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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 period ended March 31, 2012
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
For the transition period from _____ to _______
Commission File Number: 0-11050
Dynamic Energy Alliance Corporation
(formerly Mammatech Corporation)
(Exact Name of Registrant as Specified in its Charter)
Memphis Clark Tower, 5100 Popular Avenue, Ste. 2700, Memphis, TN 38137
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number including area code: (901) 414-0003
233 North Garrard, Rantoul, IL 61866 Fiscal year December 31
Former name, former address, and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
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 definition of "large accelerated filer", "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of May 10, 2012, 81,304,504 shares of registrant’s common stock, par value $0.0001, were outstanding.
DYNAMIC ENERGY ALLIANCE CORPORATION
(formerly Mammatech Corporation)
Quarterly Report on Form 10-Q for the period ended March 31, 2012
This report includes forward-looking statements with-in the meaning of Section 27A of the Securities Act (the "Securities Act") and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We have based these statements on our beliefs and assumptions, based on information currently available to us. These forward-looking statements are subject to risks and uncertainties. Forward-looking statements include the information concerning our possible or assumed future results of operations, our total market opportunity and our business plans and objectives set forth under the sections entitled "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking statements are not guarantees of performance. Our future results and requirements may differ materially from those described in the forward-looking statements. Many of the factors that will determine these results and requirements are beyond our control. In addition to the risks and uncertainties discussed in "Business" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," investors should consider those discussed under "Risk Factors, and elsewhere herein, and in other filings with the SEC."
These forward-looking statements speak only as of the date of this report. We do not intend to update or revise any forward-looking statements to reflect changes in our business anticipated results of our operations, strategy or planned capital expenditures, or to reflect the occurrence of unanticipated events.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC ENERGY ALLIANCE CORPORATION
(formerly Mammatech Corporation)
UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD ENDED MARCH 31, 2012
DYNAMIC ENERGY ALLIANCE CORPORATION
(formerly Mammatech Corporation)
CONDENSED CONSOLIDATED BALANCE SHEETS
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DYNAMIC ENERGY ALLIANCE CORPORATION
(formerly Mammatech Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 and 2011
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DYNAMIC ENERGY ALLIANCE CORPORATION
(formerly Mammatech Corporation)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2012 AND 2011
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
DYNAMIC ENERGY ALLIANCE CORPORATION
(formerly Mammatech Corporation)
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED March 31, 2012 and 2011
Dynamic Energy Alliance Corporation (“DEAC”) was formerly Mammatech Corporation (“MAMM”) (or the “Company”), and was incorporated in the State of Florida on November 23, 1981 as Mammatech Corporation. The fiscal year end of the Company was changed to December 31 from August 31. The Company formally changed its name to Dynamic Energy Alliance Corporation, having amended its Articles of Incorporation effective September 15, 2011.
Through its wholly owned subsidiary, Dynamic Energy Development Corporation (“DEDC”), the Company has under way implementation of a business to develop, commercialize, and sell innovative technologies in the recoverable energy sector. Specifically, it is focused on identifying, combining and enhancing existing industry technologies with proprietary recoverable production and finishing processes to produce synthetic oil, carbon black, gas, and carbon steel from waste feedstock. This process will be accomplished with limited residual waste product and significant reductions in greenhouse gases, compared to traditional processing. To maximize this opportunity, the Company has developed a scalable, commercial development strategy to build "Energy Campuses" with low operational costs and long-term, recurring revenues.
In conjunction with the acquisition of DEDC, the Company acquired Transformation Consulting (‘TC”), a wholly-owned subsidiary of DEDC. TC provides business development, marketing and administrative consulting services. Through a January 2010 management services and agency agreement (“Agency Agreement”), TC receives revenues from a related party based on billings received from certain of TC’s direct to consumer membership club products that were transferred to the related party under the Agency Agreement.
Merger Acquisition by way of Share Exchange
On March 9, 2011, the Company effectively completed a merger acquisition transaction whereby it entered into a Share Exchange Agreement (“SEA”) with DEDC, a privately held corporation, with DEDC becoming a wholly-owned subsidiary of the Company. All of the shares of DEDC were transferred to Dynamic Development Corporation, a Delaware corporation. This company was then merged with the Company. The share transactions to complete the merger transaction are hereinafter collectively referred to as the “Merger.” All costs incurred in connection with the Merger have been expensed. Following the Merger, the Company abandoned its prior business and concurrently adopted DEDC’s business plan as its principal business. In addition, the director and officer of MAMM were replaced by the directors and officers of DEDC.
The accompanying unaudited condensed consolidated financial statements of Dynamic Energy Alliance Corporation are presented in accordance with the requirements for Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by generally accepted accounting principles. In the opinion of management, all adjustments (all of which were of a normal recurring nature) considered necessary to fairly present the financial position, results of operations, and cash flows of the Company on a consistent basis, have been made.
These financial statements should be read in conjunction with the Company’s financial statements and notes thereto included in the Company’s Form 10-K The Company assumes that the users of the interim financial information herein have read, or have access to, the audited financial statements for the preceding fiscal year, and that the adequacy of additional disclosure needed for a fair presentation may be determined in that context. Accordingly, footnote disclosure, which would substantially duplicate the disclosure contained in the Company’s financial statements for the fiscal year ended December 31, 2011, has been omitted. The results of operations for the three month period ended March 31, 2012 are not necessarily indicative of results for the entire year ending December 31, 2012.
Since inception, the Company has a cumulative net loss of $5,184,323. The Company currently has only limited working capital with which to continue its operating activities. The amount of capital required to sustain operations is subject to future events and uncertainties. The Company must secure additional working capital through loans, sale of equity securities, or a combination, in order to implement its business plans. There can be no assurance that such funding will be available in the future, or available on commercially reasonable terms. These conditions raise substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements have been presented on the basis of the continuation of the Company as a going concern and do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
The Company has generated revenue in the amount of $301,704 in the first quarter of 2012. Management has continued to manage its burn rate, budget versus actual results for 2012 to ensure appropriate funding is on hand for its operation. If the Company's 2012 projections are not expected to be met, the company will be required to decrease expenses and raise additional equity and/or debt financing.
This merger acquisition was transacted as follows (The Company’s shares of common stock disclosures in this note have been presented on a post forward stock split basis.):
The Company, DEDC and Verdad Telecom (“MAMM Controlling Shareholder”) entered into a Share Exchange Agreement, pursuant to which MAMM Controlling Shareholder, owning an aggregate of 44,786,188 shares of common stock, $.0001 par value per share, of the Company (“Common Stock”), equivalent to 85.5% of the issued and outstanding Common Stock (the “Old MAMM Shares”) would return its shares to treasury and DEDC shareholders would exchange 17,622,692 DEDC shares on a one for one basis of newly issued shares of the Company. On return of such shares to treasury, the MAMM Controlling Shareholder received a cash payment of $322,000 (the “Purchase Price”).
In addition, prior to the effective time of the Merger, 6,000,000 shares of the Company’s common stock were issued to a debenture holder pursuant to an investment bonus feature in the convertibility of debenture notes.
Immediately prior to the effective time of the Merger, 22,871,100 shares of the Company’s common stock were issued and outstanding. Upon completion of the Merger, the DEDC shareholders owned approximately 69.8% of the Company’s issued and outstanding common stock.
