MAGNUM D'OR RESOURCES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		December 31,				September 30,
		2009				2009
		(unaudited)				(audited)
ASSETS
Current Assets:
Cash		$	2,938,054			$	57,844
Accounts receivable			12,934				19,708
Inventory			51,193				25,509
Bond acquisition costs, net			288,443				-
Lien asset receivable, net of deferred revenue of $66,547			66,550				66,550
Prepaid expenses			3,105,205				408,311
Total Current Assets			6,462,379				577,922
Property, plant and equipment, net			3,513,692				3,242,466
Other Assets:
Inventory			6,971,698				6,971,698
Utility deposits			29,796				28,333
Deposits on equipment			409,302				390,558
Total Other Assets			7,410,796				7,390,589
TOTAL ASSETS		$	17,386,867			$	11,210,977
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses		$	868,388			$	598,836
Accrued interest			44,449				138,778
Advances from stockholders			-				1,051,000
Deferred rent			219,155				189,084
Current obligations under capital leases			16,533				15,667
Notes payable, net of discounts of $3,409,308 and $18,451, respectively			1,860,722				2,288,706
Total Current Liabilities			3,009,247				4,282,071
Long Term Liabilities:
Asset retirement obligation			52,619
Non-current obligations under capital leases			77,742				79,236
Non-current notes payable			2,277,656				1,460,188
Derivative liability			2,982,699				-
Total Long Term Liabilities			5,390,716				1,539,424
TOTAL LIABILITIES			8,399,963				5,821,495
COMMITMENTS AND CONTINGENCIES
Stockholders' Equity:
Preferred stock, $.001 par value; 10,000,000 shares authorized,
10,000,000 issued and outstanding, respectively			10,000				10,000
Preferred stock B, $.001 par value; 40,000,000 shares authorized,
30,000,000 and 0 issued and outstanding, respectively			30,000				30,000
Common stock, $.001 par value; 150,000,000 shares authorized,
73,436,209 and 68,613,792 issued and outstanding, respectively			73,436				68,614
Additional paid-in capital			57,320,748				51,204,486
Accumulated deficit			(48,455,392	)			(45,878,841	)
Accumulated other comprehensive loss			8,112				(44,777	)
Total Stockholders' Equity			8,986,904				5,389,482
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	17,386,867			$	11,210,977

 

 

See accompanying notes to the consolidated financial statements

3

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MAGNUM D'OR RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME

(unaudited)

 

		Three Months Ended
		December 31,				December 31,
		2009				2008
Sales		$	5,377			$	5,647
Cost of Sales			355,977				33,254
Gross Loss			(350,600	)			(27,607	)
Operating Expenses
Officer compensation, non-cash			123,706				418,612
Consulting fees, non-cash			1,690,867				4,138,540
Legal and professional fees			409,715				95,571
General and administrative expenses			174,986				41,544
Rent			101,479				86,414
Royalties			48,361				25,216
Depreciation and amortization			8,368				9,239
Total Operating Expenses			2,557,482				4,815,136
Loss from Operations			(2,908,082	)			(4,842,743	)
Other Income (Expense)
Gain (loss) on disposal of assets			(3,808	)			-
Miscellaneous income			3,027				-
Interest income			111				-
Amortization of bond acquisition costs			(6,557	)			-
Gain on derivative			512,799				-
Interest expense			(174,041	)			(113,042	)
Net other income (expense)			331,531				(113,042	)
Net Loss			(2,576,551	)			(4,955,785	)
Other Comprehensive Income (Loss)
Gain (loss) from foreign currency translation			52,889				(153,370	)
Comprehensive Loss		$	(2,523,662	)		$	(5,109,155	)
Net Loss Per Share - Basic and Diluted		$	(0.04	)		$	(0.16	)
Per Share Information:
Weighted  Average Number of Shares
Outstanding - Basic and Diluted			72,771,012				30,621,473

 

 

See accompanying notes to the consolidated financial statements

4

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MAGNUM D'OR RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)

(unaudited)

																																						Total
																										Additional								Other				Stockholder's
		Common				Stock				Preferred				Stock				Preferred				Stock				Paid-in				Accumulated				Comprehensive				Equity
		Shares				Amount				Shares				Amount				Shares B				Amount				Capital				(Deficit)				Loss				(Deficit)
Balance - September 30, 2008			16,117,137				16,117				10,000,000				10,000				-				-				8,351,065				(8,562,779	)			(26,857	)			(212,454	)
Issuance of stock for consulting services			40,849,500				40,850												25,000,000				25,000				29,269,776												29,335,626
Issuance of stock for compensation			2,500,000				2,500												5,000,000				5,000				3,167,500												3,175,000
Issuance of stock for accrued legal services			620,000				620																				708,030												708,650
Issuance of stock for exercise of stock option			500,000				500																				49,500												50,000
Issuance of stock for conversion of note payable			7,006,185				7,006																				6,982,667												6,989,673
Issuance of stock in connection with the purchase of assets			500,000				500																				549,500												550,000
Issuance of stock for accrued expenses			150,000				150																				152,850												153,000
Issuance of stock for accrued compensation			370,970				371																				459,629												460,000
Valuation of warrants issued with notes payable																											1,513,969												1,513,969
Net loss for year																															(37,316,062	)							(37,316,062	)
Other comprehensive loss																																			(17,920	)			(17,920	)
Balance - September 30, 2009			68,613,792				68,614				10,000,000				10,000				30,000,000				30,000				51,204,486				(45,878,841	)			(44,777	)			5,389,482
Issuance of stock for consulting services			3,375,000				3,375																				4,511,125												4,514,500
Issuance of stock for conversion of note payable			1,047,417				1,047																				1,182,237												1,183,284
Issuance of stock for conversion of warrants			300,000				300																				300,000												300,300
Issuance of stock for prepaid expenses			100,000				100																				122,900												123,000
Net loss for year																															(2,576,551	)							(2,576,551	)
Other comprehensive gain																																			52,889				52,889
Balance - December 31, 2009			73,436,209				73,436				10,000,000				10,000				30,000,000				30,000				57,320,748				(48,455,392	)			8,112				8,986,904

