U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| S | ANNUAL REPORT UNDER SECTION 13 OR 15 (D) OF THE SECURITIES EXCHANGE |
ACT OF 1934: FOR THE FISCAL YEAR ENDED MAY 31, 2013
ZINCO DO BRASIL, INC.
(formerly TurkPower Corporation)
(Exact name of registrant as specified in its charter)
| Delaware | | 26-2524571 |
| (State or other jurisdiction of incorporation) | | (IRS employer ID Number) |
100 Park Avenue Suite 1600
New York, New York 10017
(212) 984-0628
(Address and Telephone Number including area code
of registrant’s principal executive offices):
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.0001 par value per share
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act: Yes¨Nox
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes¨Nox
Indicate by check mark whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act 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. Yesx No¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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¨ Nox
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) isnot contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.x
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 x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes¨ Nox
The aggregate market value of the voting stock held on November 30, 2012 by non-affiliates of the registrant was $29,504,074 based on the closing price of $1.49 per share as reported on the OTC Bulletin Board on November 30, 2012 the last business day of the registrant's most recently completed fiscal second quarter (calculated by excluding all shares held by executive officers, directors and holders known to the registrant of five percent or more of the voting power of the registrant's common stock, without conceding that such persons are "affiliates" of the registrant for purposes of the federal securities laws).
As of September 13, 2013, there were 23,563,850shares of common stock of the registrant issued and outstanding.
TABLE OF CONTENTS
| | | | | Page |
| PART I | | |
| | | | |
| Item 1. | | Description of Business | | 1 |
| Item 1A. | | Risk Factors | | 2 |
| Item 2. | | Properties | | 7 |
| Item 3. | | Legal Proceedings | | 7 |
| Item 4. | | Mine Safety Disclosures | | 7 |
| | | |
| PART II | | |
| | | | |
| Item 5. | | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | | 7 |
| Item 6. | | Selected Financial Data | | 12 |
| Item 7. | | Management’s Discussion and Analysis of Financial Condition and Results of Operation | | 12 |
| Item 7A. | | Quantitative and Qualitative Disclosures About Market Risk | | 16 |
| Item 8. | | Financial Statements and Supplementary Data | | 16 |
| Item 9. | | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | | 16 |
| Item 9A(T). | | Controls and Procedures | | 16 |
| Item9B. | | Other Information | | 17 |
| | | |
| PART III | | |
| | | | |
| Item 10. | | Directors, Executive Officers, Promoters and Corporate Governance | | 17 |
| Item 11. | | Executive Compensation | | 20 |
| Item 12. | | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | | 23 |
| Item 13. | | Certain Relationships and Related Transactions, and Director Independence | | 24 |
| Item 14. | | Principal Accountant Fees and Services | | 24 |
| | | | | |
| PART IV | | | | |
| | | | | |
| Item 15. | | Exhibits, Financial Statement Schedules | | 24 |
| | | | | |
| Signatures | | | | 26 |
| Certifications | | | | |
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Special Cautionary Notice Regarding Forward-Looking Statements
This Report contains statements that constitute forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Various matters discussed in this document and in documents incorporated by reference herein, including matters discussed under the caption “Plan of Operation,” may constitute forward-looking statements for purposes of the Securities Act and the Exchange Act. These statements are based on many assumptions and estimates and are not guarantees of future performance and may involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Zinco Do Brasil, Inc. (the “Company” or “Zinco”) to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. The words “expect,” “anticipate,” “intend,” “plan,” “believe,” “seek,” “estimate,” and similar expressions are intended to identify such forward-looking statements. The Company’s actual results may differ materially from the results anticipated in these forward-looking statements due to a variety of factors, including, without limitation:
Overview
References in this Report to "Zinco," "we," "our," "us,” "Registrant,” and the "Company" refer to Zinco Do Brasil, Inc.
Organizational History
Zinco Do Brasil, Inc. (formerly TurkPower Corporation) was incorporated in the State of Delaware on November 4, 2004 as Global Ink Supply Company and was organized for the purpose of forming a vehicle to pursue a business combination. On May 11, 2010, an amendment was filed with the Secretary of State of Delaware to change the name of the Company to TurkPower Corporation. On September 28, 2012, an amendment was filed with and approved by the Secretary of State of Delaware to (i) change the name of the Company to Zinco do Brasil, Inc., (ii) effect a reverse split on a 1:15 basis and (iii) increase the number of the Company’s authorized shares of capital stock from 310,000,000 shares to 810,000,000 of which 800,000,000 shares are common stock with a par value $0.0001 per share and 10,000,000 shares are preferred stock with a par value $0.0001 per share.The amended Articles of Incorporation were approved by the State of Delaware effective September 28, 2012.
Business of the Company
On August 14, 2012, the Company entered into a Binding Agreement (the “Agreement”) with Ouro do Brasil Holdings Ltd. (“OBH”) and IMS Engenharia Mineral Ltda. (“IMS”) for the proposed acquisition of 99.9% (the “Transaction”) of the capital stock of Zinco do Brasil Mineracao Ltda., a company to be formed under the laws of Brazil (“ZBM”), which will be owned by OBH and IMS. Pursuant to the Agreement, the Company will acquire 99.9% of the total capitalization of ZBM in exchange for (i) 7,166,667 newly issued shares of the Company’s restricted common stock, par value $0.001 per share (the “Common Stock”), to OBH (the “OBH Shares”) and (ii) 1,075,000 shares of a newly-created Series C Preferred Stock, par value $0.0001 per share, to IMS (the “IMS Shares”). At the closing of the Transaction (the “Closing”) all officers, directors and shareholders holding 10% or more of the Company’s Common Stock shall enter into lock-up agreements.
The Company issued 3,466,667 of the OBH Shares to OBH and the IMS Shares to IMS. The balance of the respective shares will be issued to OBH at the Closing pursuant to a Final Transaction Agreement (“Transaction Agreement”) to be executed by the parties upon the formation of ZBM. The Transaction Agreement will contain customary terms, conditions, and covenants for a transaction of this nature.
In connection with the Transaction, the Company will convert an aggregate of approximately $5,000,000 of outstanding debt into approximately 3,333,333 shares of the Company’s Common Stock. In addition, following the closing of the proposed transaction, the Company shall consummate a private placement offering of $300,000 secured convertible notes and, within six months of closing the proposed transaction, the Company must: (i) raise up to $6,000,000 or such amount necessary to satisfy payment to Vale S.A. to complete the acquisition of the zinc mine; and (ii) raise $17,000,000 on or before the anniversary of the closing for working capital and general corporate purposes (collectively, the “Financing Conditions”). If the Financing Conditions are not met, IMS shall have the right of rescission provided that IMS has not converted any of its IMS Shares into Common Stock.
Upon execution of the Agreement, Ahmet Calik, Juvenil Felix, Ed Dowling and Jose Mendo de Souza were appointed to the Company’s Board of Directors on or before the Closing; James Davidson was appointed Chairman and Chief Executive Officer; Ryan Hart, the Company’s former Chairman and Chief Executive Officer, was appointed as President; and Adriano Espeschit was appointed a Director and Chief Operations Officer. On September 26, 2012, the Registrant accepted the resignation of Kaveh Meghdadpour as member of the Board of Directors. On December 17, 2012, the Board resolved to remove James Davidson as Chairman and Chief Executive Officer and appointed Ryan Hart as interim Chairman and Chief Executive Officer. On June 17, 2013, the Registrant appointed Daniel J. Kunz as its Executive Chairman of the Board of Directors and, effective September 1, 2013, its Chief Executive Officer. Also on June 17, 2013, Ryan E. Hart was appointed to serve as Vice Chairman of the Board of Directors.
ZBM will become a wholly-owned subsidiary of the Company, and the Company amended its Articles of Incorporation to change its name to “Zinco do Brasil, Inc.” This change was approved by the State of Delaware effective September 28, 2012.
Further, on or before the second anniversary of the closing, the Company shall divest itself of all current assets and operations in Turkey (the “Turkish Operations”) in exchange of the assumption of any liabilities associated with the Turkish Operations.
As of the date of this filing, ZBM has not been formed and the transaction has not been completed. The fair value of OBH shares and IMS shares of $200,600 has been recorded as a deposit on the acquisition.
On February 13, 2013, Zinco, OBH and IMS entered into a modification of the Agreement, dated August 14, 2012, to extend the date by which Zinco is required to raise $6,000,000 or such amount necessary to satisfy payment to Vale S.A. to complete the acquisition of the zinc mine until June 14, 2013.
On June 14, 2013, the Registrant, OBH and IMS entered into a modification of the Binding Agreement dated August 14, 2012, as amended on February 13, 2013, to extend the date by which the Registrant is required to raise $6,000,000 or such amount necessary to satisfy payment to Vale S.A. to complete the acquisition of the zinc mine, until September 14, 2013.
The extension was granted, in part, as a result of the substantial, partial performance made by the Registrant in its efforts to complete the acquisition, including the delivery of 5,921,620 shares of common stock and 1,074,999 shares of Series C Preferred Stock, as well as the conversion of an aggregate of $4,286,832.05 of liabilities into shares of common stock at $1.50 per share. The Registrant continues to devote all its efforts and operations toward the preparation of engaging in mining operations upon consummation of the transaction. The Registrant owns a minority interest in the Kuluncak mine, an iron ore mine in Turkey formerly owned by Exxaro and is currently in the process of evaluating its options and defining its strategy regarding its asset in Turkey.
Employees
Zinco has 6 full-time employees.
ITEM 1A - RISK FACTORS
Risks Related to Our Business
IF WE DO NOT OBTAIN ADDITIONAL FINANCING, OUR BUSINESS WILL FAIL.
We need to obtain additional financing in order to complete our business plan. We are not currently generating operating cash flows. We do not have any arrangements for financing and we may not be able to find such financing if required. Obtaining additional financing would be subject to a number of factors, including investor acceptance of mineral claims and investor sentiment. These factors may adversely affect the timing, amount, terms, or conditions of any financing that we may obtain or make any additional financing unavailable to us.
FLUCTUATIONS IN OUR OPERATING RESULTS AND ANNOUNCEMENTS AND DEVELOPMENTS CONCERNING OUR BUSINESS AFFECT OUR STOCK PRICE.
Our quarterly operating results, the number of stockholders desiring to sell their shares, changes in general economic conditions and the financial markets, the execution of new contracts and the completion of existing agreements and other developments affecting us, could cause the market price of our common stock to fluctuate substantially.
THE SUCCESS OF OUR BUSINESSES WILL DEPEND ON OUR ABILITY TO EFFECTIVELY DEVELOP AND IMPLEMENT STRATEGIC BUSINESS INITIATIVES.
We are currently developing various strategic business initiatives and we will incur additional expenses and capital expenditures to implement the initiatives. The development and implementation of these initiatives also requires management to divert a portion of its time from day-to-day operations. These expenses and diversions could have a significant impact on our operations and profitability, particularly if the initiatives included in any new initiative proves to be unsuccessful. Moreover, if we are unable to implement an initiative in a timely manner, or if those initiatives turn out to be ineffective or are executed improperly, our business and operating results would be adversely affected.
IF WE ARE UNABLE TO MAKE NECESSARY CAPITAL INVESTMENTS OR RESPOND TO PRICING PRESSURES, OUR BUSINESS MAY BE HARMED.
In order to remain competitive, we need to invest in research and development, manufacturing, customer service and support, and marketing. From time to time we also have to adjust the prices of our products to remain competitive. We may not have available sufficient financial or other resources to continue to make investments necessary to maintain our competitive position.
OUR BUSINESS DEPENDS SUBSTANTIALLY ON THE CONTINUING EFFORTS OF OUR EXECUTIVE OFFICERS AND OUR ABILITY TO MAINTAIN A SKILLED LABOR FORCE, AND OUR BUSINESS MAY BE SEVERELY DISRUPTED IF WE LOSE THEIR SERVICES.
Our future success depends substantially on the continued services of our executive officers, especially Mr. Ryan Hart, our Chairman and Chief Executive Officer. We do not maintain key man life insurance on any of our executive officers. If one or more of our executive officers are unable or unwilling to continue in their present positions, we may not be able to replace them readily, if at all. Therefore, our business may be severely disrupted, and we may incur additional expenses to recruit and retain new officers. In addition, if any of our executives joins a competitor or forms a competing company, we may lose some of our customers.
IF WE ARE UNABLE TO ATTRACT, TRAIN AND RETAIN TECHNICAL AND FINANCIAL PERSONNEL, OUR BUSINESS MAY BE MATERIALLY AND ADVERSELY AFFECTED.
Our future success depends, to a significant extent, on our ability to attract, train and retain technical and financial personnel. Recruiting and retaining capable personnel, particularly those with expertise in our chosen industries, are vital to our success. There is substantial competition for qualified technical and financial personnel, and there can be no assurance that we will be able to attract or retain our technical and financial personnel. If we are unable to attract and retain qualified employees, our business may be materially and adversely affected.
OUR DIRECTORS, OFFICERS AND PRINCIPAL STOCKHOLDERS AND THEIR RESPECTIVE AFFILIATES HAVE SIGNIFICANT CONTROL OVER US.
Our directors, executive officers and holders of more than 5% of our common stock, together with their affiliates, beneficially own, in the aggregate over 70% of our outstanding common stock. As a result, these stockholders, acting together, may be able to exercise significant influence over the management of our company; impede a merger, consolidation, takeover or other business consolidation, or discourage a potential acquirer from making a tender offer for our common stock; and control matters submitted to stockholders for approval, including:
| | • | amendment of our certificate of incorporation and by-laws; |
| | • | election of our board of directors; |
| | • | removal of any directors; and |
| | • | adoption of measures that could delay or prevent a change of control or impede a merger, business combination or similar transaction. |
WE MAY BE SUBJECT TO FURTHER GOVERNMENT REGULATION WHICH WOULD ADVERSELY AFFECT ITS OPERATIONS.
Although we will be subject to the reporting requirements under the Exchange Act, management believes we will not be subject to regulation under the Investment Company Act of 1940, as amended ( the “Investment Company Act”), since we will not be engaged in the business of investing or trading in securities. If we engage in business combinations which result in our holding passive investment interests in a number of entities, we could be subject to regulation under the Investment Company Act. If so, we would be required to register as an investment company and could be expected to incur significant registration and compliance costs. We have obtained no formal determination from the U.S. Securities and Exchange Commission ("SEC") as to our status under the Investment Company Act and, consequently, violation of the Investment Company Act could subject us to material adverse consequences. In addition, we currently produce no products or services, therefore, we are not presently subject to any governmental regulation in this regard. However, in the event that we engage in a merger or acquisition transaction with an entity that engages in such activities, we will become subject to all governmental approval requirements to which the merged or acquired entity is subject.
WE HAVE HAD LOSSES SINCE OUR INCEPTION. WE EXPECT LOSSES TO CONTINUE IN THE FUTURE AND THERE IS A RISK WE MAY NEVER BECOME PROFITABLE.
We have incurred operating losses of $8,179,193 during the year ended May 31, 2013. We expect to continue to incur significant operating expenses as we maintain our consulting and services. Our operating expenses have been and are expected to continue to outpace revenues and result in significant losses in the near term. We may never be able to reduce these losses, which will require us to seek additional debt or equity financing. If such financing is available, of which there can be no assurance, you may experience significant additional dilution.