All references to share and per share amounts in these financial statements have been restated to retroactively reflect the number of common shares of MAMM common stock issued pursuant to the Merger.
The Merger was accounted for as a reverse acquisition pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 805-40-25.1, which provides that the merger of a private operating company into a non-operating public shell corporation without significant net assets typically results in the owners and management of the private company having actual or effective operating control of the combined company after the transaction, with the shareholders of the former public corporation continuing only as passive investors.
These transactions are considered by the Securities and Exchange Commission to be capital transactions in substance, rather than business combinations. That is, the transaction is equivalent to the issuance of stock by the private company for the net monetary assets of the shell corporation, accompanied by a recapitalization.
Accordingly, the Merger has been accounted for as a recapitalization, and, for accounting purposes, DEDC is considered the accounting acquirer in a reverse acquisition.
The Company’s historical accumulated deficit for periods prior to March 9, 2011, in the amount of $3,075,165 was eliminated by offset against additional-paid-in-capital, and the accompanying financial statements present the previously issued shares of MAMM common stock as having been issued pursuant to the Merger on March 9, 2011.
The shares of common stock of the Company issued to the DEDC stockholders in the Merger are presented as having been outstanding since December 13, 2010, the month when DEDC first sold its equity securities.
Because the Merger was accounted for as a reverse acquisition under Generally Accepted Accounting Principles (“GAAP”), the financial statements for periods prior to March 9, 2011 reflect only the operations of DEDC.
On March 9, 2011, DEDC acquired all of the outstanding shares, of Transformation Consulting (“TC”) pursuant to a Stock Purchase Agreement dated February 25, 2011 and Amendment No. 1 to Stock Purchase Agreement, dated December 30, 2011. The purchase price for the Shares was $2,000,000, payable from the gross revenues (pre-tax) of TC, as received, subject to the following contingent reduction or increase of the purchase price. If TC’s gross revenues during the two years following the closing are less than $2,000,000, then the purchase price for the shares shall be reduced to the actual revenue received by TC during the two year period. If TC’s revenues during the same two year period exceed $2,000,000, then the purchase price for the shares shall be increased by one-half of the excess revenues over $2,000,000 (“contingent consideration”). At the time of the acquisition, TC had minimal tangible assets and the entire $2,000,000 purchase price was allocated to a customers’ list intangible asset.
Basis of Presentation
These unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, Dynamic Energy Development Corporation and Transformation Consulting. All intercompany balances and transactions are eliminated on consolidation.
Use of Estimates
Preparation of the Company's financial statements in conformity with United States GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosures of contingent assets and liabilities as well as the reported amounts of revenues and expenses. Accordingly, actual results could differ from those estimates.
Development costs are expensed in the period they are incurred unless they meet specific criteria related to technical, market and financial feasibility, as determined by management, including but not limited to the establishment of a clearly defined future market for the product, and the availability of adequate resources to complete the project. If all criteria are met, the costs are deferred and amortized over the expected useful life, or written off if a product is abandoned. For the three months ended March 31, 2012 and 2011, total development costs amounted to $149,391 and $0, respectively. At March 31, 2012 and December 31, 2011, the Company had no deferred product development costs.
Cash and Cash Equivalents
Cash and cash equivalents, if any, include all highly liquid instruments with an original maturity of three months or less at the date of purchase. At March 31, 2012 and 2011, the Company had no cash equivalents.
Financial Instruments and Concentration of Risk
The fair values of financial instruments, which include cash, accounts payable and accrued liabilities and convertible notes, were estimated to approximate their carrying values due to the immediate or relatively short maturity of these instruments. Management does not believe that the Company is subject to significant interest, currency or credit risks arising from these financial instruments. During the period ended March 31, 2012, the company earned all revenues from one customer.
Fair Value of Financial Instruments
The Company accounts for the fair value of financial instruments in accordance with the FASB ASC Topic 820, Fair Value Measurements and Disclosures ("Topic 820"). Topic 820 defines fair value, establishes a three-level valuation hierarchy for disclosures of fair value measurement and enhances disclosure requirements for fair value measures.
The three levels are defined as follows:
The fair value of the Company's cash and cash equivalents, accrued liabilities and accounts payable approximate carrying value because of the short-term nature of these items.
Management believes it is not practical to estimate the fair value of loan to related parties because the transactions cannot be assumed at arm's length, the terms are not deemed to be market terms, there are no quoted values avaialble for these instruments, and an independent valuation would not be practical due to the lack of data regarding similar instruments, if any, and the associated potential costs.
Intangible Assets and Impairment of Long-lived Assets
The Company has adopted the provision codified in ASC 350, Intangibles – Goodwill and Other which revises the accounting for purchased goodwill and intangible assets. Under ASC 350, goodwill and intangible assets with indefinite lives are no longer amortized and are tested for impairment annually. The determination of any impairment would include a comparison of estimated future operating cash flows anticipated during the remaining life with the net carrying value of the asset as well as a comparison of the fair value to book value of the Company.
Intangible assets comprised the customer lists purchased in connection with the acquisition of Transformation Consulting on March 9, 2011. The intangible assets were reported at acquisition cost and were to be amortized on the basis of management’s estimate of the future cash flows from this asset over approximately five years, which was management’s initial estimate of the useful life of the customer lists.
In accordance with ASC Topic 360-10-15 (prior authoritative literature: SFAS 144), the Company performed an assessment as of December 31, 2011. The Company assessed the recoverability of the carrying value of its intangible assets based on estimated undiscounted cash flows to be generated from this asset. For the year ended December 31, 2011, the Company determined that, based on estimated future cash flows, the intangible asset was fully impaired; accordingly, an impairment loss of the carrying amount of $2,000,000 was recognized and is included in impairment loss on intangibles.
The Company recognizes revenue in accordance with the FASB ASC Section 605-10-S99, Revenue Recognition, Overall, SEC Materials ("Section 605-10-S99"). Section 605-10-S99 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed and determinable; and (4) collectability is reasonably assured.
Specifically with respect to TC, commission revenue is earned on consulting services provided to a company controlled by a director of the Company. TC earns these commissions based on this company’s revenues from certain direct to consumer membership club products. Commissions earned are recorded when deposited into an escrow account, effectively allowing for uncertainty of collectability and bad debt issues.
Loss Per Common Share
Basic loss per common share (“EPS”) is calculated by dividing the net loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. The number of common shares that are exercisable or converted into common stock is not material to effect diluted EPS results. Further, since the Company shows losses for the periods presented, basic and diluted loss per share are the same for all periods presented. As of March 31, 2012 and 2011, there were no outstandings dilutive securities.
Potential benefits of income tax losses are not recognized in the accounts until realization is more likely than not. The Company has adopted the accounting standards codified in ASC 740, Income Taxes as of its inception. Pursuant to those standards, the Company is required to compute tax asset benefits for net operating losses carried forward. Potential benefit of net operating losses have not been recognized in these financial statements because the Company cannot be assured it is more likely than not that it will utilize the net operating losses carried forward in future years.
ASC 740-10-25 prescribes recognition thresholds that must be met before a tax position is recognized in the financial statements and provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. An entity may only recognize or continue to recognize tax positions that meet a "more likely than not" threshold. Based on its evaluation, the Company has concluded that there are no significant uncertain tax positions requiring recognition in its financial statements.