 

 

See accompanying notes to the consolidated financial statements

5

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MAGNUM D'OR RESOURCES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Three Months Ended
		December 31,				December 31,
		2009				2008
Cash Flows from Operating Activities:
Net Loss		$	(2,576,551	)		$	(4,955,785	)
Adjustments to reconcile net loss to net cash used in
operating activities:
Stock issued for services and expenses			1,734,433				4,080,525
Stock issued for compensation expense			-				375,000
Depreciation and amortization			79,342				9,239
Amortization of debt discount			104,641				59,466
Loss on disposal			3,808				-
Services paid with fixed assets			5,000				-
Gain on derivatives			(512,799	)			-
Changes in operating assets and liablitites:
Accounts receivable			6,899				(5,647	)
Inventory			(24,625	)			-
Prepaid expenses			209,009				(53,195	)
Utility deposits			(500	)			-
Accounts payable and accrued expenses			276,598				280,000
Accrued interest			43,570				53,042
Deferred rent			-				40,665
Net cash flows used in operating activities			(651,175	)			(116,690	)
Cash Flows from Investing Activities:
Payments for equipment			(43,938	)			(298,367	)
Increase in equipment deposits			(196,580	)			(428,958	)
Cash flows used in investing activities			(240,518	)			(727,325	)
Cash Flows from Financing Activities:
Cash overdraft			-				9,347
Payments on capital leases			(3,905	)			-
Repayment on notes payable			(584,303	)			(650	)
Payments of bond acquisition costs			(295,000	)			-
Proceeds from issuance of notes payable			4,659,329				300,000
Proceeds from loans and advances from stockholders			-				87,690
Cash flows provided by financing activities			3,776,121				396,387
Net (decrease) increase  in cash			2,884,428				(447,628	)
Effect of exchange rates on cash			(4,218	)			(62,041	)
Cash - Beginning of year			57,844				510,042
Cash - End of year		$	2,938,054			$	373
Supplementary Information
Interest Paid		$	14,280			$	-
Taxes Paid		$	-			$	-
Non-Cash Transactions
Conversion of notes payable for common stock		$	1,345,686			$	-
Common stock issued for prepaid expenses		$	2,903,067			$	-
Common stock issued for accrued interest		$	137,899			$	-
Equipment financed through capital lease obligations		$	-			$	95,524

 

 

See accompanying notes to the consolidated financial statements

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

 

Note 1 - Basis of Presentation and Summary of Significant Accounting Policies

Business Description

Magnum d’Or Resources, Inc. (the “Company”) was incorporated on September 3, 1999, under the laws of the State of Nevada. Since its inception, the Company evolved through several transitions to its present mode. During its evolution, it operated as an internet information company, a junior resource mining company, and a business acquisition company. These ventures proved to be marginally effective.

Currently the Company is engaged in the business of providing modified sources of recycled rubber products, reconstituted rubber derivatives, and rubber powders to various distributors and manufacturers. It currently has two production facilities located in Magog, Canada and Hudson, CO.  It intends to develop additional facilities that produce various wholesale rubber products, high quality reconstituted rubber powders, specialty blend malleable materials, thermoplastics and thermoplastics elastomers.

The Company intends to acquire additional equipment, facilities and resources to allow it to strategically provide modified sources of recycled rubber products, reconstituted rubber derivatives, and high quality rubber powders to various distributors and manufacturers. This will be accomplished through wholly owned and joint venture facilities that may be fabricated or acquired as the market allows.  The Company intends on establishing technical facilities, either coincident with or separate from its production facilities, for purposes of research and development activities.  It may also enter into strategic alliances with educational institutions and/or research firms to advance its market research and develop innovative products and solutions associated with its core recycling business.

Business History

During October 2005, the Company formed Sunrise Mining Corporation (“Sunrise”), which became a wholly-owned subsidiary. Subsequent to Sunrise’s incorporation, the Company transferred all of the rights to its mining operations to Sunrise. During January 2007, the Company announced that it planned to spin-off its wholly owned subsidiary, Sunrise Mining Corporation, to its stockholders.  The spin-off was completed in November 2007.

During December 2006, the Company was acquired by a new management group and restructured for the express purpose of pursuing and consummating a merger between the Company and Terra Elastomer Technologies S.L., a private European company based in Düsseldorf, Germany. In December 2007 the Merger was abandoned due to unexpected complexities, market financing interruptions and insurmountable cost considerations.