WE HAVE A LIMITED OPERATING HISTORY. THERE CAN BE NO ASSURANCE THAT WE WILL BE SUCCESSFUL IN GROWING OUR MINERAL EXPLORATION ACTIVITIES.
We have a limited history of operations. As a result, there can be no assurance that we will be successful in our consulting and service operations for wind, hydro, solar, coal and geothermal energy parks in Turkey, and acquisition of operational mines with proven reserves. Our success to date in entering into ventures to acquire mineral properties is not indicative that we will be successful in entering into any further ventures. Any potential for future growth in our mineral exploration activities will place additional demands on our executive officers, and any increased scope of our operations will present challenges due to our current limited management resources. Our future performance will depend upon our management and their ability to locate and negotiate additional exploration opportunities in which we are solely involved or participate in as a joint venture partner. There can be no assurance that we will be successful in our efforts. Our inability to locate additional opportunities, to hire additional management and other personnel, or to enhance our management systems, could have a material adverse effect on our results of operations. There can be no assurance that our operations will be profitable.
WE MAY NOT BE ABLE TO SUCCESSFULLY ACQUIRE OR PROFITABLY OPERATE THE MINING COMPANY.
On August 14, 2012, we entered into an agreement to purchase 99.9% of the shares of Zinco do Brasil Mineracao Ltda. (“Zinco”), a company to be formed under the laws of Brazil (“ZBM”), which will be owned by Ouro do Brasil Holdings Ltd. and IMS Engenharia Mineral Ltda. Our acquisition of the shares is contingent upon our payment of the purchase price by certain specified dates. If, for some reason, we are unable to raise the funds to pay the purchase price, we will not be able to acquire the shares. We have expended significant resources and management effort in the negotiation and entry into the purchase agreement and our inability to consummate the acquisition may have a material adverse effect on our business. In addition, even if we successfully acquire the shares, there is no guarantee that the Zinco will produce positive results or that we will be able to successfully integrate Zinco, which could result in substantial costs and delays or other operational, technical or financial problems. If any of these events occur, it would have a material adverse effect upon our operations and results from operations.
YOU MAY SUFFER SIGNIFICANT DILUTION IF WE RAISE ADDITIONAL CAPITAL.
If we need to raise additional capital to expand or continue operations, it may be necessary for us to issue additional equity or convertible debt securities. If we issue equity or convertible debt securities, the net tangible book value per share may decrease, the percentage ownership of our current stockholders would be diluted, and any equity securities we may issue may have rights, preferences or privileges senior or more advantageous to our common stockholders.
Risks related to Our Common Stock
THE SHARES OF COMMON STOCK ELIGIBLE FOR FUTURE SALE COULD NEGATIVELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK.
As of May 31, 2013, the Company had a total of 23,563,850 shares of Common Stock issued and outstanding. If the Company's stockholders sell substantial amounts of the Company's common stock in the public market, including shares issued upon the exercise of outstanding options or warrants, the market price of its common stock could fall. These sales also may make it more difficult for the Company to sell equity or equity-related securities in the future at a time and price that the Company deems reasonable or appropriate. Stockholders who have been issued shares in the Acquisition will be able to sell their shares pursuant to Rule 144 under the Securities Act of 1933, beginning one year after the stockholders acquired their shares provided we have satisfied the conditions in Rule 144 relating to ceasing to be a shell company, are subject to the reporting requirements of Section 13 or 15(d) of the Exchange Act, have timely filed all Exchange Act reports required to be filed during the preceding 12 months, and at least one year has elapsed from the time that we filed current Form 10 information reflecting our status as an entity that is not a shell company.
OUR COMMON STOCK MAY BE DEEMED TO BE A PENNY STOCK AND, AS SUCH, WE ARE SUBJECT TO THE RISKS ASSOCIATED WITH “PENNY STOCKS”. REGULATIONS RELATING TO “PENNY STOCKS” LIMIT THE ABILITY OF OUR SHAREHOLDERS TO SELL THEIR SHARES AND, AS A RESULT, OUR SHAREHOLDERS MAY HAVE TO HOLD THEIR SHARES INDEFINITELY.
Our Common Stock is currently subject to the "penny stock" rules adopted under section 15(h) of the Securities Exchange Act of 1934. The penny stock rules apply, for the purposes relevant to us, to companies whose Common Stock is not listed on a national securities exchange and trades at less than $4.00 per share. These rules generally require, among other things, that brokers who trade penny stock to potential investors complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. If our securities are subject to the penny stock rules, investors will find it more difficult to dispose of our securities.
FAILURE TO ACHIEVE AND MAINTAIN EFFECTIVE INTERNAL CONTROLS IN ACCORDANCE WITH SECTION 404 OF THE SARBANES-OXLEY ACT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS AND OPERATING RESULTS AND STOCKHOLDERS COULD LOSE CONFIDENCE IN OUR FINANCIAL REPORTING.
Effective internal controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our operating results could be harmed. We may be required in the future to document and test our internal control procedures in order to satisfy the requirements of Section 404 of the Sarbanes-Oxley Act, which requires increased control over financial reporting requirements, including annual management assessments of the effectiveness of such internal controls and a report by our independent certified public accounting firm addressing these assessments. Failure to achieve and maintain an effective internal control environment, regardless of whether we are required to maintain such controls could also cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
SHARES ELIGIBLE FOR FUTURE SALE, IF AT ALL, MAY ADVERSELY AFFECT THE MARKET PRICE OF OUR COMMON STOCK, AS THE FUTURE SALE OF A SUBSTANTIAL AMOUNT OF OUR RESTRICTED STOCK IN THE PUBLIC MARKETPLACE COULD REDUCE THE PRICE OF OUR COMMON STOCK.
From time to time, certain of our stockholders may be eligible, if at all, to sell all or some of their shares of common stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144, promulgated under the Securities Act (“Rule 144”), subject to certain limitations. In general, pursuant to Rule 144, a stockholder (or stockholders whose shares are aggregated) that was our affiliate who has satisfied a six-month holding period may, under certain circumstances, sell within any three-month period a number of securities which does not exceed the greater of 1% of the then outstanding shares of common stock or the average weekly trading volume of the class during the four calendar weeks prior to such sale. Rule 144 also permits, under certain circumstances, the sale of securities, without any volume limitations, by a non-affiliate of our company that has satisfied a six-month holding period. Rule 144 is not available for the resale of securities initially issued by shell companies (other than business combination related shell companies) or issuers that have been at any time previously a shell company unless we meet certain conditions. Any substantial sale of common stock pursuant to Rule 144 or pursuant to any resale prospectus may have an adverse effect on the market price of our securities.
WE HAVE NEVER PAID DIVIDENDS ON OUR COMMON STOCK AND WE DO NOT EXPECT TO PAY DIVIDENDS IN THE FUTURE. ANY RETURN ON INVESTMENT MAY BE LIMITED TO THE VALUE OF OUR STOCK.
We have never paid dividends on our common stock and do not presently intend to pay any dividends in the foreseeable future. We anticipate that any funds available for payment of dividends will be re-invested into the Company to further its business strategy. If we do not pay dividends, its stock may be less valuable because a return on your investment will only occur if our stock price appreciates.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2 - PROPERTIES
We do not own any properties. We lease office space for our executive offices. We also utilize the office space and equipment of our Chief Executive Officer at no cost. Management estimates such amounts to be immaterial. We currently have no policy with respect to investments or interests in real estate, real estate mortgages or securities of, or interests in, persons primarily engaged in real estate activities.
ITEM 3 - LEGAL PROCEEDINGS
On December 26, 2011, the Company commenced a lawsuit against Nalan Oral and Seluck Oral, the shareholders of Avrasya Yapı Yatırım Hizmetleri A.Ş., in the United States District Court for the Southern District of New York alleging the defendants breached the Mine Purchase Agreement and seeking to cancel the 2,666,667 shares of Common Stock and 226,667 warrants issued to the defendants in connection with the Mine Purchase Agreement. The Company is also seeking damages of $6,000,000 from the defendants for breach of contract.
On October 2, 2012, the Company was served with a Summons and Notice of Motion for Summary Judgment in an action entitledTurigay Affiliates Corp. v. TurkPower Corporation, Index No. 653415/2012, Supreme Court, New York County. The Company has opposed the Plaintiff’s motion and asserted a number of defenses including fraud and the forgery of the signatures of certain of the Company’s officers. At a hearing on May 8, 2013, the court granted the Plaintiff’s Motion for Summary Judgment in lieu of complaint for repayment of €450,000. A judgment has not yet been entered in this matter.
Except as disclosed herein, we are not aware of any material, existing or pending legal proceedings nor are we involved as a plaintiff in any material proceeding or pending litigation.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our common stock is listed for quotation on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “ZNBR.”
The following table sets forth the high and low closing bid prices for our common stock for the fiscal quarters indicated as reported on the OTCBB. The quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not represent actual transactions. Our Common Stock is thinly traded and, thus, pricing of our common stock on the OTCBB does not necessarily represent its fair market value.
| | | High | | | Low | |
| | | | | | | |
| Fiscal Year 2012 (June 1, 2012 – May 31, 2013) | | | | | | | | |
| First quarter (June 1, 2012 – August 31, 2012) | | $ | 0.18 | | | $ | 0.05 | |
| Second quarter (September 1, 2012 – November 30, 2012) | | $ | 0.11 | | | $ | 0.07 | |
| Third quarter (December 1, 2012 – February 28, 2013) | | $ | 3.00 | | | $ | 0.08 | |
| Fourth quarter (March 1, 2013 – May 31, 2013) | | $ | 2.14 | | | $ | 1.68 | |
| | | | | | | | | |
| Fiscal Year 2011 June 1, 2011 – May 31, 2012) | | | | | | | | |
| First quarter (June 1, 2011 – August 31, 2011) | | $ | 0.43 | | | $ | 0.18 | |
| Second quarter (September 1, 2011 – November 30, 2011) | | $ | 0.30 | | | $ | 0.15 | |
| Third quarter (December 1, 2011 – February 28, 2012) | | $ | 0.21 | | | $ | 0.10 | |
| Fourth quarter (March 1, 2012 – May 31, 2012) | | $ | 0.23 | | | $ | 0.16 | |
Number of Shareholders
As of May 31, 2013, a total of 23,563,850 shares of the Company’s common stock were outstanding and held by approximately 87 shareholders of record of our common stock. This figure does not reflect the persons or entities that hold their stock in nominee or street name through various brokerage firms. Of this amount, approximately 2,400,000 shares are unrestricted. Approximately 19,500,000 shares are restricted securities held by non-affiliates, and the remaining 2,000,000 shares are restricted securities held by affiliates. These shares may only be sold in accordance with Rule 144. As of May 31, 2013, there were 748,335 warrants 829,445 stock options to purchase the Company’s Common Stock outstanding.
Description of Securities
Common Stock
The Company's Amended and Restated Certificate of Incorporation authorizes the issuance of 300,000,000 shares of common stock, $0.0001 par value per share.
Holders of Company’s common stock are entitled to one vote per share on each matter submitted to vote at a meeting of Company’s stockholders. Holders of common stock do not have cumulative voting rights. Stockholders do not have any preemptive rights or other similar rights to acquire additional shares of Company’s common stock or other securities. Subject to preferences that may be applicable to any then-outstanding preferred stock, holders of common stock are entitled to share in all dividends that the board of directors, in its discretion, declares from legally available funds. In the event of liquidation, dissolution or winding up, subject to preferences that may be applicable to any then-outstanding preferred stock, each outstanding share of common stock entitles its holder to participate ratably in all remaining assets of the Company that are available for distribution to stockholders after providing for each class of stock, if any, having preference over the common stock.
Holders of common stock have no conversion, preemptive or other subscription rights, and there are no redemption or sinking fund provisions applicable to the common stock. The rights of the holders of common stock are subject to any rights that may be fixed for holders of preferred stock, when and if any preferred stock is authorized and issued.
Transfer Agent. Shares of Common Stock are registered at the transfer agent and are transferable at such office by the registered holder (or duly authorized attorney) upon surrender of the Common Stock certificate, properly endorsed. No transfer shall be registered unless the Company is satisfied that such transfer will not result in a violation of any applicable federal or state security laws. The Company’s transfer agent for its Common Stock isIsland Stock Transfer
15500 Roosevelt Boulevard, Suite 301, Clearwater, Florida 33760, Suite 301, (727) 289-0010)
Preferred Stock
The Company's Amended Articles of Incorporation authorizes the issuance of 10,000,000 shares of “Blank Check” Preferred Stock, par value $0.0001 per share, subject to any limitations prescribed by law, without further vote or action by the stockholders, to issue from time to time shares of preferred stock in one or more series. Each such series of Preferred Stock shall have such number of shares, designations, preferences, voting powers, qualifications, and special or relative rights or privileges as shall be determined by the Company's board of directors, which may include, among others, dividend rights, voting rights, liquidation preferences, conversion rights and preemptive rights.
The Company hasdesignated 1,000 of its preferred stock as Series A Convertible Preferred Stock with a par value of $.0001, 1,000 shares of its preferred stock as Series B Convertible Preferred Stock with a par value of $0.0001 per share, 1,100,000 of its preferred stock as Series C Convertible Preferred Stock with a par value of $0.001 per share and 1,200,000 of its preferred stock as Series D Convertible Preferred with a par value of $0.001.
Series A Convertible Preferred Stock
1,000 shares of Series A Convertible Preferred Stock, par value $0.0001 per share (“Series A”), of which no shares are outstanding. Holders of Series A are entitled to receive dividends, ratably among holders, if and when declared by the board of directors for distribution to holders of Common Stock. Each share of Series A is convertible into 260,000 shares of the Company’s Common Stock, subject to adjustment. Holders of the Series A are entitled to 260,000 votes per share on all matters requiring shareholder vote.
Series B Perpetual Convertible Preferred Stock
1,000 shares of Series B Perpetual Convertible Preferred Stock, par value $0.0001 per share (“Series B”), of which no shares are outstanding. Each share of Series B is convertible into 100,000,000 shares of the Company’s Common Stock, subject to adjustment. Holders of the Series B are entitled to 100,000,000 votes per share on all matters requiring shareholder vote. Series B has a liquidation preference of $25,000 per share.
Series C Convertible Preferred Stock
1,100,000 shares of Series C Convertible Preferred Stock, par value $0.0001 per share (“Series C”), of which 1,074,999 shares are outstanding. The Series C does no accrue dividends. Each share of Series C is convertible into 100 shares of the Company’s Common Stock, subject to adjustment. Holders of the Series C are entitled to 100 votes per share on all matters requiring shareholder vote. The Series C participates pari passu with the Common Stock in liquidation.
Series D Convertible Preferred Stock
1,200,000 shares of 12% Series D Convertible Preferred Stock, par value $0.0001 per shares (“Series D”), of which 95,000 shares are outstanding. Each share of Series D is entitled to receive cumulative annual dividends at the rate of 12.0% per annum on the stated value of $15.00. Each share of Series D is convertible into 6.667 shares of the Company’s Common Stock, subject to adjustment. Holders of the Series D are entitled to vote on an “as converted” basis together with the Common Stock on all matters requiring shareholder vote.
Dividends
We have not paid any cash dividends to date and does not anticipate or contemplate paying dividends in the foreseeable future. It is the present intention of management to utilize all available funds for the development of our business.
Long-Term Incentive Plans Awards in Last Fiscal Year
[See Item 11 for a description of recent grants of stock and stock options to directors.]
