Document/Exhibit Description Pages Size
1: 10KSB Annual Report -- Small Business 74 372K
2: EX-10.6 Material Contract 11 42K
3: EX-14.1 Code of Ethics 2 10K
4: EX-31.1 Certification per Sarbanes-Oxley Act (Section 302) 2 10K
5: EX-31.2 Certification per Sarbanes-Oxley Act (Section 302) 2 10K
6: EX-32.1 Certification per Sarbanes-Oxley Act (Section 906) 1 6K
United States Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
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(Mark One)
|X| Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange
Act of 1934 for the Fiscal Year Ended December 31, 2004
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission File Number: 000-32343
MR3 Systems, Inc.
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(Name of small business issuer in its charter)
Delaware 68-0259003
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
435 Brannan Street, Suite #200, San Francisco, California 94107
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(Address of principal executive officers) (Zip Code)
Issuer's telephone number: (415) 947-1090
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $0.01 par value per share
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes |_| No |X|
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |X|
State issuer's revenues for its most recent fiscal year: $ 380,000
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days: $4,496,787 (based on price of $0.085 per share on May 18, 2005).
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date.
Class Outstanding as of May 18, 2005
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Common Stock, Par Value $0.01 70,046,766
DOCUMENTS INCORPORATED BY REFERENCE
Transitional Small Business Disclosure Format. Yes |_| No |X|
MR3 Systems, Inc.
TABLE OF CONTENTS
PART I
Page
Item 1. Description of Business.......................................... 01
Item 2. Description of Property.......................................... 16
Item 3. Legal Proceedings................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.............. 16
PART II
Item 5. Market for Common Equity and Related Stockholder Matters......... 17
Item 6. Management's Discussion and Analysis and Plan of Operation....... 20
Item 7. Financial Statements and Supplementary Data...................... 26
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure....................................... 26
Item 8A. Controls and Procedures.......................................... 26
Item 8B. Other Information................................................ 26
PART III
Item 9. Directors, Executive Officers, Promoters and Control
Persons; Compliance With Section 16(a) of the Exchange......... 27
Item 10. Executive Compensation........................................... 31
Item 11. Security Ownership of Certain Beneficial Officers and Management. 34
Item 12. Certain Relationships and Related Transactions................... 36
PART IV
Item 13. Exhibits and Reports on Form 8-K................................. 37
Item 14. Principal Accountant Fees and Services........................... 38
Signatures....................................................... 39
Index to Financial Statements.................................... 40
Financial Statements............................................. F-1
PART I
THE INFORMATION IN THIS ANNUAL REPORT ON FORM 10-KSB CONTAINS FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF FEDERAL SECURITIES LAWS. ANY STATEMENTS IN THIS
REPORT REGARDING MR3'S OUTLOOK FOR ITS BUSINESS AND RESPECTIVE MARKETS, SUCH AS
PROJECTIONS OF FUTURE PERFORMANCE, STATEMENTS OF MANAGEMENT'S PLANS AND
OBJECTIVES, METAL PRODUCTION, PROBABLE ORE RESERVES, FUTURE FINANCING PLANS,
COMPETITION AND OTHER MATTERS ARE FORWARD-LOOKING STATEMENTS. THESE
FORWARD-LOOKING STATEMENTS RELATE TO FUTURE EVENTS AND MR3'S FUTURE FINANCIAL
AND OPERATING PERFORMANCE AND INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND
OTHER FACTORS THAT MAY CAUSE OUR ACTUAL RESULTS, LEVELS OF ACTIVITY, PERFORMANCE
OR ACHIEVEMENTS TO BE MATERIALLY DIFFERENT FROM THAT EXPRESSED OR IMPLIED BY
THESE FORWARD-LOOKING STATEMENTS. IN SOME CASES, YOU CAN IDENTIFY
FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY", "WILL", "SHOULD",
"EXPECTS", "PLANS", "INTENDS", "ANTICIPATES", "BELIEVES", "ESTIMATES",
"PREDICTS", "POTENTIAL" OR "CONTINUE", THE NEGATIVE OF SUCH TERMS OR OTHER
COMPARABLE TERMINOLOGY. THESE STATEMENTS ARE ONLY PREDICTIONS. IN EVALUATING
THESE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING,
WITHOUT LIMITATION, THE RISKS OUTLINED UNDER "RISK FACTORS" AND MATTERS
DESCRIBED IN THIS REPORT GENERALLY. THESE FACTORS MAY CAUSE OUR ACTUAL RESULTS
TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENT.
ALTHOUGH MR3 BELIEVES THAT THE EXPECTATIONS REFLECTED IN THE FORWARD-LOOKING
STATMENTS ARE REASONABLE, MR3 CANNOT GUARANTEE FUTURE RESULTS, LEVELS OF
ACTIVITY, PERFORMANCE OR ACHIEVEMENTS. GIVEN THESE UNCERTAINTIES, READERS ARE
CAUTIONED NOT TO PLACE UNDUE RELIANCE ON SUCH FORWARD-LOOKING STATEMENTS. MR3
DISCLAIMS ANY OBLIGATION TO PUBLICLY UPDATE THESE STATEMENTS, OR DISCLOSE ANY
DIFFERENCE BETWEEN ITS ACTUAL RESULTS AND THOSE REFLECTED IN THESE STATEMENTS
ITEM 1. DESCRIPTION OF BUSINESS
Business Development
MR3 Systems, Inc. ("MR3" or the "Company") was incorporated in California
on July 3, 1991 as Airponic International Corporation to engage in the business
of developing and marketing a technology that accelerates the growth of plants,
known as the Airponic Growing System ("AGS"). On March 9, 1992, the Company
amended its Articles of Incorporation to change its name to Bioponic
International. On February 26, 1997 the Company filed Amended and Restated of
Articles of Incorporation to increase its authorized common stock and to create
a new class of preferred stock.
On October 7, 1997, pursuant to a Plan and Agreement of Reorganization,
the Company obtained all of the issued and outstanding shares of MR3, Inc., a
Delaware corporation, in exchange for 2,665,000 shares of its common stock. MR3,
Inc., was then engaged in the business of manufacturing modules (integrated
hardware and media systems) for the removal and purification of metals from
industrial waster water, similar to that of the business the Company is
currently engaged in. With the acquisition of MR3, Inc., which was accounted for
as a pooling of interests, MR3 became an operating division of the Company.
On June 8, 1999 the Company formed Emarethree Corporation, a Delaware
corporation, as a wholly owned inactive subsidiary of the Company. On March 6,
2000, the Company formed Bioponic AGS, Inc. ("Bioponic AGS"), a Delaware
corporation, as a wholly owned inactive subsidiary of Emarethree Corporation. On
March 31, 2000, the Certificate of Incorporation of Emarethree Corporation was
amended and restated to change its name to MR3 Systems, Inc., increase its
authorized capital stock and create a class of preferred stock. On April 28,
2000, the Company completed a change of domicile of incorporation from the State
of California to the State of Delaware in connection with the merger of its
parent company, Bioponic International, a California corporation, with its
wholly owned subsidiary, MR3 Systems, Inc., a Delaware corporation. MR3 Systems,
Inc. became the surviving public entity resulting from the merger.
- 1 -
Effective April 29, 2000, the Company transferred its Airponic Growing
System technology assets and related liabilities to its subsidiary, Bioponic
AGS. Further, on April 29, 2000, the Company spun off its ownership in Bioponic
AGS to its shareholders of record as of January 31, 2000. Bioponic International
shareholders of record as of January 31, 2000, received one share of Bioponic
AGS Inc. for every two shares of Bioponic International as a stock dividend. An
aggregate of 13,734,369 common shares of Bioponic AGS were distributed to 422
shareholders on or about May 8, 2000. Effective with the distribution of shares
to the Company's shareholders, Bioponic AGS was no longer deemed to be a
subsidiary of the Company and the Company had no rights or ownership to any of
the technology transferred or otherwise owned by Bioponic AGS.
In May 2003, the Company formed TechMining, LLC, a Colorado company, as a
wholly owned subsidiary of the Company to own and operate a precious metals
processing facility in Lakewood, Colorado. TechMining is currently inactive and
the Company may elect to close the subsidiary if it does not initiate precious
metals processing operations in Colorado.
Business of the Company
Principal Product and Services
MR3 Systems, Inc. is a provider of turnkey commercial solutions for
metals-related remediation applications and precious metal extraction,
separation, and purification opportunities. MR3's business objective is to
provide the most cost effective metal recovery systems, both in terms of capital
expenditures and operating costs, while providing the most robust continuous
separation and recovery of individual difficult/valuable metals. MR3's chelation
driven resin technology is targeted to chemically process and separate soluble
metals and elements found primarily in mining ores and concentrates, industrial
effluents, hazardous wastes, complex metals sources and other aqueous solutions.
Certain metal ores and concentrates may require MR3 to pretreat and leach
the specific metals in the ore, and create a pregnant liquor base for further
extraction and purification. MR3 may provide its custom solutions utilizing its
own unique media and resin applications or in concert with third party strategic
partners to provide a complete turnkey solution from mechanical pretreatment
(such as grinding), chemical treatment (such as leaching) through final metals
concentration and collection. MR3 approaches each problem or opportunity with a
custom driven solution based on MR3's technical evaluation of each unique
situation and the characteristics of the particular metal laden application.
MR3 Systems plans to either license its technology for use in mining,
industry and environmental remediation, directly implement the technology in
project specific applications, or joint venture with strategic partners to
exploit the opportunity. MR3's technology has many applications in numerous
vertical markets including, but not limited to: (i) the recovery of precious
metals from ore and concentrates; (ii) the processing of industrial wastes into
purified metals and specialty chemical products; and (iii) the environmental
remediation of hazardous metals from contaminated sites including nuclear
related sites. The metals and specialty chemical products, if any, produced by
the Company will likely be offered for sale to metals and chemical commodities
brokers, refiners, and other end-users, where applicable. The Company intends to
charge contract fees, where appropriate, for various waste removal and
remediation services related to its proprietary technology.
- 2 -
In May of 2004, the Company entered into an agreement with Fluor Hanford
(see Exhibit 10.1) and the United States Department of Energy to provide a metal
recovery system for the removal of toxic chromium VI from the groundwater at
Hanford Nuclear Reservation in south-central Washington State. In coordination
with Fluor Hanford, MR3 initiated the treatability testing for the targeted
hexavalent chromium metal in July 2004. In September 2004, MR3 and Fluor Hanford
completed its first media generation cycle as specified in the agreement, in
which extracted chromium VI was stripped from the MR3 processing system, reduced
to chromium III, and removed for permanent disposal. During the fourth quarter
2004, the Company completed all of its primary obligations under the agreement
and successfully transferred operations of the MR3 system to Fluor Hanford
personnel.
The Company also fulfilled certain documentary (manuals, specifications,
drawings, etc.) and training obligations for Fluor Hanford, and initiated
technical support activities. The Company recognized $380,000 in revenue in
fourth quarter 2004 as a consequence of meeting its obligations under the
agreement. With the successful implementation of the Fluor Hanford remediation
project, management is developing a strategy to implement similar MR3 turnkey
systems for various public and private remediation projects in the United
States. At present, the Company has no other such remediation project underway.
For the foreseeable future, the Company's strategy will be to focus on
precious metals extraction, specialty chemical production and environmental
remediation applications for the MR3 technology. Management expects to license
other possible applications to qualified licensees on a territorial,
field-of-use basis with the goal of accelerating the global introduction of the
technology. Management further intends to enter into joint venture opportunities
with domestic and international entities whereby the Company will process
hazardous wastes and mining materials, collect the resultant products, arrange
for product sales to third party commodity brokers and share the proceeds or a
portion of the manufactured products (e.g. gold, silver platinum) under a
negotiated sharing agreement. Management is currently in negotiations with
several parties for licensing or other contractual adoption of its MR3
technology. The Company is in the process of taking source samples from the
prospect sites to determine the validity and potential of the designated
applications.
In August 2004, the Company entered into an agreement (see Exhibit 10.3)
with Caddell & Associates of Denver, Colorado ("Caddell"), to jointly provide
combined turnkey processing systems to certain MR3 clients for the extraction
and separation of precious and base metals from their mineral deposits. Under
the agreement, MR3 secured exclusive rights to commercialize Caddell's Halogen
Vapor Leaching System (HVLS) technology. This technology is designed to recover
precious metals from alluvial ore bodies, tailings, clay deposits, and various
refractory minerals found in the Unconventional Mining and Ore (UMO) vertical
market. Source materials can be fed continuously into the HVLS tubular reactor
geometry at rates from 20 to 200 tons per day.
During the fourth quarter 2004, Caddell & Associates undertook, for the
partnership, the construction of a 1-5 kg batch HVLS for benchmarking, testing
of ores, and process development. The combination of the HVLS and MR3's core
ion-exchange technology is expected to be a cost effective, robust, automated
processing system for implementation with prospective MR3 clients in several
markets, specifically in the aforementioned UMO, the Private Contract
Environmental Remediation (PCER), and Oil Brines and Geothermal Fluids (OBGF)
vertical markets. Both MR3 and Caddell intend to continue the process
development and scale-up of the HVLS, with the anticipation of constructing and
testing a 1-2 tons per day pilot unit at MR3's Englewood, Colorado laboratory in
the third quarter 2005. Management anticipates that it will be obligated to
provide funds on a shared investment basis for such construction.
- 3 -
During the third and fourth quarters 2004, the Company entered into
various discussions with independent mining contractors in Nevada, Arizona,
Idaho, and Montana for the processing of their mineral deposits. Management
projects that its first turnkey processing system will be implemented during the
third and fourth quarters 2005 in Nevada with Franklin Lake Resources, Inc.
("FLR"), a public Nevada corporation, for the recovery of precious metals from
clay deposits.
In September 2004, the Company entered into an exclusive agreement (see
Exhibit 10.4) with FLR for the processing of their mineral deposits locating in
a volcanic lakebed in Death Valley Junction, California. The parties are moving
forward to establish project financing for the construction of a 100 - 250
tons-per-day processing facility to be located at Franklin Lake Resources' site
at Amargosa, Nevada. The processing facility is projected to consist of three
unit operations: i) concentration of the head ore to a higher grade; ii) HVLS to
extract precious metals into saturated liquor; and iii) separation of the
precious metals with MR3's Ion-Exchange system. During the fourth quarter 2004,
MR3 initiated the evaluation of pre-treatment technologies for the grinding and
leaching of FLR ores. Management anticipates the design and construction of the
Amargosa facility to start in the fourth quarter 2005, provided that sufficient
investment capital can be raised in a timely manner. Management can provide no
guarantees as to the success of such investment capital efforts.
In November 2004, the Company entered into a Strategic Alliance and
Project Venture Agreement (see Exhibit 10.6) with The Purolite Company
("Purolite"). The agreement provides for the formation of an exclusive venture
and a general collaborative framework for mutual research and development of
novel resins and separation processes, as well as marketing of any turnkey
solutions based on such developments. The first two specialized resins to be
developed under this agreement include resins for selenium and perchlorate
removal. Management views the partnership with Purolite as a significant
strategic step for MR3 in developing and manufacturing the next generation of
resin and media for the extraction of metals from both the mining and
remediation market sectors. To date, no resins have been developed for
commercial use under the strategic alliance.
The research, development, bench-scale testing, pilot scale validation and
commercialization of the unique products and processing solutions will be
performed jointly by the Company and Purolite, with the ownership of the
resulting intellectual property to be shared equally by the parties. The
agreement positions Purolite to manufacture and market the developed products
worldwide, with MR3 supporting the turnkey applications in the various market
sectors. The partnership, which provides MR3 with sharing of royalties from the
sale of the developed products, is designed to rapidly develop, test,
manufacture, and implement turnkey solutions for the identified markets
The Company has established strategic relationships with mining and
engineering consultancy firms, such as Arrakis, Inc., a mining-related
consulting, system design, and fabrication company, and SRK Engineering, to
provide engineering, cost modeling, project due diligence and mining related
consulting support to the Company's service capabilities. In association with
these firms, and other firms with related expertise, the Company intends to
offer fee based services to its clients including: (i) materials assessment and
pre-engineering services; (ii) plant engineering and construction services;
(iii) fabrication, delivery and installation of fully configured process
components including the necessary proprietary automation systems and medias;
(iv) plant monitoring, operational and maintenance services; and (v) special
selective media preparation and production.
From time to time management has retained SRK engineering, an independent,
international consultancy group offering services mainly from earth and water
resource industries, in support of the Company's technical requirements. For
mining related projects, SRK offers services from exploration through
feasibility, mine planning, and production to mine closure. SRK, which began as
Steffen, Robertson & Kirsten in 1974, employs more than 500 professionals
internationally and employs leading specialists in each field of science and
engineering. SRK was retained to review MR3's basic design criteria for its
metals extraction process and provide guidance on improving overall engineering
efficiency for commercial level operations. SRK will also provide detailed
design and engineering support to create definitive operating and cost estimates
for project related plant construction and anticipated performance estimates.
SRK may also provide project management support in instances where MR3 assumes
the leading role in management of a project.
- 4 -
On November 1, 2003, the Company opened a testing laboratory and customer
support facility in Beverly, Massachusetts to simulate actual field applications
on a pilot scale basis, test samples from prospective client projects, provide
the basis for determining practicable solutions for designated applications,
perform quality control, and enable further research and development of the MR3
technology. As a cost cutting measure related to complimentary testing and
development expenses, the Company closed the Beverly technical support center
and relocated its laboratory to Englewood, Colorado in fourth quarter 2004 under
a sublease agreement with Arrakis, Inc.
In October 2003, management arranged a $1,250,000 credit facility (see
Exhibit 10.5) which will allow the Company to further its ability to deploy the
first in a series of plants to utilize its metals separation and purification
technology. The Company received the first distribution of $250,000 in loan
proceeds on October 14, 2003, the second distribution of $250,000 on December
17, 2003 and the third distribution of $250,000 on February 2, 2004. The Company
is obligated to submit requests for funds against the credit facility in
connection with its financing needs related to plant development and
construction. The credit facility also has an equity conversion feature allowing
the lender, High Stakes Capital--a private equity and financing group--to
convert the loan into percentage ownership in the plant.
MR3 Technology
MR3's primary technology combines high-affinity metal capture, metal
refining, waste decontamination, and water purification into a single integrated
system. This technology is used to separate and recover valuable metals from
industrial wastes and other complex metals sources. The MR3 System is a
selective metals removal and reclamation process that extracts individual metals
and separates them into high purity fractions using a low-temperature,
cost-effective, passive process. At present, the MR3 technology is not protected
by any Company owned patents. The Company attempts to protect its proprietary
technology through a combination of trade secrets, proprietary know-how,
non-disclosure agreements, employment and consulting agreements, and other
common law remedies.
MR3's manufactured end products include, but are not limited to 42 pure
industrial metals such as zinc, copper, chromium, cobalt, nickel and precious
metals such as gold, silver and platinum, which can be produced in either an
electro-winned solid bar or strip form, or as value added metal products, e.g.
sulfates, chlorides and oxides. Specialty chemical products, such as metal
sulfates, can be produced in solid or liquid form. Targeted metals can be
extracted and selectively recovered from electric arc furnace ("EAF") dust,
nuclear wastes, semiconductor manufacturing and electroplating effluents,
mercury and metal hydroxide sludge, precious metals mining tailings, ores,
contaminated soils and sediments, and other industrial waste streams containing
high concentrations of valuable metals. The Company anticipates acquiring the
source materials at low cost to the Company or at minimal expense in connection
with an end product revenue sharing agreement with the source provider. In
certain cases the Company may be paid service fees to process hazardous source
materials at MR3 related facilities.
- 5 -
The MR3 System is designed to generate little or no waste of its own, and
thus is environmentally beneficial and management believes it is also
economically sound. Low capital, operational, and maintenance costs, in
conjunction with innovative engineering, should generate net revenues from
applications previously considered cost-prohibitive.
General Overview
Metal contamination in harbors, lakes and oceans; sewage sludge; mining
tailings, polluted soils, acid mine water, industrial waste waters; photographic
rinse waters, and other sources represent significant environmental problems.
However, these types of pollutants can contain commercially attractive
quantities of concentrated valuable metals.
At the other end of the concentration spectrum, very minute amounts of
radionuclide metals, e.g., cesium-137 (Cs-137) and strontium-90 (Sr-90), the
by-products of nuclear electrical power and military weapon production, present
an even greater health hazard to the world's human and animal populations due to
their extreme toxicity even in minute amounts. These highly radioactive wastes
are stored in very dilute solution in large volumes of water at various sites
throughout the world.
The MR3 technology can remove radionuclides over a broad range of
concentration levels, even those that are dispersed as much as parts per
billion. The MR3 technology consists of a continuous operation in which several
process steps, i.e., selective capture, purification, and concentration of
individual metals removed from industrial, radioactive or mining wastes, have
been integrated into one automated modular treatment plant.
