SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: November 4, 2010
TOMBSTONE TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Colorado 333-138184 51-0431963
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(State or other jurisdiction (Commission File Number) (IRS Employer Identifi
of incorporation) -cation Number)
10001 Woodloch Forest Drive, Suite 325, The Woodlands, TX 77380
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(Address of Principal Executive Offices) (Zip Code)
281-825-5000
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Registrant's telephone number, including area code
5830 Highlands Drive, Longmont, CO 80503
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(Former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR
230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR
240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange
Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange
Act (17 CFR 240.13e-4(c))
SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. The forward-looking
statements are contained principally in the sections entitled "Description of
Business," "Risk Factors," and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." These statements involve known
and unknown risks, uncertainties and other factors which may cause our actual
results, performance or achievements to be materially different from any future
results, performances or achievements expressed or implied by the
forward-looking statements. These risks and uncertainties include, but are not
limited to, the factors described in the section captioned "Risk Factors" above.
In some cases, you can identify forward-looking statements by terms such as
"anticipates," "believes," "could," "estimates," "expects," "intends," "may,"
"plans," "potential," "predicts," "projects," "should," "would" and similar
expressions intended to identify forward-looking statements. Forward-looking
statements reflect our current views with respect to future events and are based
on assumptions and subject to risks and uncertainties. Given these
uncertainties, you should not place undue reliance on these forward-looking
statements.
Also, forward-looking statements represent our estimates and
assumptions only as of the date of this report. You should read this
registration statement and the documents that we reference and filed as exhibits
to the registration statement completely and with the understanding that our
actual future results may be materially different from what we expect. Except as
required by law, we assume no obligation to update any forward-looking
statements publicly, or to update the reasons actual results could differ
materially from those anticipated in any forward-looking statements, even if new
information becomes available in the future.
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SECTION 1 - REGISTRANT'S BUSINESS AND OPERATIONS
Item 1.01 Entry Into a Material Definitive Agreement
Tombstone Technologies, Inc. hereby incorporates by reference its response
in Item 2.01 in response to Item 1.01.
SECTION 2 - FINANCIAL INFORMATION
Item 2.01 Completion Of Acquisition Or Disposition Of Assets
On January 19, 2010, Tombstone Technologies, Inc., a Colorado corporation
("Tombstone") and its wholly owned subsidiary Hunt Acquisition Corp ("Merger
Sub") entered into an Agreement and Plan of Merger (the "Merger Agreement") with
Hunt Global Resources, Inc., a Texas corporation ("Hunt").
The Merger Agreement and the acquisition agreed to therein (the
"Acquisition") was closed on October 29, 2010. At the closing, Hunt stockholders
exchanged 91% of its outstanding shares for Tombstone stock and Hunt was merged
into Merger Sub, with Hunt as the surviving entity. The Company anticipates that
the remaining 9% of stockholders will exchange their shares or exercise
dissenter's rights. The transaction was structured as a reverse merger whereby
the shareholders of Hunt were issued Common and Preferred Stock that will result
in ownership of approximately 94.6% of the issued and outstanding stock of
Tombstone on a fully diluted as-converted basis (after the remaining 9% of its
outstanding shares are exchanged). As a result, Hunt stockholders and management
own a controlling interest in the combined company.
Upon completion of the exchange of the remaining 9% of Hunt shares, this
transaction resulted in the issuance of Tombstone shares as follows:
o 29,000,000 shares of restricted Common Stock of Tombstone to the
holders of Hunt Common Stock and Hunt Preferred Stock;
o 125,000 shares of a new series of Class A Convertible Preferred Stock
of Tombstone to certain holders of Hunt Common Stock (having a
conversion ratio of one share of Preferred Stock to 208 shares of
Common Stock of Tombstone);
o 125,000 shares of a new series of Class B Convertible Preferred Stock
of Tombstone to the "Controlling Stockholders" of Hunt Common Stock
(having a conversion ratio of one share of Preferred Stock for 248
shares of Common Stock of Tombstone and having a quarterly dividend of
$0.56 per share); and
o A reserve for issuance of an additional 10,265,999 additional shares
of Tombstone Common Stock for the exercise of Tombstone stock options
for 1,689,999 shares of Tombstone Common Stock that have been extended
for two years and the exercise of Hunt warrants for 8,576,000 shares
of Hunt Common Stock.
The holders of 7,436,000 shares of Hunt Preferred Stock and warrants
to purchase 8,576,000 shares of Hunt Common Stock were converted into restricted
Tombstone Common Stock and Warrants on a one for one basis. The Controlling
Stockholders of Hunt (Jewel and Lisa Hunt and George Sharp via Crown Financial)
converted a substantial portion of their Hunt Common Stock into Tombstone Class
B Preferred Stock and will be required to hold such shares for two years unless
the Tombstone Common Stock achieves a $7.00 trading price for 10 consecutive
trading days. The remaining shares of outstanding Hunt Common Stock were
converted into a combination of Tombstone Common Stock and Class A Preferred
Stock on a pro rata basis. The holders of Tombstone Class A Preferred Stock will
be required to hold such shares for one year unless the Tombstone Common Stock
achieves a $3.00 trading price for 10 consecutive trading days.
As a result of this transaction, Tombstone created two additional
classes of securities, the Class A Convertible Preferred Stock (Class A) and
Class B Convertible Preferred Stock (Class B). The Class A has a deemed purchase
price of $10.00 per share, shall rank senior to the Common Stock and all classes
of Preferred Stock, bear no dividends, has voting rights of two hundred eight
(208) votes for each one (1) share of Class A shares and has a liquidation
preference of $10,000 per share. The holders of Class A will have the right to
convert each share of Class A for 208 shares of Common Stock should the Common
Stock trade at an average price of $3.00 per share for 10 consecutive trading
days or after a period of one year, whichever occurs first. The Class B has a
deemed purchase price of $10.00 per share, shall rank senior to the Common Stock
and all classes of Preferred Stock except the Class A, bear a dividend of $0.56
per share on a quarterly basis commencing on January 1, 2011, has voting rights
of two hundred forty eight (248) votes for each one (1) share of Class B shares
and has a liquidation preference of $10,000 per share. The holders of Class B
will have the right to convert each share of Class B for 248 shares of Common
Stock should the Common Stock trade at an average price of $7.00 per share for
10 consecutive trading days or after a period of two years, whichever occurs
first.
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The acquisition of Hunt under the Merger Agreement was intended to
qualify as a tax-free reorganization under the provisions of Section 368 of the
Internal Revenue Code of 1986, as amended, and to be accounted for on a purchase
basis.
The summary of the Merger Agreement set forth above does not purport
to be a complete statement of the terms of the Merger Agreement. The summary is
qualified in its entirety by reference to the full text of the executed Merger
Agreement which is filed as Exhibit 10.11 to this Form 8-K.
FORM 10 DISCLOSURE
Please note that the information provided below relates to the combined
enterprises after the acquisition of Hunt, except that information relating to
periods prior to the date of the reverse acquisition only relate to Hunt unless
otherwise specifically indicated.
References to "Tombstone", "we", "us", "our" and similar words refer to
Tombstone and its wholly-owned subsidiary, Hunt, unless the context otherwise
requires.
Item 1. Description of Business
Effective on the Closing Date, pursuant to the Merger Agreement, Hunt
became a wholly-owned subsidiary of Tombstone. The acquisition ("Acquisition")
of Hunt is treated as a reverse acquisition for accounting purposes, and the
business of Hunt became the business of Tombstone as a result of the
Acquisition. At the time of the Acquisition, Tombstone was a public corporation
and only had limited operations over the last three years. Hunt is a Houston
area-based company focused on the production of aggregates, including sand and
gravel from a 350 acre site near The Woodlands, Texas. Hunt will use new
technologies to maximize the value of the extracted commodities. Hunt's business
model centers on using new, "green" and more efficient extraction and processing
methods. Hunt is committed to environmental responsibility and builds
environmental considerations into its business strategies. Reserves are
essential to long-term success in the aggregates business. We have estimated
that approximately 40 million tons of permitted and proven reserves exist on our
site. Assuming adequate capital is available, we believe the mining site will be
fully operational by the third quarter of 2011.
Properties - Hunt has leased the surface mining rights to 350 acres of
land northwest of Houston (just north of The Woodlands, Texas) for a 20 year
period from the Hunt family. The mining site contains sand and gravel of
desirable size and color variations in the marketplace. All of the sand and
gravel is contained from the surface to a depth of fifty feet; the mining
process is "surface mining" that uses a dredging technique, utilizing water and
industrial vacuums to extract the material. The process is safer and less
expensive than other mining processes, and all the permits required in the state
of Texas for this type of mining have been obtained. The Hunt family will
receive a royalty of 10% of the gross revenues derived from the aggregates
extracted from the leased property.
During the past four years, Hunt has spent approximately $4.2 million
to ready the property for the proposed sand and gravel plant. During the past
decade, sand reserves have been depleted in the Houston area due to rapid urban
expansion, and highway expansion that has supported Houston as the fourth
largest city in the nation. While the sand and gravel market in Houston has felt
some impact from economic downturn, Texas and the Houston area have not gone
through the boom-and-bust cycle that has devastated other states, such as the
Arizona, California and Nevada infrastructure, including major highway expansion
in the Houston metro area, continues at a rapid pace. We expect to complete the
entire mining operation by the year 2027.
Momentum Biofuels, Inc. - On August 21, 2009, Hunt entered into an
Agreement with Momentum Biofuels, Inc. ("Momentum"), under the terms of which
Hunt agreed to assume certain the obligations of Momentum through the assignment
of a certain Senior Secured Promissory Note in the amount of $600,000 issued by
Momentum to a group of investors arranged by Bathgate Capital Partners, LLC, of
Denver, Colorado. Those obligations assumed by Hunt included assets of
$1,010,000, $965,000 in debt, approximately $600,000 in future lease
obligations, and $45,000 accrued interest payable on certain debt in exchange
for Momentum stock. The Company further agreed to assume Momentum's obligations
under a sub-lease agreement between Momentum and Brand Infrastructure and
Services, Inc., including all past due rent, assessments other charges related
to the property covered by the sub-lease agreement, all in exchange for a
conveyance of all of the right title and interest of Momentum, in and to all of
its physical assets, including the biodiesel plant located in Pasadena, Texas
and all intellectual property, processes, techniques and formulas for creating
biofuels and related products.
Further, Hunt entered into a License Agreement with Momentum, which
provided that in exchange for a grant of a license to use, improve, sublicense
and commercialize the intellectual property described in the Agreement, in
exchange for an agreement by Hunt to pay to Momentum, a royalty of 3% of the
gross and collected revenue received by Hunt from the sale of bio-diesel and
related products and from revenues received by Hunt from its proposed commercial
sand business. Momentum assigned its rights to receive the royalty from Hunt as
described in the License Agreement to its parent, (Momentum-Colorado) in
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exchange for common shares of Momentum-Colorado equal to 39% of the issued and
outstanding stock at such date, or 40,000,000 shares, whichever sum is greater
to be issued to Hunt. Such shares were to be issued by Momentum-Colorado as
fully paid, non-assessable and subject to a non dilution agreement in favor of
Hunt.
As a result of the Momentum transaction, Hunt created a subsidiary,
Hunt BioSolutions, Inc. to hold and operate the bio-fuels business. Hunt is
currently reviewing how it may expand these operations and/or integrate it into
the production of fracing sand, a more valuable commodity that may be produced
from Hunt's primary operations.
Reserves - Our current estimate of proven aggregates reserves is
approximately 40 million tons. Estimates of reserves are of recoverable stone,
sand and gravel of suitable quality for economic extraction, are based on the
following information we have accumulated regarding the mining site:
o A 1985 reserve report prepared by an engineering firm of a 1,000 acre
tract, that includes the 350 acre site we have leased.
o A geotechnical review and analysis was performed in 2006 by an
infrastructure firm to help determine the economic viability of mining
sand and gravel reserves at our mining site.
o An appraisal of going concern value was performed in 2009 by a
reputable commercial real estate firm to help determine potential cash
flows related to the mining site.
Management plans to obtain an updated engineered reserve report on the
specific 350 acre site in the near future. Proven, or measured, reserves are
those reserves for which the quantity is computed from dimensions revealed by
drill data, together with other direct and measurable observations such as
outcrops, trenches and quarry faces; the grade and/or quality are computed from
the results of detailed sampling; and the sampling and measurement data are
spaced so closely and the geologic character is so well defined that size,
shape, depth and mineral content of reserves are well-established.
Plant Design and Systems Competitive Advantage - The design of our
plant provides benefits to our Company. The product uses a hydraulic
classification that allows maximum yield to sellable product with minimal waste
and allows for the processing of two or more sands at one time (versus older
classifying tank technology that limits production to two products
simultaneously). This newer type of technology operates with fewer moving parts,
yielding lower maintenance costs, and due to the high degree of automation,
operates without the assistance of plant personnel.
Our proprietary software technology controls the operations of the
plant. The system allows for the control of the plant to produce custom blended
orders based on customer requirements, and it allows for each type of product to
be handled only once.
Fracturing Sand - Fracturing or "fracing" is a process where a
solution--made up primarily of sand and water--is injected into a well to
maintain fractures in the oil or natural gas bearing rock. These fractures allow
for the increased flow of oil or gas out of the formation, thus maximizing
production. Fracing has been used on roughly 90 percent of all wells in
operation today; it accounts for 30% of domestic recoverable oil and natural
gas. The sand used for fracing is mined and not manufactured, and the supply is
limited in the U.S. Additionally, when raw frac sand is resin coated, its value
and demand significantly increase because the resin coating dramatically
strengthens each grain, and this resistance to crushing prevents loss of
permeability in fractures. Laboratory testing of Hunt's raw frac sand has shown
the potential for coating our product with a high-strength resin. This added
feature dramatically increases the product's market value.
Market Assessment - In spite of the economic downturn, Hunt management
believes the trends are favorable for execution of its business plan for the
following reasons, (1) the need for more deposits found in this part of the
country, (2) the demand for frac sand at the three large shale oil and gas
extraction fields located in Texas, (3) a desirable location to operate a
business and recruit management and (4) a unique opportunity to consolidate a
fragmented surface mining market. We have therefore concluded there can be a
growth opportunity for sand and gravel operations. Further, management believes
the location of the facility is in the heart of one of the fastest growing
residential and commercial markets, The Woodlands, Texas.
History of Hunt
The leased mining site property is owned by the Hunt family, who began
business operations in 1860. In 1880, the family received federal deeds and land
grants for thousands of acres of timber land throughout East Texas. During the
period from 1900 to 1990, the Hunt family was one of the largest owners of
timber land and saw mill operators in the United States. Environmental
stewardship has been an important aspect of the family's values and business
operations for more than 100 years.
The family eventually sold off their timberland and saw mill business
operations in the early 1990s just before federal regulatory changes placed
significant restrictions on the industry. Jewel Hunt, a director of Hunt,
maintained ownership of several hundred acres of the original land-grant for the
significant sand and gravel reserves existing on the property.
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In December 2008, the Hunt family leased the surface mining rights to
350 acres of land to a newly formed company (Hunt Global Resources, Inc.). The
land is owned by Jewel and Lisa Hunt, officers and directors of the combined
Company. As part of ascertaining the "highest and best use" of the land, a
series of engineering and environmental reports were commissioned. In addition
to the engineering and environmental reports, the Hunts hired a sand and gravel
company to mine the property on a limited basis. As a result of those efforts,
it was determined that:
o The sand and gravel on the property is of high quality.
o The size and color variation of the material is desirable in the
market place.
o The property can not only supply sand and concrete gravel for the
highway and building industries (where local demand actually
outstripped supply prior to the economic downturn), it can also supply
fine sand for glass manufacturing and frac sand for the oil and gas
industry, where nationwide supplies are limited. The unique size and
quality of the frac sand enables it to be resin-coated, and thereby
utilized by the oil and gas industry in recoveries of deposits using
new technologies instead of more traditional extractable methods.
o All of the material is contained from the surface to a depth of fifty
feet; the mining process is "surface mining" which uses a dredging
technique, utilizing water and industrial vacuums to extract the
material.
o The process is safer and less expensive than other mining processes,
and all the permits that are required in the state of Texas for this
type of mining have been obtained.
To further ascertain the viability of initiating a profitable mining
operation on the property, a business development team was formed to analyze the
target marketing area, build a business model and provide the structure for
on-going business operations. The resulting business model is based on:
o At one point during 2007-2008, over 70% of the sand and gravel
supplies needed for the Houston area were delivered by train from
outlying areas in west and central Texas and New Mexico. The northwest
Houston area (Hunt's location) once had eight sand and gravel
operations; that number has fallen to five as supplies have
diminished.
o Supply and Demand. Houston, the nation's fourth largest city, has been
a high-demand area for sand and gravel. Due to the oil and gas
business, Houston has not experienced the same degree of economic
downturn as some other major cities. In addition, billions of dollars
in bonds have been approved by the Texas Department of Transportation
for road construction in addition to the billions of dollars from the
American Recovery & Reinvestment Act of 2009 for infrastructure.
o Analysts predict that the demand for sand and gravel will continue to
grow over time; while the full extent of its performance may not be
reflected in revenue until after 2010 when the recovery of the housing
market further emerges, highway and public infrastructure projects
offset losses in the commercial sector. Highway funding, commercial
building interior and exterior security structure opportunities, new
operations technology allowing masonry producers to better sell
products, availability of alternative fuels, and decorative concrete
methods are just a few of the industry opportunities available today.
With the rig count in the oil and gas industry showing increase, the
demand for frac sand is expected to grow. As such, the industry can be
expected to increase their staff over time to accommodate the coming
demand.
Based on these studies and tests, Hunt Global Resources was formed, and
Lisa and Jewel Hunt executed a 20 year lease with Hunt in order to begin the
process of extracting the materials from the property.
Applications for Hunt Products
Glassmaking - Silica sand is the primary component of all types of
standard and specialty glass. It provides the essential Silicon Dioxide (SiO2)
component of glass formulation and its chemical purity is the primary
determinant of color, clarity and strength. Industrial sand is used to produce
flat glass for building and automotive use, container glass for foods and
beverages, and tableware. In its pulverized form, ground silica is required for
production of fiberglass insulation and reinforcing glass fibers. Specialty
glass applications include test tubes and other scientific tools, incandescent
and fluorescent lamps, television and computer CRT monitors.
MetalCasting - Industrial sand is an essential part of the ferrous and
non-ferrous foundry industry. Metal parts ranging from engine blocks to sink
faucets are cast in a sand and clay mold to produce the external shape, and a
resin bonded core that creates the desired internal shape. Silica's high fusion
point (1760(degree)C) and low rate of thermal expansion produce stable cores and
molds compatible with all pouring temperatures and alloy systems. Its chemical
purity also helps prevent interaction with catalysts or curing rate of chemical
binders. Following the casting process, core sand can be thermally or
mechanically recycled to produce new cores or molds.
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Building Products - Industrial sand is the primary structural component
in a wide variety of building and construction products. Whole grain silica is
put to use in flooring compounds, mortars, specialty cements, stucco, roofing
shingles, skid resistant surfaces and asphalt mixtures to provide packing
density and flexural strength without adversely affecting the chemical
properties of the binding system. Ground silica performs as a functional
extender to add durability and anti-corrosion and weathering properties in epoxy
based compounds, sealants and caulks.
Metallurgical - Industrial sand plays a critical role in the production
of a wide variety of ferrous and non-ferrous metals. In metal production, silica
sand operates as a flux to lower the melting point and viscosity of the slags to
make them more reactive and efficient. Lump silica is used either alone or in
conjunction with lime to achieve the desired base/acid ratio required for
purification. These base metals can be further refined and modified with other
ingredients to achieve specific properties such as high strength, corrosion
resistance or electrical conductivity. Ferroalloys are essential to specialty
steel production, and industrial sand is used by the steel and foundry
industries for de-oxidation and grain refinement.
