UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______ to ________
COMMISSION FILE NO. 333-64122
VERDISYS, INC.
(Exact name as specified in its charter)
CALIFORNIA
(State or other jurisdiction of incorporation or organization)
22-3755993
(I. R. S. Employer Identification No.)
25025 I-45 North, Suite 525
The Woodlands, Texas
(Address of executive offices)
77380
(Zip Code)
(281) 364-6999
(Registrant's telephone number, including area code)
Reconstruction Data Group, Inc.
10600 N. De Anza Boulevard, Suite 250
Cupertino, California 95014
(408) 517-3305
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] NO [ ].
As of September 30, 2003, there were 28,363,315 shares of Verdisys, Inc. Common
Stock issued and outstanding.
EXPLANATORY NOTE: This Amendment No. 1 on Form 10-QSB/A ("Amended Form 10-QSB")
is being filed to amend Part I, Item 1 to include a statement disclosing the
fact that unaudited interim financial statements included in the Company's Form
10-QSB for the quarter ended September 30, 2003, as filed on November 19, 2003
("Original Form 10-QSB") were not reviewed and approved by the Company's
independent public accountants. In addition, the Company is making certain
changes to reflect a reclassification and certain typographical errors in its
financial statements and Management's Discussion and Analysis and Results of
Operations as more fully described in the Explanatory Note included in Part I,
Item 1 herein. Finally, the Company failed to file certain exhibits required to
be filed under Exhibit 10 to the Original Form 10-QSB, which are included in
this Amended Form 10-QSB.
This Amended Form 10-QSB (1) files Part I, Items 1 and 2 in its entirety to add
an Explanatory Note and to make certain changes to the financial statements
described in the Explanatory Note included in Part I, Item 1 herein and (2)
amends in its entirety Part II, Item 6 of the Original Form 10-QSB. This Amended
Form 10-QSB also files all of the exhibits included in the exhibit list in Part
II, Item 6 that were not filed in the Original Form 10-QSB. This Amended Form
10-QSB speaks as of the filing date of the Original Form 10-QSB, except for the
certifications which speak as of their respective dates and the filing date of
the Amended Form 10-QSB. Except as specifically indicated, the Amended Form
10-QSB does not reflect any events occurring subsequent to the filing of the
Original Form 10-QSB.
PART I
ITEM 1. FINANCIAL STATEMENTS
EXPLANATORY NOTE
Malone & Bailey, PLLC, the Company's independent public accountants, informed
the Company that, at the time of the filing of the Original Form 10-QSB, it did
not agree with the recognition of certain revenue as presented in the Company's
unaudited interim financial statements without a review of certain documentation
requested by Malone & Bailey. The Company was not able to provide the requested
documentation to Malone & Bailey prior to the extended filing deadline for the
Original Form 10-QSB. As a result, the Company's independent accountants have
not completed their review and approval of the unaudited interim financial
statements and notes thereto included in this Amended Form 10-QSB in accordance
with Rule 310(b) of Regulation S-B promulgated under the Securities and Exchange
Act of 1934 ("Exchange Act"). The Company believes that the unaudited financial
statements and notes to the consolidated financial statements included therein
contain all of the information and necessary adjustments for a fair presentation
of these financial statements and accompanying notes. In addition to the above,
in this Amended Form 10-QSB, the Company is reclassifying a $200,000 credit from
trade receivables to deferred revenue in its September 30, 2003 condensed
balance sheet (and the related entries in the condensed statements of cash flows
for the nine months ended September 30, 2003). The Company is also correcting a
typographical error in the amortization of license expense of $30 in its
condensed statements of operations for the nine months ended September 30, 2003.
