N@N

RS Technologies Reports Second Quarter 2010 Results

^{Published on 2010-08-12 20:40:42 - Market Wire}
 

 ------------------------------------------------------------------------- RS TECHNOLOGIES INC. (formerly Resin Systems Inc.) MANAGEMENT'S DISCUSSION & ANALYSIS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 ------------------------------------------------------------------------- 

 I. Caution Regarding Forward Looking Statements ------------------------------------------------------------------------- 

 II. RS Technologies Inc. ------------------------------------------------------------------------- 

 III. Overview of the Business and Strategy ------------------------------------------------------------------------- 

 - have very compelling and undisputed advantages for customers; - have large, and where possible, global markets; - have appropriate market entry ability for RS; - allow RS's products to create significant and sustained barriers to entry for competitors; and - provide above average profit margins. 

 - increase our North American market share by working with our distribution partner to add key North American customers and increase the number of repeat orders from existing customers; - focus on new transmission projects which generally have greater gross margin potential; - increase the composite pole production rate and production efficiencies to meet the anticipated increase in demand; - improve the manufacturing process to achieve positive gross margins; - develop the RStandard product line based on the needs and experiences of customers; and - support and oversee the design and engineering of next generation turnkey production cells to meet the growing market demand. 

 IV. Business Operations ------------------------------------------------------------------------- 

 c. Corporate i. Private placement On March 19, 2010, the Company issued 22,465,396 common shares as part of a private placement at $0.33 per share for net proceeds of $7.3 million. ii. Bank loans On February 19, 2010, the Company obtained an additional $3 million of demand loans from a Canadian chartered bank at an interest rate of bank prime plus one percent due March 31, 2010. A commitment fee of $30,000 was paid to the bank upon acceptance of the loan. On March 19, 2010, the Company obtained an extension on the demand loans from March 31, 2010 to October 1, 2010. An extension fee of $35,000 was paid and a general security agreement over all the assets of the Company was provided to the bank as part of the agreement, giving the bank a first charge over the Company's assets, subject to certain permitted encumbrances. The members of the Board of Directors have agreed to provide, and subsequently extend, limited liability guarantees ("Guarantees") in favour of the bank guaranteeing all the obligations of the Company to the bank up to October 1, 2010. During the quarter, a third party advisor to the Company completed their analysis of the guarantee compensation. The Directors will be compensated for the provision of the guarantees at a weighted average annual rate of 8.46% for the originally contemplated timeframes for each loan. The Company has agreed to compensate the directors for the extension of the guarantees and will retain an independent third party valuator to provide a fair market valuation of the provision. As at August 12, 2010, this valuation has not been completed. An estimate of $0.1M for the additional compensation has been included in the financial statements. iii. Shares issued for interest In an effort to conserve cash, RS issued shares in lieu of cash interest on its unsecured $25M 8.5% debenture on January 7 and June 30, 2010. 9,486,668 common shares were issued with a weighted average price of $0.224 during the period, conserving approximately $2.1M in cash used to fund operations. V. Financial and Operating Results ------------------------------------------------------------------------- 

 Thousands of Canadian dollars except per share amounts which are in Three Months Ended June 30 Six Months Ended June 30 thousands of shares 2010 2009 % change 2010 2009 % change ------------------------------------------------------------------------- Product revenues $ 3,341 $ 4,940 (32) $ 6,330 $ 5,940 7 Gross margin $ (1,565) $ (1,834) 15 $ (3,030) $ (2,766) 10 Net loss $ (6,221) $ (7,186) 13 $(12,607) $(13,458) 6 Net loss per share $ (0.03) $ (0.05) 40 $ (0.06) $ (0.09) 33 Funds from opera- tions(1) $ (4,140) $ (5,515) 25 $ (9,406) $(10,234) 8 Total assets $ 16,089 $ 12,724 26 $ 16,089 $ 12,724 26 Convertible debent- ures(2) $ 31,304 $ 28,024 12 $ 31,304 $ 28,024 12 Basic and diluted weighted average shares outstanding 214,035 147,133 46 204,160 147,117 39 (1) Funds from operations is defined as "Cash used in operating activities", as reflected in the Consolidated Statements of Cash Flows before change in non-cash operating working capital. Management believes that the presentation of this non-generally accepted accounting principle measure provides useful information about the Company's ability to fund future operations. Funds from operations is not a recognized measure under Canadian generally accepted accounting principles. Investors are cautioned that funds from operations should not be construed as an alternative to net earnings or loss determined in accordance with Canadian generally accepted accounting principles as an indicator of the financial performance of the Company or as a measure of the Company's liquidity and cash flows. The Company's method of calculating funds from operations may differ from other issuers and may not be comparable to similar measures presented by other issuers. (2) Includes both current and long-term portions of the Convertible debentures. For detailed convertible debenture information, please see the Company's 2009 annual financial statements. 