Penny Stock Rules
The Securities and Exchange Commission has also adopted rules that regulate broker-dealer practices in connection with transactions in penny stocks. Penny stocks are generally equity securities with a price of less than $5.00 (other than securities registered on certain national securities exchanges or quoted on the NASDAQ system, provided that current price and volume information with respect to transactions in such securities is provided by the exchange or system).
Our shares are considered penny stock under the Securities and Exchange Act. The shares will remain penny stocks for the foreseeable future. The classification of penny stock makes it more difficult for a broker-dealer to sell the stock into a secondary market, which makes it more difficult for a purchaser to liquidate his/her investment. Any broker-dealer engaged by the purchaser for the purpose of selling his or her shares in us will be subject to Rules 15g-1 through 15g-10 of the Securities and Exchange Act. Rather than creating a need to comply with those rules, some broker-dealers will refuse to attempt to sell penny stock.
The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from those rules, to deliver a standardized risk disclosure document, which:
| | · | Contains a description of the nature and level of risk in the market for penny stock in both public offerings and secondary trading. |
| | · | Contains a description of the broker's or dealer's duties to the customer and of the rights and remedies available to the customer with respect to a violation of such duties or other requirements of the Securities Act of 1934, as amended. |
| | · | Contains a brief, clear, narrative description of a dealer market, including "bid" and "ask" price for the penny stock and the significance of the spread between the bid and ask price. |
| | · | Contains a toll-free telephone number for inquiries on disciplinary actions. |
| | · | Defines significant terms in the disclosure document or in the conduct of trading penny stocks. |
| | · | Contains such other information and is in such form (including language, type, size and format) as the Securities and Exchange Commission shall require by rule or regulation. |
The broker-dealer also must provide, prior to effecting any transaction in a penny stock, to the customer:
| | · | The bid and offer quotations for the penny stock. |
| | · | The compensation of the broker-dealer and its salesperson in the transaction. |
| | · | The number of shares to which such bid and ask prices apply, or other comparable information relating to the depth and liquidity of the market for such stock. |
| | · | Monthly account statements showing the market value of each penny stock held in the customer's account. |
In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from those 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 acknowledgment of the receipt of a risk disclosure statement, a written agreement to transactions involving penny stocks, and a signed and dated copy of a written suitability statement. These disclosure requirements will have the effect of reducing the trading activity in the secondary market for our stock because it will be subject to these penny stock rules. Therefore, stockholders may have difficulty selling their securities.
Recent Sales of Unregistered Securities
During the fiscal years ended May 31, 2013, May 31, 2012, and 2011, the Company issued the following securities exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act. No underwriting or other compensation was paid in connection with these transactions:
From April 22 to May 3, 2013, the Company converted an aggregate of $826,334 of existing convertible notes and accrued interest, held in favor of its investors, SDS Capital Group, Fuse Capital LLC and Mrs. Jane Hsiao, into an aggregate of 550,890 shares of newly-issued Common Stock. The basis of the conversion price was $1.50 per each share of Common Stock the notes were converted into.
On April 18, 2013, the Company accepted subscriptions in the aggregate of $1,000,000 from existing institutional investors and Edward Dowling, a member of the Company’s Board of Directors, for 100,000 shares of the Company’s Series D Convertible Preferred Stock, par value $0.0001 per share (the “Series D Stock”) plus warrants (to purchase an additional 166,667 shares of the Company’s Common Stock, at an exercise price of $2.25 per share, which expire in three (3) years. The shares of Series D Stock are convertible into 666,667 shares of Common Stock.
As of February 5, 2013, the Company has converted an aggregate of $3,460,498 of its existing 18% convertible notes and accrued interest, held in favor of its investors, Azure Trading, LLC, Frost Gamma Corp, MKM Opportunity Mater Fund, Ovation Group, Inc. and others, into an aggregate of 2,306,998 shares of newly-issued Common Stock. The basis of the conversion price was $1.50 per share of Common Stock, taking into account the Company’s recent reverse stock split of 1 share for every 15 shares of Common Stock outstanding.
On September 24, 2012, pursuant to certain amended agreements with certain subscribers for the conversion of obligations related thereto, the Registrant authorized the issuance of an aggregate of 23,286,612 shares of common stock, par value $0.0001 per share.
On various dates from June 1, 2011 to May 31, 2012, the Company issued convertible debentures totaling $2,545,000 to third party and related party investors together with 2,545,000 common shares. The convertible debentures bear annual interest at 18%, mature in one year and, together with any unpaid interest, are convertible into common shares at a conversion rate of $0.25 per share.
On August 22, 2011, the Company issued a $250,000 secured convertible debenture (“Secured Debenture”) to a third party (the “Holder”) together with 1,136,363 common shares and 1,100,000 warrants to other entities controlled by the Holder (“Holder Entities”). As security for this Secured Debenture, the Company granted the Holder a first priority lien on all of the assets of the Company. The Secured Debenture bears annual interest at 18%, matures at the earlier of 1) six months and 2) upon the Company’s receipt of $500,000 of debt or equity proceeds and, together with any unpaid interest, are convertible into common shares at a conversion rate of $0.25 per share. The Company also issued 1,100,000 warrants in connection with the issuance of convertible notes on August 22, 2011. The warrants have term of one year and are exercisable at $0.25 per share. In the event the Company raises equity at less than $0.25 per share or convertible debt which may be converted into common shares at a conversion rate of less than $0.25 per share, the Holder and the Holder Entities shall receive the same terms as the terms of the new financing arrangement (which could decrease the conversion rate of the convertible debt and could decrease the exercise price of the warrants). As a result, the Company determined the conversion feature of the Secured Debenture and related warrants are derivative liabilities.On February 29, 2012, the Company entered into an agreement with the holder to extend the maturity date of the secured debenture to June 22, 2012 in exchange for 3,250,258 common shares. Additionally, the 1,100,000 1-year warrants issued in connection with the secured debenture were modified by (i) extending its expiration date for another twelve months to September 1, 2013 (ii) lowering the exercise price from $0.25 to $0.1275 per warrant share and (iii) increasing the number of common shares convertible from 1,100,000 shares to 2,200,000 shares. The Company evaluated the modification and determined that it was substantial and was therefore accounted as an extinguishment of debt. Consequently, the fair value of the common shares of $549,294, the fair value of the additional warrants and the incremental fair value of the modified warrants of $202,549 was recorded as loss on debt extinguishment during the nine months ended February 29, 2012. Simultaneously, the Holder converted $6,816 of the interest owed into 24,742 common shares.
On various dates from April 1, 2011 to May 31, 2011, the Company issued 6,666,667 options to purchase shares of its common stock to investors for services rendered. These options were granted with an exercise price of $0.35 per share, are fully vested at issuance, and are exercisable for 3 years from their respective vesting dates.
On various dates from April 1, 2011 to May 31, 2011, the Company sold common stock for cash for $170,500, of which $70,000 was reflected as a subscription receivable at May 31, 2011 and received in June 2011.
On various dates from March 1, 2011 to May 31, 2011, the Company offered and sold an aggregate of $1,018,159 of units comprised of convertible debentures and the Company’s Common Stock for the purchase price of $50,000 per unit. Each unit was comprised of 50,000 shares of the Company’s Common Stock and a debenture in the principal amount of $50,000, with interest at the rate of 18% and convertible into shares of the Company’s Common Stock at the rate of $0.25 per share.
The sales of the securities identified above were made pursuant to privately negotiated transactions that did not involve a public offering of securities and, accordingly, we believe that these transactions were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) of the Securities Act and Rule 506 of Regulation D and Regulation S promulgated thereunder. The agreements executed in connection with this sale contain representations to support the Company’s reasonable belief that the Investor had access to information concerning the Company’s operations and financial condition, the Investor acquired the securities for their own account and not with a view to the distribution thereof in the absence of an effective registration statement or an applicable exemption from registration, and that the Investor are sophisticated within the meaning of Section 4(2) of the Securities Act and are “accredited investors” (as defined by Rule 501 under the Securities Act). In addition, the issuances did not involve any public offering; the Company made no solicitation in connection with the sale other than communications with the Investor; the Company obtained representations from the Investor regarding their investment intent, experience and sophistication; and the Investor either received or had access to adequate information about the Company in order to make an informed investment decision. All of the foregoing securities are deemed restricted securities for purposes of the Securities Act.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
We did not purchase any of our shares of Common Stock or other securities during our fiscal year ended May 31, 2013.
ITEM 6 – SELECTED FINANCIAL DATA
Not applicable for smaller reporting companies.
ITEM 7 – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the information contained in the consolidated financial statements of the Company and the notes thereto appearing elsewhere herein and in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations set forth in (1) the Company's Annual Report on Form 10-K for the year ended May 31, 2013. Readers should carefully review the risk factors disclosed in this Form 10-K and other documents filed by the Company with the SEC.
FORWARD LOOKING STATEMENTS
The following discussion and plan of operations should read in conjunction with the financial statements and the notes to those statements included in this annual report.The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs and involve risks, uncertainties and assumptions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those discussed below and under the headings “Risk Factors” and “Forward-Looking Statements.”
LIQUIDITY AND CAPITAL RESOURCES
We have funded our operations through financing activities consisting primarily of private placements of debt and equity with outside investors. Our principal use of funds has been for long-term deposits in connection with the potential acquisition of shares of an entity, and for the operating expenses of the Company.
Our cash balance as of May 31, 2013, was $687 compared to $299,298 as of May 31, 2012.
During the year ended May 31, 2013, the Company issued $0 of equity securities for cash, $1,450,000 of Preferred D securities for cash, and $212,000 of convertible debentures to third party and related party investors. The Company also made $130,000 of payments to investors on convertible debentures and converted $4,343,364 of convertible debt and accrued interest into common stock.The Company received non-interest bearing advances from shareholders totaling $67,600 and made repayments of $172,266 during the year ended May 31, 2013. As of May 31, 2013, amounts due to these shareholders totaled $35,841.
Liquidity and Capital Resources during the year ended May 31, 2012 compared to the year ended May 31, 2011.
During the year ended May 31, 2012, the Company issued $72,000 of equity securities for cash and $2,635,000 of convertible debentures to third party and related party investors. The Company also made $50,000 of payments to investors on convertible debentures and converted $119,846 of convertible debentures and accrued interest into common stock. The Company received non-interest bearing advances from shareholders totaling $205,672 and made repayments of $65,165 during the year ended May 31, 2012. As of May 31, 2012, amounts due to these shareholders totaled $140,507.
Liquidity and Capital Resource Plan for the year ending May 31, 2014
During the year ending May 31, 2014, the Company intends to fund its operations by raising proceeds from its current equity financing which will enable it to consummate its proposed acquisition of a natural resources mine in Brasil. Due to the expenses involved and capital required to acquire and commence revenue generating operations of the mine, it is not anticipated that the Company will generate additional working capital during the next fiscal year. The Company will be required to pursue working capital debt financing as well as project-specific debt financing to acquire and develop the mine. However, no assurance can be given that any such financing that the Company is pursuing will be available to us on favorable terms, if at all, and this may severely impact our current operations and delay the development of our alternative energy projects until additional funds are received by the Company.
RESULTS OF OPERATIONS
Results of Operations for the Year Ended May 31, 2013 Compared to the Year Ended May 31, 2012
The company had no revenues from continuing operations during the years ended May 31, 2013 and 2012. Revenues from discontinued operations for the year ended May 31, 2013 were $0 compared to $9,988 for the year ended May 31, 2012, a decrease of $9,988. This decrease was due to the Company discontinuing its Turkey operations and terminating its agreement to acquire BEST LLC.
Operating expenses for the year ended May 31, 2013 from continuing operations were $3,337,775 compared to $13,565,190 for the year ended May 31, 2012, a decrease of $10,227,415.This is primarily due to the decrease in stock-based compensation of $10,065,630 which was primarily due to the 240 Series A preferred shares issued for services during the year ended May 31, 2012 which had a fair value of $10,764,000.Operating expenses from discontinued operations for the year ended May 31, 2012 were $0 compared to $14,917,138 for the year ended May 31, 2012. Operating expenses for the year ended May 31, 2012 primarily consisted of the impairment on the investment in the mining company of $13,859,231. There were no operating expenses for the year ended May 31, 2013 as the Company discontinued their Turkey operations.
The Company also incurred net interest expense of $1,429,169 ($316,765 is reported under discontinued operations) and $2,493,764 ($317,876 is reported under discontinued operations) during the years ended May 31, 2013 and 2012, respectively. During the year ended May 31, 2013, this amount consisted primarily of $1,009,047 interest on the convertible debt (of which approximately $353,513 was non-cash amortization).During the year ended May 31, 2012, the Company incurred interest expense of $2,175,000 on the convertible debt (of which approximately $1,539,000 was non-cash amortization). The Company also incurred derivative gains of $416,282 and a loss on extinguishment of debt for the year ended May 31, 2013 of $1,632,701. The Company also incurred derivative losses and a loss on extinguishment of debt for the year ended May 31, 2012 of $143,417 and $827,593. Derivative gains during the year ended May 31, 2013 and losses during the year ended May 31, 2012 are substantially related to warrants issued with Preferred D subscriptions and $250,000 secured convertible debentures and related warrants issued with the debt which qualified for derivative accounting. Losses on extinguishment relate to the $250,000 secured convertible debenture and related warrants which were modified during the years ended May 31, 2013 and 2012 (see note 6).
As a result, the Company incurred a net loss of $8,179,193 for the year ended May 31, 2013, compared with a net loss of $31,965,914 for the year ended May 31, 2012.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Discontinued Operations
In accordance with ASC 205-20, Presentation of Financial Statements-Discontinued Operations (“ASC 205-20”), we reported the results of our Turkey operations as a discontinued operation. The application of ASC 205-20 is discussed in Note 3 “Discontinued Operations”.
Receivables
The Company extends unsecured credit to its customers in the ordinary course of business. An allowance for doubtful accounts is established and recorded based on management’s assessment of customer credit history, overall trends in collections and write-offs, and expected exposures based on facts and prior experience. If events or changes in circumstances indicate that specific receivable balances may be impaired, further consideration is given to the collectability of those balances and the allowance is adjusted accordingly. Past-due receivable balances are written off when our internal collection efforts have been unsuccessful. There was no allowance for doubtful accounts as of May 31, 2013 or 2012.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided on a straight-line basis, over the assets’ estimated useful lives. The estimated useful lives of furniture and equipment are 3-5 years. All property and equipment related to the operations in Turkey were written down to zero as of May 31, 2013.
Long-lived assets
Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstances or events indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the Company considers various factors, including future cash flows, to determine whether the carrying amount exceeds fair value, and in that case, the asset is written down to fair value. Long-lived assets related to the operations in Turkey were fully impaired as of May 31, 2013.
Revenue recognition
The Company recognizes revenue where there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the price has been fixed or is determinable and collectability can be reasonably assured.
In instances where the Company has received cash in advance of meeting the Company’s revenue recognition criteria, the Company records such as deferred revenue.
During the year ended May 31, 2012, the Company’s revenues (included in discontinued operations) were principally derived from energy consulting services provided to several customers in Turkey.
Income Taxes
In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of May 31, 2013 and 2012.