The Company does not have any unrecognized tax benefits as of December 31, 2011 that, if recognized, would affect the Company's effective income tax rate.
The Company's policy is to recognize interest and penalties related to income tax issues as components of income tax expense. The Company did not recognize or have any accrual for interest and penalties relating to income taxes as of March 31, 2012 and December 31, 2011.
Common Share Non-Monetary Consideration
In situations where common shares are issued and the fair value of the goods or services received is not readily determinable, the fair value of the common shares is used to measure and record the transaction. The fair value of the common shares issued in exchange for the receipt of goods and services is based on the stock price as of the earliest of the date at which:
i) the counterparty’s performance is complete;
ii) a commitment for performance by the counterparty to earn the common shares is reached; or
iii) the common shares are issued if they are fully vested and non-forfeitable at that date.
On December 1, 2005, the Company adopted the fair value recognition provisions codified in ASC 718, Compensation-Stock Compensation. The Company adopted those provisions using the modified-prospective-transition method. Under this method, compensation cost recognized for all periods prior to December 1, 2005 includes: a) compensation cost for all share-based payments granted prior to, but not yet vested as of November 30, 2005, based on the grant-date fair value and b) compensation cost for all share-based payments granted subsequent to November 30, 2005, based on the grant-date fair value. In addition, deferred stock compensation related to non-vested options is required to be eliminated against additional paid-in capital. The results for periods prior to December 1, 2005 were not restated.
The Company accounts for equity instruments issued in exchange for the receipt of goods or services from parties other than employees in accordance with ASC 505, Equity. Costs are measured at the estimated fair market value of the consideration received or the estimated fair value of the equity instruments issued, whichever is more reliably measurable. The value of equity instruments issued for consideration other than employee services is determined on the earliest of a performance commitment or completion of performance by the counterparty.
Share Purchase Warrants
The Company accounts for common share purchase warrants at fair value in accordance with ASC 815, Derivatives and Hedging. The Black-Scholes option pricing valuation method is used to determine fair value of these warrants. Use of this method requires that the Company make assumptions regarding stock volatility, dividend yields, expected term of the warrants and risk-free interest rates.
Recently and Issued Accounting Pronouncements
In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04: “Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”. This is a new accounting standard on fair value measurements that clarifies the application of existing guidance and disclosure requirements, changes certain fair value measurement principles and requires additional disclosures about fair value measurements. The standard is effective for interim and annual periods beginning after December 15, 2011. The adoption of this accounting standard does not have a material impact on the Company's consolidated financial statements and related disclosures.
In June 2011, the FASB issued ASU 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This update will require the presentation of the components of net income and other comprehensive income either in a single continuous statement or in two separate but consecutive statements. In addition, companies are also required to present reclassification adjustments for items that are reclassified from other comprehensive income to net income on the face of the financial statements. The update is effective for fiscal years and interim periods beginning after December 15, 2011. The adoption of this update did not have a material impact on the Company's consolidated financial statements.
In September 2011, the FASB issued an update that allows companies to assess qualitative factors to determine whether they need to perform the two-step quantitative goodwill impairment test. Under the option, an entity no longer would be required to calculate the fair value of a reporting unit unless it determines, based on that qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The guidance is effective for interim and annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011 although early adoption is permitted. The adoptation of this guidance did not have a material impact on the Company's consolidated financial statements.
Not Adopted -
In December 2011, the FASB issued ASU No. 2011-11 “Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities”. This accounting update requires that an entity disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. The accounting update is effective for annual periods beginning on or after January 1, 2013. The Company is currently evaluating the provisions of this accounting update and assessing the impact, if any, it may have on its financial position and results of operations.
The amounts due to a related party at March 31, 2012 and December 31, 2011 of $106,537 and $89,584, respectively, represent an unsecured promissory note due to a shareholder and director of the Company. These amounts are unsecured, bear interest at 15% per annum and are repayable on demand, with accumulated interest.
Pursuant to Stock Purchase Agreement between a director of the company (“the Director”) and DEDC, dated February 25, 2011 and Amendments No. 1 and No. 2 to Stock Purchase Agreement, dated December 30, 2011 and March 31, 2012, respectively, DEDC acquired all of the outstanding shares, of Transformation Consulting (“TC”). The purchase price for the shares was $2,000,000, payable from the gross revenues of TC, subject to the following contingent reduction or increase of the purchase price. If TC’s gross revenues during the two years following the closing are less than $2,000,000, then the purchase price for the shares shall be reduced to the actual revenue received by TC during the two year period. If TC’s revenues during the same two year period exceed $2,000,000, then the purchase price for the shares shall be increased by one-half of the excess revenues over $2,000,000 (“contingent consideration”).
TC’s revenues are primarily related to revenues received from an entity controlled by the Director (“related entity”) under a January 2010, Management Services and Agency Agreement (“Agency Agreement”). Under the Agency Agreement, TC receives revenues based on billings received from certain of TC’s direct to consumer membership club products that were transferred to the related entity under the Agency Agreement. Pursuant to the Agency Agreement, TC agreed to (1) transfer to the related entity the ownership of certain TC current direct to consumer membership products upon TC receiving a total of $1,000,000 in revenues; (2) introduce the related entity to TC’s existing and potential vendors for use in managing the TC current programs on behalf of TC; and (3) have the related entity act as TC’s sales agent for new product sales. In consideration, TC receives all gross receipts of existing sales, less the related entity’s management fee of 20% of gross sales. Separately, TC and the related entity would each be entitled to 50% of new business sales. After total payments of $2,000,000 to TC from all related revenues under the Agency Agreement, the related entity would no longer be obligated to pay TC any further compensation.
Pursuant to the contingent consideration of $2,000,000 due to the Director from TC, all revenues generated by TC under the Agency Agreement are disbursed to Director. All cash management services, pertaining to the revenues generated by TC under the Agency Agreement are managed by the Director directly from an escrow account, including deposits of revenues and payment disbursements to the Director. As a result, the Company does not have access to the cash flow from such revenues, which are administered from said escrow account. Contingency consideration is payable based on a payment schedule as follows:
Through March 31, 2012, payments, net of refunds, made to Director totaled $974,232. At March 31, 2012 and December 31, 2011, contingency consideration payable to Director is $1,025,768 and $996,414, respectively, as follows:
Related party transactions were in the normal course of operations and were measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties.
For the three months ended March 31, 2012 and 2011, the Company incurred expenses as follows:
On or about July 9, 2011, and as further amended on December 30, 2011, the Company executed a contractor agreement (the “Contractor Agreement”), with an entity controlled by a director and shareholder of the Company (the “Contractor”), in which the Company is obligated to issue one or more warrants to acquire a total of 1,000,000 shares of restricted common stock of the Company (the “Shares”) every 90 days during the term of the Contractor Agreement (the “Warrant”). During the first quarter of 2012, the Company recorded the issuance of a Warrant for 1,000,000 Shares to this Contractor. As of March 31, 2012, the Company was obligated to issue one or more Warrants totaling 7,000,000 Shares to this Contractor under the Contractor Agreement, in addition to 1,000,000 Shares every 90 days for a total of five (5) years. All warrants are exercisable at $0.0001 per share, and have a 60 month term from the date each issuance, and are exercisable at the sole discretion of the Contractor. The amount of consideration for the services rendered by the Contractor to the Company shall be determined on the fair market value of the Shares on the date of each issuance.
