10QSB 1 q063004.txt 10-QSB ENDED JUNE 30, 2004 FORM 10-QSB U.S. SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ______________________ Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended June 30, 2004 Commission File Number 000-22236 FARADAY FINANCIAL, INC. ----------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 33-0565710 ------------------------------- --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) 175 South Main, Suite 1240, SLC, UT 84111 ------------------------------------------ (Address of principal executive offices) (Zip Code) (801) 502-6100 ---------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of August 19, 2004 ------------ --------------------------------- Common Stock 2,318,000 PART I -- FINANCIAL INFORMATION Item 1. Financial Statements
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Balance Sheet (Unaudited) ASSETS June 30, 2004 ------------------ CURRENT ASSETS Cash in bank $ 368,777 Cash in escrow 35,000 Employee Advances 27,865 Accrued interest receivable 25,074 ------------------ Total Current Assets 456,716 ------------------ PROPERTY AND EQUIPMENT Furniture & equipment, net 14,240 Less - accumulated depreciation (877) ------------------ Total Property and Equipment 13,363 ------------------ OTHER ASSETS Note receivable (Note 2) 670,000 ------------------ Total Other Assets 670,000 ------------------ TOTAL ASSETS $ 1,140,079 ================== LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) CURRENT LIABILITIES Accounts payable $ 16,152 Accrued liabilities (Note 2) 256,828 Convertible debt related parties (Note 2) 1,484,531 ------------------ Total Current Liabilities 1,757,511 ------------------ Total Liabilities 1,757,511 ------------------ STOCKHOLDERS' EQUITY (DEFICIT) Common stock, $0.001 par value, 20,000,000 shares Authorized 3,113,400 issued, 2,318,000 outstanding 3,113 Capital in excess of par value 118,189 Treasury shares at cost (59,375) Other comprehensive loss - Deficit accumulated during the development stage (679,359) ------------------ Total Stockholders' Equity (Deficit) (617,432) ------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) $ 1,140,079 ================== The accompanying notes are an integral part of these consolidated financial statements. 2
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Operations and Other Comprehensive Income (Unaudited) From Inception on June 11, For the Three Months Ended, 1992 June 30, through --------------------------- June 30, 2004 2003 2004 ----------- ----------- ----------- REVENUES $ 86,742 $ - $ 86,742 EXPENSES Depreciation expense 712 - 877 General and administrative 286,088 7,349 417,123 ----------- ----------- ----------- Total Expenses 286,800 7,349 418,000 ----------- ----------- ----------- LOSS FROM OPERATIONS (200,058) (7,349) (331,258) ----------- ----------- ----------- OTHER INCOME (EXPENSE) Loss on sale of securities - (60,366) (311,004) Gain on legal settlement (Note 2) - - 184,767 Interest income 18,006 - 33,573 Interest expense (44,385) (18,969) (255,437) ----------- ----------- ----------- Total Other Income (Expenses) (26,379) (79,335) (348,101) ----------- ----------- ----------- NET LOSS (226,437) (86,684) (679,359) ----------- ----------- ----------- OTHER COMPREHENSIVE LOSS Change in marketable securities - (547,487) - ----------- ----------- ----------- Total Other Comprehensive Loss - (547,487) - ----------- ----------- ----------- COMPREHENSIVE LOSS $ (226,437) $ (634,171) $ (679,359) =========== =========== =========== BASIC LOSS PER SHARE $ (0.09) $ (0.03) =========== =========== WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,318,000 3,000,000 =========== =========== The accompanying notes are an integral part of these consolidated financial statements. 3
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Cash Flows (Unaudited) From Inception on June 11, For the Three Months Ended, 1992 June 30, through ------------------------------ June 30, 2004 2003 2004 ------------ ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net loss $ (226,437) $ (86,684) $ (679,359) Adjustments to reconcile net loss to used by operating activities: Depreciation & amortization expense 712 - 1,148 Common stock issued for services 113,400 - 113,400 Expenses paid with note payable - - 1,656 Loss on sale of securities - 60,366 311,004 Gain on legal settlement - - (184,767) Changes in operating assets and liabilities: Increase in cash in escrow (30,000) - (35,000) (Increase) decrease in interest receivable (18,006) - (25,074) Increase in accounts receivable - related (27,865) - (27,865) Increase in accounts payable 802 - 16,152 Increase in current liabilities and accrued interest 44,385 18,969 256,828 Net Cash (Used) Provided by Operating Activities (143,009) (7,349) (251,877) ------------ ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Organization costs - - (271) Purchase