Fair value of financial instruments
The carrying value of cash and cash equivalents, receivables, accounts payable and accrued expenses deferred revenue, and debt approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Foreign currency
The financial statements of the Company’s subsidiary in Turkey, for which the functional currency is the local currency, Turkish Lira (TRY or TRL), are translated into the reporting currency, U.S. dollars, using the exchange rate at the balance sheet date for all assets and liabilities. The capital accounts are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. Translation adjustments are included in other comprehensive income (loss) within stockholders’ deficit.
Gain or losses from foreign currency transactions are recognized in income.
Stock Based Payments
We account for share-based awards to employees in accordance with ASC 718“Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50“Equity”, wherein such awards are expensed over the period in which the related services are rendered at their fair value.
Recently issued accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to our investors.
ITEM 7A- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
ITEM 8- FINANCIAL STATEMENTS
The required Financial Statements and the notes thereto are contained in a separate section of this report beginning with the page following the signature page.
ITEM 9- CHANGES IN AND DISAGREMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A- CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934, as amended (the "Act") is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. It should be noted that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions, regardless of how remote.
As of the end of the period covered by this Annual Report on Form 10-K, we carried out an evaluation, under the supervision and with the participation of our executive management of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our executive management have concluded that our disclosure controls and procedures are not effective because of the identification of a material weakness in our internal control over financial reporting which is identified below, which we view as an integral part of our disclosure controls and procedures.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act. Our internal control system was designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with generally accepted accounting principles. Because of inherent limitations, a system of internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to change in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Our management conducted an evaluation of the effectiveness of our internal control over financial reporting using the criteria as required by Section 404 of the Sarbanes-Oxley Act, management, including testing using the criteria in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on its evaluation, our management concluded that there is a material weakness in our internal control over financial reporting. A material weakness is a deficiency, or a combination of control deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company's annual or interim financial statements will not be prevented or detected on a timely basis.
The material weakness relates to the Company not having personnel with knowledge of generally accepted accounting principles. Our executive management does not possess accounting expertise and our Company does not have an audit committee. This weakness was due to our lack of working capital to hire additional staff during the period covered by this report. We intend to obtain this knowledge of generally accepted accounting principles by hiring a contractor and/or hiring additional accounting personnel.
The Company's management based its evaluation on criteria set forth in the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on that assessment, management has concluded that the Company's internal control over financial reporting was not effective as of May 31, 2013.
This Annual Report on Form 10-K does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to the attestation by the Company’s registered public accounting firm pursuant to rules of the SEC that permit the Company to provide only management’s report in this annual report.
Changes in Internal Controls over Financial Reporting
There have been no changes in our internal controls over financial reporting or in other factors that could materially affect, or are reasonably likely to affect, our internal controls over financial reporting during the year ended May 31, 2013. There have not been any significant changes in the Company's critical accounting policies identified since the Company filed its Form 10-K for the year ended May 31, 2013
This annual report does not include an attestation report of the Company’s independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by the Company’s independent registered public accounting firm pursuant to temporary rules of the Securities and Exchange Commission that permit the Company to provide management report in the Annual Report.
ITEM 9B- OTHER INFORMATION
None.
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
(a)Identification of Directors and Executive Officers.
The following table sets forth information regarding the Company’s directors and executive officers and their respective positions as of May 31, 2013:
| Name | | Age | | Officer or
Director
Since | | Position |
| Daniel J. Kunz | | 61 | | 2013 | | Executive Chairman of the Board of Directors; Chief Executive Officer |
| Ryan E. Hart | | 37 | | 2009 | | Vice Chairman of the Board of Directors; President; [Chief Financial officer] |
| Juvenil Felix | | 74 | | 2012 | | Director |
| Edward Dowling | | 58 | | 2012 | | Director |
| Adriano Espeschit | | 48 | | 2012 | | Director; Chief Operating officer |
| Mustafa Aksoy | | 36 | | 2012 | | Director |
| Jose Mendo de Souza | | 74 | | 2012 | | Director |
Daniel J. Kunz,Executive Chairman of the Board of Directors, Chief Executive Officer- Mr. Kunz was co-founder and served as the Chief Executive Officer and a director of U. S. Geothermal Inc. from March 2000 and December 2003, respectively, until April 19, 2013, of which he also served as President from December 2003 to September 2011. Mr. Kunz has more than 30 years of experience in international mining, engineering and construction, including, marketing, business development, management, accounting, finance and operations. Mr. Kunz served as Chairman of the Board of U.S. Cobalt Inc. from March 2000 to December 2004. He was senior vice president and Chief Operating Officer of Ivanhoe Mines Ltd. from 1997 until October 2000, and served as its President, Chief Executive Officer and Director from November 2000 until March 2003. From March 2003 until March 2004, Mr. Kunz served as President and CEO of Ivanhoe’s subsidiary Jinshan Gold Mines Inc. Prior thereto, Mr. Kunz was a founder of and directed the 1993 initial public offering of the NASDAQ listed MK Gold Company for which he served as President, Chief Executive Officer and a Director. Also, for 17 years from January 1979 to December 1993 Mr. Kunz held executive positions with NYSE listed Morrison Knudsen Corporation including Vice President and Controller. Mr. Kunz holds a Masters of Business Administration, a Bachelor of Science in Engineering and an associate accounting degree. He is currently a director at Chesapeake Gold Corp. and its subsidiary Gunpoint Exploration Ltd, Silver Bull Resources, Kazax Minerals Inc., and Kenai Resources Ltd. The Registrant determined that Mr. Kunz’s experience of more than 30 years in international mining, engineering and construction, plus and his many years of senior management and NYSE, NASDAQ and TSX director experience, rendered him suitably qualified to serve as its Chief Executive Officer and Executive Chairman
Ryan E. Hart, Vice Chairman of the Board of Directors, President, Chief Financial Officer– Mr. Hart is a Swiss-American financial investor based in Istanbul and New York. After working several years at Credit Suisse and UBS in the fields of Equity Trading and Portfolio Management, Mr. Hart founded Mirus Investments AG in 2004 as an alternative investment advisor (with a strong focus on hedge funds and venture capital) to independent asset managers and high net-worth individuals. Since the inception of Mirus Investments, Mr. Hart and his clients have been early investors in numerous public and private businesses, offering start-up and small companies the financial resources and network to execute their business plans and create sustainable shareholder value. The Company concluded that Mr. Hart’s extensive experience in financing make him an ideal candidate to serve in these capacities.
(b) Significant Employees.
None.
(c) Family Relationships.
None.
(d) Involvement in Certain Legal Proceedings.
There have been no events under any bankruptcy act, no criminal proceedings and no judgments, injunctions, orders or decrees material to the evaluation of the ability and integrity of any director, executive officer, promoter or control person of Company during the past five years.
(e) The Board of Directors acts as the Audit Committee and the Board has no separate committees.
We have no qualified financial expert at this time because we have not been able to hire a qualified candidate. Further, we believe that we have inadequate financial resources at this time to hire such an expert. We intend to continue to search for a qualified individual for hire.
AUDIT COMMITTEE
Although our bylaws provide for the appointment of one, we are not yet required to have an Audit Committee as a result of the fact that our common stock is not considered a “listed security” as defined in Rule 10A-3 of the Exchange Act. In March, 2013, Mustafa Aksoy was elected, as an independent member, to the Company’s Board of Directors and the Chair of the Company’s Audit Committee. Due to his education and extensive experience, we believe Mr. Aksoy meets the criteria of an independent director and an “Audit Committee Financial Expert” as provided in Release 33-8173 and 34-47235.
CODE OF ETHICS
As of May 31, 2013, we have not adopted a Code of Ethics for Financial Executives, which would include our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions.
EMPLOYMENT ARRANGEMENTS
None of the Company's officers, directors, advisors or key employees are currently party to employment agreements with the Company. The Company has no pension, health, annuity, bonus, insurance profit sharing or similar benefit plans; however, the Company may adopt such plans in the future. There are presently no personal benefits available for directors, officers or employees of the Company.
2011 Omnibus Equity Incentive Plan
Zinco’s Board of Directors (the “Board”) administers the 2011 Omnibus Equity Incentive Plan ("2011 Plan"), which was adopted by the Board effective August 29, 2011. The purpose of the 2011 Plan is to provide a means through which the Company and its affiliates may attract and retain key personnel and to provide a means whereby directors, officers, employees, consultants and advisors (and prospective directors, officers, employees, consultants and advisors) of the Company and its affiliates can acquire and maintain an equity interest in the Company, or be paid incentive compensation, which may (but need not) be measured by reference to the value of the Company’s common stock, thereby strengthening their commitment to the welfare of the Company and its affiliates and aligning their interests with those of the Company’s stockholders. The 2011 Plan provides for the direct issuance of Awards including stock options, restricted stock awards and unrestricted stock awards. All of the Company’s employees, officers and directors (including persons who have entered into an agreement with the Company under which they will be employed by the Company in the future), as well as all of the Company’s consultants and advisors that are natural persons, are eligible to the awards under the 2011 Plan. The administrator is authorized to determine the terms of each award granted under the plan, including the number of shares, exercise price, term and exercisability. Stock and options may be granted for services rendered or to be rendered. The 2011 Plan shall terminate on the tenth anniversary of the date it was adopted unless sooner termination by the Board in accordance with its terms;provided,however, that such expiration shall not affect awards then outstanding, and the terms and conditions of the 2011 Plan shall continue to apply to such awards. A total of 20,000,000 shares of Common Stock have been authorized for issuance under the 2011 Plan.
Awards Under the 2011 Plan
In connection with the adoption of the 2011 Plan, on August 29, 2011, the Board approved grants to certain of our named executive officers. Aykut Ferah, our Chief Executive Officer and Chief Financial Officer, was granted 5,000,000 stock options and Ryan E. Hart, our Executive Chairman, was granted 5,000,000 stock options. The stock options granted to Messrs. Ferah and Hart have an exercise price equal to $0.35 per share of common stock covered by the stock options, and will become exercisable at such time as the Company achieves a market capitalization of $150 million or annual EBITDA of $7.5 million or in the event that the Company merges with or is acquired by another company (whichever event first occurs). The stock options to each executive have a term of 10 years following the date of grant and are subject to forfeiture in the event that the executive is terminated by the Company for cause.
ITEM 11 - EXECUTIVE COMPENSATION
The following Summary Compensation Table shows certain compensation information for each of the Named Executive Officers. Compensation data is shown for the years ended May 31, 2013 and 2012. This information includes the dollar value of base salaries, bonus awards, the number of stock options granted, and certain other compensation, if any, whether paid or deferred.
Name and Principal
Position | | Year | | Salary | | | Bonus ($) | | | Restricted
Stock
Award(s)
($) | | | Option
Awards(#) | | | Nonequity
Incentive
Plan | | | All Other
Compensation
($) | | | Total ($) | |
| Daniel J. Kunz (a) | | 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Executive Chairman of the Board of Directors, Chief Executive Officer | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ryan Hart, (b) | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | | - | | | $ | - | | | $ | - | |
| President and Financial Officer; Vice Chairman of the Board of Directors | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | 5,000,000 | | | $ | - | | | $ | 48,000 | | | $ | 48,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| James Davidson, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | _____ | | | $ | _______ | |
| Director (c) | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | [__] | | | $ | [_] | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Kaveh Meghdadpour, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | ____ | | | $ | _____ | |
| Director (d) | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | 5,000 | | | $ | 5,000 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Edward Dowling, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Director | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Jose Mendo de Souza | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Director | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adriano Espeschit, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Director and Chief Operating Officer | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Mustafa Aksoy, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Director | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ahmet Calik, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Director | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Juvenil Felix, | | 2013 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
| Director | | 2012 | | $ | - | | | $ | - | | | $ | - | | | | - | | | $ | - | | | $ | - | | | $ | - | |
(a) Was elected on June 17, 2013 to serve as Executive Chairman of the Board of Directors and, effective September 1, 2013, its Chief Executive Officer.
(b) Served as Chief Executive Officer under September 1, 2013. On June 17, 2013 was appointed to serve as Vice Chairman of the Board of Directors.
(c) Was elected in June, 2013 to serve as Chief Executive Officer and Chairman of the Board of Directors and subsequently resigned of all capabilities on December 20, 2012.
(d) Resigned as a director on September 26, 2012.
Outstanding Equity Awards at Fiscal Year-End
The following table sets forth for each named executive officer certain information concerning the outstanding equity awards as of May 31, 2013.
| | | Option awards | | | Stock awards | |
Name and
Principal
Position | | Number of
Securities
Underlying
Unexercised
Options
Exercisable | | | Number
of Securities
Underlying
Unexercised
Options
Unexercisable | | | Option
Exercise
Price ($) | | | Option
Expiration
Date | | | Number
of Shares
or Units
of Stock
that Have
Not
Vested | | | Market
Value of
Shares or
Units of
Stock
that Have
Not
Vested | | | Equity
Incentive
Plan
Awards:
Number
of
Unearned
Shares,
Units
or Other
Rights
that
Have Not
Vested | | | Equity
Incentive
Plan
Awards:
Market
or Payout
Value of
Unearned
Shares,
Units or
Other
Rights
that Have
Not
Vested | |
| Ryan E. Hart | | | - | | | | 5,000,000 | | | $ | 0.35 | | | | 8/28/2021 | | | | - | | | | - | | | | - | | | | - | |
| James Davidson | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Kaveh Meghdadpour | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Directors Equity Compensation
Kaveh Meghdadpour
On January 3, 2011, the Company granted 500,000 options to purchase shares of its common stock to Kaveh Meghdadpour upon becoming a member of the Board. 100,000 of the stock options vested immediately and are exercisable for 3 years from the vesting date of January 3, 2011. The director’s remaining 400,000 stock options will vest ratably 100,000 per year over the next four years provided that the director serves as a director for each 12 month period. Each 100,000 stock option tranche shall be exercisable for three years from the date each tranche vests. The stock options granted to Mr. Meghdadpour have an exercise price equal to $0.35 per share and are governed by the terms of the 2011 Plan. The intrinsic value and fair value for these options on the grant date was $22,500 and $171,666, respectively.
James Davidson
On April 13, 2011, the Company issued 2,000,000 fully vested shares of common stock to James Davidson upon becoming a member of the Board. The stock price of the Company on April 13, 2011 was $0.355 per share. The Company recorded stock compensation expense of $710,000 during the year ended May 31, 2011. In addition, the Director received an additional 2,000,000 restricted shares of common stock, which will vest after 18 months of continuous service for the Company as a Director. The Company determined the grant date of these shares was April 13, 2011 and will record an additional $710,000 of stock compensation expense over the 18 months term, of which the Company recognized stock compensation expense of $119,306 during the year ended May 31, 2012. The Company will record future stock compensation expense of $590,694 in connection with this restricted stock grant.
Richard Schaeffer
On May 2, 2011, the Company issued 250,000 stock options to purchase shares of its common stock to Richard Schaeffer upon becoming a member of the Board. These options were granted with an exercise price of $0.35 per share, were fully vested at issuance, are exercisable for 3 years from the vesting date of May 2, 2011 and are governed by the terms of the 2011 Plan. The intrinsic value and fair value for these stock options on the grant date was $10,000 and $69,027, respectively.
Cash Compensation
Kaveh Meghdadpour receives $5,000 in cash for each Board meeting he attends. James Davidson receives $50,000 in cash each year payable in monthly installments. No other directors currently receive cash compensation. All directors of the Company are reimbursed for business expenditures incurred in connection with performing their services as directors of the Company.