As of March 31, 2012 and December 31, 2011, the Company had $0 convertible debentures payable. During the fourth quarter of 2011, all convertible debentures payable had been converted to common stock.
The Company is authorized to issue 50,000,000 shares (previously 200,000,000 shares) of preferred stock, having a par value of $0.0001 per share, and 300,000,000 shares (previously 150,000,000 shares) of common stock having a par value of $0.0001 per share.
Forward Stock Split and Authorized Capital Stock
Effective September 15, 2011, by Articles of Amendment, the Company effected the following changes:
On October 5, 2011, by approval of shareholders of the Company and the Florida Secretary of State, the authorized number of Series A Convertible Preferred Stock was changed to 50,000,000 shares from the previously authorized 200,000,000 shares of preferred stock. The Certificate of Designation for these shares provides among other rights and privileges the requirement that 75% of the outstanding Series A Convertible Preferred must give their prior consent, before the Company can elect members to the Board of Directors, issue any securities of the Company or affect any fundamental transaction (defined as acquisitions, mergers, sale or purchase of substantially all assets, etc.).
The Company effectuated these amendments during the fourth fiscal quarter of 2011.
The shareholders of convertible preferred stock are voted equally with the shares of the Company’s common stock. Each share of the convertible preferred stock is convertible into two fully paid and non-assessable shares of common stock, subject to certain adjustments, as follows:
Issued and Outstanding
There were 7,732,824 preferred shares issued and outstanding as of March 31, 2012 and December 31, 2011.
On October 10, 2011, the Company issued a total of 8,340,000 shares of series A convertible preferred stock, par value $0.0001, in exchange for the purchase and cancellation of certain convertible debentures and other outstanding obligations of DEDC, a subsidiary of the Company, to four debenture holders, all directors of the Company, in the total amount of $1,146,565.
On December 30, 2011, the original issuance total was adjusted to 7,732,824 shares, in order to reflect certain payments in the amount of $121,435 made to one of the debenture holders during the period ending December 31, 2011. As a result, the total amount of the debt cancelled was adjusted to $1,146,565, in exchange for a total issuance of 7,732,824 shares of Series A convertible preferred stock.
There were 81,304,504 common shares issued and outstanding as of March 31, 2012 and December 31, 2011.
During the three month period ended March 31, 2012, there were no common share transactions.
During the year ended December 31, 2011, the following share transactions occurred, presented on a retroactive post forward split basis:
The Company's reverse merger transaction has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of the acquired company become the historical financial statements of the Company, with no adjustment of the carrying value of the assets and liabilities.
The financial statements have been prepared as if the reverse merger transactions had occurred retroactively as of the periods presented. Share and share amounts reflect the effects of the recapitalization for all periods presented. Accordingly, all of the outstanding shares of the acquired company's common stock at the completion date of the reverse merger transaction have been exchanged for the Company's common stock for all periods presented.
On December 29, 2011, the Company executed separate securities exchange agreements with thirteen certain non-related debenture holders regarding debentures owed by DEDC, a subsidiary of the Company, in the aggregate amount of $226,500, plus accrued interest of $45,300, for a total of $271,800. These debentures were acquired, as well as accrued interest due to the debenture holders in exchange for the private issuance to the thirteen debenture holders as a group of 1,494,909 shares of restricted common stock. The fair value of the share compensation was calculated as $179,389.
During the first quarter of 2012, the Company issued a total of two Warrants for the purchase of a total of 1,500,000 Shares with a total fair value of $140,000 as follows:
(1) On January 17, 2012, the Company issued a Warrant for the purchase of 1,000,000 Shares to TMDS, LLC ("TMDS"'), a company controlled by a director of the Company, as consideration for services rendered per a Contractor Agreement, dated July 9, 2011, and as further amended December 30, 2011. TMDS receives a Warrant to purchase 1,000,000 Shares every ninety days during the term of the Contractor Agreement for a total of five (5) years. The Warrants are exercisable at $0.0001 per share, and have term expiring on the fifth anniversary date from the date of each issuance. A total of 25 million stock purchase warrants are issuable over the term of the agreement. The fair value of the stock purchase warrants issued in the first quarter is $70,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.79%, expected life of 5 years and expected volatility of 473.82%.
(2) On March 17, 2012, the Company issued a Warrant for the purchase of 500,000 Shares, at an exercise price of $0.001 per share, with a term expiring on the fifth anniversary date from the date of issuance, to a departing Chief Financial Officer, who resigned effective March 14, 2012. The fair value of these stock purchase warrants is $70,000, based on Black-Scholes option-pricing model using risk free interest rate of 1.13%, expected life of 5 years and expected volatility of 460.03%.
* Includes warrants issued July 21,2011.
Warrants outstanding and currently exercisable at March 31, 2012 are as follows:
On April 25, 2011 the Company entered into an agreement with NBN Enterprises, Inc. (“NBN”), through to May 1, 2013, whereby NBN provides strategic business services to the Company and pays the cost of outside legal counsel who will advise the Company on securities, corporate and contract matters. The agreement provides for compensation to NBN in the form of issuance of restricted Company common stock equal to 5% of outstanding shares, with anti-dilution protection through the issuance of additional shares through the term and for the succeeding 12 months, and a non-accountable expense allowance of $3,500 per month. During the first quarter of 2012, the Company incurred legal expenses of $10,500 under this agreement and remains obligated to issue 1,065,226 shares of common stock pursuant to the original terms of the agreement..
On July 9, 2011, the Company established a revolving line of credit bearing interest at 15% per annum, with Charles R. Cronin, a director of the Company, (the “Lender”), with advances to be requested in writing by Company on dates and in amounts up to the credit limit, and in the case of each advance, to be made only upon approval the Lender. On September 11, 2011 and October 5, 2011, the Board of Directors of the Company approved and the Company executed approvals of credit limit amendments to increase the Company’s outstanding line of credit to $300,000.
On March 31, 2012, and December 31, 2011 the Company owed the Lender $106,537 and $89,584, respectively. During the first quarter of 2012, the Company recorded interest expense of $16,953 and $15,210, respectively, related to the line of credit.
On July 9, 2011, the Company executed a consulting agreement with Key Services, Inc. (“Key”), whereby Key will locate and assist in the Company’s development and construction of an energy campus project to be undertaken by the Company in the future. The Consulting Agreement is non-exclusive and runs for a period of five years. As consideration, the Company has agreed to pay compensation to Key in the form of cash in an amount equal to $20,000 per month or at the Company’s option (if funds are not available), restricted shares of the Company’s common stock, valued at the average closing price of Company’s common stock over the preceding 20 trading days. In addition, Key is entitled to additional fees, including but not limited to, joint venture, partnership, consulting, developer, contractor and/or project management fees, to be negotiated separately, and agreed to in writing on a project-by-project basis.
On March 31, 2012 and December 31, 2011, the Company owed Key $46,863 and $46,863, respectively. During the first quarter of 2012, the Company recorded consulting expenses of $60,000 and paid Key $60,000 related to this agreement.