Chemical Production - Silicon-based chemicals are the foundation of
thousands of everyday applications ranging from food processing to soap and dye
production. In this case, SiO2 is reduced to silicon metal by coke in an arc
furnace, to produce the Si precursor of other chemical processes. Industrial
sand is the main component in chemicals such as sodium silicate, silicon
tetrachloride and silicon gels. These chemicals are used in products like
household and industrial cleaners, to manufacture fiber optics and to remove
impurities from cooking oil and beverages.
Oil and Gas Recovery: Known commonly as proppant, or "frac sand," -
Industrial sand is pumped down holes in deep well applications to prop open rock
fissures and increase the flow rate of natural gas or oil. In this specialized
application round, whole grain deposits are used to maximize permeability and
prevent formation cuttings from entering the well bore. Silica's hardness and
its overall structural integrity combine to deliver the required crush
resistance of the high pressures present in wells up to 2,450 meters deep. Its
chemical purity is required to resist chemical attack in corrosive environments.
Frac sand is used in the oil and gas industry as a part of a fracturing process
to improve production. It is pumped into the well during the fracturing
operation, carried along with the fluid into the fracture, and will remain in
the fracture when the pressure is removed, keeping the fracture propped open and
allowing an effective means by which oil can flow. Tests concluded that our frac
sand product falls into various quality ranges (4kpsi - 7kpsi) currently selling
for $40 - $100 per ton. Since frac sand is mined and not manufactured, the
supply is limited and demand is predicted to remain strong into the future.
Paint and Coatings - Paint formulators select micron-sized industrial
sands to improve the appearance and durability of architectural and industrial
paint and coatings. High purity silica contributes critical performance
properties such as brightness, color consistency, and oil absorption. In
architectural paints, silica fillers improve tint retention, durability, and
resistance to dirt, mildew, cracking and weathering. Low oil absorption allows
increased pigment loading for improved finish color. In marine and maintenance
coatings, the durability of silica imparts excellent abrasion and corrosion
resistance.
Ceramics and Refractories - Ground silica is an essential component of
the glaze and body formulations of all types of ceramic products, including
tableware, sanitary ware and floor and wall tile. In the ceramic body, silica is
the skeletal structure upon which clays and flux components attach. The SiO2
contribution is used to modify thermal expansion, regulate drying and shrinkage,
and improve structural integrity and appearance. Silica products are also used
as the primary aggregate in both shape and monolithic type refractories to
provide high temperature resistance to acidic attack in industrial furnaces.
Filtration and Water Production - Industrial sand is used in the
filtration of drinking water, the processing of wastewater and the production of
water from wells. Uniform grain shapes and grain size distributions produce
efficient filtration bed operation in removal of contaminants in both potable
water and wastewater. Chemically inert, silica will not degrade or react when it
comes in contact with acids, contaminants, volatile organics or solvents. Silica
gravel is used as packing material in deep-water wells to increase yield from
the aquifer by expanding the permeable zone around the well screen and
preventing the infiltration of fine particles from the formation.
Recreational: Industrial sand - even finds its way into sports and
recreation. Silica sand is used for golf course bunkers and greens as well as
the construction of natural or synthetic athletic fields. In golf and sports
turf applications silica sand is the structural component of an inert,
uncontaminated, growing media. Silica sand is also used to repair greens and to
facilitate everyday maintenance like root aeration and fertilization. The
natural grain shape and controlled particle size distribution of silica provides
the required permeability and compaction properties for drainage, healthy plant
growth and stability. Industrial sand has four basic qualities:
o Shape -- whether the individual grains are angular or round;
o Crush resistance -- the hardness of the grains;
o Acid solubility; and
o Turbidity -- the clearness of the grains.
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Due to the processing technologies expected to be implemented by HGRI
along with the proprietary value-added software-based control systems that will
be utilized, the management team of HGRI believes they will be able to cost
effectively produce high-value and high-margin specialty products for the South
Texas market. This compares to the vast majority of other local competitive
operators who have based their operations on older technologies and do not seek
to address what is believed to be a significant market for these products,
because they are selling as much sand and gravel as they can produce.
Market for Hunt Products
We estimate that the ten largest aggregates producers account for
approximately 30% to 35% of the total U.S. aggregates production. The largest
U.S. aggregates producers include Vulcan, Cemex, CRH, Heidelberg, Holcim,
Lafarge, MDU Resources and Martin Marietta Materials. Vulcan, the industry
leader, total U.S. market share is less than 10%. The U.S. aggregates industry
is highly fragmented with approximately 5,000 companies managing more than
10,000 operations. This industry structure provides considerable opportunities
for consolidation and it is common for companies in the industry to grow by
entering new markets or enhancing their market positions by acquiring existing
facilities.
According to the United States Geographical Survey, the amount of sand
and gravel to be mined within the United States over the next 25 years will
exceed that mined over the past 100 years. While the general growth in building
construction has been a major contributing factor, another primary demand factor
in the Houston area has been road, highway and other infrastructure
construction. About 38,000 tons are used in the construction of every mile of
interstate highway and about 400 tons are used to construct the average house.
Highway construction is the most aggregates-intensive form of
construction and residential construction is the least intensive. A dollar of
spending for highway construction is estimated to consume seven times the
quantity of aggregates consumed by a dollar of spending for residential
construction. Other non-highway infrastructure markets like airports, sewer and
waste disposal or water supply plants and utilities also require large
quantities of aggregates in their foundations and structures. These types of
infrastructure-related construction can be four times more aggregates-intensive
than residential construction. Generally, nonresidential buildings require two
to three times as much aggregates per dollar of spending as a new home with most
of the aggregates used in the foundations, building structure and parking lots.
In 2008, it was estimated that about 44% of construction sand and
gravel was used as concrete aggregates; 23% for road base and coverings and road
stabilization; 14% as construction fill; 12% as asphaltic concrete products such
as blocks, bricks and pipes; and the remaining 3% for filtration, railroad
ballast, roofing granulates, snow and ice control and other miscellaneous use.*
(*First Research, 2009)
Industry Environmental Costs and Governmental Regulation
Our operations are subject to federal, state and local laws and
regulations relating to the environment and to health and safety, including
noise, water discharge, air quality, dust control, zoning and permitting. We may
required by state and local regulations or contractual obligations to reclaim
our former mining sites. These reclamation liabilities will be recorded in our
financial statements as a liability at the time the obligation arises. The fair
value of such obligations is capitalized and depreciated over the estimated
useful life of the owned or leased site. The liability is accreted through
charges to operating expenses. To determine the fair value, we will estimate the
cost for a third party to perform the legally required reclamation, adjusted for
inflation and risk and including a reasonable profit margin. All reclamation
obligations will be reviewed at least annually. Reclaimed quarries often have
potential for use in commercial or residential development or as reservoirs or
landfills. However, no projected cash flows from these anticipated uses will be
considered to offset or reduce the estimated reclamation liability.
Competition for Hunt Products
Some of the more established construction sand companies in the area are
listed below. These are private companies (except for U.S. Concrete, Martin
Marietta and TXI):
o U.S Concrete supplies over 4.5 million cubic yards of concrete and 3.0
million tons of aggregates annually, approximately half of which is
supplied in Texas.
o Hanson Concrete supplies much of the 2" to 3/4" river rock and rainbow
rock in the area; in addition, they supply concrete sand, mortar sand
drainage sand and some special sands i.e. golf course sand, if the
order is large enough. It is currently estimated that Hanson sells
3-5,000 tons/day.
o Quality Concrete supplies cement sand, motor sand, mixed gravel 3/8"-
1 1/2", concrete sand and will do same special sands if large enough
order. The Company is estimated to ship approximately 3,000 tons/day.
o Hallett Materials supplies mortar sand, concrete sand, bank sand,
cement stabilizer sand and field dirt. It is estimated, Hallet sells
1,500 tons of sand and gavel and 1,500 tons of cement stabilizer sand
daily.
8
o Porter Sand supplies cement sand, gravel, mortar sand, bank sand and
field dirt.
o Frontier Materials supplies concrete sand, motor sand, bank sand,
field dirt and gravel.
o Liberty Materials supplies concrete sand, mortar sand, bank sand and
gravel; approximately 3,000 tons/day.
o Martin Marietta Materials supplies gravel, sand and other types of
materials such as limestone; also ships by railcar.
o TXI supplies gravel mostly but will supply sand to its big customers.
Also ships by railcar.
In this industry, competitors are also likely customers, working
together to fill large orders. The most likely candidates are Martin Marietta
Materials, Hanson and TXI, depending on the material demand. These three firms
have multiple sites in the area.
Funding of the Hunt Business Plan
To date Hunt has been funded via a combination of private debt and
equity. Since early 2009, Hunt has raised approximately $4.2 million in equity
via a private placement of Preferred Stock and attached Warrants. Hunt has also
issued equity in exchange for services and forgiveness of debt. Hunt management
further believes that merging with a public company will enhance its ability to
raise equity capital in the future.
Hunt has applied for and is in the final stages of obtaining a $10.9
million bank loan that is 70% guaranteed by the United States Department of
Agriculture (the "USDA Loan"). Under the terms of the loan agreement,
approximately $3.5 million will be used to refinance existing debt, $6.7 million
will be used for equipment purchases and working capital and $600,000 in closing
costs. The loan is for a term of 20 years with payment of interest only in year
one then amortizing monthly with principal and interest payments the remaining
term of the loan. The interest rate is prime plus 2.25% and is subject to change
quarterly. The loan is personally guaranteed by Jewel and Lisa Hunt, the
principal stockholders in the Company.
Hunt management has raised capital in the past and believes it will be
able to continue to raise additional capital in the future based on the assets
of Hunt, principally the estimated 40 million tons of aggregate reserves. This
capital will be used for the operation of facilities needed to mine the
aggregate reserves from the site.
Item 1A. Risk Factors (These factors are related to the business activity of
Hunt as a result of the Merger. The financial data is based on the proforma
financial statements included herein.)
An investment in our common stock involves a high degree of risk. You
should carefully consider the risks described below, together with all of the
other information included in this report, before making an investment decision.
If any of the following risks actually occurs, our business, financial condition
or results of operations could suffer. In that case, the trading price of our
common stock could decline, and you may lose all or part of your investment. You
should read the section entitled "Special Note Regarding Forward-Looking
Statements" above for a discussion of what types of statements are
forward-looking statements, as well as the significance of such statements in
the context of this report.
RISKS RELATED TO OUR FINANCIAL RESULTS
We have limited cash resources, an accumulated deficit, are not currently
profitable and expect to incur significant expenses in the near future.
As of June 30, 2010, based on the consolidated proforma balance sheet
as of that date, we had a working capital deficit of $5,362,768. We have
incurred a substantial net loss for the period from our inception in December
2008 to June 30, 2010, and are currently experiencing negative cash flow. We
expect to continue to experience negative cash flow and operating losses through
the second quarter of 2011 and possibly thereafter. As a result, we will need to
generate significant revenues to achieve profitability.
We may fail to become and remain profitable or we may be unable to fund our
continuing losses, in which case our business may fail.
We are focused on the development of our intangible leasehold asset and
have not generated any revenue to date. We do not believe we will begin earning
revenues from operations until mid 2011 at the earliest as we transition from a
development stage company. We have incurred operating losses since our
inception. Based on the consolidated proforma income statement included herein,
our net loss for the twelve months ended December 31, 2009 was $10,606,809 and
our net loss for the six months ended June 30, 2010 was $2,255,465.
We will be required to raise additional capital to fund our operations. If we
cannot raise needed additional capital in the future, we will be required to
cease operations.
Based on our current plans, we will need additional financial resources
to meet our operating expenses and capital requirements. Closing of the USDA
9
Loan is an important part of our capital raising strategy. In addition, we plan
to seek additional funding through third party debt financing and private
placement offerings of our public securities. You should be aware that in the
future:
o we may not obtain additional financial resources when necessary or on
terms favorable to us, if at all; and
o any available additional financing may not be adequate.
If we cannot raise additional funds when needed, or on acceptable
terms, we may not be able to complete implementation of our business plan. We
require substantial working capital to fund our operations. Since we do not
expect to generate significant revenues in the foreseeable future, in order to
fund operations, we will be completely dependent on debt and equity financing
arrangements. There is no assurance that any financing will be sufficient to
fund our capital expenditures, working capital and other cash requirements even
for the immediate future. No assurance can be given that any such additional
funding will be available or that, if available, can be obtained on terms
favorable to us. If we are unable to raise needed funds on acceptable terms, we
will not be able to develop or implement our business plan, take advantage of
any future opportunities or respond to competitive pressures or unanticipated
requirements. A material shortage of capital will require us to take drastic
steps such as reducing our level of operations, disposing of selected assets or
seeking an acquisition partner. If cash is insufficient, we will not be able to
continue operations.
Our purposes in entering into the agreement and plan of merger with Hunt is to
pursue our new business plan but no assurance can be made that we can
successfully implement our new business plan.
Although Hunt has not commenced operation of its business plan in the
sand and gravel industry, the Company has developed a business concept that
should allow it to quickly build a business in this industry and will be led by
a management team with experience and existing relationships in the aggregates
business. Although no assurances can be made that this strategy will be
successful, we believe the acquisition of Hunt is in our best interests and the
best interests of our shareholders.
We have insufficient capital to implement our repositioned business plan.
Although we have taken steps to reposition the company and focus our
business on the development of the intangible leasehold asset with the closing
of the Acquisition, we currently have no ability to fund the development and
implementation of the entire business plan. We currently have no revenue so we
expect to rely on external sources of capital through the issuance of debt
and/or equity securities in private placement offerings to provide funding of
our business. We expect to initiate such actions to obtain additional capital to
fund our business following the closing of the Acquisition. No assurances can be
made that we will be successful in obtaining additional funding on terms and
conditions that are acceptable to us.
We have deferred, and may continue to defer, payment of some of our obligations,
which may adversely affect our ability to obtain goods and services in the
future.
We estimate that we will require approximately $10.0 million to carry
out our business plan and meet our expenses for the next 12 months. Should we
successfully close the USDA Loan, the proceeds may sufficiently fund our
operations for the next 12 months. In addition, we raised approximately $500,000
from the sale of Common Stock on October 29, 2010. These funds should be
sufficient to fund our immediate obligations, which primarily include
professional fees, payment for services rendered by our officers and outside
consultants, legal expenses associated with being a public company, and so
forth. Until such time, if at all, as we receive adequate funding, we intend to
defer payment of all other obligations that are capable of being deferred. Such
deferment has resulted in the past, and may result in the future, in some
vendors demanding cash payment for their goods and services in advance, and
other vendors refusing to continue to do business with us, which may adversely
affect our ability to obtain goods and services in the future, or to do so on
favorable terms.
We will need to take significant additional actions to secure required equipment
and establish processes for our business plan and expect to incur losses during
such period.
Because we have not yet begun implementation of our repositioned
business in the aggregates business, we have to take additional actions to
secure the necessary manufacturing equipment as well as build the infrastructure
necessary to implement the operational processes for the business. In addition,
to compete effectively, any future products or services must be cost-effective
and economical to deliver, as the case may be, on a commercial scale. We may not
achieve any of these objectives.
Our operating expenses are unpredictable, which may adversely affect our
business, operations and financial condition.
As a result of our limited operating history, because of the
significant capital expenditures needed in the business in which we will
compete, and the lack of implementation of our repositioned business in the
aggregates sector, our financial data is of limited value in planning future
10
operating expenses. Our historical financial performance is all based upon basic
start-up costs and is not reflective in any way of the financial requirements of
our repositioned business in the aggregates sector.
To the extent our operating expenses precede or are not rapidly
followed by increased revenue, our business, results of operations and financial
condition may be materially adversely affected. Our expense levels will be based
in part on our expectations concerning future revenues. The size and extent of
our revenues, if any, are wholly dependent upon the choices and demand of
individuals for our products and services, which are difficult to forecast
accurately. We may be unable to adjust our operations in a timely manner to
compensate for any unexpected shortfall in revenues. Further, business
development and marketing expenses may increase significantly as we expand our
operations.
RISKS RELATED TO OUR BUSINESS
If our plan is not successful or management is not effective, the value of our
common stock may decline.
As a corporate entity, we have had nominal operations since inception
until recently. As a result, we are a development stage company with a limited
operating history that makes it impossible to reliably predict future growth and
operating results. Our business and prospects for the aggregates business must
be considered in light of the risks and uncertainties frequently encountered by
companies in their early stages of development. In particular, we have not
demonstrated that we can:
o build or acquire the infrastructure necessary to implement the
operational processes for the business in the aggregates sector for
the manufacture and distribution of sand and gravel products;
o secure the manufacturing equipment necessary for our planned business
operations; or
o establish many of the business functions necessary to operate,
including sales, marketing, administrative and financial functions,
and establish appropriate financial controls.
We cannot be sure that we will be successful in meeting these
challenges and addressing these risks and uncertainties. If we are unable to do
so, our business will not be successful.
Our estimates of the quantity of mineral reserves (sand and gravel reserves) may
be incorrect.
We intend to mine 350 acres for sand and gravel. We have based our
estimates of the quantity and value of 350 acres of mineral reserves (sand and
gravel reserves) on the engineering report of a 1,000 acre tract of land that
contains within it the specific 350 acres that we intend to mine. The reserve
report was written in 1985 and reaffirmed in 2006 by a professional engineer
covering 1,000 acres, out of which we have an agreement whereby we can mine the
specific 350 acres. We do not know if there is an uneven distribution of
minerals on the 1,000 acre tract and therefore we can only estimate what the
mineral reserves on the specific 350 acres were in 1985. We plan to conduct a
new mineral reserve report for the specific 350 acres in the near future. The
new estimates of mineral reserve quantity and value could differ materially from
those stated in the 1985 reserve report.
Our lack of commercial marketing, sales and distribution may prevent us from
successfully commercializing our services, which would adversely affect our
level of future revenues, if any.
Our business plan to enter the aggregates sector for the manufacture
and distribution of sand and gravel is untested and unproven. We have no
experience in the marketing and sales in the aggregates business.
The consumer marketplace may not accept and utilize our services, the effect of
which would prevent us from successfully commercializing any proposed services
and adversely affect our level of future revenue, if any.
Our ability to market and commercialize our services for the
manufacture and distribution of sand and gravel products depends on the
acceptance of such services by individuals and companies. We will need to
develop commercialization initiatives designed to increase awareness about us
and our services to consumers of sand and gravel products. Currently, we have
not developed any such initiatives. Without success in these areas, we may not
be able to successfully commercialize any proposed products or generate revenue.
Failure to comply with environmental laws or regulations could expose us to
significant liability or costs which would adversely impact our operating
results and divert funds from the operation of our business which would have a
material adverse effect on our business.
We may be required to incur significant costs to comply with current or
future environmental laws and regulations related to our sand and gravel
operations. We are subject to federal, state and local laws and regulations
governing the use, manufacture, storage, handling and disposal of these
materials and some waste products. Although we believe that our safety
11
procedures for handling and disposing of these materials will comply with the
standards prescribed by these laws and regulations, the risk of contamination or
injury from these materials cannot be completely eliminated. In the event of an
incident, we could be held liable for any damages that result, and any liability
could exceed our resources. Current or future environmental laws or regulations
may have a material adverse effect on our operations, business and assets.
We depend on the continued services of our executive officers and the loss of a
key executive could severely impact our operations.
The execution of our present business plan depends on the continued
services of Jewel Hunt, George Sharp and Lisa Hunt. We currently do not maintain
any key-man insurance policies on the lives of these individuals. We have not
entered into employment agreements with any of these individuals, and the loss
of any of their service would be detrimental to us and could have a material
adverse effect on our business, financial condition and results of operations.
Our executive officers, directors and principal shareholders control our
business and may make decisions that are not in the best interests of the
non-principal shareholders.
