SIENA TECHNOLOGIES, INC.

(Exact name of small business issuer as specified in its charter)

 

Nevada	88-0390360
State or other jurisdiction of	(IRS Employer
Incorporation or organization	Identification Number)
1110 Route 55, Suite 206 LaGrangeville, New York	12540
(Address of principal executive offices)	(Zip Code)

 

(845) 575-6670

(Issuer’s telephone number, including area code)

 

5625 South Arville Street, Suite E

Las Vegas, Nevada, 89118

(Former name, former address and former fiscal year, if changed)

 

     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. Yes R No £

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

	Large Accelerated filer	£	Accelerated filer	£
	Non-accelerated filer	£	Smaller reporting Company	þ
	(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes £ No R

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY

PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.

Yes £ No £

 

APPLICABLE ONLY TO CORPORATE ISSUERS

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

28,347,114 common shares outstanding as of October 3, 2008.

 

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Index to Financial Statements

 

CONSOLIDATED BALANCE SHEETS		F-4
CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited)		F-5
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)		F-6
CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007 (Unaudited)		F-7

3

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED BALANCE SHEETS

 

		September 30, 2008			December 31, 2007
		(Unaudited)			(Audited)
ASSETS
Current Assets
Cash		$	15,818		$	1,835
Current Assets of Discontinued Operations (Note 6)			—			2,850,238
Total Current Assets			—			2,852,073
TOTAL ASSETS		$	15,818		$	2,852,073
LIABILITIES & STOCKHOLDERS’ DEFICIT
Current Liabilities
Accounts Payable and Accrued Expenses		$	81,487		$	134,158
Current Liabilities of Discontinued Operations (Note 6)			144,368			4,996,036
Related Party Promissory Notes - In Default (Note 5)			435,863			—
Fair Value of Derivatives Embedded Within Promissory Notes (Note 4)			873,336			—
Fair Value of Derivative Liabilities (Note 4)			2,341			8,124
Note Payable - In Default			407,222			377,727
Related Party Note Payable (Note 5)			9,422,066			8,422,570
Total Current Liabilities			11,366,683			13,938,615
Total Liabilities			11,366,683			13,938,615
Commitments & Contingencies (Note 7)
Stockholders’ Deficit
Common Stock, $.001 par value; 100,000,000 shares authorized, 28,347,114 and 42,163,691 shares issued and outstanding at September 30, 2008 and December 31, 2007, respectively			28,347			42,163
Additional Paid-in Capital			29,987,211			29,605,537
Shares to be Issued			163			163
Accumulated Deficit			(41,366,586	)		(40,734,405	)
Total Stockholders’ Deficit			(11,350,865	)		(11,086,542	)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT		$	15,818		$	2,852,073

The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements

 

F-4

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

		Nine Months Ended September 30						Three Months Ended September 30
		2008			2007			2008			2007
Revenues		$	—		$	—		$	—		$	—
Costs of Sales			—			—			—			—
Gross Profit			—			—			—			—
Operating Expenses
Investor Relations			23,491			182,077			5,000			71,895
Stock Based Compensation			34,675			172,454			—			34,307
Other Selling, General and Administrative Expenses			323,151			339,453			151,729			162,175
Total Operating Expenses			381,317			693,984			156,729			268,377
Loss From Continuing Operations			(381,317	)		(693,984	)		(156,729	)		(268,377	)
Other Income and Expenses
Changes in Fair Value of Derivatives			5,783			2,553,030			2,079			(145,864	)
Changes in Fair Value of Embedded Derivatives			97,350			—			472,517			—
Gain on Disposal of Subsidiary - Kelley			2,150,133			—			—			—
Interest Expense			(2,304,342	)		(363,870	)		(831,491	)		(126,420	)
Total Other Income and Expenses			(51,076	)		2,189,160			(356,895	)		(272,284	)
Net (Loss) Income From Continuing Operations			(432,393	)		1,495,176			(513,624	)		(540,661	)
Loss From Discontinued Operations			(199,788	)		(2,266,398	)		—			(258,463	)
Provision for Income Taxes			—			—			—			—
Net Loss		$	(632,181	)	$	(771,222	)	$	(513,624	)	$	(799,124	)
Basic and Diluted Net (Loss) Income Per Common Share		$	(0.02	)	$	(0.02	)	$	(0.02	)	$	(0.02	)
Number of Common Shares Used to Compute Basic and Diluted Weighted Average			37,625,399			39,942,075			28,647,474			42,636,991