A processing facility that employs MR3's innovative technology uses MR3
ion-exchange media of unique affinity and selectivity to economically remove and
simultaneously purify almost any metal from aqueous solutions. It operates
efficiently with metal concentrations of over 20,000 parts per million (ppm) to
less than one part per billion (ppb). Under laboratory conditions, water has
been successfully cleaned of radionuclides (e.g., Sr-90 and Cs-137) to
undetectable levels, even with starting concentrations as low as parts per
trillion.
In the MR3 process, hazardous metals in soils, tailings, sediments, sludge
or ashes are brought into solution and moved from their solid state into an
aqueous state in the form of slurry. Solid materials are then separated from the
metal-laden liquid as the solution passes through metal recovery modules where
each module selectively removes a target metal from the mixed metal stream.
Each separated metal is then processed individually into a non-waste,
metal product (e.g., ferric sulfate [Fe2(SO4)3] for drinking water purification,
zinc sulfate [ZnSO4.H20] corrosion inhibitor and for fertilizers, and copper
sulfate [CuSO4.H20] for algaecide or animal feeds. In instances where the
quantity of metal may be of no commercial interest (e.g., metals from most
contaminated soils), all toxic metals may be simultaneously removed from the
water as a group by a single MR3 module.
Where a metal-contaminated water is the starting material and thus already
in an aqueous state, the water with its metal load enters the MR3 process, and
the cleaned effluent water can be introduced directly into the environment or
used for other purposes. The water used internally as a metal carrier in the MR3
process is reused repeatedly. The repeated re-use of process water and the fact
that the process generates little or no waste of its own contributes to the
MR3's technology being environmentally beneficial and economically sound.
- 6 -
Development of MR3 Media
To date, approximately twenty-four (24) MR3 ion-exchange media have been
developed, synthesized and tested. They have all proven to display excellent
capacities for metal capture, each being specific to an individual metal or
group of metals. These MR3 media have high degrees of specificity and affinity
specifically for: aluminum, arsenic, cadmium, cesium, chromium, cobalt, copper,
gold, iron, lead, magnesium, manganese, mercury, molybdenum, nickel, plutonium,
selenium, silver, strontium, thorium, titanium, uranium, vanadium, and zinc.
In management's informed opinion, such media are non-toxic and are far
more efficient in capturing metals from aqueous solutions than are the
conventional and commonly used ion-exchange materials. Moreover, metal capture
from MR3 media is highly selective, which represents a distinct advantage over
conventional ion-exchange resins.
During the development of the MR3 media, the following required features
and characteristics have been established for optimal performance:
--------------------------------------------------------------------------------
MR3 Media - Features and Characteristics
--------------------------------------------------------------------------------
Affinity: Very high capture efficiency in solutions containing low
metal concentration.
--------------------------------------------------------------------------------
Specificity and The ability to capture specific metals while ignoring others
Selectivity: present in the same medium.
--------------------------------------------------------------------------------
Performance: High flow rates with freedom from swelling, shrinking, and
compaction due to hydrostatic or osmotic pressure.
--------------------------------------------------------------------------------
Stability: Strong resistance to harsh chemical and physical treatment.
--------------------------------------------------------------------------------
Regenerability: Easy displacement of the captured metals from charged media,
resulting in metal concentration, high-volume reduction
factors, and re-use of free media.
--------------------------------------------------------------------------------
Capacity: The capability to capture substantial amounts of metal per
unit of media while still maintaining high capture
efficiency.
--------------------------------------------------------------------------------
Toxicity: Freedom from toxicity as there is no addition of trace toxic
components to the treated solution.
--------------------------------------------------------------------------------
Cost Efficiency: Production costs minimized by media
regenerability.
--------------------------------------------------------------------------------
In instances where it is desirable to remove more than one metal, more
than one metal-specific column may be used in a series. With some media, it is
possible to broaden their specificities by chemical modification or special
conditioning. As a result, a number of different metals can be removed from
solutions simultaneously. The MR3 System can also be used in conjunction with
conventional ion-exchange materials when the simultaneous use of both high and
low capture efficiencies can produce the intended results.
The design features and characteristics originally sought have been
attained with respect to a relatively large selection of media useful for the
separation of a broad spectrum of metals from solution. The requirements
originally set forth for affinity, specificity, selectivity, performance,
stability, regenerability, capacity, toxicity and cost-efficiency have in all
cases been met successfully and in many instances have been surpassed.
- 7 -
Potential Applications
The MR3 technology can be used to extract and recover metals from a vast
range of sources, originating as both solid and aqueous states. Specific
examples of applications include:
o Water purification, metal reclamation, and refining from metal-laden
industrial water or sludge waste.
o Water purification and metal reclamation from metal-laden acid mine water.
o Metal reclamation (including precious metals) from mining tailings and
ore.
o Cleaning sewage sludge and sewage sludge ash.
o Cleaning fly ash and bottom ash.
o Cleaning contaminated soils, including silt and clay fractions.
o Cleaning ground water of heavy metal contamination, including chromate
(Cr-6).
o Cleaning harbor and lake sediments.
o Recovery of metals and water from plating rinse waters.
o Recovery of metals from hydroxide sludge from the metal finishing
industry.
o High-affinity capture of low concentrations of radionuclides (e.g.,
Cs-137,
o Co-60, Sr-90, Pu) from water.
o Recovery and purification of precious metals from ore and placer.
o Recovery of individual metals from process residuals (e.g., flue dusts).
o Recovery of individual metals from bag-house contents (e.g., electric arc
furnace dust).
o Recovery of individual metals from slags and cinder.
o Selective recovery of the oxidized iron ion, leaving the non-oxidized ion,
from pickling baths used in the auto industry.
o Selective removal of iron from electro-galvanizing baths to greatly
prolong bath life.
o Removal of extremely low concentrations of industrial metals from sewage
plant outflows.
o Removal and recovery of metals from spent catalysts.
o Removal of metals from wastewater of electronics industry (circuit boards,
thick films, thin films, wafers).
o Recovery of precious metals from computer junk.
o Metal decontamination of blasting sand used in paint removal from ships,
etc., and recycling of the sand.
o Recovery of selenium from agricultural irrigation waters, from water used
to wash crude oil, and from waste water from the Xerox production process;
and
o Selective removal of contaminating iron from any aqueous solution for the
prevention of microbial growth.
Technical Specifications
The MR3 technology functions over a pH range from 1 to 14 and a
temperature range from 5(degree) C to 95(degree) C. It yields a purity exceeding
99% of the target ion, such that the output is immediately salable with no
further processing. Metal products collected directly from the module typically
achieve up to 99.9% purity. The purity level depends on the quality of the agent
that is used to recover the collected metal. If the separation process is
followed by an electrowinning treatment, purities of 99.99% or greater are
possible
It works over a concentration range from 1 molar to parts-per-trillion,
yielding removal ratios of 40,000 to 10 million, even in the presence of high
concentrations of competing ions. The media capacity is on the order of 14 moles
(the mass in grams of this amount of a substance, numerically equal to the
molecular weight of the substance) per cubic foot.
- 8 -
Related Markets
The Company currently utilizes its technology to operate primarily as a
high technology metals extraction and recovery company, producer of specialty
chemical products and provider of environmental remediation services. The
Company intends to commercially manufacture certain precious metals, such as
gold, silver and platinum, and various chemical products, such as potassium
dichromate, copper sulfate and zinc sulfate, for sale to third parties. The
Company considers the primary markets for its products to be specialty and
precious metal commodities brokers located domestically and internationally
According to the Mine Safety and Health Association ("MSHA"), currently
there are over one hundred active gold and other precious metals mine locations
in the United States. The USGS reports that in 2002 gold was produced at about
52 major lode mines, a dozen or more larger placer (a glacial or alluvial
deposit of sand or gravel containing eroded particles of valuable materials)
mines and numerous smaller placer mines (mostly in Alaska and Western States).
In addition, there are thousands of "inactive" or "shutdown" precious metals
mine sites and other locations where conventional mining would be impractical or
cost inefficient. Management believes that there will be more than adequate
source materials well into the future for its projected precious metals mining
and processing activities.
Management further believes that there are numerous hazardous chemical,
waste dump and other environmentally challenged sites around the world that
would provide sufficient source materials for the production of specialty
chemicals, as well as numerous sources for the purchase of said resultant
specialty chemicals.
Current Operations
MR3 Processing Facilities
With the exception of the recently completed Fluor Hanford project, the
Company has not deployed any new fully operational metals related processing
systems in calendar year 2005.
The MR3 process consists of a continuous operation in which various
steps--selective capture, purification and concentration--have been integrated
into one automated modular treatment facility. Plants utilizing the MR3
processing technology can be constructed proportional to the requirements of the
designated application. MR3 plants can range from bench-scale pilot systems,
room size system implementations for small to midsize applications, and full
building size facilities for large scale extraction, production or reclamation
operations. The MR3 technology is modular in design and can be scaled
accordingly to meet the size and scope of the particular application. The nature
of MR3's modular plant construction is such that it facilitates disassembly and
transportation to other locations once the requirements of an application has
been satisfied. The Company intends to initially focus on applications where the
targeted metals source material is already in a liquid or slurry form or
circumstances where the client assumes that responsibility. Consequently,
projected expenses related to handling, pretreatment, separation of solids, and
converting the raw materials into a saturated solution form should be
dramatically reduced or eliminated.
MR3 processing plants can be fabricated for practical applications for as
low as several hundred thousand or several million dollars dependent on the
scope and nature (e.g. extraction of precious metals, chemical production or
environmental remediation) of the project under consideration. A MR3 processing
plant consists of a combination of certain standard laboratory equipment,
manufacturing hardware, and "unique" MR3 technology related modules and chemical
media including, but not limited to effluent treaters, filter and vacuum units,
crystallizers, extraction tanks, storage and product tanks, pH controllers,
computer equipment, pumps and motors, chemical reagents, and counter flow
fluidized-bed reactors. It is the "unique" media utilized in the disparate
applications that creates the designation of a unique module. The Company
intends to formulate its application-based media in-house and then outsource the
manufacture of the media in large volume on a subcontract basis. Management
estimates that it would take three to six months to fabricate and equip such
processing plants dependent on the size, scope and nature of the designated
application.
- 9 -
Linsa Joint Venture
Effective April 10, 2002, the Company entered into a Joint Venture and
Technology Transfer Agreement with Linsa Associates Ltd., a British Virgin
Islands Company ("Linsa"), to commercialize the MR3 Technology in Canada,
Australia, Asia and the Middle Eastern Territories. Both parties agreed to share
all the distributable profits resulting from the use of the MR3 Technology to
which they are collectively entitled on a 50%-50% basis. In February 2004,
management negotiated an amendment with Linsa to reduce the number of exclusive
jurisdictions to Taiwan and Egypt, including affiliates or subsidiaries
operating outside of the restricted jurisdictions subject to certain conditions.
In October 2004, the Company filed for declaratory relief (see MR3 Current
Report on Form 8-K filed with the Commission on October 18, 2004) with respect
to the agreement. Linsa concurrently filed suit against the Company in the
jurisdiction of Delaware. The parties have agreed to stay further prosecution on
this legal matter pending voluntary non-binding mediation
Competition
There are a substantial number of competitors in both the precious metal
mining and chemical production industries, a vast majority of which are larger
and better capitalized than MR3. The Company does not compete with conventional
mining operations for the exploration and acquisition of mining properties
producing or capable of producing gold and other precious metals. Due to
intensified research in the field of industrial chromatography in the last
several years, a number of companies are trying commercialize metals recovery
technologies similar to that of MR3. There can be no assurance that other
persons or entities will not succeed in developing technologies that are more
effective than those which the Company is developing or which would render the
Company's technology noncompetitive.
MR3's principal technology approach is based on applications of its
chromatographic media to industrial scale treatments of concentrated aqueous
solutions for metals separation and recovery. The Company expects that it will
achieve a competitive advantage with the aforementioned competitors through the
cost effective utilization of its uniquely formulated metals-extraction media at
commercial production levels, as well as its exclusive partnerships with notable
third party providers of complimentary technologies.
Management believes that there are currently more than sufficient sources
of the raw waste materials that comprise the base components that make up the
core of the Company's targeted manufactured products. Management further
believes that such raw waste materials can be reasonably obtained at little to
minimal cost and without substantive mining operations or extensive mechanical
collection activities. The sale of precious metals and specialty chemical
products in the commercial marketplace are affected by numerous factors, many of
which are beyond the control of the Company. Such factors include, but are not
limited to the price of the commodity in the marketplace, imports of the
commodity from international sources and the availability of adequate refining
and processing facilities to produce the product. Sales prices for such
commodities are determined by world market forces and may be subject to
significant fluctuations. The Company has not been materially affected by such
circumstances in the past, but believes that price fluctuations, especially in
the precious metals market, could impact revenues in the future. Management
believes that there will be sufficient demand for its manufactured products in
the future.
- 10 -
Intellectual Property
The Company attempts to protect its proprietary technology through a
combination of trade secrets, proprietary know-how, non-disclosure agreements,
employment and consulting agreements, and common law remedies. Such agreements
generally provide that all confidential information developed or made known to
the individual (or entity) by the Company during the course of the individual's
relationship with the Company is not to be disclosed to third parties, except in
specific circumstances, and that all inventions conceived by the individual (or
entity) in the course of rendering services to the Company shall be the
Company's exclusive property. There can be no assurance that confidentiality or
proprietary information agreements will not be breached, that remedies for any
breach would be adequate, or that the Company's trade secrets will not otherwise
become known to, or independently developed, by competitors.
Research and Development
Research and development expenditures represent internal costs incurred in
connection with the Company's testing, documenting, enhancement and optimization
of its hazardous waste and precious metals recovery processes. The primary
emphasis of the Company's research and development efforts is to tailor the
existing MR3 technology to meet the commercial level processing requirements of
the unique project source materials. Research and development costs are expensed
as incurred and the majority of expenditures in 2004 and 2003 are directly
related to personnel and consulting costs. The Company does not presently
license any third party technology in its operations. Aggregate development
expenses, inclusive of research and development, for 2004 and 2003 were
approximately $474,000 and $545,000, respectively.
In consideration of its planned activities, the Company expects that its
research and development expenditures will materially increase in 2005 and
beyond. The majority of research and development work will be undertaken at its
technical support facility located in Englewood, Colorado and at prospective
operating locations.
Government Regulation
The Company's proposed business activities and plant operations are
subject to various federal, state, and local laws and regulations in the United
States and other prospective jurisdictions in which the Company may operate. The
regulating agencies may include, but are not limited to such agencies as the
Environmental Protection Agency ("EPA"), the Mine Safety and Health
Administration ("MHSA"), the Bureau of Land Management ("BLM") the Occupational
Health and Safety Administration ("OSHA") which normally govern mining,
production, exports, taxes, labor standards, occupational health, waste
disposal, protection of the environment, mine safety, hazardous substances and
other matters. Given its proposed environmentally favorable operating
methodology, the Company believes that it will be compliant in all material
respects with applicable mining, health, safety and environmental statutes and
regulations in effect within the jurisdictions it intends to operate. The
Company further intends to make adequate provision for disposal of mine waste
and mill tailings at all of its prospective operating facilities in a manner
that complies with current federal and state environmental requirements.
The Company has obtained various permits and authorizations in the past
and will be required to do so in the future with respect to its planned
activities and locations where the Company intends to operate. All on-site
mining permits will be obtained from the various state(s) controlled Department
of Mines. In May 2003, the Company received an Exploration Permit for the Empire
Gold mine site and subsequently conducted preliminary mining activities, but has
no current plans to conduct further mining related operations there at this
time. The permits for operating the Company's chemical-based processing facility
at its targeted locations are expected to be standard industrial-building
equipment installation and operating permits. The Company believes that it will
be able to reasonably obtain applicable permits, when necessary, to conduct its
business in a routine manner. Management has further determined that the
acquisition and maintenance of such permits or authorizations will also not have
a material adverse on the Company's results of operations and financial
condition.
- 11 -
Compliance with Environmental Laws
The Company's metals extraction and recovery projects are subject to
various federal agencies (i.e., Environmental Protection Agency, Nuclear
Regulatory Commission), state and local laws and regulations governing
protection of the environment. These laws are continually changing and, as a
general matter, are becoming more restrictive. The Company's policy is to
conduct its business in a way that safeguards public health and the environment.
Management believes that its future operations will readily be conducted in
material compliance with environmental laws and regulations applicable to its
mechanical and chemical processing technology.
Changes to current local, state or federal laws and regulations in the
jurisdictions where the Company operates, or may operate in the future, could
require additional capital expenditures and increased operating and/or
reclamation costs. Although the Company is unable to predict what additional
legislation, if any, might be proposed or enacted, additional regulatory
requirements could impact the economics of its projects. The Company reasonably
estimates, however, that it will not incur material expenditures for
environmental regulation compliance and education during fiscal year 2005 or for
the foreseeable future.
The mining and chemical waste processing industry, including the
prospective business of Company, must follow local, provincial and federal
regulations imposed in each international jurisdiction where it intends to
operate to maintain environmental quality. As a result, the Company will likely
be subject to certain environmental regulations in such jurisdictions with
regard to prospective joint venture projects with Linsa Associates and other
potential international partners.
Prior to 2003, the Company recorded accruals for the estimated future
costs associated with certain environmental remediation activities related to
the overdue disposal of hazardous materials at the Butte, Montana facility.
Substantially all such costs relate to divested operations and to facilities or
locations that are no longer in operation. These costs were estimated at
approximately $38,250 and were recorded in the Company's financial statements
for the period ended December 31, 2004. In January 2004, the Company received
notification of settlement with the Montana Department of Environmental Quality
("MDEQ")for the sum of $38,502 payable in six monthly installments commencing on
January 30, 2004. MR3 received notification on June 7, 2004 from the MDEQ that
the matter was considered closed.
Patents, Trademarks and Other Licenses
The Company claims no patents or trademarks. The Company has license
agreements with Caddell Associates and Purolite, the terms of which are more
fully disclosed in the Principal Products and Services section of this annual
report.
Employees
As of the date hereof, MR3 employs five full-time employees, two of which
are executive officers, two in administrative matters and one in senior
technical management. The Company hires independent contractors and outside
service providers on an as-needed basis. The Company has no collective
bargaining agreements or other such labor contracts with its employees and
believes that its employee relationships are satisfactory. In the long-term,
management will likely hire additional staff to meet its anticipated growth rate
requirements. Management does not anticipate encountering problems in its
ability to hire individuals with the requisite employee skill set.
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Financial and Public Relations
In September 2003, the Company retained The Wells Group, Inc., a
Scottsdale, Arizona based investor relations consulting firm and unrelated
party, to implement a proactive national investor relations campaign. The Wells
Group participated in developing the Company's perception and positioning
activities, arrange and coordinate presentations and serve as the primary
information resource on behalf of the Company to the professional investment
community. The Wells Group also provided media relation activities and
comprehensive information fulfillment services for all inquiries by shareholders
or prospective investors. The term of the agreement was for twelve months and
either party could terminate the agreement with thirty days notice after the
sixth month. In compensation for its services, The Wells Group received 250,000
restricted shares of the Company's common stock for each three-month period The
Wells Group provided its services under the agreement. In April 2004, the
parties extended the agreement through December 31, 2004 in consideration of the
issuance of 500,000 common shares by MR3 to The Wells Group. The Company may
elect to retain such services in 2005, but has not done so as of this date.
Risk Factors Relating to the Company's Business
Management cannot be certain that the Company's acquisition and processing
activities will be commercially successful.
As of this date, the Company has no facilities in operation that produce
precious metals or other saleable chemical products in commercial quantities.
Substantial expenditures are required to build and develop MR3 processing
facilities capable of generating such levels of precious metals and specialty
chemical products. There can be no assurance that any probable precious metal
reserves predicted in the Company's prospective projects will meet expectations
or be present in sufficient quantities to justify commercial operations. In
addition, there can be no assurance that precious metals recovery in small-scale
laboratory tests or pilot plant conditions will be duplicated in commercial
production levels under actual on-site conditions. In addition, there are no
assurances that any additional funds required by the Company for multiple
facility developments can be obtained in a timely manner. Should these events
materialize, they could have a materially adverse impact on the Company's
business operations and negatively affect future potential revenues and/or
profitability.
The Company's technology has only been employed at a high-rate commercial
processing level for limited periods of time in several applications. As such,
the Company does not have a history of cost effective commercial level
processing with respect to its current business strategy over a long period or
other extended basis. Consequently, the Company could experience unanticipated
expenses resulting from unknown factors occurring during comprehensive
operations over a full year basis. These unanticipated expenses could have an
adverse affect on the Company's profitability from planned operations.
The price of precious metals is subject to fluctuations, which could
adversely affect the Company's quarterly results of operations and cash flow.
The Corporation's potential future revenues are expected to be materially
derived from the generation and sale of precious metals, such as gold, and
specialty chemical products from its processing facilities. The price of
precious metals has fluctuated widely over time, and is affected by numerous
factors beyond the control of the Company, including, but not limited to,
international, economic and political trends, expectations of inflation,
currency exchange fluctuations, central bank activities, interest rates, global
or regional consumption patterns and speculative activities. The effect of these
factors on the price of precious metals, and therefore the economic performance
of the Company in any fiscal quarter, cannot accurately be predicted. A material
decline in the price of certain precious metals could adversely affect the
Corporation's potential revenues and profits.