Our officers, directors and principal shareholders, and their
affiliates, in the aggregate, own a substantial portion of the outstanding
shares of our Common Stock (greater than 50%). As a result, such persons, acting
together, have the ability to substantially influence all matters submitted to
our shareholders for approval, including the election and removal of directors
and any merger, consolidation or sale of all or substantially all of our assets,
and to control our management and affairs. Accordingly, such concentration of
ownership may have the effect of delaying, deferring or preventing a change in
control or discouraging a potential acquirer from making a tender offer or
otherwise attempting to obtain control of our business, even if such a
transaction would be beneficial to other shareholders.
Certain of our Officers and Directors are related to one another and are the
majority shareholders of the Company. As such there is a possibility of them
controlling the Company to the detriment of outsiders.
Mr. and Mrs. Jewel and Lisa Hunt are married. Both are officers and
directors of the Company. Jointly, on a fully diluted they hold approximately
46.38% of the fully diluted outstanding stock. As such they will be able to
control the operations and the direction of the Company with minimal outside
influence.
RISKS RELATED TO THE MARKET FOR OUR STOCK GENERALLY
Our common stock is quoted on the OTC Bulletin Board which may have an
unfavorable impact on our stock price and liquidity.
Our common stock is quoted on the OTC Bulletin Board. The OTC Bulletin
Board is a significantly more limited market than the New York Stock Exchange or
NASDAQ. The quotation of our shares on the OTC Bulletin Board may result in a
less liquid market available for existing and potential stockholders to trade
shares of our common stock, could depress the trading price of our common stock
and could have a long-term adverse impact on our ability to raise capital in the
future. We plan to list our common stock as soon as practicable. However, we
cannot assure you that we will be able to meet the initial listing standards of
any stock exchange, or that we will be able to maintain any such listing.
We may be subject to penny stock regulations and restrictions and you may have
difficulty selling shares of our common stock.
The SEC has adopted regulations which generally define so-called "penny
stocks" to be an equity security that has a market price less than $5.00 per
share or an exercise price of less than $5.00 per share, subject to certain
exemptions. Our common stock is a "penny stock" and is subject to Rule 15g-9
under the Exchange Act, or the Penny Stock Rule. This rule imposes additional
sales practice requirements on broker-dealers that sell such securities to
persons other than established customers and "accredited investors" (generally,
individuals with a net worth in excess of $1,000,000 or annual incomes exceeding
$200,000, or $300,000 together with their spouses). For transactions covered by
Rule 15g-9, a broker-dealer must make a special suitability determination for
the purchaser and have received the purchaser's written consent to the
transaction prior to sale. As a result, this rule may affect the ability of
broker-dealers to sell our securities and may affect the ability of purchasers
to sell any of our securities in the secondary market, thus possibly making it
difficult to raise additional capital.
For any transaction involving a penny stock, unless exempt, the rules
require delivery, prior to any transaction in penny stock, of a disclosure
schedule prepared by the SEC relating to the penny stock market. Disclosure is
also required to be made about sales commissions payable to both the
broker-dealer and the registered representative and current quotations for the
securities. Finally, monthly statements are required to be sent disclosing
recent price information for the penny stock held in the account and information
on the limited market in penny stock.
12
There can be no assurance that our common stock will qualify for
exemption from the Penny Stock Rule. In any event, even if our common stock were
exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of
the Exchange Act, which gives the SEC the authority to restrict any person from
participating in a distribution of penny stock, if the SEC finds that such a
restriction would be in the public interest.
We do not intend to pay dividends for the foreseeable future.
For the foreseeable future, we intend to retain any earnings to finance
the development and expansion of our business, and we do not anticipate paying
any cash dividends on our common stock. Accordingly, investors must be prepared
to rely on sales of their common stock after price appreciation to earn an
investment return, which may never occur. Investors seeking cash dividends
should not purchase our common stock. Any determination to pay dividends in the
future will be made at the discretion of our board of directors and will depend
on our results of operations, financial condition, contractual restrictions,
restrictions imposed by applicable law and other factors our board deems
relevant.
Dissenting shareholders of Hunt could litigate for an appraisal.
The merger between Hunt and Tombstone was done as a short form merger
since Tombstone owned more than 90% of Hunt as a result of an exchange of stock
between Tombstone and most of the former shareholders of Hunt. The remaining
shareholders of Hunt may choose to exchange their shares of Hunt and therefore
receive shares of Tombstone, or dissent in which case they can litigate for an
appraisal. The outcome of such litigation is unknown at this time.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Operating Results for the six months ended June 30, 2010 (Based on the proforma
financial statements included herein)
For the six months ended June 30, 2010, we had a net loss of $2,255,465
and an accumulated deficit since inception of $14,011,674. We have not generated
any revenue from operations since inception. Our accumulated deficit from our
date of inception represents various expenses incurred with organizing the
company, undertaking an audit and reviews, professional and consultant fees,
general office expenses, and paying for services rendered by the Company's
officers.
We anticipate that the execution of Hunt's business plan will result in
a rapid expansion of our operations, which may place a significant strain on
Hunt's management, financial and other resources. Hunt's ability to manage the
problems associated with the expansion of Hunt's business operations after the
Acquisition will depend, among other things, on our ability to monitor
operations, control costs, maintain effective quality control, secure necessary
marketing arrangements, expand internal management, technical information and
accounting systems and attract, assimilate and retain qualified management and
other personnel. If we fail to manage these issues, we may not be profitable in
the near future, or ever.
The difficulties in managing these various business issues will be
compounded by a number of unique attributes of our anticipated business
operations and business strategy. Should these and other concepts not perform as
expected, Hunt's financial condition and the results of our operations could be
materially and adversely affected.
Liquidity and Capital Resources
We estimate that we will require approximately $10.0 million to carry
out our business plan and meet our expenses for the next 12 months. If Hunt
acquires additional funding through the issuance of Tombstone equity securities,
Tombstone's shareholders may experience dilution in the value per share of their
equity securities. In addition, the USDA Loan will result in a substantial
portion of our future cash flow from operations being dedicated to the payment
of principal and interest on that indebtedness, and could render us more
vulnerable to competitive pressures and economic downturns.
We expect to begin building a backlog of future revenues as we get
closer to commencing operations at our mining site. We believe we will be able
to execute longer term contracts to provide aggregate products for a number of
customers, including those involved in highway construction, residential and
commercial construction and the oil and gas recovery business. Based on the
current status of the local economy, we believe demand for our sand and gravel
products will be strong.
Item 3. Properties
For discussion of Hunt's leased mining site, refer to Item 1 -
"Description of Business - Properties" above.
Hunt subleases approximately 6,000 square feet of office space for its
corporate office at 10001 Woodloch Forest, Suite 325, The Woodlands, Texas,
77380. Hunt is obligated under this sublease to make the following payments -
$13,277 per month, from July 1, 2009 through December 31, 2010 - $13,698 per
month and from January 1, 2011 through February 27, 2012 - $14,120 per month
thereafter.
13
Tombstone does not own any property, real or otherwise. For the first
year and currently, the Company conducted administrative affairs from the office
located in the home of the Company's Chairman and CFO, Neil A. Cox, at no cost.
Tombstone's office address prior to the merger was 5380 Highlands Dr., Longmont,
Colorado 80503. During the year ended December 31, 2009, the Company moved from
its offices located at 2400 Central Ave., Suite G, Boulder, CO 80301 to its
current location. Prior to the move, the Company rented its office space for
approximately $965 per month, on a month-to-month basis. Upon closing of this
transaction, all records were transferred to Hunt's Woodlands office discussed
above.
The offices of Hunt BioSolutions, Inc. are located in Pasadena, Texas.
The 4,160 square feet of office space, 10,000 square feet of warehouse space and
8.7018 acres of land are occupied under the sub-lease requiring rental payments
of $14,500 per month through July 14, 2012, the expiration date. Additionally,
common area maintenance charges of $3,500 per month are due and payable with the
monthly rental amount.
Item 4. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information regarding the beneficial
ownership of our common stock as of the Merger date October 29, 2010 by (1) each
person known by us to own beneficially more than five percent (5%) of our
outstanding common stock, (ii) each of our officers and directors and (iii) all
of our officers and directors as a group. As of October 29, 2010, shares
outstanding included 33,878,000 shares of Common Stock, 250,000 shares of
Preferred Stock that is convertible into 57,000,000 of Common Stock, and
Warrants and Stock Options to purchase 10,265,999 shares of Common Stock.
--------------------------------------------- -------------------- -------------- ----------------------- --------------
Number of Shares Number of Shares Held % of
Person or Entity Held Prior to % of Total After the Merger (1) Total (1)
Merger
============================================= ==================== ============== ======================= ==============
John Harris (2)
5830 Highlands Drive
Longmont, CO 80503 ..................... 580,000 11.89% 580,000 0.57%
Neil Cox (3)
5830 Highlands Drive
Longmont, CO 80503 ..................... 680,000 13.94% 680,000 0.67%
Jewel Hunt (4)
10001 Woodloch Forest Dr., Suite 325
The Woodlands, TX 77380 ............... -- -- % 46,837,202 46.31%
Lisa Hunt (4)
10001 Woodloch Forest Dr., Suite 325
The Woodlands, TX 77380 ............... -- -- % 46,837,202 46.31%
George T. Sharp (5)
10001 Woodloch Forest Dr., Suite 325
The Woodlands, TX 77380 .............. -- -- % 551,186 0.55%
Crown Financial LLC (5)
2425 Fountainview
Houston, TX 77057....................... -- -- % 5,709,070 5.64%
Gregory Enders (6)
10001 Woodloch Forest Dr., Suite 325
The Woodlands, TX 77380 ............... -- -- % 1,102,374 1.10%
Gary Johnson (7)
Rick Richards (8)
7435 Hollister Road
Houston, TX 77040........................ -- -- % 7,167,208 7.09%
Total officers and directors............ -- -- % 56,011,018 55.38%
(1) Fully-diluted as-converted shares outstanding as of October 29, 2010
were 101,143,999. The combined company intends to increase the authorized
shares of common stock in the near future from the current amount of
100,000,000.
(2) Mr. Harris was the Chief Executive Officer of Tombstone prior to the
Merger with Hunt. Mr. Harris has been asked and will remain on the Board of
Directors of the combined company subsequent to the merger.
14
(3) Mr. Cox was the Chief Financial Officer of Tombstone prior to the
Merger with Hunt. Mr. Cox has been asked and will remain on the Board of
Directors of the combined company subsequent to the merger.
(4) Jewel and Lisa Hunt are the owners of the principal asset of Hunt, a
350 acre sand and gravel pit that has been leased to the company. They are
also co-founders of Hunt Global Resources. They were both appointed members
of the Board of Directors of the combined company subsequent to the merger.
Jointly, they hold a total of 8,738,416 shares of Tombstone Common Stock,
50,654 shares of Tombstone Series A Preferred Stock that is convertible
into 10,536,024 shares of Tombstone Common Stock and 111,140 shares of
Tombstone Series B Preferred Stock convertible into 27,562,762 shares of
Tombstone Common Stock. Jewel directly holds 4,369,208 shares of Tombstone
Common Stock, 25,327 shares of Tombstone Series A Preferred Stock that is
convertible into 5,268,012 shares of Tombstone Common Stock and 55,571
shares of Tombstone Series B Preferred Stock that is convertible into
13,781,381 shares of Tombstone Common Stock. Lisa directly holds 4,369,208
shares of Tombstone Common Stock, 25,327 shares of Tombstone Series A
Preferred Stock that is convertible into 5,268,012 shares of Tombstone
Common Stock and 55,570 shares of Tombstone Series B Preferred Stock that
is convertible into 13,781,381 shares of Tombstone Common Stock.
(5) Mr. Sharp is the Chief Executive Officer of Hunt prior to and
subsequent to the merger. He was appointed a member of the Board of
Directors of the combined company subsequent to the merger. These shares
include 249,890 shares of Tombstone Common Stock, 1,449 shares of Tombstone
Series A Preferred Stock that is convertible into 301,296 shares of
Tombstone Common Stock. Mr. Sharp is the principal owner of Crown
Financial, a co-founder of Hunt Global Resources. Crown Financial employs
Mr. Sharp, the Chief Executive Officer of Hunt. These shares include
1,089,732 shares of Tombstone Common Stock, 6,317 shares of Tombstone
Series A Preferred Stock that is convertible into 1,313,904 shares of
Tombstone Common Stock and 13,860 shares of Tombstone Series B Preferred
Stock that is convertible into 3,437,238 shares of Tombstone Common Stock.
(6) Mr. Enders is the Chief Executive Officer of Hunt BioSolutions, Inc., a
subsidiary of Hunt. These shares include 499,781 shares of Tombstone Common
Stock, 2,897 shares of Tombstone Series A Preferred Stock that is
convertible into 602,593 shares of Tombstone Common Stock.
(7)Mr. Johnson is the Chief Operating Officer of Hunt BioSolutions, Inc., a
subsidiary of Hunt. These shares include 249,890 shares of Tombstone Common
Stock, 1,449 shares of Tombstone Series A Preferred Stock that is
convertible into 301,296 shares of Tombstone Common Stock.
(8)Mr. Richards is an investor in Hunt and has assisted in raising much of
the equity capital to date. These shares include 3,308,326 shares of
Tombstone Common Stock, 15,514 shares of Tombstone Series A Preferred Stock
that is convertible into 3,226,882 shares of Tombstone Common Stock and
warrants to purchase 632,000 shares of common stock.
fItem 5. Directors and Executive Officers
Below are the names and certain biographical information regarding
Tombstone's and Hunt's executive officers following the acquisition of Hunt:
Name Age Position at Tombstone Pre-Merger Position at Tombstone/Hunt Post-Merger
John N. Harris.......... 63 President, CEO and Director Director
Neil A. Cox............. 60 Chairman of the Board and CFO Director
William H. Reilly...... 56 COO/CTO and Director None
Jewel S. Hunt............ 54 None Chairman of the Board
George T. Sharp........ 68 None CEO and Director
Lisa A. Hunt............ 50 None President
John N. Bingham....... 56 None Acting CFO
Gregory Enders......... 56 None CEO, Hunt BioSolutions, Inc.
Gary Johnson............ 53 None COO, Hunt BioSolutions, Inc.
John N. Harris. On October 29, 2010, Mr. Harris resigned his position as
President and CEO of Tombstone. He remains as a director. Mr. Harris began his
career in the securities industry in 1971 with Newhard Cook & Co., a St. Louis
based NYSE member firm. Licensed both as a broker and principal, he ultimately
managed brokerage offices for several regional NASD brokerage firms. Since 1985,
he has been self-employed as a business consultant and as a private investor.
For the last 5 years Mr. Harris has been an independent financial consultant.
Neil A. Cox. On October 29, 2010, Mr. Cox resigned his position as Chairman
of the Board and CFO of Tombstone. He remains as a director. Mr. Cox has more
than 30 years experience in the securities and financial industry. Mr. Cox was a
former officer and director of a regional broker-dealer and with involved with
structuring, financing, and investment banking activities. In 1999, he was the
chief financial officer of IDMedical.com, where he coordinated the efforts for
the company to become a publicly traded software company Mr. Cox had been
self-employed with Rocky Mountain Securities and
15
Investments, Inc. until 2002, a registered broker-dealer; and from 2002-2004,
Mr. Cox was self-employed with Moloney Securities Co., Inc., a registered
broker-dealer. Since 2004, Mr. Cox has been an independent insurance broker
(Life, Health, & Accident) who has represented many Life and Health Insurance
Companies and is also an independent business consultant. Mr. Cox received a
Bachelor of Business Administration (BBA) from West Texas A&M University
(formerly known as West Texas State University) in 1971.
Jewel S. Hunt. Effective October 29, 2010, Mr. Hunt was appointed Chairman
of the Board of the combined company. Mr. Hunt is the husband of Ms. Lisa A.
Hunt, the President, Secretary and Director of the Company. Prior to that, he
was a co-founder and the Chairman of the Board of Hunt. Mr. Hunt has an
executive and management background, encompassing running both an
industry-leading firm as well being highly involved in international operations.
Mr. Hunt has served as the chief executive of a family business. He has
executive experience as a specialist in industrial plant manufacturing
production processes and managing operations globally. Along with other business
interests, Mr. Hunt manages family real estate holdings.
George T. Sharp. On October 29, 2010, Mr. Sharp, was appointed as the Chief
Executive Officer and Director of the combined company. Prior to that, he was a
co-founder and the Chief Executive Officer of Hunt. Mr. Sharp is an entrepreneur
with 35 years executive experience at the Chief Executive Officer and President
level. He has founded a number of companies, having taken several of them
public. He is a former leverage buyout specialist.
Lisa A. Hunt. Effective October 29, 2010, Ms. Hunt was appointed the
President of the combined company. Prior to that, she was a co-founder and the
President and Secretary of Hunt. Ms. Hunt is the wife of Mr. Jewel S. Hunt, a
director of the Company. Ms. Hunt has 28 years of executive experience at the
corporate level, designing and implementing computer software systems, including
the development Dynegy's energy trading systems, American Bridge Corp's
accounting system, Compaq Computer's industrial operations management system and
other systems for companies. During the past four years, she has managed the
development of the 350 acre property containing the sand and gravel reserves
owned by Hunt. This included supervising the design and construction of roads
and the facility, along with managing relationships with the Environmental
Protection Agency, Army Corps of Engineers, TECQ, etc.
John N. Bingham. Effective April 6, 2010, Hunt engaged Agility Financial
Partners ("Agility") to provide financial and regulatory consulting to Hunt
during the completion of its merger with Tombstone. On October 29, 2010, Mr.
Bingham was appointed as the Acting Chief Financial Officer of the combined
company. Mr. Bingham is the Managing Director of Agility, which is a provider of
CFOs, financial/SEC reporting and corporate governance solutions and services to
microcap and small cap public companies. Mr. Bingham has acted or been employed
in a CFO or Chief Accounting Officer role for several public companies,
including Cambridge Royalty Company, Houston Biotechnology Incorporated,
Physicians Resource Group, Inc., North American Technologies Inc. and others.
Prior to that, Mr. Bingham worked for Arthur Andersen & Co. Mr. Bingham has a BS
in Accounting from the University of Houston at Clear Lake City and is a
Certified Public Accountant. Mr. Bingham has not been involved with a related
transaction or relationship as defined by Item 404(a) of Regulation S-B.
Gregory Enders. On December 31, 2009, Gregory Enders was appointed the
Chief Executive Officer of Hunt BioSolutions, Inc., a subsidiary of Hunt. Prior
to that, Mr. Enders served as the Chief Executive Officer and a Director of
Momentum Biofuels (OTCBB: MMBF.OB) since October 20, 2007. Mr. Enders has served
as Chief Executive Officer of several public and private companies including
Stratasoft, Inc., Commerciant Holdings, Inc., Intermat, Inc., Strategic
Distribution, MRO Software, Inc., Integration Systems, Inc. (d/b/a Bizmart
Computer Super Centers) and Computer Productivity, Inc. From 2002 until October
of 2007 Mr. Enders served on the Development Board of Texas A&M's Mays Business
School.
Gary Johnson. On December 31, 2009, Gary Johnson was appointed Chief
Operating Officer of Hunt BioSolutions, Inc. Prior to that, Mr. Johnson served
as the Chief Operating Officer of Momentum Biofuels since October 16, 2007. Mr.
Johnson has over 20 years of executive level management experience delivering
products, services and solutions to Global 2000 clients. Prior to joining
Momentum, Mr. Johnson served as Vice President of Operations for Stratasoft,
Inc., President of IHS-Intermat Solutions, Vice President of Operations with MRO
Software and Vice President and General Manager of Integration Systems, Inc. Mr.
Johnson attended the University of Houston.