Neither of these changes has any impact on net income for any period. Finally,
the Company is also making certain changes to its Management's Discussion &
Analysis of Financial Condition and Results of Operations to correct certain
typographical errors. The Company anticipates amending this Form 10-QSB when the
independent accountants' review is complete.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
CONDENSED BALANCE SHEET
ASSETS
SEPTEMBER 30, 2003 DECEMBER 31, 2002
Unaudited
Current assets:
Cash $ 200,501 $ 135
Trade receivable 1,775,236 10,402
Trade receivable - related party (Note 4) 337,500 --
Employee advances -- 42,620
Other current assets 25,468 --
------------ ------------
Total current assets 2,338,705 53,157
Equipment, net of accumulated depreciation of $43,153
and $41,833 411,280 3,755
License, net of accumulated amortization of $114,585
and 0 (Note 5) 4,917,528 --
------------ ------------
Total assets $ 7,667,513 $ 56,912
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 294,763 $ 1,562,339
Accrued expenses 910,186 905,461
Note payable to stockholders (Note 5) 2,224,510 1,579,562
Deferred revenue 575,884 56,180
------------ ------------
Total current liabilities 4,005,343 4,103,542
Long-term debt:
Deferred revenue -- 80,367
------------ ------------
Total liabilities 4,005,343 4,183,909
------------ ------------
Commitments and contingencies -- --
Stockholders' equity:
Common stock, $0.001 par value, 50,000,000 and 14,963,139
authorized, 28,363,615 and 14,963,139 issued and outstanding
restated to give effect of the merger 28,364 14,963
Additional paid-in capital 15,865,134 6,802,514
Retained earnings (12,231,328) (10,944,474)
------------ ------------
Total stockholders' equity (deficit) 3,662,170 (4,126,997)
------------ ------------
Total Liabilities and Stockholders' Equity $ 7,667,513 $ 56,912
============ ============
The accompanying notes are an integral part of these condensed
financial statements.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Revenues: $ 2,094,612 $ 20,509 $ 2,627,959 $ 227,332
Cost and expenses:
Cost of goods sold 775,278 28,107 1,138,260 225,562
Selling, general & administrative 815,722 581,992 2,003,414 1,445,467
Amortization of license 61,638 3,587 107,472 8,477
------------ ------------ ------------ ------------
Operating income (loss) 441,974 (593,177) (621,187) (1,452,174)
Other (income) expense:
Bad debts 19,999 -- 19,999 --
Debt forgiveness (61,653) -- (521,887) --
Impairment expense -- -- 1,000,000 --
Interest expense 59,217 38,926 156,055 101,804
------------ ------------ ------------ ------------
Net income (loss) $ 424,411 $ (632,103) $ (1,275,354) $ (1,553,978)
============ ============ ============ ============
Basic income (loss) per share $ 0.02 $ (0.05) $ (0.06) $ (0.11)
============ ============ ============ ============
Fully diluted income (loss) per share $ 0.01 -- -- --
Basic weighted average
common shares outstanding 26,783,077 13,553,139 21,491,391 13,553,139
============ ============ ============ ============
Fully diluted weighted average
common shares outstanding 34,893,910 -- -- --
The accompanying notes are an integral part of these condensed
financial statements.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30, September 30,
2003 2002
------------ -------------
Cash flows from operating activities:
Net loss $(1,275,354) $(1,553,978)
Adjustments to reconcile net loss to net cash provided
by (used in) operating activities
Issuance of options and warrants for services -- 353,709
Depreciation and amortization 108,792 8,477
Impairment expense 1,000,000 --
Gain on debt restructuring (521,888) --
Shares issued for services 326,329 --
Option expense 810,935 --
Changes in:
Trade receivable (1,764,834) 41,510
Trade receivable - related parties (337,500) --
Other current assets 17,152 (9,500)
Accounts payable (86,021) 100,758
Accrued expenses 311,353 570,639
Deferred revenue 439,337 115,730
Net cash used in operating activities $ (971,699) $ (372,655)
------------ -------------
Cash flows from investing activities:
Cash payments for license (100,000) --
Purchases of equipment (408,846) (5,286)
------------ -------------
Net cash used in investing activities (508,846) (5,286)
------------- --------------
Cash flows from financing activities:
Payments on the bridge debt (50,894) --
Payments on notes payable (379,596) --
Payments on convertible notes (105,000)
Proceeds from the exercises of warrants 234,251
Proceeds from the sale of preferred stock 1,982,150 380,000
------------- --------------
Net cash provided by financing activities 1,680,911 380,000
------------- --------------
Net change in cash 200,366 2,059
Cash, beginning of period $ 135 $ 3,397
------------- --------------
Cash, end of period $ 200,501 $ 5,456
============= ==============
The accompanying notes are an integral part of these condensed
financial statements.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
VERDISYS, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - ORGANIZATION AND BASIS OF PRESENTATION
Reconstruction Data Group, Inc. ("RDGI") and Verdisys, Inc.("Verdisys") entered
into an Agreement and Plan of Merger on April 24,2003, as amended, which was
effective as of July 18, 2003. Prior to the merger the authorized capital stock
of RDGI consisted of 50,000,000 shares of RDGI common stock, $.001 par value, of
which approximately 3,651,500 shares of common stock were outstanding.
Immediately prior to closing, RDGI cancelled 2,151,500 shares of common stock,
which included 1,485,000 shares of common stock previously owned by the
president of RDGI, in exchange for 100% of RDGI's ownership, rights, interest
and liabilities in ARC Network. The ARC Network represented all the operations
of RDGI immediately prior to the merger.
Prior to the consummation of the merger, the authorized capital stock of
Verdisys consisted of 40,000,000 shares of Verdisys common stock, and 60,000,000
shares of preferred stock, no par value, of which 17,935,137 shares of common
stock were outstanding. Immediately prior to the merger, Verdisys, Inc. changed
its name to Verdisys Operations Corporation and RDGI changed its name to
Verdisys, Inc.
Upon consummation of the merger, Verdisys, Inc. issued 25,202,539 newly issued,
restricted common shares. Each share of common stock of Verdisys Operation
Corporation was converted into and exchanged into one share of restricted common
stock of Verdisys, Inc., except shares held in treasury which were cancelled.
Following the closing, Verdisys, Inc. remained the surviving corporation with
26,702,539 shares outstanding. The following table reconciles the number of
shares of common stock issued and outstanding immediately prior to consummation
of the merger to the number of shares of common stock issued and outstanding
immediately following consummation of the merger.