The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements

 

F-5

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited) 

		Nine Months Ended Sept 30,
		2008			2007
CASH USED IN OPERATING ACTIVITIES
Net Loss		$	(632,181	)	$	(771,222	)
Adjustments to Reconcile Net Income to Net Cash Used in Operating Activities
Stock Issued for Services			—			30,000
Liquidated Damages Incurred Upon Default on Promissory Notes			103,198			—
Beneficial Conversion Feature			347,000			—
Amortization of Debt Discount			253,032			—
Fair Value Adjustments of Derivative Liabilities			(5,783	)		(2,553,030	)
Fair Value Adjustments of Embedded Derivative Liabilities			(97,350	)		—
Fair Value of Derivative Liabilities in Excess of Proceeds, Expensed			595,686			—
Stock Option Expense			34,675			172,454
Gain on Divestiture of Kelley			(2,150,133	)		—
Accretion of Notes Payable Balances			1,108,624			262,306
Changes in Operating Assets and Liabilities
(Increase) Decrease Current Assets of Discontinued Operations			—			1,045,085
(Decrease) Increase in Accounts Payable and Accrued Expenses			82,215			—
(Decrease) in Current Liabilities of Discontinued Operations			—			(843,891	)
NET CASH USED IN OPERATING ACTIVITIES			(361,017	)		(2,658,297	)
CASH PROVIDED BY FINANCING ACTIVITIES:
Net Proceeds from Issuance of Stock			—			1,132,000
Repayment of Related Party Notes Payable			—			(597,641	)
Proceeds from Related Party Promissory Notes			375,000
Proceeds from Related Party Notes Payable			—			2,155,985
NET CASH PROVIDED BY FINANCING ACTIVITIES			375,000			2,690,344
NET INCREASE IN CASH & CASH EQUIVALENTS			13,983			32,047
BEGINNING CASH & CASH EQUIVALENTS			1,835			7,808
ENDING CASH & CASH EQUIVALENTS		$	15,818		$	39,855
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid for Interest		$	—		$	261,458
Cash Paid for Income Taxes		$	—		$	—
Stock Issued for Services and Debt Reduction.		$	—		$	30,000
Accrued Commissions in Connection with Private Placement		$	—		$	32,500
Assets Contributed to Tuscany Services LLC in Exchange for Joint Venture Interest		$	—		$	375,000
Issuance of Warrants in Connection with Private Placement		$	—		$	1,045,182

The Accompanying Notes Are an Integral Part of these Consolidated Financial Statements

 

F-6

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

NOTE 1 - DESCRIPTION OF BUSINESS

 

On October 25, 2006, Network Installation Corp. (“NIC”) changed its name to Siena Technologies, Inc. (together with its two wholly owned subsidiaries, the “Company”). The Company was incorporated on March 24, 1998 under the laws of the state of Nevada. The Company has two wholly owned subsidiaries, Com Services, Inc. (“COM”) and Network Installation Corporation (“Network”), both of which are no longer operating. The net assets of the Company’s third subsidiary, Kelley Communication Company, Inc. (“Kelley”) was sold on April 7, 2008.

 

Control by Principal Stockholders

 

The Company’s directors, executive officers and their affiliates or related parties, own beneficially and in the aggregate, the majority of the voting power of the outstanding shares of the common stock of the Company. Accordingly, if voting their respective shares uniformly, the directors, executive officers and their affiliates would have the ability to control the approval of most corporate actions, including increasing the authorized capital stock of the Company and the dissolution, merger or sale of the Company’s assets or business.