On July 9, 2011, as amended December 30, 2011, Company executed a consulting agreement with TMDS, LLC (“TMDS”), whereby TMDS will locate and assist in the Company’s development and construction of energy campus projects to be undertaken by the Company in the future. The consulting agreement is non-exclusive and runs for a period of five years. As consideration, the Company has agreed to pay compensation to TMDS in the form of one or more Warrants for the purchase of 1,000,000 shares of restricted common stock of the Company every 90 days, exercisable at $0.0001 per share, with an exercise term of five (5) years from the date of each issuance. In addition, TMDS is entitled to additional fees, including but not limited to, joint venture, partnership, consulting, developer, contractor and/or project management fees, to be negotiated separately, and agreed to in writing on a project-by-project basis.
During the first quarter of 2012, the Company issued a Warrant for a total of 1,000,000 Shares with a value of $70,000 to TMDS under this agreement. (See Note 8.)
On March 14, 2012, the Company executed a consulting agreement with Undiscovered Equities, Inc. (“UEI”), pursuant to which UEI has agreed to provide various consulting services, including retention and supervision of various public relations services and investor relations services, strategic business planning, broker dealer relations, financing alternatives and sources, and due diligence meetings for the investor community. The agreement has a 6 month term, but may be terminated early after 60 days, and provides for the Company to pay consulting fees as follows: (i) the sum of $25,000 per month over the term of the agreement (the “Cash Payments”) and (ii) a signing bonus in the form of immediate issuance of 125,000 shares of the Company’s restricted Common stock (the “Stock Payments”), which was issued March 19, 2012. On May 3, 2012, the Company and UEI executed a letter of execution (the “Letter of Extension”) of the consulting agreement to extend the payment terms of Cash Payments and Stock Payments from the May 7, 2012 to June 15, 2012. The shares will be issued on the revised payment date.
On March 20, 2011, the Company, through its wholly owned subsidiary, DEDC, entered into a stock purchase agreement (the “Stock Purchase Agreement”) with C.C. Crawford Tire Company, Inc. (the “Seller”), pursuant to which DEDC agreed to acquire 100% of the issued and outstanding common shares of C.C. Crawford Retreading Company, Inc., a Texas corporation (“CTR”), for an aggregate purchase price of $600,000 in cash, due and payable upon the date of closing, on or before April 20, 2012, subject to the completion of certain closing conditions precedent, to be performed by both the Seller and DEDC.
As of the date of this filing, the closing had not commenced due to certain outstanding closing conditions of executed Stock Purchase Agreement. Both parties continue to work closely together to complete these outstanding closing conditions, but there is no guarantee the parties will be able to come to agreement on such items. However, the Company anticipates that the parties will complete the transaction within the second quarter 2012.
Management projects that CTR will have on its books (unaudited) on the date of closing approximately $838,000 in assets, approximately $418,000 in liabilities, and approximately $420,000 in equity. As part of the agreement, DED and DEAC agree to assume and immediately cause to be paid off approximately $350,000 of the CTR liabilities immediately after the closing.
It is a condition of closing that DED provide either a funding commitment for $1,000,000 or proof of $1,000,000 in cash in its accounts, which funds will be needed to close the transaction and provide working capital to CTR after the closing. Neither DED nor DEAC have sufficient funds to meet this condition at this date, and as a result, closing of the acquisition transaction remains contingent on DEAC’s raising of $1,000,000 in capital by the closing date. Whether such capital can be obtained, or obtained on commercially reasonable terms, remains uncertain at this date. If such funds cannot be obtained on a timely basis, then the transaction will not proceed.
The agreement contains customary warranties and representations and indemnification and confidentiality provisions, as well as a three-year non-compete by the selling shareholders and their affiliates. Either party may terminate the Agreement if it has not closed by April 20, 2012, without penalty.
DEAC is still conducting its due diligence investigation of CTR and its business at this time, prior to close. CTR collects and recycles approximately 4 million pounds of waste tires annually. The assets of the CTR entity include the ownership of the 10-acre site and 35,000 square feet of buildings that management believes could provide the basis for a future waste tire pyrolysis energy campus. During its last fiscal year ended September 30, 2011, CTR reported (unaudited) $1,231,000 in revenues, and net income before tax of $138,000.
On March 31, 2012, DEDC entered into a non-binding term sheet with R.F.B., LLC (“RFB”), pursuant to which RFB agreed to license and assign to DEDC a Non-Provisional Patent Application (the “Application”), for a confidential aggregate purchase price to be paid in the form of the issuance of shares of the Company’s restricted common stock, contingent upon preparation and execution of a definitive agreement covering the transaction, and the completion of certain other closing conditions to be performed by both RFB and DEDC.
The definitive agreement was to be executed on or before April 30, 2012, with a subsequent date of closing, to be mutually agreed to by RFB and DEDC. As of the date of this filing, the parties have not executed a definitive agreement and there is no guarantee that such definitive agreement will be executed. However, the Company anticipates that the parties will complete the transaction within the second quarter 2012.
Pursuant to the term sheet, RFB will assign and grant to DEDC, an exclusive, worldwide license and right in and to RFB’s catalyst(s) and reactor technology relating to the recovery of high value organics from the processing of scrap tires (the “RFB Technology”). RFB consents that DEDC may utilize the RFB Technology in (a) the development and manufacture of goods and products; and (b) the design, construction and modification of plants (new and existing). Further, RFB will allow DEDC to sell to third parties (i) goods and products produced by utilization of RFB Technology; and (ii) plants utilizing RFB Technology.
As additional consideration, RFB will also receive a revenue share of the high-value organic compounds produced by DEDC and/or its assigns, utilizing the RFB catalysts(s) and reactor technology; and (b) a percentage of the net profits realized from the recovery of energy products recovered from oil sands or tar sands. The anticipated term of the license will be the greater of (i) 25 years and (ii) 20 years from the notice of allowance relative to the Application. The specific compensation terms of the license are based on trade secrets that are considered confidential and therefore are not being released.
Potential benefits of income tax losses and other tax assets are not recognized in the accounts until realization is more likely than not. As of March 31, 2012, the Company has net operating losses carried forward of $1,121,179 (December 31, 2011 – $1,022,465) for tax purposes in various jurisdictions subject to expiration as described below. Pursuant to ASC 740, Income Taxes, the Company is required to compute tax asset benefits for net operating losses carried forward and other items giving rise to deferred tax assets. Future tax benefits which may arise as a result of these losses and other items have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these items.
The actual income tax provisions differ from the expected amounts calculated by applying the combined income tax statutory rates applicable in each jurisdiction to the Company’s loss before income taxes and non-controlling interest. The components of these differences are as follows:
The Company’s tax-effected deferred income tax assets and liabilities are estimated as follows:
The Company has approximately $1,121,179 in net operating losses carried forward for United States income tax purposes which will expire, if not utilized, in 2030.
The Company follows FASB ASC 280, Segment Reporting, and currently has two reportable segments as follows:
Through its wholly owned subsidiary TC, the Company receives revenues from a related party based on billings received from certain of its direct to consumer membership club products after merger on March 9, 2011. During the first quarter of 2012 and 2011 TC gross revenues totaled $301,704 and $0, respectively.
Through its wholly owned subsidiary DEDC, the Company’s energy sector involves a plan for commencement of a business to develop, commercialize, and sell innovative technologies in the recoverable energy industry.
Financial information for each segment is presented in the following table. The accounting policies of each reportable segment are the same as those of the consolidated company, as described in Note 5, Summary of Significant Accounting Policies.