RDGI shares just prior to the merger 3,651,500
Shares cancelled:
Shares owned by President 1,485,000
Shares owned by other founder 666,500 (2,151,500)
----------
RDGI shares prior to share issuance 1,500,000
Newly issued shares for the share exchange 25,202,539
----------
Verdisys shares outstanding immediately after
merger 26,702,539
The accompanying unaudited interim financial statements of Verdisys have been
prepared in accordance with accounting principles generally accepted in the
United States of America and the rules of the Securities and Exchange Commission
("SEC"), and should be read in conjunction with the audited financial statements
and notes thereto contained in Verdisys' Annual Report filed with the SEC on
Form 8-K, Amendment No. 1 filed on September 29, 2003, amending a Form 8-K
initially filed on July 18, 2003. The merger has been accounted for as a reverse
acquisition. The condensed statement of operations presented for the three and
nine months ended September 30, 2003 and 2002 include the historical results of
Verdisys prior to the merger for each of the periods presented. Earnings per
share for periods prior to the merger are restated to reflect the number of
equivalent shares received. Historical stockholders' equity of Verdisys is
retroactively restated for the equivalent number of shares received in the
merger after giving effect to the difference in par value of the issuer's and
acquirer's stock with an offset to paid-in capital. Retained earnings (deficit)
has been carried forward after the merger.
In the opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of financial position and the
results of operations for the interim periods presented have been reflected
herein. The results of operations for the interim periods are not necessarily
indicative of the results to be expected for the full year. Notes to the
financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for 2002 as reported in the 8-KA
have been omitted.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
Certain amounts in financial statements of prior years have been reclassified to
conform to the presentation of the current year for comparative purposes. Those
reclassifications did not affect consolidated net income for the years
presented.
In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS
148, "Accounting for Stock-Based Compensation - Transition and Disclosure" (SFAS
148). This pronouncement provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
employee compensation. Under the fair value based method, compensation cost for
stock options is measured when options are issued. In addition, SFAS 148 amends
the disclosure requirements of SFAS 123 to require more prominent and more
frequent disclosures in financial statements of the effects of stock-based
compensation.
The transition guidance and annual disclosure provisions of SFAS 148 are
effective for fiscal years ending after December 15, 2002, with earlier
application permitted in certain circumstances. Verdisys has adopted SFAS 148 as
of December 31, 2002 through continued application of the intrinsic value method
of accounting under APB 25, and enhanced financial statement disclosures of the
effect on net income and earnings per share of fair value provisions as if SFAS
148 had been applied.
Verdisys accounts for non-cash stock based compensation issued to non-employees
in accordance with the provisions of SFAS No. 123 and EITF No. 96-18,
"Accounting for Equity Investments That Are Issued to Non-Employees for
Acquiring, or in Conjunction with Selling Goods or Services". Common stock
issued to non-employees and consultants is based upon the value of the services
received or the quoted market price, whichever value is more readily
determinable. Verdisys accounts for stock options and warrants issued to
employees under the intrinsic value method. Under this method, Verdisys
recognizes no compensation expense for stock options or warrants granted when
the number of underlying shares is known and the exercise price of the option or
warrant is greater than or equal to the fair market value of the stock on the
date of grant.
The following table illustrates the effect on net loss and net loss per share if
Verdisys had applied the fair value provisions of SFAS No. 123.
2003
Three Months Ended Nine Months Ended
Net income (loss) as reported $ 424,411 $(1,275,354)
Less: stock based compensation determined
Under fair valued-based method 299,008 299,008
----------- -----------
Pro Forma net income (loss) $ 125,403 $(1,574,362)
=========== ===========
Basic net income (loss) per common share:
As reported $ 0.02 $ (0.06)
Pro forma $ -- $ (0.07)
Diluted net income (loss) per common share:
As reported $ 0.01 $ --
Pro forma $ -- $ --
The weighted average fair value of the stock options granted during third
quarter 2003 and third quarter 2002 was $410,000 and --, respectively. Variables
used in the Black-Scholes options-pricing model include (1) 5.0% risk-free
interest rate, (2)expected option life is the actual remaining life of the
options as of each year end, (3) expected volatility is zero, and (4) zero
expected dividends.
NOTE 2 - PRIVATE PLACEMENT
In July and August 2003, Verdisys sold 609,000 shares of common stock at $2.00
per share in a private placement for total proceeds of $1,218,000 and fees
consisted of 39,400 shares of restricted common stock and 9,501 warrants.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
In connection with the offerings as described above, Verdisys issued 9,501
warrants for the purchase of common stock at a price of $2.00 per share to
certain partners of the placement agent that assisted with the offering. The
warrants may be exercised at any time prior to September 5, 2008 by paying cash
at the warrant price, prior to a registration statement such warrants may be
exercised by surrendering such number of shares of common stock received upon
exercise of the warrants with a current market price equal to the warrant price.
NOTE 3 - DEBT FORGIVENESS INCOME
During the three and nine months ended September 30, 2003, Verdisys negotiated
settlements of accounts payable Verdisys recorded debt forgiveness of $61,653
and $521,888 for the three and nine months ended September 30, 2003,
respectively.