During December 2007, the Company acquired licensing rights to a number of patents and processes that allowed rubber to be reconstituted, added to raw virgin rubber in various quantities, specially blended into various other polymers, and mixed into EPDM compounds.  These license agreements were terminated on September 28, 2008 and replaced by new and more advanced technologies agreements developed by Sekhar Research Innovations of Malaysia (see below and Note 11).

In May 2008, the Company formed a wholly-owned subsidiary, Recyclage Magnum Canada, Inc. (“MRC”), which the Company subsequently transferred all production equipment to for the purpose of establishing its first North American production facility.  The facility is located in Magog, Quebec, Canada for strategic geographical and commercial purposes.  Equipment installation and testing was performed throughout the summer and fall of 2008.  Production activities commenced during November of 2008, thus transforming the Company from a development stage entity to an operational entity.

During this same period the Company entered into a Joint Venture Agreement with Sekhar Research Innovations of Malaysia (October 2008) to acquire use of technologically advanced patents, processes, and equipment that were thought to be more compatible with overall Company product development and market strategy. The Company will use these patented processes to disintegrate scrap tires, remove fibers and metal wire, produce crumb rubber, slurry, and liquefy recycled raw materials into various rubber and rubber-like products.

 

7

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

In June 2009, the Company formed another wholly-owned subsidiary, Magnum Recycling USA (“MRUSA"), for the purpose of establishing its first US operations.  In August 2009, a tire disposal facility located in Hudson, CO was acquired to meet this goal and establish a centralized US production and distribution facility. The site is superbly located geographically in the US to allow access to raw materials and delivery throughout the USA and North America.

On October 1, 2009, the Company formed a wholly-owned subsidiary, Magnum Engineering ("MEI") for the express purpose of providing engineering related services to the Company and to interested third parties.

Basis of Presentation

These condensed consolidated financial statements have been prepared by the Company, without audit, in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the three month period ended December 31, 2009, are not necessarily indicative of results that may be expected for the fiscal year ending September 30, 2010. The condensed consolidated balance sheet information as of September 30, 2009 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K. These interim financial statements should be read in conjunction with that report.

The Company operates in one business segment, the development of recycling rubber tires into various rubber products. Significant accounting principles followed by the Company and the methods of applying those principles, which materially affect the determination of financial position and cash flows, are summarized below:

Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates.

Consolidation Policy

The accompanying consolidated financial statements include the accounts of Magnum d’Or Resources, Inc. and its wholly owned subsidiaries, Recyclage Magnum Canada, Inc., Magnum Recycling USA, Inc, and Magnum Engineering. Intercompany accounts and transactions have been eliminated.

Foreign Currency Adjustments

The accompanying consolidated financial statements are presented in United States dollars (USD). The functional currency of the Company’s foreign subsidiary is the Canadian dollar (CND). Assets and liabilities of this foreign subsidiary are translated into United States dollars at currency exchange rates in effect at the end of the periods reported. Equity accounts are translated at historical rates corresponding to the date of transaction. Revenues and expenses are translated at average exchange rates in effect for the periods reported. Gains and losses resulting from translation of foreign subsidiary financial statements into U.S. dollars are included as a separate component of stockholders’ equity.

 

Accounts Receivable

 

Accounts receivable are recognized and carried at the original invoice amount less allowance for any uncollectible amounts.  The Company uses the allowance method to account for uncollectible trade receivable balances.  An estimate for doubtful accounts is made when collection of the full amount is no longer probable.  

8

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

Inventories

 

At December 31, 2009, inventories are stated at the lower of cost (determined on a first-in, first-out basis) or market. Provisions to value the inventory at the lower of the actual cost to purchase and / or manufacture the inventory, or the current estimated market value of the inventory, are based upon assumptions about future demand and market conditions. The Company also performs evaluations of inventory and records a provision for estimated excess and obsolete items based upon forecasted demand, and any other known factors at the time.  No provision existed as of December 31, 2009.  Raw materials are primarily considered long-term assets as they are not expected to be manufactured and sold by the end of the subsequent fiscal year. Finished goods are considered current assets as they are expected to be sold before the end of the subsequent fiscal year.  Inventory as of December 31, 2009 consists of the following:

 

Raw materials		$	6,971,698
Finished Goods			51,193
Total		$	7,022,891

 

Property, plant and equipment

 

Property, plant and equipment are stated at cost. Depreciation has been computed using the straight-line method based upon estimated useful lives of ten years for production equipment and three to five years for software and computer equipment. Leasehold improvements are depreciated over the lesser of the remaining term of the lease, or the economic useful life.   

 

Income Taxes

The Company accounts for income tax using an asset and liability approach and allows for recognition of deferred tax benefits in future years. Under the asset and liability approach, deferred taxes are provided for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. A valuation allowance is provided for deferred tax assets if it is more likely than not these items will expire before either the Company is able to realize their benefits, or that future realization is uncertain.

There has been no provision for U.S. federal, state, or foreign income taxes for any period because the Company has incurred losses in all periods and for all jurisdictions since inception.

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.  The Company has identified net deferred tax assets, primarily made up of cumulative net operating loss carryforwards.  However, the Company has also recorded a 100% valuation allowance for these deferred tax assets based on the amount expected to be realized.

