UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2010
OR
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
COMMISSION FILE NUMBER 333-142076
IX ENERGY HOLDINGS, INC.
(Exact Name of small business issuer as specified in its charter)
Delaware | 36-4620445 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
711 Third Avenue, 12th floor, New York, New York 10017
(Address of principal executive offices) (Zip Code)
Issuer’s telephone Number: (212) 682-5068
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 preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | Accelerated filer | |
Non-accelerated filer | Smaller reporting company x | |
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes No x
As of May 20, 2010 the issuer had 70,443,143 outstanding shares of Common Stock.
IX Energy Holdings, Inc. and Subsidiaries
Form 10-Q
March 31, 2010
TABLE OF CONTENTS
Page | ||
PART I | FINANCIAL INFORMATION | |
Item 1. | Financial Statements | |
Condensed Consolidated Balance Sheets as of March 31, 2010 (unaudited) and December 31, 2009 (audited) | 1 | |
Condensed Consolidated Statements of Operations for the three months ended March 31, 2010 and 2009 (unaudited) | 2 | |
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited) | 3 | |
Notes to the Condensed Consolidated Financials (unaudited) | 4 | |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 15 |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk | 18 |
Item 4T | Controls and Procedures | 18 |
PART II | OTHER INFORMATION | |
Item 1. | Legal Proceedings | 19 |
Item 1A. | Risk Factors | 19 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 19 |
Item 3. | Defaults Upon Senior Securities | 19 |
Item 4. | (Removed and Reserved) | 19 |
Item 5. | Other Information | 19 |
Item 6. | Exhibits | 20 |
Signatures | 20 |
PART I.
ITEM 1. FINANCIAL STATEMENTS
IX Energy Holdings, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
March 31, 2010 | December 31, 2009 | |||||||
(unaudited) | (audited) | |||||||
Assets | ||||||||
Assets | ||||||||
Cash | $ | 281,902 | $ | 108,006 | ||||
Accounts receivable | - | 8,000 | ||||||
Other receivables | 143,610 | 623,000 | ||||||
Prepaid expenses | 15,572 | 49,896 | ||||||
Total Current Assets | 441,084 | 788,902 | ||||||
Property and equipment | 18,856 | 173,614 | ||||||
Total Assets | $ | 459,940 | $ | 962,516 | ||||
Liabilities and Stockholders’ Deficit | ||||||||
Liabilities | ||||||||
Accounts payable and accrued expenses | $ | 428,274 | $ | 387,444 | ||||
Notes payable - related party | 350,000 | 350,000 | ||||||
Notes payable - other | 350,000 | 350,000 | ||||||
Accrued interest payable - related party | 163,669 | 142,957 | ||||||
Accrued interest payable - other | 30,412 | 26,097 | ||||||
Derivative liability - warrants | 98,786 | 261,745 | ||||||
Registration rights liability | 347,500 | 347,500 | ||||||
Total Current Liabilities | 1,768,641 | 1,865,743 | ||||||
Stockholders’ Deficit | ||||||||
Preferred Stock, $0.0001 par value, 10,000,000 shares authorized, none issued and outstanding | - | - | ||||||
Common stock, $0.0001 par value, 500,000,000 shares authorized, 70,443,143 and 66,193,143 shares issued and outstanding | 7,044 | 6,620 | ||||||
Additional paid in capital | 10,634,546 | 10,487,819 | ||||||
Accumulated deficit | (11,950,291 | ) | (11,397,666 | ) | ||||
Total Stockholders’ Equity Deficit | (1,308,701 | ) | (903,227 | ) | ||||
Total Liabilities and Stockholders’ Deficit | $ | 459,940 | $ | 962,516 |
See accompanying notes to
unaudited condensed consolidated financial statements
1
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
Revenues - solar panels | $ | - | $ | 1,796,238 | ||||
Revenues - construction contracts | - | 43,658 | ||||||
Total revenues | - | 1,839,896 | ||||||
Cost of revenues - solar panels | - | 1,447,579 | ||||||
Cost of revenues - construction contracts | - | 35,075 | ||||||
Total cost of revenues | - | 1,482,654 | ||||||
Gross profit | - | 357,242 | ||||||
General and administrative expenses | 567,564 | 5,201,426 | ||||||
Loss from operations | (567,564 | ) | (4,844,184 | ) | ||||
Other income (expense) | ||||||||
Other income | 27,102 | - | ||||||
Interest income | 19 | 17,829 | ||||||
Interest expense | (25,142 | ) | (32,924 | ) | ||||
Loss on impairment | (150,000 | ) | - | |||||
Change in fair value of derivative liability - warrants | 162,960 | - | ||||||
Total other income (expense) | 14,939 | (15,095 | ) | |||||
Net loss | $ | (552,625 | ) | $ | (4,859,279 | ) | ||
Net Loss per Common Share - Basic and Diluted | $ | (0.01 | ) | $ | (0.08 | ) | ||
Weighted Average Number of Common Shares Outstanding During the Period - Basic and Diluted | 69,268,144 | 61,075,392 |
See accompanying notes to unaudited condensed consolidated financial statements
2
IX Energy Holdings, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended | ||||||||
March 31, 2010 | March 31, 2009 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (552,625 | ) | $ | (4,859,279 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Bad debt expense | 8,000 | - | ||||||
