited to, investor
perception of us and our industry and general economic and market conditions.
The trading price of the common stock could be subject to wide fluctuations
in
response to announcements of our business developments or our competitors,
quarterly variations in operating results, and other events or factors. In
addition, stock markets have experienced extreme price volatility in recent
years. This volatility has had a substantial effect on the market prices of
companies, at times for reasons unrelated to their operating performance. Such
broad market fluctuations may adversely affect the price of our common
stock.
Trading
on the OTC Bulletin Board may be sporadic because it is not a stock exchange,
and stockholders may have difficulty reselling their
shares.
Our
common stock is quoted on the OTC Bulletin Board. Trading in stock quoted on
the
OTC Bulletin Board is often thin and characterized by wide fluctuations in
trading prices, due to many factors that may have little to do with our
operations or business prospects. Moreover, the OTC Bulletin Board is not a
stock exchange, and trading of securities on the OTC Bulletin Board is often
more sporadic than the trading of securities listed on the Nasdaq SmallCap.
If
we fail to remain current on our reporting requirements, we could be removed
from the OTC Bulletin Board which would limit the ability of broker-dealers
to
sell our securities and the ability of stockholders to sell their securities
in
the secondary market.
Companies
trading on the OTC Bulletin Board, such as us, must be reporting issuers under
Section 12 of the Securities Exchange Act of 1934, as amended, and must be
current in their reports under Section 13, in order to maintain price quotation
privileges on the OTC Bulletin Board. If we fail to remain current on our
reporting requirements, shares of our common stock could be removed from the
OTC
Bulletin Board. As a result, the market liquidity for our securities could
be
severely adversely affected by limiting the ability of broker-dealers to sell
our securities and the ability of stockholders to sell their securities in
the
secondary market.
Our
common stock is subject to the “penny stock” rules of the sec and the trading
market in our securities is limited, which makes transactions in our stock
cumbersome and may reduce the value of an investment in our
stock.
The
Securities and Exchange Commission has adopted Rule 15g-9 which establishes
the
definition of a “penny stock,” for the purposes relevant to us, as any equity
security that has a market price of less than $5.00 per share or with an
exercise price of less than $5.00 per share, subject to certain exceptions.
For
any transaction involving a penny stock, unless exempt, the rules require that
a
broker or dealer approve a person's account for transactions in penny stocks
and
the broker or dealer receive from the investor a written agreement to the
transaction, setting forth the identity and quantity of the penny stock to
be
purchased.
In
order
to approve a person's account for transactions in penny stocks, the broker
or
dealer must, obtain financial information and investment experience objectives
of the person and make a reasonable determination that the transactions in
penny
stocks are suitable for that person and the person has sufficient knowledge
and
experience in financial matters to be capable of evaluating the risks of
transactions in penny stocks.
The
broker or dealer must also deliver, prior to any transaction in a penny stock,
a
disclosure schedule prescribed by the Commission relating to the penny stock
market, which, in highlight form sets forth the basis on which the broker or
dealer made the suitability determination and that the broker or dealer received
a signed, written agreement from the investor prior to the
transaction.
Generally,
brokers may be less willing to execute transactions in securities subject to
the
“penny stock” rules. This may make it more difficult for investors to dispose of
our common stock and cause a decline in the market value of our
stock.
Disclosure
also has to be made about the risks of investing in penny stocks in both public
offerings and in secondary trading and about the commissions payable to both
the
broker-dealer and the registered representative, current quotations for the
securities and the rights and remedies available to an investor in cases of
fraud in penny stock transactions. Finally, monthly statements have to be sent
disclosing recent price information for the penny stock held in the account
and
information on the limited market in penny stocks.
We
do not expect to pay dividends on our common stock.
We
have
not declared dividends on our common stock since our incorporation and we have
no present intention of paying dividends on our common stock.
MANY
OF THESE RISKS AND UNCERTAINTIES ARE OUTSIDE OF OUR CONTROL AND ARE DIFFICULT
FOR US TO FORECAST. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE EXPRESSED
OR
IMPLIED IN THE FORWARD-LOOKING STATEMENTS.
ITEM
7. FINANCIAL
STATEMENTS
The
Consolidated Financial Statements and schedules that constitute Item 7 are
attached at the end of this Annual Report on Form 10-KSB.
ITEM
8. CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None
ITEM
8A CONTROLS
AND PROCEDURES
We
maintain “disclosure controls and procedures” (as defined in the Securities
Exchange Act of 1934 Rules 13a-15(e) and 15(d)-15(e)) designed to ensure that
information required to be disclosed in reports filed under the Securities
Exchange Act of 1934, as amended, is recorded, processed, summarized and
reported within the specified time periods. Our chief executive officer and
chief financial officer, with the participation of our management, have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as of June 30, 2006. Based upon that evaluation, the
chief executive officer and chief financial officer concluded that our
disclosure controls and procedures are effective in timely alerting them to
material information required to be included in our periodic filings with the
Securities and Exchange Commission.
To
date,
and during the first quarter of fiscal year 2006, there have been no changes
in
our internal control over financial reporting that have materially affected
or
are reasonably likely to materially affect our internal control over financial
reporting.
ITEM
8B OTHER
INFORMATION
None.
PART
III
ITEM
9. DIRECTORS,
EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a)
OF THE EXCHANGE ACT
Identification
of Directors and Executive Officers
The
following table sets forth the names and the nature of all positions and offices
held by all directors and executive officers of our Company for the fiscal
year
ended June 30, 2006, all of whom are consultants to the Company and not
employees, and the period or periods during which each such director or
executive
officer has served in his or her respective positions.
|
Name
|
|
Age
|
|
Position
with the Company
|
|
Date
of Election or Designation
|
|
Nataliya
Hearn, Ph.D.
|
|
39
|
|
President,
Chief Executive Officer and Director
|
|
October
4, 2002
|
|
John
Grippo
|
|
50
|
|
Chief
Financial Officer
|
|
March
1, 2006
|
|
Gerald
Enloe
|
|
58
|
|
Director,
Chairman
|
|
October
4, 2002
|
|
Jim
Morin(1)
|
|
55
|
|
Director,
Vice President, Secretary, Treasurer, Chief Financial
Officer
|
|
October
4, 2002
|
(1) Mr.
Morin
resigned as an officer and director of the Company on July 31,
2006.
Term
of Office
The
term
of office of the current Directors shall continue until the annual meeting
of
our stockholders, which is scheduled in accordance with the direction of the
Board of Directors. The annual meeting of our Board of Directors immediately
follows the annual meeting of our stockholders, at which officers for the coming
year are elected.
Business
Experience
Nataliya
Hearn, Ph.D., P. Eng.,
is a
Canadian citizen with a Ph.D. in Civil Engineering from Cambridge University
and
is a registered professional engineer. Dr. Hearn serves as President and CEO
of
the Company. Since 1999, Dr. Hearn has been an Associate Professor at the
University of Windsor and since 1994 has been an Adjunct Professor at the
University of Toronto. Dr. Hearn is currently a Director of MagIndustries Corp.
MAA.U TSX-V, Director of New Product Development and Marketing at Link-Pipe
Inc.. Dr. Hearn has considerable experience in technology transfer, evaluation,
and government/industry grants. Dr. Hearn’s managing experience involves:
| · |
evaluation,
exploration and organization of Ukrainian gold deposits, by the Canadian
geologists together with the Ukrzoloto and Ashurst
teams;
|
| · |
management
of teams for testing and evaluation of damaged concrete in construction
defects litigation in the USA; and
|
| · |
management
of concept development, implementation, financing and marketing of
new
products in trenchless technology repair
business.
|
John
Grippo
of
Scarsdale, New York, serves as Chief Financial Officer of the Company. Mr.
Grippo has been the president of his own financial management practice, John
Grippo, Inc. since 2000. His firm provides services as the CFO to small to
mid-sized public and private companies and also provides other related
accounting and consulting services. Prior to that, Mr. Grippo served for ten
years as a Chief Financial Officer to companies in housewares, electric vehicles
and financial services industries. He worked for five years as an auditor with
Arthur Andersen, LLP, followed by seven years in various accounting positions
in
the financial services industry. He is a member of the New York Society of
Certified Public Accountants and the American Institute of Certified Public
Accountants.
Gerald
Enloe
of
Houston, Texas, serves as a Director and our Chairman of our Board. Mr. Enloe
has served as President and CEO of Houston Industrial Materials, Inc. since
1991.
Family
Relationships
There
are
no family relationship among the Directors and executive officers named
above.