The table below shows the aggregate cash paid, and stock awards issued, to the non-employee directors during the year ended May 31, 2013 in accordance with the descriptions set forth above:
| Name | | Fees
Earned or
Paid in
Cash ($) | | | Stock
Awards
($)(1) | | | Option
Awards
($) | | | Total ($) | |
| James Davidson | | | 50,000 | | | | - | | | | - | | | | 50,000 | |
| Richard Schaeffer | | | - | | | | - | | | | - | | | | - | |
| Kaveh Meghdadpour | | | 5,000 | | | | - | | | | - | | | | 5,000 | |
| (1) | Amounts in this column represent the grant date fair value of stock awards granted during the year ended May 31, 2013, in accordance with ASC Topic 718. |
| (2) | The table below shows the number of stock options held by each of our non-employee directors as of May 31, 2013. The options owned by Richard Schaeffer are fully vested. 200,000 of the options owned by Kaveh Meghdadpour are vested and the remaining 300,000 options will vest ratably 100,000 per year over the next three years provided that the director serves as a director for each 12 month period. |
| Name | | Grant
Date | | No. of
Securities
Underlying
Unexercised
Options | | | Option
Exercise
Price ($) | |
| Kaveh Meghdadpour | | 01/03/2011 | | | 500,000 | | | | 0.35 | |
Equity Compensation Plan Information
The following table summarizes share and exercise information about the Company's equity compensation plans as of May 31, 2013.
| Plan Category | | Number of
Securities to be
Issued Upon
Exercise of
Outstanding
Options, Warrants
and Rights | | | Weighted-Average
Exercise Price of
Outstanding
Options,
Warrants and
Rights | | | Number of
Securities
Remaining
Available for
Future Issuance
Under
Equity
Compensation
Plans (excluding
securities included
in
column 1) | |
| Stock Options | | | 17,666,667 | | | $ | 0.35 | | | | 2,333,333 | |
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS
The following table sets forth, as of May 31, 2012, information known to us about the number of shares of common stock owned of record and beneficially by executive officers, directors and persons who hold 5% or more of the outstanding shares of our common stock.
Beneficial ownership of shares is determined under the rules of the SEC and generally includes any shares over which a person exercises sole or shared voting or investment power. Shares of our common stock subject to options currently exercisable or exercisable within 60 days of August 19, 2011, and not subject to repurchase as of that date, are deemed to be outstanding for calculating the percentage of outstanding shares of the person holding these options, but are not deemed to be outstanding for calculating the percentage of any other person. The percentage of ownership is based on 125,303,158 shares of voting common stock outstanding as of August 19, 2011. Unless otherwise indicated, the address for those listed below is c/o Zinco Do Brasil, Inc., 100 Park Avenue, Suite 1600, New York, New York 10017.
The table also shows the number of shares beneficially owned as of May 31, 2013 by each of the individual directors and executive officers and by all directors and executive officers as a group.
| Name of Beneficial Owner | Title of Class | Beneficial Ownership(1) | Percent of Class(2) | |
| | | | | |
| Daniel Kunz | Common Stock | | 1,000,000 | | 4.2 | % |
Ryan E. Hart (4) Director, Chief Executive Officer and Chief Financial Officer | Common Stock | | 600,000 | | 2.5 | % |
| Edward Dowling | Series D Preferred Stock | | 50,000 | | * | % |
| | Common Stock | | 833,334 | | 3.5 | % |
| Jose Mendo de Souza | Common Stock | | 560,271 | | * | % |
| Mustafa Askoy | Series D Preferred Stock | | 50,000 | | * | % |
| | Common Stock | | 833,334 | | 3.5 | % |
| Juvenil Felix | Common Stock | | 330,000 | | 1.3 | % |
| Adriano Epeschit | Common Stock | | 560,271 | | 2.4 | % |
| All Officers and Directors as a Group (8 Persons) | | | | | | % |
(1) "Beneficial Owner" means having or sharing, directly or indirectly (i) voting power, which includes the power to vote or to direct the voting, or (ii) investment power, which includes the power to dispose or to direct the disposition, of shares of the common stock of an issuer. The definition of beneficial ownership includes shares, underlying options or warrants to purchase common stock, or other securities convertible into common stock, that currently are exercisable or convertible or that will become exercisable or convertible within 60 days. Unless otherwise indicated, the beneficial owner has sole voting and investment power.
(2) For each shareholder, the calculation of percentage of beneficial ownership is based upon 162,300,414 shares of Common Stock outstanding as of April 19, 2012, and shares of Common Stock subject to options, warrants and/or conversion rights held by the shareholder that are currently exercisable or exercisable within 60 days, which are deemed to be outstanding and to be beneficially owned by the shareholder holding such options, warrants, or conversion rights. The percentage ownership of any shareholder is determined by assuming that the shareholder has exercised all options, warrants and conversion rights to obtain additional securities and that no other shareholder has exercised such rights.
(3) Includes 2,500,000 shares owned directly. Each share of Series A Preferred Stock votes as 260,000 shares of Common Stock. The address for Seacrest Trading Corporation SA. is 2, Route D’Oron, 1010 Lausanne, Switzerland. Ajoy Garapati holds voting and dispositive voting power for Seacrest Trading Corporation SA.
(4) Effective November 16, 2011, the Board of Directors of TurkPower appointed Mr. Ryan E. Hart as Interim Chief Executive Officer and Interim Chief Financial Officer of TurkPower, to serve at the pleasure of the Board of Directors.
(5) Includes shares of Common Stock that may be acquired upon exercise of warrants.
(b)Director Independence.
Although the Company is not a listed issuer, under the NASDAQ definition of “independence”, Messrs. Davidson, Meghdadpour and Schaeffer qualify as independent directors.
(c)Securities Authorized for Issuance Under Equity Compensation Plans.
There were no securities issued under equity compensation plans as of May 31, 2013. See Item 10 for a description of the 2011 Plan, which was adopted on August 29, 2011.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Except as otherwise disclosed herein, there have been no related party transactions, or any other transactions or relationships, including matters related to director independence, required to be disclosed pursuant to Items 404 or 407(a) of Regulation S-B.
ITEM 14- PRINCIPAL ACCOUNTING FEES AND SERVICES
The following table sets forth the aggregate fees billed to us for fiscal years ended May 31, 2013 and 2012 by Malone Bailey, LLP, the Company’s independent registered public accounting firm:
| | | 2013 | | | 2012 | |
| | | | | | | |
| Audit Fees (1) | | $ | 90,000 | | | $ | 88,600 | |
| Audit Related Fees (2) | | | - | | | | - | |
| Tax Fees (3) | | | - | | | | - | |
| | | | | | | | | |
| Total Fees paid to auditor | | $ | 90,000 | | | $ | 88,600 | |
(1) Audit fees consist of fees billed for professional services rendered for the audit of the Company’s annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by Malone Bailey, LLP in connection with statutory and regulatory filings or engagements.
(2) Audit-Related fees consist of fees billed for assurance and related services that are reasonably related to the performance of the audit or review of Company’s consolidated financial statements and are not reported under "Audit Fees".
(3) Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.
ITEM 15- EXHIBITS
(a) Exhibits:
EXHIBITS
| 31.1 | | Chief Executive Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 31.2 | | Chief Financial Officer Certification of Periodic Financial Report Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* |
| 32.1 | | Chief Executive Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* |
32.2 | | Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002* |
| | | |
| * | | Filed herewith |
Zinco Do Brasil, Inc.
(Formerly TurkPower Corporation)
| FINANCIAL STATEMENTS | Page # |
| | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| | |
| Consolidated Balance Sheets as of May 31, 2013 and 2012 | F-3 |
| | |
| Consolidated Statements of Operations and Comprehensive Loss for the Years Ended May 31, 2013 and 2012 | F-4 |
| | |
| Consolidated Statements of Stockholders’ Deficit for the Years Ended May 31, 2013 and 2012 | F-5 |
| | |
| Consolidated Statements of Cash Flows for the Years Ended May 31, 2013 and 2012 | F-6 |
| | |
| Notes to the Consolidated Financial Statements | F-7 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Zinco do Brasil, Inc.
(formerly TurkPower Corporation)
New York, New York
We have audited the accompanying consolidated balance sheets of Zinco do Brasil, Inc. and its subsidiaries (collectively “the Company”) as of May 31, 2013 and 2012 and the related consolidated statements of operations and comprehensive loss, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform an audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Zinco do Brasil, Inc. and its subsidiaries as of May 31, 2013 and 2012 and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 3 to the consolidated financial statements, the Company has incurred losses from operations and has a working capital deficit as of May 31, 2013 which raises substantial doubt about its ability to continue as a going concern. Management's plans regarding those matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/MaloneBailey, LLP
www.malone-bailey.com
Houston, Texas
September 13, 2013
Zinco Do Brasil, Inc.
(Formerly TurkPower Corporation)
Consolidated Balance Sheets
| | | May 31, | |
| | | 2013 | | | 2012 | |
| ASSETS | | | | | | | | |
| Current assets: | | | | | | | | |
| Cash | | $ | 687 | | | $ | 299,298 | |
| Total current assets | | | 687 | | | | 299,298 | |
| | | | | | | | | |
| Other assets: | | | | | | | | |
| Deposit on acquisition of Zinco do Brasil Mineracao Ltda. | | | 210,320 | | | | - | |
| | | | | | | | | |
| TOTAL ASSETS | | $ | 211,007 | | | $ | 299,298 | |
| | | | | | | | | |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | | | | | | | | |
| Current liabilities: | | | | | | | | |
| Accounts payable and accrued expenses | | $ | 328,645 | | | $ | 150,349 | |
| Accrued interest | | | 412,323 | | | | 896,417 | |
| Related party payable | | | 35,841 | | | | 140,507 | |
| Derivative liabilities | | | 499,646 | | | | 508,819 | |
| Convertible debt - related party, net of unamortized discount of $492 and $- as of May 31, 2013 and May 31, 2012, respectively | | | 31,508 | | | | 393,159 | |
| Convertible debt, net of unamortized discount of $51,156 and $267,718 as of May 31, 2013 and May 31, 2012, respectively | | | 1,173,844 | | | | 3,782,282 | |
| Liabilities of discontinued operations | | | 2,450,307 | | | | 2,168,047 | |
| Total current liabilities | | | 4,932,114 | | | | 8,039,580 | |
| | | | | | | | | |
| Total liabilities | | | 4,932,114 | | | | 8,039,580 | |
| | | | | | | | | |
| Stockholders' Deficit: | | | | | | | | |
| Series A Preferred stock: $0.0001 par value; 1,000 shares authorized; 0 and 240 shares issued and outstanding as of May 31, 2013 and 2012, respectively | | | - | | | | - | |
| Series B Preferred stock: $0.0001 par value; 1,000 shares authorized; 0 shares issued and outstanding as of May 31, 2013 and 2012, respectively | | | - | | | | - | |
| Series C Preferred stock: $0.001 par value; 1,100,000 shares authorized; 1,074,999 and 0 shares issued and outstanding as of May 31, 2013 and 2012, respectively | | | 1,075 | | | | - | |
| Series D Preferred Stock: $0.001 par value; 1,200,000 shares authorized; 150,000 and 0 shares issued and outstanding as of May 31, 2013 and 2012, respectively | | | 150 | | | | - | |
| Common stock: $0.0001 par value; 300,000,000 shares authorized; 23,563,850 and 10,050,028 shares issued and outstanding as of May 31, 2013 and 2012, respectively | | | 2,356 | | | | 1,005 | |
| Additional paid-in capital | | | 41,678,431 | | | | 30,517,144 | |
| Accumulated other comprehensive income | | | 212,324 | | | | 177,819 | |
| Accumulated deficit | | | (46,582,584 | ) | | | (38,403,391 | ) |
| Total stockholders' deficit of Zinco Do Brasil, Inc. | | | (4,688,248 | ) | | | (7,707,423 | ) |
| Non-controlling interest | | | (32,859 | ) | | | (32,859 | ) |
| Total deficit | | | (4,721,107 | ) | | | (7,740,282 | ) |
| | | | | | | | | |
| TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT | | $ | 211,007 | | | $ | 299,298 | |
See accompanying notes to the consolidated financial statements.
Zinco Do Brasil, Inc.
(Formerly TurkPower Corporation)
Consolidated Statements of Operations and Comprehensive Loss
| | | Year Ended May 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Professional fees | | $ | 395,585 | | | $ | 324,292 | |
| Selling, general and administrative expenses | | | 2,942,190 | | | | 13,240,898 | |
| Total operating expenses | | | 3,337,775 | | | | 13,565,190 | |
| Loss from operations | | | (3,337,775 | ) | | | (13,565,190 | ) |
| | | | | | | | | |
| Other (income) expense: | | | | | | | | |
| Derivatives (gain) loss | | | (416,282 | ) | | | 143,417 | |
| Interest expense | | | 1,112,404 | | | | 2,175,888 | |
| Loss on extinguishment of debt | | | 1,632,701 | | | | 827,593 | |
| Debt conversion expense | | | 2,195,830 | | | | - | |
| Total other expense | | | 4,524,653 | | | | 3,146,898 | |
| | | | | | | | | |
| Loss from continuing operations | | | (7,862,428 | ) | | | (16,712,088 | ) |
| Loss from discontinued operations | | | (316,765 | ) | | | (15,283,705 | ) |
| | | | | | | | | |
| Net loss | | | (8,179,193 | ) | | | (31,995,793 | ) |
| Net loss attributable to non-controlling interest | | | - | | | | 29,879 | |
| Net loss attributable to Zinco Do Brasil, Inc. | | | (8,179,193 | ) | | | (31,965,914 | ) |
| Deemed dividend related to incremental beneficial conversion feature on preferred stock | | | (522,876 | ) | | | - | |
| Preferred dividends | | | (41,589 | ) | | | - | |
| Net loss attributable to Zinco Do Brasil, Inc.’s common stockholders | | $ | (8,743,658 | ) | | $ | (31,965,914 | ) |
| | | | | | | | | |
| Basic and diluted loss per common share: | | | | | | | | |
| Loss from continuing operations | | $ | (0.45 | ) | | $ | (1.82 | ) |
| Loss from discontinued operations | | $ | (0.01 | ) | | $ | (1.66 | ) |
| Net loss per share | | $ | (0.46 | ) | | $ | (3.48 | ) |
| | | | | | | | | |
| Weighted average number of common shares outstanding - basic and diluted | | | 18,808,560 | | | | 9,204,887 | |
| | | | | | | | | |
| Comprehensive loss | | | | | | | | |
| Net loss | | $ | (8,179,193 | ) | | $ | (31,995,793 | ) |
| Foreign currency translation adjustments | | | 34,505 | | | | 137,419 | |
| Total comprehensive loss | | | (8,144,688 | ) | | | (31,858,374 | ) |
| Comprehensive loss attributable to non-controlling interests | | | - | | | | 29,879 | |
| Comprehensive net loss attributable to Zinco Do Brasil, Inc. | | $ | (8,144,688 | ) | | $ | (31,828,495 | ) |
See accompanying notes to the consolidated financial statements.
Zinco Do Brasil, Inc.