In accounting for unrecognized tax benefits, a tax position is required to meet a prescribed recognition threshold before being recognized in the financial statements. Based on all known facts and circumstances and current tax law, the Company believes that the total amount of unrecognized tax benefits as of December 31, 2009, is not material to its results of operations, financial condition or cash flows.  The Company also believes that the total amount of unrecognized tax benefits as of December 31, 2009, if recognized would not have a material effect on its effective tax rate. The Company further believes that there are no tax provisions for which it is more likely than not, based on current tax law and policy, that the unrecognized tax benefits will significantly increase or decrease over the next 12 months producing, individually or in the aggregate, a material effect on the Company’s results of operations, financial condition, or cash flows.

 

9

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

Asset Retirement Obligations

The Company accounts for asset retirement obligations in accordance with ASC 410-20.  Under this standard, a liability is recognized for the fair value of legally required asset retirement obligations associated with long-lived assets in the period in which the retirement obligations are incurred and the liability can be reasonably estimated. The Company capitalizes the associated asset retirement costs as part of the carrying amount of the long-lived asset. The liability is initially measured at fair value and subsequently is adjusted for accretion expense and changes in the amount of timing of the estimated cash flows.

Going Concern

The accompanying consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate the continuation of the Company as a going concern. The Company’s operations are progressing forward; however, the Company has generated no significant revenue, has an accumulated deficit of $48,455,392 and a negative cash flow from operations of $651,175 for the three months ended December 31, 2009.  These factors raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The future success of the Company is dependent on its ability to obtain additional capital funds to purchase equipment and construct facilities to fulfill its current contractual commitments, and, ultimately attain future profitable operations. There can be no assurance that the Company will be successful in obtaining such financing, or that it will attain positive cash flow from operations.

Fair Value of Financial Instruments

The Company accounts for fair value in accordance with ASC 820-10 with respect to fair value measurements of (a) non-financial assets and liabilities that are recognized or disclosed at fair value in the Company's financial statements on a recurring basis (at least annually) and (b) all financial assets and liabilities. ASC 820-10 defines fair value as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants as of the measurement date. 

 

ASC 820-10 establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company's assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy is broken down into three levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs include quoted prices for similar assets or liabilities in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

10

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

The following table provides the assets and liabilities carried at fair value measured on a recurring basis as of December 31, 2009:

		Total Carrying Value at 12/31/2009				(Level 1)				(Level 2)				(Level 3)
Compound Embedded Derivative		$	714,368			$	—			$	—			$	714,368
Warrant Derivatives		$	2,268,331			$	—			$	—			$	2,268,331
Total		$	2,982,699			$	—			$	—			$	2,982,699

The derivative liabilities are measured at fair value using quoted market prices and estimated volatility factors, and are classified within Level 3 of the valuation hierarchy. There were no changes in the valuation techniques during the three months ended December 31, 2009.  The Company recorded a gain from the derivative liability of $512,799 which is recorded as gain on derivate in the statement of operations.

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Compound Embedded Derivative			Warrant Derivative				Total
Inception date fair value (December 23, 2009)		$	863,134			$	2,632,364			$	3,495,498
Total (gains) recorded in earnings			(148,766	)			(364,033	)			(512,799	)
Fair value at December 31, 2009		$	714,368			$	2,268,331			$	2,982,699

 

Stock Based Compensation

The Company periodically issues stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. The Company accounts for stock option and warrant grants issued and vesting to employees using ASC 718-10, and for all share-based payments granted based on the requirements of ASC 718-10. The Company accounts for stock option and warrant grants issued and vesting to non-employees in accordance with ASC 505-50:  whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. 

Net Loss per Share

The net loss per share has been computed using the weighted-average number common shares outstanding during the three months ending December 31, 2009.  As of December 31, 2009, potentially dilutive convertible notes payable, options and warrants to purchase common stock aggregating 2,892,562, zero, and 7,231,406 shares respectively, were outstanding and not considered because their effect would have been anti-dilutive.

Accounting Pronouncements Issued Not Yet Adopted

 

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). Also refer to FASB ASC 810-10-65, Consolidation – Overall – Transition and Open Effective Date Information. This guidance relates to the consolidation of variable interest entities. It eliminates the quantitative approach previously required for determining the primary beneficiary of a variable interest entity and requires ongoing qualitative reassessments of whether an enterprise is the primary beneficiary of a variable interest entity. This guidance also requires additional disclosures about an enterprise’s involvement in variable interest entities. This guidance is effective as of the beginning of an entity’s fiscal year, and interim periods within the fiscal year, beginning after November 15, 2009. The Company will adopt this guidance in the first quarter of fiscal 2011. The Company is currently evaluating the potential impact, if any, of this guidance on its consolidated financial statements.