Depreciation | 4,758 | 2,426 | ||||||
Amortization of debt issue costs | - | 1,988 | ||||||
Loss on impairment | 150,000 | - | ||||||
Change in fair value of derivative liability- warrants | (162,960 | ) | - | |||||
Share based payments | 147,151 | 4,501,421 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) Decrease in: | ||||||||
Accounts receivable | 479,390 | - | ||||||
Cost & estimated earnings in excess of billings on uncompleted contracts | - | (8,659 | ) | |||||
Prepaid expenses and deposits | 34,325 | (140,484 | ) | |||||
Increase (Decrease) in: | ||||||||
Accounts payable and accrued expenses | 40,830 | (128,794 | ) | |||||
Accrued interest payable – related party | 20,712 | 24,771 | ||||||
Accrued interest payable – other | 4,315 | 6,165 | ||||||
Deferred revenue | - | (1,796,238 | ) | |||||
Net Cash Provided by (Used in) Operating Activities | 173,896 | (2,396,683 | ) | |||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of property and equipment | - | (260,547 | ) | |||||
Net Cash Used in Investing Activities | - | (260,547 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Repayment of notes payable - related party | - | (250,000 | ) | |||||
Proceeds from common stock issued for cash in private placement | - | 725,000 | ||||||
Cash paid as direct offering costs | - | (201,775 | ) | |||||
Net Cash Provided By Financing Activities | - | 273,225 | ||||||
Net Increase (Decrease) in Cash | 173,896 | (2,384,005 | ) | |||||
Cash - Beginning of Period | 108,006 | 4,736,812 | ||||||
Cash - End of Period | $ | 281,902 | $ | 2,352,807 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Period for: | ||||||||
Income taxes | $ | - | $ | - | ||||
Interest | $ | - | $ | - |
See accompanying notes to unaudited condensed consolidated financial statements
3
IX Energy Holdings, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
March 31, 2010
(Unaudited)
Note 1 - Nature of Operations, Basis of Presentation and Summary of Significant Accounting Policies
Nature of Operations
IX Energy Holdings, Inc. (“IX Energy” or the “Company”) was incorporated on March 3, 2006 under the laws of the State of Delaware. The Company is a renewable energy company primarily focused on solar power project development and integration. In an effort to become a vertically integrated solar products and services company that designs, markets and installs its own solar power systems, the Company plans to design solar modules that will be marketed primarily to federal military and civilian agencies.
On March 25, 2009, the Company incorporated IX Geo, LLC (“IX Geo”) under the laws of Delaware as a wholly owned subsidiary of IX Energy. This entity is inactive.
On March 25, 2009, the Company formed IX Legatus6, LLC under the laws of Delaware as a wholly owned subsidiary of IX Energy. On July 21, 2009, the Company changed the name of IX Legatus6, LLC to IX Energy Solutions, LLC (“IX Solutions”). This entity is inactive.
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation.
The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K, which contains the audited financial statements and notes thereto, together with the Management’s Discussion and Analysis, for the years ended December 31, 2009 and 2008. The interim results for the period ended March 31, 2010 are not necessarily indicative of results for the full fiscal year.
Going Concern
As reflected in the accompanying condensed consolidated financial statements, the Company has a net loss of $552,625 and net cash provided by operations of $173,896 for the three months ended March 31, 2010; and had a working capital deficit of $1,327,557 and a stockholders’ deficit of $1,308,701 at March 31, 2010.
The Company believes its current available cash, along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. The Company may require additional funding to finance the growth of its current and expected future operations, as well as to achieve its strategic objectives. The Company believes that the further implementation of its business plan may provide future positive cash flows. The financial statements of the Company do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classifications of liabilities that might be necessary should the Company be unable to continue as a going concern.
4
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company is also trying to restructure its outstanding debt.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.
Risks and Uncertainties
The Company operates in an industry that is subject to intense competition and rapid technological change, and is in a state of fluctuation as a result of the credit crisis occurring in the United States. The Company's operations are subject to significant risk and uncertainties including financial, operational, technological, and regulatory risks including the potential risk of business failure.
Long Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The Company recorded loss on impairment of $150,000 and $0, during the three months ended March 31, 2010 and 2009, respectively.
