Paychest Inc (PYCT)

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http://www.sedar.com



Consolidated Ecoprogress Technology Inc.
Management Discussion and Analysis
For the nine months ended March 31, 2008
All figures expressed in Canadian Dollars except where noted
June 13, 2008
The following discussion and analysis of the results of operations and financial position of Consolidated
Ecoprogress Technology Inc. (“CET” or “the Company”) is prepared as of June 13, 2008 and should be
read in conjunction with the Company’s audited financial statements and the notes thereto as at June 30,
2007.
Overall Performance
For the nine months ended March 31, 2008.
CET develops and markets biodegradable, disposable absorbent products which include feminine
hygiene, adult incontinence and baby diaper products.
The nine months to March 31, 2008 was a period in which the Company concentrated on finding
alternative financing sources as the API deal did not complete. Other activities were reduced to a
minimum.
During the period the Company continued to attract capital. The Company received $440,000 from the
exercise of warrants – almost all of which was set aside to pursue the API deal and subsequent activities
mentioned above.
In March, 2007 the Company received an offer from April 1 Project (“API”) which the Company had been
working diligently to complete through to early 2008. Unfortunately API were unable to complete the deal
and on May 7, 2008 the agreements were assigned to Paychest Inc., based in Arizona. As a result of the
difficulties the Company was experiencing with completing the API deal, the Company was forced to
make other arrangements and, on February 8, 2008, the Company made a loan agreement with Cardiff
Bay Holdings, a Hong Kong based company, through which Cardiff Bay agreed to loan the Company up
to $200,000 at an interest rate of 15% per annum for a period of one year. The loan agreement is secured
by a promissory note and a general security agreement on the assets of the company.
The financial results are discussed in more detail in Results of Operations below.
As the Company struggled financially in the second half of the year, it was unable to complete the year
end audit on time and trading in the Company’s stock was halted on November 9th, 2007.
The Company has incurred significant operating losses to date and is primarily dependent on sources of
equity financing to provide the necessary funding to meet ongoing product development costs and
anticipated operating losses.
The Company’s working capital deficit at March 31, 2007 was $765,416 (2007: $251,428). These factors
raise doubt about the Company’s ability to continue as a going-concern.
In the interim, in order to meet working capital requirements, the company will continue to raise funds
primarily through the issuance of share capital or the successful conclusion of the Paychest deal which
will bring in royalty payments. The outcome of these activities is uncertain and no assurances can be
provided that the Company will be successful in these endeavours. Even if the Company generates
higher revenues and raises additional capital, there can be no assurance that the Company will achieve
positive cash flows.
Page 2
Results of Operations
For the nine months ended March 31, 2008
Revenue during the nine months ended March 31, 2008 was $26,298 (2006: $229,042) derived from the
quarterly amount of deferred revenue from the S. China distribution rights. There were no product sales
because there was no production as the Company does not have the financing to commence and
continue full scale operations.
Operations costs of $42,947 (2007: $131,645) declined substantially as there was no production in the
period. Activities were confined to developing new production and financing relationships. Sales and
marketing costs were $Nil (2007: $239,777) because there were no sales in the quarter.
General and administrative expenses of $634,499 (2007: $630,809) were the same as the decline in
activities was offset by the cost of trying to find short and long-term financing and the API and Paychest
deals. Consulting expenses were up significantly at $133,846 (2007: $11,520) as a result of using outside
consultants to find long-term financing. Management and administration fees fell from $156,304 to
$77,839 as a result of the resignation of the CFO in early August. Professional fees increased from
$39,775 to $114,766 as a result of the extra expenses involved with the API and Paychest deals and a
credit for the period in 2007. Shareholder communications rose from $124,689 to $163,185 as the
Company continued to raise awareness in the Company and a favourable settlement on an invoice
reduced costs in 2007. The nine months in 2007 also saw $233,316 of advances written down, most of
which were allocated to consulting when invoices were received.
Research and Development costs were down slightly from $21,443 to $10,648 as there was less patent
and trademark activity.
As a result of these reductions in expenses, the Company showed a net loss of $661,825 compared with
$1,215,711 for the nine months ended March 31, 2007.
At March 31, 2008, the Company’s cash and cash equivalents position was a deficit of $842 (year ended
March 31, 2007: surplus of $8,460), with a working capital deficiency of $765,416 (2007: $251,428).