 

11

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

 

In October 2009, the FASB issued ASU No. 2009-13, Revenue Recognition – Multiple Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 updates the existing multiple-element revenue arrangements guidance currently included in FASB ASC 605-25. The revised guidance provides for two significant changes to the existing multiple-element revenue arrangements guidance. The first change relates to the determination of when the individual deliverables included in a multiple-element arrangement may be treated as separate units of accounting. This change will result in the requirement to separate more deliverables within an arrangement, ultimately leading to less revenue deferral. The second change modifies the manner in which the transaction consideration is allocated across the separately identified deliverables. Together, these changes will result in earlier recognition of revenue and related costs for multiple-element arrangements than under previous guidance. This guidance also expands the disclosures required for multiple-element revenue arrangements. Effective for interim and annual reporting periods beginning after December 15, 2009. The Company is currently evaluating the potential impact, if any, of this guidance on its consolidated financial statements.

 

From time to time, new accounting pronouncements are issued by the FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Company’s consolidated financial statements upon adoption.

Note 2 –Property, Plant and Equipment and Deposits on Equipment

The Company placed equipment into service during the quarter ending December 31, 2009 totaling $281,565. In addition, during fiscal year 2009 the Company entered into a contract with a Malaysian company that specializes in developing rubber compounds (see Note 9), processing techniques, and specialized equipment for production of scrap rubber. Costs associated with this contract include certain amounts allocated to the development and purchase of equipment. The Company made payments aggregating $409,302 through December 31, 2009 that have been included in the accompanying condensed consolidated balance sheet as deposits for equipment. Advance payments made will be credited to the total price.

		December 31, 2009				September 30, 2009
Assets:
Land		$	419,566			$	419,566
Land – Asset retirement obligation			52,619				-
Building			614,944				614,944
Leasehold improvements			54,984				51,290
Production equipment			2,589,301				2,289,292
Office equipment and furniture			8,077				6,410
Total equipment			3,730,494				3,381,502
Less: accumulated depreciation			(216,802	)
Property, plant and equipment, net		$	3,513,692			$	3,242,466

 

Depreciation and amortization expense totaled $79,592 and $9,239 for the three months ended December 31, 2009 and 2008, respectively.

 

 

12

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

Note 3 – Notes Payable, Accrued Interest and Stockholder Loans

Notes payable, net, consists of the following:

		December 31, 2009				September 30, 2009
4% notes payable		$	1,867,713			$	2,161,342
6% notes payable			974,179				1,262,553
9% notes payable			90,692				-
9.75% notes payable			1,164,645				-
12% notes payable			41,149				324,999
Total			4,138,378				3,748,894
Less: current maturities			(1,860,722	)			(2,288,706	)
Long term debt		$	2,277,656			$	1,460,188

4.00%  Note Payable

During fiscal year 2009, the Company issued promissory notes aggregating $2,408,103 to unrelated financial institutions in connection with the acquisition of liens related to an asset acquisition. Interest payable at the rate of 4% with scheduled monthly payments of interest and principal totaling $104,642. These notes are secured obligations of the Company, as evidenced by pledge agreements that provide as collateral for the repayment of these notes, deeds of trust for all real property associated with the asset acquisition.  Any unpaid balance of principal or interest will be due in full in June 2011. As of December 31, 2009 the outstanding principal balances totaled $1,867,713 and accrued interest of $3,045 which are recorded in the accompanying consolidated balance sheet.

6.00%  Note Payable

During fiscal year 2009, the Company issued a promissory note for $1,000,000 to an unrelated financial institution in connection with the acquisition of liens related to an asset acquisition. Interest payable at the rate of 6% with scheduled monthly payments of interest and principal totaling $100,000. This note is a secured obligation of the Company, as evidenced by a pledge agreement that provide as collateral for the repayment of this note, a deed of trust for all real property associated with the asset acquisition. Any unpaid balance of principal or interest will be due in full in May 2010. As of December 31, 2009 the outstanding principal balance totaled $974,179 and accrued interest of $12,829 which are recorded in the accompanying consolidated balance sheet.

9.00%  Note Payable

During fiscal year 2010, the Company issued $3,500,000 (net of discounts of $3,409,308) in convertible notes to unrelated individuals with interest payable at the rate of 9.00% per annum. The Company incurred $295,000 of debt issuance costs related to these notes payable. Any unpaid balance of principal or interest will be due in full in December 2010. The debt issuance costs are being amortized using the effective interest rate method over the notes payable term. Amortization recorded as interest expense in the statement of income for the three months ended December 31, 2009 was $6,557.  The convertible notes have an accrued interest balance of $7,875 payable as of December 31, 2009, which is recorded in accrued interest in the accompanying consolidated balance sheet.  See Notes 6 and 7.

 

13

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

12% Notes Payable

 

During fiscal year 2009, the Company issued a promissory note for $43,450 to an unrelated financial institution in connection with the acquisition of liens related to an asset acquisition. Interest payable at the rate of 12% with no scheduled monthly payments.  Any unpaid balance of principal or interest will be due in full in May 2011. As of December 31, 2009 the outstanding principal balance totaled $41,149 and accrued interest of $3,492 which are recorded in the accompanying consolidated balance sheet.

 

9.75% Notes Payable

 

During fiscal year 2010, the Company issued, in lieu of cash, an aggregate of $1,164,642 of 2 year promissory notes with unrelated individuals all with interest payable at the rate of 9.75% per annum with no scheduled monthly payments.  Any unpaid balance of principal or interest will be due in full in December 2011.  The promissory notes have an accrued interest balance of $16,329 payable as of December 31, 2009, which is recorded in accrued interest in the accompanying consolidated balance sheet.

