Washington, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
SAUER ENERGY, INC.
Nevada 26-3261559
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification 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 filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: 76,237,442 shares of common stock, par value $0.0001 per share, as of July 11, 2011.
SAUER ENRGY, INC.
ITEM 1. FINANCIAL STATEMENTS
The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions for Form 10-Q and Article 210 8-03 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. All such adjustments are of a normal recurring nature. Operating results for the three and nine month periods ended May 31, 2011, are not necessarily indicative of the results that may be expected for the fiscal year ending August 31, 2011. For further information, these consolidated financial statements should be read in conjunction with the financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended August 31, 2010.
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| Unaudited Consolidated Financial Statements | |
| | |
| Consolidated Balance Sheets | F-1 |
| | |
| Consolidated Statements of Operations | F-2 |
| | |
| Consolidated Statements of Cash Flows | F-3 |
| | |
| Notes to Unaudited Consolidated Financial Statements | F-4 to F-9 |
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Sauer Energy, Inc. (A Development Stage Enterprise) Consolidated Balance Sheets |
| | | May 31, 2011 (Unaudited) | | August 31, 2010 (Audited) |
| Assets | | | | |
| Current assets | | | | |
| Cash | | $ | 247,099 | | $ | 44,311 |
| Prepaid expense | | | 3,225 | | | 10,000 |
| Total current assets | | | 250,324 | | | 54,311 |
| | | | | | | |
| Furniture and equipment, net | | | 39,601 | | | - |
| Total assets | | $ | 289,925 | | $ | 54,311 |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Liabilities and Stockholders’ Equity (Deficit) | | | | | | |
| Current liabilities | | | | | | |
| Accounts payable and accrued expenses | | $ | 7,562 | | $ | 5,555 |
| Loan payable | | | 50,685 | | | 89,022 |
| Shareholders’ loan | | | 10,000 | | | 63,140 |
| Total current liabilities | | | 68,247 | | | 157,717 |
| | | | | | | |
| | | | | | | |
| Stockholders' Deficit | | | | | | |
| Common stock, $0.0001 par value, 200,000,000 shares authorized, 75,330,749 and 71,500,000 shares issued and outstanding on May 31, 2011 and August 31, 2010. | | | 7,533 | | | 7,150 |
| Additional paid-in capital | | | 1,606,150 | | | 162,550 |
| Deficit accumulated during the exploration stage | | | (1,392,005) | | | (273,106) |
| Total stockholders' equity (deficit) | | | 221,678 | | | (103,406) |
| Total Liabilities and Stockholders' Equity (Deficit) | | $ | 289,925 | | $ | 54,311 |
| | | | | | | |
The accompanying notes are an integral part of the interim consolidated financial statements
Sauer Energy, Inc. (A Development Stage Enterprise) Consolidated Statements of Operations For the nine month ended May 31, 2011 and 2010 and for the period from Inception (August 7, 2008) to May 31, 2011 (Unaudited) |
| | Three months ended | Nine months ended | Inception |
| | May 31, | May 31, | (August 7, 2008) |
| | | 2011 | | | | 2010 | | | | 2011 | | | | 2010 | | Through May 31, 2011 |
| | | | | | | | | | | | | | | | | | | | | |
| Revenues | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | |
| General and administrative expense: | | | | | | | | | | | | | | | | | | | | |
| Professional fees | | | 15,500 | | | | - | | | | 48,313 | | | | - | | | | 52,343 | |
| Consulting fees | | | 144,242 | | | | 16,699 | | | | 541,930 | | | | 16,699 | | | | 571,939 | |
| Investor relations | | | 4,400 | | | | - | | | | 202,616 | | | | | | | | 202,616 | |
| Director fees | | | - | | | | - | | | | 48,000 | | | | - | | | | 48,000 | |
| Research and development expense | | | 84,693 | | | | 36,924 | | | | 131,302 | | | | 36,924 | | | | 231,955 | |
| Depreciation | | | 1,561 | | | | - | | | | 1,561 | | | | - | | | | 1,561 | |
| Occupancy costs | | | 12,539 | | | | 8,060 | | | | 27,762 | | | | 10,160 | | | | 47,386 | |
| Other general and administrative expenses | | | 75,486 | | | | 41,100 | | | | 117,415 | | | | 42,137 | | | | 236,205 | |
| Total operating expenses | | | 338,421 | | | | 102,783 | | | | 1,118,899 | | | | 105,920 | | | | 1,392,005 | |
| | | | | | | | | | | | | | | | | | | | | |