(Formerly TurkPower Corporation)
Consolidated Statement of Stockholders’ Deficit
For the years ended May 31, 2013 and 2012
| | | | | | | | | | | | | | | | | | | | | Accumulated | | | | | | | | | Total | |
| | | Preferred Stock
Series A | | | Preferred Stock
Series C | | | Preferred Stock
Series D | | | Common Stock | | | Additional
Paid-in | | | Subscription | | | Other
Comprehensive | | | Accumulated | | | Non-Controlling | | | Stockholders'
Equity | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Receivable | | | Income | | | Deficit | | | Interest | | | (Deficit) | |
| Balance, May 31 2011 | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,666,210 | | | $ | 667 | | | $ | 5,371,942 | | | $ | (70,000 | ) | | $ | 40,400 | | | $ | (6,437,477 | ) | | $ | (2,980 | ) | | $ | (1,097,448 | ) |
| Issuance of common stock for purchase of Mining Company | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,666,667 | | | | 267 | | | | 11,224,733 | | | | - | | | | - | | | | - | | | | - | | | | 11,225,000 | |
| Issuance of warrants for purchase of Mining Company | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 587,173 | | | | - | | | | - | | | | - | | | | - | | | | 587,173 | |
| Subscription receivable | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 70,000 | | | | - | | | | - | | | | - | | | | 70,000 | |
| Issuance of common stock with convertible debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 234,758 | | | | 23 | | | | 530,372 | | | | - | | | | - | | | | - | | | | - | | | | 530,395 | |
| Beneficial conversion feature | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 409,734 | | | | - | | | | - | | | | - | | | | - | | | | 409,734 | |
| Stock issued in conversion and extinguishment of debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 275,060 | | | | 28 | | | | 744,862 | | | | - | | | | - | | | | - | | | | - | | | | 744,890 | |
| Issuance of common stock for cash | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 133,333 | | | | 13 | | | | 1,987 | | | | - | | | | - | | | | - | | | | - | | | | 2,000 | |
| Stock-based compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | 74,000 | | | | 7 | | | | 834,650 | | | | - | | | | | | | | | | | | | | | | 834,657 | |
| Stock option expense | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 47,691 | | | | - | | | | - | | | | - | | | | - | | | | 47,691 | |
| Issuance of preferred shares for services | | | 240 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,764,000 | | | | - | | | | - | | | | - | | | | - | | | | 10,764,000 | |
| Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 137,419 | | | | - | | | | - | | | | 137,419 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | (31,965,914 | ) | | | (29,879 | ) | | | (31,995,793 | ) |
| Balance, May 31, 2012 | | | 240 | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 10,050,028 | | | | 1,005 | | | | 30,517,144 | | | | - | | | | 177,819 | | | | (38,403,391 | ) | | | (32,859 | ) | | | (7,740,282 | ) |
| Stock issued in conversion and extinguishment of debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 3,710,574 | | | | 371 | | | | 8,171,524 | | | | - | | | | - | | | | - | | | | - | | | | 8,171,895 | |
| Issuance of common stock with convertible debt | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 2,133 | | | | - | | | | 1,953 | | | | - | | | | - | | | | - | | | | - | | | | 1,953 | |
| Issuance of Series D convertible preferred stock for cash | | | - | | | | - | | | | - | | | | - | | | | 150,000 | | | | 150 | | | | | | | | - | | | | 1,077,506 | | | | - | | | | - | | | | - | | | | - | | | | 1,077,656 | |
| Stock-based compensation | | | - | | | | - | | | | - | | | | - | | | | | | | | | | | | 869,022 | | | | 87 | | | | 1,454,018 | | | | - | | | | - | | | | - | | | | - | | | | 1,454,105 | |
| Stock-based compensation -warrants | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | | | | | - | | | | 126,613 | | | | - | | | | - | | | | - | | | | - | | | | 126,613 | |
| Stock issued to settle accounts payable and accrued expenses | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 60,379 | | | | 6 | | | | 68,050 | | | | - | | | | - | | | | - | | | | - | | | | 68,056 | |
| Conversion of Series A Preferred Shares to common stock | | | (240 | ) | | | - | | | | - | | | | - | | | | - | | | | - | | | | 4,160,000 | | | | 416 | | | | (416 | ) | | | - | | | | - | | | | - | | | | - | | | | - | |
| Stock issued as a deposit on acquisition of Zinco do Brasil | | | - | | | | - | | | | 1,074,999 | | | | 1,075 | | | | - | | | | - | | | | 4,711,714 | | | | 471 | | | | 208,774 | | | | - | | | | - | | | | - | | | | - | | | | 210,320 | |
| Debt discount related to beneficial conversion feature | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 53,265 | | | | - | | | | - | | | | - | | | | - | | | | 53,265 | |
| Foreign currency translation adjustments | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 34,505 | | | | - | | | | - | | | | 34,505 | |
| Net loss | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | (8,179,193 | ) | | | - | | | | (8,179,193 | ) |
| Balance, May 31, 2013 | | | - | | | | - | | | | 1,074,999 | | | $ | 1,075 | | | | 150,000 | | | $ | 150 | | | | 23,563,850 | | | $ | 2,356 | | | $ | 41,678,431 | | | $ | - | | | $ | 212,324 | | | $ | (46,582,584 | ) | | $ | (32,859 | ) | | $ | (4,721,107 | ) |
See accompanying notes to the consolidated financial statements.
Zinco Do Brasil, Inc.
(Formerly TurkPower Corporation)
Consolidated Statements of Cash Flows
| | | Year Ended May 31, | |
| | | 2013 | | | 2012 | |
| CASH FLOWS FROM OPERATING ACTIVITIES | | | | | | | | |
| Net loss | | $ | (8,179,193 | ) | | $ | (31,995,793 | ) |
| Less: loss from discontinued operations | | | 316,765 | | | | 15,283,705 | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | |
| (Gain) loss on derivatives | | | (416,282 | ) | | | 143,417 | |
| Stock-based compensation | | | 1,580,718 | | | | 11,646,348 | |
| Amortization of deferred financing costs | | | - | | | | 20,000 | |
| Amortization of debt discount | | | 324,054 | | | | 1,539,456 | |
| Loss on debt extinguishment | | | 1,632,701 | | | | 827,593 | |
| Gain on settlement of accrued expenses | | | (24,583 | ) | | | - | |
| Debt conversion expense | | | 2,195,830 | | | | - | |
| Changes in operating assets and liabilities: | | | | | | | | |
| Prepaid expenses and advances | | | - | | | | 10,000 | |
| Accounts payable and accrued expenses | | | 844,045 | | | | 869,260 | |
| Cash used in continuing operations | | | (1,725,945 | ) | | | (1,656,014 | ) |
| Cash used in discontinued operations | | | - | | | | (215,160 | ) |
| NET CASH USED IN OPERATIONS | | | (1,725,945 | ) | | | (1,871,174 | ) |
| | | | | | | | | |
| CASH FLOWS FROM INVESTING ACTIVITIES | | | | | | | | |
| Cash used in discontinued operations | | | - | | | | (920,247 | ) |
| CASH USED IN INVESTING ACTIVITIES | | | - | | | | (920,247 | ) |
| | | | | | | | | |
| CASH FLOWS FROM FINANCING ACTIVITIES | | | | | | | | |
| Proceeds from issuance of Series D convertible preferred stock, net of | | | 1,450,000 | | | | - | |
| Proceeds from issuance of convertible debt | | | 180,000 | | | | 2,635,000 | |
| Proceeds from issuance of convertible debt - related party | | | 32,000 | | | | - | |
| Payments on convertible debt | | | (130,000 | ) | | | (50,000 | ) |
| Payment of deferred financing costs | | | - | | | | (20,000 | ) |
| Advances from related parties | | | 67,600 | | | | 205,672 | |
| Payments on advances from related parties | | | (172,266 | ) | | | (65,165 | ) |
| Proceeds from sale of common stock | | | - | | | | 72,000 | |
| CASH PROVIDED BY FINANCING ACTIVITIES | | | 1,427,334 | | | | 2,777,507 | |
| | | | | | | | | |
| EFFECT OF EXCHANGE RATES ON CASH | | | - | | | | 95,900 | |
| | | | | | | | | |
| NET CHANGE IN CASH AND CASH EQUIVALENTS | | | (298,611 | ) | | | 81,986 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD | | | 299,298 | | | | 217,312 | |
| | | | | | | | | |
| CASH AND CASH EQUIVALENTS AT END OF PERIOD | | $ | 687 | | | $ | 299,298 | |
| | | | | | | | | |
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | | | |
| Cash paid during the period for: | | | | | | | | |
| Income taxes | | $ | - | | | $ | - | |
| Interest | | $ | 164,240 | | | $ | 7,612 | |
| NONCASH INVESTING AND FINANCING ACTIVITIES | | | | | | | | |
| Debt discount due to common stock issued with debt and beneficial conversion feature | | $ | 73,218 | | | $ | 940,129 | |
| Debt discount due to derivative liabilities issued with convertible debt | | $ | 34,765 | | | $ | 162,853 | |
| Derivative liabilities due to warrants issued with Series D Preferred Stock | | $ | 372,344 | | | $ | - | |
| Conversion of accounts payable- related party into related party debt | | $ | - | | | $ | 20,000 | |
| Conversion of accounts payable to debt | | | - | | | | 140,000 | |
| Common stock issued to settle accrued expenses | | $ | 68,056 | | | $ | - | |
| Conversion of convertible debt and accrued interest to equity | | $ | 4,343,364 | | | $ | 119,846 | |
| Interest converted to debt principal | | $ | 25,000 | | | $ | - | |
| Conversion of Series A Preferred Stock to common stock | | $ | 416 | | | $ | - | |
| Fair value of common stock issued as a deposit to Sellers of Zinco do Brasil Mineracao Ltda. | | $ | 210,320 | | | $ | - | |
| Fair value of common stock issued to Sellers of the Mining Company | | $ | - | | | $ | 11,225,000 | |
| Fair value of warrants issued to Sellers of the Mining Company | | $ | - | | | $ | 587,173 | |
See accompanying notes to the consolidated financial statements.
Zinco Do Brasil, Inc.
(Formerly TurkPower Corporation)
Notes to Consolidated Financial Statements
May 31, 2013 and 2012
NOTE 1 – ORGANIZATION AND OPERATIONS
Zinco Do Brasil, Inc. (formerly TurkPower Corporation) was incorporated in the State of Delaware on November 4, 2004 as Global Ink Supply Company and was organized for the purpose of developing e-commerce website to sell ink printer cartridges and toner. On September 28, 2012, an amendment was filed with and approved by the Secretary of State of Delaware to (i) change the name of the Company to Zinco do Brasil, Inc., (ii) effect a reverse split on a 1:15 basis and (iii) increase the number of the Company’s authorized shares of capital stock from 310,000,000 shares to 810,000,000 of which 800,000,000 shares are common stock with a par value $0.0001 per share and 10,000,000 shares are preferred stock with a par value $0.0001 per share. The amended Articles of Incorporation were approved by the State of Delaware effective September 28, 2012.
The reverse split does not affect the number of common shares authorized for issuance. All share and per share information has been retroactively adjusted to reflect the reverse stock split in the financial statements and in the notes to financial statements for all periods presented, to reflect the reverse stock split as if it occurred at beginning of the comparable year.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of its wholly owned US subsidiary, TurkPower USA Corporation and its foreign subsidiary, Turkpower Enerji San. Ve Tic. A.S., of which the Company has a 99.8% controlling interest. All significant intercompany balances and transactions have been eliminated in the consolidation.
Use of estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 as well as the reported amount of revenues and expenses during the reporting period. Actual results could differ from these estimates.
Discontinued Operations
In accordance with Accounting Standards Codification (ASC) 205-20,Presentation of Financial Statements-Discontinued Operations, we reported the results of our Turkey operations as a discontinued operation. This is discussed in Note 4 “Discontinued Operations”.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Property and equipment
Property and equipment are stated at cost, less accumulated depreciation. Expenditures for additions, major renewals and betterments are capitalized and expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is provided on a straight-line basis, over the assets’ estimated useful lives. The estimated useful lives of furniture and equipment are 3 – 5 years. All property and equipment related to the operations in Turkey was written down to zero as of May 31, 2012.
Long-lived assets
Long-lived assets held and used by the Company are reviewed for impairment whenever changes in circumstances or events indicate that the carrying amount of an asset may not be recoverable. For purposes of evaluating the recoverability of long-lived assets, the Company considers various factors, including future cash flows, to determine whether the carrying amount exceeds fair value, and in that case, the asset is written down to fair value. Long-lived assets related to the operations in Turkey were fully impaired as of May 31, 2012 (see Note 4).
Revenue recognition
The Company recognizes revenue where there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the price has been fixed or is determinable and collectability can be reasonably assured.
In instances where the Company has received cash in advance of meeting the Company’s revenue recognition criteria, the Company records such as deferred revenue.
The Company didn’t have revenues during the year ended May 31, 2013. During the year ended May 31, 2012 the Company’s revenues (included in discontinued operations) were principally derived from energy consulting services provided to several customers in Turkey.
Income Taxes
In accordance with ASC 740 - Income Taxes, the provision for income taxes is computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not expected to be realized.
The Company also follows the guidance related to accounting for income tax uncertainties. In accounting for uncertainty in income taxes, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting the more likely than not threshold, the amount recognized in the consolidated financial statements is the largest benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with the relevant tax authority. No liability for unrecognized tax benefits was recorded as of May 31, 2013 and 2012.
Fair value of financial instruments
The carrying value of cash and cash equivalents, accounts payable and accrued expenses, and debt approximate their fair values because of the short-term nature of these instruments. Management believes the Company is not exposed to significant interest or credit risks arising from these financial instruments.
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value maximize the use of observable inputs and minimize the use of unobservable inputs. The Company utilizes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable.
| ● | Level 1 — | Quoted prices in active markets for identical assets or liabilities. These are typically obtained from real-time quotes for transactions in active exchange markets involving identical assets. |
| ● | Level 2 — | Quoted prices for similar assets and liabilities in active markets; quoted prices included for identical or similar assets and liabilities that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets. These are typically obtained from readily-available pricing sources for comparable instruments. |
| ● | Level 3 — | Unobservable inputs, where there is little or no market activity for the asset or liability. These inputs reflect the reporting entity’s own beliefs about the assumptions that market participants would use in pricing the asset or liability, based on the best information available in the circumstances. |
The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of May 31, 2013:
| | | Amount | | | Level 1 | | | Level 2 | | | Level 3 | |
| Embedded conversion derivative liability | | $ | 67,004 | | | $ | - | | | $ | - | | | $ | 67,004 | |
| Warrant derivative liabilities | | | 432,642 | | | | - | | | | - | | | | 432,642 | |
| Total | | $ | 499,646 | | | $ | - | | | $ | - | | | $ | 499,646 | |
The following table presents the derivative financial instruments, the Company’s only financial liabilities measured and recorded at fair value on the Company’s consolidated balance sheets on a recurring basis, and their level within the fair value hierarchy as of May 31, 2012:
| | | Amount | | | Level 1 | | | Level 2 | | | Level 3 | |
| Embedded conversion derivative liability | | $ | 159,000 | | | $ | - | | | $ | - | | | $ | 159,000 | |
| Warrant derivative liabilities | | | 349,819 | | | | - | | | | - | | | | 349,819 | |
| Total | | $ | 508,819 | | | $ | - | | | $ | - | | | $ | 508,819 | |
The following table provides a summary of the changes in fair value, including net transfers in and/or out, of the derivative financial instruments, measured at fair value on a recurring basis using significant unobservable inputs:
| Balance at May 31, 2012 | | $ | 508,819 | |
| Fair value of warrant derivative liabilities at issuance | | | 407,109 | |
| Unrealized derivative gains included in other expense | | | (416,282 | ) |
| Balance at May 31, 2013 | | $ | 499,646 | |
The fair value of the derivative liabilities are calculated at the time of issuance and the Company records a derivative liability for the calculated value. Changes in the fair value of the derivative liabilities are recorded in other income (expense) in the consolidated statements of operations and comprehensive loss.