 

Note 4 – Common Stock

During October 2009, the Company issued, in lieu of cash, an aggregate of 3,100,000 shares of common stock valued at $3,513,000 for consulting services. The common stock was valued between $1.13 and $1.23 per share, based on the closing market prices on the date the board of directors authorized the issuances. As of December 31, 2009, the value of services that are yet to be performed and have been capitalized is $2,147,000

On October 15, 2009 the Company issued, in lieu of cash, 100,000 shares of common stock valued at $123,000 for professional services. The common stock was valued at $1.23 per share, based on the closing market price on the date the board of directors authorized the issuance.  The value of services that are yet to be performed and have been capitalized is $88,157.

On October 20, 2009, the Company issued, 300,000 shares of common stock, valued at $300,000, in accordance with the purchase privileges of 300,000 previously issued warrants.  These warrants were exercised at their face value of $1.00 per share (see Note 10).  $300,000 of 12% principal debt was retired concurrently with the exercise of these warrants and applied against the purchase of the 300,000 shares of common stock issued. In addition, 46,830 shares of common stock, valued at $52,924, or $1.13 per share, were issued to pay the accrued interest on these notes.

Also on October 20, 2009 the Company issued in lieu of cash, 930,088 shares of common stock valued at $1,051,000 to repay prior cash advances to the Company from stockholders. This fulfilled complete repayment of the outstanding advance balance as of the issue date. In addition, 70,500 shares of common stock, valued at $79,662, or $1.13 per share, were issued to pay the accrued interest on these notes.

During November 2009, the Company issued, in lieu of cash, an aggregate of 550,000 shares of common stock for consulting services and bonuses valued at $686,000. The common stock was valued between $1.18 and $1.34 per share, based on the closing market prices on the date the Board of Directors authorized the issuances.  As of December 31, 2009, the value of services that are yet to be performed and have been capitalized is $750,928.

Also during November 2009, the Company issued, in lieu of cash, 125,000 shares of common stock, valued at $147,500 for satisfaction of certain accounts payable for previous services rendered by consultants of the Company for professional and contract services.  The common stock was valued at $1.18 per share, based on the closing market prices on the date the Board of Directors authorized the issuance.

On November 20, 2009, the Company rescinded 500,000 shares of common stock issued to a previous employee and Director, valued at $75,000, in accordance with its revocability clauses in response to the early termination of his employment contract.  The remaining terms of the agreement are currently in effect with no additional liability for payments or penalties. The common stock issued was valued at $0.15 per share, based the closing market prices on the date the board of directors authorized the issuance.

 

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

During December 2009, the Company issued, in lieu of cash, 500,000 shares of common stock, valued at $715,000 for satisfaction of certain accounts payable for previous services rendered by consultants of the Company for professional and contract services.

During December 2009, the Company rescinded 400,000 shares of common stock previously issued in connection with the asset acquisition due to breach of the agreement entered into.  The common stock rescinded was valued at $472,000, or $1.18 per share, based on the value at the date of issuance.

Note 5 – Preferred Stock

During August 2009, the Company issued, in lieu of cash, an aggregate of 30,000,000 shares of Series B preferred stock to the Chief Executive Officer and a consultant valued at $16,800,000 or $0.56 per share.  The valuation was based on an analysis report performed by an independent valuation expert who utilized a market approach to value the securities. The stock was issued in lieu of cash bonus and performance payments.

Note 6 – Secured Convertible Note Financing

 

On December 18, 2009 the Company entered into an agreement with Chardan Capital Markets, LLC as exclusive placement agent to procure equity based financing for the Company.  On December 23, 2009 the Company completed an agreement with Cranshire Capital, LP and other entities involving the issuance of $3,500,000 of 9% secured convertible notes payable due in one year, plus warrants.  The notes are convertible into the Company’s common shares based upon a fixed conversion price of $1.21, but are subject to full-ratchet anti-dilution protection if the Company sells shares or share-indexed financing instruments at less than the conversion price.  The holders have the option to redeem the notes for cash in the event of defaults and certain other contingent events, including a change in control event and events related to the common stock into which the instrument was convertible, registration and listing (and maintenance thereof) of our common stock and filing of reports with the Securities and Exchange Commission. In addition, the Company extended registration rights to the holders that require registration and continuing effectiveness thereof.  In connection with the issuance of the Notes, the Company issued Series A warrants to purchase 2,169,422 shares of the Company's common stock, Series B warrants to purchase 2,892,562 shares of the Company's common stock, and Series C warrants to purchase 2,169,422 shares of the Company's common stock.  The exercise price for the warrants is $1.21 per share, and each class of warrant is exercisable for five, one, and five years, respectively, from the date of issuance.  

The Company received net proceeds of $3,415,000 from the financing arrangement.  Incremental, direct financing costs of $295,000, which includes $85,000 withheld from the note balance are included in deferred bond acquisition costs and are subject to amortization using the effective method.  Accumulated amortization of deferred financing costs, which is included in interest expense, during the current quarterly period, amounted to $6,557.