NOTE 4 - RELATED PARTY
In April 2003, Verdisys signed a drilling service contracts with Energy 2000
NGC, Inc. of Louisiana ("Energy 2000"), whereby Energy 2000 will pay Verdisys a
minimum of $1,800,000 for lateral drilling of 45 wells. This contract is a fixed
fee contract with the total price depending on the number of wells drilled and
offshoot lateral bores drilled. In addition, Verdisys will receive an 80 percent
interest in the net operating income after payback from these properties and
will also be reimbursed for 20 percent of its field costs. In September, 2003
Verdisys entered into another contract with E2000 for an additional 57 wells
with terms similar to the original contract.
Energy 2000 is a related party. Energy 2000 is a wholly owned subsidiary of Berg
McAfee Companies for which Eric McAfee, a director of Verdisys, has a 50%
ownership. Mr. McAfee has a 0.4% direct ownership of Verdisys and Berg McAfee
Companies has a 29.6% ownership in Verdisys, and Clyde Berg, the co-owner of
Berg McAfee Companies, owns 1.3% of Verdisys; therefore, Mr. McAfee and Mr. Berg
have a total beneficial ownership of 31.3% in Verdisys.
Verdisys has recognized revenues of $107,500 and $0 for the three months ended
September 30, 2003 and September 30, 2002, respectively, relating to Energy
2000. Verdisys has eliminated revenue of $33,712 for the three months ended
September 30, 2003 for the related party ownership portion of Mr. McAfee and Mr.
Berg. Accounts receivable related to Energy 2000 is $237,500 at September 30,
2003.
The Chairman of the Board of Verdisys is employed by Texas A&M University. The
Company recorded $0 and $20,380 of revenue from a contract with Texas A&M for
the three and nine-months ended September 30, 2003, respectively.
NOTE 5 - LICENSE AND RELATED NOTES PAYABLE
In April 2003, an individual licensed his lateral drilling technology and
equipment to Verdisys. Verdisys agreed to pay $2,750,000 plus 10 percent of
related gross revenues from drilling operations. Verdisys paid $100,000 upon
signing and entered into a note agreement for $2,650,000 plus 8 percent interest
to be paid from May 2003 through March 2004.
In July 2003, Verdisys issued 125,000 restricted shares to the individual in
exchange for a $250,000 reduction of the note payable. During the quarter,
certain provisions of the licensing agreement were amended to issuance of
500,000 shares of restricted stock and the grant of a board seat in exchange for
elimination of the 10% royalty and agreement to pay $500 per well drilled. The
stock price at the time of issuance was $4.55 per share. Verdisys accounted for
the transaction as an increase in license and stockholders' equity of
$2,275,000.
At September 30, 2003 the gross balance of the license was $5,025,000 and
accumulated amortization was $114,585 and is being amortized over the remaining
life of the patent, 14 years. The balance of the note payable at September
30,2003 was $2,020,404. Interest expense of $67,290 and $120,404 was recognized
for the three and nine-months ended September 30, 2003.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
NOTE 6 - CONCENTRATION OF CREDIT RISK
Verdisys has a concentration of credit risk related to one customer which
accounted for 92% of the total revenues for the three months ended September 30,
2003. To mitigate this risk, the Company performs ongoing credit evaluations of
its customers and at time requires collateral in support of its trade
receivables. Verdisys also has legal rights to claims against the producing
properties held by the customer. As of September 30,2003, accounts receivable
from this customer total of approximately $1.7 million. Management of the
Company believes such amount is realizable.
NOTE 7 - EQUIPMENT
The Company recorded a $340,000 increase in equipment related to the purchase of
2 drilling rigs. Depreciated expense for the rigs is computed on a straight-line
basis over a period of 5 to 7 years. There is no depreciation expense for the
quarter related to the rigs as the rigs were acquired at the end of the quarter.
NOTE 8 - NON-CASH TRANSACTIONS
The following table contains non-cash information for the nine months ended
September 30, 2003:
Purchase of license for note payable (see note 5) $2,650,000
Stock issued for note payable (see note 5) $ 250,000
Stock issued for amendment to license (see note 5) $2,275,000
Warrants issued for accounts payable $ 95,000
Contributions to capital for restructuring $ 548,000
Issuances of equity for bridge debt $ 590,000
Stock issued for convertible notes $ 506,004
NOTE 9 -RECENT ACCOUNTING PRONOUNCEMENTS
The FASB issued SFAS 150 -"Accounting for Certain Financial Instruments with
Characteristics of both Liabilities and Equity" (SFAS 150). SFAS 150 establishes
standards for how an issuer classifies and measures certain financial
instruments that is within its scope as a liability or an asset in some
circumstances. The adoption of SFAS 150 as of July 1, 2003 did not have a
material impact on Verdisys' financial position or results of operations.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
In January 2003, the FASB released Interpretation No. 45 "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Guarantees of Indebtedness
of Others" (FIN 45). FIN 45 requires the disclosure in the financial statements
footnotes of the nature of guarantees and the maximum potential amount of future
payments that could be required of the guarantor. Footnote disclosures are
required for guarantees and indemnification agreements Verdisys issues beginning
in year-end financial statements ending after December 15, 2002. FIN 45 also
includes liability recognition and measurement provisions that apply
prospectively to guarantees issued or modified after December 31, 2002. As of
September 30, 2003, no liabilities have been recorded. See footnote 12 for
further disclosure.