Involvement
in Certain Legal Proceedings
To
the
knowledge of management and during the past ten years, no present director,
person nominated to become a director, executive officer, promoter or control
person of the Company:
| |
(1)
|
Was
a general partner or executive officer of any business by or against
which
any bankruptcy petition was filed, whether at the time of such filing
or
two years prior thereto;
|
| |
(2)
|
Was
convicted in a criminal proceeding or named the subject of a pending
criminal proceeding (excluding traffic violations and other minor
offenses);
|
| |
(3)
|
Was
the subject of any order, judgment or decree, not subsequently reversed,
suspended or vacated, of any court of competent jurisdiction, permanently
or temporarily enjoining him from or otherwise limiting his or her
involvement in any type of business, securities or banking activities;
|
| |
(4)
|
Was
found by a court of competent jurisdiction in a civil action, the
Securities and Exchange Commission or the Commodity Futures Trading
Commission to have violated any federal or state securities law or
commodities law, and the judgment has not been subsequently reversed,
suspended, or vacated.
|
Audit
Committee
The
Board
of Directors serves as the Company’s audit committee. Currently none of the
Company’s directors qualifies as a “financial expert” pursuant to Item 401 of
Regulation S-B. The Company has not sought to add a director to its board who
qualifies as a “financial expert” because although the Company believes it would
be desirable to have a financial expert on its audit committee, the costs of
retaining such an expert would be prohibitive, given the Company’s resources at
this time.
Compliance
with Section 16(a) of the Exchange Act
The
following reports on Forms 3, 4 or 5 were required to be filed by our directors,
executive officers, and 10% or greater stockholders under the rules and
regulations promulgated by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), on the
following dates; and as indicated, were filed later than required by the
applicable rules and regulations: (Needs to be updated)
|
Name
|
|
Description
of Form or Schedule
|
|
Required
Filing Date
|
|
Filing
Date
|
|
Number
of Reportable Transactions
|
|
Nataliya
Hearn, Ph.D.
|
|
4
|
|
02/26/06
|
|
|
|
1
|
|
Gerald
Enloe
|
|
4
|
|
02/26/06
|
|
*
|
|
1
|
|
Jim
Morin
|
|
4
|
|
**
|
|
**
|
|
**
|
|
*
|
Management
will use its best efforts to cause any forms listed above which are
required to be filed and which have not yet been filed to be filed
as soon
as practicable.
|
|
**
|
It
came to the Company’s attention during fiscal year 2006 that Mr. Morin, a
former Director of the Company, engaged in multiple sales of the
Company’s
common stock over the course of several years that, to the knowledge
of
management, have not been reported on Form
4.
|
Code
of Ethics
The
Company has not yet adopted a code of ethics for its principal executive
officer, principal financial officers, principal accounting officer or
controller due to the small number of executive officers involved with the
Company and due to the fact that the Company operates through strategic
consultants with no employees. The Board of Directors will continue to evaluate,
from time to time, whether a code of ethics should be developed and
adopted.
ITEM
10. EXECUTIVE
COMPENSATION
EXECUTIVE
COMPENSATION
The
following table sets forth in summary form the compensation of the Company’s
current Chief Executive Officer and each other executive officer that received
total salary and bonus exceeding $100,000 since its inception (“Named Executive
Officers”).
Summary
Compensation Table
The
following table sets forth the aggregate executive compensation paid by our
Company for services rendered during the periods indicated (each person is
referred to in this Item 10 as a “Named Executive Officer”).(Needs to be updated
for stock compensation agreements)
|
SUMMARY
COMPENSATION TABLE
|
| |
Long-Term
Compensation
|
|
Annual
Compensation
|
Awards
|
Payouts
|
|
(a)
|
(b)
|
(c)
|
(d)
|
(e)
|
(f)
|
(g)
|
(h)
|
(i)
|
|
Name
and Principal Position
|
Years
of Periods Ended
|
$
Salary
|
$
Bonus
|
Other
Annual Compensation
|
Restricted
Stock Awards $
|
Option/
SAR’s
#
|
LTIP
Payouts $
|
All
Other Compensation
|
|
Nataliya
Hearn, PhD, President, CEO
and
Director (1)
|
06/30/06
06/30/05
06/30/04
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
1,500,000
0
0
|
0
0
0
|
0
0
0
|
|
Jim
Morin, Treasurer and Secretary (2)
|
06/30/06
06/30/05
06/30/04
|
125,000
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
|
John
Grippo, Chief Financial Officer (3)
|
06/30/06
06/30/05
06/30/04
|
32,000
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
|
Bill
Dey
Executive
Vice President of Sales, General Manager
|
06/30/06
06/30/05
06/30/04
|
60,000
0
0
|
0
0
0
|
0
0
0
|
0
0
|
0
0
0
|
0
0
0
|
0
0
0
|
| (1) |
Nataliya
Hearn serves as the CEO and President of the Company without cash
compensation. The Company has agreed to grant Dr. Hearn options to
purchase 1,500,000 common shares at a purchase price of $0.08 per
share in
exchange for services rendered to the Company during calendar year
2006.
These options have not yet been granted. Ms. Hearn began serving
as an
executive officer of the Company on October 4,
2002.
|
| (2) |
Mr.
Morin resigned as an officer of the Company on July 31, 2006. Mr.
Morin
was awarded 125,000 shares of Series A Convertible Preferred Stock
of the
Company valued at $1 per share in exchange for services rendered
to the
Company.
|
| (3) |
Mr.
Grippo was engaged as a consultant to the Company and was named the
Chief
Financial Officer of the Company on March 1, 2006. Of the $32,000
in
compensation paid to Mr. Grippo, $9,000 was paid in cash, $3,000
remains
to be paid by the Company and $20,000 was paid through the grant
of
unrestricted shares of the Company’s Common
Stock.
|
| (4) |
Mr.
Dey was engaged as a consultant to the Company and was named Vice
President of Sales and General Manager on January 1, 2006.
|
Except
as
indicated above, no cash compensation, deferred compensation or long-term
incentive plan awards were issued or granted to our Company’s management during
the years ended June 30, 2005, or 2004, or the period ending on the date of
this
Annual Report. Further, except as indicated above, no member of our Company’s
management has been granted any option or stock appreciation right; accordingly,
no tables relating to such items have been included within this Item.
Compensation
Committee
The
Board
of Directors serves as the Company’s compensation committee. The Company does
not have any employees and its officers serve the Company without compensation.
When the Company determines that compensation for services will commence, the
Board of Directors expects to nominate a Compensation Committee.
Compensation
of Directors
There
are
no standard arrangements pursuant to which our Company’s directors are
compensated for any services provided as director. No additional amounts are
payable to our Company’s directors for committee participation or special
assignments.
Termination
of Employment and Change of Control Arrangement
Except
for the Company’s Agreement with Dr. Hearn, a copy of which is attached hereto
as Exhibit 10.4, there are no compensatory plans or arrangements, including
payments to be received from our Company, with respect to any person named
in
the Summary Compensation Table set out above which would in any way result
in
payments to any such person because of his or her resignation, retirement or
other termination of such person’s consulting relationship with our Company or
our subsidiaries, or any change in control of our Company, or a change in the
person’s responsibilities following a change in control of our
Company.
ITEM
11. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
(a)
Security Ownership of Certain Beneficial Owners.
All
tables as of September 30, 2006.
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class(2)
|
|
Common
Stock, par value $0.01 per share
|
Clearline
Capital LLC
86
Clearview Lane
New
Canaan, CT 06840
|
29,411,300
(1)
|
18.6%
|
| |
Vladimir
Goryunov
Alderstasse
31
Zurich
8008,Switzerland
|
29,411,300
(1)
|
18.6%
|
| (1) |
Includes
8,823,530 shares of Common Stock that may be acquired within sixty
(60)
days of September 30, 2006 upon the exercise of outstanding warrants
held
by the holder. Includes 5,882,400 shares of Common Stock issuable
upon the
conversion of the 58,824 shares of Series B Convertible Preferred
Stock
held by the holder. Includes 8,823,530 shares of Common Stock issuable
upon the exercise of warrants to purchase 8,823,530 shares of Common
Stock
that may be acquired by
the holder from the Company at any time prior to November 30, 2006
and
5,882,400
shares of Common Stock issuable upon the conversion of 58,824 shares
of
Series B Convertible Preferred Stock that may be acquired by
the holder from the Company at any time prior to November 30,
2006.
|
| (2) |
Calculated
based on 99,630,554 shares of Common Stock outstanding as of September
30,
2006 plus an aggregate of 58,822,600 shares of Common Stock issuable
to
Clearline Capital LLC and Vladimir Goryunov as described
above.
|
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|
Series
A Convertible Preferred Stock, par value $0.10 per share
|
Nataliya
Hearn(1)
|
971,910
|
46%
|
| |
ASA
Commerce (1)
|
891,646
|
42%
|
| |
Jim
Morin (1)
|
125,000
|
6%
|
| |
Gerald
Enloe(1)
|
125,000
|
6%
|
(1)
Address is c/o Element 21 Golf Company, 200 Queens Quay East, Unit #1, Toronto,
Ontario, Canada, M5A 4K9
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class
|
|
Series
B Convertible Preferred Stock, par value $0.10 per share
|
Clearline
Capital LLC
86
Clearview Lane
New
Canaan, CT 06840
|
117,649
(1)
|
50%
|
| |
VladimirGoryunov
Alderstasse
31,
Zurich
8008,Switzerland
|
117,649
(1)
|
50%
|
(1)
Includes 58,825 shares of Series B Convertible Preferred Stock which may be
acquired by the holder from the Company at any time prior to November 30, 2006.