Item 6. Executive Compensation
Since inception, no significant compensation has been paid to the
executive officers or directors of Hunt or Tombstone. Effective as of the date
of the Merger, the compensation arrangements of the highest paid executive
officers are summarized below:
16
o On October 5, 2009, the Company entered into a service agreement that
included a note payable to Crown Financial, a company providing
executive and advisory services that employs Mr. Sharp, the CEO of
Hunt. The Company will pay Crown a total of $500,000 plus interest at
the rate of 8% until paid in full for past executive and advisory
services, including equity and debt funding. The Company further
agreed to compensate Crown for future services beginning October 1,
2009 through December 31, 2012 as follows:
Period Amount
-------------------------------------- ---------------
October through December 2009 $ 36,000
Year ending December 31, 2010 240,000
Year ending December 31, 2011 360,000
Year ending December 31, 2012 600,000
---------------
Total due under the agreement $ 1,236,000
===============
The service agreement with Crown is non cancelable and is fully
collateralized by Hunt assets. All payments due under this agreement
dated are due semi-monthly. If payments are not paid within ten days of
the date due or if the Company elects to terminate the agreement for
any reason, all payments due under the contract will be accelerated and
be due to be paid in full. Further, the Company waived all notice in
the event of foreclosure notices on assets. At June 30, 2010, the
accrued liability to a related party of $156,000 in the accompanying
balance sheet represents the amount due to Crown for the period from
October 2009 to June 2010.
o The surface mining rights agreement provides for the payment of a
royalty to the Hunt's equal to 10 percent of the sold price of all
products mined, processed, removed or manufactured and sold from the
property. On December 1, 2008, the Company's board of directors
approved the prepayment of royalties to the Hunt's, not to total more
than $450,000 per year. Based on the board's actions, the Company made
advanced or prepaid royalty payments to the Hunts of $274,276 and
$4,000 during the year ended December 31, 2009, and the period from
inception, December 1, 2008, through December 31, 2008, respectively.
These amounts are included in prepaid royalties in the accompanying
balance sheet.
The Hunt's maintain a satellite office that is used for Company
business. This office is responsible for property maintenance, security
and computer operations and is located near the property subject to
surface mining rights. On December 1, 2008, the Company approved a
reimbursement to the Hunts of $9,000 per month. Rent expense recognized
by the Company related to this office was $108,000 and $9,000 during
the year ended December 31, 2009, and the period from inception,
December 1, 2008, through December 31, 2008, respectively. The Company
also paid certain expenses and obligations on behalf of the Hunts
totaling $306 and $21,395, respectively during the year ended December
31, 2009, and the period from inception, December 1, 2008, through
December 31, 2008. These expenses were treated as compensation and
included in general and administrative expenses.
o Upon closing of the Merger, John N. Bingham became the Acting CFO for
the Company. Under the Company's current agreement with Mr. Bingham
financial consulting company, Agility Business Partners LLC, the
Company will pay Agility for Mr. Bingham's services at $150 an hour
for services performed on behalf of the Company. In addition, Agility
may provide other personnel and professional services for the Company.
Item 7. Certain Relationships and Related Transactions, and Director
Independence
Director Independence
From Tombstone. The Directors, John N. Harris and Neil A., are stockholders
of the Company and are not considered an independent director at this time.
From Hunt. Jewel S. Hunt and George T. Sharp are officers and stockholders
of the Company and are not considered an independent director at this time.
There is no independent director at the date of this filing. See Item 4
Security Ownership of Certain Beneficial Owners and Management for all
significant equity transactions with officers and directors of the Company. For
further historical information regarding related parties, please refer to the
Note 9 of the audited financial statements of Hunt for the year ended December
31, 2009 contained herein.
Item 8. Legal Proceedings
We are not a party to any legal proceedings.
17
Item 9. Market Price of and Dividends on Common Equity and Related Stockholder
Matters
Tombstone's Common Stock is presently traded on the over-the-counter
market on the OTC Bulletin Board maintained by the Financial Industry Regulatory
Authority ("FINRA"). The Company's stock currently trades on the OTC Bulletin
Board under the symbol "TMCI." During the periods listed below, Tombstone's
common stock had limited trading as shown in the following table.
Period High Low
2010:
For the quarter ended December 31, 2010 (thru October 29) $1.59 $0.75
For the quarter ended September 30, 2010 $2.00 $1.05
For the quarter ended June 30, 2010 $2.44 $0.95
For the quarter ended March 31, 2010 $1.25 $0.25
2009:
For the quarter ended December 31, 2009 $0.90 $0.30
For the quarter ended October 30, 2009 $0.30 $0.06
For the quarter ended June 30, 2009 $0.30 $0.20
For the quarter ended March 31, 2009 $0.65 $0.27
2008:
For the quarter ended December 31, 2008 $0.65 $0.65
For the quarter ended October 30, 2008 $0.55 $0.55
For the quarter ended June 30, 2008 $1.05 $1.05
For the quarter ended March 31, 2008 $0.90 $0.85
In addition to Tombstone's common stock, in October 2007, the Company
began trading its Units on the OTC Bulletin Board. A Unit consists of 1 share of
Tombstone common stock, 1 of the Company's "A" Warrants and 1 of the Company's
"B" Warrants. The Units trade on the OTC Bulletin Board under the symbol
"TMCIU." During the years ended December 31, 2009 and 2008, the Company's Units
did not trade. During the year ended December 31, 2009, the Company's "A"
Warrants and "B" Warrants expired.
Per the terms of the Merger Agreement, as soon as possible after the
merger Tombstone will change its name to Hunt Global Resources, Inc. The Company
will then also seek to change the name of its ticker symbol.
Holders. Prior to the merger (as of October 29, 2010), there were
4,878,000 shares of our common stock outstanding and approximately 75
shareholders of record of our common stock. Subsequent to the merger, there were
33,878,000 shares of our common stock outstanding and approximately 225
shareholders of record of our common stock.
Transfer Agent and Registrar. Our transfer agent is Corporate Stock
Transfer Company, 3200 Cherry Creek Drive South, Suite 430, Denver, CO 80209;
Phone (303) 282-4800.
Dividend Policy. Tombstone has not paid any dividends to common
shareholders. There are no restrictions which would limit Tombstone's ability to
pay dividends on common equity or that are likely to do so in the future. The
Colorado Revised Statutes, however, do prohibit Tombstone from declaring
dividends where, after giving effect to the distribution of the dividend; the
Company would not be able to pay its debts as they become due in the usual
course of business; or its total assets would be less than the sum of the total
liabilities plus the amount that would be needed to satisfy the rights of
shareholders who have preferential rights superior to those receiving the
distribution.
Tombstone will begin to pay a dividend to the Class B Convertible
Preferred stockholders of $0.56 per share on a quarterly basis commencing on
January 1, 2011.
Warrants, Options and Convertible Debt. Currently, there are stock
options to purchase 1,689,999 shares of the Company's common stock at an average
exercise price of $0.65 per share and warrants to purchase 8,576,000 shares of
the Company's common stock at an average exercise price of $1.00 per share.
Item 10. Recent Sales of Unregistered Securities
The Company hereby incorporates by reference its response in Item 3.02
below.
18
Item 11. Description of Securities
Common Stock
We are authorized to issue up to 100,000,000 shares of no par value
common stock. We plan to increase the number of authorized shares in the near
future. Holders of shares of our common stock are entitled to one vote for each
share on all matters to be voted on by the shareholders. Unless a greater
plurality is required by the express requirements of law or Tombstone's
Certificate of Incorporation, the affirmative vote of a majority of the shares
of voting stock represented at a meeting of shareholders at which there shall be
a quorum present shall be required to authorize all matters to be voted upon by
the shareholders of Tombstone. According to our charter documents, holders of
our common stock do not have preemptive rights and are not entitled to
cumulative voting rights. There are no conversion or redemption rights or
sinking funds provided for our shareholders. Shares of our common stock share
ratably in dividends, if any, as may be declared from time to time by the Board
of Directors at its discretion from funds legally available for distribution as
dividends. In the event of a liquidation, dissolution or winding up of
Tombstone, the holders of our common stock are entitled to share pro rata in all
assets remaining after payment in full of all liabilities. All of the
outstanding shares of our common stock are fully paid and non-assessable.
Preferred Stock
We are authorized to issue up to 1,000,000 shares of preferred
stock. As a result of this transaction, Tombstone created two classes of
Preferred Stock securities, the Class A Convertible Preferred Stock (Class A)
and Class B Convertible Preferred Stock (Class B). The Class A has a deemed
purchase price of $10.00 per share, shall rank senior to the Common Stock and
all classes of Preferred Stock, bear no dividends, has voting rights of two
hundred eight (208) votes for each one (1) share of Class A shares and has a
liquidation preference of $10,000 per share. The holders of Class A will have
the right to convert each share of Class A for 208 shares of Common Stock should
the Common Stock trade at an average price of $3.00 per share for 10 consecutive
trading days or after a period of one year, whichever occurs first. The Class B
has a deemed purchase price of $10.00 per share, shall rank senior to the Common
Stock and all classes of Preferred Stock except the Class A, bear a dividend of
$0.56 per share on a quarterly basis commencing on January 1, 2011, has voting
rights of two hundred forty eight (248) votes for each one (1) share of Class B
shares and has a liquidation preference of $10,000 per share. The holders of
Class B will have the right to convert each share of Class B for 248 shares of
Common Stock should the Common Stock trade at an average price of $7.00 per
share for 10 consecutive trading days or after a period of two years, whichever
occurs first.
Item 12. Indemnification of Directors and Officers
Tombstone's certificate of incorporation contains certain provisions
permitted under Colorado Corporation Law relating to the liability of directors.
The provisions eliminate a director's liability for monetary damages for a
breach of fiduciary duty, except in certain circumstances where such liability
may not be eliminated under applicable law. Further, Tombstone's certificate of
incorporation contains provisions to indemnify Tombstone's directors and
officers to the fullest extent permitted by the Colorado Corporation Law.
Item 13. Financial Statements and Supplementary Data
With regard to Tombstone's 2008, 2009 and 2010 financial statements,
reference is made to the filings with the SEC made by Tombstone on Form 10-K on
March 29, 2010 and Form 10-Q on August 13, 2010. The audited financial
statements of Hunt as of December 31, 2009 and interim financial statements as
of June 30, 2010 are attached hereto. Also attached hereto are the pro forma
financial statements of the combined companies as of June 30, 2010 (as if the
merger occurred on January 1, 2010) and December 31, 2009 (as if the merger
occurred on January 1, 2009).
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
SECTION 3 - SECURITIES AND TRADING MARKETS
ITEM 3.02 UNREGISTERED SALES OF EQUITY SECURITIES.
As disclosed under Item 2.01 above, in connection with the Merger
Agreement, Tombstone issued an aggregate of 29,000,000 shares of common stock,
125,000 shares of Class A Preferred Stock and 125,000 shares of Class B
Preferred Stock to the former Hunt shareholders. The Company hereby incorporates
by reference its response in Item 2.01 in response to Item 3.02. There were
fewer than 35 non-accredited investors in these transactions. These transactions
were made in reliance upon exemptions from registration under Section 4(2) of
the Securities Act. Each certificate issued for unregistered securities
19
contained a legend stating that the securities have not been registered under
the Securities Act and setting forth the restrictions on the transferability and
the sale of the securities. No underwriter participated in, nor did we pay any
commissions or fees to any underwriter, in these transactions. These
transactions did not involve a public offering. The investors had knowledge and
experience in financial and business matters that allowed them to evaluate the
merits and risk of receipt of these securities. The investors were knowledgeable
about our operations and financial condition.
SECTION 4 - MATTERS RELATED TO ACCOUNTANTS AND FINANCIAL STATEMENTS
ITEM 4.01 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT
Cordovano & Honeck (C&H) served as Tombstone's independent registered
public accounting firm to audit the financial statements for the fiscal year
ended December 31, 2009 and 2008. With the exception of an expressed uncertainty
regarding our possible continuation as a going concern, the reports of C&H for
the past two years did not contain an adverse opinion or disclaimer of opinion,
nor were they modified as to uncertainty, audit scope, or accounting principles.
During the fiscal years ended December 31, 2009 and 2008 and
subsequently to November 3, 2010, there were no disagreements with C&H on any
matter of accounting principles or practices, financial statement disclosure, or
auditing scope or procedure that, if not resolved to C&H's satisfaction, would
have caused them to make reference to the subject matter in connection with
their reports on the Company's consolidated financial statement for such years,
and there were no reportable events, as listed in Item 304(a)(1)(v) of
Regulation S-K.
The Company has provided C&H with a copy of the foregoing disclosures
and requested in writing that C&H furnish the Company with a letter addressed to
the Securities and Exchange Commission stating whether or not they agree with
such disclosures. C&H provided a letter dated November 4, 2010 stating its
agreement with such statements. This letter is attached hereto as Exhibit 16.1.
The Company has appointed Ham Langston & Brezina, LLP (HLB) as the
successor independent registered public accounting firm on November 4, 2010.
Prior to such appointment, Hunt had consulted with HLB with respect to the
application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the Company's consolidated financial statements, or any other matter or
reportable events listed in Items 304(a)(2)(i) and (ii) of Regulation S-K.
SECTION 5 - CORPORATE GOVERNANCE AND MANAGEMENT
Item 5.01 Changes In Control Of Registrant
As a result of the Merger Transaction, the stockholders and management
of Hunt will own a controlling interest in the combined company. The following
table summarizes the ownership of the combined company by the respective
stockholder groups of each company as of the closing of this transaction on
October 29, 2010 (on an as converted basis):
Common Stock Options/ Series A Series B Total
Warrants Preferred Preferred (as converted) %
--------------- --------------- ---------------- --------------- ------------------- -----------
Tombstone ....... 4,878,000 1,689,999 -- -- 6,567,999 6.5%
Hunt Preferred . 7,436,000 8,436,000 -- -- 15,872,000 15.7%
Hunt Common . 21,564,000 140,000 26,000,000 31,000,000 78,704,000 77.8%
--------------- --------------- ---------------- --------------- ------------------- -----------
Total ... 33,878,000 10,265,999 26,000,000 31,000,000 101,143,999 100.0%
=============== =============== ================ =============== =================== ===========
Item 5.02 Departure of Directors or Certain Officers; Election of Directors;
Appointment of Certain Officers; Compensatory Arrangements of Certain Officers.
Resignation of Officers and Directors
As a result of the merger of Tombstone and Hunt and effective October 29,
2010, Hunt management assumed control of the combined company. Messrs. John N.
Harris and Neil A. Cox, resigned as the Chief Executive Officer/President and
Chief Financial Officer, respectively, of Tombstone. Messrs. Harris and Cox
remained as directors of the Company.
Effective October 29, 2010, Mr. William H. Reilly resigned as the Chief
Operating Officer and a Director of Tombstone.
20
For certain biographical and other information regarding the newly
appointed officers and directors, see the disclosure under Item 2.01 of this
report, which disclosure is incorporated herein by reference. For compensatory
arrangements with executive officers, see the disclosures under Item 2.01 of
this report.
ITEM 5.03 AMENDMENTS TO ARTICLES OF INCORPORATION OR BYLAWS; CHANGE IN FISCAL
YEAR.
On October 29, 2010, the Company filed Certificates of Designations
with the Secretary of State of Colorado to amend the Articles of Incorporation
for the creation of the Class A and Class B Preferred Shares, as disclosed in
Item 2.01 above.
21
SECTION 9 - FINANCIAL STATEMENTS AND EXHIBITS
ITEM 9.01 FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of Business Acquired. The following is a complete list
of financial statements filed as part of this Report.
Description Page
Report of Independent Registered Public Accounting Firm....................................... F-1
Consolidated Balance Sheets as of December 31, 2009 and 2008.................................. F-3
Consolidated Statement of Operations for the year ended December 31, 2009 and the
period from inception (December 1, 2008 through December 31, 2008 ..................... F-4
Consolidated Statement of Shareholders' Equity for the year ended December 31, 2009
and the period from inception December 1, 2008 through December 31, 2008 ............... F-5
Consolidated Statement of Cash Flows for the year ended December 31, 2009 and the
period from inception December 1, 2008 through December 31, 2008 ....................... F-6
Notes to Consolidated Financial Statements .................................................... F-7
Unaudited Consolidated Condensed Balance Sheets as of June 30, 2010 and December 31,
2009.................................................................................... F-22
Unaudited Condensed Consolidated Statement of Operations for the six months ended June
30, 2010 and 2009....................................................................... F-23
Unaudited Condensed Consolidated Statement of Cash Flows for the six months ended
June 30, 2010 and 2009.................................................................. F-24
Notes to Unaudited Condensed Consolidated Financial Statements ................................ F-25
(b) Pro Forma Financial Statements. The following is complete list of the
unaudited pro forma financial statements filed as a part of this Report.
Description Page
Unaudited Pro Forma Condensed Consolidated Balance Sheet at December 31, 2009.................. F-29
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Year Ended
December 31, 2009 ............................................................................. F-30
Unaudited Pro Forma Condensed Consolidated Balance Sheet at June 30, 2010...................... F-32
Unaudited Pro Forma Condensed Consolidated Statement of Operations for the Six Months Ended
June 30, 2010.................................................................................. F-33
(c) Exhibits
Exhibit Description
4.1 Tombstone Series A Preferred Stock Certificate of Designation
4.2 Tombstone Series B Preferred Stock Certificate of Designation
16.1 Letter from Cordovano & Honek to the Securities and Exchange Commission dated November 4, 2010 acknowledging
and agreeing with Item 4.01 disclosure.
10.11 Amended Agreement and Plan of Merger and Reorganization, by and among Hunt Global Resources Inc., Hunt
Acqusition Corp., and Tombstone Technologies, Inc. date October 29, 2010
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this Report to be signed on its behalf by the
undersigned, hereunto duly authorized.
TOMBSTONE TECHNOLOGIES, INC.
By: /s/George T. Sharp
-----------------------------------------------
George T. Sharp, Chief Executive Officer
By /s/John N. Bingham
-----------------------------------------------
John N. Bingham, Acting Chief Financial Officer
Date: November 4, 2010
23
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Management of
Hunt Global Resources, Inc.
We have audited the accompanying consolidated balance sheets of Hunt
Global Resources, Inc. and subsidiary (a development stage company) (the
"Company"), as of December 31, 2009 and 2008, and the consolidated statements of
operations, shareholders' equity (deficit), and cash flows for the year ended
December 31, 2009 and the period from December 1, 2008 (date of inception)
through December 31, 2008. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
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
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes 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, such consolidated financial statements present fairly,
in all material respects, the financial position of the Company as of December
31, 2009 and 2008, and the results of its operations and its cash flows for the
year ended December 31, 2009 and the period from December 1, 2008 (date of
inception) through December 31, 2008, in conformity with accounting principles
generally accepted in the United States of America.
As shown in the financial statements, the Company incurred net losses
$10,903,514 and $819,369 for the year ended December 31, 2009 and the period
from December 1, 2008 through December 31, 2008, respectively. At December 31,
2009, current liabilities exceed current assets by $5,088,346. These factors,
and the others discussed in Note 3, raise substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments relating to the recoverability and classification of recorded
assets, or the amounts and classification of liabilities that might be necessary
in the event the Company cannot continue in existence.
Ham, Langston & Brezina, L.L.P.