In preparing these condensed consolidated financial statements, the Company has evaluated events and transactions for potential recognition or disclosure through May 18, 2012, the date the condensed consolidated financial statements were available to be issued.
On May 3, 2012, the Company and UEI executed a letter of execution (the “Letter of Extension”) of the consulting agreement to extend the agreed to payment terms of the agreement from the May 7, 2012 to June 15, 2012, as previously disclosed in herein (see Note 9(e)).
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Basis of Presentation
The following management’s discussion and analysis is intended to provide additional information regarding the significant changes and trends which influenced our financial performance for the three-month period ended March 31, 2012 and 2011. This discussion should be read in conjunction with the unaudited financial statements and notes as set forth in this report.
The Company’s business plan is focused on developing and implementing recoverable energy technologies. DEDC, the Company’s wholly owned subsidiary, is currently seeking to locate joint venture partners or other financing partners (hereinafter collectively “joint venture partners”), on a project by project basis, for the purpose of development, construction and operation of free standing plants which provide full cycle processing to convert discarded tires into shelf ready, salable fuel and carbon products (hereinafter referred to as “plants”). Although, the Company has identified various plant locations and potential joint venture opportunities, as of today, it has not executed any agreements for the development of a plant.
The Company proposes to develop a full cycle process plant for converting discarded tires to salable fuel and carbon products. To accomplish this plan and other milestones, management intends to secure one or more partnerships, on a site-by-site basis, with local joint venture partners and/or financing sources, including companies who produce shredded tire feedstock usable in the plants. The Company’s business plan anticipates the creation of a state-of-the-art production facility called the “Pyrol Black Energy Campus” in late 2012 and early 2013, as one of its initial milestones. Specifically, the Company plans to acquire, combine and optimize a variety of existing proven and potentially innovative “Renewable Energy” technologies currently available in the market. Once a demonstration plant has been completed and is in operation, the Company’s plan includes the development of similar freestanding facilities at different US locations (and, possibly other global markets). Creation of such an initial plant requires obtaining a location that has a dependable supply of waste feed stock for the plant, obtaining the necessary capital to develop, construct and set in operation the plant (likely with local joint venture partners and/or other financing sources), and establishment of markets for the resale of resulting products. The Company will seek to partner with other companies who can provide tire feedstock, land for a plant, and/or capital, on a joint venture basis. As of this date, the Company has identified a location in Ennis, Texas as a potential site upon which it could develop its first Energy Campus, and has announced its intention to purchase such site, pending the completion of favorable due diligence and the obtaining of the necessary capital required to proceed, the source for which is uncertain at this date.
Requirements and Utilization of Funds
To implement our plan of operations, including some or all of the above described milestones (objectives), we will need to continue to raise capital (“equity”) in an amount between $2.5 and $5.0 million in equity from restricted stock sales or other acceptable financing options over the next 6-12 month period beginning in the second quarter of 2012 on terms and conditions to be determined. Management may elect to seek subsequent interim or “bridge” financing in the form of debt (corporate loans) as may be necessary.
We anticipate the need to raise additional capital beyond the first 6 months of operations, subject to the successful implementation of our initial milestones over the first 180 days of operations and our revenue growth cycle thereafter. At this time, management is unable to determine the specific amounts and terms of such future financings.
We foresee the proceeds from capital raised to be allocated as follows: (a) consolidation and integration; (b) growth capital; (c) research and due diligence; (d) pre-development plant costs; (e) product enhancements and technology partners; (f) new business development; (g) legal, audit, SEC filings and compliance fees; (h) financing costs; (i) working capital (general and administrative); (j) reserve capital for costs of acquisition and market expansion.
At such time as these funds are required, management would evaluate the terms of such debt financing and determine whether the business could sustain operations and growth and manage the debt load. To date management has not identified the source for such additional capital, and whether the Company will be able to raise sufficient capital, and do so on commercially reasonable terms, in uncertain. If we cannot raise additional proceeds via a private placement of our common stock or secure debt financing we would be required to cease business operations. As a result, investors in our common stock would lose all of their investment.
Management has plans for the staged development of our business over the next 12 months. Other than engaging and/or retaining independent consultants to assist the Company in various administrative and marketing related needs, we do not anticipate a significant change in the number of our employees, if any, unless we are able to obtain adequate financing.
In our recently file Form 10-K, our auditors have issued a “going concern” opinion. This means that there is substantial doubt that we can continue as an on-going business for the next 12 months unless we obtain additional capital to pay our expenses. This is because we have not generated enough revenues and no substantial revenues are anticipated in the near-term. Accordingly, we must seek to raise cash from sources other than from the sale of our products.
Our operating results for the three months ended March 31, 2012 and 2011 are summarized as follows:
Revenue represents TC commission revenues earned after Merger on March 9, 2011, from a management service agreement that the TC had in place prior to the merger.
Our expenses for the three months ended March 31, 2012 and 2011 are outlined in the table below:
There was no project development activity during the first quarter of 2011. The decrease in consulting services from first quarter 2011 to first quarter 2012 is primarily related to merger related costs in 2011. The increase in general and administrative expenses in 2012 is primarily related to increase in public company related costs, such as accounting, auditing, legal and investor related activities.
Liquidity and Capital Resources
As of March 31, 2012, we had cash of $6,502 and our working capital deficit is $1,398,675. During the three-month period ended March 31, 2012, we generated revenues of $301,704 and have a net loss of $238,714. As of March 31, 2012, we have a cumulative net loss of $5,184,323. We are illiquid and need cash infusions from investors and/or current shareholders to support our proposed marketing and sales operations.
Cash Used in Operating Activities
Cash used in operating activities of $30,504 in the first quarter of 2012 is primarily due to net operating loss of $(221,761), offset by non-cash warrants issued in first quarter of 2012 for services of $140,000 and increase in accounts payable of 63,257. Cash used in operating activities in first quarter of 2011is primarily due to net operating loss of $453,762, offset by non-cash consulting expenses of $428,000, less various merger related adjustments.
Cash Provided by Financing Activities
Cash provided by financing activities in the first quarter of 2012 is primarily due to refund of contingency consideration. Cash provided by financing activities in 2011 is primarily due to proceeds from convertible debentures.
Management believes that our current financial condition, liquidity and capital resources may not satisfy our cash requirements for the next 12 months and as such we will need to either raise additional proceeds and/or our officers and/or directors will need to make additional financial commitments to our company, neither of which is guaranteed. We plan to satisfy our future cash requirements, primarily the working capital required to execute on our objectives, including marketing and sales of our product, and legal and accounting fees, through financial commitments from future debt/equity financings, if and when possible.
Management believes that we may generate more sales revenue within the next twelve (12) months, but that these sales revenues will not satisfy our cash requirements to implement the first 6-12 months of our business plan, including, but not limited to, project acquisitions, engineering, and integration costs, and other operating expenses and corporate overhead (which is subject to change depending upon pending business opportunities and available financing).
We have no committed source for funds as of this date. No representation is made that any funds will be available when needed. In the event that funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales, and could fail to satisfy our future cash requirements as a result of these uncertainties.
If we are unsuccessful in raising the additional proceeds from officers and/or directors, we may then have to seek additional funds through debt financing, which would be extremely difficult for an early stage company to secure and may not be available to us. However, if such financing is available, we would likely have to pay additional costs associated with high-risk loans and be subject to above market interest rates.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures are effective in all material respects, including those to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In the first quarter ended March 31, 2012, there had been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently a party to any material, pending legal proceedings, other than ordinary, routine litigation incidental to our business.