(b)
Security Ownership of Management. Except
as
indicated in the footnotes below, each person has sole voting and dispositive
power over the shares indicated.
|
Title
of Class
|
Name
and Address of Beneficial Owner
|
Amount
and Nature of Beneficial Owner
|
Percent
of Class(4)
|
|
Common
Stock, par value $0.01 per share
|
Gerald
Enloe, Director and Chairman (3)
|
3,440,656
(1)
|
3.2%
|
| |
Nataliya
Hearn, Ph.D., President, Chief Executive Officer and Director
(3)
|
9,721,215
(2)
|
9.2%
|
| |
John
Grippo
Chief
Financial Officer (3)
|
395,833
|
*%
|
| |
Bill
Dey,
Executive
Vice President of Sales and General Manager (3)
|
0
|
0%
|
|
All
Officers, Directors as a Group (4 Persons)
|
|
13,557,704
|
12.9%
|
| |
(1)
|
Includes
490,196 shares of Common Stock issuable upon the conversion of 125,000
shares of Series A Convertible Preferred Stock held by the
holder.
|
| |
(2)
|
Includes
1,500,000 shares of Common Stock issuable upon the exercise of stock
options to be granted to the holder, which when granted will be
immediately exercisable. Includes 3,811,411 shares of Common Stock
issuable upon the conversion of 971,910 shares of Series A Convertible
Preferred Stock held by the holder.
|
| |
(3)
|
Address
is c/o Element 21 Golf Company, 200 Queens Quay East, Unit #1, Toronto,
Ontario, Canada, M5A 4K9
|
| (4) |
Calculated
based on 99,630,554 shares of Common Stock outstanding as of September
30,
2006 plus an aggregate of 5,801,607 shares of Common Stock issuable
upon
the exercise of to be granted stock options and the conversion of
outstanding shares of Series A Convertible Preferred Stock as described
above.
|
*
Less
than
1%.
Changes
in Control
Two
stockholders, Clearline Capital LLC and Vladimir Goryunov,
as a
group, beneficially own over 35% of our common stock. As a result, they may
be
able to control our company and direct our affairs, including the election
of
directors and approval of significant corporate transactions. This concentration
of ownership may also delay, defer or prevent a change in control of our
company, and make some transactions more difficult or impossible without their
support. These transactions might include proxy contests, tender offers, open
market purchase programs or other share purchases that could give our
shareholders the opportunity to realize a premium over the then prevailing
market price of our common stock. As a result, this concentration of ownership
could depress our stock price.
Currently,
no known change of control is anticipated.
ITEM
12. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions
with Management and Others
There
have been no material transactions, series of similar transactions or currently
proposed transactions, to which the Company or any of our subsidiaries was
or is
to be a party, in which the amount involved exceeded $60,000 and in which any
director or executive officer, promoter or founder or any security holder who
is
known to us to own of record or beneficially more than five percent of our
common stock, or any member of the immediate family of any of the foregoing
persons, or any promoter or founder had a material interest.
|
Exhibit
No.
|
Exhibit
Description
|
|
3(i)(1)
|
Amended
Certificate of Incorporation of the Company, incorporated
herein by reference to the Company’s Registration Statement on Form
S-1, as amended, File No. 33-43976 filed on November 14,
1991.
|
| |
|
|
3(i)(2)
|
Certificate
of Amendment to Amended Certificate of Incorporation of the Company,
incorporated herein by reference to Exhibit 3.1 to the Company’s Form 8-K
dated May 12, 2006.
|
| |
|
|
3(i)(3)
|
Certificate
of the Powers, Designations, Preferences and Rights of the Series
A
Convertible Preferred Stock, $0.10 par value per share, incorporated
herein by reference to Exhibit 4.1 to the Company’s Form 8-K dated
February 24, 2006.
|
| |
|
|
3(i)(4)
|
Certificate
of the Powers, Designations, Preferences and Rights of the Series
B
Convertible Preferred Stock, $0.10 par value per share, incorporated
herein by reference to Exhibit 3(i) to the Company’s Form 8-K dated August
3, 2006.
|
| |
|
|
3(ii)
|
Amended
and Restated Bylaws of the Company, incorporated
herein by reference to the
Company’s Registration Statement on Form S-1, as amended,
File No. 33-43976 filed on November 14, 1991.
|
| |
|
|
4.1
|
Form
of Element 21 Golf Company 10% Convertible Promissory Note, incorporated
herein by reference to Exhibit 4.2
to
the Company’s Form 8-K dated February
24,
2006.
|
| |
|
|
4.2
|
Element
21 Golf Company 10% Convertible Promissory Note issued to Oleg
Muzyrya,
incorporated herein by reference to Exhibit 4.3
to
the Company’s Form 8-K dated February
24,
2006.
|
| |
|
|
4.3
|
Common
Stock Purchase Warrant, incorporated herein by reference to Exhibit
4.4 to
the Company’s Form 8-K dated February 24, 2006.
|
| |
|
|
4.4
|
Form
of Element 21 Golf Company 10% Convertible Promissory Note, incorporated
herein by reference to Exhibit 4.1 to the Company’s Form 8-K dated May 23,
2006.
|
| |
|
|
4.5
|
Common
Stock Purchase Warrant, incorporated herein by reference to Exhibit
4.2 to
the Company’s Form 8-K dated May 23, 2006.
|
| |
|
|
4.6
|
Form
of Warrant for Purchase of 3,750,000 Shares of Common Stock dated
July 31,
2006, incorporated herein by reference to Exhibit 4.1 to the Company’s
Form 8-K dated August 3, 2006.
|
| |
|
|
4.7
|
Form
of Warrant for Purchase of 5,073,530 Shares of Common Stock dated
July 31,
2006, incorporated herein by reference to Exhibit 4.2 to the Company’s
Form 8-K dated August 3, 2006.
|
| |
|
|
10.1
|
Series
A Convertible Preferred Stock Exchange Agreement and Acknowledgement
dated
as of February 22, 2006, incorporated herein by reference to Exhibit
10.1
to the Company’s Form 8-K dated February 24, 2006.
|
| |
|
|
10.2
|
Element
21 Golf Company 2006 Equity Incentive Plan, incorporated herein by
reference to Annex C to the Company’s Proxy Statement Pursuant to Section
14(a) of the Securities Exchange Act of 1934 filed on April 7,
2006.
|
| |
|
|
10.3
|
Form
of Subscription Agreement for Shares of Series B Convertible Preferred
Stock dated as of July 31, 2006, incorporated herein by reference
to
Exhibit 10.1 to the Company’s Form 8-K dated August 3,
2006.
|
| |
|
|
10.4
|
Consulting
Agreement with Nataliya Hearn dated as of January 4,
2006.
|
| |
|
|
10.5
|
Consulting
Agreement with John Grippo dated as of November 10,
2005
|
| |
|
|
31
|
Rule
13a-14(a)/15a-14(a) Certifications of Chief Executive Officer and
Chief
Financial Officer.
|
| |
|
|
32
|
Certification
of Chief Executive Officer and Chief Financial Officer Pursuant to
18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
ITEM
14. PRINCIPAL
ACCOUNTANT FEES AND SERVICES
Audit
Fees
Lazar
Levine and Felix LLP (“LLF”) is the
Company’s independent auditors. Audit and review fees for the years ended June
30, 2006 and 2005 aggregated $59,560 and $51,000, respectively. LLF was hired
effective October 27, 2004.
Audit-Related
Fees
For
the
years ended June 30, 2006 and 2005, the Company was billed $1,500 and $1,700,
respectively, for fees related to a registration statement.