Verdisys is involved in litigation arising in the normal course of business.
Management believes the ultimate resolution of that litigation will not have a
material adverse effect on the financial statements.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
NOTE 11 - EARNINGS PER COMMON SHARE
Basic earnings per common share are computed by dividing income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted earnings per common share reflect the potential dilution
that could occur when potential common shares are added to common shares
outstanding. Diluted earnings per common share are calculated quarterly, and the
number of incremental shares to be included at year end is the weighted average
of each quarterly calculation. Fully diluted earnings per share are not
presented for the nine months ended September 30, 2003 and the nine months ended
September 30, 2002, as fully dilutive earnings per share would be anti-dilutive
due to the losses in those periods.
NOTE 12 - SUBSEQUENT EVENTS
In October, Verdisys issued 833,333 shares of common stock, at a price of $6.00
per share for a total purchase price of $5,000,000 to Gryphon Master Fund, L.P.
Proceeds from the offering were used to pay stock issuance costs of $420,000,
83,334 warrants at $6 per share that expire October 24, 2008 and 20,000 shares
of restricted common stock. The warrants maybe exercised at any time prior to
October 24, 2008 by paying cash at the warrant price, prior to a registration
statement such warrants may be exercised, by surrendering such number of shares
of common stock received upon exercise of the warrants with a current market
price equal to the warrant price. If the Company fails to meet certain
milestones related to registration of such shares, Verdisys shall pay liquidated
damages equal to 1% of the purchase price of the shares paid for the first 30
days the event is not cured and 2 percent of the purchase price paid for each
thirty day period thereafter until cured. In no event shall Verdisys be required
to pay more than aggregate liquidated damages of 8% of the purchase price or
$400,000. In addition, if the 30 day average closing price of Verdisys, Inc.
common stock drops, such drops could result in the issuance of a maximum of
277,778 additional shares of common stock for no additional compensation. If
this occurs, a total of 1,111,111 common shares will have been issued for a
price of $4.50 per share. The maximum exposure under these two provisions total
$1,250,000.
In October 2003, Verdisys amended certain provisions of its contract with its
major customer. Under the provisions of the amendment, Verdisys shall refund to
its customer $200,000 if delivery of certain leases to customer does not occur.
In November 2003, the Company signed an option to purchase a large natural gas
field with significant current gas production for a specified time period. The
option required the Company to pay a non-refundable deposit of $500,000 and has
incurred fees to date of $120,000 associated with the transaction.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND PLAN OF
OPERATIONS
This statement may include projections of future results and "forward looking
statements" as that term is defined in Section 27A of the Securities Act of 1933
as amended (the "Securities Act"), and Section 21E of the Securities Exchange
Act of 1934 as amended (the "Exchange Act"). All statements that are included in
this Quarterly Report, other than statements of historical fact, are forward
looking statements. Although management believes that the expectations reflected
in these forward looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct.
Management Discussion
Headquartered in The Woodlands, Texas, Verdisys, Inc. (Verdisys or the Company)
provides proprietary oil services and solutions for Energy Production
Enhancement including patented Lateral Drilling Technologies and secure
Satellite Communications.
Verdisys was incorporated in the State of California as Rocker & Spike
Entertainment, Inc. on September 27, 2000. Until December 31, 2000, operations
consisted of organizational matters, the sale of no par value common stock, and
the search for an operating company with which to perform a merger or
acquisition. Effective January 1, 2001, Rocker & Spike Entertainment, Inc.
purchased the assets and web domain of Accident Reconstruction Communications
Network, a sole proprietorship, from the sole proprietor. Following the
acquisition, the company changed its name from Rocker & Spike Entertainment,
Inc. to Reconstruction Data Group, Inc. effective March 19, 2001.
Reconstruction Data Group, Inc. ("RDGI") and Verdisys, Inc.("Verdisys") entered
into an Agreement and Plan of Merger on April 24,2003, as amended, which was
effective as of July 18, 2003. Prior to the merger, the authorized capital stock
of RDGI consisted of 50,000,000 shares of RDGI common stock, $.001 par value, of
which approximately 3,651,500 shares of common stock were outstanding.
Immediately prior to closing, RDGI cancelled 2,151,500 shares of common stock,
which included 1,485,000 shares of common stock previously owned by the
president of RDGI, in exchange for 100% of RDGI's ownership, rights, interest
and liabilities in ARC Network. The ARC Network represented all the operations
of RDGI immediately prior to the merger.
Prior to the Consummation of the merger, the authorized capital stock of
Verdisys consisted of 40,000,000 shares of Verdisys common stock, and 60,000,000
shares of preferred stock, no par value, of which 17,935,137 shares of common
stock were outstanding. Immediately prior to the merger, Verdisys, Inc. changed
its name to Verdisys Operations Corporation and RDGI changed its name to
Verdisys, Inc.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
Upon consummation of the merger, Verdisys, Inc. issued 25,202,539 newly
issued, restricted common shares. Each share of common stock of Verdisys
Operation Corporation was converted into and exchanged into one share of
restricted common stock of Verdisys, Inc., except shares held in treasury which
were cancelled. Following the closing, Verdisys, Inc. remained the surviving
corporation with 26,702,539 shares outstanding. The following table reconciles
the number of shares of common stock issued and outstanding immediately prior to
consummation of the merger to the number of shares of common stock issued and
outstanding immediately following consummation of the merger.