of fixed assets - - (14,240) Purchase of securities - - (500,000) Sale of securities - 7,594 259,585 Issuance of note receivable (170,000) - (670,000) ------------ ------------ ------------ Net Cash (Used) Provided by Investing Activities (170,000) 7,594 (924,926) ------------ ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Common stock issued for cash - - 5,746 Purchase of treasury shares (25,000) - (59,375) Proceeds from contribution of capital - - 500 Proceeds from convertible notes 565,000 - 1,775,295 Principal payments on convertible notes - - (176,586) ------------ ------------ ------------ Net Cash Provided by Financing Activities 540,000 - 1,545,580 ------------ ------------ ------------ NET INCREASE IN CASH 226,991 245 368,777 CASH AT BEGINNING OF PERIOD 141,786 - - ------------ ------------ ------------ CASH AT END OF PERIOD $ 368,777 $ 245 $ 368,777 ============ ============ ============ The accompanying notes are an integral part of these consolidated financial statements. 4
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Consolidated Statements of Cash Flows (Continued) (Unaudited) From Inception on June 11, For the Three Months Ended, 1992 June 30, through ------------------------------ June 30, 2004 2003 2004 ------------ ------------ ------------ SUPPLEMENTAL SCHEDULE OF CASH FLOW ACTIVITIES NON-CASH INVESTING AND FINANCING ACTIVITIES: Common stock issued for debt paid on behalf of the Company $ - $ - $ 1,656 Distribution of assets in payment of convertible debt $ - $ - $ 114,178 Common stock issued for services $ 113,400 $ - $ 113,400 CASH PAID FOR: Interest $ - $ - $ - Taxes $ - $ - $ - The accompanying notes are an integral part of these consolidated financial statements. 5
FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements For the Three Months Ended June 30, 2004 and 2003 NOTE 1 - BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted in accordance with such rules and regulations. The information furnished in the interim condensed consolidated financial statements include normal recurring adjustments and reflects all adjustments, which, in the opinion of management, are necessary for a fair presentation of such financial statements. Although management believes the disclosures and information presented are adequate to make the information not misleading, it is suggested that these interim condensed consolidated financial statements be read in conjunction with the Company's most recent audited financial statements and notes thereto included in its March 31, 2004 Annual Report on Form 10-KSB. Operating results for the three months ended June 30, 2004 are not necessarily indicative of the results that may be expected for the year ending March 31, 2005. NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES Notes Payable and Agreement with NutraCea In December 2000, the Company entered into a merger agreement with NutraCea (formerly NutraStar Incorporated). The merger was contingent on a $500,000 loan from Faraday to NutraCea. As of March 2001, the Company had secured investors and advanced $500,000 to NutraCea. By April 2001 the Company determined that the merger plans were terminated. The $500,000 that had been advanced to NutrCea was due within 90 days and bore interest 12%. The note carried an optional conversion feature in which the Company could convert the principal and accrued interest into common stock of NutraCea at a rate of $1.00 per share. The notes also carried a mandatory conversion feature as follows: in the event that NutraCea merged into a public company or issued shares pursuant to its initial public offering of common stock, the outstanding principal and accrued interest was to be converted into common stock of NutraCea at the lesser of a) $1.00 per share, b) the average share price over the initial 10 day trading period less 20%, or c) the price per share of common stock offered in a private placement at the time of mandatory conversion. Investors advanced the $500,000 with the understanding that following either a merger with NutraCea or NutraCea's merger with another public company, the amounts would be converted to equity in the newly merged corporation. However, no written agreements were signed formalizing the nature or the terms of the advances. Management of the Company believes that accounting for the investors' advance of $500,000 to NutraCea on behalf of Faraday as notes payable is the most accurate way to report the transaction. The Company recorded $71,791, $67,740 and $56,102 of interest expense related to these notes payable at 12% per annum for the years ended March 31, 2004, 2003 and 2002. 