Tax
Fees
For
the
years ended June 30, 2006 and 2005, the Company did not receive any tax
compliance, tax advice, and tax planning services for which we were
billed.
All
Other Fees
For
the
years ended June 30, 2006 and 2005, the Company was not billed for products
and
services other than those described above.
Audit
Committee Pre-Approval Policies
The
Board
of Directors, which is performing the equivalent functions of an audit
committee, has
pre-approved all audit services provided by the independent auditors, and the
compensation, fees and terms for such services. No permitted non-audit
services
were
provided or approved by the Board of Directors.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this Report to be signed on its behalf
by
the undersigned, hereunto duly authorized.
| |
|
|
| |
ELEMENT
21
GOLF COMPANY |
|
|
|
| Date: October
13, 2006 |
By: |
/s/
Nataliya Hearn |
| |
Nataliya
Hearn, Ph.D.
President
and Director
|
| |
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
| |
|
|
|
| Date:
October
13, 2006 |
|
By: |
/s/Nataliya
Hearn |
|
|
|
|
Nataliya
Hearn, Ph.D.
President,
Chief Executive Officer and Director
|
| |
|
|
|
| |
|
|
|
| Date: October
13, 2006 |
|
By: |
/s/ Gerald
Enloe |
| |
|
|
Gerald
Enloe
Director
|
| |
|
|
|
| Date: October
13, 2006 |
|
By: |
/s/
John Grippo |
| |
|
|
John
Grippo
Chief
Financial Officer
|
| |
|
|
|
ELEMENT
21 GOLF COMPANY AND SUBSIDIARIES
INDEX
| |
Page
|
| |
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
| |
|
|
Consolidated
Balance Sheets as of June 30, 2006 and 2005
|
F-3
|
| |
|
|
Consolidated
Statements of Operations For The Years Ended June 30, 2006 and
2005
|
F-4
|
| |
|
|
Consolidated
Statements of Shareholders’ Deficit For The Years Ended June 30, 2006 and
2005
|
F-5
|
| |
|
|
Consolidated
Statements of Cash Flows For The Years Ended June 30, 2006 and
2005
|
F-6
|
| |
|
|
Notes
to Consolidated Financial Statements
|
F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the
Shareholders and Board of Directors
Element
21 Golf Company
Toronto,
Canada
We
have
audited the accompanying consolidated balance sheets of Element 21 Golf Company
and subsidiaries, (the “Company”) as of June 30, 2006 and 2005 and the
consolidated statements of operations, shareholders’ deficit and cash flows for
the two years in the period ended June 30, 2006. These consolidated financial
statements are the responsibility of the Company’s management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we
plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes consideration
of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose
of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit
also
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits provide
a
reasonable basis for our opinion.
In
our
opinion, the consolidated financial statements referred to above present
fairly,
in all
material respects, the consolidated financial position of Element 21 Golf
Company and subsidiaries as of June 30, 2006 and 2005 and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.
The
accompanying consolidated financial statements have been prepared assuming
the
Company will continue as a going concern. As discussed in Note 1(b), the
Company’s recurring losses from operations and its dependency on future
financing raise substantial doubt about its ability to continue as a going
concern. Management’s plans concerning these matters are also discussed in Note
1(b). The consolidated financial statements do not include any adjustments
that
might result from the outcome of these uncertainties.
/s/Lazar
Levine & Felix LLP
LAZAR
LEVINE & FELIX LLP
New
York,
New York
October
13, 2006
ELEMENT
21 GOLF COMPANY
CONSOLIDATED
BALANCE SHEETS
JUNE
30, 2006 AND 2005
|
-
ASSETS -
|
|
|
CURRENT
ASSETS:
|
|
2006
|
|
2005
|
|
|
Cash
|
|
$
|
263,219
|
|
$
|
1,148
|
|
|
Accounts
receivable - net of allowance for doubtful accounts of $0
|
|
|
11,994
|
|
|
36,451
|
|
|
Inventories
|
|
|
128,382
|
|
|
170,928
|
|
|
Prepaid
expenses and other current assets
|
|
|
17,907
|
|
|
6,380
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
421,502
|
|
|
214,907
|
|
| |
|
|
|
|
|
|
|
|
FIXED
ASSETS - NET
|
|
|
510,530
|
|
|
12,712
|
|
| |
|
|
|
|
|
|
|
|
TOTAL
ASSETS
|
|
$
|
932,032
|
|
$
|
227,619
|
|
| |
|
-
LIABILITIES AND SHAREHOLDERS’ DEFICIT -
|
|
CURRENT
LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$
|
157,191
|
|
$
|
416,446
|
|
|
Accrued
expenses
|
|
|
1,054,858
|
|
|
543,000
|
|
|
Accrued
interest
|
|
|
31,485
|
|
|
-
|
|
|
Convertible
notes
|
|
|
348,581
|
|
|
-
|
|
|
Derivative
liability
|
|
|
1,491,945
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
3,084,060
|
|
|
959,446
|
|
| |
|
|
|
|
|
|
|
|
LONG-TERM
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable - related parties
|
|
|
504,001
|
|
|
484,251
|
|
|
Loans
and advances - officers/shareholders
|
|
|
104,162
|
|
|
483,764
|
|
|
TOTAL
LONG-TERM LIABILITIES
|
|
|
608,163
|
|
|
968,015
|
|
| |
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
SHAREHOLDERS’
DEFICIT
|
|
|
|
|
|
|
|
|
Preferred
stock, $.10 par value, authorized 5,000,000 shares, no shares issued
and
outstanding
|
|
|
-
|
|
|
-
|
|
|
Series
A Preferred stock, $.001 par value, authorized 5,000,000 shares,
2,113,556
shares issued and outstanding
|
|
|
2,114
|
|
|
-
|
|
|
Common
stock, $.01 par value; 300,000,000 shares authorized 99,630,554 and
87,487,241 shares issued and outstanding in 2006 and 2005,
respectively
|
|
|
996,308
|
|
|
874,872
|
|
|
Additional
paid-in capital
|
|
|
13,453,963
|
|
|
10,141,767
|
|
|
Accumulated
deficit
|
|
|
(17,212,576
|
)
|
|
(12,716,481
|
)
|
| |
|
|
(
2,760,191
|
)
|
|
(1,669,842
|
)
|
|
TOTAL
LIABILITIES AND SHAREHOLDERS’ DEFICIT
|
|
$
|
932,032
|
|
$
|
227,619
|
|
See
notes to consolidated financial statements.
ELEMENT
21 GOLF COMPANY
CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR
THE YEARS ENDED JUNE 30, 2006 AND 2005
| |
|
Year
Ended June 30,.
|
|
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
|
REVENUES
|
|
$
|
51,569
|
|
$
|
65,635
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
Costs
of sales
|
|
|
25,722
|
|
|
39,380
|
|
|
General
and administrative
|
|
|
3,566,192
|
|
|
1,378,439
|
|
|
Depreciation
expense
|
|
|
171,704
|
|
|
747
|
|
|
TOTAL
COSTS AND EXPENSES
|
|
|
3,763,618
|
|
|
1,418,566
|
|
| |
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(3,712,049
|
)
|
|
(1,352,931
|
)
|
| |
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(382,818
|
)
|
|
-
|
|
|
Derivative
expense
|
|
|
(392,179
|
)
|
|
-
|
|
|
Other
expense, net
|
|
|
(9,049
|
)
|
|
-
|
|
| |
|
|
(784,046
|
)
|
|
-
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
|
|
(4,496,095
|
)
|
|
(1,352,931
|
)
|
| |
|
|
|
|
|
|
|
|
Provision
for income taxes
|
|
|
-
|
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
NET
LOSS
|
|
|
(4,496,095
|
)
|
|
(1,352,931
|
)
|
| |
|
|
|
|
|
|
|
|
Preferred
stock dividends
|
|
|
(543,512
|
)
|
|
-
|
|
| |
|
|
|
|
|
|
|
|
LOSS
APPLICABLE TO COMMON STOCKHOLDERS
|
|
$
|
(5,039,607
|
)
|
$
|
(1,352,931
|
)
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted weighted average shares
|
|
|
97,764,539
|
|
|
86,089,275
|
|
| |
|
|
|
|
|
|
|
|
Basic
and diluted loss per share
|
|
$
|
(0.05
|
)
|
$
|
(0.02
|
)
|
See
notes to consolidated financial statements.