October 28, 2010
F-1
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
December 31, December 31,
2009 2008
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ 5,766 $ -
Related party receivables 58,000 -
Prepaid royalties to related parties 274,246 4,000
15,000 13,277
Prepaid rent and other 15,000 13,277
------------------- ------------------
Total current assets 353,012 156,047
Property, plant and equipment, net of accumulated
depreciation of $33,838 and $-0-,
respectively 979,134 -
Surface mining rights and royalty agreement 3,696,177 3,696,177
Assets held for sale 536,265 -
Deposits 13,277 13,277
------------------- ------------------
Total assets $ 5,577,865 $ 3,865,501
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of notes payable and long-term debt $ 3,763,600 $ 3,268,600
Notes payable to related parties 1,106,144 380,000
Accounts payable - 9,000
Accrued liability to a related party
Accrued interest payable 36,000 254,214
Accrued dividends payable 105,631 -
------------------- ------------------
Total current liabilities 5,441,358 3,911,814
Long term debt, net of current portion 120,000 -
------------------- ------------------
Total liabilities 5,561,358 3,911,814
------------------- ------------------
Commitments and contingencies:
Shareholders' equity (deficit)
Preferred stock, $0.01 par value per share, 50,000,000
shares authorized, 5,708,000 shares issued and
outstanding at December 31, 2009 57,080 -
Common stock, $0.001 par value per share, 200,000,000
shares authorized, 134,907,200 and 95,953,200
shares issued and outstanding at December 31, 2009
and 2008, respectively 134,907 95,953
Additional paid in capital 11,547,403 677,103
Loss accumulated during the development stage (11,722,883) (819,369)
------------------- ------------------
Total shareholders' equity (deficit) 16,507 (46,313)
------------------- ------------------
Total liabilities and shareholders' equity (deficit) $ 5,577,865 $ 3,865,501
=================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
F-2
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
--------------------------------------------------------------------------------------------------------------------
For the For the
Period From Period From
Inception, Inception,
For the Year December 1, December 1,
Ended 2008, to 2008, to
December 31, December 31, December 31,
2009 2008 2009
------------------ ------------------- -------------------
Operating expenses:
Selling, general, and administrative $ 7,799,388 $ 73,880 $ 7,873,268
Depreciation and amortization 33,838 - 33,838
------------------ ------------------- -------------------
Total operating expenses 7,833,226 73,880 7,907,106
------------------ ------------------- -------------------
Loss from operations during the
(7,907,106)
development stage (7,833,226) (73,880) (21,595,371)
------------------ ------------------- -------------------
Other income / (expense):
Interest and other income 655 - 655
Interest expense (945,447) (745,489) (1,690,936)
Loss on debt conversion (927,981) (927,981)
Equity in loss of Momentum (30,000) - (30,000)
-
Loss on investment (1,167,515) - (1,167,515)
------------------ ------------------- -------------------
(3,815,777)
Total other income / (expense), net (3,070,288) (745,489) (5,596,019)
------------------ ------------------- -------------------
Net loss (10,903,514) (819,369) (11,722,883)
(105,631)
Preferred stock dividends (105,631) - (105,631)
------------------ ------------------- -------------------
Net loss attributable to common stock $ (11,009,145) $ (819,369) $ (11,828,514)
================== =================== ===================
Net loss per common share - basic and
diluted $ (0.10) $ (0.01)
================== ===================
Weighted average shares outstanding -
basic and diluted 114,933,003 95,953,200
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-3
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
------------------------------------------------------------------------------------------------------------------------------------
Additional
Preferred Stock Common Stock Paid-In
--------------------------------- ---------------------------------
Shares Amount Shares Amount Capital
----------------- ------------ -----------------
Balance at inception,
December 1, 2008 - $ - - $ - $ -
Issuance of common stock
for leasehold agreement - - 91,000,000 91,000 -
Issuance of common stock to
compensate debtholders - - 4,953,200 4,953 677,103
Net loss - - - - -
----------------- ------------ --------------- -------------- -----------------
Balance at December 31, 2008 - $ - 95,953,200 $ 95,953 $ 677,103
Issuance of common stock in
payment of interest
expense - - 50,000 50 6,835
Preferred stock and common
stock warrants sold as
units in private placement 2,506,000 25,060 - - 2,480,940
Preferred stock and common
stock warrants issued in
units in settlement of debt 2,052,000 20,520 - - 2,031,480
Preferred stock and warrants
for common stock issued
in units to consolidate and
extend debt agreements 950,000 9,500 - - 940,500
Preferred stock issued for
debt extension 200,000 2,000 - - 198,000
Common stock issued for
services - - 38,854,000 38,854 5,311,341
Common stock issued in
settlement of debt - - 50,000 50 6,835
Preferred stock dividends - - - - (105,631)
Net loss - - - - -
----------------- ------------ --------------- -------------- -----------------
Balance at December 31, 2009 5,708,000 57,080 134,907,200 $ 134,907 $ 11,547,403
================= ============ =============== ============== =================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------------------------------------
Losses
Accumulated
During the
Development
Stage Total
------------------ ------------------
Balance at inception,
December 1, 2008 $ - $ -
Issuance of common stock
for leasehold agreement - 91,000
Issuance of common stock to
compensate debtholders - 682,056
Net loss (819,369) (819,369)
------------------ ------------------
Balance at December 31, 2008 $ (819,369) $ (46,313)
Issuance of common stock in
payment of interest
expense - 6,885
Preferred stock and common
stock warrants sold as
units in private placement - 2,506,000
Preferred stock and common
stock warrants issued in
units in settlement of debt - 2,052,000
Preferred stock and warrants
for common stock issued
in units to consolidate and
extend debt agreements - 950,000
Preferred stock issued for
debt extension - 200,000
Common stock issued for
services - 5,350,195
Common stock issued in
settlement of debt - 6,885
Preferred stock dividends - (105,631)
Net loss (10,903,514) (10,903,514)
------------------ ------------------
Balance at December 31, 2009 $ (11,722,883) $ $ 16,507
================== ==================
The accompanying notes are an integral part of these consolidated financial statements.
F-4
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOWS
--------------------------------------------------------------------------------------------------------------------
For the For the
Period From Period From
Inception, Inception,
For the Year December 1, December 1,
Ended 2008, to 2008, to
December 31, December 31, December 31,
2009 2008 2009
------------------ ------------------- -------------------
Cash flows from operating activities
Net loss $ (10,903,514) $ (819,369) $ (11,722,883)
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation and amortization 33,838 -
Loss on investment 1,167,515 - 1,167,515
Loss on debt conversion 927,981 -
Equity in losses of Momentum 30,000 - 30,000
Issuance of common stock for services 5,350,195 5,350,195
Common stock issued for interest expense 206,885 682,056 888,941
Investment exchanged for services 10,000 - 10,000
Issuance of note payable for consulting 500,000 - 500,000
Changes in operating assets and
liabilities, net of acquisitions:
Related party receivables 80,770 (138,770)
Prepaid expenses and other assets (271,969) (17,277) (289,246)
Deposits - (13,277) (13,277)
Accounts payable and accrued liabilities 531,309 66,637 597,946
------------------ ------------------- -------------------
Net cash used in operating activities (2,336,990) (240,000) (2,576,990)
------------------ ------------------- -------------------
Cash flows from investing activities
Purchases of property, plant and
equipment (2,972) - (2,972)
Investment in Reserve Oil Technologies (46,416) - (46,416)
------------------ ------------------- -------------------
Net cash used in investing activities (49,388) - (49,388)
------------------ ------------------- -------------------
Cash flows from financing activities
Proceeds from notes payable 38,699 250,000 288,699
Payments on long term debt (152,55) (10,000) (162,555)
Proceeds from issuance of preferred stock 2,506,000 - 2,506,000
------------------ ------------------- -------------------
Net cash provided by financing activities 2,392,144 240,000 2,632,144
------------------ ------------------- -------------------
Increase in cash and cash equivalents 5,766 - 5,766
Cash and cash equivalents, beginning of period - - -
------------------ ------------------- -------------------
Cash and cash equivalents, end of period $ 5,766 $ - $ 5,766
================== =================== ===================
Supplemental disclosure of cash flow information:
Interest paid $ 484,252 $ 5,795
================== ===================
Income taxes paid $ - $ -
================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-5
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND NATURE OF BUSINESS
Hunt Global Resources, Inc. and Subsidiary ("Hunt" or the "Company") is
a Houston based development stage company focused on the production of
aggregates, including sand and gravel. The Company's business model centers on
using new, "green" and more efficient extraction and processing methods to
enhance profit and shareholder value. The Company has one wholly-owned
subsidiary, Hunt BioSolutions, Inc.
On December 1, 2008, the Company secured the surface mining rights to
350 acres of land in northwest Houston which contains high-grade sand and gravel
reserves, whose size and color variations are the most desirable in the
marketplace. All of the sand and gravel is contained from the surface to a depth
of fifty feet. The mining process is "surface mining" which uses tractors and
conveyors to extract the material. The process is safer and less expensive than
other mining processes, and the project meets all requirements for the permits
that are required in the state of Texas for this type of mining. The Company is
preparing to build a state-of-the-art sand and gravel plant, projected to be
operating at full capacity in the third quarter of 2011. See Note 4 for further
disclosures on this transaction.
Additionally, due to the positive results from the laboratory testing
of its `frac' sand reserves, the Company is planning to coat its frac sand with
resin. Frac sand is used as part of a fracturing process to enhance domestic oil
and gas production; this process has facilitated the extraction of more than 600
trillion cubic feet of gas and 7 billion barrels of oil. The sand used for
fracing is mined and not manufactured, and the supply is limited in the U.S.
When raw frac sand is resin-coated, its value and demand significantly increase
because the resin coating dramatically strengthens each grain, and this
resistance to crushing prevents loss of permeability in fractures. This added
feature dramatically increases the product's market value.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICES
In June 2009, the FASB issued the FASB Accounting Standard Codification
(TM) (the "Codification"). The Codification becomes the single source of
authoritative nongovernmental U.S. GAAP, superseding existing authoritative
literature. The codification establishes one level of authoritative GAAP. All
other literature is considered non-authoritative. This Statement was effective
beginning with our financial statements issued for the year ended December 31,
2009. As a result, references to authoritative accounting literature in our
financial statement disclosures are referenced in accordance with the
Codification.
Basis of Presentation
The accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America.
Principles of Consolidation
The consolidated financial statements include the accounts of Hunt and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires the use
of estimates and assumptions by management in determining the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as
of 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. Our significant estimates primarily relate to the assessment of
warrants and debt and equity transactions and the estimated lives and methods
used in determining depreciation of fixed assets. Actual results could differ
from those estimates.
F-6
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash and Cash Equivalents
Cash and cash equivalents include all highly liquid investments having
maturities of three months or less at the date of purchase.
Equity Method Investments
The Company accounts for non-marketable investments using the equity
method of accounting if the investment provides the Company with the ability to
exercise significant influence over, but not control of, an investee.
Significant influence generally exists with an ownership interest representing
between 20% and 50% of the voting stock of an investee. Under the equity method
of accounting, investments are stated at initial cost and adjusted for
subsequent additional investments and the Company's proportionate share of
earnings or losses and distributions. The Company currently has one equity
method investee, Momentum, and we record our share of Momentum's earnings or
losses in equity in losses of Momentum in the accompanying consolidated
statements of operations. Where the Company's investment balance is reduced to
zero from its proportionate share of losses, as in the case of Momentum, the
investments are accounted for under the cost method. Under the cost method,
investments are carried at cost and adjusted only for other-than-temporary
declines in fair value, distributions of earnings or additional investments.
Property, Plant and Equipment, Net
Property and equipment is recorded at original cost. Assets acquired in
connection with business combinations are recorded at the assets' fair value.
Repairs and maintenance are charged to expenses as incurred. Depreciation is
computed using the straight-line method based on the estimated useful lives of
assets. This method is applied to group asset accounts, which in general have
the following lives: buildings and leasehold improvements - 15 years; machinery
and equipment- 5 to 7 years; furniture, software and fixtures - 5 years; and
computer hardware - 3 years. When we retire or dispose of property, plant or
equipment, we remove the related cost and accumulated depreciation from our
accounts and reflect any resulting gain or loss in our statements of operations.
The recoverability of our long-lived assets and certain identifiable
intangibles are evaluated for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets is measured by comparing the carrying
amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. Such evaluations for impairment are significantly
impacted by estimates of future prices, capital needs, economic trends in the
applicable construction sector and other factors. If such assets are considered
to be impaired, the impairment is measured by the amount by which the carrying
amount of the assets exceeds their fair value. Assets to be disposed of by sale
are reflected at the lower of their carrying amounts, or fair values, less cost
to sell.
Surface Mining Rights
A significant portion of our intangible assets are contractual rights
in place associated with obtaining, zoning, permitting and other rights to
access and extract aggregates reserves. Contractual rights in place associated
with aggregates reserves are amortized using a unit-of-production method based
on estimated recoverable units. Other intangible assets are amortized
principally by the straight-line method.
Accretion of Asset Retirement Obligations
Accretion reflects the period-to-period increase in the carrying amount
of the liability for asset retirement obligations. It is computed using the same
credit-adjusted, risk-free rate used to initially measure the liability at fair
value.
F-7
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value Measurements
Fair value is defined as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants at the measurement date. The fair value hierarchy prioritizes the
inputs to valuation techniques used to measure fair value into three broad
levels as described below:
Level 1: Quoted prices in active markets for identical assets or
liabilities; Level 2: Inputs that are derived principally from or
corroborated by observable market data; Level 3: Inputs that are
unobservable and significant to the overall fair value measurement.
Stripping Costs
In the mining industry, the costs of removing overburden and waste
materials to access mineral deposits are referred to as stripping costs.
Stripping costs incurred during the production phase are considered costs of
extracted minerals, inventoried, and recognized in cost of sales in the same
period as the revenue from the sale of the inventory. Additionally, such costs
inventory only to the extent inventory exists at the end of a reporting period.
Stripping costs incurred during the development stage of a mine (pre-production
stripping) are excluded from inventory cost. Pre-production stripping costs will
generally be expensed as incurred.
Other Costs
Costs are charged to earnings as incurred for the start-up of new
plants and for normal recurring costs of mineral exploration and research and
development.
Reclamation Costs
Reclamation costs resulting from the normal use of long-lived assets
are recognized over the period the asset is in use only if there is a legal
obligation to incur these costs upon retirement of the assets. Additionally,
reclamation costs resulting from the normal use under a mineral lease are
recognized over the lease term only if there is a legal obligation to incur
these costs upon expiration of the lease. The obligation, which cannot be
reduced by estimated offsetting cash flows, is recorded at fair value as a
liability at the obligating event date and is accreted through charges to
operating expenses. This fair value is also capitalized as part of the carrying
amount of the underlying asset and depreciated over the estimated useful life of
the asset. If the obligation is settled for other than the carrying amount of
the liability, a gain or loss is recognized on settlement.
In determining the fair value of the obligation, the cost for a third
party to perform the legally required reclamation tasks, including a reasonable
profit margin, is estimated. The estimated cost is then increased for both
future estimated inflation and an estimated market risk premium related to the
estimated years to settlement. Once calculated, this cost is discounted to fair
value using present value techniques with a credit-adjusted, risk-free rate
commensurate with the estimated years to settlement.
In estimating the settlement date, the current facts and conditions are
evaluated to determine the most likely settlement date. If this evaluation
identifies alternative estimated settlement dates, a weighted-average settlement
date, considering the probabilities of each alternative, is used.
Reclamation obligations are reviewed at least annually for a revision
to the cost or a change in the estimated settlement date. Additionally,
reclamation obligations are reviewed in the period that a triggering event
occurs that would result in either a revision to the cost or a change in the
estimated settlement date. Examples of events that would trigger a change in the
cost include a new reclamation law or amendment of an existing mineral lease.
Examples of events that would trigger a change in the estimated settlement date
include the acquisition of additional reserves or the closure of a facility.
Environmental Compliance
Environmental compliance costs are expected to include maintenance and
operating costs for pollution control facilities, the cost of ongoing monitoring
programs, the cost of remediation efforts and other similar costs. Although we
F-8
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
have not incurred any significant environmental compliance expenses to date, we
will expense or capitalize environmental expenditures for current operations or
for future revenues consistent with our capitalization policy.
Costs for environmental assessment and remediation efforts will be
accrued when the Company determines that a liability is probable and a
reasonable estimate the cost can be determined. At the early stages of a
remediation effort, environmental remediation liabilities are not easily
quantified due to the uncertainties of varying factors. The range of an
estimated remediation liability is defined and redefined as events in the
remediation effort occur.
Earnings per share (EPS)
The Company reports two earnings per share numbers, basic and diluted.
These are computed by dividing net earnings (loss) by the weighted-average
common shares outstanding (basic EPS) or weighted-average common shares
outstanding assuming dilution (diluted EPS).
All dilutive common stock equivalents are reflected in our earnings per
share calculations. Anti-dilutive common stock equivalents are not included in
our earnings per share calculations. The number of potentially dilutive common
stock equivalents that have been excluded from the calculation of diluted
earnings per share for the year ended December 31, 2009 and for the period from
inception, December 1, 2008, through December 31, 2008, were 11,016,000 and -0-,
respectively. The Company had no potentially dilutive common stock equivalents
at December 31, 2008 and an analysis of the potentially dilutive common stock
equivalents at December 31, 2009 is as follows:
Number of
Common Stock
Equivalents
----------------
Warrants for purchase of common stock 5,508,000
Preferred stock convertible to common stock 5,508,000
----------------
11,016,000
================
Revenue and Expenses
The Company is in the development stage and has no revenues or cost of
sales. Selling expenses consist primarily of sales commissions, salaries of
sales managers, travel and entertainment expenses, and trade show expenses.
General and administrative expenses consist primarily of executive and
administrative compensation and benefits, office rent, utilities, communication
and technology expenses, and professional fees.
Income Taxes
We use the liability method of accounting for income taxes. Under this
method, we record deferred income taxes based on temporary differences between
the financial reporting and tax bases of assets and liabilities and use enacted
tax rates and laws that we expect will be in effect when we recover those assets
or settle those liabilities, as the case may be, to measure those taxes. We
record a valuation allowance to reduce the deferred tax assets to the amount
that is more likely than not to be realized.
Fair Value of Financial Instruments
The carrying amounts of financial instruments including cash and cash
equivalents, receivables, and payables approximated fair value because of the
relatively short maturity of these instruments. The carrying values of other
financial instruments approximate their respective fair values.
Share-Based Payment Arrangements
Compensation expense for all share-based payment awards, including
employee stock options, is measured and recognized based on estimated fair
values. The value of the portion of the award that is ultimately expected to
vest is recognized as expense on a straight-line basis over the requisite
service periods, if any.
F-9
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of stock option awards is estimated on the date of grant
using an option-pricing model. The Company uses the Black-Scholes option-pricing
model ("Black-Scholes Model") as its method of valuation for share-based awards.
The determination of fair value of share-based payment awards on the date of
grant using an option-pricing model is affected by the Company's stock price, as
well as assumptions regarding a number of subjective variables. These variables
include, but are not limited to, expected stock price volatility over the term
of the awards, as well as actual and projected exercise and forfeiture activity.
The Company follows the guidance of the Codification as described in
ASC 505-50 "Equity Based Payments to Non-Employees" for transactions in which
equity instruments are issued in exchange for the receipt of goods or services
to non-employees. The Company accounts for the issuance of equity instruments to
acquire goods and services based on the fair value of the goods and services or
the fair value of the equity instrument at the time of issuance, whichever is
more reliably measurable.
Recent Accounting Pronouncements
In August 2009, the Financial Accounting Standards Board ("FASB")
issued authoritative guidance, which provides additional guidance on measuring
the fair value of liabilities. This guidance reaffirms that the fair value
measurement of a liability assumes the transfer of a liability to a market
participant as of the measurement date. This guidance became effective October
1, 2009. This guidance did not have a material impact on our consolidated
financial statements.
In June 2009, the FASB issued authoritative guidance on consolidation
of variable interest entities (VIEs) that changes how a reporting entity
determines a primary beneficiary that would consolidate the VIE from a
quantitative risk and rewards approach to a qualitative approach based on which
variable interest holder has the power to direct the economic performance
related activities of the VIE as well as the obligation to absorb losses or
right to receive benefits that could potentially be significant to the VIE. This
guidance requires the primary beneficiary assessment to be performed on an
ongoing basis and also requires enhanced disclosures that will provide more
transparency about a company's involvement in a VIE. This guidance is effective
for a reporting entity's first annual reporting period that begins after
November 15, 2009. The adoption of this guidance is not expected to have a
material impact on our consolidated financial statements.
In May 2009, the FASB issued guidance under the Subsequent Events topic
of the Codification which requires entities to disclose the date through which
they have evaluated subsequent events and whether the date corresponds with the
release of their financial statements. This guidance was effective for all
interim and annual periods ending after June 15, 2009. In February 2010, the
FASB issued updated guidance which stated that SEC filers must still evaluate
subsequent events through the issuance date of their financial statements,
however, they are not required to disclose that date in their financial
statements. We adopted this guidance for the fiscal year ended December 31, 2009
and it did not have an impact on our consolidated financial statements.