RDGI shares just prior to the merger 3,651,500
Shares cancelled:
Shares owned by President 1,485,000
Shares owned by other founder 666,500 (2,151,500)
----------
RDGI shares prior to share issuance 1,500,000
Newly issued shares for the share exchange 25,202,539
----------
Verdisys shares outstanding immediately after
merger 26,702,539
Financial Summary
Three Months Ended September 30, 2003 Compared to Three Months Ended September
30, 2002
Verdisys earned $2,094,612 in revenues and $424,411 in operating income for
the quarter ended September 30, 2003 as compared to revenues of $20,509 and an
operating loss of $632,103 for the quarter ended September 30, 2002. The
significant increase in revenues and operating income for the three months ended
September 30, 2003 was due to lateral drilling services utilizing the Landers
lateral drilling technology for the first full quarter. There were no comparable
revenues in 2002 as the license to the Landers lateral drilling technology was
acquired in April 2003.
Revenues
Lateral Drilling Services
Lateral Drilling Services' revenues were $2,060,788 and $0 for the three months
ended September 30, 2003 and three months ended September 30, 2002,
respectively. During the quarter, 31 wells were drilled with Verdisys'
proprietary drilling rigs under the Edge Capital Group ("Edge") initial
contract for the Monroe field. In addition to the fee for drilling services,
Verdisys shall receive a 66 2/3% interest in the net operating income from
Edge's portion of the properties' income (the "Verdisys Royalty") after Edge has
fully recovered all drilling service fees and related expenses incurred for all
wells drilled as part of the contract. The Verdisys Royalty will be calculated
as 66 2/3% of the net lease after recovery by Edge (and/or its third party
financing sources) of Edge's costs related to the drilling services, including
principal, interest, fees and costs for financing such drilling services; cost
of acquisition of the lease; land owner royalties or other royalties to third
parties other than Edge or Verdisys; and field operating costs. Therefore, after
completion of the re-development of the field, Edge will secure for Verdisys a
66 2/3% listing with the gatherer for direct payment of proceeds. It is not
anticipated that Verdisys will receive any royalties until late 2004 or later.
In addition during the quarter, the Company signed a second contract with Edge
for drilling services for 100 wells associated with the Franklin field.
During the quarter, two wells were drilled by Verdisys in accordance with the
Energy 2000 NGC, Inc.'s (E2000) agreement, and 4 wells during the second quarter
2003. E2000 is a wholly owned subsidiary of Berg McAfee Companies for which Eric
McAfee, a director of Verdisys, has a 50% ownership. Mr. McAfee has a 0.4%
direct ownership of Verdisys and Berg McAfee Companies has a 29.6% ownership in
Verdisys, and Clyde Berg, the co-owner of Berg McAfee Companies, owns 1.3% of
Verdisys; therefore, Mr. McAfee and Mr. Berg have a total beneficial ownership
of 31.3% in Verdisys. Verdisys has recognized revenues of $107,500 and $0 for
the three months ended September 30, 2003 and September 30, 2002, respectively,
relating to E2000. Verdisys has eliminated revenue of $33,712 for the three
months ended September 30, 2003 for the prorated related party prorate portion
of ownership by Mr. McAfee and Mr. Berg. To date, E2000 paid $160,000 under the
contracts, $100,000 of which was received in October 2003.
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
Accounts receivable related E2000 is $337,500 at September 30, 2003. In addition
to the fee for drilling services, Verdisys shall receive an 80% interest in the
net operating income from E2000's portion of the properties' income (the
"Verdisys Royalty") after E2000 has fully recovered all drilling service fees
and related expenses incurred for all wells drilled as part of the contract. The
Verdisys Royalty will be calculated as 80% of the net lease after recovery by
Edge and/or its third party financing sources of E2000's costs related to the
drilling services, including principal, interest, fees and costs for financing
such drilling services; cost of acquisition of the lease; land owner royalties
or other royalties to third parties other than E2000 or Verdisys; and field
operating costs. Therefore, after completion of the re-development of the field,
E2000 will secure for Verdisys an 80% listing with the gatherer for direct
payment of proceeds. It is not anticipated that Verdisys will receive any
royalties until late 2004 or later.
During the quarter, the Company amended its lateral drilling license agreement
with Mr. Landers. In July 2003, Verdisys exchanged 125,000 shares of Verdisys
restricted common stock for reduction of a $250,000 note payable to Mr. Landers.
In August 2003, Mr. Landers agreed to retroactively eliminate the royalty fees
of 10% of the net revenues on Verdisys' lateral drilling, in exchange for
500,000 shares of restricted common stock of Verdisys plus a $500 flat fee per
well drilled. Mr. Landers agreed to amend the term of the license to the
expiration date associated with the patents to the lateral drilling technology.