- 13 -
The Company's growth potential could be impacted by its failure to
adequately protect its intellectual property.
The Company's proprietary MR3 technology and related processes are not
currently protected by patents. Management has, however, recently initiated
action to explore the feasibility of doing so in the future. In the interim,
there can be no assurance that the Company will be able to protect its
technology from unauthorized use by competitors or other third parties. The
Company relies primarily on a combination of copyright law, industrial design
legislation, trade secret security measures and nondisclosure agreements with
employees and third parties to protect its intellectual property and proprietary
technology. There can be no assurance of effective protection of the Company's
intellectual property and there can be no assurance that others will not
independently develop a similar technology or obtain access to the Company's
technology. Such failure to protect its proprietary technology and intellectual
property could negatively impact the Company somewhat by making it easier for
its competitors to duplicate the Company's service offerings and more actively
compete with the Company for future business opportunities.
Loss of key personnel may negatively affect the Company
The business of the Company will be dependent upon the active
participation of its officers, directors and other key personnel. To the extent
any of them becomes unavailable for any reason, it could have a serious adverse
impact on the Company. Any officer or employee of the Company can terminate his
or her relationship with the Company at any time with sufficient notice. The
Company's future success will also depend on its ability to attract, train,
retain and motivate highly qualified engineering, marketing, sales and
management personnel. There can be no assurance that the Company will be able to
attract and retain such key personnel.
Environmental issues and concerns may negatively affect the Company's
ability to perform
The Company will be subject to stringent standards designed to reduce air,
water and soil emissions through state and local laws and regulations relating
to the protection of human health and the environment. Management believes that
the Company's proposed processing facilities will reasonably meet standards
imposed by various jurisdictions, but cannot assure that such standards will not
become more exacting or draconian over time.
Short Operating History Could Lead to a Lack of Profitability and Lack of
Business Growth
The Company has a short operating history with respect to the processing
of precious metals and specialty chemical products. The Company has generated
only limited revenues to date and has incurred operating losses since its
inception. Its likelihood of success must be considered in light of the many
costs, expenses, problems, difficulties and delays frequently associated with
new enterprises. Also, there is no assurance that the Company's business
ventures will be successful or that it will be able to attract and retain
sufficient customers and clients to attain its goals. The Company anticipates
that its operating expenses will increase substantially as its business expands
and there will be a greater need to generate significantly more revenues to
achieve profitability.
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Difficulties in Future Funding Could Hinder Growth and Development of the
Company's Business
In the past, the Company has financed much of its operations from
borrowing and the sale of its securities pursuant to private placements,
convertible debt instruments, and other warrant agreements. It is likely that
the Company will be required to seek additional external funding sources to
satisfy the Company's future working capital demands if its operations do not
produce the anticipated level of profitability. There can be no assurance that
outside funding will be available to the Company at the time and in the amount
to satisfy the Company's needs, or, that if such funds are available, they will
be available on terms favorable to the Company. If the Company issues additional
shares of common stock, current shareholders may experience immediate and
substantial dilution in their ownership of Company shares. In the event the
Company issues securities or instruments other than common stock, it may be
required to issue such instruments with greater rights than that currently
possessed by holders of the Company's common stock.
Concentration of Share Ownership Gives Control of the Company to a Small
Group
The Company's directors, executive officers and other principal
shareholders own approximately 41.40% of the Company's outstanding common stock
as of March 31, 2005. As a result, these persons possess significant influence
over the Company on matters including the election of directors. This
concentration of share ownership may: (i) delay or prevent a change in control
of the Company; (ii) impede a merger, consolidation, takeover, or other business
involving the Company; or (iii) discourage a potential acquirer from making a
tender offer or otherwise attempting to obtain control of the Company.
Limited Public Market for the Common Stock
The Company's common stock is presently quoted on the OTC Bulletin Board
and its securities are traded by broker-dealers. Because shares of the Company's
common stock are not currently quoted on a recognized national securities
exchange in the United States, the shares are subject to rules adopted by the
Securities and Exchange Commission regulating broker-dealer practices in
connection with transactions in "penny-stocks." Broker-dealers dealing in
penny-stocks are required to provide potential investors with a document
disclosing the risks of penny stocks. Moreover, broker-dealers are required to
determine whether an investment in a penny stock is a suitable investment for a
prospective investor. These requirements may reduce the potential market for the
Company's common stock by reducing the number of potential investors. This may
make it more difficult for investors in the Company's common stock to sell
shares to third parties or to otherwise dispose of them. Accordingly, there can
be no assurance that an active trading market in the Company's shares will be
sustained. Additional disclosure on penny-stocks and related restrictions is
provided in Item 5. Market For Registrant's Common equity and Related
Stockholder Matters.
The Company's limited financial condition could hinder its efforts to
raise new capital.
The Company has generated only limited revenues to date and has incurred
operating losses since its inception. The Company has not yet established a
source of revenues sufficient to cover its operating costs. For the years ended
December 31, 2004 and 2003, the Company had net losses of $2,359,527 and
$1,648,721, respectively. At fiscal year end 2004, the Company's liabilities
exceeded its assets. There can be no assurance that the Company will generate
revenues in a timely manner in the future, that it will not continue to have
losses, or that it will be able to maintain funding such losses if they
continue. In the past, the Company has successfully raised funds to cover its
expenses through the sale of its securities utilizing various financial
instruments such as private placements, convertible notes, and warrants
agreements despite its lack of profitability and weak financial condition. The
Company reasonably believes that it will be able to raise necessary working
capital in a timely manner to carry out its plan of operations for the
foreseeable future. Should the Company not be able to raise sufficient funds
through these means or through licensing sales, it could adversely impact its
ability to fund all critical operations and new business development activities
in accordance with its existing business strategy.
- 15 -
ITEM 2. PROPERTIES
The Company's leases 1,873 square feet of office space at 435 Brannan
Street, Suite #200, San Francisco, California for its executive offices. The
Company is committed under a recent extension to its operating lease for a
period of two years beginning October 1, 2004 and expiring September 30, 2006.
This lease requires monthly rental payments of approximately $2,950.
The Company leased 3,700 square feet of commercial office space within the
Cummings Center located in Beverly, Massachusetts for its testing laboratory,
research and development, and customer support requirements. In January 2005,
the Company elected to vacate the premises and relocated its testing and
development activities to 3040 South Vallejo Street, Englewood, Colorado, under
a sublease arrangement with an associate consultancy firm, Arrakis, Inc. MR3 is
committed under its sublease for a period of five years beginning March 15, 2005
and expiring on March 14, 2010. The sublease requires monthly rental payments of
approximately $2,570. The Company has accrued certain amounts in its financial
statements to account for any potential liability (difference in sublease
arrangements) that may arise out of the Company's action in vacating its
remaining lease obligations at the Beverly, Massachusetts facility.
Each property is leased from an unaffiliated party. The Company maintains
tenant fire and casualty insurance on its properties in an amount deemed
appropriate by the Company.
ITEM 3. LEGAL PROCEEDINGS
With the exception noted below, there are presently no material pending
legal proceedings to which the Company or any of its subsidiaries is a party or
to which any of its property is subject and, to the best of its knowledge, no
such actions against the Company are contemplated or threatened.
On October 18, 2004, MR3 Systems, Inc. ("MR3 or the Company") filed a
legal action MR3 Systems, Inc. v. Linsa Associates, Ltd., et. al. CGC-04-435558
in California Superior Court, in and for the City and County of San Francisco,
against Linsa, Ltd., et al. ("Linsa"), for breach of contract and declaratory
relief in connection with the Company's MR3 Technology Transfer Agreement
("Agreement") with Linsa. These claims arise out of Linsa's failure to use its
best efforts to commercialize the MR3 Technology, as required under the
Agreement, and to correct a default on monies owed to MR3 for services performed
under the Agreement. Concurrent with the Company's legal action, Linsa filed
suit on this dispute against MR3 in the jurisdiction of Delaware. The parties
have agreed to stay further prosecution on this legal matter pending voluntary
non-binding mediation
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the Company's security holders
during the fourth quarter of the fiscal year ended December 31, 2004.
Pursuant to written notice to shareholders of record as of July 22, 2004,
the Company held its Annual Meeting of shareholders on September 20, 2004 at the
Hyatt Regency, San Francisco, California. Four voting proposals were put forth
to shareholders at the annual meeting. Description and voting results of the
four proposals are more fully disclosed in the Company's quarterly report on
Form 10-QSB for the period ended September 30, 2004, filed with the Commission
on November 15, 2004.
- 16 -
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Effective March 23, 2004, the Company's common stock was quoted on the OTC
Bulletin Board under the symbol "MRMR." For a portion of first quarter 2004 and
for calendar year 2003, the Company's stock traded over-the-counter on the Pink
Sheets and was quoted through the National Quotation Bureau's Electronic
Quotation System, also under the symbol MRMR. Due to a delay in the timely
filing of its 2004 annual report on Form 10-KSB, the Company's common stock has
been quoted under the symbol "MRMRE" as of April 22, 2005.
The following table sets forth, for the periods indicated, the range of
quarterly high ask and low bid prices of the Company's common stock based on
intraday trading as derived through Prophet Financial Systems, Inc. for the past
two years and through the date set forth for the current year. The quotations
reflect inter-dealer prices, without retail mark-up, mark-down or commission and
may not represent actual transactions.
Year Quarter Ending High Bid Low Bid
---- -------------- -------- -------
2005 March 31, 2005 $ 0.19 $ 0.13
Through May 18, 2005 $ 0.16 $ 0.07
2004 March 31, 2004 $ 0.60 $ 0.24
June 30, 2004 $ 0.60 $ 0.26
September 30, 2004 $ 0.30 $ 0.15
December 31, 2004 $ 0.29 $ 0.16
2003 March 31, 2003 $ 0.26 $ 0.09
June 30, 2003 $ 0.28 $ 0.11
September 30, 2003 $ 0.33 $ 0.17
December 31, 2003 $ 0.50 $ 0.22
The ability of an individual shareholder to trade their shares in a
particular state may be subject to various rules and regulations of that state.
A number of states require that an issuer's securities be registered in their
state or appropriately exempted from registration before the securities are
permitted to trade in that state. Presently, the Company has no plans to
register its securities in any particular state. Further, most likely the
Company's shares will be subject to the provisions of Section 15(g) and Rule
15g-9 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
commonly referred to as the "penny stock" rule. Section 15(g) sets forth certain
requirements for transactions in penny stocks and Rule 15g-9(d)(1) incorporates
the definition of penny stock as that used in Rule 3a51-1 of the Exchange Act.
- 17 -
The Commission generally defines penny stock to be any equity security
that has a market price less than $5.00 per share, subject to certain
exceptions. Rule 3a51-1 provides that any equity security is considered to be a
penny stock unless that security is: registered and traded on a national
securities exchange meeting specified criteria set by the Commission; authorized
for quotation on The NASDAQ Stock Market; issued by a registered investment
company; excluded from the definition on the basis of price (at least $5.00 per
share) or the issuer's net tangible assets; or exempted from the definition by
the Commission. If the Company's shares are deemed to be a penny stock, trading
in the shares will be subject to additional sales practice requirements on
broker-dealers who sell penny stocks to persons other than established customers
and accredited investors, generally persons with assets in excess of $1,000,000
or annual income exceeding $200,000, or $300,000 together with their spouse.
For transactions covered by these rules, broker-dealers must make a
special suitability determination for the purchase of such securities and must
have received the purchaser's written consent to the transaction prior to the
purchase. Additionally, for any transaction involving a penny stock, unless
exempt, the rules require the delivery, prior to the first transaction, of a
risk disclosure document relating to the penny stock market. A broker-dealer
also must disclose the commissions payable to both the broker-dealer and the
registered representative, and current quotations for the securities. Finally,
monthly statements must be sent disclosing recent price information for the
penny stocks held in the account and information on the limited market in penny
stocks. Consequently, these rules may restrict the ability of broker-dealers to
trade and/or maintain a market in the Company's common stock and may affect the
ability of shareholders to sell their shares.
Record Holders
As of December 31, 2004 there were approximately 414 shareholders of
record of MR3 Systems, Inc. common stock. The Company believes that the number
of beneficial owners is substantially greater than the number of record holders
because a portion of its outstanding common stock is held in broker "street
names" for the benefit of individual investors or other nominees.
As of December 31, 2004 there were approximately 81 shareholders of record
of MR3 Systems, Inc. Series A preferred stock. As of December 31, 2004, there
are 232,714 shares of preferred stock issued and outstanding. Preferred stock is
convertible into common shares on a one-to-one ratio. There is no market for the
trading of the Company's preferred stock.
Dividends
The Company has never paid any cash dividends on its common stock and does
not anticipate paying cash dividends within the next two years. The Company
anticipates that all earnings, if any, will be retained for development of its
business. Any future dividends will be subject to the discretion of the board of
directors and will depend on, among other things, future earnings, MR3's
operating and financial condition, MR3's capital requirements and general
business conditions.
Equity Compensation Table
The following table provides information about the Company's common stock
that may be issued upon the exercise of options and warrants under all of the
Company's equity compensation arrangements as of December 31, 2004. In third
quarter 2004, the Company adopted a formal equity based incentive compensation
plan, approved by shareholders during the Company's annual meeting, for the
benefit of employees and/or non-employees. With the exception of employment
agreements entered into with Messrs. Tao, Reis, Rotter, and DeVoe (which were
not approved by a vote of shareholders), all securities disclosed in the table
below resulted from individual grants of options and warrants for services
provided to the Company or expected to be provided to the Company and were
unrelated to any written compensation plan or agreement.
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EQUITY COMPENSATION PLAN INFORMATION
[Enlarge/Download Table]
Plan category Number of securities to be Weighted average exercise Number of securities
issued upon exercise price of remaining available for
of outstanding options, outstanding options, future issuance
warrants and rights warrants and rights
(a) (b) (c)
Equity compensation plans -0- -0- 7,000,000
approved by security holders
Equity compensation plans not approved 33,362,603 $0.172 -0-
by security holders
Total 33,362,603 $0.172 7,000,000
Recent Sales of Unregistered Securities
Fourth Quarter Funding and Dilutive Instruments
None
Fourth Quarter 2004 Stock Issuances
1. A total of 27,343 shares were issued to two individuals in exchange
for services rendered to the Company.
2. An aggregate of seven individuals or entities were issued 3,349,087
shares pursuant to the cashless exercise of warrants issued in prior
periods. 1,028,940 of these shares related to cashless warrants
issued to Dr. Irving DeVoe, former Director and Chief Science
Officer.
3. A total of 350,000 shares were issued to three individuals pursuant
to the conversion of warrants at an exercise price of $0.10.
4. A total of 203,343 shares were issued to Zevtec pursuant to the
conversion of warrants at an exercise price of $0.07. At the
direction of Zevtec, the Company allocated $14,234 of accrued
interest owing to Zectec as of 9/30/04 to the conversion of
outstanding warrants.
5. One individual was issued 50,000 shares pursuant to the exercise of
warrants at an exercise price of $0.03.
The above issuances were not registered under the Act. Each issuance of
convertible debt instruments, common stock, or warrants was made in a private,
isolated transaction with either an affiliate of the Company or a person
familiar with the operations of the Company. There was no general solicitation
of potential purchasers, rather, securities were offered only to persons known
by directors, employees or agents of the Company. The Company also made
available to prospective purchasers general information about the business,
including financial statements and other information that might be requested.
With the exception of the common shares issued to Dr. DeVoe pursuant to the
"cashless" exercise of warrants held greater than two years, the aforementioned
issued securities were deemed "restricted" as defined by the Act and all
certificates representing the issued securities bore appropriate restrictive
legends. Accordingly, the issuances were made in transactions not involving a
public offering and were exempt from registration under Section 4(2) of the Act.
- 19 -
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the attached
financial statements and notes thereto. Except for the historical information
contained herein, any statements that refer to expectations, projections or
other characterization of future events or circumstances, and especially those
which include variations of the words "believes," "intends," "estimates,"
"anticipates," "expects," "plans," or similar words or variations thereof, are
likely to be forward-looking statements, and as such, are likely to concern
matters involving risk, uncertainty, unpredictability and other factors that
could materially and adversely affect the outcome or results indicated by or
inferred from the statements themselves. Therefore, the reader is advised that
the following discussion should be considered in light of the discussion of
risks and other factors contained in this annual report on Form 10-KSB and in
the Company's other filings with the Securities and Exchange Commission, and
that no statements contained in the following discussion or in this Form 10-KSB
should be construed as a guarantee or assurance of future performance or future
results.
Overview
Since 1997, the Company has been engaged in developing and applying its
technology for the efficient recovery, separation and purification of metals
from various aqueous streams of source material. The technology originated from
research in microbiology on how microbial cells efficiently acquire their
essential nutrient metals such as calcium, copper, zinc, etc. The MR3 technology
is an automated, modular metals reclamation system that integrates specialized
media with a unique hydrometallurgical chemical process to selectively separate,
extract, and purify individual targeted metals. MR3 has developed a process for
the recovery, separation and purifying of a broad range of metals. The Company
has also entered into strategic alliances with third party manufactures of
related technology processes to utilize their technology, or jointly develop new
technology processes, in the implementation of MR3 custom solutions for its
prospective clients. The Company has incurred losses from its inception through
December 31, 2004.
The Company intends to produce these metals and metal-compound products in
facilities (or mobile modular plants) wholly owned and operated by the Company
or in facilities jointly owned and operated with other third party principals.
Such facilities may be limited to the placement of integrated engineering
hardware and MR3 technology components in a leased building or a specially built
plant corresponding to a unique project requirement. The resultant manufactured
products are then offered for sale to metals and specialty chemical
commodities-brokers and other client end-users. Where feasible, the Company also
plans to license its technology to third parties in consideration for licensing
fees and possible revenue sharing arrangements. In addition, the Company may
elect to charge contract fees for various waste removal and remediation services
related to its proprietary technology.
MR3's technology has many applications including: (i) the recovery of
precious metals from ore and concentrates;(ii) the processing of industrial
wastes into purified metals and specialty chemical products; and (iii) the
environmental remediation of hazardous metals from contaminated sites. The
Company's strategy is to either license its proprietary technology to third
parties for use in individual applications or directly implement the technology
under operations controlled by the Company or through joint ventures with other
entities.
- 20 -
Results of Operations
Fiscal year Ended December 31, 2004 Compared to Fiscal Year Ended December 31,
2003
The Company recognizes revenue when manufactured product is shipped to a
customer or at the time other services, such as metals related remediation are
rendered. The Company recorded $380,000 in revenues in the fourth quarter of
2004 related to the successful implementation of its Fluor Hanford project. The
Company did not realize any revenues from its metals separation and recovery
technology during fiscal year 2003 as management elected to revamp its business
strategy during that period away from specific specialty chemical production to
focus on prospective lucrative prospects for its metals recovery technology,
especially in the area of precious metals.
Cost of goods sold amounted to $293,346 and $0 for 2004 and 2003,
respectively. The components that make up cost of goods sold include, but are
not limited to chemicals and materials used in the processing of wastes, rent at
the site processing facility, removal and disposal of post processing waste
materials and residues, and salaries of personnel and contractors utilized in
the Company's processing activities. Given that the gross margin of 22.8% was
solely related to the implementation of the Fluor Hanford chromium VI
remediation project, there is no reasonable basis to determine if such result
will be typical of future service projects.
General operating expenses--less depreciation, amortization and
consideration for impairment loss--increased $613,188 (38.7%) from $1,586,705 in
2003 to $2,199,893 in 2004. The increase is attributable to increases in most
operating categories related to the Company's larger staffing requirements
(including outside services and consultants) in 2004 related to prospective
project(s) due diligence. Development expenses decreased by $71,028 (13.0%) in
2004 to $474,307 compared to $545,335 in 2003. The decrease in development
expenses primarily related to expenses incurred by a singular study performed by
SRK and recorded as expense in 2003 ($103,000). In addition, the Company
eliminated Empire Gold related development expenses in fiscal year 2004 that
were a material portion of 2003 development expense.
In connection with its expanded business activities to acquire new
contractual commitments and perform on existing obligations, the Company
incurred increases in both personnel expenses and external consulting and
professional fees. Personnel expenses increased $83,764 (17.13%) to a level of
$572,741 in 2004 compared with $488,977 in 2003, as the Company increased its
workforce in 2004 in consideration of its pending project obligations and
marketing efforts to identify new prospective opportunities. External services
and professional fees increased $399,644 (92.4%) to a level of $832,055 in 2004
compared to $432,391 in 2003. Notable components of external services and
professional fees in 2004 were $165,000 in expense related to the Company's
public relations efforts, as well as compensation expense recorded to reflect
the grant of options or warrants to independent consultants. In addition, office
expenses increased $197,964 (232.4%) to a level of $283,164 in 2004 compared to
$85,200 in 2003. The increase is primarily attributable to significant increases
in travel and living expenses, as well as ordinary expenses related to the
greater size of the Company's workforce.