In April 2009, the FASB issued authoritative guidance related to
interim disclosures about fair value of financial instruments. The guidance
requires an entity to provide disclosures about fair value of financial
instruments in interim financial information. This guidance is to be applied
prospectively and is effective for interim and annual periods ending after June
15, 2009. There was no impact on our consolidated financial statements, as the
guidance relates only to additional disclosures.
In April 2009, the FASB issued authoritative guidance related to
accounting for assets acquired and liabilities assumed in a business combination
that arise from contingencies. This guidance requires that assets acquired and
liabilities assumed in a business combination that arise from contingencies be
recognized at fair value, if fair value can be reasonably estimated. If fair
value cannot be reasonably estimated, the asset or liability would generally be
recognized in accordance with existing authoritative guidance related to
accounting for contingencies and reasonable estimation of the amount of a loss.
The guidance also eliminates the requirement to disclose an estimate of the
range of possible outcomes of recognized contingencies at the acquisition date.
For unrecognized contingencies, the FASB requires that entities include only the
disclosures required by the authoritative guidance on accounting for
contingencies. This guidance was adopted effective January 1, 2009. There was no
impact on our
F-10
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
consolidated financial statements upon adoption, and its effects on future
periods will depend on the nature and significance of business combinations
subject to this guidance.
In December 2007, the FASB issued authoritative guidance related to
business combinations that establishes principles and requirements for how an
acquirer recognizes and measures in its financial statements the identifiable
assets acquired, the liabilities assumed, any non-controlling interest in the
entity acquired and the goodwill acquired. This guidance also establishes
disclosure requirements which will enable users to evaluate the nature and
financial effects of the business combination and was effective for fiscal years
beginning after December 15, 2008. The adoption of this guidance did not have a
material impact on our consolidated financial statements.
In September 2006, the FASB issued authoritative guidance on fair value
measurements and disclosures. This guidance defines fair value, establishes a
framework for measuring fair value in accordance with GAAP, and expands
disclosures about fair value measurement. The initial application of this
guidance was limited to financial assets and liabilities and became effective on
January 1, 2008. The impact of the initial application on our consolidated
financial statements was not material. In February 2008, the FASB revised the
authoritative guidance on fair value measurements and disclosures to delay the
effective date of the guidance for nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis, to fiscal years beginning after
November 15, 2008. We elected to defer the adoption of this guidance for
nonfinancial assets and nonfinancial liabilities until January 1, 2009. Adoption
of this guidance on January 1, 2009 did not have a material impact on our
consolidated financial statements.
3. GOING CONCERN CONSIDERATIONS
Hunt has incurred significant losses from operations since inception,
has limited financial resources and a significant deficit in working capital
since December 31, 2009. These factors raise substantial doubt about Hunt's
ability to continue as a going concern. Hunt's financial statements for the year
ended December 31, 2009 have been prepared on a going concern basis, which
contemplates the realization of assets and the satisfaction of liabilities in
the normal course of business. The Company has an accumulated deficit of
$11,722,883 through December 31, 2009. Hunt's ability to continue as a going
concern is dependent upon its ability to develop additional sources of capital
and, ultimately, achieve profitable operations. The accompanying consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.
4. ACQUISITIONS AND DIVESTITURES
Mining Property
On December 1, 2008, the Company entered into the Hunt Land and Mineral
Lease Agreement (the "Mining Agreement") and secured the surface mining rights
to 350 acres of land in northwest Houston which contains high-grade sand and
gravel reserves. The majority owners of the land are Jewel and Lisa Hunt
(44.45%), officers and directors of the Company, and Mallie Hunt Adams (44.45%).
In exchange for the mining rights, the Company issued to the owners of
the land 91,000,000 shares of common stock as founders' shares valued at $91,000
(see Note 7 below). In addition, the Company assumed debt on the mining property
and related accrued interest in the amount of $3,605,177. Per the terms of the
Mining Agreement, the Company will pay the land owners a royalty of 10% of the
sold price of all products mined, processed, removed or manufactured and sold
from the mining site. The term of the lease is twenty years and expires on
December 31, 2028 unless extended in writing by the parties to the lease. The
Company is responsible for the maintenance of the property and all property
taxes during the term of the lease.
Management estimates that the land under the Mining Agreement has
reserves of sand and gravel that are expected to provide production for 18
years.
Reserve Oil Technologies, LLC
On February 27, 2009, the Company (along with four individual
investors) formed Reserve Oil Technologies, LLC (the "LLC"). Under their
agreement, the four investors agreed to provide a maximum of $1,000,000 in
financing to the venture (including $250,000 previously loaned to the Company)
F-13
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
to purchase certain oil and gas leases in Bastrop County, Texas containing at
least 70 previously drilled wells. The original ownership of this LLC was to be
25% to Hunt, 10% to the managing individual investor, and 65% to the four
individual investors as a group.
On March 1, 2009, the Company issued promissory notes to the four
investors totaling $1,000,000 as guaranty for their maximum investment,
including the conversion of the $250,000 in previous notes, and the four
investors were issued a total of 950,000 shares of Hunt preferred stock along
with a 950,000 warrants to purchase common stock during the ensuing 4 years for
$1.00 per share as a financing premium (see Note 6).
On December 15, 2009, the Company entered into agreements with the four
investors to acquire the investors entire interest in the LLC and retire the
outstanding $1,000,000 in notes payable with accrued interest to the four
investors for the issuance of 2,052,000 shares of Hunt preferred stock along
with a 2,052,000 warrants to purchase common stock during the ensuing 4 years
for $1.00 per share (see Note 6).
On December 22, 2009, the Company entered into a sales agreement for
all oil and gas leases owned by the LLC for a sales price of $1,100,000 less
offsets for vendor liens, prospective vendor liens and defective leases. The
transaction funded during the first quarter of 2010 with net proceeds received
by Hunt of $536,265. The Company recorded a corresponding loss on investment of
$1,167,515 in December 2009 to write down our investment in the LLC to its fair
market value.
Momentum Biofuels, Inc.
On August 21, 2009, the Company entered into an Agreement with Momentum
Biofuels, Inc. ("Momentum"), under which the Company agreed to acquire certain
assets and assume certain liabilities, obligations and commitments of Momentum
as shown in the analysis below. The assets received by the Company were
Momentum's physical assets, including the biodiesel plant located in Pasadena,
Texas, and all intellectual property, processes, techniques and formulas for
creating biofuels and related products.
The Company also entered into a License Agreement with Momentum, which
grants the Company the right to use, improve, sublicense and commercialize the
intellectual property described in the Agreement, in exchange for a 3% royalty
on the gross and collected revenue received by the Company from the sale of
bio-diesel and related products and from revenues received by the Company from
its proposed commercial sand business. Momentum assigned its royalty rights to
its parent, (Momentum-Colorado) in exchange for 40,000,000 common shares of
Momentum-Colorado, which was equal to approximately 39% of the issued and
outstanding stock at the date of the License Agreement. The 40,000,000 shares
are subject to a non dilution agreement.
On October 9, 2009, the Momentum transaction was consummated and on
December 31, 2009, the Company received the 40,000,000 shares of common stock of
Momentum described in the previous paragraph and transferred 10,000,000 shares
to Crown Financial, LLC (see Note 9 below for further details).
The following table summarizes the fair values of the assets acquired
and the liabilities assumed under the Momentum agreement:
Estimated
Value
---------------
Assets acquired:
Plant $ 998,000
Plant equipment 12,000
Investment in Momentum 40,000
---------------
Total assets acquired $ 1,050,000
===============
Liabilities assumed:
Accrued interest $ 45,000
Bathgate notes payable 600,000
Brand Energy notes payable 185,000
Other notes payable 220,000
---------------
Total liabilities assumed $ 1,050,000
===============
F-13
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Not shown in the analysis, the Company further agreed to assume
Momentum's commitment under a sub-lease agreement between Momentum and Brand
Infrastructure and Services, Inc., including all past due rent, assessments and
other charges related to the property.
The 40,000,000 shares of Momentum common stock issued to Hunt were
valued at their par value due to the doubt about Momentum's ability to continue
as a going concern as disclosed in its annual report.
Summarized financial information for Momentum, assuming a 100%
ownership interest, is as follows:
December 31,
2009
-----------------
Balance Sheet
Current liabilities $ 2,124,527
Noncurrent liabilities 120,000
Stockholder' deficit (2,244,527)
October 9, 2009
(Acquisition Date) To
December 31, 2009
-----------------
Statement of Operations
Plant expenses $ 26,891
General and administrative expenses 541,845
Loss from operations (568,736)
Net loss attributable to shareholders (590,268)
Equity in losses of Momentum (30,000)
The Company recognized loss from its investment in Momentum only to the
extent of its initial investment of $30,000.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
December 31, December 31,
2009 2008
--------------- ---------------
Plant
$ 998,000 $ -
Machinery and equipment 12,000 -
Furniture and fixtures 2,972 -
--------------- ---------------
1,012,972 -
Less accumulated depreciation (33,838) -
--------------- ---------------
Property, plant and equipment, net $ 979,134 $ -
=============== ===============
Total depreciation expense for the year ended December 31, 2009 and for
the period from inception, December 1, 2008, through December 31, 2008 was
$33,838 and $0, respectively.
F-13
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES PAYABLE AND LONG-TERM DEBT, INCLUDING RELATED PARTY NOTES PAYABLE
-----------------------------------------------------------------------
Notes payable and long-term debt consists of the following:
December 31, December 31,
2009 2008
---------------- ----------------
Mortgage note payable to an individual, bearing interest of 18%
per year, payable on October 18, 2008, collateralized by Deed of Trust
and Security Agreement on real property owned a company owned by a
stockholder of the Company and by officers, directors and stockholders
of the Company, in an undivided 88.89 percent interest in a tract of
land containing 553.735 acres in Montgomery County, Texas. $ 2,450,000 $ 2,450,000
Mortgage note payable to a company, bearing interest of 18% per
year, payable on October 18, 2008, collateralized by Deed of Trust and
Security Agreement on real property owned by an unrelated individual and
by officers, directors and of the Company, consisting of 6.066 acres in
Montgomery County 635,000 635,000
Mortgage note payable to a company, bearing interest of 15% per year, payable
on April 1, 2010, collateralized by Deed of Trust and Security Agreement
on real property owned by officers, directors and stockholders of the
Company, consisting of 21.676 acres in Montgomery County, Texas. 123,600 123,600
Mortgage note payable to a company, bearing interest of 18% per
year, payable on April 17, 2008, collateralized by Deed of Trust and
Security Agreement on real property owned by officers, directors and
stockholders of the Company, consisting of 13 of Carriage Hills
subdivision in Montgomery County, Texas
Note payable to an individual for consulting services, bearing interest of 8%
per year, payable on December 1, 2009, collateralized by personal
guaranty of officers, directors stockholders of the Company. 250,000 -
Note payable to a company, bearing interest of 8% per year,
payable January 9, 2010, collateralized by personal guaranty of
officers, directors and stockholders of the Company. 185,000 -
Notes payable to an individual, bearing interest of 10% per year,
payable on May 1, 2013, unsecured. 95,000 -
Note payable to an individual, bearing interest of 10% per year,
payable on demand, collateralized by Security Agreement
covering certain equipment which the Company acquired from Momentum 60,000 -
Note payable to an individual, bearing interest of 10% per year, payable on
April 8, 2014, collateralized by Security Agreement covering
250,000 shares of stock of Momentum. 25,000 -
-------------- -------------
Total notes payable and long-term debt 3,883,600 3,268,600
Less current portion (3,763,600) (3,268,000)
--------------- ---------------
Long term debt $ 120,000 $ -
=============== ===============
The Company was in default on $3,395,000 and $3,200,000 of the total
notes payable balance as a result of being past due on payments as of December
31, 2009 and 2008, respectively. Following is analysis of future annual
maturities of long-term debt at December 31, 2009:
Year ending December 31, Amount
------------------------------ -----------------
2010 $ 4,869,744
2011 -
2012 -
2013 95,000
2014 25,000
-----------------
$ 4,989,744
=================
F-14
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Notes payable to related parties consist of the following:
December 31, December 31,
2009 2008
--------------- ---------------
Notes payable to two individual stockholders, non-interest
bearing, payable on demand, unsecured. $ 6,144 $ 75,000
Notes payable to four individual stockholders, bearing interest
of 10% per year plus a fixed premium totaling $37,500, payable on
February 15, 2009, collateralized by the Personal Guaranty officers,
directors and stockholders of the Company, along the pledge of real
estate owned by such officers, stockholders consisting of 6.066 acres
in Montgomery County, Texas. - 250,000
Notes payable to two individual stockholders, bearing interest
of fixed amounts of $5,000 and $1,250, payable March and June
2008, unsecured - 55,000
Notes payable to fourteen stockholders of Momentum assembled by
an investment banking company, bearing interest of 10% per year, pay-
able on December 31, 2010, collateralized by a Security Agreement
covering all property, plant and equipment, and assets which the
Company acquired from Momentum 600,000 -
Note payable to a company controlled by an officer of the
Company for financial and management consulting services, bearing
interest of 8% per year, payable on January 1, 2010,
unsecured. 500,000 -
-------------- -------------
Notes payable to related parties $ 1,106,144 $ 380,000
=============== ==============
7. SHAREHOLDERS' EQUITY
Common Stock
On December 1, 2008, the Company authorized the issuance of 91,000,000
shares of common stock to the three property owners of the sand and gravel
mining land that forms the basis of the Company's Mining lease (See Note 4). In
addition, the Company also authorized the issuance of an additional 4,953,200
shares of common stock to various creditors who had previously loaned money to
the property owners to help preserve ownership of the mining property in periods
prior to December 1, 2008. The value of these shares issued to the property
owners was recorded at the $91,000 par value of the stock because that value
approximates the owners historic cost in the property under lease. The Shares
issued to various creditors were valued at $.1377 per share and charged to
interest expense (totaling $682,056) based on a valuation of the Company at June
30, 2010 that was adjusted for changes during 2009 and 2010.
The $0.1377 per share valuation of common stock was used in all
issuances of common stock for services and interest expense in 2008 and 2009
On May 1, 2009, the Company authorized the issuance of 38,854,000
shares of common stock to various consultants for services performed for the
Company. These shares were valued based at their estimated fair value of $0.1377
per share (totaling $5,350,196) as described above.
On June 10, 2009, the company issued 50,000 shares of common stock to
various note holders in lieu of interest payments. These shares were valued
based at their estimated fair value of $0.1377 per share (totaling $6,885).
F-15
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June and October 2009, the Company issued a total of 50,000 shares
of common stock to individuals in settlement of notes with the Company. These
shares were valued based at their estimated fair value of $0.1377 per share
(totaling $6,885).
Preferred Stock
During 2009, the Company issued 2,506,000 shares of its Series A
Convertible Preferred Stock to accredited investors in conjunction with a
private placement memorandum (the "Memorandum"). Each share of convertible
preferred stock was sold for $1.00 per share, bears a 10% dividend and includes
a detachable warrant The detachable warrant is exercisable for a term of 2
years, for the purchase of one share of common stock at an exercise price of
$1.00 per share. The warrant is callable by the Company at any time after the
Company's common stock is publicly trading for a price in excess of $4.00 per
share for seven consecutive business days that include a minimum average trading
volume of at least 25,000 shares per day.
In March 2009, the Company issued 950,000 shares of Series A
Convertible Preferred Stock to four individuals as part of the Reserve Oil
Technologies, LLC investment (See Note 4 above). These preferred shares were
valued at $1.00 per share because they include essentially the same rights as
the preferred shares issued for cash as described above; however, the detachable
warrants are for a term of 4 years.
In September 2009, the Company issued 200,000 shares of its Series A
Convertible Preferred Stock as a fee to facilitate the assumption of debt
agreements with a group of investors, arranged by Bathgate Partners, who had
provided debt financing to Momentum. These debt agreements were assumed by the
Company in the Momentum transaction (See Note 4 above). These preferred shares
were valued at $1.00 per share because they include the same rights as the
preferred shares issued for cash as described above (with no warrants).
In December 2009, the Company issued 2,052,000 shares of its Series A
Convertible Preferred Stock to four individual note holders in settlement of
their notes payable by the Company. These preferred shares were valued at $1.00
per share because they include essentially the same rights as the preferred
shares issued for cash as described above; however, the detachable warrants are
for a term of 4 years.
Warrants
In conjunction with the sales and other issuance of Series A
Convertible Preferred Stock described above, during 2009 the Company issued
warrants to purchase a total of 5,508,000 shares of common stock at $1.00 per
share. A summary of warrant activity during the year ended December 31, 2009, is
as follows:
Number of Warrants Weighted
Outstanding and Average
Exercisable Exercise Price
--------------------- ----------------
Outstanding, December 31, 2008 - $ -
Issued with private placement 2,506,000 1.00
Issued with settlement of debt 2,052,000 1.00
Issued for acquisition 950,000 1.00
------------------- -----------
Outstanding, December 31, 2009 5,508,000 $ 1.00
=================== ===========
As of December 31, 2009, the range of warrant prices for shares under
warrants, the weighted average remaining contractual life and the aggregate
intrinsic value is as follows:
Remaining Aggregate
Exercise Number of Contractual Intrinsic
Price Warrants Life (in months) Value
------------- --------------- -------------------- -------------
Warrants $ 1.00 3,002,000 47.5 $ -
Warrants 1.00 2,506,000 23.0 -
F-16
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INCOME TAXES
There is no current or deferred tax expense for the year ended December
31, 2009 nor for the period from December 1, 2008 to December 31, 2008 due to
the Company's loss position. The deferred tax consequences of temporary
differences in reporting items for financial statement and income tax purposes
are recognized, as appropriate. Realization of the future tax benefits related
to the deferred tax assets is dependent on many factors, including the Company's
ability to generate taxable income. Management has considered these factors in
reaching its conclusion as to the valuation allowance for financial reporting
purposes and has recorded a full valuation allowance against the deferred tax
asset.
The income tax effect of temporary differences comprising deferred tax
assets and liabilities are summarized as follows:
December 31, December 31,
2009 2008
------------------ -----------------
Net operating loss carryforwards $ 1,209,800 $ 47,493
Book vs. tax basis of property, plant and equipment (2,216) -
Prepaid royalty expense (93,254) (1,360)
------------------ -----------------
1,114,330 46,133
Valuation allowance (1,114,330) (46,133)
------------------ -----------------
Net deferred tax assets $ - $ -
================== =================
The Company has available net operating loss carryforwards of
approximately $3,268,000 for tax purposes to offset future taxable income which
expire in 2028 and 2029. The tax years 2008 and 2009 remain open to examination
by federal authorities and other jurisdictions in which the company operates and
is subject to taxation.
A reconciliation between the statutory federal income tax rate of 34%
and the effective rate of income tax expense is as follows:
Period From
Inception,
December 1,
For the Year Ended 2008, to
December 31, December 31,
2009 2008
------------------- ------------------
Tax benefit at federal statutory rate $ 3,707,195 $ 278,585
Non-deductable stock based compensation (1,819,077) -
Non-deductable business meals and entertainment (6,073) (553)
Non-deductable interest expense (72,682) (231,899)
Non-deductible loss on investment and loss on debt conversion (697,680) -
Non-deductible loss on equity investment (45,702) -
Change in valuation allowance (1,068,197) (46,133)
------------------- ------------------
Provision for income taxes $ - $ -
=================== ==================
9. Operating leases
The Company leases certain equipment, office and manufacturing
facilities under operating lease arrangements. At December 31, 2009, future
annual minimum lease payments due under non-cancelable operating leases were as
follows:
Year ending December 31, Amount
------------------------------- ----------------
2010 $ 407,789
2011 412,307
2012 161,211
-----------------
$ 981,307
================
F-17
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The total rent expense under operating lease arrangements was $271,675,
and $0 for the year ended December 31, 2009, and for the period from inception,
December 1, 2008 through December 31, 2008, respectively.