In the Company’s evaluation of the financing arrangement, it was concluded that the conversion features were not afforded the exemption as a conventional convertible instrument due to the anti-dilution protection; and it did not otherwise meet the conditions set forth in current accounting standards for equity classification. Since equity classification is not available for the conversion feature, the Company was required to bifurcate the embedded conversion feature and carry it as a derivative liability, at fair value (see Note 6). The Company also concluded that the default put required bifurcation because, while puts on debt instruments are generally considered clearly and closely related to the host, the default put is indexed to certain events and premiums that are not associated debt instruments.  The Company combined all embedded features that required bifurcation into one compound instrument that is carried as a component of derivative liabilities. The Company determined that the investor warrants did not meet the conditions for equity classification. Therefore, the investor warrants are also required to be carried as a derivative liability, at fair value.  Derivative financial instruments are carried initially and subsequently at their fair values.

 

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

The Company estimated the fair value of the derivative warrants and the compound derivative on the inception dates, and subsequently, using the lattice valuation technique, specifically the binomial model, because that technique embodies all of the assumptions (including credit risk, interest risk, stock price volatility and conversion behavior estimates) that are necessary to fair value complex compound derivative instruments. See Note 7.

Note 7 – Derivative Liabilities

 

Derivative financial instruments, as defined in ASC 815-10-15-83 Derivatives and Hedging (pre-Codification FAS No. 133 Accounting for Derivative Financial Instruments and Hedging Activities), consist of financial instruments or other contracts that contain a notional amount and one or more underlying (e.g. interest rate, security price or other variable), require no initial net investment and permit net settlement.  Derivative financial instruments may be free-standing or embedded in other financial instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as liabilities or, in rare instances, assets.

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However, the Company has entered into certain other financial instruments and contracts, such as debt financing arrangements, and freestanding warrants with features that are either (i) not afforded equity classification, (ii) embody risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty.  As required by ASC 815, these instruments are required to be carried as derivative liabilities, at fair value, in the financial statements.

The conversion feature of the Company’s $3,500,000 convertible debt as disclosed in Note 6, and the warrants issued with this debt, do not have fixed settlement provisions because their conversion and exercise prices, respectively, may be lowered if the Company issues securities at lower prices in the future.  The Company was required to include the reset provisions in order to protect the debenture holders from the potential dilution associated with future financings.  In accordance with ASC 815-10, the conversion feature of the debentures was separated from the host contract, the debenture, and recognized as an embedded derivative instrument.  Both the conversion feature of the debt and the warrants have been characterized as derivative liabilities. ASC 815-10 requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

The Company measures the fair value of derivative financial instruments using various techniques (and combinations thereof) that are considered to be consistent with the objective of measuring fair value. In selecting the appropriate technique, the Company considers, among other factors, the nature of the instrument, the market risks that it embodies and the expected means of settlement. For complex derivative instruments, such as embedded conversion options, puts and redemption features embedded in hybrid debt instruments, the Company generally uses a lattice valuation technique, specifically the binomial model, and the Monte Carlo Simulation valuation technique because these techniques embody all of the requisite assumptions (including credit risk, interest-rate risk and exercise/conversion behaviors) that are necessary to fair value these more complex instruments. Estimating fair values of derivative financial instruments requires the development of significant and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal and external market factors. In addition, the valuation techniques are highly volatile and sensitive to changes in the trading market price of our common stock, which has a high-historical volatility. Since derivative financial instruments are initially and subsequently carried at fair values, our income will reflect the volatility in these estimate and assumption changes.  

Information and significant assumptions embodied in the valuations (including ranges for certain assumptions during the subject periods that instruments were outstanding) as of the inception date of the financing (December 23, 2009) are illustrated in the following tables:

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		Series A Warrants				Series B Warrants				Series C Warrants
Risk-free interest rate			2.51	%			0.41	%			2.51	%
Expected volatility			69.5	%			69.5	%			69.5	%
Expected life (in years)			5				1				5
Strike price of warrant		$	1.21			$	1.21			$	1.21
Underlying stock price		$	1.165			$	1.165			$	1.165

		Embedded Conversion Derivative
Risk-free interest rate			0.41	%
Expected volatility			69.5	%
Expected life (in years)			1
Strike price of conversion		$	1.21
Underlying stock price		$	1.165

Due to the relatively short period of time between the inception date of December 23, 2009 and December 31, 2009, the only significant factor that changed in the derivative liability fair value calculations for the warrants and the embedded conversion derivative is the underlying stock price.  The underlying stock price on December 31, 2009 was $1.05.

The Company’s $3,500,000 convertible debt and related warrants issued give rise to the following derivative liabilities as of December 31, 2009:

		Compound Embedded Derivative				Warrant Derivatives				Total Derivatives
$3,500,000 face value convertible note:		$	714,368			$	2,268,331			$	2,982,699

The following table summarizes the effects on the Company’s income (expense) associated with changes in the fair values of the derivatives liabilities for the three months ended December 31, 2009:

		Compound Embedded Derivative				Warrant Derivatives				Total Derivatives
$3,500,000 face value convertible note:		$	148,766			$	364,033			$	512,799

The following table summarizes the change in the Company’s derivative liabilities for the three months ended December 31, 2009:

Inception date fair value (December 23, 2009)		$	3,495,498
Change in value of derivative liability			512,799
Fair value at December 31, 2009		$	2,982,699

 

17

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

The Company’s derivative liabilities and derivative gain as of December 31, 2009 are significant to the Company’s consolidated financial statements. The magnitude of derivative gain reflects the following: The market price of the Company’s common stock, which significantly affects the fair value of the derivative financial instruments, experienced material price fluctuations from the inception date to December 31, 2009. The lower stock price on December 31, 2009 compared to the stock price on the inception date had the effect of significantly decreasing the fair value of the derivative liabilities and, accordingly, the Company was required to adjust the derivatives to these lower values with charges to derivative income.