 

NOTE 2 - BASIS OF PRESENTATION

 

The accompanying consolidated financial statements include the accounts of the Company and its 100% owned subsidiaries, COM and Network. All significant inter-company accounts and transactions have been eliminated in consolidation. The results of each of the Company’s subsidiaries have been included in Loss from Discontinued Operations in the Company’s accompanying consolidated financial statements.

 

These condensed interim consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“US GAAP”).

 

The interim results of operations are not necessarily indicative of the results to be expected for the fiscal year ending December 31, 2008. The Company’s financial statements contained herein are unaudited and, in the opinion of management, contain all adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of financial position, results of operations and cash flows for the period presented. The Company’s accounting policies and certain other disclosures are set forth in the notes to the consolidated financial statements contained in the Company’s Annual Report on Form 10-KSB, as amended, for the year ended December 31, 2007, filed with the Securities and Exchange Commission on April 28, 2008. These financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto. The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

F-7

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

Reclassifications

 

The Company has made certain reclassifications to the 2007 financial statements herein, in order for the 2007 financial results to be comparable to the 2008 financial statements. The reclassifications did not impact total assets, total liabilities, total stockholders’ deficit or net loss for 2007.

 

Use of Estimates

 

The preparation of financial statements, in conformity with US GAAP, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates made in preparing these financial statements include analysis of the value of goodwill, the fair value of derivative financial instruments such as warrants, the fair value of embedded derivatives, and the fair value of common stock issued for services. Actual results could differ from those estimates.

 

FAIR VALUE MEASUREMENTS

Effective January 1, 2008, we adopted SFAS 157, Fair Value Measurements (SFAS 157). SFAS 157 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

Level 1-Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

 

Level 2-Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

 

Level 3-Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

The adoption of SFAS No. 157 did not have a material impact on our fair value measurements.

 

The following tables present our assets and liabilities that are measured at fair value on a recurring basis and are categorized using the fair value hierarchy. The fair value hierarchy has three levels based on the reliability of the inputs used to determine fair value.

					Fair Value Measurements at Reporting Date Using
Description		September 30, 2008			Quoted Prices in Active Markets for Identical Assets (Level 1)			Significant Other Observable Inputs (Level 2)			Significant Unobservable Inputs (Level 3)
Liabilities - Warrants		$	2,341		$	2,341		$	—		$	—
Liabilities - Conversion Options			873,336			873,336			—			—
Total Liabilities		$	875,677		$	875,677		$	—		$	—

 

F-8

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

NOTE 3 - GOING CONCERN

 

The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplates continuation of the Company as a going concern. However, the Company has an accumulated deficit of ($41,366,586), and is generating losses from operations. The continuing losses have adversely affected the liquidity of the Company. The Company faces continuing significant business risks, including, but not limited to, its ability to continue raising funds from Dutchess Private Equities Fund, Ltd, or its related entities (collectively, “Dutchess”). The Company is fully dependent on Dutchess for its financing needs and does not expect financing from other sources to become available in the near future. Dutchess is not under any commitment to continue to provide funding to the Company.

 

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, and to succeed in its future operations. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

F-9

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

NOTE 4 - EMBEDDED DERIVATIVES AND DERIVATIVE LIABILITIES

 

The fair market value of embedded derivative liabilities consisted of the following:

 

		September 30, 2008			December 31, 2007
Derivatives embedded within promissory note dated December 19, 2007, initial value		$	218,400		$	—
Cumulative adjustments to record fair market value of embedded derivative			60,712			—
Subtotal			279,112			—
Derivatives embedded within promissory note dated March 26, 2008, initial value			160,000			—
Cumulative adjustments to record fair market value of embedded derivative			80,196			—
Subtotal			240,196			—
Derivatives embedded within promissory note dated May 27, 2008, initial value			82,286			—
Cumulative adjustments to record fair market value of embedded derivative			50,879			—
Subtotal			133,165			—
Derivatives embedded within promissory note dated August 15, 2008, initial value			480,000			—
Cumulative adjustments to record fair market value of embedded derivatives			(277,221	)		—
Subtotal			202,779			—
Derivatives embedded within promissory note dated September 16, 2008, initial value			30,000			—
Cumulative adjustments to record fair market value of embedded derivatives			(11,916	)		—
Subtotal			18,084			—
Total		$	873,336		$	—