 VI. Financial Position ------------------------------------------------------------------------- 

 Increase/ (Decrease) Cash and cash $(2.3) Decrease is due to production costs equivalents million being greater than selling cost. Accounts receivable $(0.5) Decrease is due to the timing of current million quarter sales and receipt of prior quarter receivables. Inventory $1.4 Increase is due to the build up of million finished goods inventory and raw materials on hand. Prepaid expenses and $0.3 Increase is due to the prepayment of deposits million raw materials, the renewal of insurance and an increase in other deposits. Property, plant and ($0.1) Decrease is due to the amortization of equipment million property, plant and equipment. Current liabilities $1.5 Increase is due to the addition of bank million debt; increased accretion expense on the debentures; offset by a reduction in accounts payable and accrued liabilities and a reduction in the value of the deferred share units issued and outstanding. Secured and $0.2 Increase is due to the accretion on the unsecured million secured debentures. convertible debentures Other long-term ($0.1) Decrease is due to the repayment of the liabilities million mortgage on the Tilbury, Ontario land and building. VII. Financial Instruments ------------------------------------------------------------------------- 

 Contr- Thousands of Carrying actual 0 to 3 3 to 6 Canadian dollars amount cash flow months months ------------------------------------------------------------------------- Accounts payable and accrued liabilities $ 3,129 $ 3,129 $ 3,129 $ - Bank loans 7,000 7,000 - 7,000 Other liabilities 4,292 3,633 2,431 61 Unsecured debentures i) 24,179 25,000 - 25,000 Secured debenture i) 7,125 10,000 - - Debenture interest i) - 6,650 - 2,076 ------------------------------------------------------------------------- $ 45,725 $ 55,412 $ 5,560 $ 34,137 ------------------------------------------------------------------------- ------------------------------------------------------------------------- Thousands of 6 to 12 12 to 24 After 24 Canadian dollars months months months --------------------------------------------------------------- Accounts payable and accrued liabilities $ - $ - $ - Bank loans - - - Other liabilities 124 247 770 Unsecured debentures i) - - - Secured debenture i) - - 10,000 Debenture interest i) 1,500 1,500 1,574 --------------------------------------------------------------- $ 1,624 $ 1,747 $ 12,344 --------------------------------------------------------------- --------------------------------------------------------------- i) These instruments allow the Company to choose whether it settles the financial liabilities by delivering cash or issuing common shares. VIII. Related Party Transactions ------------------------------------------------------------------------- 

 IX. Commitments ------------------------------------------------------------------------- 

 X. Liquidity and Capital Resources ------------------------------------------------------------------------- 

 XI. Share Capital ------------------------------------------------------------------------- 

 XII. Summary of Eight Recently Completed Quarters ------------------------------------------------------------------------- 

 ------------------------------------------------------------------------- 2010 2009 ------------------------------------------------------------------------- Jun Mar Dec Sept ------------------------------------------------------------------------- (Thousands of Canadian dollars except per share amounts) ------------------------------------------------------------------------- Product revenue 3,341 2,989 3,222 1,409 ------------------------------------------------------------------------- Net loss (6,221) (6,386) (6,803) (8,250) ------------------------------------------------------------------------- Basic and diluted loss per common share (0.03) (0.03) (0.04) (0.05) ------------------------------------------------------------------------- Total cash and cash equivalents 738 3,939 3,048 1,879 ------------------------------------------------------------------------- Total assets 16,089 21,498 17,371 15,575 ------------------------------------------------------------------------- Total long-term liabilities 8,691 8,605 9,083 30,975 ------------------------------------------------------------------------- ------------------------------------------------------------------------- 2009 2008 ------------------------------------------------------------------------- Jun Mar Dec Sept ------------------------------------------------------------------------- (Thousands of Canadian dollars except per share amounts) ------------------------------------------------------------------------- Product revenue 4,940 1,000 101 446 ------------------------------------------------------------------------- Net loss (7,186) (6,272) (8,369) (12,013) ------------------------------------------------------------------------- Basic and diluted loss per common share (0.05) (0.04) (0.06) (0.08) ------------------------------------------------------------------------- Total cash and cash equivalents 415 2,005 7,964 7,111 ------------------------------------------------------------------------- Total assets 12,724 14,960 19,548 20,071 ------------------------------------------------------------------------- Total long-term liabilities 29,880 28,011 27,321 20,384 ------------------------------------------------------------------------- XIII. Disclosure Controls and Procedures and Internal Controls over Financial Reporting ------------------------------------------------------------------------- 