ELEMENT
21 GOLF COMPANY
CONSOLIDATED
STATEMENT OF CHANGES IN SHAREHOLDERS' DEFICIT
FOR
THE YEARS ENDED JUNE 30, 2006 AND 2005
| |
|
Series
A Preferred Stock
|
|
Shares
|
|
Common
Stock
|
|
Additional
Paid-In Capital
|
|
Deficit
Accumulated During the Development Stage
|
|
Accumulated
Deficit
|
|
Total
Shareholders’ Equity (Deficit)
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
June 30, 2004
|
|
$
|
-
|
|
|
82,653,312
|
|
$
|
826,533
|
|
$
|
9,871,868
|
|
$
|
(3,261,401
|
)
|
$
|
(8,102,149
|
)
|
$
|
(665,149
|
)
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
4,833,929
|
|
|
48,339
|
|
|
269,899
|
|
|
-
|
|
|
-
|
|
|
318,238
|
|
|
Reclass
development stage deficit
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
3,261,401
|
|
|
(3,261,401
|
)
|
|
-
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(1,352,931
|
)
|
|
(1,352,931
|
)
|
|
Balance,
June 30, 2005
|
|
|
-
|
|
|
87,487,241
|
|
|
874,872
|
|
|
10,141,767
|
|
|
-
|
|
|
(12,716,481
|
)
|
|
(1,699,842
|
)
|
|
Issuance
of Series A Preferred Stock
|
|
|
2,114
|
|
|
-
|
|
|
-
|
|
|
2,111,442
|
|
|
-
|
|
|
-
|
|
|
2,113,556
|
|
|
Beneficial
conversion feature of convertible preferred stock
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
543,512
|
|
|
-
|
|
|
-
|
|
|
543,512
|
|
|
Deemed
dividend
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(543,512
|
)
|
|
-
|
|
|
-
|
|
|
(543,513
|
)
|
|
Issuance
of warrants for services
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
219,020
|
|
|
-
|
|
|
-
|
|
|
219,020
|
|
|
Issuance
of convertible notes
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
63,234
|
|
|
-
|
|
|
-
|
|
|
63,234
|
|
|
Sale
of warrants
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
-
|
|
|
-
|
|
|
80,000
|
|
|
Issuance
of common stock for services
|
|
|
-
|
|
|
12,143,313
|
|
|
121,436
|
|
|
838,500
|
|
|
-
|
|
|
-
|
|
|
959,936
|
|
|
Net
loss
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
(4,496,095
|
)
|
|
(4,496,095
|
)
|
|
Balance,
June 30, 2006
|
|
$
|
2,114
|
|
|
99,630,554
|
|
$
|
996,308
|
|
$
|
13,453,963
|
|
$
|
-
|
|
$
|
(17,212,576
|
)
|
$
|
(2,760,191
|
)
|
See
notes to consolidated financial statements.
ELEMENT
21 GOLF COMPANY
CONSOLIDATED
STATEMENTS OF CASH FLOWS
FOR
THE YEARS ENDED JUNE 30, 2006 AND 2005
| |
|
2006
|
|
2005
|
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,496,095
|
)
|
$
|
(1,352,931
|
)
|
|
Adjustments
to reconcile net loss to net cash (used in) operating
activities:
|
|
|
|
|
|
|
|
|
Compensatory
common stock and warrants
|
|
|
959,936
|
|
|
318,238
|
|
|
Compensatory
preferred stock
|
|
|
777,397
|
|
|
-
|
|
|
Beneficial
conversion feature of convertible notes
|
|
|
63,234
|
|
|
-
|
|
|
Depreciation
|
|
|
171,704
|
|
|
747
|
|
|
Amortization
of discount to convertible notes
|
|
|
348,581
|
|
|
-
|
|
|
Excess
derivative liability expense
|
|
|
392,179
|
|
|
-
|
|
|
Changes
in:
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
24,457
|
|
|
(36,451
|
)
|
|
Inventories
|
|
|
42,546
|
|
|
(170,928
|
)
|
|
Prepaid
expenses and other current assets
|
|
|
(11,527
|
)
|
|
(4,193
|
)
|
|
Accounts
payable
|
|
|
(259,255
|
)
|
|
319,701
|
|
|
Accrued
interest
|
|
|
31,485
|
|
|
-
|
|
|
Derivative
liability
|
|
|
1,491,945
|
|
|
-
|
|
|
Accrued
expenses
|
|
|
511,858
|
|
|
511,063
|
|
|
Net
cash provided by (used in) operating activities
|
|
|
48,445
|
|
|
(414,754
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOW FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchase
of capital assets
|
|
|
(669,522
|
)
|
|
(13,459
|
)
|
|
Net
cash (used in) investing activities
|
|
|
(669,522
|
)
|
|
(13,459
|
)
|
| |
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Advances
from related parties
|
|
|
(379,602
|
)
|
|
(29,866
|
)
|
|
Proceeds
from sale of warrants
|
|
|
80,000
|
|
|
-
|
|
|
Proceeds
from issuance of convertible notes
|
|
|
1,163,000
|
|
|
-
|
|
|
Loan
proceeds from shareholders
|
|
|
19,750
|
|
|
456,433
|
|
|
Net
cash provided from financing activities
|
|
|
883,148
|
|
|
426,567
|
|
| |
|
|
|
|
|
|
|
|
NET
(DECREASE) INCREASE IN CASH
|
|
|
262,071
|
|
|
(1,646
|
)
|
| |
|
|
|
|
|
|
|
|
CASH,
BEGINNING OF YEAR
|
|
|
1,148
|
|
|
2,794
|
|
| |
|
|
|
|
|
|
|
|
CASH,
END OF YEAR
|
|
$
|
263,219
|
|
$
|
1,148
|
|
| |
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
Interest
paid
|
|
$
|
-
|
|
$
|
-
|
|
|
Taxes
paid
|
|
|
-
|
|
|
-
|
|
See
notes to consolidated financial statements.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES:
| (a) |
Organization
and Basis of Presentation:
|
In
September of 2002, BRL Holdings, Inc. (“BRL”) acquired Element 21 Technologies,
Inc. (“Technologies”) under an Amended and Restated Agreement (the “Agreement”)
wherein BRL issued 42,472,420 shares of its common stock to shareholders of
Technologies and assumed Technologies’ obligations under option agreements
allowing for the purchase of 6,432,000 additional shares of common stock.
Technologies was a development stage company formed to design, develop and
market E21 alloy golf clubs. This acquisition was accounted for as a reverse
acquisition using the purchase method of accounting, as the shareholders of
Technologies assumed control immediately following the acquisition.
Immediately
following the closing of the Technologies acquisition BRL declared: 1) a 2
for 1
split of its common stock effected in the form of a dividend and 2) a dividend
of 100% of its ownership of TVI (now named AssureTec Holdings, Inc.
(“AssureTec”) and Advanced Conductor Technologies, Inc. (“ACT”) which
collectively represented substantially all of BRL’s assets prior to its
acquisition of Technologies (the “Spin-Off”) and the officers and directors
immediately prior to the acquisition resigned. The shareholders who received
common stock in connection with the Technologies acquisition have received
the
stock dividend, but have waived their rights to receive distributions associated
with the planned Spin-Off. The Spin-Off has not yet been effected and will
only
occur after compliance with Securities and Exchange Commission
regulations.
In
October 2003, BRL Holdings, Inc. changed its name to Element 21 Golf Company
(the “Company”).
In
May
2001, the Company declared a reverse split of the then outstanding common stock
of the Company on a one-for-12.5 basis. In July of 2001 the Company formed
Advanced Conductor Technologies, Inc (“ACT”) and I-JAM Entertainment, Inc.
(I-JAM) as wholly owned subsidiaries. These entities were formed in anticipation
of certain merger and acquisition transactions, which were never consummated.
These entities currently have no operating business and no sources of revenue.
In November 2001, the Company issued 6,354,000 shares of its common stock under
an Acquisition Agreement (the “Acquisition”) with AssureTec wherein the Company
received 100% of AssureTec’s common stock. Effective April 1, 2002 the Company
repurchased 5,704,000 shares of its common stock issued in connection with
the
Acquisition from founding shareholders of AssureTec in exchange for a like
number of AssureTec common stock held by the Company. As a result of these
transactions and the issuance of additional shares of AssureTec to employees
on
the exercise of stock options, the Company’s ownership fell to 34.2 % of
AssureTec as of June 30, 2002. As of June 2005, this investment has been written
down to zero as a result of losses incurred by AssureTec.