 

F-10

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

The fair market value of derivative liabilities consisted of the following:

		September 30, 2008			December 31, 2007
Derivative liability, warrants exchanged for common stock on March 10, 2007, initial value		$	1,497,416		$	1,497,416
Cumulative adjustments to record fair market value of derivative liability			(1,497,416	)		(1,491,657	)
Subtotal			—			5,759
Derivative liability, warrants related to private placement on November 13, 2006, initial value			729,820			729,820
Cumulative adjustments to record fair market value of derivative liability			(729,615	)		(729,098	)
Subtotal			205			722
Derivative liability, warrants related to private placement on January 23, 2007, initial value			1,045,182			1,045,182
Cumulative adjustment to record fair market value of derivative liability			(1,044, 657	)		(1,043,539	)
Subtotal			525			1,643
Derivative liability, warrants related to Dutchess debt financing on July 17, 2007, initial value			30,000			30,000
Adjustment to record fair market value of derivative liability			(28,389	)		(30,000	)
Subtotal			1,611			—
Total		$	2,341		$	8,124

 

NOTE 5 - RELATED PARTY TRANSACTIONS

 

Note Payable - Dutchess (In Default)

 

On July 17, 2007, the Company entered into an agreement with Dutchess (the “July 2007 Agreement”), providing for, among other things, additional funding from Dutchess in the amount of $2,000,000 (the “Additional Financing”). The Additional Financing was added to the then outstanding principal amount of the promissory note dated June 30, 2006, in the principal amount of $6,254,960 (the “Original Note”). The Original Note was cancelled and a new noted was issued in the aggregate amount of approximately $8,384,726 (the “New Note”). Further, pursuant to the July 2007 Agreement, Dutchess has the right to appoint three (3) members to the Company’s Board of Directors, the total number of which shall remain at five (5), and such appointments shall continue until the New Note is repaid in full; during such time that the New Note (as defined below) is outstanding, Dutchess may remove and replace any of its appointed members. The July 2007 Agreement further provided for certain conditions to closing, all of which have been satisfied.

 

The New Note bears interest at a rate of seven percent (7%) per annum and is secured by all the assets of the Company, as evidenced by that certain amended and restated security agreement between the Company and Dutchess, dated July 17, 2007 (“Amended Security Agreement”). The New Note is due and payable on or before January 1, 2012. The Company also issued Dutchess a five year warrant to purchase an aggregate of 3,000,000 shares of the Company’s common stock at a purchase price of four cent ($0.04) per share (the “Warrant”) (see Note 4 herein). The Warrant provides for certain anti-dilution provisions and cashless exercise in the event that the Company does not have an effective registration statement covering the shares of common stock underlying the Warrant on or before one year from the date of issuance of the Warrant. The Company also entered into a negative pledge, dated July 17, 2007 (the “Negative Pledge”), pursuant to which the Company agreed to not grant, any lien, charge, security interest, hypothec, mortgage or encumbrance of any nature or kind over any of the property identified in the Amended Security Agreement.

 

F-11

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

In connection with the July 2007 Agreement, the Company paid Dutchess’ closing costs of $50,000.

 

The New Note is currently in default and Dutchess has the right to declare the full and unpaid balance of the New Note due and payable, and enforce each of its rights under the convertible debentures and warrants previously retired as of June 30, 2006, including conversion into and/or purchase of shares of the Company’s common stock.

 

Promissory Notes Payable - Dutchess (In Default)

 

On December 19, 2007, the Company issued a promissory note to Dutchess for $126,000. The Company received proceeds from this transaction of $105,000. The promissory note bears interest at 12% annually. The promissory note is currently in default.