Depreciation expense amounted to $35,413 in 2004 compared to $9,113 in
2003, an increase of $26,300. The increase is related to additional property and
equipment acquired by the company in late 2003 and during calendar year 2004.
The Company also recorded certain losses on write-downs of equipment in 2003
amounting to $105,813. There were no comparable write-downs of property and
equipment in 2004.
The Company recorded net interest expense of $216,859 in 2004 and $168,533
for 2003. This increase of $48,326 (28.7%) for 2004 is attributed to interest
accrued on new and continuing notes payable to shareholders, related parties and
other third party holders of debt instruments. In addition, the Company incurred
interest expenses for the full year of 2004 related to contracts for equipment
and instrumentation in connection with its technical support laboratory.
Management anticipates that interest expense will likely increase in fiscal year
2004 in consideration of the aforementioned debt obligations and the potential
addition of new debt instruments, provided that certain existing note holders do
not convert their notes into shares of the Company's common stock through their
conversion privileges. In 2003, the Company recorded gains under other income of
$223,843 related to debt forgiveness and reduction in accrued liabilities, in
connection with the settlement of various longstanding obligations and claims
against the Company. There were no such material gains in fiscal year 2004.
- 21 -
The Company's net loss for fiscal year 2004 increased $710,806
(43.1%) to $2,359,527 as compared to $1,648,721 for fiscal year 2003. The
increase is attributed to the material increase in operating expenses incurred
by the Company in implementing its revamped operating strategy and the staffing
up of additional management and technical personnel to oversee its business
activities and technical development.
Net Operating Losses
At December 31, 2004 and 2003, the Company has available approximately
$10,981,000 and $8,969,000 in net operating loss carryforwards available to
offset future federal and state income taxes, respectively, which expire through
2021. Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. A change of greater than 50% of the
Company ownership could significantly reduce the availability of the tax
credits. At December 31, 2004 and 2003, the Company has provided a valuation
allowance to reduce its net deferred tax asset to zero. The amount of deferred
tax asset considered realizable, however, can be revised in the near term based
upon future operating conditions during the carryforwards period.
Liquidity and Capital Resource
Historically, the Company's working capital needs have been satisfied
primarily through the Company's private placement of securities, convertible
debentures and other debt instruments, such as short and long-term notes with
certain shareholders and third party financiers. The Company reasonably expects
to continue to do so in the future, but cannot guarantee that such financing
activities will be sufficient to fund its current and future projects and its
abilities to meet its cash and working capital needs
At December 31, 2004, the Company had a working capital deficit of
$1,524,505 compared to a working capital deficit of $982,347 at December 31,
2003. The $542,158 (55.2%) increase in working capital deficit is primarily
attributed to deceases in cash, increases in accrued expenses, and increases in
short term note obligations, all related to the Company's increased business
activities for the full year in 2004 compared with 2003. At December 31, 2004,
the Company had $63,712 in cash compared to $288,674 at December 31, 2003.
As of December 31, 2004, the Company had total assets of $593,761 and a
total shareholder's holder's deficit of $1,808,927 compared with total assets of
$701,260 and total stockholder's deficit of $1,182,390 at December 31, 2003.
Total assets decreased in 2004 due to a decrease in cash resulting from basic
operations, offset by increases in property and equipment. Total shareholders'
deficit increased by $626,537 (53.0%) due to increased operating losses incurred
by the Company in carrying out its business activities.
For the fiscal year ended December 31, 2004, cash used by operating
activities increased to $1,705,596 from $1,272,447 for the comparable period
ended December 31, 2003. This $433,149 (34.0%) increase is attributed to the
material expansion of the Company's business activities in 2004.
- 22 -
For the fiscal year ended December 31, 2004, cash used by investing
activities decreased to $168,041 from $220,746 for the comparable period ended
December 31, 2003. This $52,435 (23.8%) decrease is attributed to the purchase
of lesser amounts of property and equipment in 2004.
In fiscal year ended 2004, the Company realized cash flow from financing
activities of $1,350,490 compared with $1,769,101 for the comparable period in
2003. In 2004, the Company realized $350,000 in proceeds from notes payables and
$1,055,315 from the sale of common stock and warrants. In 2003, the Company
realized net proceeds (receipts less partial principal payments) from notes
payable to certain shareholders of $980,661 and proceeds from the sale of common
stock and the exercise of warrants of $793,500.
During fiscal year 2005, the Company expects to meet its cash and working
capital needs primarily from cash generated from operations, prospective license
sales, the private sale of its securities, convertible debt instruments, note
payables and credit facilities with private lenders. Management can provide no
guarantees regarding its expectations in achieving its working capital
objectives on a timely basis.
The Company presently leases its facilities on a contractual basis with
certain timeframe commitments and obligations. The Company believes that its
existing facilities will be sufficient to meet the Company's current needs.
Should the Company need additional space to accommodate increased activities,
management believes it can secure such additional space on reasonable terms.
From time to time, the Company has committed to leases on a month-to-month basis
without a minimum commitment and may elect to do so in the future.
Off-Balance sheet Arrangements
The Company does not have any off balance sheet arrangements that have or
are likely to have a material current or future effect on the Company's
financial condition, or changes in financial condition, liquidity or capital
resources or expenditures.
Plan of Operation
Since April 2004, the Company initiated a restructuring of its business
strategy with multiple objectives positioning the Company toward positive
revenue generation. This revised strategy provides for the penetration of six
vertical markets in mining and environmental remediation with the application of
MR3's core technology of selective metals extraction, either as the primary
operation, or in partnership with synergistic third party commercial
technologies. Management's short-term (6 months-12 months) objective is to
implement the MR3 technology with strategic partners owning ores, concentrates,
and tailings in the United States. The general terms of these partnerships
involve the joint design, construction, and operation of metals recovery
centers, from which the recovered metals will be sold to third party brokers and
clients. MR3's long-term (12 months-24 months) objective is to align with a
financial strategic partner(s), from which metal recovery opportunities globally
may be adequately financed.
In May of 2004, the Company entered into an agreement with Fluor Hanford
and the United States Department of Energy to provide a metal recovery system
for the removal of toxic chromium VI from the groundwater at Hanford Nuclear
Reservation in south-central Washington State. With the successful
implementation of the remediation project, management intends to leverage this
success so as to implement similar nuclear related turnkey systems for various
public and private remediation projects in the United States. The Company
recognized $380,000 in revenue related to this project in 2004.
- 23 -
In August 2004, the Company entered into an agreement with Caddell &
Associates of Denver, Colorado ("Caddell"), to jointly provide combined turnkey
processing systems to certain MR3 clients for the extraction and separation of
precious and base metals from their mineral deposits. Under the agreement, MR3
secured exclusive rights to commercialize Caddell's Halogen Vapor Leaching
System (HVLS) technology. In November 2004, the Company entered into a Strategic
Alliance and Project Venture Agreement with The Purolite Company ("Purolite"),
which signifies a formation of an exclusive venture and a general collaborative
framework for mutual research and development of novel resins and separation
processes, as well as marketing of any turn-key solutions based on such
developments. Management believes that such alliances with established third
party partners described above will provide more opportunities for the
implementation of the Company's technology than would otherwise be available to
MR3.
In September 2004, the Company entered into an exclusive agreement with
Franklin Lakes Resources for the processing of their mineral deposits locating
in a volcanic lakebed in Death Valley Junction, California. Contingent on
receiving adequate investment funds, management expects to aggressively pursue
this venture in the second half of 2005.
MR3 continues to work with SRK Consulting to develop three opportunities
for base metal removal from various large-scale mining operations. The revenue
model for applications in this Conventional Mining and Ore (CMO) market involves
processing system equipment sale, service contract for technical support and
media supply, and recurring revenue from the sale of base metals recovered.
t 6 0 MR3 is also collaborating with SRK Consulting and Arrakis Mining for
rapid penetration of the Private Contract Environmental Remediation (PCER)
market. Opportunities in this market are anticipated to involve the sale of
turnkey processing equipment, vendor contract for support services, and
contracts for the supply of special media for use in the metals extraction. The
Company is negotiating with several commercial entities for the removal of
contaminated metals from their large-scale mining operations. Implementation of
MR3 processing systems for these large-scale operations is estimated to be in
the range of 300-500 gallons-per- minute. The Company's goal is to penetrate
this PCER market rapidly through several small-scale, first-phase demonstration
efforts, followed by the design and implementation of the large scale processing
systems in coordination with established firms, such as SRK and Arrakis.
MR3 continues to develop and evaluate its technology for revenue
generation opportunities including, but not limited to the adoption of two new
processing techniques for the extraction of base, precious, and rare earth
metals from oil brines and geothermal fluids (OBGF). This venture requires
relatively small capitalization for continuous extraction of metals, but could
provide significant return to MR3 in helping to build shareholder value. This
objective is in the early stage of development and participation in this market
would likely require modification of the MR3 core technology.
Plant costs, associated with MR3 Technology engineering, design,
construction and equipment, are expected to vary as a factor of the particular
metals extraction application and required plant size. Future MR3 production
facilities are expected to vary in initial cost from $500,000 to $2 million and
above. Implementation schedules are expected to be in terms of less than
eighteen months. Development expenses for the MR3 technology will be limited to
adapting the technology to specific field applications and are likely to be
proportional to the number of projects contracted by the Company. The Company
does not expect these technology development costs to exceed the revenues
contemplated by each specific project.
The design of the MR3 System lends itself to be scalable without material
difficulty. The Company anticipates supplying the initial processing materials
and then provide recurring materials (equipment, reagents, and media) to the
licensee or contract client at its cost plus a reasonable markup. In addition,
the Company will also likely provide technical consulting services, over and
above normal services in line with a prospective license, at a predetermined
price to the licensee. The Company further expects to charge a negotiated
percentage of the precious metals extracted from the concentrates, as well as a
monthly fee related to savings in capital and operating costs realized by the
licensee or contract client from their normal operations.
- 24 -
In anticipation of the need for working capital to provide marketing,
preliminary sample testing, development, project validation and implementation
services related to the aforementioned prospective projects, the Company
initiated private placements in 2004 with a limited number of accredited
investors. Total proceeds related to the private sale of its securities in 2004
amounted to approximately $1,055,000. In addition, the Company received $350,000
in proceeds from funds advanced pursuant to certain note payables. The Company
has received an additional $210,000 in funds advanced in 2005 pursuant to such
notes..
During October 2004, MR3 entered into a Memorandum of Understanding with
Swift Capital, an investment arm of Sino Capital Foundation. The MOU provides
the framework for Swift Capital to perform due diligence on MR3 for the purpose
of providing long-term financial investment into the Company. Sino Capital
Foundation is a global conglomerate owning petroleum, energy, mining, and
banking assets in Asia, Southeast Asia, and Europe. The Company and Sino Capital
intend to structure a long-term partnership in which Sino Capital will provide
funding for MR3 operations in the US, contracts for MR3 technology applications
in Asia and Europe, and long-term financing for joint projects. Swift Capital
started their due diligence at the end of 2004 and has continued the process
into second quarter 2005. $100,000 of the aforementioned funds advanced to the
Company pursuant to note agreements in 2004 originated with third parties
related to Sino Capital. An additional $210,000 in advanced funds was received
in 2005 from these same parties.
Management believes that cash expected to be generated from operations and
current cash reserves will not be sufficient for the Company to meet its capital
expenditures and working capital needs, over the next twelve months, as
presently outlined in its business strategy. The Company's future liquidity and
cash requirements will depend on a wide range of factors, including the level of
business in designated market segments, expansion of facilities and possible
acquisitions, and the formation of long-term financial strategic partnerships.
The Company anticipates meeting its working capital requirement for the
next twelve months through a combination of revenue generated from operations,
project specific financing from third parties, certain debt instruments and
additional sales of its securities on an as needed basis. If anticipated cash
flows from operations are not sufficient, it will be necessary for the Company
to raise capital or seek additional financing. While there can be no assurance
that such raising of capital or seeking of additional financing would be
available in amounts and on terms acceptable to the Company, management believes
that such financing would likely be available and management will be reasonably
successful in doing so. The primary and most significant expenditures for 2005
are expected in the area of salaries, consulting, professional fees, research
and development, rent, travel, fabrication of processing systems and certain
engineering costs related to anticipated operating agreements.
Effects of Inflation
In the opinion of management, inflation has not had a material effect on
the operations of the Company.
Recent Accounting Pronouncements
In 2004 and 2003, the Company adopted certain accounting pronouncements,
the results of which are reflected, as applicable, in the Company's financial
statements and accompanying notes for fiscal years 2004 and 2003. Disclosure on
the various accounting pronouncements adopted by the Company during 2004 and
2003 are more fully detailed in Section 1 (Summary of Significant Accounting
Policies; Recent Accounting Pronouncements) of the Company's financial
statements included with this annual report and incorporated herein by
reference.
- 25 -
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The attached financial statements commencing on page F-1 have been audited
by Pohl, McNabola, Berg & Company (formerly Berg & Company), independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing herein.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There have been no changes in or disagreements with the Company's
accountants, Pohl, McNabola, Berg & Company, for the reporting period.
ITEM 8A. CONTROLS AND PROCEDURES
The Company's Chief Executive Officer and Chief Financial Officer
("Certifying Officers") are responsible for establishing and maintaining
disclosure controls and procedures for the Company. The Certifying Officers have
concluded (based on their evaluation of these controls and procedures as of a
date within 90 days of the filing of this report) that the design and operation
of the Company's disclosure controls and procedures (as defined in Rule
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) adequately
meet intended objectives and are effective. As of this date, given the small
size of the Company and its limited operations and over the last year, the
Company utilized a preliminary and basic standard of internal controls and
procedures related to its financial reporting for the period covered by this
report. Management is in the process of developing and adopting new and more
stringent controls and procedures and anticipates such controls and procedures
to be in place prior to the end of fiscal year 2005.
Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in Company
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the Securities and
Exchange Commission's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed in Company reports filed under the Exchange
Act are accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely decisions
regarding required disclosure.
No significant changes were made in the Company's internal controls or in
other factors that could significantly affect those controls subsequent to the
date of the evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
The Company filed a Form 12b-25 (Notification of Late Filing) on April 1,
2004 related to the late filing of its annual report on Form 10-KSB for the
period ended December 31, 2004. The late filing was unrelated to any material
weakness or deficiency in the Company's internal controls and procedures.
ITEM 8B. OTHER INFORMATION
None.
- 26 -
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The current Executive Officers and Directors of the Company are as
follows: (1)
Name Age Position
Randall S. Reis 63 Chairman of the Board and CFO
William C. Tao 49 Chief Executive Officer and Director
(1.) In first quarter 2004, Mr. Gary Abreim provided the Company
with his notice of resignation as the Chief Financial Officer effective on
or about the filing date of the Company's Annual Report on Form 10-KSB for
the period ended December 31, 2003. Mr. Abreim's resignation is not
related to any disagreement or discord with the Company on its financial
matters. Mr. Randall S. Reis has assumed the acting role of Chief
Financial Officer until such time as a qualified individual can be hired
consistent with the needs of the Company and its available resources. Mr.
Abreim continues to supply interim accounting services as the Company's
principal accounting authority for the purposes of preparing this 2004
annual report on Form 10-KSB.
In second quarter 2004, Mr. John K. Burns, then President and
Director resigned his positions with Company effective April 9, 2004. The
resignation was not related to any disagreement or other discord with the
Company or its management. Mr. Burns has agreed to provide senior
consultant services to the Company, as required, on a mutually agreed upon
basis. During his executive management tenure with the Company, Mr. Burns
was not compensated with a salary, but was issued 1,000,000 warrants to
purchase common shares of the Company.
In second quarter 2004, Mr. Bradley N. Rotter, then Chief Executive
Officer and Director, resigned his executive position as CEO of the
Company, effective in April 2004, but remained as a Director of the
Company until his successor was elected at the Company's annual meeting
held on September 20, 2004. Mr. Rotter's resignation is not related to any
discord or disagreement with the policies of the Company. Mr. Rotter
continues to be a substantial shareholder of the Company and has agreed to
continue to provide advisory services to the Company in business and
corporate financing matters.
In third quarter 2004, the Company accepted Dr. Irving W. DeVoe's
resignation from MR3 Systems as its Chief Science Officer related to his
retirement from the Company. The Company has no immediate plans to replace
Dr. DeVoe in his capacity as Chief Science Officer.
There is no family relationship between any director or executive officer
of the Company. There are no known arrangements or understandings between any
director or executive officer and any other person pursuant to which any of the
above-named executive officers or directors was selected as an officer or
director of the Company. All directors hold office until the next annual meeting
of stockholders and until their successors have been duly elected and qualified.
Aside from expenses to attend the Board of Directors meetings, the Company has
not compensated its directors for service on the Board of Directors or any
committee thereof. As of the date hereof, no director has accrued any expenses
or other compensation. The Board of Directors appoints officers annually and
each executive officer serves at the discretion of the Board of Directors. The
Company does not have any standing committees at this time.
None of the officers and /or directors of the Company are currently
officers or directors of any other publicly traded corporation. None of the
directors, officers, affiliates or promoters of the Company have filed any
bankruptcy petition, been convicted in or been the subject of any pending
criminal proceedings, or the subject of any order, judgment, or decree involving
the violation of any state or federal securities laws within the past five
years.
- 27 -
The business experience of each of the persons listed above, as well other
significant persons and contributors to the Company, are as follows:
Randall S. Reis. Mr. Reis co-founded MR3 and has been Chairman of the
Board since its inception in July 1991. He served as MR3's Chief Executive
Officer from 1991-2003. Mr. Reis has over 35 years of executive level management
and legal experience in entrepreneurial, private and public companies. Mr.
Reis's areas of responsibility typically focused on business start-up,
acquisition, IPO strategies, capital raising activities, overall business plan
development and implementation, SEC compliance matters, and the negotiation of
all major contracts. From 1986 to 1991, Mr. Reis was co-founder, CEO, and a
director of Vitafort International Corporation ("VIT"), a publicly traded
company, located in Mill Valley, CA. VIT was primarily engaged in the business
of developing nutritionally enhanced food and beverage products, including
vitamin fortified products for the Crystal Geyser Water Company and Power Burst,
a nutritionally fortified sports drink. From 1981 to 1985, Mr. Reis was
co-founder, CEO and a director of Edwards Ridge, Lt., a private California
corporation, which was engaged in the business of developing multi-unit luxury
single-family home real estate projects in Sausalito, CA. From 1970 to 1980, Mr.
Reis was a co-founder and senior partner of Burden and Reis, a San Francisco
based law firm specializing in corporate, securities, and real estate matters.
Mr. Reis is a member of the California, New York and Connecticut State Bars
Association, and a graduate of Amherst College (B.A.) and the Stanford School of
Law (J.D.).
William C. Tao, Ph.D. Dr. Tao joined the Company in April 2004 as Chief
Executive Officer and was subsequently appointed a Director of the Company. Dr.
Tao is an entrepreneur and technologist with twenty-four years of business and
technical experience including, but not limited to the chemical, environmental
and nuclear-related industries. Dr. Tao has extensive experience in structuring
strategic partnerships and commercial ventures within the energy, petroleum,
transportation and materials application markets for both the public and private
sector. From 2002 to April 2003, Dr. Tao was Chief Technologist and a Principal
of Global Environment and Technology Foundation, a non-profit Virginia based
foundation involved in technology consulting for U.S. government agencies and
international commercial institutions. During this period, Dr. Tao also served
as a co-founder and Managing Director of Global Technology Ventures; a Nevada
based corporation focused on equity financing and project capitalization for
entrepreneurial ventures. From 1998 to 2002, Dr. Tao served as a Senior Vice
president and Chief Strategy and Technology Officer for Clean Fuels Technology,
Inc., a Nevada based company. Dr. Tao was responsible for international and
domestic technology commercialization, large-scale product demonstration, and
corporate finance strategies. From 1997 to 1998, Dr. Tao was president and CEO
of Landmark Credit, Inc. providing global finance and technology services for
public and private developers in the US, Philippines and Southeast Asia. From
1990 to 1997, Dr. Tao served in multiple positions and capacities with the
Lawrence Livermore National laboratory in Livermore, California. These positions
included, but were not limited to Program Manager for Nuclear Weapons Surety,
Program Development for Director's Program office and Director-International
Program Development.
Dr. Tao holds two B.S. degrees in Chemical Engineering and Nuclear
Engineering from University of California at Berkeley, and an M.S. degree in
Chemical Engineering and Ph.D. degrees in Chemical Physics and Chemical
Engineering from Stanford University. He has authored over 45 journal articles
and served as editor for two Symposium Series on Shock Physics and Specialty
Materials.
Other Senior Management, Significant Persons and Contributors
Jody J. Sitkoski. Mr. Sitkoski joined the Company in January 2003 as
Senior Vice President. Prior to that, he provided advisory services to the
Company from time to time over a five-year period as a consequence of his being
an original shareholder of MR3, Inc., the predecessor to MR3 Systems, Inc. Along
with providing technical and mechanical guidance on mining operations, Mr.