6 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements For the Three Months Ended June 30, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable and Agreement with NutraCea (Continued) On December 13, 2001, the Company reached a settlement agreement with NutraCea. The agreement states that NutraCea borrowed a total of $500,000 from the Company pursuant to a series of promissory notes bearing interest at 12% per annum and due and payable 90 days from the date of issuance. The outstanding principal and accrued but unpaid interest on the date of the settlement was $551,797. Per the terms of the agreement the Company and NutraCea released, settled and disposed of any and all claims, demands and disputes of any kind between them, including, but not limited to, any disputes connected with the proposed terminated merger. NutraCea settled their debt to Faraday of $500,000 principal and $51,797 accrued interest in exchange for 735,730 shares of NutraCea Preferred Stock per the terms of the agreement. The agreement also stipulates that failure on the part of NutraCea to file a Registration Statement on For SB-2 or a substantially equivalent registration that is declared effective by the Securities and Exchange Commission by June 30, 2002 will result in conversion of the 735,730 Preferred Shares to the same number of Common Shares of NutraCea. NutrCea failed to register the Preferred Shares with the Securities and Exchange Commission on or before June 30, 2002, and therefore, NutraCea was obligated to convert the 735,730 Preferred Shares to 735,730 Common Shares. On July 16, 2002, a Complaint was filed against NutraCea by the Company in the United States District Court, for the District of Utah (Case No 02-CV-00959). The Company filed the lawsuit when NutraCea failed to meet the terms set forth in the settlement agreement. NutraCea did file a registration statement with the Securities and Exchange Commission on June 4, 2002, however, such registration statement had not been declared effective as of June 30, 2002 as required by the settlement agreement. As discussed previously, in the event that NutraCea failed to affect a registration statement by June 30, 2002, NutraCea's Chief Executive Officer, Ms. Patricia McPeak, was to transfer to the Company an additional 735,730 pre-reverse split shares of her common stock and become personally liable to the Company for the original $500,000 debt amount plus 12% interest per annum. The lawsuit also seeks to award the Company any attorney's fees and other costs related to this matter. On August 29, 2002, NutraCea filed a motion to dismiss the Complaint filed by the Company due to lack of personal jurisdiction for both NutraCea and Ms. McPeak. On November 27, 2002, NutraCea's motion to dismiss was denied as to both NutraCea and Ms. McPeak. An alternative settlement agreement was reached on December 10, 2003, whereby the suit was dismissed and the Company shall be guaranteed payment on any deficiency upon the sale of their common stock. On September 18, 2003 the Company converted its existing 735,730 preferred shares of NutraCea to 735,730 shares of NutraCea common stock. Also, in September of 2003 per the terms of the new settlement agreement NutraCea transferred an additional 735,730 shares of its common stock to the Company. NutraCea also paid deferred dividends to the Company as of September 18, 2003 in the form of 1,301,692 shares of its common stock. 7 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements For the Three Months Ended June 30, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable and Agreement with NutraCea (Continued) The new settlement agreement also states that the Company has until September 18, 2004 to sell the NutraCea common stock, and in the event the Company is unable to realize $551,797 plus any legal fees the Company incurred as of September 18, 2003 through the sale of its 2,774,772 shares of NutraCea common stock (735,730 preferred shares converted to common plus the additional 735,730 common shares and 1,301,692 shares granted in payment of dividends) that NutraCea shall have 90 days from the date that the Company demonstrates that through its best efforts it has not been able to realize $551,797 plus legal fees through the sale of its NutraCea common stock, to transfer to the Company additional NutraCea common shares to make up any deficiency between the actual sales price obtained by the Company after it has sold all of its NutraCea shares and the amount of $551,797 plus legal fees. In addition, should the Company choose not to sell any portion of its NutraCea common stock prior to September 18, 2004, the value of any portion of its NutraCea common stock still remaining shall be credited against the original $551,797. Furthermore, should the value of the common stock exceed the $551,797, the Company is entitled to keep the excess. It is the full intention of the Company to distribute the stock awards from the settlement on a pro rata basis to each investor. As of March 31, 2004 the Company has distributed a total of 73,735 shares of NutraCea common stock valued at $114,178 directly to the investors. The