| (Loss) from operations | | | (338,421 | ) | | | (102,783 | ) | | | (1,118,899 | ) | | | (105,920 | ) | | | (1,392,005 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Other income (expense): | | | - | | | | - | | | | - | | | | - | | | | - | |
| (Loss) before taxes | | | (338,421 | ) | | | (102,783 | ) | | | (1,118,899 | ) | | | (105,920 | ) | | | (1,392,005 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Provision (credit) for taxes on income | | | - | | | | | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Net (Loss) | | $ | (338,421 | ) | | $ | (102,783 | ) | | $ | (1,118,899 | ) | | $ | (105,920 | ) | | $ | (1,392,005 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Basic earnings (loss) per common share | | $ | (0.005 | ) | | $ | (0.001 | ) | | $ | (0.015 | ) | | $ | (0.001 | ) | | | | |
| Weighted average number of common shares outstanding | | | 73,889,709 | | | | 138,937,175 | | | | 72,875,155 | | | | 138,937,175 | | | | | |
The accompanying notes are an integral part of the interim consolidated financial statements
Sauer Energy, Inc. (A Development Stage Enterprise) Consolidated Statements of Cash Flows For the nine month ended May 31, 2011 and 2010 and for the period from Inception (August 7, 2008) to May 31, 2011 (Unaudited) |
| | | | Nine months ended | | | Inception | |
| | | | May 31 | | | (August 7, 2008) | |
| | | | 2011 | | | | 2010 | | | | Through May 31, 2011 | |
| Cash flows from operating activities: | | | | | | | | | | | | |
| Net (loss) | | $ | (1,137,649 | ) | | $ | (105,920 | ) | | $ | (1,410,755 | ) |
| Adjustments to reconcile net (loss) to net cash provided (used) by development stage activities: | | | | | | | | | | | | |
| Director fees issued by shares | | | 48,000 | | | | - | | | | 48,000 | |
| Consulting fees issued by shares | | | 455,480 | | | | - | | | | 455,480 | |
| Investor relation fees issued by shares | | | 180,000 | | | | - | | | | 180,000 | |
| Depreciation | | | 1,561 | | | | - | | | | 1,561 | |
| Changes in operating assets and liabilities | | | | | | | | | | | | |
| Prepaid expense | | | 6,775 | | | | - | | | | (3,225 | ) |
| Accounts payable and accrued expenses | | | 2,007 | | | | - | | | | 7,562 | |
| Net cash flows used by operating activities | | | (443,826 | ) | | | (105,920 | ) | | | (721,377 | ) |
| | | | | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | | | | |
| Purchase of furniture and equipment | | | (41,162 | ) | | | - | | | | (41,162 | ) |
| Net cash flows used in investing activities | | | (41,162 | ) | | | - | | | | (41,162 | ) |
| | | | | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | | | | |
| Proceeds from loan | | | 11,000 | | | | 89,022 | | | | 100,022 | |
| Repayment on loan | | | (49,337 | ) | | | - | | | | (49,337 | ) |
| Proceeds from shareholders’ loan | | | 19,116 | | | | 24,214 | | | | 82,256 | |
| Repayment on shareholders’ loan | | | (72,256 | ) | | | - | | | | (72,256 | ) |
| Proceeds from issuance of common stock, net of costs | | | 779,253 | | | | - | | | | 948,953 | |
| Net cash flows provided by financing activities | | | 687,776 | | | | 113,236 | | | | 1,009,638 | |
| | | | | | | | | | | | | |
| Net increase in cash and cash equivalents | | | 202,788 | | | | 7,316 | | | | 247,099 | |
| Cash and cash equivalents, beginning of period | | | 44,311 | | | | 819 | | | | - | |
| Cash and cash equivalents, end of period | | $ | 247,099 | | | $ | 8,135 | | | $ | 247,099 | |
| | | | | | | | | | | | | |
| Supplemental disclosure of cash flow information: | | | | | | | | | | | | |
| Cash paid for interest | | $ | - | | | $ | - | | | $ | - | |
| Cash paid for income taxes | | $ | - | | | $ | - | | | $ | - | |
The accompanying notes are an integral part of the interim consolidated financial statement
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(Unaudited – Prepared by Management)
Note 1 - Organization and Summary of Significant Accounting Policies:
Following is a summary of our organization and significant accounting policies:
Organization and nature of business – Sauer Energy, Inc. (formerly: BCO Hydrocarbon Ltd.) (identified in these footnotes as “we” or the “Company”) was incorporated in the State of Nevada, United States of America on August 19, 2008. It was a natural resource exploration stage company holding an option on a 50% working interest in certain oil and gas leases in Canada.
Sauer Energy Inc. (the “Old Sauer”) was incorporated in California on August 7, 2008. The Company is a development stage company engaged in the design and manufacture of vertical axis wind turbine (VAWT) systems.