Sitkoski was instrumental in identifying potential candidate projects for the
Company's technology and was principally involved in any subsequent
negotiations. Mr. Sitkoski brings to the Company over 20 years of hands on
business experience in mining facilities construction and maintenance; and
environmental technology processes including electro coagulation systems, UV,
ozone, EC Fuel for municipal waste water/ drinking water system cleaning,
landfill leaching, industrial waste water and precious metal/rare earth mine
processes for metals extraction and the purification of mining concentrates. For
the past five years Mr. Sitkoski has been self-employed as a private real estate
developer and personal investor. Mr. Sitkoski received an Associate degree in
Computer Science from Control Data Institute in Milwaukee, Wisconsin and holds
numerous real estate certifications in real estate law, development and
brokerage.
- 28 -
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors, executive
officers, and the persons who beneficially own more than ten percent of our
common stock, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission. Copies of all filed reports are required to
be furnished to the Company. Based solely on the reports received by us and on
the representations of the reporting persons, we believe that no Form 5
documents were required to be filed at year-end 2004. The Company is not aware
of any transactions in our common stock by or on behalf of any director,
executive officer or 10% shareholder, which would require the filing of any
report pursuant to Section 16(a) during the fiscal year ended December 31, 2004,
that was not timely filed with the Commission.
Committees
It is the intention of the Company's management to have its board of
directors ultimately structured to comply with the directives of Sarbanes-Oxley
Act of 2002. Presently, the Company's common stock is quoted on the OTC Bulletin
Board. As such, the Company is not currently obligated to meet certain
compliance requirements of Sarbanes-Oxley associated with national stock
exchanges. The Company intends, however, to seek and attract potential
independent directors to its board and to ask its shareholders to elect these
potential directors at future annual meeting(s). At this time, the Company's
board of directors consists of two directors, all of which are insiders (the
Chairman and founder of the Company and the Chief Executive Office.
The Company anticipates using NASDAQ's Rule 4200(a)(15) as a guideline to
determine independent status. It should be noted that the Company may experience
difficulties attracting independent directors given its current stage of
corporate development and level of resources. Once sufficient independent
directors are in place, the Company expects to form a minimum of three
committees--an Audit Committee, a Nominating and Corporate Governance Committee,
and a Compensation and Benefits Committee. In the interim, the Company expects
to carry out the responsibilities of those committees, as practicable, with
inside directors and support of individuals from its Board of Advisors. The
Company is in the process of developing charters for each of the aforementioned
committees.
Audit Committee
As of the date of this annual report, the Company has no independent
directors and thus it is not feasible to appoint such members to an audit
committee. Therefore, in the interim, the Company's existing Board of Directors
has and will conduct the respective role of an audit committee with support from
a financially knowledgeable representative of the Board of Advisors. When
established, the audit committee's primary function will be to provide advice
with respect to our financial matters and to assist the Board of Directors in
fulfilling oversight responsibilities regarding finance, accounting, tax and
legal compliance. The audit committee's primary duties and responsibilities will
be to: (i) serve as an independent and objective party to monitor our financial
reporting process and internal control system; (ii) review and appraise the
audit efforts of our independent accountants; (iii) evaluate our quarterly
financial performance as well as compliance with laws and regulations; (iv)
oversee management's establishment and enforcement of financial policies and
business practices; and (v) provide and open avenue of communication among the
independent accountants, management and the board of directors.
- 29 -
Nominating and Corporate Governance Committee
The purpose of the Committee shall be to: (i) identify qualified
individuals for membership on the board; (ii) recommend to the board the
director nominees for the next annual meeting of shareholders; (iii) develop and
recommend to the board a set of corporate governance guidelines for the board;
and (iv) provide oversight of the corporate governance affairs of the board and
the Company. In the absence of independent directors, the Company has requested
three members of its board of advisors to serve in an advisory role as a
nominating committee for the election of future board members.
The Company is in the process of developing corporate governance
guidelines that meets both its current and anticipated future operating
conditions and corporate structure. Such guidelines, when adopted by the board
of directors, will be posted on the Company's web site under the caption of
Corporate Governance.
Compensation and Benefits Committee
When formed and adopted by the Company's Board of Directors, this
committee's responsibilities will relate to compensation of the Company's
directors and executive officers and oversight of the management of the various
plans, if any, that are implemented for the benefit of the Company's employees.
Code of Ethics
MR3 adopted a Code of Ethics ("Code") in 2004 applicable to all its
employees regardless of position or stock ownership. The Company has
historically operated under informal ethical guidelines, under which the
Company's principal executive, financial and accounting officer, are held
accountable. In accordance with these informal guidelines, the Company has
always promoted honest, ethical and lawful conduct throughout the organization.
Certain of the Company's senior executive and financial officers--Chairman,
Chief Executive Officer, President and Chief Operating Officer, Chief Financial
Officer and Chief Science Office--provide services and perform functions that
merit a more detailed expression of their duties, because they are singularly
responsible for the integrity, accuracy and timeliness of our periodic financial
reports to regulators and the investing public. Certain officers left the
Company since its adoption and William C. Tao joined the Company as Chief
Executive Officer subsequent to its adoption. Thus the Company has provided as
an exhibit to this Annual Report, a signed acknowledgement of the applicable
officers understanding and acceptance of the Code.
Board of Advisors
MR3 has assembled an experienced and accomplished group of advisors to
provide guidance to management on various corporate, technical and financial
matters. These executive level individuals, whose profiles are listed on the
Company's web site, have agreed to serve on the Company's recently formed Board
of Advisors. Their experience in both entrepreneurial ventures and large-scale
public companies will provide added insight and experience to MR3's current
management team. These executives will provide guidance to management on such
matters as business development, investment banking and financial services,
equity markets, general technology and chemical-related industries. From time to
time the Company anticipates drawing upon the experience of these individuals to
fulfill certain roles on corporate committees in the absence of independent
directors.
- 30 -
Shareholder Communication With the Board of Directors
The Company maintains a process for shareholders to communicate with the
Board of Directors. Shareholders wishing to communicate with the Board should
send any communication to Corporate Secretary, MR3 Systems, Inc., 435 Brannan
Street, Suite 200, San Francisco, CA 94107. Any such communication must state
the number of shares beneficially owned by the stockholder making the
communication. The Corporate Secretary will forward such communication to the
full Board of Directors or to any individual director or directors to whom the
communication is directed. Alternatively, the Company maintains contact
information, both telephone and email, on its website under the heading "Contact
MR3". By following the Contact MR3 link, a shareholder will be given access to
the Company's telephone number as well as a link for providing email
correspondence to Investor Relations. Communications sent to Investor Relations
and specifically marked as a communication for the Board will be forwarded to
the Board or specific members of the Board as directed in the shareholder
communication.
ITEM 10. EXECUTIVE COMPENSATION
The following Summary Compensation Table indicates certain compensation
information for the Chairman and Chief Executive Officer (collectively referred
to as the "Named Executive Officers"). Compensation data for other executive
officers is not presented in the table because aggregate compensation for such
executive officers does not exceed $100,000 for services rendered in all
capacities during the fiscal year. This information provided below includes the
dollar value of base salaries, bonus awards, the number of SARs/options granted,
and certain other compensation, if any.
- 31 -
[Enlarge/Download Table]
Summary Compensation Table
Long Term Compensation Awards
Awards Payout
Annual Compensation ------ ------
Restricted LTIP Securities All Other
Name and Stock Awards Pay-out Underlying Compen-
Principal Position Year Salary Bonus Other Options/ sation
------------------ ---- ------ ----- -----
($) ($) ($) SARs ($)
(#)
Randall S. Reis 2004 106,000 10,546 -
Chairman (1) 2003 101,122 1,000,000
2002 79,730 -
William C. Tao 2004 75,530 8,000 5,000,016
Chief Executive (2) 2003 - - -
Officer & Director 2002 - - -
1. Includes advances made during the period and excludes deferred
compensation. Balance of deferred compensation accrued on the
Company's financial statements at fiscal year ended December 31,
2004, and 2003 and 2002 was $27,578, $18,878, and $6,176,
respectively. Mr. Reis' employment agreement with the Company
specifies a gross annual salary of $120,000. At December 31, 2002,
Mr. Reis has waived $192,000 of compensation, which represents the
unpaid balance owed to him in excess of amounts paid during the
noted periods and any accrued deferred compensation. Securities
underlying options include warrants granted during the noted period
at $0.10 per share with a five-year exercise period.
2. Includes advances made during the period and excludes deferred
compensation. Balance of deferred compensation accrued on the
Company's financial statements at fiscal year ended December 31,
2004 was $0. Dr. Tao's employment agreement with the Company
specifies a gross annual salary of $108,000. Securities underlying
options include warrants granted during the noted period at $0.32
per share with a five-year exercise period. 3,000,016 of the
warrants vest equally over a two-year period from date of grant.
Option/SAR Grants in Fiscal Year 2004
Individual Grants
-----------------
[Download Table]
Number of % of Total
Securities Options/SARs
Underlying Granted to
Options/SARs Employees in Exercise or Base Expiration
Name Granted (#) Fiscal year Price ($/Share) Date
William C. Tao 1,500,000 21.99% $0.32 4-12-09
William C. Tao 3,000,016 43.98% $0.32 4-12-09
The Company granted 6,820,016 warrants to employees in 2004, of which 5,320,016
are on vesting schedules.
Option Exercises and Fiscal Year-End Values
The following table sets forth information with respect to the number t 6 0 of
unexercised stock options held by the named executive officers on December 31,
2004, and the value of the unexercised in-the-money stock options on that date.
- 32 -
Aggregated Option/SAR Exercises in Fiscal Year 2004
and December 31, 2004 Option/SAR Values
[Enlarge/Download Table]
Number of Securities Value of Unexercised
Underlying Unexercised Options In-The-Money Options
At December 31, 2004 (#) At December 31, 2004 ($) (1)
Shares ($)
Acquired on Value
Name Exercise (#) Realized Exercisable Unexercisable Exercisable Unexercisable
---- ------------ ---------
Randall S. Reis - - 1,000,000 - $90,000 -
William C. Tao - - 2,739,589 2,260,427
(1.) Represents the difference between the option exercise price of
in-the-money options and the fair market value per share of the
Company's Common Stock at December 31, 2004 ($0.19 per share) as
quoted on the National Quotation Bureau's ("NQB") Electronic
Quotation System at the close of trading on that date, multiplied by
the number of shares underlying the option.
Employment Agreements
In January 2003, the Company entered into a three-year employment
agreement with Jody J. Sitkoski for the position of senior vice president.
Details of the employment agreement are more fully disclosed in the Company's
2003 annual report (and any subsequent amendments) on Form 10-KSB filed with the
Commission on March 29, 2004.
In second quarter 2003, the Company entered into three-year employment
agreements with Mr. Bradley N. Rotter, then the Company's President and Chief
Operating Officer, and Dr. Irving W. DeVoe, Chief Science Officer. Details of
the employment agreements are more fully disclosed in the Company's 2003 annual
report (and any subsequent amendments) on Form 10-KSB filed with the Commission.
The employment agreements subsequently terminated as a consequence of the
resignations in 2004 of Mr. Rotter and Dr. DeVoe.
In second quarter 2003, the Company entered into a three-year employment
agreement with Randall S. Reis, then the Company's Chairman and CEO. Details of
the employment agreement are more fully disclosed in the Company's 2003 annual
report (and any subsequent amendments) on Form 10-KSB filed with the Commission.
In second quarter 2004, the Company entered into a three-year employment
agreement with Dr. William C. Tao, the Company's Chief Executive Officer. Upon
completion of the three-year term, the employment agreement automatically renews
on a month-to-month basis until terminated or until the parties negotiate a new
term. Neither party may terminate the agreement without cause. Upon termination
of the agreement by Dr. Tao for "good reason"--as specified in the employment
agreement--the Company is obligated to pay Dr. Tao the following material
amounts: (a) all accrued benefits; (b) a lump sum cash payment equal to one and
one-half times his base salary in effect; and (c) a lump sum cash payment equal
to one and one-half times his highest annual bonus paid or payable prior to his
termination of the agreement for good reason.
- 33 -
The agreement specifies an annual salary of $108,000, automobile allowance
of $500 per month and a flight allowance of $250 per month through December
2004. In addition, the Company is obligated to pay limited premiums associated
with a $2,000,000 term life insurance policy on Dr. Tao with the beneficiaries
to be designated by him. The Company has further agreed to provide family health
insurance to Dr. Tao until such time as a company group plan is adopted. Mr. Tao
will be reimbursed for ordinary and necessary expenses incurred in performance
of his duties on behalf of the Company. As further consideration for entering
into the employment agreement, Dr. Tao was granted 1,500,000 warrants, vesting
immediately, to purchase shares of the Company's common stock at an exercise
price of thirty-two cents ($0.32) for a five-year period. Dr. Tao was also
granted an additional 3,500,016 warrants at a price of $0.32 for a five-year
period, which vest at a rate of 145,834 warrants per month for a twenty-four
month period.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, to the best knowledge of the
Company, as of December 31, 2003, certain information with respect to shares
beneficially owned by: (a) each person who is known by us to be the beneficial
owner of more than 5% of our outstanding shares of common stock; (b) each of our
directors; (c) the executive officers named in the Summary Compensation Table
above and (d) all current directors and executive officers as a group.
Information as to beneficial ownership is based upon statements furnished
to the Company by such persons. To our knowledge, except as indicated in the
footnotes to this table and pursuant to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to
all shares of common stock shown as beneficially owned by them. Unless otherwise
indicated, the business address of the individuals named below is c/o MR3
Systems, Inc., 435 Brannan Street, Suite 200, San Francisco, California 94107.
- 34 -
Name and Address Amount and Nature
of Beneficial Owner of Beneficial Owner Percent of
as of March 31, 2005 as of March 31, 2005 Class (1)
-------------------- -------------------- ---------
Randall S. Reis * 6,521,687 (2) 7.30%
Irving W. DeVoe 5,275,291 (3) 5.91%
Bradley N. Rotter 10,366,664 (4) 11.61%
William C. Tao* 3,468,759 (5) 3.88%
Mel Kelm 5,863,357 (6) 6.56%
Pfeiffer Ridge, #7
Big Sur, CA 93920
Theodore H. Swindells & 4,499,999 (7) 5.59%
High Stakes Capital, LLC
11400 S.E. 8th St.; Unit 420
Belleuve, WA 98004
All directors and executive officers 9,990,446 (8) 11.18%
as a group (2)
* Director and/or executive officer
1. Based upon 70,046,766 shares of common stock outstanding on December 31,
2004, and includes consideration of stock options, warrants, conversion
privileges or similar obligations owned by certain Officers, Directors
and/or principal shareholders entitling the holders to purchase an
aggregate of 19,282,374 shares of common stock which are exercisable
within sixty days. Therefore, for the purposes of calculating percentage
ownership as indicated in the table above 89,329,140 shares of common
stock are deemed to be issued and outstanding in accordance with Rule
13d-3 adopted by the Securities and Exchange Commission under the
Securities Exchange Act of 1934, as amended.
2. Includes 1,000,000 shares that may be acquired by Mr. Reis pursuant to the
exercise of warrants priced at $0.10 per share and expiring 5/1/08.
3. Includes 2,772,951 shares that may be acquired by Dr. DeVoe pursuant to
the exercise of warrants priced at $0.10 per share and expiring during the
period 02/15/06 through 12/31/07.
4. Includes 7,033,331 shares that may be acquired by Mr. Rotter pursuant to
the exercise of warrants priced between $0.10 to $0.36 per share and
expiring during the period 2/11/06 through 8/31/09
5. Includes 5,000,016 shares that may be acquired by Dr. Tao pursuant to the
exercise of warrants priced at $0.32 and expiring 4/12/09.
6. Includes 830,667 shares that may be acquired by Mr. Kelm pursuant to the
exercise of warrants priced between $0.02 and $0.05 and expiring during
the period 7/15/06 and 5/9/07. 7. Includes 4,166,666 shares that may be
acquired by Mr. Swindells and High Stakes Capital, LLC pursuant to the
exercise of warrants priced between $0.20 and $0.37 and expiring during
the period 7/21/07 and 10/06/08.
8. Includes 4,468,759 shares that may be acquired by the Company's Directors
or Executive Officers pursuant to the exercise of warrants exercisable at
various prices and expiring during the period 5/01/08 and 4/12/09.
- 35 -
As of the date thereof, there are no known arrangement, agreements or
understandings that may at a later date result in a change in control or delay
in change in control of the Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There have been no transactions between the Company and any officer,
director, nominee for election as director, or any shareholder owning grater
than five percent (5%) of the Company's outstanding shares, nor any member of
the above referenced individual's immediate family, except as set forth below:
During 2004, the Company granted warrants to purchase common shares of the
Company's stock to its CEO, as noted in Item 10 - Executive Compensation. The
warrants were issued in consideration for beneficial services expected to be
rendered to the Company pursuant to his employment agreement.
In April 2004, Dr. William C. Tao was granted 1,500,000 warrants, vesting
immediately, to purchase shares of the Company's common stock at an exercise
price of thirty-two cents ($0.32) for a five-year period. Dr. Tao was also
granted an additional 3,500,016 warrants at a price of $0.32 for a five-year
period, which vest at a rate of 145,834 warrants per month for a twenty-four
month period.
In 2004, the Company entered into an agreement with Nevada Hospitality
Incorporated ("NHI") to provide consulting services to MR3 in forming and
implementing political, legislative, and business strategies with the intent of
establishing partnerships with public and private sectors of the state of
Nevada. In addition, NHI was retained to provide assistance in forming and
implementing a comprehensive strategy for establishing MR3's metals recovery
technology in the state of Nevada in the form of a toll-based, processing
service for various mining consortia. Dr. William C. Tao, the Company's CEO and
Director, serves as a Director of NHI. The aggregate sum of payments made to NHI
during 2004 totaled $31,000.
Mr. Bradley N. Rotter resigned his position as Chief Executive Officer as
of April 30, 2004. Mr. Rotter remained a non-officer employee of the Company
through August 31, 2004 in a finance and investment guidance position. Mr.
Rotter maintained his position as a Director of MR3 until his successor was
elected at the Company's annual meeting held on September 20, 2004. In
consideration of his performance and contributions during the noted four month
period, the Company granted Mr. Rotter 333,336 warrants, vesting immediately
after August 31, 2004, and exercisable at $0.23 for a five-year period, which
represents the total amount of warrants Mr. Rotter would have received during
the period pursuant to his employment agreement had it been in effect through
August 31, 2004.
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PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
2.0 Plan and Agreement of Reorganization, dated October 3, 1997 (1)
3.1 Articles of Incorporation of Company, filed July 3, 1991 (1)
3.2 Certificate of Amendment of Articles of Incorporation of Company, filed
March 9, 1992 (1)
3.3 Amended and Restated Articles of Incorporation of Company, filed February
26, 1997 (1)
3.4 Certificate of Incorporation of Emarethree Corporation, a wholly owned
subsidiary of the Company, filed June 8, 2000 (1)
3.5 Amended and Restated Certificate of Incorporation of Emarethree
Corporation changing name to MR3 Systems, Inc., filed March 31, 2000 (2)
3.6 Delaware Certificate of Ownership and Merger Merging Bioponic
International into MR3 Systems, Inc. filed, April 28, 2000 (1)
3.7 By-Laws of MR3 Systems, Inc., filed as Exhibit to Form 10-SB dated
February 12, 2001 (1)
10.1 Purchase agreement with Fluror Hanford dated May 4, 2004 (3)
10.2 William C. Tao Employment Agreement dated April 12, 2004 (4)
10.3 Alliance and Project Venture Agreement between the Company and Caddell &
Associates, LLC dated August 23, 2004 (5)
10.4 MR3 Systems Metals Extraction Agreement between the Company and Franklin
Lakes Resources, Inc., dated September 14, 2004 (5)
10.5 Loan Agreement (Credit Facility) between High Stakes Capital LLC and the
Company dated October 7, 2003 (6)
10.6 Strategic Alliance and Projected Venture Agreement between the Company and
Purolite Company dated November 15, 2004.
14.1 Code of ethics
21.1 Subsidiary of the Company (7)
31.1 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
31.2 Certification of CFO pursuant to Section 302 of the Sarbanes Oxley Act of
2002
32.1 Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(1) Incorporated by reference from Registration Statement on Form 10-SB
filed with the Securities and Exchange Commission on February 12, 2001.
(2) Filed to reflect the current version on file with the Delaware Office
of Secretary of State.
(3) Incorporated by reference from the quarterly report on Form 10-QSB for
the period ended March 31, 2004 filed with the Securities and Exchange
Commission on 5/17/2004.
(4) Incorporated by reference from the quarterly report on Form 10-QSB for
the period ended June 30, 2004 filed with the Securities and Exchange Commission
on 8/13/2004.
- 37 -
(5) Incorporated by reference from the quarterly report on Form 10-QSB for
the period ended September 30, 2004 filed with the Securities and Exchange
Commission on 11/15/2004.