 XIV. Future Accounting Changes ------------------------------------------------------------------------- 

 - Property, plant and equipment - Impairment of assets - Financial Instruments recognition and measurement - Financial Instruments presentation 

 XV. Critical Accounting Estimates ------------------------------------------------------------------------- 

 1) The engagement of Macquarie Capital Advisors as a financial advisor, to assist the Company in securing funds for both its near term working capital needs and manufacturing improvements. The Company, with its financial advisor is actively, engaged in seeking debt and/or equity financing in order to raise the funds necessary to pursue management's plan of operation, to fund the working capital deficit, and in order pay its accounts payable and accrued liabilities, and make capital improvements to enhance manufacturing. The Company does not currently have any arrangements in place for the completion of any debt and/or equity financing and there is no assurance that RS will be successful in completing any debt and/or equity financing. RS's ability to continue operations will be entirely dependent upon the Company's ability to obtain bridge financing until such time as long-term financing is obtained. The Company has obtained $2.0M of bridge financing from a related party (see the Subsequent Events section) and will require additional funds in the event that a long- term financing arrangement is not completed prior to August 31, 2010. It is anticipated that changes to the Company's outstanding indebtedness and/or equity will be required in conjunction the completion of with any long-term financing arrangement. The structure and timing of these changes remain unknown until an arrangement is finalized, subject to the approval of such changes by the applicable securityholders and regulatory agencies. In addition, the Company may choose to begin changing its outstanding indebtedness and/or equity prior to reaching a long-term financing arrangement in order to ease the current debt burden. 2) Continuing to implement plans to reduce operational costs. In order to extend the availability of current capital resources, a focus on cash management including detailed weekly budgets, the negotiation of more favourable terms with the Company's suppliers, and a reduction of discretionary spending, has been implemented. Management has made every effort to ensure that these changes have not and will not impact the Company's ability to meet its current and future customer obligations. 

 XVI. Risk and Uncertainties ------------------------------------------------------------------------- 

 XVII. Outlook ------------------------------------------------------------------------- 

 - increase our North American pole market share by working with our distribution partner to add key North American customers and increase the number of repeat orders from existing customers; - focus on new transmission projects which generally have greater gross margin potential; - increase the composite pole production rate and production efficiencies to meet the anticipated increase in demand; - improve the manufacturing process to achieve positive gross margins; - develop the RStandard product line based on the needs and experiences of customers; and - support and oversee the design and engineering of the next generation of turnkey production cells to meet the growing market demand. 