Note 8 – Asset Retirement Obligations

 

The Company has recorded estimated asset retirement obligations related to the restoration of its Colorado land. These obligations were acquired in connection with the Company’s August 2009 acquisition of properties in Colorado. The Company’s asset retirement obligation at December 31, 2009 is as follows:

Asset retirement obligations at September 30, 2009		$	-
Adjustment to estimate			52,619
Accretion expense			-
Asset retirement obligations at December 31, 2009		$	52,619

 

Note 9 –Consulting Agreements

The continuation of other agreements with independent financial and business advisors continued through the reporting period. These consultants provide strategic relationships with several business development resources, and such other business matters as deemed necessary by Company management.  The terms of these agreements range from six months to several years. Under the terms of several of these agreements the Company shall from time to time, pay to the consultant such compensation as shall be mutually agreed to between the parties. Under the terms of others, these agreements specify a fixed obligation by the Company to pay the consultant, either in cash or Company stock, at the discretion of the Company.  Under the terms of these agreements, during fiscal year 2009 the consultants received 1,042,500 shares of common stock from the Company’s 2007 Consultant Stock Option, SAR and Stock Bonus Plan. The total value of the services was $172,525 which was recorded as consulting expense in the accompanying condensed consolidated statement of operations and comprehensive loss for the three months ended December 31, 2008. None of the $172,525 in consulting compensation is capitalized at December 31, 2009.

 

During December 2008, the Company commenced with the consulting portion of a broader agreement entered into in October 2008.  The agreement calls for a monthly advisory fee of $7,000 to a consultant which continues in 2010.

In accordance with this agreement, $21,000 was charged to expense in the statement of operations for the three months ended December 31, 2009.

Note 10 – Warrants

The following table summarizes certain information about the Company’s stock purchase warrants (including the warrants discussed in Notes 6 and 7).

 

18

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

		Number of Warrants				Weighted Ave. Exercise Price
Warrants outstanding, September 30, 2009			350,000			$	1.00
Warrants granted			7,231,406			$	1.21
Warrants exercised			(300,000	)		$	1.00
Warrants expired/cancelled			(50,000	)		$	1.00
Warrants outstanding, December 31, 2009			7,231,406			$	1.21

The warrants issued and outstanding as of December 31, 2009 are considered derivative liabilities and the valuation factors are disclosed in Note 7.

 

Note 11 – Commitments and Contingencies

License and royalty agreement

In October 2008, the Company entered into an agreement with a Malaysian company that specializes in developing rubber compounds, processing techniques, and specialized equipment for processing scrap rubber and producing specialty compounds. License, patent, and royalty expenses associated with this contract include payments aggregating $130,031 through December 31, 2009 and have been included in the accompanying condensed consolidated statement of operations and comprehensive loss as operating expenses.

Note 12 -  Operating and Capital Leases

The Company entered into a building lease agreement on September 1, 2008 to lease 98,535 square feet of a commercial building in Magog, Quebec, Canada for the purpose of processing scrap rubber and tires. The term of this lease is five years, with annual rent equal to $2.25 per square foot (approximately $204,000, or $17,000 per month) for the first year, with annual base rent escalations of $1.00 per square foot, resulting in annual rent in the fifth year of $5.75 per square foot (approximately $567,000, or $47,250 per month). The Company is also responsible for real estate taxes, utilities and other general maintenance of the premises.

On October 9, 2008 the Company entered into an equipment lease agreement for a forklift to transfer materials within its facility in Magog, Quebec, Canada. The lease calls for 60 equal payments of $535, which includes a financing fee of 7.25%, and a buyout provision of $1 at the lease completion. This lease is accounted for as a capitalized lease and recorded as obligations under capital leases in the accompanying consolidated balance sheet.

On December 9, 2008 the Company entered into an equipment lease agreement for a loader truck to transfer materials within and external to its facility in Magog, Quebec, Canada. The lease calls for 60 equal payments of $1,214, which includes a financing fee of 7.25%, and a residual buyout provision of 25% (approximately $20,000) at the lease completion. This lease is accounted for as a capitalized lease and recorded as obligations under capital leases in the accompanying consolidated balance sheet.

 

19

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Magnum d’Or Resources Inc. and Subsidiaries

Notes to the Condensed Consolidated Financial Statements

December 31, 2009

(Unaudited)

 

 

Minimum future lease payments as of December 31, 2009 are payable as follows:

Year Ending		Operating Lease			Capital Leases
September 30, 2010 (remaining)		$	237,371		$	17,090
September 30, 2011			411,443			22,786
September 30, 2012			506,391			22,786
September 30, 2013			543,975			22,786
		$	1,699,180		$	85,448

 

Lease expenses for the quarter ending December 31, 2009 and 2008 were $121,382 and $86,414.