10. Related party Transactions
During the year ended December 31, 2009, and for the period from
inception, December 1, 2008, through December 31, 2008, the Company engaged in
many related party transactions. These transactions were approved by the
Company's board of directors and management and are described below:
Jewel Hunt is a co-founder and the Chairman of the Board of Directors
of the Company and his wife is a co-founder, member of the board and the
Company's secretary. The Hunt's are also the founders and primary stockholders
of the Company and the primary owners of 350 acres of land in northwest Houston
containing sand and gravel reserves to which the Company has obtained surface
mining rights. The Company's business plan is dependent on the involvement of
the Hunt's and on the profitable development of the sand and gravel reserves
that they own. The Company has engaged in the following transactions with the
Hunts and other related parties during the year ended December 31, 2009, and
during the period from inception, December 1, 2008, through December 31, 2008.
On December 1, 2008, the Company approved the acquisition of the
surface mining rights discussed in the previous paragraph in exchange for the
issuance of 91,000,000 shares of common stock to the Hunt's and the assumption
of debts totaling $3,605,177. The surface mining rights were valued based on the
historic cost of the underlying property to the Hunts plus the debt assumed by
the Company. The historic cost was assumed to equal the par value of the shares
issued or $91,000 as the property has been in the Hunt family for over a
century.
The surface mining rights agreement provides for the payment of a
royalty to the Hunt's equal to 10 percent of the sold price of all products
mined, processed, removed or manufactured and sold from the property. On
December 1, 2008, the Company's board of directors approved the prepayment of
royalties to the Hunt's, not to total more than $450,000 per year. Based on the
board's actions, the Company made advanced or prepaid royalty payments to the
Hunts of $274,276 and $4,000 during the year ended December 31, 2009, and the
period from inception, December 1, 2008, through December 31, 2008,
respectively. These amounts are included in prepaid royalties in the
accompanying balance sheet.
The Hunt's maintain a satellite office that is used for Company
business. This office is responsible for property maintenance, security and
computer operations and is located near the property subject to surface mining
rights. On December 1, 2008, the Company approved a monthly reimbursement to the
Hunts of $9,000 per month for this space. Rent expense recognized by the Company
related to this office was $108,000 and $9,000 during the year ended December
31, 2009, and the period from inception, December 1, 2008, through December 31,
2008, respectively. The Company also paid certain expenses and obligations on
behalf of the Hunts totaling $306 and $21,395, respectively during the year
ended December 31, 2009, and the period from inception, December 1, 2008,
through December 31, 2008. These expenses were treated as compensation and
included in general and administrative expenses.
In December 2008, $250,000 received from the issuance of debt was
deposited into a checking account of Jewel Hunt, the Company's Chairman of the
Board. These funds were used for operating expenses of the Company, with the
remaining balance classified as a related party receivable at December 31, 2008.
On September 21, 2009, the Company entered into an Agreement with
Momentum Biofuels, Inc. ("Momentum"), under which the Company agreed to acquire
certain assets and assume certain liabilities, obligations and commitments of
Momentum. On October 9, 2009, the Momentum transaction was consummated and on
December 31, 2009, the Company received 40,000,000 shares of Momentum common
stock and became a 39% owner of Momentum. The Momentum transaction is described
in Note 4 and resulted in the following:
o George Sharp, the Company's Chief Executive Officer and a member of
the Company's Board of Directors, became the Chief Executive Officer
and Chairman of the Board of Directors of Momentum.
F-18
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o Jewel Hunt, the Company's Chairman of the Board of Directors, became a
member of the Board of Directors of Momentum.
o 10,000,000 shares of Momentum were transferred to a company owned by
George Sharp, Crown Financial, LLC ("Crown") In connection with the
transfer, the Company recognized $10,000 of expense, included in
selling, general and administrative expenses, based on the estimated
value of the Momentum shares.
Included in the payment of selling, general and administrative expenses
were amounts paid to the Hunts, George Sharp and Crown for compensation as
follows:
Period From
Inception,
For the Year December 1,
Ended 2008, to
December 31, December 31,
2009 2008
----------------- -----------------
George Sharp for cash compensation $ 119,000 $ 15,000
George Sharp for stock compensation 1,459,620 -
The Hunts for rent and utilities 108,000 9,000
The Hunts for expenses or payments made on their behalf 306 21,395
Accrued compensation Crown (October 1 - December 31, 2009) 36,000 -
Crown for compensation in the form of Momentum stock 10,000 -
----------------- -----------------
$ 1,732,926 $ 45,395
================= =================
At December 31, 2008, the related party receivables of $138,770,
represents amounts held in the accounts of the Hunts available for operations of
the Company.
On October 5, 2009, the Company entered into a service agreement that
included a note payable to Crown whereby the Company will pay Crown a total of
$500,000 plus interest at the rate of 8% until paid in full for past executive
and advisory services, including equity and debt funding (See Note 6). The
Company further agreed to compensate Crown for future services beginning October
1, 2009 through December 31, 2012 as follows:
Period Amount
-------------------------------------- ----------------
October through December 2009 $ 36,000
Year ending December 31, 2010 240,000
Year ending December 31, 2011 360,000
Year ending December 31, 2012 600,000
----------------
Total due under the agreement $ 1,236,000
================
The service agreement with Crown is non cancelable and is fully
collateralized by Hunt assets. All payments due under this agreement dated are
due semi-monthly. If payments are not paid within ten days of the date due or if
the Company elects to terminate the agreement for any reason, all payments due
under the contract will be accelerated and be due to be paid in full. Further,
the Company waived all notice in the event of foreclosure notices on assets. At
December 31, 2009, the accrued liability to a related party of $36,000 in the
accompanying balance sheet represents the amount due to Crown for the period
from October to December 2009.
In addition to services provided through Crown, on May 29, 2009, George
Sharp (via Crown Financial) was issued 10,600,000 shares of the Company's common
stock for being a co-founder of Hunt and services performed. These shares were
valued at $0.1377 per share as described in note 7. Included in selling general
and administrative expenses for the year ended December 31, 2009 was expense of
$1,459,620 related to this share issuance.
George Sharp is the owner and primary officer of a start-up company, US
Med Alerts. During the year ended December 31, 2009, the Company loaned US Med
Alerts $55,000, which is included in related party
F-19
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivables at December 31, 2009. Also included in related party receivable at
December 31, 2009 is $3,000 due from Momentum.
11. NON-CASH INVESTING AND FINANCING ACTIVITIES
-------------------------------------------
Period From
Inception,
December 1,
For the Year Ended 2008
December 31, To December
2009 2008
------------------- ---------------
Preferred stock dividend accrued $ 105,631 $ -
Preferred stock issued for satisfaction of debt
debt 2,052,000 -
Common stock issued for mining rights - 91,000
Debt assumed for mining rights 3,605,177 -
12. SUBSEQUENT EVENTS
Tombstone Transaction
On January 19, 2010, Tombstone Technologies, Inc., a Colorado
corporation ("Tombstone") and its wholly owned subsidiary Hunt Acquisition Corp
("Merger Sub") entered into an Agreement and Plan of Merger (the "Merger
Agreement") with the Company.
The Merger Agreement and the proposed acquisition described therein
(the "Acquisition") has been under negotiation and is expected, by management to
close at the end of October, 2010. At the closing, The Company's stockholders
are expected to exchange 91% of its outstanding shares for Tombstone stock and
the Company is expected to be merged into Merger Sub, with the Company as the
surviving entity. The Company anticipates that the remaining 9% of stockholders
will exchange their shares or exercise dissenter's rights. The proposed
transaction will be structured as a reverse merger whereby the shareholders of
Hunt were issued Common and Preferred Stock that will result in ownership of
approximately 93.5% of the issued and outstanding stock of Tombstone on a fully
diluted as-converted basis. As a result, Hunt stockholders and management own a
controlling interest in the combined company.
The proposed transaction will require the issuance of Tombstone
shares as follows:
o 29,000,000 new shares of restricted Common Stock of Tombstone to the
holders of Hunt Common Stock and Hunt Preferred Stock;
o 125,000 shares of a new series of Class A Preferred Convertible Stock
of Tombstone to certain holders of Hunt Common Stock (having a
conversion ratio of one share of Preferred Stock to 208 shares of
Common Stock of Tombstone); and
o 125,000 shares of a new series of Class B Preferred Convertible Stock
of Tombstone to the "Controlling Stockholders" of Hunt Common Stock
(having a conversion ratio of one share of Preferred Stock to 248
shares of Common Stock of Tombstone and having a quarterly dividend of
$0.56 per share); and
o A reserve for issuance of an additional 10,125,999 additional shares
of Tombstone Common Stock for the exercise of Tombstone stock options
for 1,689,999 shares of Tombstone Common Stock that have been extended
for two years and the exercise of Hunt warrants for 8,436,000 shares
of Hunt Common Stock.
The holders of 7,436,000 shares of Hunt Preferred Stock and warrants
to purchase 8,436,000 shares of Hunt Common Stock will be converted into
restricted Tombstone Common Stock and Warrants on a one for one basis. The
F-21
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Controlling Stockholders of Hunt (Jewel and Lisa Hunt and George Sharp via Crown
Financial) will convert a substantial portion of their Hunt Common Stock into
Tombstone Class B Preferred Stock and will be required to hold such shares for
two years unless the Tombstone Common Stock achieves a $7.00 trading price for
10 consecutive trading days. The remaining shares of outstanding Hunt Common
Stock were converted into a combination of Tombstone Common Stock and Class A
Preferred Stock on a pro rata basis. The holders of Tombstone Class A Preferred
Stock will be required to hold such shares for one year unless the Tombstone
Common Stock achieves a $3.00 trading price for 10 consecutive trading days.
As result of the transaction discussed above, the business of Tombstone
will change from the development of online printing software to a producer of
aggregates, including sand and gravel.
Sale of Reserve Oil Technologies, LLC Investment
During the first quarter of 2010, the Company sold its investment in
Reserve Oil Technologies, LLC to a group of investors for $536,265 (see Note 4
above for further information on this investment).
Issuances of Common and Preferred Stock
From January 1, 2010 through October 28, 2010, the Company issued
5,796,000 shares of its Common Stock to various individuals for services
provided to the Company.
From January 1, 2010 through October 28, 2010, the Company issued
1,728,000 shares of its Series A Convertible Preferred Stock to several
accredited investors in conjunction with the Memorandum. Each share of
convertible preferred stock was sold for $1.00 per share and also contains
detachable Class A Warrants for the purchase of one share of common stock at an
exercise price of $1.00 per share, which must be exercised within 24 months of
the date of their issuance.
General
Company management has evaluated the effect of subsequent events on the
Company's financial statements through October 28, 2010, the date of financial
statement issuance.
F-22
HUNT GLOBAL RESOURCES INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
--------------------------------------------------------------------------------------------------------------------
June 30, December 31,
2010 2009
------------------- -------------------
ASSETS
Current assets:
Cash and cash equivalents $ - $ 5,766
Related party receivables 229,707
Prepaid royalties to related parties 427,470 274,246
Prepaid rent and other 20,500 15,000
------------------- -------------------
Total current assets 677,677 353,012
Property, plant and equipment, net 972,470 979,134
Surface mining rights and royalty agreement 3,696,177 3,696,177
Assets held for sale - 536,265
Deposits and investments 26,277 13,277
------------------- -------------------
Total assets $ 5,372,601 $ 5,577,865
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 196,504 $ -
Accrued liabilities to related parties 156,000 36,000
Accrued interest expense and preferred dividends 941,364 535,614
Notes payable to related parties 918,750 1,106,144
Current portion of notes payable and long-term debt 4,008,600 -
------------------- -------------------
Total current liabilities 6,221,218 5,441,358
Long term debt, net of current portion - 120,000
------------------- -------------------
Total liabilities 6,221,218 5,561,358
------------------- -------------------
Commitments and contingencies:
Shareholders' equity (deficit)
Preferred stock, $0.01 par value per share, 50,000,000 shares
authorized, 7,136,000 and 5,708,000 shares issued and outstanding
at June 30, 2010 and
December 31, 2009 71,360 57,080
Common stock, $0.001 par value per share, 200,000,000
shares authorized, 136,557,200 and 134,907,200
shares issued and outstanding at June 30, 2010
and December 31, 2009, respectively 136,557 134,907
Additional paid in capital 12,878,328 11,547,403
Loss accumulated during the development stage (13,934,862) (11,722,883)
------------------- -------------------
Total shareholders' equity (deficit) (848,617) 16,507
------------------- -------------------
Total liabilities and shareholders' equity (deficit) $ 5,372,601 $ 5,577,865
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-23
HUNT GLOBAL RESOURCES INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
----------------------------------------------------------------------------------------------------------------------
For the
Period From
Inception,
For the Six For the Six December 1,
Months Ended Months Ended 2008, to
June 30, June 30, June 30,
2010 2009 2010
------------------- ------------------- -------------------
Operating expenses:
Selling, general, and administrative $ 1,782,131 $ 4,185,117 $ 9,862,286
Depreciation and amortization 52,836 - 86,674
------------------- ------------------- -------------------
1,834,967 4,185,117 9,948,960
------------------- ------------------- -------------------
Loss from operations during the
development stage (1,834,967) (4,185,117) (9,948,960)
------------------- ------------------- -------------------
Other income / (expense):
Interest and other income 5,036 494 5,692
Interest expense (382,047) (6,885) (1,866,098)
Loss on debt conversion - - (927,981)
Equity in loss of Momentum - - (30,000)
Loss on investment - - (1,167,515)
------------------- ------------------- -------------------
(377,011) (6,391) (3,985,902)
------------------- ------------------- -------------------
Net loss (2,211,978) (4,191,508) (13,934,862)
Preferred stock dividends 308,351 3,288 413,982
------------------- ------------------- -------------------
Net loss attributable to common stock $ (2,520,329) $ (4,194,796) $ (14,348,844)
=================== =================== ===================
Net loss per common share - basic and
Diluted $ (0.02) $ (0.04)
=================== ===================
Weighted average shares outstanding -
basic and diluted 136,557,200 98,934,968
=================== ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-24
HUNT GLOBAL RESOURCES INC. AND SUBSIDIARY
(A Development Stage Company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
---------------------------------------------------------------------------------------------------------------------------
For the
Period From
Inception,
For the Six For the Six December 1,
Months Ended Months Ended 2008, to
June 30, June 30, June 30,
2010 2009 2010
------------------ ------------------- -------------------
Cash flows from operating activities:
Net loss $ (2,211,978) $ (4,191,508) $ (13,937,861)
Adjustments to reconcile net income to
net cash flow from operating activities:
Depreciation and amortization 52,836 - 86,674
Loss on investment - - 1,167,515
Loss on debt conversion - - 927,981
Equity in losses of Momentum - - 30,000
Issuance of common stock for services 225,001 3,600,931 5,577,400
Common stock issued for interest expense - 10,253 888,941
Investment exchanged for services - - 10,000
Issuance of note payable for consulting - - 500,000
Changes in operating assets and
liabilities, net of acquisitions:
Related party receivables (137,708) - (195,708)
Prepaid expenses and other assets (195,724) (54,723) (484,970)
Deposits - - (13,277)
Accounts payable and accrued liabilities 416,107 (386,420) 1,014,053
----------------- ------------------- --------------------
Net cash used in operating activities (1,851,466) (1,021,467) (4,428,456)
----------------- ------------------- --------------------
Cash flows from investing activities:
Purchases of property, plant and
equipment (46,171) - (49,143)
Investment in Spirit Industries (10,000) - (10,000)
Investment in Reserve Oil Technologies 536,265 (753,779) 489,849
----------------- ------------------- --------------------
Net cash used in investing activities 480,094 (753,779) 430,706
----------------- ------------------- --------------------
Cash flows from financing activities:
Proceeds from notes payable - 1,025,000 288,699
Payments on long term debt (62,394) (302,420) (224,949)
Proceeds from issuance of preferred stock 1,428,000 1,000,000 3,934,000
----------------- ------------------- --------------------
Net cash provided by financing activities 1,365,606 1,722,580 3,997,750
----------------- ------------------- --------------------
Increase in cash and cash equivalents (5,766) (52,666) -
Cash and cash equivalents, beginning of period 5,766 138,770 -
----------------- ------------------- --------------------
Cash and cash equivalents, end of period $ - $ 86,104 $ -
================= =================== ====================
Supplemental disclosure of cash flow information:
Interest paid $ $
================= ===================
Income taxes paid $ $
================= ===================
The accompanying notes are an integral part of these consolidated financial statements.
F-25
HUNT GLOBAL RESOURCES, INC. AND SUBSIDIARY
(A DEVELOPMENT STAGE COMPANY)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
-----------
1. GENERAL
The accompanying unaudited consolidated condensed financial statements
have been prepared in accordance with generally accepted accounting principles
in the United States of America ("U.S. GAAP") for interim financial information.
Accordingly, they do not include all of the information and disclosures required
by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary
for a fair presentation have been included. Operating results for the six months
ended June 30, 2010, are not necessarily indicative of the results that may be
expected for the year ending December 31, 2010. The balance sheet at December
31, 2009, has been derived from the audited financial statements at that date
but does not include all of the information and disclosures required by U.S.
GAAP for complete financial statements. For further information, refer to the
financial statements and notes thereto included in the Company's audited
financial statements for the year ended December 31, 2009.
2. SUMMARY OF ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its subsidiaries. Intercompany accounts and transactions have
been eliminated.
Use of Estimates
The preparation of financial statements in conformity with GAAP
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 periods. Actual results could differ
from those estimates. The Company's significant estimates made in connection
with the preparation of the accompanying financial statements include the
carrying value of goodwill and intangible assets, revenue recognition on
uncompleted contracts, allowance for doubtful accounts, and the valuation of
stock options and warrants.
Reclassification
Certain items from the December 31, 2009 balance sheet and the six
months ended June 30, 2009 statements of operations have been reclassified to
conform to the six months ended June 30, 2010 financial statement presentation.
There is no effect on net income, cash flows or stockholders' equity as a result
of these reclassifications.
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board issued
revised guidance intended to improve disclosures related to fair value
measurements. This guidance requires new disclosures as well as clarifies
certain existing disclosure requirements. New disclosures under this guidance
require separate information about significant transfers in and out of level 1
and level 2 and the reason for such transfers, and also require purchase, sale,
issuance, and settlement information for level 3 measurement to be included in
the rollforward of activity on a gross basis. The guidance also clarifies the
requirement to determine the level of disaggregation for fair value measurement
disclosures and the requirement to disclose valuation techniques and inputs used
for recurring and nonrecurring fair value measurements in either level 2 or
level 3. This accounting guidance is effective for the Company beginning the
first quarter of fiscal year 2010. The adoption of this guidance did not have a
significant impact on the Company's financial statement disclosures.
F-26
1. SIGNIFICANT EVENTS
Tombstone Transaction
On January 19, 2010, Tombstone Technologies, Inc., a Colorado
corporation ("Tombstone") and its wholly owned subsidiary Hunt Acquisition Corp
("Merger Sub") entered into an Agreement and Plan of Merger (the "Merger
Agreement") with Hunt.
The Merger Agreement and the proposed acquisition described therein
(the "Acquisition") has been under negotiation and is expected, by management to
close at the end of October, 2010. At the closing, The Company's stockholders
are expected to exchange 91% of its outstanding shares for Tombstone stock and
the Company is expected to be merged into Merger Sub, with the Company as the
surviving entity. The Company anticipates that the remaining 9% of stockholders
will exchange their shares or exercise dissenter's rights. The proposed
transaction will be structured as a reverse merger whereby the shareholders of
Hunt were issued Common and Preferred Stock that will result in ownership of
approximately 94.6% of the issued and outstanding stock of Tombstone on a fully
diluted as-converted basis. As a result, Hunt stockholders and management own a
controlling interest in the combined company.