The Company capitalized $2,275,000 associated with the 500,000 shares issued and
is amortizing the amounts associated with the license over a period of 14 years.
Satellite Communications Services
Satellite Communication Services' revenues for the third quarter ended September
30, 2003 were $33,824. Revenues were down for the current quarter as compared to
the prior 2003 quarter due to the nature of the services provided. As hardware
is sold, Verdisys recognizes the revenue in the period it is delivered to the
customer. The bandwidth revenue is amortized over the period benefited. Cash
collected for bandwidth is recorded as deferred revenue. At September 30, 2003
there was $251,228 reflected in the condensed balance sheet as deferred revenue
relating to Satellite Communications.
Operating Income
The operating income for the third quarter ended 2003 improved substantially due
to the high gross margins realized from the lateral drilling services.
Nine Months Ended September 30, 2003 Compared to Nine Months Ended September 30,
2002
Verdisys earned $2,627,959 in revenues and an operating loss of $621,187 for the
nine months ended September 30, 2003 as compared to revenues of $227,332 and an
operating loss of $1,452,174 for the nine months ended September 30, 2002. The
significant increase in revenues and reduction in operating loss for the nine
months ended September 30, 2003 was due primarily to lateral drilling services
provided utilizing the Landers lateral drilling technology. There were no
comparable revenues for the comparable nine month period in 2002 as the license
to the Landers lateral drilling technology was acquired in April 2003.
Revenues
Lateral Drilling Services' revenues for the nine months ended September 30, 2003
were $2,259,844.
Satellite Communication Services' revenues for the nine months ended September
30, 2003 were $368,115. Revenues increased due to the increase in contracts to
provide satellite communication services.
Backlog
To date the Company has signed contracts to drill 464 wells and had drilled and
completed 37 wells as of September 30, 2003. Of the 464 wells under contract 318
wells are related to Edge's contracts, 102 wells
VERDISYS, INC.
(Formerly, Reconstruction Data Group, Inc.)
are related E2000's contract and 44 wells are related to Natural Gas Systems,
Inc., of which Mr. McAfee and Mr. Berg and other affiliates have a 28.6%
beneficial ownership.
Liquidity and Capital Resources
Capital Expenditures
The Company utilized two drilling rigs owned and operated by Mr. Landers and his
affiliates during the current quarter. The Company took delivery of two in late
September. The completion of two additional rigs in November and three expected
in December brings the company's total rig fleet to nine which is expected to
cost the company approximately $1.6 million.
Liquidity
In July and August, Verdisys sold 609,000 shares of common stock at $2.00 per
share in a private placement for total proceeds of $1,218,000 and fees consisted
of 39,400 shares of restricted common stock and 9,501 warrants.
In connection with the offering, Verdisys issued 9,501 warrants for the purchase
of common stock at a price of $2.00 per share to certain partners of the
investment bank that assisted with the offering. The warrants may be exercised
at any time prior to September 5, 2008, by paying cash at the warrant price.
Prior to a registration statement such warrants may be exercised by surrendering
such number of shares of common stock received upon exercise of the warrants
with a current market price equal to the warrant price.
In October, Verdisys issued 833,333 shares of common stock, at a price of $6.00
per share for a total purchase price of $5,000,000 to Gryphon Master Fund, L.P.
Proceeds from the offering were used to pay stock issuance costs of $420,000,
83,334 warrants at $6 per share that expire October 24, 2008 and 20,000 shares
of restricted common stock. The warrants maybe exercised at any time prior to
October 24, 2008 by paying cash at the warrant price. Prior to a registration
statement such warrants may be exercised. If a registration statement to
register such shares does not occur within a specified time period, Verdisys
shall pay liquidated damages equal to 1% of the purchase price of the shares
paid for the first 30 days the event is not cured and 2 percent of the purchase
price paid for each thirty day period thereafter until cured. In no event shall
Verdisys be required to pay aggregate liquidated damages of 8% of the purchase
price or $400,000. In addition, if the 30 day average closing price of Verdisys,
Inc. common stock drops, such drops could result in the issuance of a maximum of
277,778 additional shares of common stock for no additional compensation. If
this occurs, a total of 1,111,111 common shares will have been issued for a
price of $4.50 per share. The maximum exposure under these two provisions total
$1,250,000. The purpose of this offering was to provide additional operating
capital to assist the company in fulfilling its current commitments and
expanding operations related to Lateral Drilling operations and Satellite Data
Services.
In November 2003, the Company signed an option to purchase a large natural gas
field with significant current gas production for a specified time period. The
option required the Company to pay a non-refundable deposit of $500,000 and has
incurred fees to date of $120,000 associated with the transaction.
The company continuously explores ways to expand its operations either by adding
new lateral drilling rigs or by acquisitions that fit into the company's lateral
drilling or satellite operations. Such expansion will be funded by debt, equity,
or a combination.
PART II
Item 6. Exhibits and Reports on Form 8-K.
EXHIBITS
Verdisys, Inc. includes herewith the following exhibits, all of which are filed
herewith:
3.1 Restated Articles of Incorporation of Verdisys, Inc., dated July 15,
2003, filed July 17, 2003 with Secretary of State, State of California.