(6) Incorporated by reference from the annual report on Form 10-KSB
(Amendment #2) for the period ended December 31, 2002 filed with the Securities
and Exchange Commission on December 22, 2003.
(7) Incorporated by reference from the annual report on Form 10-KSB for
the period ended December 31, 2002 filed with the Securities and Exchange
Commission on August 19, 2003.
Reports on Form 8-K
The Company filed a Current Report on Form 8-K on October 18, 2004,
related to the disclosure of MR3's filing of a legal motion for breach of
contract and declaratory relief in connection with a MR3 Technology Transfer
Agreement with Linsa Associates Ltd.
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit fees
The aggregate fees billed for professional services rendered by our
principal accountant for the audit of our annual financial statements, review of
our financial statements included in our quarterly reports and other fees that
are normally provided by our accountant in connection with our audits for the
fiscal years ended December 31, 2004 and 2003 were $68,400 and $58,985,
respectively.
Audit Related Fees
There were no aggregate fees billed for assurance and related services by
our principal accountant that are reasonably related to the performance of the
audit or review of our financial statements, other than amounts previously
reported in this Item 14 for the fiscal years ended December 31, 2004 and 2003.
Tax Fees
The aggregate fees billed for professional services rendered by our
principal accountant for tax compliance, tax advice and tax planning for the
fiscal years ended December 31, 2004 and 2003 were $3,412, and $11,825,
respectively.
All Other Fees
There were no other fees billed by our principal accountant for the fiscal
years ended December 31, 2004 and 2003.
Audit Committee
The Company's directors, acting as its audit committee, pre-approved all
of the above amounts billed to the Company prior to incurring the expenses
associated therewith.
- 38 -
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MR3 Systems, Inc.
Date: May 19, 2005
By: /s/ RANDALL S. REIS
-------------------------------------
Randall S. Reis
Chairman of the Board
In accordance with the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Signature Title Date
/s/ RANDALL S. REIS Chairman of the Board and May 19, 2005
-------------------
Randall S. Reis Chief Financial Officer
/s/ WILLIAM C. TAO Chief Executive Officer and Director May 19, 2005
------------------
William C. Tao
- 39 -
MR3 SYSTEMS, INC
FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
C O N T E N T S
---------------
Report of Independent Certified Public Accountants F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Shareholders' Equity F-4
Statements of Cash Flows F-5 - F-6
Notes to Consolidated Financial Statements F-7 - F-32
- 40 -
REPORT OF REGISTERED INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
MR3 Systems, Inc
We have audited the balance sheets of MR3 Systems, Inc., as of December 31, 2004
and 2003, and the related statements of operations, shareholders' equity and
cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MR3 Systems, Inc., as of
December 31, 2004 and 2003, and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has incurred substantial net losses and
utilized substantial amounts of cash in its operating activities over the past
several years and as of December 31, 2004, has an accumulated deficit of
$13,091,064 and a stockholders' deficit of $1,808,927. These matters, among
others, raise substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are described in Note 2.
These financial statements do not include any adjustments relating to the
recoverability and classification of recorded assets, or the amounts and
classification of liabilities that might be necessary in the event the Company
cannot continue in existence.
Pohl, McNabola, Berg & Company LLP
San Francisco, CA
April 22, 2005
F-1
MR3 SYSTEMS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
------------ ------------
ASSETS
Cash $ 63,712 $ 288,674
Accounts receivable 17,650 --
------------ ------------
Total current assets 81,362 288,674
------------ ------------
Property, equipment and leaseholds,
net of accumulated depreciation and
amortization 509,902 391,089
Deposits 2,497 21,497
------------ ------------
Total non-current assets 512,399 412,586
------------ ------------
TOTAL ASSETS $ 593,761 $ 701,260
============ ============
LIABILITIES
Accounts payable $ 464,522 $ 417,371
Payroll taxes payable 152,895 179,739
Accrued expenses 491,590 294,470
Note payable 84,254 84,254
Capital lease obligation 55,773 50,418
Short term notes payable 356,833 244,769
------------ ------------
Total current liabilities 1,605,867 1,271,021
------------ ------------
Long term notes payable 745,970 501,597
Capital lease obligation - long term 50,851 111,032
------------ ------------
Total long term liabilities 796,821 612,629
------------ ------------
TOTAL LIABILITIES 2,402,688 1,883,650
------------ ------------
SHAREHOLDERS' DEFICIT
Common stock: 250,000,000 shares authorized;
par value $ 0.01 70,046,766 and 60,334,897
shares issued and outstanding
in 2004 and 2003, respectively 700,468 603,350
Preferred stock: 5,000,000 shares authorized;
par value $ 0.01 Series A, 1,250,000 shares
authorized; 232,714 and 237,464 shares issued
and outstanding in 2004 and 2003, respectively 2,327 2,375
Additional paid-in capital 10,579,342 8,943,422
Accumulated deficit (13,091,064) (10,731,537)
------------ ------------
Total shareholders' deficit (1,808,927) (1,182,390)
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' DEFICIT $ 593,761 $ 701,260
============ ============
The accompanying notes are an integral part of these financial statements.
F-2
MR3 SYSTEMS, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
2004 2003
------------ ------------
Income
Sales $ 380,000 $ --
Cost of goods sold (293,346) --
------------ ------------
Gross margin 86,654 --
------------ ------------
Operating Expenses
Development expenses 474,307 545,335
Office expenses 283,164 85,200
Personnel expenses 572,741 488,977
Outside services and professional fees 832,055 432,391
Office rent 37,626 34,802
Loss on write-down of equipment -- 105,813
Depreciation 35,413 9,113
------------ ------------
Total operating expenses 2,235,306 1,701,631
------------ ------------
Other (Income) and Expenses
Interest expense 216,859 168,533
Other income (5,984) (223,843)
------------ ------------
Total other (income) and expense 210,875 (55,310)
------------ ------------
Net loss before taxes (2,359,527) (1,646,321)
------------ ------------
Provision for income taxes -- 2,400
------------ ------------
Net loss $ (2,359,527) $ (1,648,721)
============ ============
Loss per share:
Basic - continuing operations $ (0.04) $ (0.03)
============ ============
Diluted - continuing operations $ (0.04) $ (0.03)
============ ============
Weighted average number of shares:
Basic 64,262,583 53,060,616
============ ============
Diluted 64,262,583 53,060,616
============ ============
The accompanying notes are an integral part of these financial statements.
F-3
MR3 SYSTEMS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
[Enlarge/Download Table]
Common Stock Preferred Stock Additional
paid-in Accumulated
Shares Amount Shares Amount Capital Deficit Total
----------- --------- -------- ------- ------------ ------------ -----------
Balance December 31, 2002 48,382,171 $ 483,822 245,464 $ 2,455 $ 7,403,600 $ (9,082,816) $(1,192,939)
----------- --------- -------- ------- ------------ ------------ -----------
Sale of common stock 6,511,178 65,112 -- -- 544,638 -- 609,750
Warrants issued with stock
offering -- -- -- -- 183,750 -- 183,750
Conversion of preferred stock
into common stock 8,000 80 (8,000) (80) -- -- --
Conversion of notes payable and
accrued interest
into common stock 4,297,276 42,973 -- -- 460,455 -- 503,428
Shares issued for cancellation of
warrants 105,000 1,050 -- -- 11,550 -- 12,600
Shares issued in settlement of
anti-dilution agreement 200,000 2,000 -- -- 18,000 20,000
Compensation recognized on
options granted -- -- -- -- 25,800 -- 25,800
Compensation recognized on
repriced options -- -- -- -- 85,475 -- 85,475
Warrant issuance -- -- -- -- 129,729 -- 129,729
Common stock issued for services 831,272 8,313 -- -- 80,425 -- 88,738
Net loss -- -- -- -- -- (1,648,721) (1,648,721)
----------- --------- -------- ------- ------------ ------------ -----------
Balance December 31, 2003 60,334,897 $ 603,350 237,464 $ 2,375 $ 8,943,422 $(10,731,537) $(1,182,390)
----------- --------- -------- ------- ------------ ------------ -----------
Sale of common stock 5,134,071 51,341 -- -- 967,475 -- 1,018,816
Conversion of preferred stock )
into common stock 4,750 48 (4,750 (48) -- -- --
Conversion of accrued interest
into common stock 203,343 2,033 -- -- 12,201 -- 14,234
Conversion of accounts payable
into common stock 43,375 434 -- -- 8,241 -- 8,675
Exercise of warrants and options
into common stock 5,445,148 54,451 -- -- 446,563 -- 501,014
Shares repurchased of warrants
exercised (1,696,061) (16,961) -- -- (447,554) -- (464,515)
Compensation recognized on
options granted -- -- -- -- 124,580 -- 124,580
Compensation recognized on
repriced options -- -- -- -- 298,186 -- 298,186
Warrants issuance -- -- -- -- 48,000 -- 48,000
Warrants issued for services -- -- -- -- 19,000 -- 19,000
Common stock issued for services 577,243 5,772 -- -- 159,228 -- 165,000
Net loss -- -- -- -- -- (2,359,527) (2,359,527)
----------- --------- -------- ------- ------------ ------------ -----------
Balance December 31, 2004 70,046,766 $ 700,468 232,714 $ 2,327 $ 10,579,342 $(13,091,064) $(1,808,927)
=========== ========= ======== ======= ============ ============ ===========
The accompanying notes are an integral part of these financial statements.
F-4
MR3 SYSTEMS, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(2,359,527) $(1,648,721)
Adjustments to reconcile net loss to net cash used
by operating activities:
Depreciation and amortization 35,413 9,113
Net loss on write-down and disposal of property and equipment 13,815 105,813
Compensation expense on stock options granted 422,766 111,275
Amortization of warrant issuance 42,373 62,021
Shares issued for Services 184,000 88,738
Shares issued on settlement of anti-dilution agreement -- 20,000
Changes in assets and liabilities
Accounts receivable (17,650) --
Prepaid expenses and deposits 19,000 86,000
Accounts payable 55,826 (80,360)
Payroll taxes payable (26,844) (16,957)
Accrued expenses 223,418 24,579
Liabilities related to discontinued division -- (33,948)
----------- -----------
Net cash used by operating activities $(1,407,410) $(1,272,447)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment $ (168,041) $ (220,476)
----------- -----------
Net cash used by investing activities $ (168,041) $ (220,476)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable-shareholders $ 350,000 $ 1,007,661
Principal payments on notes payable-shareholders -- (27,000)
Payments on capital lease obligations (54,826) (5,060)
Proceeds from sale of common stock and warrants 1,055,315 793,500
----------- -----------
Net cash provided by financing activities $ 1,350,489 $ 1,769,101
----------- -----------
(continued)
The accompanying notes are an integral part of these financial statements.
F-5
MR3 SYSTEMS, INC.
STATEMENTS OF CASH FLOWS (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 2004 AND 2003
[Enlarge/Download Table]
2004 2003
--------- ---------
Increase (decrease) in cash and $(224,962) $ 276,178
--------- ---------
Balance at beginning of year 288,674 12,496
--------- ---------
Balance at end of year $ 63,712 $ 288,674
========= =========
Supplemental disclosures:
Cash paid for interest $ 28,466 $ --
========= =========
Cash paid for taxes $ -- $ 2,400
========= =========
Supplemental Schedule of Non-Cash Investing and Financing Activities:
2004 2003
--------- ---------
Conversion of notes payable and accrued interest into common stock $ 14,234 $ 503,428
========= =========
Conversion of accounts payable into common stock $ 8,675 $ --
========= =========
Common stock issued for services $ 165,000 $ 88,738
========= =========
Compensation expense on stock options and warrants granted $ 441,766 $ 111,275
========= =========
Amortization of warrant issuance $ 42,373 $ 62,021
========= =========
Shares issued on settlement of anti-dilution agreement $ -- $ 20,000
========= =========
Shares issued for cancellation of warrants $ -- $ 12,600
========= =========
2003
---------
Acquisition of equipment under capitalized leases $ 200,425
Less: Equipment loans and capitalized leases (166,510)
---------
Cash used for acquisition of equipment under capitalized leases $ 33,915
=========
The accompanying notes are an integral part of these financial statements.
F-6
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies
Organization and line of business
MR3 Systems, Inc., (formerly known as Bioponic International, Inc.), a Delaware
corporation ("the Company" or "MR3") was formed in July 1991 initially for the
purpose of developing, manufacturing and installing its proprietary Airponic
Growing Systems ("AGS"). On October 7, 1997, Bioponic International, Inc.
acquired all of the outstanding shares of MR3, Inc., a Delaware environmental
technology Company, for 2,665,000 shares of the Company's stock. The merger
qualified as a tax-free exchange and was accounted for as a pooling of
interests. MR3, Inc. had nominal assets and liabilities on the date of
acquisition. On June 8, 1999, the Company formed Emarethree Corporation, a
Delaware Corporation, as a wholly owned inactive subsidiary of the Company. On
March 6, 2000, the Company formed Bioponic AGS, Inc., a Delaware Corporation, as
a wholly owned inactive subsidiary of Emarethree Corporation. On March 31, 2000,
the Certificate of Incorporation of Emarethree Corporation was amended and
restated to change its name to MR3 Systems, Inc. In April 2000, the Company
completed a change of domicile from California to Delaware.
MR3 has developed processes that can selectively capture and remove metals from
aqueous streams. The Company has focused its efforts on completing the
development of its products and initial marketing and sales efforts. The
Company's long-term objectives are to focus on the sales and development of its
environmental technology and to expand the worldwide operations of MR3 by
identifying and processing metal-laden source materials appropriate to its
technology.
On April 29, 2000, the Company spun off its Airponic Growing Systems (AGS)
division to its shareholders (shareholders of record as of January 31, 2000).
The AGS division was comprised of agricultural and horticultural production,
plant biotechnology and consumer products. Further, Bioponic International
shareholders received one share of Bioponic AGS, Inc. for every two shares of
Bioponic International as a stock dividend.
Basis of accounting
The financial statements have been prepared in accordance with Generally
Accepted Accounting Principles in the United States of America ("U.S. GAAP").
Use of estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and the disclosures of
contingent assets and liabilities at the date of the financial statements, as
well as the reported amounts of revenues and expenses during the reporting
period. Significant estimates include accrued expenses, and depreciation. Actual
results could differ from those estimates.
F-7
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Contingencies
Certain conditions may exist as of the date the financial statements are issued,
which may result in a loss to the Company but which will only be resolved when
one or more future events occur or fail to occur. The Company's management and
its legal counsel assess such contingent liabilities, and such assessment
inherently involves an exercise of judgment. In assessing loss contingencies
related to legal proceedings that are pending against the Company or unasserted
claims that may result in such proceedings, the Company's legal counsel
evaluates the perceived merits of any legal proceedings or unasserted claims as
well as the perceived merits of the amount of relief sought or expected to be
sought therein.
If the assessment of a contingency indicates that it is probable that a material
loss has been incurred and the amount of the liability can be estimated, then
the estimated liability would be accrued in the Company's financial statements.
If the assessment indicates that a potentially material loss contingency is not
probable but is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an estimate of the
range of possible loss if determinable and material, would be disclosed.
Loss contingencies considered remote are generally not disclosed unless they
involve guarantees, in which case the nature of the guarantee would be
disclosed.
Cash and cash equivalents
For purpose of the statements of cash flows, cash equivalents include amounts
invested in a money market account with a financial institution. The Company
considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. Cash equivalents are carried at cost,
which approximates market.
Concentration of cash
The Company at time maintains cash balances in excess of the federally insured
limit of $100,000 per financial institution. Uninsured balances amounted to
$202,531 at December 31, 2003. There were no uninsured balances at December 31,
2004.
Revenue recognition
The Company recognizes revenue when merchandise is shipped to a customer or at
the time services are rendered, subject to certain acceptance criteria agreed to
between the Company and the customer. Shipping costs for delivery of the
Company's products are recorded as sales revenue.
F-8
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Property and equipment
Property and equipment are recorded at cost less accumulated depreciation and
amortization. Expenditures for major additions and improvements are capitalized,
and minor maintenance, repairs and replacements are charged to expense as
incurred. When property and equipment are retired or otherwise disposed of, the
cost and accumulated depreciation are removed from the accounts and any
resulting gain or loss is included in the results of operations for the
respective period. Depreciation and amortization are provided using the
straight-line method over the estimated useful lives of the respective assets
using the straight-line method for financial statement purposes. The Company
uses other depreciation methods (generally accepted) for tax purposes where
appropriate. The estimated useful lives for significant property and equipment
are as follows:
Computer and manufacturing equipment 5 - 10 years
Office furniture and fixtures 3 - 7 years
Building and improvements 2 - 25 years
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated lives of
the improvements.
Assets held under capital leases
Assets held under capital leases are recorded at the lower of the net present
value of the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization of assets held under capital leases is
computed using the straight-line method over the shorter of the estimated useful
lives of the assets or the period of the related lease.
Advertising costs
The Company expenses advertising costs as incurred. There were no advertising
costs for the years ended December 31, 2004 and 2003, respectively.
Basic and diluted net earnings per share
Basic net earnings (loss) per common share is computed by dividing net earnings
(loss) applicable to common shareholders by the weighted-average number of
common shares outstanding during the period. Diluted net earnings (loss) per
common share is determined using the weighted-average number of common shares
outstanding during the period, adjusted for the dilutive effect of common stock
equivalents, consisting of shares that might be issued upon exercise of common
stock options. In periods where losses are reported, the weighted-average number
of common shares outstanding excludes common stock equivalents, because their
inclusion would be anti-dilutive.
F-9
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Income taxes
The Company utilizes SFAS No. 109, "Accounting for Income Taxes," which requires
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been included in the financial statements
or tax returns. Under this method, deferred income taxes are recognized for the
tax consequences in future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each period end based
on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are
established, when necessary, to reduce deferred tax assets to the amount
expected to be realized. The provision for income taxes represents the tax
payable for the period and the change during the period in deferred tax assets
and liabilities.
Fair value of financial instruments
The Company measures its financial assets and liabilities in accordance with
generally accepted accounting principles. For certain of the Company's financial
instruments, including cash and cash equivalents, accounts payable and accrued
liabilities, the carrying amounts approximate fair value due to their short
maturities. The amounts shown for notes payable also approximate fair value
because current interest rates offered to the Company for debt of similar
maturities are substantially the same.
SFAS-133: Accounting for Derivative Instruments and Hedging Activities
The Company is currently not engaged in hedging activities nor does it have any
derivative instruments, thus there is no impact on the current period financial
statements.
Intangible assets
Effective January 1, 2002, the Company adopted Statement of Financial Accounting
Standards No. 142 ("SFAS 142"), "Goodwill and Other Intangible Assets." In
accordance with SFAS 142, the Company ceased amortizing the intangible value of
its proprietary rights to metal extraction and separation technology and
performed a transitional test of this intangible asset as of January 1, 2002.
SFAS 142 requires that intangibles be tested for impairment on an annual basis
and between annual tests in certain circumstances. The Company generally
determines the fair value of its intangible assets using the expected present
value of future cash flows, giving consideration to the market comparable
approach. If the carrying amount of the Company's reporting units exceeds the
reporting unit's fair value, the Company performs the second step of the
goodwill impairment test to determine the amount of impairment loss. The second
step of the goodwill impairment test involves comparing the implied fair value
of the Company's reporting unit's goodwill with the carrying amount of that
goodwill.
F-10
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Intangible assets (continued)
The carrying value and useful lives of intangible assets are based on
management's current assessment of recoverability. Management periodically
evaluates whether certain circumstances may affect the estimated useful lives or
the recoverability of the unamortized balance of intangible assets using both
objective and subjective factors. Objective factors include management's best
estimates of projected future earnings and cash flows and analysis of recent
sales and earnings trends. Subjective factors include competitive analysis and
the Company's strategic focus.
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles, are
excluded from net income in accordance with Statement on Financial Accounting
Standards No. 130, "Reporting Comprehensive Income." The Company, however, does
not have any components of comprehensive income (loss) as defined by SFAS No.
130 and therefore, for the years ended December 31, 2004 and 2003 comprehensive
income (loss) is equivalent to the Company's reported net income (loss).
Stock option plan
Financial Accounting Standards Board Statement No. 123 (Accounting for
Stock-Based Compensation) encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans based on the fair
value of options granted. The Company has elected to continue to account for
stock-based compensation using the intrinsic value method prescribed in
Accounting Principles Board Opinion No. 25 (Accounting for Stock Issued to
Employees) and related interpretations and to provide additional disclosures
with respect to the pro forma effects of adoption had the Company recorded
compensation expense as provided in SFAS-123.
In accordance with APB-25, compensation cost for stock options is recognized in
income based on the excess, if any, of the quoted market price of the stock at
the grant date of the award or other measurement date over the amount an
employee must pay to acquire the stock. Generally, the exercise price for stock
options granted to employees equals or exceeds the fair market value of the
Company's common stock at the date of grant, thereby resulting in no recognition
of compensation expense by the Company.