Basic and Diluted Loss per Share
Basic earnings per share (“EPS”) is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period, excluding the effects of any potentially dilutive securities. Diluted EPS gives effect to all dilutive potential of shares of common stock outstanding during the period including stock options or warrants, using the treasury stock method (by using the average stock price for the period to determine the number of shares assumed to be purchased from the exercise of stock options or warrants), and convertible debt or convertible preferred stock, using the if-converted method. Diluted EPS excludes all dilutive potential of shares of common stock if their effect is anti-dilutive.
5
The computation of basic and diluted loss per share for three months ended March 31, 2010 and 2009 excludes the following potentially dilutive securities because their inclusion would be anti-dilutive:
2010 | 2009 | |||||||
Stock options | 2,994,132 | 1,033,066 | ||||||
Stock warrants | 9,377,500 | 9,377,500 | ||||||
Total common stock equivalents | 12,371,632 | 10,410,566 |
We review any common stock purchase warrants and other freestanding derivative financial instruments at each balance sheet date and classify them on our balance sheet as:
1. | Equity if they (i) require physical settlement or net-share settlement, or (ii) gives us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement), or as |
2. | Assets or liabilities if they (i) require net-cash settlement (including a requirement to net cash settle the contract if an event occurs and if that event is outside our control), or (ii) give the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). |
We assess classification of our common stock purchase warrants and other freestanding derivatives at each reporting date to determine whether a change in classification between assets and liabilities is required.
In determining the appropriate fair value, the Company uses the Black-Scholes option-pricing model. Once determined, derivative liabilities are adjusted to reflect fair value at each reporting period end, with any increase or decrease in the fair value being recorded in results of operations as an adjustment to fair value of derivatives. In addition, the fair value of freestanding derivative instruments such as warrants, are also valued using the Black-Scholes option-pricing model.
Finally, the Company has applied the related guidance when determining the existence of liquidated damage provisions. At March 31, 2010 and December 31, 2009, the Company had recorded a liquidated damages provision due to the failure to file and have declared effective a registration statement.
Share-Based Payments
Generally, all forms of share-based payments, including stock option grants, restricted stock grants and stock appreciation rights are measured at their fair value on the awards’ grant date, based on the estimated number of awards that are ultimately expected to vest. Share-based compensation awards issued to non-employees for services rendered are recorded at either the fair value of the services rendered or the fair value of the share-based payment, whichever is more readily determinable. The expense resulting from share-based payments are recorded in cost of goods sold or general and administrative expense in the consolidated statement of operations, depending on the nature of the services provided.
Reclassifications
Certain amounts have been reclassified to conform to the current period presentation, such reclassifications had no effect on the reported results of operations or cash flows.
6
Recent Accounting Pronouncements
In January 2010, the Financial Accounting Standards Board ("FASB") issued updated guidance to amend the disclosure requirements related to recurring and nonrecurring fair value measurements. This update requires new disclosures on significant transfers of assets and liabilities between Level 1 and Level 2 of the fair value hierarchy (including the reasons for these transfers) and the reasons for any transfers in or out of Level 3. This update also requires a reconciliation of recurring Level 3 measurements about purchases, sales, issuances and settlements on a gross basis. In addition to these new disclosure requirements, this update clarifies certain existing disclosure requirements. For example, this update clarifies that reporting entities are required to provide fair value measurement disclosures for each class of assets and liabilities rather than each major category of assets and liabilities. This update also clarifies the requirement for entities to disclose information about both the valuation techniques and inputs used in estimating Level 2 and Level 3 fair value measurements. This update will become effective for the Company with the interim and annual reporting period beginning January 1, 2010, except for the requirement to provide the Level 3 activity of purchases, sales, issuances, and settlements on a gross basis, which will become effective for the Company with the interim and annual reporting period beginning January 1, 2011. The Company will not be required to provide the amended disclosures for any previous periods presented for comparative purposes. Other than requiring additional disclosures, adoption of this update will not have a material effect on the Company's consolidated financial statements.
In April 2010, FASB issued ASU 2010-17, Revenue Recognition—Milestone Method (Topic 605): Milestone Method of Revenue Recognition (“ASU 2010-17”). ASU 2010-17 provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research or development transactions. ASU 2010-17 is effective on a prospective basis for milestones achieved in fiscal years, and interim periods within those years, beginning on or after June 15, 2010. The Company is currently evaluating the impact of the provisions of ASU 2010-17 on its consolidated results of operations, financial position or liquidity.
Note 2 - Fair Value
We have categorized our assets and liabilities recorded at fair value based upon the fair value hierarchy specified by GAAP.
The levels of fair value hierarchy are as follows:
· | Level 1 inputs utilize unadjusted quoted prices in active markets for identical assets or liabilities that we have the ability to access; |
· | Level 2 inputs utilize other-than-quoted prices that are observable, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs such as interest rates and yield curves that are observable at commonly quoted intervals; and |
· | Level 3 inputs are unobservable and are typically based on our own assumptions, including situations where there is little, if any, market activity. |
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, we categorize such financial asset or liability based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability.