Beginning December 1, 2012, the Company used the Lattice model to value derivative instruments issued subsequent to November 30, 2012. The change is considered a change in estimate and is applied prospectively. For warrants issued prior to December 1, 2012, the Company continues to use the Black Scholes model.
As of May 31, 2013, there were a total of 421,669 derivative warrants outstanding, of which 146,667 were valued using Black Scholes and 275,002 were valued using the Lattice model.
The following are the assumptions used for derivative instruments valued using the Black Scholes option pricing model:
| | | May 31, | |
| | | 2013 | | | 2012 | |
| Market value of stock on measurement date | | $ | 1.80 | | | $ | 2.40 | |
| Risk-free interest rate | | | 0.04 | % | | | 0.03 – 0.18 | % |
| Dividend yield | | | 0 | % | | | 0 | % |
| Volatility factor | | | 49 – 50 | % | | | 152 – 179 | % |
| Term | | | 0.25 – 0.31 year | | | | 0.06 – 1.25 years | |
The following are the assumptions used for derivative instruments valued using the Lattice model:
| | | Initial Valuations | | | May 31, 2013 | |
| Market value of common stock on measurement date | | | $1.27-$2.05 | | | $ | 1.80 | |
| Adjusted exercise price | | | $1.65-$2.50 | | | | $1.98-$2.50 | |
| Risk free interest rate | | | 0. 36-0.65 | % | | | 0.41-1.05 | % |
| Warrant lives in years | | | 3 | | | | 2.58-2.86 | |
| Expected volatility | | | 162-169 | % | | | 147-161 | % |
| Expected dividend yields | | | 0 | % | | | 0 | % |
| Offering price range | | | $1.49-2.72 | | | | $1.45-2.55 | |
The Company has considered the provisions of ASC 480,Distinguishing Liabilities from Equity, as the conversion feature embedded in each debenture could result in the note principal being converted to a variable number of the Company’s common shares.
Foreign currency
The financial statements of the Company’s subsidiary in Turkey, for which the functional currency is the local currency, Turkish Lira (TRY or TRL), are translated into the reporting currency, U.S. dollars, using the exchange rate at the balance sheet date for all assets and liabilities. The capital accounts are translated at historical exchange rates prevailing at the time of the transactions while income and expenses items are translated at the average exchange rate for the period. Translation adjustments are included in other comprehensive income within stockholders’ deficit.
Gain or losses from foreign currency transactions are recognized in income.
Concentration of credit risk
Cash is maintained in bank accounts which, at times, may exceed insured limits. The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant credit risk on cash.
Net loss per common share
Basic and diluted net loss per common share has been calculated by dividing the net loss available to common stockholders by the basic and diluted weighted average number of common shares outstanding. Common stock equivalents pertaining to the convertible debt, options, warrants and convertible preferred shares were not included in the computation of diluted net loss per common share because the effect would have been anti-dilutive due to the net loss for the years ended May 31, 2013 and 2012.
Stock Based Payments
We account for share-based awards to employees in accordance with ASC 718“Stock Compensation”. Under this guidance, stock compensation expense is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the estimated service period (generally the vesting period) on the straight-line attribute method. Share-based awards to non-employees are accounted for in accordance with ASC 505-50“Equity”, wherein such awards are expensed over the period in which the related services are rendered.
Recently issued accounting pronouncements
Management does not believe that any recently issued, but not yet effective accounting pronouncements, if adopted, would have a material effect on the accompanying consolidated financial statements.
Reclassification
Certain accounts in the prior period were reclassified to conform with the current period financial statements presentation.
NOTE 3 – GOING CONCERN
As shown in the accompanying consolidated financial statements, the Company had a net loss of $8,179,193 for the year ended May 31, 2013 and had a working capital deficit as of May 31, 2013 of $4,931,427. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company intends to raise additional working capital either through debt or equity financing. The consolidated financial statements do not include any adjustments 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.
NOTE 4 – DISCONTINUED OPERATIONS
In November 2011, the Company determined that it would cease all operations in Turkey and sell its Turkish subsidiary, including its investment in the mining company. As a result, the Company has identified the assets and liabilities of the Turkish subsidiary as assets and liabilities of discontinued operations at May 31, 2013 and 2012 and has segregated its operating results and presented them separately as a discontinued operation for all periods presented.
A summarized operating result for discontinued operations is as follows:
| | | Year Ended May 31, | |
| | | 2013 | | | 2012 | |
| Revenues | | $ | - | | | $ | 9,988 | |
| Professional fees, selling, general and administrative expenses | | | - | | | | (1,057,907 | ) |
| Impairment in Investment in Mining Company | | | - | | | | (13,859,231 | ) |
| Total operating expenses | | | - | | | | (14,917,138 | ) |
| Loss from operations | | | - | | | | (14,907,150 | ) |
| Other income (expense) | | | - | | | | | |
| Interest expense, net | | | (316,765 | ) | | | (317,876 | ) |
| Gain on extinguishment of debt | | | - | | | | 115,930 | |
| Foreign currency loss | | | - | | | | (174,609 | ) |
| Total other expense | | | (316,765 | ) | | | (376,555 | ) |
| Loss from discontinued operations | | $ | (316,765 | ) | | $ | (15,283,705 | ) |
The losses from discontinued operations above do not include any income tax effect as the Company was not in a taxable position due to its continued losses and a full valuation allowance.
Summary of liabilities of discontinued operations is as follows:
| | | May 31, 2013 | | | May 31, 2012 | |
| Accounts payable and accrued expenses | | $ | 1,187,212 | | | $ | 1,205,173 | |
| Accrued interest | | | 527,766 | | | | 216,420 | |
| Short-term debt, net | | | 735,329 | | | | 746,454 | |
| Total current liabilities of discontinued operations | | $ | 2,450,307 | | | $ | 2,168,047 | |
Investment in Mining Company, at cost
On April 29, 2010, the Company entered into a nonbinding share transfer and shareholders agreement with Endeks Holding and Avrasya Yapi for the purchase of 50% of their ownership in Exxaro Madencilik Sanayi ve Ticaret A.S. Company (“Exxaro”). Exxaro’s principal asset is an iron ore mine. In May 2010, the Company made an advance payment to the sellers of €1,000,000 ($1,284,673) and the balance was due June 15, 2010 but then extended as a result of a 975,000 TRL ($619,661) payment made to the sellers on June 16, 2010. During May 2011, $660,552 of these deposits were returned by Avrasya Yapi and was used to pay off the Company’s existing line of credit.
On June 30, 2011, the Company entered into a Share Purchase Agreement with Avrasya Yapi Yaturum Hizmetleri A.S. (the “Seller”). The Company agreed to acquire from the Seller 50% of the Seller’s shares in Maksor Madencilik Sanayi Ve Ticaret Anonim Sirketi (previously known as Exxaro Madencilik Sanayi ve Ticaret A.S. prior to its name change on May 17, 2011) for cash, and the issuance of certain TurkPower common shares and warrants. The Seller accepted the €1,000,000 deposit paid in May 2010 as the initial payment and the Company paid the Seller an additional €500,000 ($716,886) during the year ended May 31, 2012.
The Company issued to the shareholders of the Seller 1,666,667 common shares on July 12, 2011, which were valued at $4.80 per share, the closing price on that day for a total value of $8,000,000. On September 16, 2011, the Company issued another 1,000,000 common shares valued at $3.23, the closing price on that day for a total value of $3,225,000.
The Company also issued to the Seller 226,667 warrants to purchase common shares on September 14, 2011 which were valued at $587,173. The warrants were valued using the Black-Scholes option pricing model on the issuance date with the following assumptions: stock price on the measurement date of $3.15; term of 3 years; expected volatility of 171% and discount rate of 0.35%.
The Company reviews its investment in the mining company for impairment on an annual basis, or as events or circumstances might indicate that the carrying value of the investment may not be recoverable. As at May 31, 2012, the Company determined that its investment in the mining company was fully impaired. As a result, the Company recorded an impairment of $13,859,231 on its investment in the mining company, which is included in the loss from discontinued operations.
Short-term debt included in Liabilities of Discontinued Operations
As of May 31, 2013 and 2012, the Company owes $735,329 and $746,454, respectively, to an unrelated party. These amounts are included in liabilities of discontinued operations. The loan is unsecured, bears annual interest at 25.0% and matured on December 15, 2011. While delinquent, the Turkish subsidiary is required to pay 2.5% interest per month on the principal balance to the lender. As of May 31, 2013 and 2012, accrued interest related to this note, included in liabilities of discontinued operations, is $527,766 and $216,420, respectively. The Company recorded interest expense of $316,765 and $317,876 for the years ended May 31, 2013 and 2012. As of May 31, 2013, this loan is in default.
NOTE 5 – DEPOSIT ON ACQUISITION OF ZINCO DO BRASIL MINERACAO LTDA.
On August 14, 2012, the Company agreed with Ouro do Brasil Holdings Ltd. (“OBH”) and IMS Engenharia Mineral Ltda. (“IMS”) for the proposed acquisition of 99.9% of Zinco do Brasil Mineracao Ltda., a company to be formed under the laws of Brazil (“ZBM”), which will be owned by OBH and IMS. Pursuant to the agreement, the Company will acquire 99.9% of ZBM in exchange for (i) 7,166,667common shares to OBH and (ii) 1,075,000 Series C preferred shares to IMS (the “IMS Shares”). The Company also agreed to raise $17 million which will be used to complete the acquisition of the zinc project.
As of the date of this filing, ZBM has not been formed and the transaction has not been completed, although some of the shares have been issued. As of May 31, 2013, 1,074,999 Series C preferred shares and 4,711,714 common shares have been issued. The fair value of OBH shares and IMS shares issued as ofMay 31, 2013of $210,320 has been recorded as a deposit on the acquisition (see Note 7). The fair value of the shares issued were based on the enterprise value done by a valuation expert. In the event that the acquisition is not consummated, IMS shall have the right to rescind the agreement and the obligations of both parties shall be terminated and the contemplated transaction is voided as if the agreement was never entered into.
On February 13, 2013, Zinco, OBH and IMS entered into a modification of the Agreement, dated August 14, 2012, to extend the date by which Zinco is required to raise $6,000,000 or such amount necessary to satisfy payment to Vale S.A. to complete the acquisition of the zinc mine until June 14, 2013.
On June 14, 2013, the Registrant, OBH and IMS entered into a modification of the Binding Agreement dated August 14, 2012, as amended on February 13, 2013, to extend the date by which the Registrant is required to raise $6,000,000 or such amount necessary to satisfy payment to Vale S.A. to complete the acquisition of the zinc mine, until September 14, 2013.
NOTE 6 – CONVERTIBLE DEBT
Six-Month Secured Convertible Debenture issued with warrants
On August 22, 2011, the Company issued a $250,000 secured convertible debenture to a third party together with 75,758 common shares and warrants to purchase 73,333 shares of common stock with a term of one (1) year and an exercise price $3.75 per share. The secured debenture was due on the earlier of 1) six months (February 22, 2012) or 2) upon the Company’s receipt of $500,000 of debt or equity proceeds and, together with any unpaid interest, are convertible into common shares at a conversion rate of $3.75 per share. On February 29, 2012, the Company and the noteholder agreed to extend the maturity date of the secured debenture to June 22, 2012 in exchange for 216,684 common shares. Further, the 73,333 warrants issued in connection with the secured debenture were modified by (i) extending its expiration date for another twelve months to September 1, 2013 (ii) lowering the exercise price from $3.75 to $1.91 per warrant share and (iii) increasing the number of common shares exercisable from 73,333 shares to 146,667 shares.
The Company evaluated the modification and determined that it was substantial and was therefore accounted as an extinguishment of debt. Consequently, the fair value of the common shares of $549,294, the fair value of the additional warrants and the incremental fair value of the modified warrants of $202,549 was recorded as loss on debt extinguishment during the year ended May 31, 2012. Simultaneously, the Holder converted $6,186 of the interest owed into 1,650 common shares.
On July 21, 2012 the Company entered into an agreement with the holder to extend the maturity date of the secured debenture to November 1, 2012 and to convert $25,000 of accrued interest to principal. Under the terms of the new agreement, the conversion price of the debt was changed from $3.75 per share to $1.50 per share. Additionally, the 146,667 1-year warrants issued in connection with the secured debenture were modified, lowering the exercise price from $1.91 to $1.50 per share and the holder was issued an additional 533,333 shares of common stock, valued at $623,200.
On January 22, 2013, the Company entered into an agreement with the holder to further extend the maturity date of the secured debenture to May 1, 2013 and to pay $175,000 of principal and all accrued interest on or before February 28, 2013. In addition, the company agreed to issue 266,667 common stock shares valued at $800,000.
The Company evaluated the modification and determined that it was substantial and was therefore accounted for as an extinguishment of debt. Consequently, the fair value of the 800,000 common shares of $1,423,200 and the incremental fair value of the modified warrants of $8,276 was recorded as loss on debt extinguishment.
As of May 31, 2013, the outstanding balance on the debenture amounted to $275,000 and the debenture is currently in default.
One Year Term Debentures
Fiscal year 2013
During the year ended May 31, 2013, the Company borrowed $32,000 by issuing a convertible debenture to a related party together with 2,133 common shares. The convertible debenture bears annual interest at 18%, matures in one year and, together with any unpaid interest is convertible into common shares at a conversion rate of $3.75 per share. The relative fair value of the shares at the time of issuance was $1,953 and was recorded as a debt discount and a corresponding increase in equity. The discount is amortized to interest expense over the term of the debenture using the effective interest method.
The convertible debenture was analyzed for a beneficial conversion feature at which time it was concluded that no beneficial conversion feature exists. The Company also analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply to these instruments.
Fiscal year 2012
On various dates from June 1, 2011 to May 31, 2012, the Company borrowed $2,385,000 by issuing convertible debentures to third parties together with 159,000 common shares. The convertible debentures bear annual interest at 18%, mature in one year and, together with any unpaid interest, are convertible into common shares at a conversion rate of $3.75 per share. The relative fair value of the 159,000 common shares at the time of issuance was $443,248 and was recorded as a debt discount with a corresponding increase in equity. The discount is amortized to interest expense over the terms of the debentures using the effective interest method.
The Company also issued $160,000 of the convertible notes (of which $20,000 was related party) along with 10,667 common shares for services and recorded stock compensation expense of $237,750 based on the fair value of the common stock into which it could be converted.
The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed for certain convertible debentures. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $409,734. This amount was recorded as a debt discount and is being amortized to interest expense over the terms of the debentures.
The Company analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply to these instruments.
Fiscal year 2011
On various dates from March 7, 2011 to May 31, 2011, the Company issued convertible debentures totaling $1,018,159 to third party and related party investors together with 67,877 common shares ($143,159 of these convertible debentures were issued to a related party, of which $50,000 was paid on November 3, 2011). The convertible debentures bear annual interest at 18%, mature in one year and, together with any unpaid interest, are convertible into common shares at a conversion rate of $3.75 per share. The relative fair value of the 67,877 common shares at the time of issuance was $255,814 and was recorded as a debt discount with a corresponding increase in equity. The discount is amortized to interest expense over the terms of the debentures using the effective interest method.