Upon
the
closing of the Technologies acquisition, as discussed above, the Company
reported as a development stage enterprise effective September 17, 2002. During
fiscal year 2005, the Company commenced active operations and began reporting
revenues during the last quarter of the year. As such, the Company is no longer
reporting as a development stage entity.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(b) Going
Concern:
These
financial statements have been presented on the basis that the Company is a
going concern, which contemplates the realization of assets and the satisfaction
of liabilities in the normal course of business. The Company’s subsidiaries are
inactive and are not expected to produce significant revenues or generate cash.
During the last quarter of fiscal year 2005, the Company commenced sales of
its
products and has begun generating revenue. However, as of June 30, 2006, the
Company continues to have negative working capital of $2,662,558, an accumulated
deficit of $17,212,576 ($3,261,401 of which was realized during the development
stage period from September 17, 2002 to June 30, 2004), a total shareholders’
deficit of $2,760,191 and for the year ended June 30, 2006 incurred a net loss
of $4,496,095, all of which raise substantial doubt about the Company’s ability
to continue as a going concern.
Managements’
plans for the Company include more aggressive marketing, raising additional
capital (see Note 9 - Subsequent Events) and other strategies designed to
optimize shareholder value. However, no assurance can be made that management
will be successful in fulfilling all components of its plan. The failure to
achieve these plans will have a material adverse effect on the Company’s
financial position, results of operations and ability to continue as a going
concern.
(c) Principles
of Consolidation:
The
accompanying consolidated financial statements include the accounts of the
company and its wholly owned, inactive subsidiaries (Element 21 Technologies,
Inc. and Advanced Conductor Technologies, Inc.). All significant inter-company
accounts and transactions have been eliminated.
(d) Use
of Estimates:
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States of America 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 the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
(e) Fair
Value of Financial Instruments:
The
Company’s significant financial instruments consist of cash, short-term
receivables and payables. The carrying value of all such instruments
approximates their fair value. The fair value of convertible notes and loans
and
advances from officers and shareholders are not determinable due to the terms
of
these instruments.
(f) Cash
and Cash Equivalents:
For
purposes of the statements of cash flows, the Company considers all highly
liquid investments purchased with a remaining maturity of three months or less
to be cash equivalents.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(g) Inventories:
Inventories,
which consist primarily of goods held for resale, are stated at the lower of
cost (first-in, first-out method) or market.
(h) Fixed
Assets and Depreciation:
Fixed
assets are recorded at cost. Expenditures for major additions and improvements
are capitalized and minor replacements, maintenance and repairs are expensed
as
incurred. Depreciation is provided over the estimated useful lives of the
related assets using the straight-line method for financial statement purposes.
The estimated useful lives are as follows:
|
Furniture
and fixtures
|
5
years
|
|
Computer
equipment
|
3
years
|
|
Office
equipment
|
5
years
|
(i) Revenue
Recognition:
The
Company recognizes revenue in accordance with the Securities and Exchange
Commission Staff Accounting Bulletin No. 104, “Revenue Recognition” (“SAB 104”).
Under SAB 104, revenue is recognized when there is persuasive evidence of an
arrangement, delivery has occurred or services have been rendered, the sales
price is determinable, and collectibility is reasonably assured. Revenues
from product sales are recognized when title passes to customers, which is
when
goods are shipped.
(j) Income
Taxes:
Deferred
income taxes are recognized for the tax consequences in future years for
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory
tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense
is
the tax payable for the period and the change in deferred tax assets and
liabilities during the period.
(k) Stock-Based
Compensation:
The
Company accounts for equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force (“EITF”) No.
96-18, “Accounting for Equity Instruments That Are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling, Goods or Services.”
The
Company does not maintain a formal incentive compensation plan covering its
employees, directors and independent contractors. Options to purchase the
Company’s common stock vest at varying intervals, but in general, typically vest
over two to four year periods. An option’s maximum term is ten years. See Note 3
for additional information regarding the Company’s stock options.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(l) Net
Loss Per Common Share:
Basic
net
loss per common share is computed by dividing the net loss applicable to common
shareholders by the weighted average number of common shares outstanding during
the period. Diluted net loss per common share reflects, in addition to the
weighted average number of common shares, the potential dilution if common
stock
options were exercised into common stock, unless the effects of such exercises
would have been antidilutive.
(m) New
Accounting Pronouncements Affecting the Company:
In
December 2004, the FASB issued SFAS No. 123 (revised 2004), or SFAS 123R,
“Share-Based Payment.” This statement replaces SFAS 123, “Accounting for
Stock-Based Compensation” and supersedes Accounting Principles Board’s Opinion
No. 25 (ABP 25), “Accounting for Stock Issued to Employees.” SFAS 123R will
require us to measure the cost of our employee stock-based compensation awards
granted after the effective date based on the grant date fair value of those
awards and to record that cost as compensation expense over the period during
which the employee is required to perform services in exchange for the award
(generally over the vesting period of the award). SFAS 123R addresses all forms
of share-based payments awards, including shares issued under employee stock
purchase plans, stock options, restricted stock and stock appreciation rights.
In addition, we will be required to record compensation expense (as previous
awards continue to vest) for the unvested portion of previously granted awards
that remain outstanding at the date of adoption. SFAS 123R is effective for
us
(a small business issuer) beginning
with the first interim or
annual
reporting period that begins after December 15, 2005.
Therefore, we are required to implement the standard no later than the fiscal
quarter which begins on January 1, 2006. SFAS 123R permits public companies
to
adopt its requirements using the following methods: (1) a “modified prospective”
method in which compensation cost is recognized beginning with the effective
date (a) based on the requirements of SFAS 123R for all share-based payments
granted after the effective date and (b) based on the requirements of SFAS
123
for all awards granted to employees prior to the effective date of SFAS 123R
that remain unvested on the effective date; or (2) a “modified retrospective”
method which includes the requirements of the modified prospective method
described above, but also permits entities to restate their financial statements
based on the amounts previously recognized under SFAS 123 for purposes of pro
forma disclosures for either (a) all prior periods presented or (b) prior
interim periods of the year of adoption.
The
adoption of SFAS 123R’s fair value method did not have a significant impact on
our results of operations.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
1 - SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES (Continued):
(m) New
Accounting Pronouncements Affecting the Company
(continued):
In
June
2005, the FASB issued Statement of Financial Accounting Standard No. 154,
Accounting
Changes and Error Corrections,
("SFAS
154"). SFAS 154 replaces Accounting Principle Bulletin No. 20 ("APB 20"), and
Statement of Financial Accounting Standard No. 3, Reporting
Accounting
Changes
in Interim Financial Statements
("SFAS
3"), and applies to all voluntary changes in accounting principle, and changes
the requirements for accounting for and reporting of a change in accounting
principle. APB 20 previously required that most voluntary changes in accounting
principle be recognized by including in net income of the period of change
a
cumulative effect of changing to the new accounting principle, whereas SFAS
154
requires retrospective application to prior periods' financial statements of
a
voluntary change in accounting principle unless it is impracticable. SFAS 154
enhances the consistency of financial information between periods. SFAS 154
is
effective for fiscal years beginning after December 15, 2005. Our adoption
of
SFAS 154 is not expected to have a material impact on our results of operations
or financial position.
In
July
2006, the FASB issued FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes
(FIN
48), which, among other things, requires applying a "more likely than not"
threshold to the recognition and derecognition of tax positions. The provisions
of FIN 48 will be effective for us on July 1, 2007. We are currently evaluating
the impact of adopting FIN 48 on the financial statements, but we do not expect
its adoption to have a significant transition effect.
NOTE
2 - FIXED
ASSETS:
Fixed
assets consists of the following:
| |
|
2006
|
|
2005
|
|
|
Furniture
and fixtures
|
|
$
|
10,178
|
|
$
|
3,530
|
|
|
Computer
equipment
|
|
|
5,984
|
|
|
929
|
|
|
Tools
& Dies
|
|
|
635,791
|
|
|
-
|
|
|
Leasehold
improvements
|
|
|
24,428
|
|
|
-
|
|
|
Office
equipment
|
|
|
6,600
|
|
|
9,000
|
|
| |
|
|
682,981
|
|
|
13,459
|
|
|
Less:
accumulated depreciation
|
|
|
172,451
|
|
|
747
|
|
| |
|
$
|
510,530
|
|
$
|
12,712
|
|
Depreciation
expense for the fiscal 2006 and 2005 years aggregated $171,704 and $747,
respectively.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
3 - RELATED
PARTY TRANSACTIONS:
(a) Accounts
Payable - Related Parties:
Since
April of 1996 and until June 30, 2005, the Company had engaged R T Robertson
Consultants, Inc. (“Robertson”) and Robertson Advisors, LLC (“Advisors”),
consulting firms controlled by family members of Dr. R. Bruce Reeves, to perform
the executive duties of the Company without specific compensation. Mr. Reeves
was a member of the Board of Directors, President, and Chief Executive Officer
of the Company until October 4, 2002. In this capacity and as an employee of
the
consulting firm, Dr. Reeves managed ongoing business activities of the Company
until the transaction in September 2002. During the fiscal year ended June
30,
2005, Robertson and/or Advisors charged $135,000 in administrative management
oversight plus $9,049 in billable expenses to the Company and its subsidiaries.