7
Both observable and unobservable inputs may be used to determine the fair value of positions that are classified within the Level 3 category. As a result, the unrealized gains and losses for assets within the Level 3 category presented in the tables below may include changes in fair value that were attributable to both observable and unobservable inputs.
The following are the major categories of assets and liabilities measured at fair value on a recurring basis during the three months ended March 31, 2010 and year ended December 31, 2009, using quoted prices in active markets for identical assets and liabilities (Level 1); significant other observable inputs (Level 2); and significant unobservable inputs (Level 3):
March 31, 2010 | December 31, 2009 | |||||||
Level 1: Quoted prices in active markets for identical assets | $ | - | $ | - | ||||
Level 2: Significant Other Observable Inputs (Derivative Liabilities) | 98,786 | 261,745 | ||||||
Level 3: Significant Unobservable Inputs | - | - | ||||||
$ | 98,786 | $ | 261,745 |
On a recurring basis, the Company utilizes the Black Scholes pricing model to value certain derivative liability warrants. The inputs into the model on a recurring basis include the exercise price of the Company’s common stock, the market price of the Company’s common stock, expected volatility of the Company’s common stock, expected life of the warrants, and the risk-free interest rate.
Note 3 – Property and Equipment
At March 31, 2010 and December 31, 2009, property and equipment consists of the following:
March 31, 2010 | December 31, 2009 | |||||||
Equipment | $ | - | $ | 150,000 | ||||
Computers and office equipment | 29,023 | 29,023 | ||||||
Total | 29,023 | 179,023 | ||||||
Less: accumulated depreciation | (10,167 | ) | (5,409 | ) | ||||
Property and equipment, net | $ | 18,856 | $ | 173,614 |
Estimated useful lives of property and equipment are as follows:
Asset | Est. useful life | |
Equipment | 20 years | |
Computers and office equipment | 3 years |
In connection with the sale of equipment in December 2009, the Company retained approximately $150,000 of equipment related materials. During the three months ended March 31, 2010, the Company determined that these materials have no future economic benefit due to projected losses, and expected future negative cash flows from operations, and recorded and impairment loss for $150,000.
8
Note 4 - Notes Payable
In July 2008, the Company entered into eight promissory note agreements for aggregate principal of $500,000 with various third parties. The notes bear interest at 5%, and the principal and interest is due and payable on the earlier of July 1, 2009 or when the Company completes the sale of any debt securities, common stock or common stock equivalents in a single transaction or series of related transactions resulting in gross proceeds of $3,500,000. In October 2009, the Company paid $150,000 of principal and $9,082 in accrued interest related to these notes. The Company is currently negotiating the payment terms with the other borrowers, and the $350,000 of principal is classified as current as of March 31, 2010. At December 31, 2009 the balance was $350,000. As of March 31, 2010 and December 31, 2009, there is $30,412 and $26,097, respectively of accrued interest related to these notes.
On April 29, 2010, IX Energy Holdings, Inc. and its wholly owned subsidiary IX Energy, Inc entered into a settlement agreement with certain individuals (the “Note-holders”) who were issued promissory notes by IXE in July 2008. Pursuant to the terms of the settlement agreement, the Note-holders received an aggregate of $125,000, which was paid on April 21, 2010 and 5,000,000 shares of common stock of the Company to settle notes and accrued interest of approximately $380,000. These shares had a fair value of $75,000 ($0.015/share), based upon the quoted closing trading price. In connection with this settlement, the Company has recorded a gain on debt settlement of approximately $180,000.
The Note-holders received piggy-back registration rights in connection with the shares issued under the settlement agreement. In addition, in connection with the settlement agreement, the Note-holders executed Stipulations of Discontinuance which were filed with the court in New York County, to dismiss, with prejudice, the actions brought against the Company related to the promissory notes.
Note 5 - Stockholders’ Deficit
(A) Stock issuances
2010
On January 15, 2010, the Company issued 1,250,000 shares of common stock regarding the second of three share issuances to a consultant for services under to a consulting agreement dated October 15, 2009. The shares had a fair value of $25,000 ($0.02/share), based on the quoted closing price.
On January 29, 2010 the Company entered into a consulting agreement with an investor relations firm. 3,000,000 shares of common stock were issues for services. The shares had a fair value of $30,000 ($0.01/share) based on the quoted closing trading price on that day.
9
(B) 2009 Stock Options
During the three months ended March 31, 2010, the Company recognized $77,064 due to stock options that have vested during the period.