 XVIII. Subsequent Events ------------------------------------------------------------------------- 

 Unaudited Interim Consolidated Financial Statements of RS TECHNOLOGIES INC. (formerly Resin Systems Inc.) For the Three and Six Month Periods Ended June 30, 2010 and 2009 RS TECHNOLOGIES INC. (formerly Resin Systems Inc.) CONSOLIDATED BALANCE SHEETS ------------------------------------------------------------------------- Thousands of Canadian dollars (unaudited) June December 31, 2010 31, 2009 ------------------------------------------------------------------------- ASSETS Current assets Cash $ 738 $ 3,048 Accounts receivable 855 1,378 Inventories (note 3) 6,412 5,033 Prepaid expenses and deposits 523 240 ------------------------------------------------------------------------- 8,528 9,699 Restricted cash 146 145 Property, plant and equipment 7,415 7,527 ------------------------------------------------------------------------- $ 16,089 $ 17,371 ------------------------------------------------------------------------- ------------------------------------------------------------------------- LIABILITIES and SHAREHOLDERS' DEFICIT Current liabilities Accounts payable and accrued liabilities $ 3,129 $ 5,849 Bank loans (note 4) 7,000 4,000 Province of Ontario loan 2,000 2,000 Current portion of long-term debt 233 226 Unsecured convertible debentures (note 5) 24,179 22,718 Other current liabilities 493 763 ------------------------------------------------------------------------- 37,034 35,556 Secured convertible debentures (note 5) 7,125 6,892 Long-term debt 915 1,033 Other long-term liabilities 651 652 ------------------------------------------------------------------------- 45,725 44,133 Shareholders' deficit Share capital (note 6) 147,550 138,051 Warrants (note 6) 2,746 2,746 Equity component of secured and unsecured convertible debentures 10,415 10,415 Contributed surplus (note 6) 10,064 9,830 Deficit (200,411) (187,804) ------------------------------------------------------------------------- (29,636) (26,762) ------------------------------------------------------------------------- Future operations (note 2) Contingencies (note 10) Commitments (note 11) Subsequent events (note 12) ------------------------------------------------------------------------- $ 16,089 $ 17,371 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. On behalf of the Board: Signed "David Williams" Signed "Wilmot Matthews" Director Director RS TECHNOLOGIES INC. (formerly Resin Systems Inc.) CONSOLIDATED STATEMENTS OF LOSS, COMPREHENSIVE LOSS AND DEFICIT ------------------------------------------------------------------------- Thousands of Canadian dollars Except per share Three months Six months amounts and shares ended June 30 ended June 30 outstanding (unaudited) 2010 2009 2010 2009 ------------------------------------------------------------------------- Product revenue $ 3,341 $ 4,940 $ 6,330 $ 5,940 Cost of sales 4,906 6,774 9,360 8,706 ------------------------------------------------------------------------- (1,565) (1,834) (3,030) (2,766) ------------------------------------------------------------------------- Expenses Selling, general and administrative 2,683 2,839 5,669 5,668 Depreciation 51 297 106 568 Stock based compensation (note 6) 48 626 78 1,239 ------------------------------------------------------------------------- 2,782 3,762 5,853 7,475 ------------------------------------------------------------------------- Operating loss (4,347) (5,596) (8,883) (10,241) Guarantees - 90 - 90 Other income 18 36 31 59 Financing charges (note 8) (1,892) (1,716) (3,755) (3,366) ------------------------------------------------------------------------- Net loss and comprehensive loss (6,221) (7,186) (12,607) (13,458) Deficit, beginning of period (194,190) (165,565) (187,804) (159,293) ------------------------------------------------------------------------- Deficit, end of period $ (200,411) $ (172,571) $ (200,411) $ (172,751) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted loss per common share $ (0.03) $ (0.05) $ (0.06) $ (0.09) ------------------------------------------------------------------------- ------------------------------------------------------------------------- Basic and diluted weighted average number of shares outstanding 214,034,540 147,133,047 204,160,161 147,116,843 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. RS TECHNOLOGIES INC. (formerly Resin Systems Inc.) CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------------------------------------------- Three months Six months Thousands of Canadian ended June 30 ended June 30 dollars (unaudited) 2010 2009 2010 2009 ------------------------------------------------------------------------- Cash provided by (used in): Operating activities: Net loss $ (6,221) $ (7,186) $ (12,607) $ (13,458) Items which do not involve cash Depreciation of property, plant and equipment 283 362 573 701 Non-cash financing charges 1,772 749 2,601 1,467 Amortization of deferred gain on sale of property, plant and equipment (19) (30) (38) (50) Stock based compensation 48 606 78 1,239 Other non-cash items (3) (16) (13) (133) ------------------------------------------------------------------------- Cash used in operating activities (4,140) (5,515) (9,406) (10,234) Change in non-cash operating working capital 1,450 2,795 (2,545) 2,159 ------------------------------------------------------------------------- (2,690) (2,720) (11,951) (8,075) Financing activities: Issue of share capital - 12 7,335 12 Bank loan - - 3,000 - Issue of unsecured promissory notes - 1,500 - 1,500 Issue of mortgage - 1,404 - 1,404 Repayment of mortgage (57) - (111) - Repayment of other long-term liabilities (57) (129) (121) (149) ------------------------------------------------------------------------- (114) 2,787 10,103 2,767 Investing activities: Purchase of property, plant and equipment (397) (1,657) (462) (2,241) ------------------------------------------------------------------------- Decrease in cash and cash equivalents (3,201) (1,590) (2,310) (7,549) Cash and cash equivalents, beginning of period 3,939 2,005 3,048 7,964 ------------------------------------------------------------------------- Cash and cash equivalents, end of period 738 415 738 415 ------------------------------------------------------------------------- ------------------------------------------------------------------------- ------------------------------------------------------------------------- Cash 