10.1 Employment Agreement, by and between Verdisys, Inc. and Daniel
Williams, President and Chief Executive Officer, dated June 2003.
10.2 Employment Agreement, by and between Verdisys, Inc. and Andrew Wilson,
Chief Financial Officer Officer, dated June 2003.
10.3 Employment Agreement, by and between Verdisys, Inc. and David Mauz,
Chief Operating Officer, dated June 2003.
10.4 Advisor Agreement, by and between Verdisys, Inc. and Ron Robinson,
Chairman of the Board of Directors, dated July 2003.
10.5 Advisor Agreement, by and between Verdisys, Inc. and Eric A. McAfee,
Director, dated October 1, 2000.
10.6 Contract by and between Verdisys, Inc. and Natural Gas Systems, re:
lateral drilling services, "Delhi Field", dated September 22, 2003.
10.7 Contract by and between Verdisys, Inc. and Edge Capital Group, re:
lateral drilling services, "Franklin Field", dated September 27, 2003.
10.8 Contract by and between Verdisys, Inc. and Apache Corp, re: satellite
services, dated September 11, 2002.
10.9 Contract by and between Verdisys, Inc. and Noble Energy, re: satellite
services, dated September 17, 2002.
10.10 Technology Report "Landers Technology", dated October 13, 2003.
10.11 Placement Agency Agreement between the Company and Stonegate
Securities, Inc. dated August 26, 2003.
10.12 Verdisys Inc. 2003 Stock Option Plan.
10.13 Independent Contractor Agreement between the Company and TerrOnne
Petroleum Corporation dated August 1, 2003.
10.14 Addendum to Contract by and between Verdisys, Inc. and Edge Capital
Group re: lateral drilling services, "Monroe Field", dated November 19,
2003.
10.14.1 Letter acknowledging amounts owed to Verdisys, Inc. at September 30,
2003 related to Contract by and between Verdisys, Inc. and Edge
Capital Group re: lateral services, "Monroe Field", dated June 16,
2003.
31.1 Certification of Principal Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Accounting Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
32.2 Certification of Principal Accounting Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
REPORTS ON FORM 8-K
On July 18, 2003, the Company filed a Current Report on Form 8-K reporting its
Agreement and Plan of Merger with Verdisys, Inc. as an event under Item 2, which
Form 8-K was amended by Amendment No. 1 to Form 8-K filed on September 29, 2003.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
VERDISYS, INC.
-----------------------------------
(Registrant)
Date November 20, 2003 By: /s/ DAN WILLIAMS
---------------------- --------------------------------
Name: Dan Williams
Title: Principal Executive Officer
Date November 20, 2003 By: /s/ ANDREW WILSON
---------------------- --------------------------------
Name: Andrew Wilson
Title: Principal Accounting Officer
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 Restated Articles of Incorporation of Verdisys, Inc., dated July
15, 2003, filed July 17, 2003 with Secretary of State, State of
California.
10.1 Employment Agreement, by and between Verdisys, Inc. and Daniel
Williams, President and Chief Executive Officer, dated June 2003.
10.2 Employment Agreement, by and between Verdisys, Inc. and Andrew
Wilson, Chief Financial Officer Officer, dated June 2003.
10.3 Employment Agreement, by and between Verdisys, Inc. and David
Mauz, Chief Operating Officer, dated June 2003.
10.4 Advisor Agreement, by and between Verdisys, Inc. and Ron
Robinson, Chairman of the Board of Directors, dated July 2003.
10.5 Advisor Agreement, by and between Verdisys, Inc. and Eric A.
McAfee, Director, dated October 1, 2000.
10.6 Contract by and between Verdisys, Inc. and Natural Gas Systems,
re: lateral drilling services, "Delhi Field", dated September 22,
2003.
10.7 Contract by and between Verdisys, Inc. and Edge Capital Group,
re: lateral drilling services, "Franklin Field", dated September
27, 2003.
10.8 Contract by and between Verdisys, Inc. and Apache Corp, re:
satellite services, dated September 11, 2002.
10.9 Contract by and between Verdisys, Inc. and Noble Energy, re:
satellite services, dated September 17, 2002.
10.10 Technology Report "Landers Technology", dated October 13, 2003.
10.11 Placement Agency Agreement between the Company and Stonegate
Securities, Inc. dated August 26, 2003.
10.12 Verdisys Inc. 2003 Stock Option Plan.
10.13 Independent Contractor Agreement between the Company and TerrOnne
Petroleum Corporation dated August 1, 2003.
10.14 Addendum to Contract by and between Verdisys, Inc. and Edge
Capital Group re: lateral drilling services, "Monroe Field",
dated November 19, 2003.
10.14.1 Letter acknowledging amounts owed to Verdisys, Inc. at September
30, 2003 related to Contract by and between Verdisys, Inc. and
Edge Capital Group re: lateral services, "Monroe Field", dated
June 16, 2003.
31.1 Certification of Principal Executive Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
31.2 Certification of Principal Accounting Officer pursuant to Section
302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Principal Executive Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2 Certification of Principal Accounting Officer pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.