The following is a summary of the Company’s stock option activity:
Weighted | ||||||||
Average | ||||||||
Options | Exercise Price | |||||||
Outstanding – December 31, 2008 | - | - | ||||||
Granted | 5,131,132 | $ | 0.46 | |||||
Exercised | - | - | ||||||
Forfeited | (2,137,000 | ) | $ | 0.44 | ||||
Outstanding – December 31, 2009 | 2,994,132 | $ | 0.46 | |||||
Granted | - | - | ||||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Outstanding – March 31, 2010 | 2,994,132 | $ | 0.46 | |||||
Exercisable – March 31, 2010 | 2,808,043 | $ | 0.36 | |||||
Weighted average fair value of options exercisable at March 31, 2010 | 765,649 | $ | 0.27 |
Options outstanding | |||||||||
Exercise price | Number outstanding | Weighted remaining life | Weight avg. exercise price | ||||||
$0.04-$0.50 | 2,994,132 | 4.32 years | $ | 0.46 | |||||
Options exercisable | |||||||||
Exercise price | Number outstanding | Weighted remaining life | Weight avg. exercise price | ||||||
$0.04-$0.50 | 2,808,043 | 4.22 years | $ | 0.36 |
10
(C) Warrants & Derivative Liability
During the three months ended March 31, 2010, the Company recognized $15,087 due to warrants that have vested during the period.
The following is a summary of the Company’s warrant activity:
Warrants | Weighted Avg. Exercise price | |||||||
Balance, December 31, 2008 | 7,225,000 | $ | 0.50 | |||||
Granted | 2,152,000 | $ | 0.50 | |||||
Exercised | - | - | ||||||
Forfeited | - | - | ||||||
Balance, December 31, 2009 | 9,377,500 | $ | 0.01 | |||||
Granted | - | - | ||||||
Forfeited | - | - | ||||||
Balance, March 31, 2010 | 9,377,500 | $ | 0.01 | |||||
Outstanding and Exercisable, March 31, 2010 | 9,377,500 | $ | 0.01 |
Exercise price | Number outstanding | Weight average life remaining | |||
$0.01 | 9,377,500 | 1.94 years |
Fair Value and Assessment of Derivative Financial Instruments
The Company had two offerings of equity based financing. The first was on December 30, 2008, and the second was on February 25, 2009.
As a result of the offering on December 30, 2008, the Company issued 7,225,000 warrants, inclusive of 350,000 warrants paid to a placement agent as a direct offering cost. The warrants have a 3 year term. The exercise price is $0.50. The warrants paid as a direct offering cost have a net effect of zero on the statement of equity and had a fair value of $63,993 at December 31, 2008.
During the two year anniversary from the issuance date, if the Company issues or grants any shares of common stock or any warrants or other convertible securities pursuant to which shares of common stock may be acquired at a per share price less than $0.50 (subject to certain customary exceptions, including where shares are issued in connection with employment arrangements or business combinations in which a portion of the consideration may be payable in shares or convertible securities with a business in substantially the same line of business as the Company), then the exercise price of the Warrants shall be reduced to the lower price. Finally, should the Company fail to achieve at least $17.5 million of consolidated gross revenue within one year of the final closing of the Private Placement, the exercise price shall be reduced to $0.01 per share. The private placement closed on February 25, 2009. As a result of this provision, the Company adjusted the exercise price of the warrants to $0.01 per share at December 31, 2009 to determine the fair value of the derivative warrants.
If at any time following the one year anniversary of the reverse merger (See Note 1) there is no effective registration statement registering the resale of the shares of common stock underlying the Warrants, the holders of the Warrants have the right to exercise the Warrants by means of a cashless exercise.
11
In connection with the ASC 815, “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock,” the Company determined that the embedded conversion feature and the warrant issuances (ratchet down of exercise price based upon lower exercise price in future offerings) are not indexed to the Company’s own stock and, therefore, is an embedded derivative financial liability (the “Embedded Derivative”), which requires bifurcation and to be separately accounted for.
The Company measured the fair value of these warrants using a Black-Scholes valuation model on January 1, 2009, since this represents the effective commitment date since these warrants were not indexed to the Company’s own stock. The fair value of the 7,225,000 warrants was determined to be $1,320,954 based upon the following management assumptions:
The Black-Scholes assumptions used are as follows:
Exercise price | $ | 0.50 | ||
Expected dividends | 0 | % | ||
Expected volatility | 78.88 | % | ||
Risk free interest rate | 0.94 | % | ||
Expected life of option | 3 years | |||
Expected forfeitures | 0 | % |
The fair value of these warrants was charged to accumulated deficit on January 1, 2009, as a cumulative adjustment due to a change in accounting principle.