738 215 738 215 Cash equivalents - 200 - 200 ------------------------------------------------------------------------- Cash and cash equivalents, end of period $ 738 $ 415 $ 738 $ 415 ------------------------------------------------------------------------- ------------------------------------------------------------------------- See accompanying notes to the consolidated financial statements. RS Technologies Inc. (Formerly Resin Systems Inc.) Notes to the consolidated financial statements Three and Six months ended June 30, 2010 and 2009 1. Basis of presentation: These unaudited interim consolidated financial statements of RS Technologies Inc. (formerly Resin Systems Inc.) ("RS" or the "Company") have been prepared by management in accordance with Canadian generally accepted accounting principles ("GAAP"). The accounting policies and methods of application are consistent with those outlined in RS's audited consolidated financial statements for the year-ended December 31, 2009. These consolidated financial statements reflect all normal recurring adjustments that are, in the opinion of management, necessary to fairly present the financial position and results of operations. These interim consolidated financial statements do not include all disclosures required in the annual financial statements and should be read in conjunction with the Company's annual audited consolidated financial statements and notes thereto for the year ended December 31, 2009. 2. Future operations: These interim consolidated financial statements have been prepared on a going concern basis in accordance with Canadian GAAP, which assumes that the Company will realize its assets and discharge its liabilities and commitments in the normal course of business. The application of the going concern concept is dependent upon, amongst other things, the continued support and cooperation of shareholders, lenders, suppliers, and the ability to generate profitable operations. For the six months ended June 30, 2010, the Company reported a net loss of $12,607. RS had negative working capital of $28,506 and an accumulated deficit of $200,411 at quarter end. As a result of these factors and the continued use of cash in operations, there exists significant doubt with respect to the Company's ability to discharge its current liabilities through the normal course of operations beyond August 31, 2010. Additional financing by way of debt and/or equity will be required for the Company to continue as a going concern. Management is perusing a number of actions in an effort to ensure that RS will continue as a going concern until additional financing is obtained, including but not limited to: 1) The engagement of Macquarie Capital Advisors as a financial advisor, to assist the Company in securing funds for both its near term working capital needs and manufacturing improvements. The Company, with its financial advisor is actively, engaged in seeking debt and/or equity financing in order to raise the funds necessary to pursue management's plan of operation, to fund the working capital deficit, and in order pay its accounts payable and accrued liabilities, and make capital improvements to enhance manufacturing. The Company does not currently have any arrangements in place for the completion of any debt and/or equity financing and there is no assurance that RS will be successful in completing any debt and/or equity financing. RS's ability to continue operations will be entirely dependent on the Company's ability to obtain bridge financing until such time as long-term financing is obtained. The Company has obtained $2,000 of bridge financing from a related party (see note 12) and will require additional funds in the event that a long-term financing arrangement is not completed prior to August 31, 2010. It is anticipated that changes to the Company's outstanding indebtedness and/or equity will be required in conjunction the completion of with any long-term financing arrangement. The structure and timing of these changes remain unknown until an arrangement is finalized, subject to the approval of such changes by the applicable securityholders and regulatory agencies. In addition, the Company may choose to begin changing its outstanding indebtedness and/or equity prior to reaching a long-term financing arrangement in order to ease the current debt burden. 2) Continuing to implement plans to reduce operational costs. In order to extend the availability of current capital resources, a focus on cash management including detailed weekly budgets, the negotiation of more favorable terms with the Company's suppliers, and a reduction of discretionary spending, has been implemented. Management has made every effort to ensure that these changes have not and will not impact the Company's ability to meet its current and future customer obligations. Management believes that the foregoing actions, together with the continued support and cooperation of securityholders, lenders and suppliers, and securing the required long-term financing, will enable RS to continue as a going concern. There can be no assurance that management's plans will be successful as such plans will be entirely dependent upon the completion of a long-term financing arrangement, market acceptance of the Company's products, and the implementation of manufacturing improvements. Should the Company be unsuccessful in raising additional financing, it may have no choice but to seek protection from its creditors. These financial statements do not reflect any adjustments should RS be unable to continue as a going concern and therefore be required to realize its assets and discharge its liabilities outside the normal course of business. 