Page 3
Summary of Quarterly Results
Quarter ended Quarter ended Quarter ended Quarter ended
March 31, 2008 December 31,
2007
September 30,
2007
June 30, 2007
Total revenues $ 8,756 $ 8,756 $ 8,756 $ 17,721
(Net loss) $(203,149) $(223,700) $(234,981) $(1,031,203)
(Loss) per
share, basic and
diluted
(0.00)
(0.00)
(0.00)
(0.02)
Quarter ended Quarter ended Quarter ended Quarter ended
March 31, 2007 December 31,
2006
September 30,
2006
June 30, 2006
Total revenues $ 5,788 $127,615 $95,659 $42,369
(Net loss) $(533,584) $(280,968) $(401,159) $(567,352)
(Loss) per share,
basic and diluted
(0.01)
(0.004)
(0.01)
(0.01)
There was no general trend in sales over the last eight quarters other than a decline in sales as
production stopped in the quarter ended December 31, 2006.
The loss per share in the fourth quarter was less than the fourth quarter of 2007 largely because of the
lower loss and the greater number of shares outstanding at the end of March, 2008.
Third Quarter to March 31, 2008
Revenue for the third quarter totaled $8,756 compared with $5,768 in 2007. This represented deferred
revenue from distributor’s rights.
Operation costs for the second quarter were $13,512 (2007: $42,040). This was primarily because of the
reduction of all costs as there was only maintenance activity in 2008 compared with efforts to revive
production in 2007. Sales & marketing costs were $Nil compared with $10,310 in 2007 as sales activity
declined in the third quarter of 2007 and subsequently ceased.
Overall the general and administration costs fell to $198.364 from $269,930. An increase in the use of
outside consultants from $4,500 to $44,043 to source long-term financing, was partially offset by a
reduction in management fees from $45,529 to $25,000 as the CFO was not replaced though costs were
accrued for related services. Office expenses fell from $175,578 to $55,613. Of this decrease $138,000
was for the provision in bad debt made in 2007 against the Australian distributor receivable, there was no
rent for two months in 2008 and the major portion of the costs were $36,200 for the finance fees for the
loan. Shareholder communications were up from ($19,032) to $26,238 as the Company continued to
promote itself to generate interest in the stock and increase the likelihood of obtaining long-term finance.
The negative figure in 2007 was caused by a favourable settlement of an invoice. Research and
Development costs were down because there was minimal activity.
Page 4
Liquidity
The Company has incurred significant operating losses in this and previous fiscal years and its ability to
continue operating as a going concern is contingent on the Company being able to raise equity or debt
financing to cover operating deficits until such time as its operations become cash neutral or cash
positive.
In the nine months the Company’s financing activities netted $440,000 of additional cash resources as a
result of the conversion of warrants. The Company is continuing to investigate appropriate sources for
both short and long term financing to support its growth.
IN the period, the Company entered into a loan agreement with Cardiff Bay Holdings which has certain
terms and covenants attached to it. The Company does not anticipate it will incur any default or arrears
on payment of leases or debt principal or interest. The company believes that the assignment of the
agreements from API to Paychest Inc. will give the Company a better chance of success in this matter.
There are no contractual lease obligations as the Company was forced to vacate its premises at the end
of January, 2008.
Capital Resources
The Company is not committed to further capital expenditures for the purchase of property, plant and
equipment but is committed to further expenditures on Product Development. During the fiscal year end
June 30, 2006, on June 7, 2006 the Company announced that it has reached an agreement in principle
with QuarTek Corporation of Greensboro, North Carolina whereby the Company will license certain
nanotechnology products for use in the Flushaway products. In return, the Company will issue 4,150,000
shares and pay QuarTek US$300,000 in five installments between June 30, 2006 and March 1, 2007.
The Company will issue an additional 2,500,000 shares upon implementation of the licensed technology.
The Company issued 4,150,000 shares and paid US$100,000 in the year ended June 30, 2007.
As of March 31, 2008, the Company had 450,000 outstanding share purchase options with an exercise
price of $0.25, 545,000 options at $0.10, 470,000 options at $0.20, 1,093,500 options at $0.15, 2,647,000
options at an exercise price of $0.145 and 3,000,000 for a total of 8,205,500.
At March 31, 2007, the Company had 17,534,920 outstanding share purchase warrants (with exercise
prices ranging from $0.10 for 7,365,400 to $0.11 for 10,169,520. Subsequent to the quarter end,
10,169,520 warrants expired on May 1, 2008.
Transactions with Related Parties
During the nine months ended March 31, 2008 the Company accrued management and administration
services of $76,701 (2007: $105,196) to directors, former directors, officers and shareholders, and
companies controlled by directors and officers of the Company.
Due to related parties includes amounts due to directors, officers and shareholders and companies
controlled by, or associated with directors, and officers for consulting services and expenses of $95,279
(2007: $125,195). These amounts are non-interest bearing with no specific terms of repayment.
Advances to officers and employees are made for travel and other business related purposes. Included
in payables are travel and business expenses owing to a consultant (VP Operations) of $34,937 (2007:
receivable of $20,919).