At June 30, 2006, $117,468 was owed to Robertson, $132,329 was owed to Advisors,
$1,876 was owed to Dr. Reeves and the balance was owed to other related parties.
All parties have indicated that payment of these balances is not expected during
the next fiscal year.
(b) Loans
and Advances - Officers/Shareholders:
All
loans
and advances from officers/shareholders were made on a non-interest bearing
basis and the officer has agreed to not demand payment during the next fiscal
year.
Included
in Accrued Expenses is approximately $500,000 of consulting compensation accrued
for our officers and directors. Depending on the financial condition of the
Company, this liability may be converted into Company common stock at a future
date.
NOTE
4 - CONVERTIBLE
NOTES:
Bridge
I Financing:
Between
January 17 and March 6, 2006, the Company issued 10% Convertible Promissory
Notes in the aggregate principal face amount of $540,000 to 15 individual
investors. In respect of notes totaling $340,000 (“$340,000 Notes”), each such
investor also received three separate warrants (a warrant exercisable for one
year, a warrant exercisable for two years, and a warrant exercisable for three
years) to purchase shares of the Company's common stock up to an amount equal
to
the initial investment in the Notes at an exercise price to be determined based
on a twenty day trading average of shares of the Company’s Common Stock prior to
the date of exercise or from and after the date of an equity financing of at
least $5.0 million (“Equity Financing”), if that at all occurs, the price per
share paid by participants in the Equity Financing. In respect of one note
for
$200,000 (“200,000 Note”), the investor received 3,243,243 warrants (1/3
warrants exercisable for one year, 1/3 warrants exercisable for two years,
and
remaining 1/3 warrants exercisable for three years) with similar terms, except
that the warrants are exercisable at an exercise price which is fixed at $0.17
per share. All these warrants are subject to certain anti-dilution price
adjustments. The Notes mature one year after issuance and accrue interest at
an
annual interest rate equal to 10% per annum, payable at maturity. The notes
are
convertible, at the option of the investor, into shares of Company’s Common
Stock, upon the consummation by the Company of an Equity Financing, at a price
equal to the price per share paid by participants in the equity financing in
respect of the $340,000 Notes and at $0.17 per share in respect of the $200,000
Note.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
4 - CONVERTIBLE
NOTES (Continued):
Bridge
II Financing:
Between
May 5 and June 29th, 2006, the Company issued additional 10% Convertible
Promissory Notes in the aggregate principal face amount of $623,000 to 16
individual investors. Each such investor also received warrants, exercisable
for
one year, to purchase shares of the Company's common stock up to 150% of the
investor’s initial investment in the Notes at an exercise price equal to the
lesser of (i) $0.175, or (ii) the ten day trading average of shares of the
Company’s Common Stock prior to the date of exercise. All these warrants are
subject to certain anti-dilution price adjustments. The Notes mature one year
after issuance and accrue interest at an annual interest rate equal to 10%
per
annum, payable at maturity. The notes are convertible, at the option of the
investor, into shares of Company’s Common Stock at a conversion price equal to
the lesser of (i) $0.175, or (ii) the ten day trading average of shares of
the
Company’s Common Stock prior to the date of conversion.
The
Company has accounted for the above convertible notes and warrants as follows:
under the provisions of Statement of Financial Accounting Standards No. 133,
Accounting for Derivative Instruments and Hedging Activities, ("SFAS 133")
an
embedded conversion option should be bifurcated and accounted for separately
as
a derivative instrument, unless the specific requirements for equity
classification of the embedded conversion option, as stated in EITF 00-19:
Accounting for Derivative Financial Instruments Indexed to, and Potentially
Settled in, a Company's Own Stock (“EITF 00-19”) are met. EITF 00-19 provides
that an equity classification is appropriate if the settlement criteria set
forth therein for such classification are met and that the additional conditions
necessary for equity classification, set forth therein, are also met.
The
Company has analyzed the convertible notes and warrants under the two Bridge
financings and has made the following determination:
The
conversion option in respect of Bridge I Financing -$340,000 Notes was not
valued as management determined that the probability of a Equity Financing
of
$5.0 million was remote. Even if the option had some value, in absence of a
conversion price it was not possible to value the conversion option, if any.
The
corresponding warrants were determined to be a liability due to a theoretical
exercise price that could be very small to cause the number of shares to be
issued to be indeterminate and hence net share settlement is not within the
control of the Company. This is as per paragraph 20 of EITF 00-19. These
warrants were initially valued at $560,610, which is in excess of the value
of
the underlying Notes. As such, the value of the warrants has been restricted
to
the amount of the proceeds of $340,000 and has been recorded as a discount
to
the convertible notes with a corresponding credit to warrant liability. The
discount of $340,000 is accreted on a straight-line basis over the maturity
period of the note. As a result of the Company losing control over the number
of
shares to be issued (the “tainting feature”), all embedded derivatives and
warrants related to convertible notes issued subsequently defaulted to being
a
derivative liability.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
4 - CONVERTIBLE
NOTES (Continued):
The
conversion option in respect of Bridge I Financing -$200,000 Notes was not
valued as management determined that the probability of a Equity Financing
of
$5.0 million was remote. The corresponding warrants were determined to be a
liability due to the tainting feature stated above. These warrants were
initially valued at $269,690 which is in excess of the value of the underlying
Notes. As such, the value of the warrants has been restricted to the amount
of
the proceeds of $200,000 and has been recorded as discount to the convertible
notes with a corresponding credit to warrant liability. The discount of $200,000
is accreted on a straight-line basis over the maturity period of the note.
The
conversion option and the warrants in respect of Bridge II Financing were
determined to be a liability due to due to the tainting feature stated above.
The conversion option and warrants were initially valued in excess of the
proceeds of the underlying notes. As such, the value of the warrants and the
conversion option was restricted to the amount of the proceeds of $623,000
and
have been recorded as discount to the convertible notes with a corresponding
credit to a derivative liability for warrants and conversion feature. The
discount of $623,000 is being accreted on a straight-line basis over the
maturity period of the note.
The
Company values the conversion option and the warrants under the Black Scholes
option-pricing model with the following assumptions: an expected life equal
to
the contractual term of the conversion option or warrants, as the case may
be;
no dividends; a risk free rate of return of 5.1% and volatility of 163%.
EITF
00-19 requires that the Company revalue the derivative instruments periodically
to compute the value in connection with changes in the underlying stock price
and other assumptions, with the change in value recorded as interest expense
or
interest income. Upon the earlier of the warrant exercise or their expiration
date, the warrant liability will be reclassified into shareholders’ equity.
Until that time, the warrant liability will be recorded at fair value based
on
the methodology described above. Changes in the fair value during each period
will be recorded as other income or other expense. The Company similarly
revalues the conversion option each reporting period with the change in value
recorded as interest expense or interest income.
As
of
June 30 2006, Bridge I financing warrants issued were revalued and the change
in
fair value of these warrants from $922,448 to $932,179 or $9,731 has been
recorded as other expense. Similarly, the Bridge II financing warrants and
conversion feature was revalued as of June 30, 2006 and there was no significant
change in fair value.
NOTE
5 - PREFERRED SHARES:
In
February 2006, the Company issued a total of 2,113,556 shares of newly
designated Series A Convertible Preferred Stock (“Series A Preferred”) in order
to settle outstanding debts owed to officers and consultants of the Company
(a
portion of which were for unpaid consulting fees) in the aggregate amount of
$2,113,556. The shares of Series A Series A Preferred are convertible at the
option of the holder, at any time after issuance. Each share of Series A
Preferred is convertible into that number of shares of common stock of the
Company as is equal to the Original Issue Price of shares of Series A Preferred,
or $1.00, by the Conversion Price which is initially equal to $0.255 and is
subject to adjustment in certain cases. Each share of Series A Preferred carries
with it the right to fifty votes.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
5 - PREFERRED SHARES (Continued):
Also,
in
February 2006, the Company issued a warrant to purchase 1,000,000 shares of
the
Company’s common stock at a price of $0.01 as part of the Company’s repayment of
outstanding indebtedness to a creditor of the company. The warrants vested
immediately and are exercisable for a three year period from the date of
issuance.