The convertible debentures were analyzed for a beneficial conversion feature at which time it was concluded that a beneficial conversion feature existed for all of the convertible debentures. The beneficial conversion feature was measured using the commitment-date stock price and was determined to be $509,114. This amount was recorded as a debt discount and is being amortized to interest expense over the terms of the debentures.
The Company analyzed the convertible debentures for derivative accounting consideration and determined that derivative accounting does not apply to these instruments
On January 6, 2012, an investor converted $113,660 of convertible debenture and accrued interest into 30,059 common shares. The unamortized discount of $38,483 was expensed in the current period as interest expense.
During the year ended May 31, 2012, three convertible debentures were modified to extend their respective maturity dates and 26,667 shares were issued to the respective holders as consideration for the extension. The Company evaluated the modification and determined that it was substantial and was therefore accounted as an extinguishment of debt. Consequently, the fair value of the common shares of $75,750 was recorded as loss on debt extinguishment during the year ended May 31, 2012.
During the year ended May 31, 2012, the Company made principal payments of $50,000 on the above convertible debentures.
Conversions
During the year ended May 31, 2013 the Company converted $ 2,943,159 of convertible debt and accrued interest of $907,148 into 2,566,870 common shares. In order to induce conversion, the conversion price on these debentures was modified from $3.75 per share to $1.50 per share. The Company accounted for the conversion as induced conversion under the guidance of FASB ASC 470-20. Consequently, the Company recognized a debt conversion expense of $2,195,830 which is equivalent to the fair value of the incremental shares issued as a result of the reduction in the conversion price.
Debt Modification
On May 3, 2013 the Company entered into an agreement with a debt-holder to extend the maturity date of several debentures totaling to $200,000 with original maturity dates ranging from December 22, 2010 through March 25, 2012 to April 26, 2014 and to change the annual interest rate from 18% to 20%. As a result of this extension, the holder was issued 15,000 common shares valued at $30,300. Likewise, under the same agreement, a portion of a $650,000 debenture amounting to $350,000 and the unpaid interest of $143,057 was converted to 328,704 common shares using a conversion price of $1.50 per share. The payment terms for the balance of $300,000 was amended as follows:
| a) | $100,000 upon execution of the agreement |
| b) | $100,000 upon receipt by the Company of investments amounting to$500,000 or greater |
| c) | $100,000 upon receipt by the Comopany of additional investments amounting to $500,000 or more |
Likewise, the annual interest rate of 18% was increased to 20%. The first principal payment of $100,000 was made in May 2013.
The Company evaluated the modification and determined that it was substantial and was therefore accounted for as an extinguishment of debt. Consequently, the fair value of the 15,000 common shares of $30,300 and excess of the shares issued against the carrying value of the debt of $170,925 was recorded as loss on debt extinguishment.
As of May 31, 2013, the balance of all convertible debentures was $1,107,000 (including related party debentures totaling $32,000) which includes convertible debentures that are currently in default and subjected to a default interest of 20% amounting to $707,000.
180-Day Convertible Promissory Notes
During the year ended May 31, 2012, the Company issued four 180-day convertible promissory Notes (“180-day notes) to third party investors for $150,000, with maturity dates ranging from August 20, 2013 through September 7, 2013. The 180-day notes are convertible into common shares at the conversion price of $1.50 per share, carry interest rates of 18% per annum and a 10% debt discount $15,000 due on maturity date. In conjunction with the 180-day notes, the Company also issued a total of 25,002 warrants with a fair value of $34,765 on the issuance date. The warrants were determined to be a derivative due to the reset provision in their exercise prices and the related fair value was recognized as a debt discount with a corresponding credit to derivative liability.
The 180-day notes were analyzed for a beneficial conversion feature and concluded that beneficial conversion feature exists amounting to $53,265.
The total of the original issue discount of $15,000, the warrant fair value of $34,765, and beneficial conversion feature of $53,265 were recognized as a debt discount and amortized over the term of the notes.
60-Day Promissory Notes
During the year ended May 31, 2013, the Company issued two 60-day promissory notes (“60-day notes”) to third party investors for $30,000. The 60-day notes matured on April 5, 2013, carry interest rate of 8% per annum and a 10% debt discount due on maturity date. The notes were paid by the Company prior to the maturity date and the discount was fully amortized on the date of payment.
For the years ended May 31, 2013 and 2012, debt discount amortization recorded to interest, for the convertible debentures, 180-day notes and 60-day notes, amounted to $324,054 and $1,539,456, respectively.
NOTE 7 – STOCKHOLDERS’ EQUITY
During the year ended May 31, 2013, the Company designated 1,000 shares of its preferred stock as Series B Convertible Preferred Stock with a par value of $0.0001 per share, 1,100,000 of its preferred stock as Series C Convertible Preferred Stock with a par value of $0.001 per share and 1,200,000 of its preferred stock as Series D Convertible Preferred with a par value of $0.001.
The Series B and Series C Convertible Preferred Stock are convertible into 6,667 and 7 common shares, respectively.
The Series D Convertible Preferred Stock is convertible into 7 common shares and include 12% cumulative annual dividend payable semiannually on November 30 and May 31. The accrued dividend is also convertible into common shares.
The Company had the following equity transactions during the year ended May 31, 2013:
| · | In August 2012, the Company converted 240 Series A preferred shares into 4,160,000 common shares. |
| · | Convertible debentures totaling $3,293,159 and accrued interest of $1,050,205 were converted into 2,895,574 common shares (see Note 6). |
| · | 800,000 common shares and warrants with a fair value of $1,431,476 were issued in connection with the modification of debt (see Note 6). |
| · | 15,000 common shares with a fair value of $30,300 were issued to an unrelated party in connection with the modification of several convertible debentures (see Note 6). |
| · | 2,133 common shares with a fair value of $1,953 were issued to a related party in connection with the issuance of a convertible debenture for $32,000 (see Note 6). |
| · | 10,000 common shares with a fair value of $33,000 were issued to a lender as consideration for the waiver in the default of his respective convertible debentures |
| · | 859,022 common shares with a fair value of $1,248,270 were issued for services |
| · | 60,379 common shares with a fair value of $68,056 were issued as settlement of accounts payable and accrued director’s fees |
| · | 1,074,999 Series C Convertible Preferred Stock with a fair value of $137,587 and 4,711,714 common shares with a fair value of $72,733 were issued as a deposit on the acquisition of ZBM. |
| · | The Company received subscriptions in the aggregate of $1,500,000 for 150,000 shares of the Company’s Series D Convertible Preferred Stock plus warrants to purchase an additional 250,000 common shares at an exercise price of $2.25 per share and a term of three years. As consideration for acquiring these subscriptions, the Company paid commissions of $50,000 which have been deducted from the proceeds on these subscriptions |
| · | The Company converted 240 preferred shares to 4,160,000 common shares. |
| · | The Company received $72,000 from the sale of 180,000 common shares, of which 133,333 and 46,667 were issued during the years ended May 31, 2012 and 2011, respectively. |
| · | 74,000 fully vested common shares and 240 Series A Convertible Preferred Stock were issued to consultants and an employee for services provided to the Company and recorded the stock-based compensation of $11,598,657 which is equivalent to the fair value of the shares at the date of grant. |
NOTE 8– STOCK OPTIONS AND WARRANTS
Stock option activity for year ended May 31, 2013 is presented in the table below:
| | | Number of
Shares | | | Weighted-
average
Exercise
Price | | | Weighted-
average
Remaining
Contractual
Term (years) | | | Aggregate
Intrinsic
Value | |
| Outstanding at May 31, 2012 | | | 1,177,778 | | | $ | 5.25 | | | | 6.31 | | | $ | - | |
| Granted | | | - | | | $ | - | | | | - | | | $ | - | |
| Forfeited | | | (348,333 | ) | | $ | 5.25 | | | | - | | | $ | - | |
| Outstanding at May 31, 2013 | | | 829,445 | | | $ | 3.82 | | | | 4.16 | | | $ | - | |
| Exercisable at May 31, 2013 | | | 462,778 | | | $ | 5.25 | | | | 0.91 | | | $ | - | |
As of May 31, 2013, there was approximately $1,200,180 of total unrecognized compensation cost related to non-vested stock options which is expected to be substantially recognized when certain performance conditions are met or when there is a change of control.
Warrants
Warrant activity is presented in the table below:
| | | Number of
Shares | | | Weighted-
average
Exercise
Price | | | Weighted-
average
Remaining
Contractual
Term (years) | | | Aggregate
Intrinsic
Value | |
| Outstanding at May 31, 2012 | | | 373,333 | | | $ | 3.15 | | | | 1.88 | | | $ | - | |
| Granted | | | 385,002 | | | $ | 2.57 | | | | - | | | $ | - | |
| Outstanding at May 31, 2013 | | | 758,335 | | | $ | 3.16 | | | | 1.84 | | | $ | - | |
| Exercisable at May 31, 2013 | | | 733,335 | | | $ | 3.09 | | | | 1.82 | | | $ | - | |
NOTE 9 - RELATED PARTY TRANSACTIONS
The Company received non-interest bearing advances from shareholders totaling $67,600 and made repayments of $172,266 during the year ended May 31, 2013. As of May 31, 2013, amounts due to these shareholders totaled $35,841.
During the year ended May 31, 2013, the Company paid expenses totaling $666,091 on behalf of their CEO and these costs were included in selling, general and administrative expense.
NOTE 10 – INCOME TAXES
At May 31, 2013 and 2012, the Company had net operating loss carry–forwards for U.S. Federal income tax purposes of approximately $32,000,000 and $23,000,000, respectively that may be offset against future taxable income through 2032. Availability of loss usage is subject to change of ownership limitations under Internal Revenue Code 382. No tax benefit has been recognized with respect to these net operating loss carry-forwards in the accompanying financial statements because the Company believes that the realization of the Company’s net deferred tax assets as of May 31, 2013 and 2012 of approximately $10,850,000 and $7,800,000, respectively, was not considered more likely than not and accordingly, the potential tax benefits of the net loss carry-forwards are fully offset by a valuation allowance.
The Company recognizes interest and/or penalties related to income tax matters in income tax expense. The Company did not have any uncertain income tax positions or accrued interest or penalties included in the consolidated balance sheets at May 31, 2013 and 2012, and did not recognize any interest and/or penalties in the consolidated statements of operations during the years ended May 31, 2013 and 2012.
Deferred tax assets consist of the tax effect of NOL carry-forwards. The Company has provided a full valuation allowance on the deferred tax assets because of the uncertainty regarding its realizability.
NOTE 11 – COMMITMENT AND CONTINGENCIES
On December 26, 2011, the Company commenced a lawsuit against Nalan Oral and Seluck Oral, the shareholders of Avrasya Yapı Yatırım Hizmetleri A.Ş., in the United States District Court for the Southern District of New York alleging the defendants breached the Mine Purchase Agreement and seeking to cancel the 2,666,667 shares of Common Stock and 226,667 warrants issued to the defendants in connection with the Mine Purchase Agreement. The Company is also seeking damages of $6,000,000 from the defendants for breach of contract.
On October 2, 2012, the Company was served with a Summons and Notice of Motion for Summary Judgment in an action entitledTurigay Affiliates Corp. v. TurkPower Corporation, Index No. 653415/2012, Supreme Court, New York County. The Plaintiff is seeking repayment of amounts loaned to the Company’s Turkish subsidiary. The Company has opposed the plaintiff’s motion and asserted a number of defenses including fraud and the forgery of the signatures of certain of the Company’s officers. At a hearing on May 8, 2013, the court granted the Plaintiff’s Motion for Summary Judgment in lieu of complaint for repayment of €450,000. A judgment has not yet been entered in this matter.
The liability related to this loan is included under Liabilities of discontinued operation in the consolidated balance sheets.
Except as disclosed above, the Company is not a party to any other material pending legal proceedings nor is the Company aware of any threatened or contemplated proceeding by any governmental authority against the Company.
NOTE 12 - SUBSEQUENT EVENTS
In June 2013, the Company appointed Daniel J. Kunz as its Executive Chairman of the Board of Directors and, effective September 1, 2013, its Chief Executive Officer. Also on June 17, 2013, Ryan E. Hart was appointed to serve as Vice Chairman of the Board of Directors. Mr. Hart will continue to serve as Chief Executive Officer until September 1, 2013. As compensation for these roles, the Company agreed to compensate Mr. Kunz in the amount of $30,000 per month, 1,000,000 shares of common stock, par value $0.0001 per share (the “Common Stock”) which vest after three years and warrants to purchase another 1,000,000 shares of Common Stock at an exercise price of $1.72 per share equal to the closing price as of June 17, 2013.
In June 2013, the Company issued a 60-day promissory note (“60-day note”) to a third party investor for $20,000. The 60-day note matured on August 6, 2013, carries interest at a rate of 8% per annum and a 10% debt discount due on maturity date. This note is currently in default.
In June 2013, the Company accepted subscriptions in the aggregate of $200,000 for 20,000 shares of the Company’s Series D Convertible Preferred Stock plus warrants to purchase an additional 33,333 common shares, at an exercise price of $2.25 per share, which expire in three (3) years.
In July 2013, the Company accepted subscriptions in the aggregate of $250,000 for 25,000 shares of the Company’s Series D Convertible Preferred Stock plus warrants to purchase an additional 41,667 common shares, at an exercise price of $2.25 per share, which expire in three (3) years.
SIGNATURES
Pursuant to the requirements of the Section 13 or 15(d) of the Exchange Act, Zinco Do Brasil, Inc. has duly caused this report to be signed on its behalf by the undersigned persons, and in the capacities so indicated on September 13, 2013.
| | | ZINCO DO BRASIL, INC. |
| | | |
| | | By: | /s/ Daniel J. Kunz |
| | | | Name: Daniel J. Kunz |
| | | | Title: Chief Executive Officer |
| | | | (PrincipalExecutive Officer) |
| | | | |
| | | By: | /s/ Ryan Hart |
| | | | Name: Ryan Hart |
| | | | Title: Chief Financial Officer |
| | | | (PrincipalFinancial Officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated below.
| Signature | | Title | | Date |
| | | | | |
| /s/ Daniel J. Kunz | | Chief Executive Officer, Executive Chairman | | September 13, 2013 |
| | | | | |
| /s/ Ryan E. Hart | | Chief Executive Officer and Chief Financial Officer; Vice Chairman | | September 13, 2013 |
| Ryan E. Hart |
| |
| /s/ Ahmet Calik | | Director | | September 13, 2013 |
| Ahmet Calik | | | | |
| | | | | |
| /s/ Juvenil Felix | | Director | | September 13, 2013 |
| Juvenil Felix | | | | |
| | | | | |
| /s/ Mustafa Askay | | Director | | September 13, 2013 |
| Mustafa Askay | | | | |
| | | | | |
| /s/ Adriano Epeschit | | Director; Chief Operating Officer | | September 13, 2013 |
| Adriano Epeschit | | | | |
| | | | | |
| /s/ Jose Mendo Mizael de Souza | | Director | | September 13, 2013 |
| Jose Mendo Mizael de Souza | | | | |
| | | | | |
| /s/ Edward Dowling | | Director | | September 13, 2013 |
| Edward Dowling | | | | |