3. Inventories: --------------------------------------------------------------------- June 30, 2010 December 31, 2009 --------------------------------------------------------------------- Raw materials $ 1,569 $ 1,096 Finished goods 4,843 3,937 --------------------------------------------------------------------- $ 6,412 $ 5,033 --------------------------------------------------------------------- --------------------------------------------------------------------- During the quarter, the Company wrote-down finished goods inventory to net realizable value. The year to date inventory write-down of $1,649 (2009 - $1,432) is included in cost of sales. Raw materials are recorded at cost. 4. Bank loans: On February 19, 2010, the Company obtained an additional $3,000 of demand loans from a Canadian chartered bank at an interest rate of bank prime plus 1.00% due March 31, 2010. A commitment fee of $30 was paid to the bank upon acceptance of the loan. On March 19, 2010, the Company obtained an extension on the demand loans from March 31, 2010 to October 1, 2010. An extension fee of $35 was paid and a general security agreement over all the assets of the Company was provided to the bank as part of the agreement, giving the bank a first charge over the Company's assets, subject to certain permitted encumbrances. The members of the Board of Directors have agreed to provide and extend, limited liability guarantees ("Guarantees") in favour of the bank, guaranteeing all the obligations of the Company to the bank up to October 1, 2010. During the quarter, a third party advisor to the Company completed their analysis of the guarantee compensation. The Directors will be compensated for the provision of the guarantees at a weighted average annual rate of 8.46% for the originally contemplated timeframes for each loan. The Company has agreed to compensate the directors for the extension of the guarantees and will retain an independent third party valuator to provide a fair market valuation of the provision. As at June 30, 2010, this valuation has not been completed, and an estimate of $138 for the additional compensation has been included in these financial statements. 5. Secured and unsecured convertible debentures: Unsecured convertible debentures On October 6, 2005, the Company issued $25,000 of unsecured convertible debentures ("Unsecured Debentures") due October 7, 2010 and bearing interest at 8.5% per annum payable semi-annually each June 30th and December 31st. The holders of the Unsecured Debentures have the option to convert the principal amount of the Unsecured Debenture into common shares at an original conversion price of $2.90 per share at any time prior to the maturity date or the business day preceding the Company exercising its redemption option on the debentures. This conversion price was more than the market price of the Company's shares at the issue date. The Unsecured Debentures are redeemable by the Company at any time after October 6, 2007 at a redemption price equal to the principal amount plus accrued and unpaid interest provided that the volume weighted average trading price ("VWAP") of the common shares exceeds $3.63 for the twenty consecutive trading days ending five trading days prior to the date of which notice of redemption is given. On redemption or maturity, the Company may elect to repay the principal amount plus accrued and unpaid interest on the debentures by issuing and delivering common shares in the amount of the unsecured debenture principal plus accrued and unpaid interest divided by 95% of the VWAP of the common shares for the twenty consecutive trading days ending five trading days preceding the date fixed for redemption or maturity. As a result of the rights offering in July 2009, the conversion price of the outstanding unsecured convertible debentures was adjusted from $2.90 per common share to $2.76 per common share. This results in a conversion rate of approximately 362 common shares for each $1,000 principal amount of debentures. The Unsecured Debentures were bifurcated into a liability component of $14,129 and an equity component of $10,258 at inception. The difference between the $25,000 due on maturity and the initial liability component is accreted and recorded as financing charges. The financing costs related to the Unsecured Debentures of $1,410 were also bifurcated into a liability component and an equity component on a pro-rata basis based on carrying amounts. In January 2010, the Company entered into a supplemental indenture whereas the interest due on December 31, 2009 and through the remainder of the debenture term can be made by an issuance of shares in lieu of a cash payment. The number of shares issued is based on 95% of the current market price as defined by the Toronto Stock Exchange ("TSX"). On January 7, 2010, the Company issued 2,582,891 shares at $0.411 per share as payment for interest accrued for the period from July 1, 2009 to December 31, 2009. On June 30, 2010, the Company issued 6,903,777 common shares at $0.154 per share as payment for interest accrued for the period from January 1, 2010 to June 30, 2010. Secured convertible debentures On December 16, 2008, the Company issued 10,000 units for total proceeds of $10,000, due December 17, 2013. Each unit consists of a one thousand dollar convertible secured redeemable debenture ("Secured Debenture") earning interest at 15% per annum paid annually with the first interest payment due on November 30, 2009. The Company has the option of paying the interest by issuing common shares to the debenture holders. The issuance of the shares would be based on 85% of the VWAP of the common shares for the five consecutive trading days ending five trading days preceding the interest payment date. The Secured Debentures are secured by all of the assets of the Company, subject to the ability to put in place senior indebtedness. The Secured Debentures and accrued interest are convertible by the holder at any time after December 16, 2010 and prior to repayment of the debenture. The conversion price will be based on 115% of the VWAP for the five consecutive trading days immediately preceding December 16, 2010. The Secured Debentures are redeemable by the Company, in whole or in part, at a redemption price equal to their principal amount plus any accrued and unpaid interest. In addition, each unit has 4,000 purchase warrants enabling the holder to purchase common shares at $0.18 per share until December 16, 2013. As a result of the rights offering in July 2009, the exercise price for the 40 million warrants currently outstanding has been adjusted to $0.17 per common share and the number of common shares purchasable per warrant has been adjusted to 1.06 common shares. On maturity or on redemption at any time after December 16, 2010, the Company may, at its option, on not more than 60 days and not less than 40 days prior notice and subject to regulatory approval, elect to satisfy its