Company accounted for the transaction as a reduction to the principal amount of the notes. Also during the year ended March 31, 2004 the Company sold 347,743 shares of the NutraCea common stock and distributed the proceeds to the investors. The total amount distributed to the investors was $259,585 and was accounted for as a reduction to the principal amount of the notes. The Company plans to distribute the remaining shares of the NutraCea stock or the proceeds from the sales of the stock to investors until the remaining principal and accrued interest is paid in full. At June 30, 2004 the remaining principal balance of these notes was $209,531. The Company has recorded accrued interest of $217,940 as of June 30, 2004. Notes Payable, Notes Receivable and Agreement with VIB.TV The Company, Video Internet Broadcasting Corporation (VIB) and Homenet Utah, Inc. ("Homenet"), a wholly owned subsidiary of the Company, have entered into a Merger Agreement whereby Homenet may be merged into VIB ("Merger") with VIB to be the surviving corporation. The separate existence of Homenet would cease if the Merger becomes effective. Consummation of the Merger is subject to various conditions including satisfactory resolution of the potential VIB liabilities and no VIB shareholders exercising dissenters rights. Notwithstanding the foregoing, Homenet may waive such conditions to closing as it deems appropriate. In addition, as part of the Merger, VIB's name will be changed to HomeNet Communications, Inc. 8 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements For the Three Months Ended June 30, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable, Notes Receivable and Agreement with VIB.TV (Continued) Upon closing of the Merger Agreement, each share of VIB capital stock that is issued and outstanding immediately prior to the closing will be converted into 1.0903 shares of the Company's common stock and all previously outstanding shares of VIB capital stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist. All other securities convertible into or exercisable for shares of VIB capital stock, including but not limited to stock options, convertible debt and warrants and issued by the Company prior to the effective date of the Merger, shall become, without further action, convertible into or exercisable for the number of shares of Company common stock determined by using the 1.0903 conversion factor. VIB currently has 2,184,939 shares of common stock outstanding, 350,550 shares of preferred stock outstanding, options exercisable for an additional 424,000 shares of stock and other convertible securities that are convertible under terms that are in dispute. It is expected that (assuming conversion of all VIB convertible securities and settlement of the contingent obligations on anticipated terms of which there can be no assurance) the Company would be issuing approximately 3,312,826 shares its common stock on a fully diluted basis in connection with the Merger. In addition, there is a possibility that the Company may create a class of preferred stock that would be issued to some of the holders of VIB securities that are convertible into VIB preferred stock. However, the exact number of shares and the number and form of the convertible securities to be issued is still subject to agreement. In connection with the proposed merger between Faraday and VIB, the parties entered into a loan agreement, pursuant to which Faraday has lent VIB a principal amount of $670,000 as of June 30, 2004. To obtain the financing needed for the loan agreement between Faraday and VIB, Faraday entered into loan agreements with several investors. During March 2004, the Company issued convertible debentures to finance its loan to VIB. The debentures accrue interest at 12% per annum and are due six months from the original date of the notes. Principal and interest not paid when due shall bear interest at the rate of 18% per annum. The notes are convertible at any time at the option of the holder into shares of the Company's common stock at the rate of one share of common stock for every $1.00 in principal and accrued interest that is converted. In addition, the notes have attached common stock purchase warrants to acquire 100 shares of common stock at an exercise price of $1.50 per share for every one thousand dollars in principal lent by the lender. In determining whether an instrument includes a beneficial conversion option, the Emerging Issues Task Force reached a consensus that the effective conversion price based on the proceeds received for or allocated to the convertible instrument should be used to compute the intrinsic value, if any, of the embedded conversion option. As a result of this consensus, an issuer should first allocate the proceeds received in a financing transaction that includes a convertible instrument to the convertible instrument and any other detachable