The proposed transaction will require the issuance of Tombstone
shares as follows:
o 29,000,000 new shares of restricted Common Stock of Tombstone to the
holders of Hunt Common Stock and Hunt Preferred Stock;
o 125,000 shares of a new series of Class A Preferred Convertible Stock
of Tombstone to certain holders of Hunt Common Stock (having a
conversion ratio of one share of Preferred Stock to 208 shares of
Common Stock of Tombstone); and
o 125,000 shares of a new series of Class B Preferred Convertible Stock
of Tombstone to the "Controlling Stockholders" of Hunt Common Stock
(having a conversion ratio of one share of Preferred Stock to 248
shares of Common Stock of Tombstone and having a quarterly dividend of
$0.56 per share); and
o A reserve for issuance of an additional 10,265,999 additional shares
of Tombstone Common Stock for the exercise of Tombstone stock options
for 1,689,999 shares of Tombstone Common Stock that have been extended
for two years and the exercise of Hunt warrants for 8,576,000 shares
of Hunt Common Stock.
The holders of 7,436,000 shares of Hunt Preferred Stock and warrants
to purchase 8,576,000 shares of Hunt Common Stock will be converted into
restricted Tombstone Common Stock and Warrants on a one for one basis. The
Controlling Stockholders of Hunt (Jewel and Lisa Hunt and George Sharp via Crown
Financial) will convert a substantial portion of their Hunt Common Stock into
Tombstone Class B Preferred Stock and will be required to hold such shares for
two years unless the Tombstone Common Stock achieves a $7.00 trading price for
10 consecutive trading days. The remaining shares of outstanding Hunt Common
Stock were converted into a combination of Tombstone Common Stock and Class A
Preferred Stock on a pro rata basis. The holders of Tombstone Class A Preferred
Stock will be required to hold such shares for one year unless the Tombstone
Common Stock achieves a $3.00 trading price for 10 consecutive trading days. As
result of the transaction discussed above, the business of Tombstone will change
from the development of online printing software to a producer of aggregates,
including sand and gravel.
Sale of Reserve Oil Technologies, LLC Investment
On December 22, 2009, the Company entered into a sales agreement for
all oil and gas leases owned by the LLC for a sales price of $1,100,000 less
offsets for vendor liens, prospective vendor liens and defective leases. During
F-28
the first quarter of 2010, the Company sold its investment in Reserve Oil
Technologies, LLC to a group of investors for $536,265. The Company recorded a
corresponding loss on investment of $1,167,515 in December 2009 to write down
our investment in the LLC to its fair market value.
Issuances of Common and Preferred Stock
From January 1, 2010 through June 30, 2010, the Company issued
1,650,000 shares of its Common Stock to six individuals for consulting services
provided to the Company.
From January 1, 2010 through June 30, 2010, the Company issued
1,528,000 shares of its Series A Convertible Preferred Stock to several
accredited investors in conjunction with the Memorandum. Each share of
convertible preferred stock was sold for $1.00 per share and also contains
detachable Class A Warrants for the purchase of one share of common stock at an
exercise price of $1.00 per share, which must be exercised within 24 months of
the date of their issuance.
2. SUBSEQUENT EVENTS
From January 1, 2010 through October 28, 2010, the Company issued
5,796,000 shares of its Common Stock to various individuals for services
provided to the Company.
From January 1, 2010 through October 28, 2010, the Company issued
1,728,000 shares of its Series A Convertible Preferred Stock to several
accredited investors in conjunction with the Memorandum. Each share of
convertible preferred stock was sold for $1.00 per share and also contains
detachable Class A Warrants for the purchase of one share of common stock at an
exercise price of $1.00 per share, which must be exercised within 24 months of
the date of their issuance.
General
Company management has evaluated the effect of subsequent events on the
Company's financial statements through October 28, 2010, the date of financial
statement issuance.
F-29
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA CONDENSED CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
On October 29, 2010, Tombstone Technologies, Inc. ("Tombstone") entered
into a Merger Agreement (the "Agreement") and acquired substantially all the
issued and outstanding stock of Hunt Global Resources, Inc. ("Hunt") in exchange
for the issuance of Tombstone shares as follows:
o 29,000,000 shares of restricted Common Stock of Tombstone to the
holders of Hunt Common Stock and Hunt Preferred Stock;
o 125,000 shares of a series of Class A Convertible Preferred Stock of
Tombstone to certain holders of Hunt Common Stock (having a conversion
ratio of one share of Preferred Stock to 208 shares of Common Stock of
Tombstone);
o 125,000 shares of a series of Class B Convertible Preferred Stock of
Tombstone to the "Controlling Stockholders" of Hunt Common Stock
(having a conversion ratio of one share of Preferred Stock for 248
shares of Common Stock of Tombstone and having a quarterly dividend of
$0.56 per share); and
o A reserve for issuance of an additional 10,265,999 additional shares
of Tombstone Common Stock for the exercise of Tombstone stock options
for 1,689,999 shares of Tombstone Common Stock that have been extended
for two years and the exercise of Hunt warrants for 8,576,000 shares
of Hunt Common Stock.
Upon completion of the acquisition, the existing Hunt stockholders will
own approximately 94.6% of the issued and outstanding stock of Tombstone on a
fully diluted as-converted basis. As a result, Hunt stockholders and management
will own a controlling interest in the combined company. Consequently, for
accounting purposes, the transaction will be accounted for as a reverse
acquisition, with Hunt as the acquirer. Subsequent to the consummation of the
transaction, the historical financial statements of Hunt will become the
historical financial statements of the combined company and the assets and
liabilities of Tombstone will be accounted for as required under the purchase
method of accounting. The results of operations of Tombstone will be included in
the consolidated financial statements from the closing date of acquisition.
The purchase price is assumed to be equal to Tombstone book value since
Tombstone had limited assets and operations, and no goodwill is recorded on the
transaction. The amount ascribed to the shares issued to the Hunt members
represents the net book value of Tombstone at the date of closing.
The accompanying proforma condensed consolidated financial statements
are unaudited and illustrate the effect of Tombstone's reverse acquisition ("Pro
Forma") of Hunt. The proforma condensed consolidated balance sheet as of
December 31, 2009 and June 30, 2010 is based on the historical balance sheets of
Hunt and Tombstone as of those dates and assumes the acquisition took place on
each of those respective dates. The pro forma condensed consolidated statements
of operations for the year ended December 31, 2009 and for the six months ended
June 30, 2010 are based on the historical statements of operations of Hunt and
Tombstone for those periods. The proforma condensed consolidated statements of
operations assume the acquisition took place on January 1, 2009 and January 1,
2010, respectively.
The proforma condensed consolidated financial statements may not be
indicative of the actual results of the acquisition. In particular, the pro
forma condensed consolidated financial statements are based on management's
current estimate of the allocation of the purchase price, the actual allocation
of which may differ.
The accompanying proforma condensed consolidated financial statements
should be read in connection with the historical financial statements of Hunt
and Tombstone, including the related notes, and other financial information
included in filing.
F-30
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 31, 2009
---------------------------------------------------------------------------------------------------------------------------------
Pro Forma Adjustments
------------------------------
Tombstone Hunt Debit Credit Pro Forma
-------------- ---------------- ------------- ------------ ----------------
ASSETS
Current assets
Cash and cash equivalents $ 7,439 $ 5,766 $ - $ - $ 13,205
Related party receivables - 58,000 58,000
Prepaid royalties to related
parties - 274,246
Prepaid rent and other - 15,000 15,000
------------- ---------------- ---------------
Total current assets 7,439 353,012 360,451
Property and equipment, net 5,679 979,134 5,679 [4] 979,134
Surface mining rights and royalty
Agreement - 3,696,177 3,696,177
Intangible assets, net 92,647 - 92,647 [4] -
Assets held for sale 536,265 536,265
Other assets - 13,277 13,277
------------- ---------------- ------------ ----------- ---------------
Total assets $ 105,765 $ 5,577,865 $ - $ 98,326 $ 5,585,304
============= ================ ============ =========== ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Accounts payable $ 7,234 $ - $ - $ - $ 7,234
Accrued expenses and other - 571,614 105,631 [3] 280,000 [3] 745,983
Notes payable to related parties - 1,106,144
Convertible promissory notes 98,333 - 98,333
Current portion of long term
debt/capital leases 1,925 3,763,600 3,765,525
------------- --------------- ---------------
Total current liabilities 107,492 5,441,358 5,723,219
120,000
Long term debt - 120,000
------------- --------------- ---------------
Total liabilities 107,492 5,561,358 5,843,219
------------- --------------- ---------------
Stockholders' deficit
Preferred stock - 57,080 57,080 [1] -
Series A Preferred Stock - - 1,250 [2] 1,250
Series B Preferred Stock - - 1,250 [2] 1,250
Common stock 955,775 134,907 134,907 [1] 955,775
Additional paid in capital 253,275 11,547,403 1,213,277 [2] 191,987 [1]
280,000 [3] 105,631 [3] 10,605,019
Accumulated deficit (1,210,777) (11,722,883) 399,604 [5] 1,210,777 [2]
100,053 [6]
199,887 [7] 401,112 [7] (11,821,209)
------------- ---------------- ---------------
Total stockholders' deficit (1,727) 16,507 (257,915)
------------- ---------------- ------------ ----------- ---------------
Total liabilities and
stockholders' deficit $ 105,765 $ 5,577,865 $ 2,390,386 $ 2,292,060 $ 5,585,304
============= ================ ============ =========== ===============
F-31
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED DECEMBER 31, 2009
---------------------------------------------------------------------------------------------------------------------------------
Pro Forma Adjustments
-------------------------------
Tombstone Hunt Debit Credit Pro Forma
------------ ---------------- ------------- ------------- ---------------
Sales $ 1,508 $ - $ 1,508 [5] $ - -
Cost of sales 1,120 - 1,120 [5] -
----------- --------------- --------------
Gross profit 388 - -
Selling, general and administrative
expenses 197,654 10,165,607 197,654 [5] 10,165,607
----------- --------------- ------------ ------------ --------------
Loss from continuing operations (197,266) (10,165,607) (10,165,607)
Other income and (expense):
Interest Income 5 655 5 [5] 655
Interest expense [5]
Beneficial conversion feature (98,333) 98,333 [5] -
Other (5,200) (738,562) 5,200 [5] (738,562)
Other (484) [5]
Loss from asset valuation - 98,326 [4] 98,326 [5]
Cost of recapitalization - - 100,053 [6] (100,053)
----------- --------------- ------------ ------------ --------------
Loss before income taxes (301,278) (10,903,514) (11,003,567)
Income tax provision - - -
----------- --------------- ------------ ------------ --------------
Net loss (301,278) (10,903,514) $ 199,887 [7] $ 401,117 [7] (11,003,567)
Preferred stock dividends - (105,631) 280,000 [8] 105,631 [8] (280,000)
----------- --------------- --------------
common stock $ (301,278) $ (11,009,145) (11,283,567)
============ ================ ===============
Loss per common share (0.32)
===============
Weighted average common shares
outstanding 4,878,000 29,000,000 33,878,000
===============
F-32
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA ADJUSTMENTS
AS OF AND FOR THE YEAR ENDED DECEMBER 31, 2009
--------------------------------------------------------------------------------------------------------
DR CR
--------------- ----------------
Proforma Adjustment [1]
Preferred stock 57,080 $
Common stock 134,907
Additional paid in capital $ 191,987
--------------- ----------------
To eliminate the historical equity accounts of Hunt 191,987 $ 191,987 $
=============== ================
Proforma Adjustment [2]
Series A Preferred Stock $ 1,250
Series B Preferred Stock 1,250
Additional Paid In Capital 1,213,277 $
Accumulated Deficit 1,210,777
--------------- ----------------
To recognize the recapitalization of Hunt with existing and 1,213,277 $ 1,213,277 $
newly issued shares of Tombstone
=============== ================
Proforma Adjustment [3]
Accrued expenses and other current 105,631 $ 280,000
liabilities
Additional Paid In Capital 280,000 105,631 $
--------------- ----------------
To recognized dividends related to Tombstone Series A and B 385,631 $ 385,631 $
preferred stock and reverse existing Hunt accrued dividends
=============== ================
Proforma Adjustment [4]
Loss from asset valuation 98,326 $
$
Property and equipment, net 5,679
Intangible assets, net 92,647
--------------- ----------------
To recognize the write-off of Tombstone assets with no $ 98,326 $
future value to the Company 98,326
=============== ================
Proforma Adjustment [5]
Accumulated Deficit $
Sales $ 399,604
1,508
Interest Income 5
Cost of sales $ 1,120
Selling, general and administrative
expenses 197,654
Beneficial Conversion 98,333
Interest expense 5,200
Other
Loss from asset valuation 98,326
--------------- ----------------
To recognize the elimination of Tombstone net loss for the $
year ended December 31, 2009 401,117 $ 401,117
=============== ================
Proforma Adjustment [6]
Cost of Recapitalization $
Accumulated Deficit 100,053 $ 100,053
--------------- ----------------
To recognize the net liabilities of Tombstone assumed in $
the Recapitalization 100,053 $ 100,053
=============== ================
Proforma Adjustment [7]
To recognize the effect of income and expense adjustments $
on accumulated deficit 199,887 $ 401,112
=============== ================
Proforma Adjustment [8]
To recognize the effect on EPS of newly issued Tombstone $
Preferred and eliminate dividends on Hunt Preferred 280,000 $ 105,631
=============== ================
F-33
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF JUNE 30, 2010
--------------------------------------------------------------------------------------------------------------------------------
Pro Forma Adjustments
---------------------------------
Tombstone Hunt Debit Credit Pro Forma
--------------- ---------------- ------------- ------------- ----------------
ASSETS
Current assets
Cash and cash equivalents $ 1,962 $ - $ - - $ 1,962
Accounts Receivable - 37,000 37,000
Related party receivables 162,679 162,679
Prepaid royalties to - 427,470 427,470
Intercompany receivables - 30,028 30,028 [9] -
Prepaid rent and other - 20,500 20,500
--------------- ---------------- ----------------
Total current assets 1,962 677,677 649,611
Property and equipment, net 2,620 972,470 2,620 [4] 972,470
Investments 10,000 10,000
Surface mining rights and
royalty agreement - 3,696,177 3,696,177
Intangible assets, net 74,192 - 74,192 [4] -
Assets held for sale - - -
Other assets - 16,277 16,277
--------------- ---------------- ------------- ------------- ----------------
Total assets $ 78,774 $ 5,372,601 $ - 106,840 $ 5,344,535
=============== ================ ============= ============= ================
LIABILITIES AND STOCKHOLDERS'
DEFICIT
Current liabilities
Accounts payable $ 7,252 $ 196,504 $ - - $ 203,756
Indebtedness to 37,535 30,028 [9] 7,507
Accrued expenses and other - 941,364 413,982 [3] 140,000 [3] 667,382
Related party liabilities - 156,000 156,000
Notes payable to related 918,750 918,750
Current portion of long -
term debt/capital leases 662 4,008,600 4,009,262
--------------- ---------------- ----------------
Total current
liabilities 45,449 6,221,218 5,962,657
Long term debt - - -
--------------- ---------------- ----------------
Total liabilities 45,449 6,221,218 5,962,657
--------------- ---------------- ----------------
Stockholders' deficit
Preferred stock - 71,360 71,360 [1] -
Series A Preferred Stock - - 1,250 [2] 1,250
Series B Preferred Stock - - 1,250 [2] 1,250
Common stock 1,055,775 136,557 136,557 [1] 1,055,775
Additional paid in capital 253,275 12,878,328 1,278,225 [2] 207,917 [1]
140,000 [3] 413,982 [3] 12,335,277
Accumulated deficit (1,275,725) (13,934,862) 141,760 [5] 1,275,725 [2]
43,487 [6]
120,299 [7] 141,760 [7] (14,011,674)
--------------- ---------------- ------------- ------------- ----------------
Total stockholders'
deficit 33,325 (848,617) (618,122)
--------------- ---------------- ------------- ------------- ----------------
Total liabilities and
stockholders' deficit $ 78,774 $ 5,372,601 $ 2,332,211 2,225,371 $ 5,344,535
=============== ================ ============= ============= ================
Shares Outstanding 4,878,000 29,000,000 33,878,000
F-34
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED JUNE 30, 2010
------------------------------------------------------------------------------------------------------------------------------
Pro Forma Adjustments
------------------------------
Tombstone Hunt Debit Credit Pro Forma
------------ -------------- ------------ ------------ ---------------
Sales
$ - $ - $ - $ - $ -
Cost of sales - - -
------------ -------------- ---------------
Gross profit - - -
Selling, general and administrative
expenses 62,951 1,782,131 62,951 [5] 1,782,131
Depreciation and amortization - 52,836 52,836
------------ -------------- ---------------
Loss from continuing operations (62,951) (1,834,967) (1,834,967)
Other income and (expense):
Interest expense (1,997) (382,047) 1,997 [5] (382,047)
Other - 5,036
Loss from asset valuation - - 76,812 [4] 76,812 [5]
Cost of recapitalization - - 43,487 [6] (43,487)
------------ -------------- ---------------
Loss before income taxes (64,948) (2,211,978) (2,255,465)
Income tax provision - - -
------------ -------------- ------------ ------------ ---------------
Net loss (64,948) (2,211,978) $ 120,299 [7] $ 141,760 [7] (2,255,465)
Preferred stock dividends - (308,351) 140,000 [8] 308,351 [8] (140,000)
------------ -------------- ---------------
Net loss attributable to common
stock $ (64,948) $ (2,520,329) $ (2,395,465)
============ ============== ===============
Loss per common share $ (0.07)
===============
Weighted average common shares
outstanding 4,878,000 29,000,000 33,878,000
===============
F-35
TOMBSTONE TECHNOLOGIES, INC.
PROFORMA ADJUSTMENTS
AS OF AND FOR THE SIX MONTHS ENDED JUNE 30, 2010
-------------------------------------------------------------------------------------------------------------------------
DR CR
------------ -------------
Proforma Adjustment [1]
Preferred stock $ 71,360
Common stock 136,557
Additional paid in capital $ 207,917
------------ -------------
To eliminate the historical equity accounts of Hunt $ 207,917 $ 207,917
============ =============
Proforma Adjustment [2]
Series A Preferred Stock $
Series B Preferred Stock
Additional Paid In Capital $ 1,278,225
Accumulated Deficit 1,275,725
------------ -------------
To recognize the recapitalization of Hunt with existing and newly
issued shares of Tombstone $ 1,278,225 $ 1,278,225
============ =============
Proforma Adjustment [3]
Accrued expenses and other current
liabilities 308,351 $ 140,000
Additional Paid In Capital $ 140,000 308,351
------------ -------------
To recognized dividends related to Tombstone Series A and B
preferred stock and reverse existing Hunt accrued dividends $ 553,982 $ 553,982
============ =============
Proforma Adjustment [4]
Loss from asset valuation $ 76,812
Property and equipment, net $ 2,620
Intangible assets, net 74,192
------------ -------------
To recognize the write-off of Tombstone assets with no future
value to the Company $ 76,812 $ 76,812
============ =============
Proforma Adjustment [5]
Accumulated Deficit $ 141,760
Selling, general and administrative expenses $ 62,951
Interest expense 1,997
Loss from asset valuation 76,812
------------ -------------
To recognize the elimination of Tombstone net loss for the year
ended December 31, 2009 $ 141,760 $ 141,760
============ =============
Proforma Adjustment [6]
Cost of Recapitalization $ 43,487
Accumulated Deficit $ 43,487
------------ -------------
To recognize the net liabilities of Tombstone assumed in the
Recapitalization $ 43,487 $ 43,487
============ =============
Proforma Adjustment [7]
To recognize the effect of income and expense adjustments on
accumulated deficit $ 120,299 $ 141,760
============ =============
Proforma Adjustment [8]
To recognize the effect on EPS of newly issued Tombstone
Preferred Stock and eliminate dividends from Hunt Preferred $ 140,000 $ 413,982
============ =============
Proforma Adjustment [9]
Related party liabilities $ 30,028
Related party receivables $ 30,028
------------ -------------
To recognize the elimination of intercompany balances $ 30,028 $ 30,028
============ =============
F-36