obligation to repay the principal amount of the Secured Debentures and accrued interest thereon by issuing and delivering that number of freely tradable common shares obtained by dividing the principal amount of the Secured Debentures and the accrued interest thereon by 85% of the volume weighted average trading price of the common shares on the TSX for the five consecutive trading days ending five trading days preceding the date fixed for redemption or maturity, as the case may be. If there is a change in control involving the acquisition of voting control or direction over 50% or more of the Company's issued and outstanding common shares, the Company is required to offer a price equal to 101% of the principal amount plus accrued and unpaid interest to the holders of the Secured Debentures. The Secured Debentures were separated into the following three components, on issuance: -------------------------------- Debenture $ 6,911 Conversion option 337 Warrants 2,752 -------------------------------- Total value of units $10,000 -------------------------------- The financing costs related to the Secured Debentures of $584 were also bifurcated into a liability component and an equity component on a pro-rata basis based on carrying amounts. 6. Shareholders' equity: (a) Authorized and issued share capital: --------------------------------------------------------------------- Common Shares Warrants ----------------------------------------------- Number Amount Number Amount --------------------------------------------------------------------- Balance, December 31, 2009 188,883,711 $ 38,051 39,919,000 $ 2,746 Shares issued in private placement(1) 22,465,396 7,335 - - Shares issued for interest(2)(3) 9,486,668 2,125 - - Restricted share units exercised 25,833 39 - - --------------------------------------------------------------------- Balance, June 30, 2010 220,861,608 $ 47,550 39,919,000 $ 2,746 --------------------------------------------------------------------- (1) On March 19, 2010, the Company issued 22,465,396 common shares as part of a private placement of $0.33 per share for net proceeds of $7,335. (2) On January 7, 2010, the Company issued 2,582,891 common shares at $0.411 per share as payment for interest accrued for the period from July 1, 2009 to December 31, 2009. (3) On June 30, 2010, the Company issued 6,903,777 common shares at $0.154 per share as payment for interest accrued for the period from January 1, 2010 to June 30, 2010. (b) Warrants: At June 30, 2010 and December 31, 2009, there were 39,919,000 warrants outstanding at a price of $0.17 and expiry of December 16, 2013. (c) Stock based compensation: In the second quarter of 2010, the Company recorded $221 (2009 - $411) in stock-based compensation relating to stock options granted to employees, net of forfeitures. In addition, a net recovery of $184 (2009 - $205 expense) of stock-based compensation has been recorded related to the granting and revaluation of deferred share units ("DSUs") and an expense of $11 (2009 - $10) related to restricted share units ("RSUs"), net of forfeitures. For the period ended June 30, 2010, the Company has recorded $251 (2009 - $871) in stock-based compensation expense that relates to stock options granted to employees, net of forfeitures. In addition, a net recovery of $195 (2009 - $338 expense) of stock- based compensation has been recorded related to the granting and revaluation of deferred share units ("DSUs") and an expense of $22 (2009 - $30) related to restricted share units ("RSUs"), net of forfeitures. (d) Stock options outstanding: --------------------------------------------------------------------- Number of Weighted average Options held by employees share options exercise price --------------------------------------------------------------------- Outstanding, December 31, 2009 10,043,050 $ 0.92 Granted 2,750,000 0.29 Forfeited (1,000,000) 0.81 --------------------------------------------------------------------- Outstanding, June 30, 2010 11,793,050 $ 0.79 --------------------------------------------------------------------- --------------------------------------------------------------------- --------------------------------------------------------------------- Number of Weighted average Options held by non-employees share options exercise price --------------------------------------------------------------------- Outstanding, December 31, 2009 and June 30, 2010 100,000 $ 1.63 --------------------------------------------------------------------- The following table summarizes information about the stock options outstanding as at June 30, 2010: Weighted average years Price range Outstanding remaining Exercisable --------------------------------------------------------------------- $ 0.23 - 0.35 5,175,000 4.28 733,332 0.36 - 1.12 2,343,000 2.97 1,194,334 1.13 - 1.50 4,175,000 1.87 3,361,666 1.51 - 2.40 200,050 0.47 200,050 --------------------------------------------------------------------- $ 0.23 - 2.40 11,893,050 3.11 5,489,382 --------------------------------------------------------------------- --------------------------------------------------------------------- (e) Restricted shares Under the Company's restricted share unit plan, the Company granted no RSUs in the current or prior period. Of the units previously granted, 25,833 vested in the current period and 100,000 units vest in 2011. (f) Deferred share unit plan As at June 30, 2010, there were 2,246,008 DSUs outstanding. The liabilities for DSUs are revalued to market on a quarterly basis and as at June 30, 2010, $312 (December 31, 2009 - $506) is included in other current liabilities. (g) Contributed surplus: The following table reconciles the Company's contributed surplus for the period: --------------------------------------------------------------------- Balance, December 31, 2009 $ 9,830 Stock-based compensation 273 Restricted share units exercised (39) --------------------------------------------------------------------- Balance, June 30, 2010 $ 10,064 --------------------------------------------------------------------- --------------------------------------------------------------------- 7. Segmented information: RS's activities are comprised of one operating segment being the development, manufacturing and sales of composite products. The Company evaluates performance as one entity. During the three and six months