ITEM 1A. Risk Factors
The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.
An investment in the Company is highly speculative in nature and involves an extremely high degree of risk. A prospective investor should consider the possibility of the loss of the investor's entire investment and evaluate all information about us and the risk factors discussed below in relation to his financial circumstances before investing in us.
Risks Related to the Business and Financial Condition
Our auditors have expressed substantial doubt about our ability to continue as a “going concern.” Accordingly, there is significant doubt about our ability to continue as a going concern.
Our business began recording revenues in first quarter 2011. As of March 31, 2012, we had an accumulated deficit of $5,184,324 and cash on hand of $6,502. A significant amount of capital will be necessary to initiate our business plan to the point where we have one or more plants up and operating which are commercially viable. The source and availability of such capital is uncertain, and we may be unable to obtain such capital, or obtain it on commercially reasonable terms. These conditions raise substantial doubt about our ability to continue as a going concern.
If we continue incurring losses, fail to achieve profitability, or are unable to locate additional capital on commercially reasonable terms to implement our business plans, we may have to cease activities. Our financial condition raises substantial doubt that we will be able to operate as a “going concern”, and our independent auditors included an explanatory paragraph regarding this uncertainty in their report on our financial statements as of December 31, 2011 and 2010. These financial statements do not include any adjustments that might result from the uncertainty as to whether we will achieve status as a “going concern”. Our ability to achieve status as a “going concern” is dependent upon our generating cash flow sufficient to fund operations. Our business plans may not be successful in addressing these issues. If we cannot achieve status as a “going concern”, you may lose your entire investment in the Company.
We are currently dependent on external financing, the source of which is uncertain
Currently, we are dependent upon external financing to fund implementation of our business plan. We estimate that within the next 12 months we will need $2,500,000 to implement the first 6-12 months of our business plan, including, but not limited to, project acquisitions, engineering, and development and integration costs, and other operating expenses and corporate overhead (which is subject to change depending upon pending business opportunities and available financing). We will also need to negotiate, joint venture arrangements and/or other financing arrangements to provide capital for development, construction and initial operation of our first plant, which we estimate will cost approximately $15,000,000 to build out and establish commercial operations. We do not have such capital available at this date. It is imperative that we receive this external financing to implement our business plan and to finance startup operations. New capital may not be available, adequate funds may not be sufficient to implement our business plan, or capital may not be available when needed or on commercially reasonable terms. Our failure to obtain adequate additional financing would require us to delay, curtail or scale back some or all of our efforts to implement our business plan and could jeopardize our ability to continue in business.
We may not be able to establish joint venture or financing arrangements, obtain the capital to market our technology, or otherwise successfully operate our business.
We believe that part of the key to establishing revenues is to successfully establish joint venture or financing arrangements with local joint venture partners, and/or other local financing sources, and with public and private entities who have the need to dispose of waste products which will serve as the feedstock for operation of our Energy Campuses tm. We have not as yet negotiated such joint ventures or arrangements, and our ability to do so, and do so on favorable terms to our proposed business is uncertain. Our success in this regard will depend in large part on how our technology works, market acceptance of our proposed technology and our efforts to educate potential joint venture and financing partners on the advantages of teaming with us to develop, build out and operate our proposed plants. Acceptance of such proposals requires marketing expenditures and education and awareness on the part of potential joint venture partners who might serve as partners in our development of plants. We may not have the resources required to promote our technology, or to promote proposals to develop plants and to promote their potential benefits. Such efforts will require additional capital, and the availability, sources and terms for such capital are uncertain. If we are unable to obtain the necessary capital, or unable to successfully promote our technology and/or proposed plant development, or unable to develop profitable joint venture arrangements with producers of waste feed stock, we will be unable to implement our business plan or continue in business.
We have limited operating history and may be unsuccessful in our efforts to implement our expanded business plan.
We have limited history of revenues from operations. We have yet to generate positive earnings and there can be no assurance that we will ultimately establish profitable operations. Our business plan is subject to all the risks inherent associated with project development, financing and implementation. We may be unable to locate sites, locate joint venture and/or financial partners, locate the required additional capital, our technology may not work as anticipated, we may find it difficult to obtain waste feed stock at reasonable prices, our end products may not find market acceptance, and/or we may fail to operate on a profitable basis. Potential investors should be aware of the difficulties normally encountered in commercializing our technology and plan proposals. If the business plan is not successful and we are not able to operate profitably, investors may lose some or all of their investment.
If we are unable to obtain additional funding, business operations will be harmed and if we do obtain additional financing then existing shareholders may suffer substantial dilution.
We anticipate that we will require up to approximately $2,500,000 to fund continued operations for the next twelve months, depending on revenue, if any, from operations. Additional capital will be required to effectively support the operations and to otherwise implement an overall business strategy. This is in addition to substantial additional capital we are proposing to raise from local joint venture partners and other financing participants on a project-by-project basis. We currently do not have any contracts or commitments for additional financing or for plant project joint ventures.. There can be no assurance that financing will be available in required amounts or on commercially reasonable terms. The inability to obtain additional capital will restrict our ability to implement our business plan. If we are unable to obtain additional financing, we will likely be required to cease activities. Any additional equity financing which involves the sale of our corporate securities may involve substantial dilution to then existing shareholders, while participation arrangements in joint ventures and other arrangements will dilute the ownership interest in, and profit potential of each plant, since the ownership and fruits of plant operation will have to be shared among participating capital sources.
Because we are small and do not have much capital, we may have to limit marketing activity which may result in a loss of your investment.
Because we are small and do not have much capital, we must limit our business activity. As such we may not be able to complete the sales and marketing efforts required to create opportunities and then enter into joint venture arrangements to develop, construct and operate plants. If we cannot successfully negotiate and enter into contracts for the development, construction and operation of plants, either in joint venture form, or though financing arrangements, then the Company will not be successful and you will lose your investment.
If we are unable to continue to retain the services of our current executive personnel and key consultants, or if we are unable to successfully recruit qualified managerial and company personnel having experience in our renewable energy industry, it would be detrimental to our business.
Our success depends to a significant extent upon the continued services of our current executive personnel and key consultants, including specifically James Michael Whitfield, Charles R. Cronin, Jr. and Tracy Williams. The loss of the services of any of these key persons could have a material adverse effect on our growth, revenues, and prospective business. None of these individuals currently have employment agreements and they could leave us with little or no prior notice. We do not have “key person” life insurance policies covering any of our employees. Additionally, there are a limited number of qualified technical personnel with significant experience in the design, development, manufacture, and sale of our recoverable energy, and we may face challenges hiring and retaining these types of employees.
In order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully retaining and recruiting qualified managerial and company personnel having experience in our recoverable energy business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.
We are a new entrant into the “Renewable Energy” industry without profitable operating history.
As of March 31, 2011, we had an accumulated deficit of $5,184,324. We expect to derive our future revenues by implementation of our business plan, which contemplates establishment of joint ventures and other financing arrangements for the development, construction and operation of plants, and the sales of our systems. Success in implementing this business plan and thereby generating revenues is highly uncertain. We expect to continue to devote available resources to implement our business plan. As a result, we expect that our operating losses will increase and that we may incur operating losses for the foreseeable future.