instruments included in the exchange (such as detachable warrants) on a relative fair value basis. Then, the Issue 98-5 model should be applied to the amount allocated to the convertible instrument, and an effective conversion price should be calculated and used to measure the intrinsic value, if any, of the embedded conversion option. Faraday issued $1,275,000 of convertible debt with a par amount of $1,275,000 and 127,500 warrants. The convertible debt is convertible at a conversion price of $1 per share (holder would receive 1 share of stock for each dollar of debt or 1,275,000 shares of the Company's common stock). Using the black-scholes model, the 127,500 warrants have no value. The Company has recorded accrued interest of $38,887 associated with the convertible debentures. 9 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements For the Three Months Ended June 30, 2004 and 2003 NOTE 2 - NOTES PAYABLE AND CONVERTIBLE DEBENTURES (Continued) Notes Payable, Notes Receivable and Agreement with VIB.TV (Continued) The Company has determined that the embedded conversion option within the debt instrument is not beneficial (has no intrinsic value) to the holder. Notes payable, convertible debentures and notes payable - related parties consist of the following as of June 30, 2004: Unsecured notes payable to shareholders of the Company due on demand, payable through the issuance of or proceeds from the sale of shares of NutraCea common stock Interest is computed at a rate of 12% per annum. $ 209,531 Unsecured convertible notes payable to shareholders of the Company due September 2004, convertible at the holders option to common stock of the Company at a ratio of one share per each dollar of outstanding principal and interest. Interest is computed at at a rate of 12% per annum. 1,275,000 ---------- Total Notes payable, notes payable - related parties and Convertible Debentures Payable $1,484,531 ========== Interest expense on the above debt amounted to $44,385 for the three months ended June30, 2004. Accrued interest was $256,878 at June 30, 2004. NOTE 3 - OUTSTANDING STOCK PURCHASE WARRANTS Under FASB Statement 123, the Company estimates the fair value of each stock purchase warrant at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for grants, respectively; dividend yield of zero percent; expected volatility of 108%; risk-free interest rate of 4.5 percent and expected life of 6 months, for the three months ended June 30, 2004. As of June 30, 2003 there were no stock purchase warrants outstanding. Had compensation cost for the Company's stock options granted to directors and employees been based on the fair value as determined by the Black-Scholes option pricing model at the grant date under the accounting provisions of SFAS No. 123, the Company would have recorded an additional expense of $-0- for the three months ended June 30, 2004. As the value of the warrants is $-0- the Company's net loss would not have been changed. 10 FARADAY FINANCIAL, INC. AND SUBSIDIARIES (A Development Stage Company) Notes to the Consolidated Financial Statements For the Three Months Ended June 30, 2004 and 2003 NOTE 3 - OUTSTANDING STOCK PURCHASE WARRANTS (Continued) A summary of the status of the Company's stock warrants as of June 30, 2004 and changes during the period ended June 30, 2004 is presented below: Weighted Weighted Options Average Average and Exercise Grant Date Warrants Price Fair Value -------- --------- ---------- Outstanding, March 31, 2003 - $ - $ - Granted 71,000 1.50 - Expired/Canceled - - - Exercised - - - --------- --------- -------- Outstanding, March 31, 2004 71,000 $ 1.50 $ - Granted 481,500 1.50 - Expired - - - Exercised - - - --------- --------- -------- Outstanding, June 30, 2004 552,500 1.50 - Exercisable, June 30, 2004 552,500 $ 1.50 $ - ========= ========= ======== NOTE 4 - GOING CONCERN The Company's financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. In order to continue as a going concern, develop a reliable source of revenues, and achieve a profitable level of operations the Company will need, among other things, additional capital resources. Management's plans to continue as a going concern include raising additional capital through sales of common stock. However, management cannot provide any assurances that the Company will be successful in accomplishing any of its plans. The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. 