On February 25, 2009, the date of the closing of the second offering, the Company granted 1,952,500 warrants, having a fair value of $1,422,917. The warrants have a 3 year term. The exercise price is $0.50. These warrants were inclusive of 140,000 warrants paid to a placement agent as a direct offering cost. The warrants paid as a direct offering cost have a net effect of zero on the statement of equity and had a fair value of $102,027 at February 25, 2009. The fair value of these warrants was determined to be $1,422,917 based upon the following management assumptions:
The Black-Scholes assumptions used are as follows:
Exercise price | $ | 0.50 | ||
Expected dividends | 0 | % | ||
Expected volatility | 80.91 | % | ||
Risk free interest rate | 1.49 | % | ||
Expected life of option | 3 years | |||
Expected forfeitures | 0 | % |
The fair value of these warrants was recorded on February 25, 2009 as derivative expense.
Mark to Market
At March 31, 2010, the Company re-measured these warrants and recorded a fair value of $98,785. As a result of the re-measurement, the Company recorded a change in fair value associated with these warrants as income totaling $162,960 for the three months ended March 31, 2010. The following management assumptions were considered:
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The Black-Scholes assumptions used are as follows:
Exercise price | $ | 0.01 | ||
Expected dividends | 0 | % | ||
Expected volatility | 163 | % | ||
Risk free interest rate (2 year treasury note) | 1.02 | % | ||
Expected life of option, remaining period | 1.75-1.91 years | |||
Expected forfeitures | 0 | % |
Note 6 - Commitments and Contingencies
A. | Litigation Claims and Assessments |
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise that may harm its business.
1. | A complaint was filed in the Supreme Court of the State of New York by a vendor seeking to recover costs and disbursements. The arbitrators awarded a judgment of $33,000 and the Company had accrued this amount as of December 31, 2009. |
2. | In September 2009, a former employee served the Company with a claim for breach of contract, breach of implied covenant of good faith and fair dealing and a breach of guarantee in the Superior Court of the State of California, County of San Diego. The amount claimed in the complaint is $175,000. The Company cannot estimate the amount or range of loss in connection with this matter. |
B. | Employment agreements |
Chief Executive Officer
On May 1, 2008, the Company entered into a two-year employment agreement with an individual to serve as the Company’s CEO and Chairman of the Board. The agreement provides for an annual salary of $225,000 and $80,000 as a bonus, paid in February 2009, for services rendered prior to this agreement. The individual is also eligible for a multi-year grant of the Company’s non-qualified options that will be equal to 6% of the total common shares outstanding after the reverse merger.
On March 19, 2009, the Company granted 1,033,066 stock options to this individual, having a fair value of $284,259. On May 12, 2009, the Company granted the 2nd one-third of total options due to this individual in the amount of 1,033,066 options, having a fair value of $288,073.
These options vested upon grant and were immediately expensed and monthly over a year. The Company expensed the full amount of the fair value to stock option expense on the date of grant.
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The Black-Scholes assumptions used are as follows:
Exercise price | $0.48 – $0.50 | ||
Expected dividends | 0% | ||
Expected volatility | 78.88% - 82.16 % | ||
Risk free interest rate | 0.98% - 1.03 % | ||
Expected life of option | 5 years | ||
Expected forfeitures | 0 % |
C. | Consulting agreement |
On January 29, 2010, the Company entered into an agreement with a consultant to provide certain investor relations services. The term of the agreement is for six months, and the Company has agreed to pay a non refundable retainer fee of $5,000 upon signing, $5,000 on March 31, 2010 and $7,500 on April 30, 2010. Furthermore, the Company issued 3,000,000 shares of common stock, having a fair value of $30,000 ($0.01/share), based upon the quoted closing trading price.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
The information in this report contains forward-looking statements. All statements other than statements of historical fact made in this report are forward looking. In particular, the statements herein regarding industry prospects and future results of operations or financial position are forward-looking statements. These forward-looking statements can be identified by the use of words such as “believes,” “estimates,” “could,” “possibly,” “probably,” anticipates,” “projects,” “expects,” “may,” “will,” or “should” or other variations or similar words. No assurances can be given that the future results anticipated by the forward-looking statements will be achieved. Forward-looking statements reflect management’s current expectations and are inherently uncertain. Our actual results may differ significantly from management’s expectations.
The following discussion and analysis should be read in conjunction with our financial statements, included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future. Such discussion represents only the best present assessment of our management.
Recent Events
Prior to December 30, 2008, we were a development stage company that sought to market and sell a natural energy drink derived from coconut water to distributors of soft drinks in Israel. On December 30, 2008, we completed a reverse merger, pursuant to which we merged with and into a private company, IX Energy, with IX Energy being the surviving company. In connection with this reverse merger, we discontinued our former business and succeeded to the business of IX Energy as our sole line of business. Since IX Energy acquired a controlling voting interest, it was deemed the accounting acquirer, while we were deemed the legal acquirer. The historical financial statements of the Company are those of IX Energy and of the consolidated entities from the date of merger and subsequent. All costs associated with the reverse merger were expensed as incurred.