We may not be successful in our efforts to build and profitably operate production facilities, with the result that we will be able to generate enough future revenues to achieve or sustain profitability.
We are dependent on the successful execution of acquiring, combining and maximizing a variety of existing, proven and unproven but innovative “Recoverable Energy” technologies which we plan to build and to use in operation of what management believes will be profitable production facilities (“Energy Campuses TM”). The market for our concept of combining technologies is unproven, and certain of the technologies are unproven as well. The technology may not work, or may not work properly in conjunction with other technologies, or may not gain adequate commercial acceptance. Thus, there is no assurance that our business plan will succeed.
If We Do Not Obtain And Maintain Necessary Domestic Regulatory Registrations, Approvals And Comply With Ongoing Regulations, We May Not Be Able To Develop, Construct or Operate Our Energy Campuses.
The Energy Campuses we propose to develop, construct and operate, will be subject to extensive Federal, State and Local laws and regulations. Compliance with such laws and regulations may involve the submission of a substantial volume of data and may require lengthy substantive review. This will increase costs and could reduce profitability. We may not be able to comply with future regulatory requirements. Moreover, the cost of compliance with government regulations may adversely affect revenue and profitability on a continuing basis once we have established plants, which are operating. Failure to comply with applicable regulatory requirements can result in, among other things, in injunctions, operating restrictions, civil fines and criminal prosecution. Delays or failure to obtain registrations could have a material adverse effect on the marketing and sales of services and impair the ability to operate profitably in the future.
Because Our Industry Is Subject To Rapid Technological Changes And New Developments, Our Future Success Will Depend On Our Ability To Respond To The Changes And Keep Out Technology updated.
The creation of plants and technology utilized to convert waste materials to energy and other usable products is a relatively new technology and is subject to potentially revolutionary technological changes and new developments. Future technological developments could render the plants we propose to build and operate, and/or the equipment therein, obsolete. Future success will depend largely on our ability to anticipate or adapt to such changes in the development, operation and subsequent adaption of our plants.
Our Markets Are Increasingly Competitive And, In The Event We Are Unable To Compete Against Larger Competitors, Our Business Could Be Adversely Affected.
The conversion of waste products and materials to energy and alternative new products is becoming an increasingly competitive business. We will compete against several companies seeking to address the conversion of low cost scrap tires into renewable fuel and consumer products. Competitors with greater access to financial resources may enter our proposed markets and compete with us. Many of our competitors will have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than we do. We do not have any research and development underway, relying instead on a combination of current state of the art technology for the initial plants we propose to develop, build and operate, while other competitors have established budgets for such R&D. Established competitors, who have substantially greater financial resources and longer operating histories than us, are able to engage in more substantial marketing and promotion and attract a greater number of joint venture opportunities for the development, construction and operation of plants. In the event that we are not able to compete successfully, our business will be adversely affected and competition may make it more difficult for us to raise capital, establish joint ventures for plant development and implement our business plan.
The Company’s Implementation of Its Plan May Be impacted by the health and stability of the general economy.
Unfavorable changes in general economic conditions, such as the current recession, or economic slowdown in the geographic markets in which the Company seeks to establish business may have the effect of making it difficult to raise the required additional capital, or to locate potential joint venture partners which serve as a key part of our business plan. Markets for our anticipated by products may disappear, or prices may fall. These factors could adversely affect the Company’s implementation of its business plan and the ultimate establishment of profitable operations.
Failure to establish and maintain effective internal controls over financial reporting could have an adverse effect on our business, operating results and stock price.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed.
Risks Related to Common Stock
Additional financings may dilute the holdings of our current shareholders.
In order to provide capital for the operation of the business, we may enter into additional financing arrangements. These arrangements may involve the issuance of new shares of common stock, preferred stock that is convertible into common stock, debt securities that are convertible into common stock or warrants for the purchase of common stock. Any of these items could result in a material increase in the number of shares of common stock outstanding, which would in turn result in a dilution of the ownership interests of existing common shareholders. In addition, these new securities could contain provisions, such as priorities on distributions and voting rights, which could affect the value of our existing common stock.
There is currently a limited public market for our common stock. Failure to develop or maintain a trading market could negatively affect its value and make it difficult or impossible for you to sell your shares.
There has been a limited public market for our common stock and an active public market for our common stock may not develop. Failure to develop or maintain an active trading market could make it difficult for you to sell your shares or recover any part of your investment in us. Even if a market for our common stock does develop, the market price of our common stock may be highly volatile. In addition to the uncertainties relating to future operating performance and the profitability of operations, factors such as variations in interim financial results or various, as yet unpredictable, factors, many of which are beyond our control, may have a negative effect on the market price of our common stock.
Risks Associated with Control of Our Company through Outstanding Preferred Stock.
Our Capital Structure as currently evolved places effective control of Certain Significant Decisions in the hands of four Series A Convertible Preferred Shareholders
We currently have outstanding 7,732,824 shares of Series A Convertible Preferred Stock, which is held by four shareholders as follows (hereinafter the “Series A Shareholders”):
The Certificate of Designation for these shares provides among other rights and privileges the requirement that 75% of the outstanding Series A Convertible Preferred must give their prior consent, before the Company can elect members to the Board of Directors, issue any securities of the Company or affect any fundamental transaction (defined as acquisitions, mergers, sale or purchase of substantially all assets, etc.).
As a result, the Company’s Board of Directors cannot act to issue additional securities to raise capital or for other purposes, nor may the common shareholders remove, replace or re-elect directors to the Board of Directors, nor may the Company affect any acquisitions, without the approval of at least 75% of its outstanding Series A Preferred Stock.
Series A Shareholders may have interests or goals different from, or even adverse to the interests of the Company and its business in some circumstances. As a result the Company may find it difficult or impossible to obtain such consent from the Series A Shareholders, should it need to raise capital by the sale of securities, or undertake one of the other specified actions. Common shareholders may be essentially blocked under these provisions from changing the members of the Board of Directors, despite the fact that Directors may not be performing their duties in an adequate manner in the view of a majority of the common shareholders. These provisions preclude or discourage outside take over or sale of the Company or its assets, unless approved by 75% of the outstanding Series A Convertible Preferred Shares. There may be potentially other adverse consequences arising from these restrictions on the Company and its Board of Directors.
Trading of our stock is restricted by the Securities Exchange Commission’s penny stock regulations, may limit a stockholder’s ability to buy and sell our stock.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth exclusive of home in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
As part of the merger (acquisition) transaction completed on March 16, 2009, we issued 17,622,692 shares of the common stock of the Company, $.0001 par value per share, to the shareholders of Dynamic Energy Development Corporation in a share exchange on a one for one basis. Subsequently, Verdad Telecom returned 44,786,188 shares of common stock in the Company, $.0001 par value per share, in exchange for a cash payment of $322,000 (the “Purchase Price”). This transaction closed on March 10, 2011. The shares were issued pursuant to an exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) of the Securities Act.
Purchases of equity securities by the issuer and affiliated purchasers
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
ITEM 5. OTHER INFORMATION.
ITEM 6. EXHIBITS.
Those exhibits marked with an asterisk (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list.
* In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
** The Company will furnish Exhibit 101 within 30 days of the filing date of this Report, as permitted under the rules of the SEC
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.