11 Item 2. Management's Discussion and Analysis or Plan of Operation. The following discussion and analysis provides information which management believes is relevant to an assessment and understanding of the Company's consolidated results of operations and financial condition. The discussion should be read in conjunction with the consolidated financial statements and notes thereto. Plan of Operation The Company has no business operations, and very limited assets or capital resources. The Company's business plan is to seek one or more potential business ventures that, in the opinion of management, may warrant involvement by the Company. The Company recognizes that because of its limited financial, managerial and other resources, the type of suitable potential business ventures which may be available to it will be extremely limited. The Company's principal business objective will be to seek long-term growth potential in the business venture in which it participates rather than to seek immediate, short-term earnings. In seeking to attain the Company's business objective, it will not restrict its search to any particular business or industry, but may participate in business ventures of essentially any kind or nature. It is emphasized that the business objectives discussed are extremely general and are not intended to be restrictive upon the discretion of management. The Company will not restrict its search for any specific kind of firms, but may participate in a venture in its preliminary or development stage, may participate in a business that is already in operation or in a business in various stages of its corporate existence. It is impossible to predict at this stage the status of any venture in which the Company may participate, in that the venture may need additional capital, may merely desire to have its shares publicly traded, or may seek other perceived advantages which the Company may offer. In some instances, the business endeavors may involve the acquisition of or merger with a corporation which does not need substantial additional cash but which desires to establish a public trading market for its common stock. Proposed Transaction With Video Internet Broadcasting Corporation ("VIB") In furtherance of the Company's plan of operation, the Company, VIB and Homenet Utah, Inc. ("Homenet"), a wholly owned subsidiary of the Company, have entered into a Merger Agreement whereby Homenet may be merged into VIB ("Merger") with VIB to be the surviving corporation. The separate existence of Homenet would cease if the Merger becomes effective. Consummation of the Merger is subject to various conditions including satisfactory resolution of the potential VIB liabilities and no VIB shareholders exercising dissenters rights. Notwithstanding the foregoing, Homenet may waive such conditions to closing as it deems appropriate. In addition, as part of the Merger, VIB's name will be changed to HomeNet Communications, Inc. There can be no assurance that such contingencies will be satisfied, that the Merger Agreement will be closed, that the combined business operations will prove successful or that the transaction will prove to be favorable for the shareholders of the Company. Upon closing of the Merger Agreement, each share of VIB capital stock that is issued and outstanding immediately prior to the closing will be converted into 1.0903 shares of the Company's common stock and all previously outstanding shares of VIB capital stock shall no longer be outstanding and shall automatically be canceled and shall cease to exist. All other securities convertible into or exercisable for shares of VIB capital stock, including but not limited to stock options, convertible debt and warrants and issued by the Company prior to the effective date of the Merger, shall become, without further action, convertible into or exercisable for the number of shares of Company common stock determined by using the 1.0903 conversion factor. VIB currently has 2,184,939 shares of common stock outstanding, 350,550 shares of preferred stock 12 outstanding, options exercisable for an additional 424,000 shares of stock and other convertible securities that are convertible under terms that are in dispute. It is expected that (assuming conversion of all VIB convertible securities and settlement of the contingent obligations on anticipated terms of which there can be no assurance) the Company would be issuing approximately 3,312,826 shares its common stock on a fully diluted basis in connection with the Merger. In addition, there is a possibility that the Company may create a class of preferred stock that would be issued to some of the holders of VIB securities that are convertible into VIB preferred stock. However, the exact number of shares and the number and form of the convertible securities to be issued is still subject to agreement. In connection with the proposed Merger, the Company and VIB entered into a loan agreement, pursuant to which the Company has lent VIB a principal amount of $670,000 as of June 30, 2004. VIB is in difficult financial circumstances and there can be no assurance that VIB will be able to repay the amounts lent. Liquidity and Capital Resources We used net cash for operating activities of $143,009 during the three months ended June 30, 2004. As of June 30, 2004, we have $456,716 in current assets, $1,757,511 in