Overview
IX Energy was incorporated in the State of Delaware on March 3, 2006 for the purpose of designing, manufacturing and installing high-performance solar electric power technologies. Historically, our operations have principally involved the integration and installation of solar power systems manufactured by third parties. However, in an effort to become a vertically integrated solar products and services company that manufactures, designs, markets and installs its own solar power systems, we have recently entered into an agreement to manufacture solar modules that will be marketed primarily to federal military and civilian agencies.
Three Months Ended March 31, 2010 Compared to Three Months Ended March 31, 2009
Revenues. During the three months ended March 31, 2010, our revenues were $0 as compared to $1,839,896 revenue for the three months ended March 31, 2009. The $1,839,896 decrease in revenues was primarily due to the fulfillment of our UNICOR Government Agreement in 2009.
Cost of Sales. During the three months ended March 31, 2010, our cost of sales was $0 as compared to cost of sales of $1,482,654 for the three months ended March 31, 2009. The $1,482,654 decrease was related to the fulfillment of our UNICOR Government Agreement in 2009.
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Operating Expenses. During the three months ended March 31, 2010, we recorded operating expenses of $567,564, as compared to operating expenses of $5,201,426 for the three months ended March 31, 2009, representing a decrease of $4,633,862. This decrease in operating expenses was primarily due to decreased consulting fees related to IR consulting agreements, and decreased common stock issued for long-term compensation.
Loss from Operations. During the three months ended March 31, 2010, we recorded an operating loss of $567,564 as compared to an operating loss of $4,844,184 for the three months ended March 31, 2009, representing a decrease of $4,276,620. This decrease in loss from operations was primarily due to decreased in operating expenses by $4,633,862 that was partially offset by our gain on the reduction of our derivative liability of $162,960.
Liquidity and Capital Resources
We have historically met our liquidity requirements from a variety of sources, including the sale of equity and debt securities to related parties and institutional investors. Based on our strategy and the anticipated growth in our business, we believe that our liquidity needs will increase. The amount of such increase will depend on many factors, including building out our management team, the costs associated with the fulfillment of our projects, whether we upgrade our technology, and the amount of inventory required for our expanding business. We believe that we have sufficient cash to fund our operations for the next twelve months.
We may be required to pursue sources of additional capital through various means, including joint venture projects and debt or equity financings. Future financings through equity investments are likely to be dilutive to existing stockholders.
Our ability to obtain needed financing may be impaired by such factors as the capital markets, both generally and specifically in the renewable energy industry, and the fact that we are not profitable, which could impact the availability or cost of future financings. If the amount of capital we are able to raise from financing activities, together with our revenues from operations, is not sufficient to satisfy our capital needs, even to the extent that we reduce our operations accordingly, we may be required to cease operations.
Cash. As of March 31, 2010, we had cash of $281,902, as compared to cash of $108,006 as of December 31, 2009.
Net Cash Provided By Operating Activities. Net cash provided by operating activities totaled $173,896 for the three months ended March 31, 2010, as compared to cash used of $2,396,683 for the three months ended March 31, 2009. This increase was primarily due to the net collection of accounts receivable in the amount of approximately $480,000, increase in accounts payable and accrued expenses related to professional fees in the amount of $40,830, as partially offset by the gain realized on the reduction of our derivative liability of approximately $163,000, stock-based compensation of $147,151 and a loss on impairment in the amount of $150,000. For the three months ended March 31, 2009, our net cash used in operating activities of $2,396,683 was comprised of primarily net loss of $4,859,729, stock-based compensation of $4,501,421, an increase in accrued interest payable to a related party of $24,771, accrued interest payable of $6,165, depreciation expense of $2,426, and amortization of debt issue costs of $1,988. The increase in net cash used in operating activities was partially offset by our net loss of $4,859,279, and decreases in deferred revenue of $1,796,238, accounts payable and accrued expenses of $128,794, an increase in cost and estimated earnings in excess of billings on uncompleted contracts of $8,659, and an increase in prepaid expenses of $140,484
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Net Cash Used in Investing Activities. Net cash used in investing activities totaled $0 during the three months ended March 31, 2010, as compared to net cash used in investing activities of $260,547 during the three months ended March 31, 2009. Cash used in investing activities during the three months ended March 31, 2009 was comprised of purchases of property and equipment for $260,547.
Net Cash Provided By Financing Activities. Net cash provided by financing activities totaled $0 during the three months ended March 31, 2010, as compared to net cash of $273,225 from financing activities during the three months ended March 31, 2009. The proceeds for the three months ended March 31, 2009 were derived from proceeds from common stock for cash in a private placement totaling $725,000. This was partially offset by repayment of notes payable of $250,000 to a related party and cash paid as direct offering costs of $201,775 related to the proceeds raised in the private placement.
Going Concern
As reflected in the accompanying financial statements, the Company has a net loss of $552,625 for the three months ended March 31, 2010; a working capital deficit of $1,327,557, and an accumulated deficit of $11,950,291 at March 31, 2010.