The Company's policies comply with the guidance provided by FASB Interpretation
No. 44, "Accounting for Certain Transactions Involving Stock Compensation." This
Interpretation addresses certain practice issues related to APB Opinion No. 25
in regards to options or warrants granted to employees and other third-parties.
Research and development cost
Research and development represent internal costs incurred in connection with
the Company's testing, documenting and improving its metals extraction and
recovery processes. All research and development costs are expensed when
incurred.
F-11
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Impairment of long-lived assets
The Company accounts for the impairment and disposition of long-lived assets in
accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to be Disposed Of". Long-lived assets are reviewed
whenever indicators of impairment are present and whenever the undiscounted cash
flows are not sufficient to recover the related asset-carrying amount.
Segment reporting
The FASB issued SFAS 131 on "Disclosures about Segments of an Enterprise and
Related Information" effective in 1998. The Company evaluated SFAS 131 and
determined that it operates in only one segment.
Business risks and uncertainties
The Company operates in the evolving field of materials waste processing. New
developments could affect both significantly and adversely existing and emerging
technologies in the field.
The Company's success in developing additional marketable products and processes
and achieving a competitive position will depend on its ability to retain
qualified management personnel and to raise sufficient capital to meet its
operating and development needs.
While the Company is seeking financing through equity and loans, there can be no
assurance that the Company will be successful in accomplishing its objectives.
Environmental costs
Costs related to environmental remediation are charged to expense. Other
environmental costs are also charged to expense unless they increase the value
of the property and/or provide future economic benefits, in which event they are
capitalized. Liabilities are recognized when the expenditures are considered
probable and can be reasonably estimated.
Recent accounting pronouncements
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46") "Consolidation
of Variable Interest Entities." Until this interpretation, a company generally
included another entity in its consolidated financial statements only if it
controlled the entity through voting interests. FIN 46 requires a variable
interest entity, as defined, to be consolidated by a company if that company is
subject to a majority of the risk of loss from the variable interest entity's
activities or entitled to receive a majority of the entity's residual returns.
The Company does not believe the adoption of FIN 46 will have a material impact
on its results of operations or financial position.
F-12
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements (continued)
In April 2003, the FASB issued SFAS 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities", which amends SFAS 133 for
certain decisions made by the FASB Derivatives Implementation Group. In
particular, SFAS 149: (1) clarifies under what circumstances a contract with an
initial net investment meets the characteristic of a derivative, (2) clarifies
when a derivative contains a financing component, (3) amends the definition of
an underlying instrument to conform it to language used in FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others," and (4) amends certain
other existing pronouncements. This Statement is effective for contracts entered
into or modified after June 30, 2003, and for hedging relationships designated
after June 30, 2003. In addition, most provisions of SFAS 149 are to be applied
prospectively. The Company does not expect the adoption of SFAS 149 will have a
material impact on its financial position, cash flows or results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS 150").
SFAS 150 changes the accounting for certain financial instruments that under
previous guidance issuers could account for as equity. It requires that those
instruments be classified as liabilities in balance sheets. The guidance in SFAS
150 is generally effective for all financial instruments entered into or
modified after May 31, 2003, and otherwise is effective on July 1, 2003. The
Company does not expect the adoption of SFAS 150 will have a material impact on
its financial position, cash flows or results of operations.
In July 2004, the EITF issued a draft abstract for EITF Issue No. 04-08, "The
Effect of Contingently Convertible Debt on Diluted Earnings per Share" ("EITF
04-08"). EITF 04-08 reflects the Task Force's tentative conclusion that
contingently convertible debt should be included in diluted earnings per share
computations regardless of whether the market price trigger has been met. If
adopted, the consensus reached by the Task Force in this Issue will be effective
for reporting periods ending after December 15, 2004. Prior period earnings per
share amounts presented for comparative purposes would be required to be
restated to conform to this consensus and the Company would be required to
include the shares issuable upon the conversion of the Notes in the diluted
earnings per share computation for all periods during which the Notes are
outstanding Management does not expect the implementation of this new standard
to have a material impact on its computation of diluted earnings per share.
In September 2004, the EITF delayed the effective date for the recognition and
measurement guidance previously discussed under EITF Issue No. 03-01, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments" ("EITF 03-01") as included in paragraphs 10-20 of the proposed
statement. The proposed statement will clarify the meaning of
other-than-temporary impairment and its application to investments in debt and
equity securities, in particular investments within the scope of FASB Statement
No. 115, "Accounting for Certain Investments in Debt and Equity Securities," and
investments accounted for under the cost method. The Company is currently
evaluating the effect of this proposed statement on its financial position and
results of operations.
F-13
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
1. Summary of Significant Accounting Policies (continued)
Recent accounting pronouncements (continued)
In December 2004, the Financial Accounting Standards Board ("FASB") released a
revision to Statement of Financial Accounting Standard ("SFAS") No. 123,
Accounting for Stock-Based Compensation ("FAS 123R"). FAS 123R addresses the
accounting for share-based payment transactions in which an enterprise receives
employee services in exchange for (a) equity instruments of the enterprise or
(b) liabilities that are based on the fair value of the enterprise's equity
instruments or that may be settled by the issuance of such equity instruments.
The statement would eliminate the ability to account for share-based
compensation transactions using APB Opinion No. 25, Accounting for Stock Issued
to Employees, and generally would require instead that such transactions be
accounted for using a fair-value-based method. The revised statement is
effective for the annual reporting period beginning after December 15, 2005. MR3
will adopt the statement beginning in 2006 as required. With the adoption of
this new statement, the Company will have to recognize substantially more
compensation expense in the future. This may have a material adverse impact on
the Company's financial position and results of operations in the future.
In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 151, "Inventory Costs, an amendment of ARB No. 43, Chapter 4", which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and charges regardless of whether they meet the criterion of "so
abnormal" that was originally stated in Accounting Research Bulletin No. 43,
chapter 4. In addition, SFAS No. 151 requires that the allocation of fixed
production overheads to conversion costs be based on the normal capacity of the
production facilities. SFAS No. 151 is effective for inventory costs incurred
during fiscal year beginning after June 15, 2005. Management does not expect the
implementation of this new standard to have a material impact on its financial
position, results of operations and cash flows.
In December 2004, the Financial Accounting Standards Board Statement issued SFAS
No. 153, "Exchanges of Nonmonetary Assets - an amendment of APB Opinion No. 29",
which amends Opinion 29 by eliminating the exception for nonmonetary exchanges
of similar productive assets and replaces it with a general exception for
exchanges of nonmonetary assets that do not have commercial substance. A
nonmonetary exchange has commercial substance if the future cash flows of the
entity are expected to change significantly as a result of the exchange. SFAS
No. 151 is effective for a fiscal year beginning after June 15, 2005, and
implementation is done prospectively. Management does not expect the
implementation of this new standard to have a material impact on its financial
position, results of operations and cash flows.
F-14
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
2. Going Concern
The accompanying financial statements have been prepared in conformity with
generally accepted accounting principles, which contemplate continuation of the
Company as a going concern. However, the Company has experienced net losses of
$2,359,527 and $1,648,721 for the years ended December 31, 2004 and 2003,
respectively. The Company also had a net working deficit of $1,524,505 and
$982,347 for the years ended December 31, 2004 and 2003, respectively.
Additionally, the Company must raise additional capital to meet its working
capital needs. If the Company is unable to raise sufficient capital to fund its
operations, it might be required to discontinue its operations. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. In view of the matters described above, recoverability of a major
portion of the recorded asset amounts shown in the accompanying balance sheet is
dependent upon the Company's ability to generate sufficient sales volume to
cover its operating expenses and to raise sufficient capital to meet its payment
obligations. The financial statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts, or amounts and
classification of liabilities that might be necessary should the Company be
unable to continue in existence.
Management has previously relied on equity financing sources and debt offerings
to fund operations. The Company's reliance on equity and debt financing will
continue. The Company has obtained additional debt financing subsequent to
December 31, 2004.
3. Property and Equipment
Property and equipment at December 31, 2004 and 2003 consist of the following:
2004 2003
--------- ---------
Office furniture and fixtures $ 26,057 $ 10,069
Computer and manufacturing equipment 531,814 379,762
Leasehold improvements -- 22,605
--------- ---------
Total property and equipment 557,871 412,436
Less accumulated depreciation and amortization (47,969) (21,347)
--------- ---------
Total $ 509,902 $ 391,089
========= =========
Depreciation expense for the years ended December 31, 2004 and 2003 was $35,413
and $9,113, respectively.
F-15
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
4. Impairment of Long-Lived Assets
In June 2002, the Company announced that it would close its Butte, Montana, Zinc
processing plant permanently and move its equipment to Denver, Colorado to
process gold under the agreement with Consolidated Empire Gold, Inc. During
2003, management decided to terminate its agreement with Consolidated Empire
Gold, Inc and performed a review of the remaining carrying value of MR3 property
and equipment. The review indicated that the MR3 property and equipment were
impaired. As a result, the Company recorded an impairment loss in the amount of
$105,813, which was included in operating expenses during the year ended
December 31, 2003.
5. Accrued Expenses
Certain officers and key employees of the Company agreed to defer a portion of
their compensation (salaries and bonuses) earned during the years ended December
31, 2004 and 2003.
Accrued interest represents the interest earned on the outstanding notes payable
balances at December 31, 2004 and 2003 due to shareholders and related parties.
Accrued expenses at December 31, 2004 and 2003 consist of the following:
2004 2003
-------- --------
Deferred compensation $223,581 $181,443
Accrued interest 164,813 50,341
Accrued vacation 21,515 27,886
Accrued audit fees 35,000 34,000
Accrued expenses - other 45,881 --
State income tax payable 800 800
-------- --------
Total $491,590 $294,470
======== ========
6. Notes Payable
The Company has entered into multiple loan agreements with its shareholders and
other related parties.
In 2002, the Company had a 10% note payable with an outstanding principal
balance of $131,608. In 2003, the Company reached an agreement with this note
holder to modify the terms of the note. The note holder agreed to receive
additional warrants convertible into 300,000 shares of the Company's common
stock at an exercise price of $0.05 per share and the principal amount of the
note was modified to include the accrued interest balance of $13,161. As a
result, the amount of the note was modified to $144,769 to reflect the revised
terms, and additional interest expense was recognized for the fair value of the
warrants granted to obtain the note payable term modification. In 2004, the
Company agreed to extend the expiration date from January 2005 to January 2007
of existing warrants convertible into 300,000 shares that has an exercise price
of $0.10 per share. The principal amount of the note was modified to include the
accrued interest of $12,064 and the note amount was modified to $156,833.
F-16
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
6. Notes Payable (continued)
In 2002, the Company issued $50,000 of 12% convertible subordinated notes to one
of its shareholders, due on October 1, 2007. Interest is due and payable at
maturity. The notes are convertible by the holder into shares of the Company's
common stock at any time at a conversion price of $0.07 per share, which was
greater than the fair value of the Company's common stock on the date of
issuance. The notes are subordinated to all existing and future senior
indebtedness, as defined in the indenture. The notes are redeemable at any time
at the option of the Company at the principal amount plus accrued interest. The
proceeds were primarily used for general corporate purposes. In February 2003,
the Company issued another 12% convertible note in the amount of $15,000 to the
same shareholder with a five-year maturity date.
During 2002, the Company entered into promissory note agreements with different
investors to finance the operations of the new plant in Colorado. These notes
mature in five (5) five years from the date of issuance and bear a 12 percent
interest rate per year. The total amount received from these notes during 2003
amounted to $349,500. In light of the subsequent termination of its agreement
with Empire Gold in October 2003, the Company offered alternative financing
arrangement to the Empire note holders. The majority of note holders converted
their principal and interest into 3,657,752 restricted shares of the Company's
common stock at twelve cents ($0.12) per share and retained their attached
warrants. The converted notes in 2003 amounted to $412,000. Two note holders
opted to retain the amount of their Empire note as a loan to the Company for a
five-year period with an annual interest rate of 12%. In addition, these note
holders were granted 105,000 shares of the Company's common stock equal to the
amount of warrants originally granted. As a consequence, the original warrants
of these two note holders were subsequently cancelled. The outstanding balance
on these notes at December 31, 2004 and 2003 amounted to $52,500.
In April 2003, the Company authorized two 12% convertible notes for $30,000 to
two unrelated parties with a five- year maturity date.
In October 2003, management arranged a $1,250,000 credit facility which will
allow the Company to further its ability to deploy the first in a series of
plants to utilize its metals separation and purification technology. The credit
facility consists of a 14% Promissory Note in the principal amount of
$1,250,000, due March 1, 2006, or an earlier date 24 months from the date the
first plant is completed and operational. The Company is obligated to submit
requests for funds against the credit facility in connection with its financing
needs related to plant development and construction. Attached to the Promissory
Note are five-year warrants to purchase 2,000,000 shares of the Company's common
stock at a price of $0.23 per share. The credit facility also has an equity
conversion feature allowing the lender, a private equity and financing group, to
convert the loan into percentage ownership in the plant. The Company received
its first $250,000 of loan proceeds on October 14, 2003 and its second $250,000
of loan proceeds on December 17, 2003. The Company received its third $250,000
of loan proceeds on February 5, 2004. The total outstanding balance on this note
amounted to $750,000 and $500,000 at December 31, 2004 and 2003, respectively.
This obligation is secured by equipment costing $224,466.
F-17
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
6. Notes Payable (continued)
In December 2003, the Company entered into a $100,000 promissory note with The
Aberdeen Trust, Grosvenor Trust Company Limited, as Trustee, for the purpose of
a bridge loan to the Company. Mr. Bradley Rotter, former Chief Executive
Officer, is the beneficial owner of the Aberdeen Trust. The Company is obligated
to pay back on demand the full amount of the note plus any interest accrued at
12% per annum. In consideration for entering into the promissory note, Aberdeen
Trust was granted warrants to purchase 200,000 shares of the Company's common
stock at $0.35 per share for a five-year period. The outstanding balance on this
note amounted to $100,000 at December 31, 2004 and 2003.
In December 2004, the company entered into a $100,000 promissory note with a
private investment group for the purpose of a bridge loan to the Company. The
Company is obligated to pay back on demand the full amount of the note plus
interest accrued at 20% per annum.
Long-term notes payable at consisted of the following at December 31,
[Enlarge/Download Table]
2004 2003
--------- ---------
12% convertible subordinated debenture dated October 2002, due October 2007 $ 50,000 $ 50,000
with interest due and payable on the maturity date, convertible into 714,286
shares of common stock at $0.07 per share at any time prior to maturity
12% convertible subordinated debenture dated February 2003, due February 2008
with interest due and payable on the maturity date, convertible into 214,286
shares of common stock at $0.07 per share at any time prior to
maturity 15,000 15,000
12% convertible subordinated debentures dated April 2003, due April 2008 with
interest due and payable on the maturity date, convertible into 300,000
shares of common stock at $0.10 per share at any time prior to maturity 30,000 30,000
12% note to a shareholder dated November 2002, due November 2007 with interest
due and payable on first anniversary date and thereafter on a
quarterly basis 50,000 50,000
12% note to a shareholder dated December 2002, due December 2007 with interest
due and payable on first anniversary date and thereafter on a
quarterly basis 2,500 2,500
14% secured promissory note to a private financing group in the principal amount
of $1,250,000 with equity conversion features dated October 2003 and
due March 1, 2006 750,000 500,000
--------- ---------
897,500 647,500
Less: Unamortized discount (151,530) (145,903)
--------- ---------
Total long-term notes payable $ 745,970 $ 501,597
========= =========
F-18
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
6. Notes Payable (continued)
In conjunction with the issuance of the convertible notes in 2002 and 2003, the
Company issued Common Stock Purchase Warrants to purchase shares of the
Company's common stock at an exercise price that ranges from $0.03 to $0.10 per
share. The total value allocated to the note warrants is being amortized to
interest expense over the term of the notes. At December 31, 2004 and 2003, the
unamortized discount on the notes amounted to $151,530 and $145,903,
respectively. All conversion features on the notes payable were priced at market
value or greater at the time of issuance.
Accrued interest on all notes amounted to $164,813 and $50,341 at December 31,
2004 and 2003, respectively.
7. Capital Lease Obligation
The Company leases laboratory equipment under a lease agreement that is
classified as a capital lease. The cost of this leased equipment amounted to
$200,425 and is included in property and equipment at December 31, 2004.
Accumulated amortization of the leased equipment at December 31, 2004 amounted
to $23,307. Amortization of assets under capital leases is included in
depreciation expense.
The future minimum lease payments required under the capital lease and the
present values of the net minimum lease payments as of December 31, 2004 are as
follows:
Year ending December 31, Amount
---------
2005 $ 63,791
2006 53,134
---------
Total minimum lease payments 116,925
Less: Amount representing interest (10,301)
---------
Present value of net minimum lease payments 106,624
Less: Current maturities of capital lease obligation (55,773)
---------
Long-term capital lease obligation $ 50,851
=========
F-19
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
8. Shareholders' Equity
Preferred Stock
The Company has one Series of preferred stock, Series A. The preferred stock is
convertible to common stock on a one-for-one basis.
Dividend rights: Subject to the rights, preferences, privileges and restrictions
of any other class or series of stock, the holders of outstanding shares of the
Series A Preferred Stock shall be entitled to receive dividends, when, as and if
declared by the Board of Directors out of any assets of the Company legally
available, at the rate of $0.40 per share during the Company's fiscal year (as
adjusted for any stock divisions, stock combinations, stock consolidations,
stock distributions or stock dividends with respect to such shares), payable in
preference and priority to any payment of any dividend on the Common Stock of
the Company and payable as the Board of Directors may determine. The right to
such dividends on the Series A Preferred Stock shall not be cumulative
Liquidation: Subject to the rights, preferences, privileges and restrictions of
any other class or series of stock, in the event of any liquidation, dissolution
or winding up of the Company, either voluntary or involuntary, the holder of
each outstanding share of the Series A Preferred Stock shall be entitled to
receive, out of the assets of the Company legally available for distribution to
its shareholders upon such liquidation, dissolution or winding up, whether such
assets are capital or surplus of any nature, the amount of $4.00 per share.
If the assets to be distributed to the holders of Series A Preferred Stock shall
be insufficient to permit the receipt by such holders of the full preferential
amounts, then all of such assets shall be distributed among such holders ratably
in accordance with the number of such shares then held by each such holder.
Common stock
Dividend Rights: dividends may be paid on Common Stock during any fiscal year,
if and when declared by the Board of Directors, after dividends have been paid
to holders of shares of Preferred Stock in accordance with their dividend
preferences. In the event that any dividend is declared on Common Stock, the
holders of the Series A Preferred Stock are entitled to receive dividends in the
amount per share of Series A Preferred Stock as would be payable on the shares
of Common Stock into which each share of Series A Preferred Stock is convertible
on the record date for the dividend on Common Stock. All dividends are
non-cumulative.
F-20
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
9. Income Taxes
Significant components of the provision for taxes based on income for the year
ended December 31 are as follows:
2004 2003
------------ ------------
Current
Federal $ -- $ --
State -- 2,400
------------ ------------
-- 2,400
Deferred
Federal -- --
State -- --
------------ ------------
Provision for income taxes $ -- $ 2,400
============ ============
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. Significant components of
the Company's deferred tax assets and liabilities for income taxes consist of
the following:
2004 2003
----------- -----------
Deferred tax asset
Net operating loss carryforward $ 4,307,501 $ 3,445,338
Amortization of intangible assets 21,720 23,892
Deferred benefits and other accruals 104,999 89,677
----------- -----------
Total deferred tax asset 4,434,220 3,558,907
----------- -----------
Deferred tax liability
Differences between book and tax depreciation (30,633) 38,026
State income tax benefit (201,846) (145,271)
----------- -----------
Total deferred tax liability (232,479) (107,245)
----------- -----------
Net deferred tax asset before valuation allowance 4,201,741 3,451,662
Less valuation allowance (4,201,741) (3,451,662)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
F-21
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
9. Income Taxes (continued)
A reconciliation of the provision for income tax expense with the expected
income tax computed by applying the federal statutory income tax rate to income
before provision for (benefit from) income taxes for the years ended December
31, 2004 and 2003 is as follows:
2004 2003
------- -------
Income tax provision (benefit) computed
at federal statutory rate (34.00%) (34.00%)
State income tax rate (8.84%) (8.84%)
Valuation allowance 42.84% 42.65%
------- -------
Effective income tax rate 0.00% 0.19%
======= =======
The Company's effective income tax rate is lower than what would be expected if
the federal statutory rate were applied to income before income taxes primarily
because of certain expenses deductible for financial reporting purposes that are
not deductible for tax purposes, and operating loss carryforwards.
At December 31, 2004 and 2003, the Company has available approximately
$10,981,000 and $8,969,000 in net operating loss carryforwards available to
offset future federal and state income taxes, respectively, which expire through
2024. Realization is dependent on generating sufficient taxable income prior to
expiration of the loss carryforwards. A change of greater than 50% of the
Company ownership could significantly reduce the availability of the tax
credits. This and other components of deferred tax asset accounts are described
above. At December 31, 2004 and 2003, the Company has provided a valuation
allowance to reduce its net deferred tax asset to zero. The amount of deferred
tax asset considered realizable, however, can be revised in the near term based
upon future operating conditions during the carryforward period.