current liabilities and a working capital (deficit) of ($1,300,795). Our current liabilities include $256,828 in accrued liabilities, an obligation in the amount of $209,531 payable on demand, unsecured convertible promissory notes in the amount of $1,275,000 that are due and payable in full in September 2004 and $16,152 in accounts payable. Our working capital requirements for the foreseeable future will vary based upon a number of factors, including the costs associated with any potential acquisition, including the proposed transaction with VIB, and other factors that may not be foreseeable at this time. We believe that we will need at least $5,000,000 in funding for then next twelve months if the Merger is closed. We have no commitments to provide additional funding and there can be no assurance that we will be able to obtain additional funding on satisfactory terms or at all. If we do not receive the needed funding, we will not be able to execute our business plan. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors. Recent Accounting Pronouncements The Company has not adopted any new accounting policies that would have a material impact on the Company's financial condition, changes in financial conditions or results of operations. Critical Accounting Policies The carrying value of the Company's cash equivalents and accounts payable approximate fair values due to their short-term nature. The carrying value of the Company's investments equals their fair value, which is based upon quoted prices in active markets. The Company follows the provisions of SFAS 115 regarding marketable securities. The Company`s securities investments that are bought and held principally for the purpose of selling them in the near term are classified as trading securities. Trading securities are recorded at fair value on the balance sheet in current assets, with the change in fair value during the period included in earnings. 13 Securities investments that the Company has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and recorded at amortized cost in investments and other assets. Securities investments not classified as either held-to-maturity or trading securities are classifies as available-for-sale securities. Available-for-sale securities are recorded at fair value in investments and other assets on the balance sheet, with the change in fair value during the period excluded from earnings and recorded net of tax as a separate component of equity. All marketable securities held by the Company have been classified as available-for-sale securities. Under FASB Statement 123, the Company estimates the fair value of each stock purchase warrant at the grant date by using the Black-Scholes option pricing model with the following weighted average assumptions used for grants, respectively; dividend yield of zero percent; expected volatility of 108%; risk-free interest rate of 4.5 percent and expected life of 6 months, for the year ended March 31, 2004. As of March 31, 2003 and 2002 there were no stock purchase warrants outstanding. Forward-Looking Statements When used in this Form 10-QSB or other filings by the Company with the Securities and Exchange Commission, in the Company's press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized officer of the Company's executive officers, the words or phrases "would be", "will allow", "intends to", "will likely result", "are expected to", "will continue", "is anticipated", "estimate", "project", or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. The Company cautions readers not to place undue reliance on any forward-looking statements, which speak only as of the date made, and advises readers that forward-looking statements involve various risks and uncertainties. The Company does not undertake, and specifically disclaims any obligation to update any forward-looking statements to reflect occurrences or unanticipated events or circumstances after the date of such statement. Item 3. Controls and Procedures The Company has evaluated, with the participation of the Company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the Company's disclosure controls and procedures as of June 30, 2004 pursuant to Exchange Act Rule 13a-15(e). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation. 14 PART II -- OTHER INFORMATION Item 2. Changes in Securities and Use of Proceeds. Between March and June, 2004, the Company entered into loan agreements with eight accredited and sophisticated investors whereby the Company borrowed $1,275,000 in funds from these investors. Maven Properties, Ltd., an entity controlled by Frank J. Gillen, lent $60,000 of these funds and Badger Investments, LLC, an entity controlled by Shauna Badger, lent $200,000 of these funds. The loans accrue interest at 12% per annum and are due six months from the effective date of the loan. Principal and interest not paid when due bear interest at the rate of 18% per annum. The notes are convertible at any time at the option of the holder into shares of the Company's common stock at the rate of one share of common stock for every $1.00 in principal and accrued interest that is converted. In addition, lenders received warrants to acquire 100 shares of common stock at an exercise price of $1.50 per share for every one thousand dollars in principal lent by the lender. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. In April 2004, the Company issued warrants exercisable for 100,000 shares of common stock to five HMG employees who are employed as telemarketers. Warrants exercisable for 75,000 of these shares expired before they were exercised. These warrants are exercisable at $1.50 per share. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. In April 2004, the Company issued warrants exercisable for a total of 100,000 shares of common stock to the Company's two directors as compensation for services rendered. The warrants are exercisable at $1.50 per share. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. In June 2004, the Company issued 48,000 shares of its common stock to Frank J. Gillen and Shauna Badger in consideration for the cancellation of $24,000 in accrued salary obligations owed to these officers and it issued 65,400 shares of its common stock to Frank J. Gillen in consideration for the cancellation of $65,400 in accrued expenses owed to him. In addition, in June 2004 the Company issued warrants to purchase 300,000 shares of the Company's common stock at $1.50 per share to several accredited and sophisticated individuals in consideration for their guarantee of a $1,500,000 line of credit with a bank for the benefit of the Company and VIB. The Company did not use an underwriter in connection with these transactions and the transactions were exempt from registration pursuant to Section 4(2) of the Securities Act of 1933 and Rule 506 as promulgated thereunder. 15 Item 6. Exhibits and Reports on Form 8-K. (a) INDEX TO EXHIBITS EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 3(i).1 Articles of Incorporation of the Company (Incorporated by reference to Exhibit 3.1 of the Company's Form 10-SB, File No. 0-22236) 3(ii).1 Bylaws of the Company (Incorporated by reference to Exhibit 3.2 of the Company's Form 10-SB, File No. 0-22236) 10.1 Settlement Agreement by and between the Company and NutraCea, dated December 10, 2002 (Incorporated by reference to Exhibit 10.1 of the Company's Form 10-KSB, dated March 31, 2004). 10.2 Loan Agreement by and between the Company and Video Internet Broadcasting Corporation, dated February 18, 2004 (Incorporated by reference to Exhibit 10.2 of the Company's Form 10-KSB, dated March 31, 2004). 10.3 Security Agreement by and between the Company and Video Internet Broadcasting Corporation, dated March 12, 2004 (Incorporated by reference to Exhibit 10.3 of the Company's Form 10-KSB, dated March 31, 2004). 10.4 Intellectual Property Security Agreement by and between the Company and Video Internet Broadcasting Corporation, dated March 12, 2004 (Incorporated by reference to Exhibit 10.4 of the Company's Form 10-KSB, dated March 31, 2004). 10.5 Amendment Number One to the Agreements by and between the Company and Video Internet Broadcasting Corporation, dated April 21, 2004 (Incorporated by reference to Exhibit 10.5 of the Company's Form 10-KSB, dated March 31, 2004). 10.6 Amendment Number Two to the Agreements by and between the Company and Video Internet Broadcasting Corporation, dated May 1, 2004 (Incorporated by reference to Exhibit 10.6 of the Company's Form 10-KSB, dated March 31, 2004). 10.7 Form of Loan Agreement by and between the Company and Lenders whereby the Company borrowed the principal amount of $765,000 (Incorporated by reference to Exhibit 10.7 of the Company's Form 10-KSB, dated March 31, 2004). 10.8 Form of Loan Agreement by and between the Company and Lenders whereby the Company borrowed the principal amount of $445,000 (Incorporated by reference to Exhibit 10.8 of the Company's Form 10-KSB, dated March 31, 2004). 10.9 Employment Agreement with Frank J. Gillen (Incorporated by reference to Exhibit 10.9 of the Company's Form 10-KSB, dated March 31, 2004). 10.10 Employment Agreement with Shauna Badger (Incorporated by reference to Exhibit 10.10 of the Company's Form 10-KSB, dated March 31, 2004). 16 EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 10.11 Agreement and Plan of Merger, by and between the Company, Homenet Utah, Inc. and Video Internet Broadcasting, Inc., dated August 2, 2004. 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K: None SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. FARADAY FINANCIAL, INC. (Registrant) Date: August 19, 2004 By /s/ Frank J. Gillen ----------------------------- Frank J. Gillen Director, President, Chief Executive Officer and Chief Financial Officer 17