The ability of the Company to continue its operations is dependent on management’s plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements.
The Company believes its current available cash, along with anticipated revenues, may be insufficient to meet its cash needs for the near future. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. The Company may require additional funding to finance the growth of its current and expected future operations, as well as to achieve its strategic objectives. The Company believes that the further implementation of its business plan will provide future positive cash flows.
Critical Accounting Policies and Estimates
We have identified the policies below as critical to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations are disclosed throughout this section where such policies affect our reported and expected financial results. Our preparation of our financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenues and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.
Significant estimates for the three months ended March 31, 2010 and the year ended December 31, 2009 included management’s estimate for recording costs and estimated earnings in excess of billings, estimating the loss on uncompleted contracts in the period when known, and a 100% valuation allowance for deferred taxes due to the Company’s continuing and expected future losses.
Accounts receivable represents trade obligations from customers that are subject to normal trade collection terms, without discounts. In certain cases the Company is entitled to rebates upon the completion of certain jobs post installation. For percentage of completion installation projects, the amounts are rebates and they are factored into the total estimated contract price when doing percentage of completion to recognize revenue on each project. The Company periodically evaluates the collectability of its accounts receivable and considers the need to adjust an allowance for doubtful accounts based upon historical collection experience and specific customer information. Actual amounts could vary from the recorded estimates. As of March 31, 2010 and December 31, 2009, the Company recorded an allowance of $8,000 and $0, respectively.
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At December 31, 2009, the Company had a concentration of accounts receivable from one customer totaling 100%
Revenue Recognition. The Company follows the guidance of the FASB Accounting Standard Codification (ASC) 605-10-25-1 for revenue recognition and records revenue when all of the following have occurred: (1) persuasive evidence of an arrangement exists, (2) the product is delivered and installed, (3) the sales price to the customer is fixed or determinable, and (4) collectability of the related customer receivable is reasonably assured. We have two methods of revenue recognition. For our construction contracts, we record revenues based upon the use of the percentage of completion method. For certain energy products that we resell to third parties, we record revenue based upon the shipment date.
Share-Based Compensation. We follow FASB ASC 718-10-30 which requires the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors including grants of employee stock options based on estimated fair values. We have used the Black-Scholes option pricing model to estimate grant date fair value for all option grants. The assumptions we use in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As such, as we use different assumptions based on a change in factors, our stock-based compensation expense could be materially different in the future.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
N/A
ITEM 4T. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures . Under the supervision and with the participation of our management, including our President, Chief Financial Officer and Secretary, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”)) as of the end of the period covered by this report. Based upon that evaluation, our President, Chief Financial Officer and Secretary concluded that our disclosure controls and procedures as of the end of the period covered by this report were effective such that the information required to be disclosed by us in reports filed under the Securities Exchange Act of 1934 is (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and (ii) accumulated and communicated to our management to allow timely decisions regarding disclosure. A controls system cannot provide absolute assurance, however, that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.
Changes in Internal Control Over Financial Reporting. During the most recent quarter ended March 31, 2010, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
ITEM 1. LEGAL PROCEEDINGS.
From time to time, the Company may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm its business.
An action was commenced in the Civil Court of the County of New York for breach of contract totaling $51,640. The company is defending the action and cannot estimate what the outcome of the case may be.
The company was engaged in Arbitration before the Joint Committee on Fee Disputes. The Arbitration yielded an award against IX Energy, Inc. in the amount of $33,000. The Arbitration award in the amount of $33,000 was confirmed by decision dated March 31, 2010. A judgment was entered on May 12, 2010 against IX Energy, Inc. in the amount of $33,941.75.
An action commenced in Superior Court of the State of California, County of San Diego for breach of contract, breach of implied covenant of good faith and fair dealing, breach of guarantee, intentional misrepresentation, negligent misrepresentation, intentional infliction of emotion distress, emotional distress resulting from financial injury, fraud and deceit, and conspiracy totaling $175,000.
An action was commenced in Court of State of New York, County of New York for breach of contract, disparagement and defamation, and breach of fiduciary duty totaling $500,000.
ITEM 1A. RISK FACTORS.
There have been no material changes to the Risk Factors described in our 2009 Annual Report on Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. REMOVED AND RESERVED
None
ITEM 5. OTHER INFORMATION.
None
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ITEM 6. EXHIBITS.
Exhibit Number | Description of Exhibit | |
31.1 | Certifications required by Rule 13a-14, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1 | Certification of Chief Executive Officer and Principal Accounting Officer pursuant to 18 U.S.C.§ 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
IX ENERGY HOLDINGS, INC. | ||
/s/ Steven Hoffmann | ||
May 24, 2010 | Steven Hoffmann | |
Chief Executive Officer, Chief Financial Officer and Director |
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