10. Commitments and Contingencies
Office leases
The Company is committed under an operating lease agreement for its office
facility at 435 Brannan Street, San Francisco, California. The lease was renewed
in 2004 for a period of two years and expiring September 30, 2006. This lease
requires monthly rental payments of approximately $2,950.
The Company is committed under an operating lease agreement for its 3,699 square
feet office and laboratory facility at 100 Cummings Center, Beverly,
Massachusetts. The lease is for a period of three years beginning November 1,
2003 and expiring October 30, 2006. This lease requires monthly rental payments
of approximately $6,432. The Company vacated this facility during December 2004
and is negotiating a termination of the lease or the sublease of the space.
F-22
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
10. Commitments and Contingencies (continued)
In October 2004, the Company entered into a triple net sublease with the
Company's primary mining and technology vendor, Arrakis, Inc., for 5,346 square
feet of lab space in Arrakis' commercial facility located in Englewood,
Colorado. The Company's pro-rata portion of rent is $2,568 per month under a
5-year sublease that expires in March 2010.
Future minimum lease payments required under these non- cancelable leases are as
follows:
Years ending December 31, Amount
----------------
2005 $ 139,548
2006 121,686
2007 30,816
2008 30,816
2009 30,816
2010 3,852
----------------
Total $ 357,534
================
During 2003 the Company rented on a month-to-month basis a lab facility in
Salem, Massachusetts.
Total rent expense under all these operating leases for the years ended December
31, 2004 and 2003 amounted to $110,467 and $52,989, respectively.
Environmental remediation
In 2002, the Company recorded additional accruals for the estimated future costs
associated with certain environmental remediation activities related to the
overdue disposal of hazardous materials at the Butte, Montana facility.
Substantially all such costs relate to divested operations and to facilities or
locations that are no longer in operation. These accrued costs were estimated at
approximately $38,250 and were recorded in the Company's financial statements at
December 31, 2002. In January 2004, the Company settled the matter with the
Montana Department of Environmental Quality ("DEQ") for the sum of $38,502
payable in six monthly installments commencing on January 30, 2004. The Company
received a release letter from the DEQ dated June 7, 2004 stating that the
matter was closed.
11. Stock Options and Warrants
The Board of Directors has granted management the authority to issue
non-statutory stock options and/or warrants to employees, officers and
consultants of the Company. As of December 31, 2004 and 2003, the Company
granted to its employees and other eligible participants options and warrants
exercisable for the Company's common stock and preferred stock. Options and
warrants to purchase shares of its common stock are usually granted at the
prices equal to the current fair value of the Company's common stock at the date
of grant.
F-23
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
11. Stock Options and Warrants (continued)
Under this authority from the Board of Directors, no option may be exercised
after the expiration date of ten years from the date of grant. There are two
types of convertible securities: Non-Qualified Stock Options (NSO) and Warrants.
NSO's and warrants may be granted to any eligible participant as determined by
the management of the Company. The non-statutory stock options and warrants are
for periods of four or five years.
On March 1, 2004, the Board of Directors adopted a 2004 Stock Incentive Plan,
which was subject to approval by the Company's shareholders. Such approval was
ratified by a majority vote of shareholders at the Company's annual meeting held
on September 30, 2004 in San Francisco, California. The maximum number of shares
of common stock that may be issued pursuant to the plan is 7,000,000 shares. No
options were granted under the plan in 2004. Stock options and warrants issued
as of December 31, 2004 and 2003 are summarized as follows:
[Enlarge/Download Table]
2004 2003
------------------------------ --------------------------
Average Exercise Average Exercise
Shares Price Shares Price
----------- ----------- ----------- -----------
Outstanding at beginning of year 54,092,895 $ 0.16 22,826,898 $ 0.11
Granted 13,746,994 0.39 31,920,997 0.19
Exercised (6,106,358) 0.09 -- --
Forfeited/Cancelled (4,200,268) 0.12 (655,000) (0.55)
----------- ----------- ----------- -----------
Outstanding at end of year 57,533,263 $ 0.23 54,092,895 $ 0.16
=========== =========== =========== ===========
Exercisable at end of year 51,446,674 $ 0.22 49,073,309 $ 0.16
=========== =========== =========== ===========
F-24
MR3 SYSTEMS, INC
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
11. Stock Options and Warrants (continued)
The following table presents information about stock options and warrants
granted during the years ended December 31, 2004 and 2003 where the exercise
price of some options and warrants differed from the market price of the
Company's stock on the grant date:
[Download Table]
Weighted
Number Average
of Shares Exercise
Granted Price
----------------- ---------------
Year ended December 31, 2003:
Exercise price equals market value 3,849,997 $ 0.10
Exercise price greater than market value 28,071,000 0.20
Exercise price less than market value - 0.00
----------------- ---------------
Total granted during year 31,920,997 $ 0.19
================= ===============
Year ended December 31, 2004:
Exercise price equals market value 8,003,352 $ 0.33
Exercise price greater than market value 3,256,142 0.50
Exercise price less than market value 2,487,500 0.44
----------------- ---------------
Total granted during year 13,746,994 $ 0.39
================= ===============
FASB Interpretation No. 44 of APB-25 Relating to Transactions Involving Stock
Compensation
Pursuant to FASB Interpretation No. 44, the Company applies provisions of SFAS
No. 123 for options and warrants granted to third parties. Accordingly, in 2004
and 2003, compensation cost has been recognized for its stock options and
warrants granted to outside third parties.
During the years ended December 31, 2004 and 2003, the Company's board of
directors approved the grant of stock options or warrants to various independent
consultants to purchase an aggregate of 571,000 and 1,310,800 shares of its
common stock, respectively. These options have an exercise price of $0.20 to
$0.50 in 2004 and $0.10 to $0.25 in 2003. All of these options or warrants
shares were vested immediately. As a result, the Company recorded $19,000 and
$25,800 in compensation expense, which is included in outside services and
professional fees in the statements of operations, at December 31, 2004 and
2003, respectively. These options or warrants were not issued as part of any of
the Company's Stock Option Plan.
F-25
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
11. Stock Options and Warrants (continued)
The following table summarizes information about options and warrants
outstanding at December 31, 2004:
[Enlarge/Download Table]
Warrants and Options Outstanding Warrants and Options Exercisable
----------------------------------------- --------------------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
-------------- ------------ ----------- --------- ------------- ----------
$ 0.01-0.03 4,515,667 2.58 $ 0.02 4,515,667 $ 0.02
$ 0.05-0.07 4,439,515 2.72 $ 0.06 4,439,515 $ 0.06
$ 0.10 12,490,509 2.78 $ 0.10 12,490,509 $ 0.10
$ 0.12-0.25 14,421,057 2.81 $ 0.21 12,421,057 $ 0.22
$ 0.30-0.41 16,101,015 3.53 $ 0.35 12,272,759 $ 0.35
$ 0.50 5,565,500 3.15 $ 0.50 5,565,500 $ 0.50
------------ -------------
57,533,263 3.01 $ 0.23 51,705,007 $ 0.22
============ =============
F-26
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
11. Stock Options and Warrants (continued)
The following table summarizes information about options and warrants
outstanding at December 31, 2003:
[Enlarge/Download Table]
Warrants and Options Outstanding Warrants and Options Exercisable
----------------------------------------- --------------------------------------
Number Weighted Number
Outstanding Average Weighted Exercisable Weighted
Range of as of Remaining Average as of Average
Exercise December 31, Contractual Exercise December 31, Exercise
Prices 2004 Life Price 2004 Price
-------------- ------------ ----------- --------- ------------- ----------
$ 0.01-0.03 5,065,667 3.55 $ 0.02 5,065,667 $ 0.02
$ 0.05-0.07 5,085,715 3.74 $ 0.06 5,085,715 $ 0.06
$ 0.10 21,088,828 2.93 $ 0.10 18,768,825 $ 0.10
$ 0.12-0.25 14,038,521 3.69 $ 0.21 12,038,521 $ 0.22
$ 0.35-0.41 8,384,999 3.75 $ 0.36 7,685,416 $ 0.36
$ 0.50-0.53 379,165 1.97 $ 0.50 379,165 $ 0.50
$ 1.00-4.00 50,000 0.07 $ 1.00 50,000 $ 1.00
------------ -------------
54,092,895 $ 0.16 49,073,309 $ 0.16
============ =============
The exercise periods for the options range from immediate to five years from the
date of the grant.
The Company has adopted only the disclosure provisions of SFAS No. 123. It
applies APB Opinion No. 25 and related interpretations in accounting for its
stock options and warrants granted to employees or to members of the Company's
Board of Directors. This information is required to be determined as if the
Company had accounted for its employee stock options/warrants granted under the
fair value method of that statement.
F-27
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
11. Stock Options and Warrants (continued)
If the Company had elected to recognize compensation expense based upon the fair
value at the grant date for awards under this plan consistent with the
methodology prescribed by SFAS No. 123, the Company's net loss and loss per
share would be reduced to the pro forma amounts indicated below for the years
ended December 31:
[Download Table]
2004 2003
----------------- ----------------
Net Loss:
As reported $ (2,359,527) $ (1,648,721)
Pro forma $ (2,526,919) $ (1,846,772)
Basic and diluted loss per common share
As reported
Basic $ (0.04) $ (0.03)
Diluted $ (0.04) $ (0.03)
Pro forma
Basic $ (0.04) $ (0.04)
Diluted $ (0.04) $ (0.04)
Options/warrants are generally granted at prices equal to the current fair value
of the Company's common stock at the date of grant.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions: 2004: dividend yield of 0%; expected volatility of 50-90%;
risk-free interest rate of 5.1%, and average expected life of 5 years; 2003:
dividend yield of 0%; expected volatility of 50%; risk-free interest rate of
4.9%, and expected life of 5 years. The weighted-average fair value of options
and warrants granted were $0.08 and $0.07 for 2004 and 2003, respectively.
The Black-Scholes option valuation model was developed for use in estimating the
fair value of traded options, which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
Options and warrants repricing
In 2004 and 2003, the Company recorded $298,186 and $85,475, respectively of
compensation expense resulting from repriced options and warrants from prior
years. The pro forma disclosures include compensation cost for the incremental
fair value resulting from such modifications on options and warrants granted to
employees.
F-28
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
12. Related Party Transactions
In second quarter 2004, the Company entered into a three-year employment
agreement with Dr. William C. Tao, the Company's Chief Executive Officer. Upon
completion of the three-year term, the employment agreement automatically renews
on a month-to-month basis until terminated or until the parties negotiate a new
term. Neither party may terminate the agreement without cause. Upon termination
of the agreement by Dr. Tao for "good reason"--as specified in the employment
agreement--the Company is obligated to pay Dr. Tao the following material
amounts: (a) all accrued benefits; (b) a lump sum cash payment equal to one and
one-half times his base salary in effect; and (c) a lump sum cash payment equal
to one and one-half times his highest annual bonus paid or payable prior to his
termination of the agreement for good reason. The agreement specifies an annual
salary of $108,000, automobile allowance of $500 per month and a flight
allowance of $250 per month through December 2004. In addition, the Company is
obligated to pay limited premiums associated with a $2,000,000 term life
insurance policy on Dr. Tao with the beneficiaries to be designated by him. The
Company has further agreed to provide family health insurance to Dr. Tao until
such time as a company group plan is adopted. Dr. Tao will be reimbursed for
ordinary and necessary expenses incurred in performance of his duties on behalf
of the Company. As further consideration for entering into the employment
agreement, Dr. Tao was granted 1,500,000 warrants, vesting immediately, to
purchase shares of the Company's common stock at an exercise price of thirty-two
cents ($0.32) for a five-year period. Dr. Tao was also granted an additional
3,500,016 warrants at a price of $0.32 for a five-year period, which vest at a
rate of 145,834 warrants per month for a twenty-four month period.
In 2004, the Company entered into a consulting agreement with Nevada Hospitality
Incorporated ("NHI") for certain services related to assistance in forming and
implementing a comprehensive strategy for establishing its metals recovery
technology in the state of Nevada in the form of a toll-based, processing
service for various mining consortia. Dr. Tao is a Director of Nevada
Hospitality Incorporated. In 2004, the Company paid NHI and its related
associates $ 31,000 and granted 5 year warrants for 96,000 shares at an exercise
price of $0.35 that vest over a 12 month period.
In January 2003, the Company granted Mr. Jody Sitkoski, Vice President, one
million (1,000,000) warrants to purchase common shares of the Company's common
stock at a price of five cents ($0.05) per share and two million (2,000,000)
warrants to purchase common shares of the Company's common stock at a price of
fifteen cents ($0.15) per share. One million of the warrants vested immediately
and the balance of two million warrants vest as of December 31, 2005.
In second quarter 2003, the Company entered into three-year employment
agreements with Randall S. Reis, then the Company's Chairman and CEO and Bradley
N. Rotter, then the Company's President, COO and board member. Upon completion
of the three-year term, the employment agreements automatically renew on a
month-to-month basis until terminated or until the parties negotiate a new term.
The agreements specify an annual salary of $120,000 for Mr. Reis and Mr. Rotter,
which may be accrued and converted into shares of the Company's common stock at
the market price in effect at the end of the applicable pay period.
F-29
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
12. Related Party Transactions (continued)
In addition, Mr. Reis and Mr. Rotter receive an automobile allowance of $500 per
month and are reimbursed for ordinary and necessary expenses incurred in
performance of their duties on behalf of the Company. Either the Company or the
employed party may terminate the agreement with or without cause or reason with
60-calendar days' written notice to the other party. Upon termination of the
employee's agreement by the Company without cause, the Company is obligated to
pay the employee his then base salary for six (6) months at the rate of the base
salary then in effect, which six month period shall begin on the effective date
of the termination. As further consideration for entering into the employment
agreement, Mr. Reis was granted 1,000,000 warrants, vesting immediately, to
purchase shares of the Company's common stock at an exercise price of ten cents
($0.10) for a five-year period. Mr. Rotter was granted 3,000,000 warrants,
vesting immediately, at a price of $0.10 for a five-year period. Mr. Rotter was
also granted an additional 3,000,000 warrants at a price of $0.10 for a
five-year period, which vested at a rate of 83,334 warrants per month for the
three-year term of the agreement.
Mr. Rotter was subsequently appointed Chief Executive Officer of the Company,
replacing Mr. Reis who remained as Chairman. Mr. Rotter resigned his position as
Chief Executive Officer as of April 30, 2004. Mr. Rotter remained a non-officer
employee of the Company through August 31, 2004 in a finance and investment
guidance position. Mr. Rotter maintained his position as a Director of MR3 until
his successor, Dr. William C. Tao, was elected at the Company's annual meeting
held on September 20, 2004. In consideration of his performance and
contributions during the noted four month period, the Company granted Mr. Rotter
333,336 warrants, vesting immediately after August 31, 2004, and exercisable at
$0.23 for a five-year period, which represents the total amount of warrants Mr.
Rotter would have received during the period pursuant to his employment
agreement had it been in effect through August 31, 2004. Upon Mr. Rotter's
resignation, 1,916,671 of Mr. Rotter's unvested warrants were cancelled.
Deferred compensation for Randall S. Reis, which is included in accrued
expenses, amounted to $27,578 and $18,878 for the years ended December 31, 2004
and 2003, respectively. Deferred compensation for Bradley N. Rotter, which is
included in accrued expenses, amounted to $72,000 and $57,000, for the year
ended December 31, 2004 and 2003, respectively.
In June 2003, the Company entered into a three-year employment agreement with
Dr. Irving DeVoe, who was employed as Chief Science Officer and is the inventor
of the MR3 technology and who subsequently resigned his position in 2004. The
agreement specifies an annual salary of $120,000 for Dr. DeVoe, which may be
accrued and converted into shares of the Company's common stock at the market
price in effect at the end of the applicable pay period. In addition, Dr. DeVoe
receives an automobile allowance of $500 per month and was reimbursed for
ordinary and necessary expenses incurred in performance of his duties on behalf
of the Company. The obligation to pay Dr. DeVoe an annual royalty equal to 5% of
the net profits of the Company received from the sale or utilization of its MR3
technologies terminated upon Dr. DeVoe's resignation. In June 2003, in
connection with Dr. Irving DeVoe's waiver of his anti-dilution agreement with
MR3, the Company granted him 200,000 shares of restricted common stock of the
Company.
F-30
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
12. Related Party Transactions (continued)
In July 2003, the Company concluded a private placement with eleven accredited
investors for total net proceeds of $735,000. The proceeds are to be used for
working capital and general corporate purposes. Pursuant to this private
placement, investors purchased restricted shares of the Company's common stock
at a price of twelve cents ($0.12) per share. Each share of common stock
purchased carried two attached purchase warrants, "A" and "B." The A warrant
allows the holder to purchase common shares at an exercise price of thirty-six
cents ($0.36) per share for a term of four years. The B warrant allows the
holder to purchase common shares at price of twenty-five cents ($0.25) per share
for a term of four years. Mr. Bradley Rotter, formerly the Company's Chief
Executive Officer, participated in the private placement in the amount of
$100,000.
In October 2003, management arranged a $1,250,000 credit facility which will
allow the Company to further its ability to deploy the first in a series of
plants to utilize its metals separation and purification technology. The credit
facility consists of a 14% Promissory Note in the principal amount of
$1,250,000, due March 1, 2006, or an earlier date 24 months from the date the
first plant is completed and operational. The Company is obligated to submit
requests for funds against the credit facility in connection with its financing
needs related to plant development and construction. Attached to the Promissory
Note are five-year warrants to purchase 2,000,000 shares of the Company's common
stock at a price of $0.23 per share. The credit facility also has an equity
conversion feature allowing the lender, a private equity and financing group, to
convert the loan into percentage ownership in the plant. The Company received
its first $250,000 of loan proceeds on October 14, 2003 and its second $250,000
of loan proceeds on December 17, 2003. The Company received its third $250,000
of loan proceeds on February 4, 2004 bringing its total borrowings under the
$1,250,000 credit facility to $750,000.
In November 2003, the Company granted John K. Burns, President and Chief
Operating Officer, 1,000,000 warrants to purchase common shares of the Company's
stock at a price of thirty-five cents ($0.35) per share over a five-year period.
Mr. Burns resigned his position in 2004.
In December 2003, the Company entered into an agreement with Toltec Engineering
Services LLC ("Toltec") of Payson, Arizona, for the manufacture and installation
of certain MR3 Technology related equipment. The agreement totaled approximately
$260,000 and obligated Toltec to manufacture and install the equipment to MR3's
specification. The agreement further obligated Toltec to supply supporting
printed documentation to the Company upon delivery of the manufactured
equipment. Mr. David DeVoe, President of Toltec, is a former officer of the
Company and is related to Dr. Irving DeVoe, the Company's former Chief Science
Officer.
In December 2003, the Company entered into a $100,000 promissory note with The
Aberdeen Trust, Grosvenor Trust Company Limited, as Trustee, for the purpose of
a bridge loan to the Company. Mr. Bradley Rotter, former Chief Executive
Officer, is the beneficial owner of the Aberdeen Trust. The Company is obligated
to pay back the full amount of the note plus any interest accrued at 12% per
annum on or before April 15, 2004. In consideration for entering into the
promissory note, Aberdeen Trust was granted warrants to purchase 200,000 shares
of the Company's common stock at $0.35 per share for a five-year period.
F-31
MR3 SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2004 AND 2003
13. Agreements
Effective February 26, 2004 the Company amended its agreement with Linsa
Associates, Ltd. ("Linsa") to reduce the restricted areas under the agreement
from thirty-six jurisdictions to two (Taiwan and Egypt) including, however, any
transactions done outside of a restricted area with subsidiaries or affiliates
of companies headquartered within a restricted area, provided that Linsa is
transacting business with such companies within the restricted area at the time
of any such outside transaction.
On October 18, 2004, MR3 Systems, Inc. ("MR3 or the Company") filed a legal
action MR3 Systems, Inc. v. Linsa Associates, Ltd., et. al. CGC-04-435558 in
California Superior Court, in and for the City and County of San Francisco,
against Linsa, Ltd., et al. ("Linsa"), for breach of contract and declaratory
relief in connection with the Company's MR3 Technology Transfer Agreement
("Agreement") with Linsa. These claims arise out of Linsa's failure to use its
best efforts to commercialize the MR3 Technology, as required under the
Agreement, and to correct a default on monies owed to MR3 for services performed
under the Agreement. The parties have agreed to stay further prosecution on the
legal matter pending voluntary non-binding mediation.
14. Subsequent Events
Subsequent to December 31, 2004, the company received an additional $210,000 in
loans from the private financing group which had loaned the company $100,000 in
December 2004. These notes are short-term and bear 20% interest. The Company
also received loans of $25,000 from four stockholders that bear interest at 10%.
These noteholders were also granted 5 year warrants to purchase 50,000 shares of
common stock at $0.10 per share.
F-32
Dates Referenced Herein and Documents Incorporated by Reference
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