 

On March 26, 2008, the Company issued a promissory note to Dutchess for $120,000. The Company received proceeds from this transaction of $100,000. The promissory note bears interest at 12% annually. The promissory note is currently in default.

 

On May 27, 2008, the Company issued a promissory note to Dutchess for $72,000. The Company received proceeds from this transaction of $60,000. The promissory note bears interest at 12% annually. The promissory note is currently in default.

 

On August 15, 2008, the Company issued a promissory note to Dutchess for $120,000. The Company received proceeds from this transaction of $100,000. The promissory note bears interest at 12% annually. The promissory note is currently in default.

 

On September 16, 2008, the Company issued a promissory note to Dutchess for $12,000. The Company received proceeds from this transaction of $10,000. The promissory note bears interest at 12% annually. The promissory note is currently in default.

 

NOTE 6 - DISCONTINUED OPERATIONS

 

On March 17, 2008, the Company determined it would dispose or sell the assets and liabilities associated with its subsidiary, Kelley. The business was underperforming and consistent profits derived from the business model did not appear possible under the operating structure in place. In conjunction with this decision, the company has accrued approximately $100,000 to cover the costs of disposing of Kelley.

 

F-12

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

The net assets and liabilities of the discontinued operations at September 30, 2008 and December 31, 2007 consist of the following:

 

		September 30, 2008			December 31, 2007
Assets of discontinued operations
Cash		$	—		$	375,959
Accounts receivable, net			—			1,207,544
Inventory			—			903,196
Fixed assets, net			—			167,660
Other Assets			—			195,879
Total assets		$	—		$	2,850,238
Liabilities of discontinued operations
Accounts payable and accrued expenses		$	—		$	1,787,965
Notes Payable			—			1,795,171
Other Liabilities			144,368			1,412,900
Total liabilities			144,368			4,996,036
Net liabilities of discontinued operations		$	144,368		$	2,145,798

 

The Company ceased all depreciation of Kelley’s fixed assets as of March 17, 2008, in accordance with Financial Accounting Standards Board No.144. (“FASB 144”)

 

Loss from discontinued operations in the Company’s Statements of Operations consists of:

		Nine Months Ended September 30
		2008			2007
Sales		$	4,743,704		$	5,032,524
Cost of Goods sold			3,347,346			3,534,070
Gross Profit			1,396,358			1,498,454
Salaries			831,938			2,325,181
Interest expense			52,807			205,413
Other			711,401			1,234,258
Loss from Discontinued Operations		$	(199,788	)	$	(2,266,398	)

 

NOTE 7 - COMMITMENTS & CONTINGENCIES

 

The Company may be involved in litigation, negotiation and settlement matters that may occur as part of the Company’s day-to-day operations. However, there are no pending, nor, to Management’s knowledge, are there any threatened legal proceedings against the Company.

 

F-13

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

The Company was obligated to pay its former Chief Executive Officer and its former Chief Financial Officer severance as a result of separation agreements dated May 25, 2007. The Company made the final payments under these agreements on July 14, 2008. No further amounts are due to the Company’s former Chief Executive Officer and Chief Financial Officer.

 

NOTE 8 - BASIC AND DILUTED NET INCOME (LOSS) PER SHARE

 

Net income (loss) per share is calculated in accordance with the Statement of Financial Accounting Standards No. 128 (SFAS No. 128), “Earnings Per Share.” Basic net loss per share is based upon the weighted average number of common shares outstanding. For all periods, all common stock equivalents were excluded from the calculation of diluted loss per common share because they were anti-dilutive, due to the Company’s net losses.

 

Warrants, which will have an anti-dilutive effect on the net loss per common share once exercised, to purchase 23,942,145 and 16,710,895 shares of common stock remained outstanding as of September 30, 2008 and 2007, respectively, at strike prices that vary from $0.01 to $0.79 and $0.01 to $0.88 per share, respectively.