ended June 30, 2010, the Company's revenues consisted entirely of utility pole sales. During the three and six months ended June 30, 2010, 80% and 86% (2009 - 93% and 92%) of total sales were to Customer A, respectively. The following table represents revenues geographic location: Three months Six months ended June 30 ended June 30 Location 2010 2009 2010 2009 --------------------------------------------------------------------- Canada $ 2,689 $ 4,279 $ 5,466 $ 4,340 --------------------------------------------------------------------- United States - 565 81 1,400 --------------------------------------------------------------------- International 652 96 783 200 --------------------------------------------------------------------- $ 3,341 $ 4,490 $ 6,330 $ 5,940 --------------------------------------------------------------------- 8. Financing charges: Six months ended June 30 --------------------------------------------------------------------- 2010 2009 --------------------------------------------------------------------- Interest on secured and unsecured convertible debentures $ 1,806 $ 1,806 Unsecured convertible debenture accretion 1,461 1,288 Secured convertible debenture accretion 232 179 Other interest 256 93 --------------------------------------------------------------------- $ 3,755 $ 3,366 --------------------------------------------------------------------- 9. Financial instruments: At June 30, 2010, the fair value of cash, accounts receivable, accounts payable and accrued liabilities, bank loans, and the Province of Ontario loan approximate their carrying amounts due to the short-term, demand nature of these instruments. The fair value of the restricted cash approximates carrying value as it earns interest at variable market rates. The fair values of the secured and unsecured convertible debentures are not materially different from the carrying value. The carrying value of the mortgage payable approximates fair value as the interest rate of the mortgage is consistent with interest rates available to the Company from other lenders with the same terms. The Company is exposed to risks of varying degrees of significance which could affect its ability to achieve its strategic objectives for growth and shareholder returns. The principal financial risks the Company is exposed to are described below. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they come due. Management uses internally prepared cash flow forecasts to seek to ensure that the Company has sufficient liquidity to meet its liabilities when due. The Company will continue its cost cutting strategies as well as complete a debt and/or equity financing discussed in note 2 to ensure that sufficient funds will be available to discharge its current obligations as they become due. The following are the contractual maturities of financial liabilities as at June 30, 2010: Carrying Contractual 0 to 3 3 to 6 amount cash flow months months --------------------------------------------------------------------- Accounts payable and accrued liabilities $ 3,129 $ 3,129 $ 3,129 $ - Bank loans 7,000 7,000 - 7,000 Other liabilities 4,292 3,633 2,431 61 Unsecured convertible debentures(a) 24,179 25,000 - 25,000 Secured convertible debenture(a) 7,125 10,000 - - Debenture interest(a) - 6,650 - 2,076 --------------------------------------------------------------------- $ 45,725 $ 55,412 $ 5,560 $ 34,137 --------------------------------------------------------------------- --------------------------------------------------------------------- 6 to 12 12 to 24 After 24 months months months -------------------------------------------------------- Accounts payable and accrued liabilities $ - $ - $ - Bank loans - - - Other liabilities 124 247 770 Unsecured convertible debentures(a) - - - Secured convertible debenture(a) - - 10,000 Debenture interest(a) 1,500 1,500 1,574 -------------------------------------------------------- $ 1,624 $ 1,747 $ 12,344 -------------------------------------------------------- -------------------------------------------------------- (ii) These instruments allow the Company to choose whether it settles the financial liabilities by delivering cash or issuing common shares. 10. Contingencies: In the ordinary course of business, the Company may be contingently liable for litigation and claims with customers, suppliers, former employees and third parties. Management believes that adequate provisions have been recorded in the accounts where applicable. Although it may not be possible to estimate accurately the extent of potential costs and losses, if any, management believes that the ultimate resolution of such contingencies would not have a material effect on the financial position of the Company. 11. Commitments: The Company has a contract with its North American distributor until December 31, 2014 at contracted prices. The contract stipulates certain price increases for RStandard modules, some that take effect on January 1, 2011, and others that may come into effect based on increases in certain manufacturing costs. Accordingly, the Company continuously monitors its manufacturing costs to plan potential changes to pricing. The Company has a 41-year warranty and limited lifetime guarantee on its RStandard(R) modules. The Company has not included a provision for the warranty or guarantee in the current period, as there is insufficient historical information to estimate the future cost of the warranty and guarantee to RS. To date, there have not been any successful warranty or guarantee claims. 12. Subsequent Events: Subsequent to quarter end, the company received $2,000 of unsecured bridge loans from a company controlled by a director. The loans will bear interest at 12% per annum, mature November 1, 2010, and will be repaid by the proceeds of any long-term financing obtained. In addition, 1,000,000 common shares will be issued at no cost to the lender. On August 11, 2010, the Company issued the maturity notice to the unsecured debenture holders of its intention to discharge the outstanding unsecured debenture principal balance of $25,000 by way of issuing common shares of the Company, in accordance with the terms of the indenture. 13. Comparative figures: Certain comparative figures have been reclassified to conform to the current financial statement presentation. (1) Energybiz. "Now is the time" Pg 6. January/February 2009.