All
of
the foregoing securities were issued upon reliance on the exemption from the
Securities Act registration requirements contained in Section 4(2) of the
Securities Act.
The
Company has evaluated the Series A Preferred to determine if there are any
embedded derivatives and determined that the Series A Preferred is more akin
to
debt than equity as it is not redeemable and carries voting rights. As such
the
Series A Preferred is considered perpetual and the option to convert into shares
of Company’s Common Stock is clearly and closely related to the host contract
i.e. Series A Preferred and therefore need not be separated. The warrants
associated with the issuance of some of the Series A Preferred have been
determined to be equity in accordance with FAS 133 and EITF 00-19, as there
are
no registration rights and associated liquidated damages. The warrants have
been
valued at $209,593 using the Black Scholes method. The value of the warrant
has
been recorded as a discount to the Series A Preferred and has been charged
as
dividend expense. The Series A Preferred is evaluated further under EITF 98-5:
Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios, (“EITF 98-5”) and EITF 00-27:
Application of Issue No. 98-5 to Certain Convertible Instruments, (“EITF 00-27”)
to determine if there is any beneficial conversion feature associated with
the
conversion. The Company calculated the beneficial conversion to be $333,920.
The
beneficial conversion feature has been charged as dividend expense.
NOTE
6 - SHAREHOLDERS’
EQUITY/STOCK OPTION PLANS:
During
fiscal 2006, the Company issued 12,143,313 shares of its common stock to various
consultants for marketing and investor relations services provided. Such shares
were valued at the market price as of the date of issuance, aggregating
$1,296,242.
During
fiscal 2005, the Company issued 4,833,929 shares of common stock for consulting
and legal services and in settlement of liabilities. The value recorded was
based on the market price at the time of issuance and aggregated
$318,238.
As
of
June 30, 2006 there are two stock option plans in effect; the 1992 Directors'
Stock Option Plan (Directors' Plan) and the 1992 Stock Option Plan (Option
Plan). The Directors' Plan allows for the grant of options to purchase up to
250,000 shares of the Company’s common stock at an exercise price no less than
the stock market price at the date of grant. Options granted under this Plan
vest immediately and expire 10 years from the date of grant. The Option Plan
allows for the grant of options to employees to purchase up to 10% of the issued
and outstanding shares of the Company, not to exceed 1,000,000 shares, at an
exercise price equal to the stock’s market price at the date of grant. The Board
sets vesting and expiration dates.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
6 - SHAREHOLDERS’
EQUITY/STOCK OPTION PLANS (Continued):
The
following table summarizes information about stock options outstanding, all
of
which were granted under the Directors’ Plan and are exercisable: (needs to be
updated through June 30, 2006)
|
Outstanding
as of June 30, 2004
|
|
|
57,200
|
|
|
Expired
|
|
|
(4,400
|
)
|
|
Outstanding
as of June 30, 2005
|
|
|
52,800
|
|
|
Expired
|
|
|
(40,000)
|
|
|
Outstanding
as of June 30, 2006
|
|
|
12,800
|
|
Exercise
prices of the outstanding options are as follows:
|
Exercise
Prices
|
|
Number
of Options
|
|
$1.06
|
|
6,400
|
|
$0.32
|
|
3,200
|
|
$0.63
|
|
3,200
|
| |
|
|
| |
|
12,800
|
NOTE
7 - INCOME
TAXES:
The
Company has not filed federal or state tax returns for any of the tax years
subsequent to December 31, 1993. Management intends to cure this deficiency
as
soon as possible and expects there will be no federal tax liability (based
on
continued losses) for these delinquent years. Deferred tax assets and
liabilities consist of the following as of June 30:
| |
|
2006
|
|
2005
|
|
| |
|
|
|
|
|
| |
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carry forwards
|
|
$
|
2,136,300
|
|
$
|
1,429,990
|
|
| |
|
|
|
|
|
|
|
|
Less
valuation allowance
|
|
|
(2,136,300
|
)
|
|
(1,429,990
|
)
|
|
|
|
$
|
-
|
|
$
|
-
|
|
A
valuation allowance equivalent to 100% of the deferred tax asset has been
established since, at the current time, it is more likely than not, that the
Company will be able to recognize a tax benefit for the asset. The net operating
losses expire at various dates through 2024.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
8 - COMMITMENTS:
In
April
2006, the Company entered into a three-year lease for office space in Toronto,
Canada, for a monthly payment of $1,927 plus GST. The Company also terminated
negotiated a final settlement on its lease in Irvine, California for $1,992.
Rent expense for the years ended June 30, 2006 and 2005 aggregated $35,474
and
$22,906, respectively.
NOTE
9 - SUBSEQUENT
EVENT:
On
July
31, 2006 (the “Initial Closing Date”), the Company agreed to a $4 million equity
financing by entering into two Series B Convertible Preferred Stock Subscription
Agreements (each a “Subscription Agreement” and collectively the “Subscription
Agreements”) with each of Clearline Capital, LLC and Vladimir Goryunov (each a
“Purchaser” and collectively, the “Purchasers”). Each Subscription Agreement
provides for the sale by the Company to the applicable Purchaser of 117,648
shares of the Company’s Series B Convertible Preferred Stock, par value $0.10
per share (the “Series B Preferred Stock”), and warrants to purchase an
aggregate of 17,647,059 shares of the Company’s common stock, in exchange for
and in consideration of an aggregate investment by each Purchaser of $2 million
in cash (each Purchaser’s “Investment Amount”), which amount is to be invested
by each Purchaser in two equal $1 million installments, the first of which
occurred on the Initial Closing Date and the second of which will occur at
a
subsequent closing to occur on or before November 30, 2006 (the “Subsequent
Closing”, and the date of such Subsequent Closing, the “Subsequent Closing
Date”); provided that the Company satisfies the necessary condition precedent to
the Subsequent Closing as described below.
On
the
Initial Closing Date, each Purchaser invested $1 million in the Company in
return for 58,824 shares of Series B Preferred Stock and two warrants (the
terms
of which are more fully described below) to purchase an aggregate of 8,823,530
shares of common stock. The Subscription Agreements obligate each Purchaser
to
invest the remaining $1 million of its Investment Amount (each Purchaser’s
“Additional Investment Amount”) in the Company no later than November 30, 2006,
subject only to the Company converting at least 80% of the aggregate outstanding
principal amount evidenced by those certain convertible promissory notes issued
by the Company between February 2006 and July 31, 2006 (collectively, the
“Promissory Notes”) into shares of common stock prior to the Subsequent Closing
Date. In exchange for each Purchaser’s Additional Investment Amount, the Company
will issue to each Purchaser an additional 58,824 shares of Series B Preferred
Stock and two additional warrants (the terms of which are more fully described
below) to purchase an aggregate of an additional 8,823,529 shares of common
stock.
ELEMENT
21 GOLF COMPANY
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS
ENDED JUNE 30, 2006 AND 2005
NOTE
9 - SUBSEQUENT
EVENT:
On
the
Initial Closing Date the Company granted each Purchaser (i) one warrant to
purchase 3,750,000 shares of common stock at an exercise price of $0.22 per
share in the event the warrant is exercised on or prior to July 31, 2007, and
$0.28 per share in the event the warrant is exercised on or after August 1,
2007, and (ii) one warrant to purchase 5,073,530 shares of common stock at
an
exercise price of $0.28 per share (each an “Initial Warrant”, and collectively,
the “Initial Warrants”). Assuming that the conditions precedent to the
Subsequent Closing are satisfied, on the Subsequent Closing Date, the Company
will grant each Purchaser (i) one additional warrant to purchase 3,750,000
shares of common stock at an exercise price of $0.22 per share in the event
the
warrant is exercised on or prior to July 31, 2007, which increases to $0.28
per
share in the event the warrant is exercised on or after August 1, 2007, and
(ii)
one additional warrant to purchase 5,073,530 shares of common stock at an
exercise price of $0.28 per share (each a “Subsequent Warrant”, collectively,
the “Subsequent Warrants” and collectively with the Initial Warrants, the
“Warrants”). The Warrants expire on January 31, 2009. The exercise prices of the
Warrants are subject to adjustment in the event of certain dilutive issuances,
stock dividends, stock splits, share combinations or other similar
recapitalization events. The Warrants may only be exercised by the payment
of
the applicable exercise price to the Company in cash, no cashless exercise
is
permitted. The terms of the Initial Warrants and the Subsequent Warrants are
identical.