 

The Dutchess and Preston notes payable, which were restructured by the Company during 2007 and 2006, remained outstanding as of September 30, 2008. The notes payable carry certain provisions allowing for Dutchess and Preston to void the restructured transactions in the event of default by the Company. In the event of default and the removal of the restructured terms of the notes payable, the notes payable would become convertible at the lender’s option at any time, at a conversion price which would be approximately 75% of the fair market value of the Company’s common stock. The Company currently estimates that these outstanding debts would potentially be convertible into approximately 2,184,000,000 shares of the Company’s common stock using the fair market value of the Company’s common stock as of September 30, 2008. There are other restrictions within the terms of the agreements with Dutchess and Preston which might limit the amount of shares the outstanding debts are convertible into, in this scenario, but the Company cannot be sure those terms will limit a conversion into a significant number of shares of the Company’s common stock.

 

The Dutchess promissory notes discussed in Note 5 are in default and potentially convertible at a 50% discount to the fair market value of the Company's common stock. As of September 30, 2008, the promissory notes are convertible into approximately 146,000,000 shares of the Company's common stock.

 

NOTE 9 - DIVESTITURE OF KELLEY

 

On March 17, 2008, the Board of Directors, believing it to be in the best interests of the Company and its shareholders, approved the sale of the assets (the “Asset Sale”) of Kelley pursuant to the terms of a certain asset purchase agreement executed on April 7, 2008 by and among the Company, Kelley, Mr. James Michael Kelley, and Kelley II, LLC, a newly formed Nevada limited liability company (“Kelley II”), and which filed as Exhibit 10.1 to the Company’s Current Report on Form 8-K, filed with the Securities and Exchange Commission on April 9, 2008 (the “Asset Purchase Agreement”).

 

F-14

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SIENA TECHNOLOGIES, INC.

CONSOLIDATED NOTES TO THE FINANCIAL STATEMENTS

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

Mr. Kelley owns 100% of the limited liability company membership interests of Kelley II, and is its sole managing member. Additionally, he may be deemed to be the beneficial owner of approximately 13,816,577 shares of the Company’s capital stock owned by Kelley II (the “Kelley Shares”). He is also a former director, who served on the Company’s Board of Directors from September 2005 until January 2008. Mr. Kelley transferred the Kelley Shares to Kelley II for purposes of consummating the transactions contemplated by the Asset Purchase Agreement.

 

Pursuant to the Asset Purchase Agreement the Company agreed to sell certain of Kelley’s assets to Kelley II, including, but not limited to, all equipment, all rights of Kelley against vendors, all customer lists, files and related information, all inventory, all rights of Kelley under certain contracts, all permits, all intellectual property of Kelley, including trademarks, service marks, trade names, domain names, web sites, phone, fax and email addresses, all rights or choses in action following the closing of the acquisition related to Kelley’s business, all books and records, all computer software, hardware, data rights and documentation, all cash and cash equivalents, and all goodwill related to these assets. A complete description of the assets sold is set forth in the Asset Purchase Agreement.

 

In exchange for the sale of the assets, Kelley II assumed certain liabilities of Kelley, which include, but are not limited to, the liabilities, if any, relating to the Obligations and Liabilities (each as defined in the Asset Purchase Agreement) of Kelley and the Company with respect to the sale of Tuscany Services, LLC, with respect to that certain Settlement Agreement dated January 31, 2008, by and between Kelley, Kelley Technologies, LLC, Michael Kelley, the Company, Lisa Cox, individually and as Special Administratrix of the Estate of Stephen L. Cox, and with respect to that certain Confession of Judgment entered into by the District Court, Clark County, Nevada, dated December 1, 2008, in favor of Technology In Practice, LLC against Kelley Communication. A complete description of the liabilities assumed is set forth in the Asset Purchase Agreement.

 

Additionally, in exchange for the acquired assets, Kelley II assigned and transferred to the Company all of the Kelley Shares.

 

The sale of Kelley was completed on June 26, 2008.

 

F-15

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