On July 25, 2010, the Company, Malcolm Albery, its president and sole director (“MA”) and Dieter Sauer, Jr. (“DS”) completed a closing (the “Closing”) under an Agreement and Plan of Reorganization, dated as of June 23, 2010 (the “Agreement”). The Agreement provided: (a) for the purchase by DS of all of the 39,812,500 shares of the Company owned by MA for $55,200; (b) the contribution by DS of all of the shares of Old Sauer, a California corporation (“SEI”) to the Company; (c) the assignment of certain patent rights related to wind turbine technology held by DS to the Company; and (d) the election of DS to the Company’s board of directors. In connection with the Closing, Mr. Sauer was elected President and CEO of the Company and two former shareholders of the Company agreed to (i) indemnify the Company against any claims resulting from breaches of representations and warranties by the Company in the Agreement; (ii) to acquire and cause to be returned for cancellation an aggregate of 67,437,500 shares of the Company’s common Stock, including all of the shares owned by former officer and director Daniel Brooks and; (3) assume all of the Company’s obligations in connection with certain oil and gas leases in Canada.
The agreement was executed on July 25, 2010 per Note 4 and above. Sauer Energy, Inc. became a wholly-owned subsidiary of the Company. On August 29, Malcolm Albery resigned as President and was replaced by Dieter Sauer. In the following month, the Company changed its name from BCO Hydrocarbon Ltd. to Sauer Energy, Inc.
The Company’s fiscal year-end is August 31.
Basis of consolidation - The consolidated financial statements for 2011 and 2010 include the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated.
Basis of presentation - The accounting and reporting policies of the Company conform to U.S. generally accepted accounting principles applicable to development stage enterprises.
Use of estimates - The preparation of financial statements in conformity with generally accepted accounting principles 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 amount of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and cash equivalents - For purposes of the statement of cash flows, we consider all cash in banks, money market funds, and certificates of deposit with a maturity of less than three months to be cash equivalents.
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(Unaudited – Prepared by Management)
Note 1 - Organization and Summary of Significant Accounting Policies (continued):
Fixed assets - Property, plant and equipment is valued at cost less accumulated depreciation and impairment losses. If the costs of certain components of an item of property, plant and equipment are significant in relation to the total cost of the item, they are accounted for and depreciated separately. Depreciation expense is recognized using the straight-line method and is amortized over the estimated useful life of the related asset. The following useful lives are assumed:
Furniture & office equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 - 5 years
Fair Value of Financial Instruments - The Financial Accounting Standards Board issued ASC (Accounting Standards Codification) 820-10 (SFAS No. 157), “Fair Value Measurements and Disclosures" for financial assets and liabilities. ASC 820-10 provides a framework for measuring fair value and requires expanded disclosures regarding fair value measurements. FASB ASC 820- 10 defines fair value as the price that would be received for an asset or the exit price that would be paid to transfer a liability in the principal or most advantageous market in an orderly transaction between market participants on the measurement date. FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs, where available. The following summarizes the three levels of inputs required by the standard that the Company uses to measure fair value:
| - Level 1: Quoted prices in active markets for identical assets or liabilities. |
| - Level 2: Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities. |
| - Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
The carrying amounts of the Company’s financial instruments as of May 31, 2011, reflect
| - Cash: Level One measurement based on bank reporting. |
| - Loan receivable and loans from Officers and related parties: Level 2 based on promissory notes. |
Federal income taxes -The Company utilizes FASB ACS 740, “Income Taxes”, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.
Advertising and Marketing Costs - The Company expenses costs of advertising and marketing as incurred. Advertising and marketing expenses for the nine month period ended May 31, 2011 and 2010 was $ 31,967 and $16,204 respectively.
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(Unaudited – Prepared by Management)
Note 1 - Organization and summary of significant accounting policies (continued):
Basic and Diluted Earnings Per Share - Net loss per share is calculated in accordance with FASB ASC 260, Earnings Per Share, for the period presented. Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. The Company had no potentially dilutive securities outstanding as of May 31, 2011 and 2010.
Development Stage Company - The Company is considered a development stage company, with no operating revenues during the periods presented, as defined by FASB Accounting Standards Codification ASC 915. ACS 915 requires companies to report their operations, shareholders’ deficit and cash flows since inception through the date that revenues are generated from management’s intended operations, among other things. Management has defined inception as August 7, 2008. Since inception, the Company has incurred an operating loss of $1,392,834. The Company’s working capital has been generated through advances from the principal of the Company and solicitation of subscriptions. Management has provided financial data since August 7, 2008 in the financial statements, as a means to provide readers of the Company’s financial information to be able to make informed investment decisions.
Note 2 – Recent accounting pronouncements:
Comprehensive Income — In June 2011, the Financial Accounting Standards Board (“FASB”) issued new guidance on the presentation of comprehensive income. Specifically, the new guidance allows an entity to present components of net income and other comprehensive income in one continuous statement, referred to as the statement of comprehensive income, or in two separate, but consecutive statements. The new guidance eliminates the current option to report other comprehensive income and its components in the statement of changes in equity. While the new guidance changes the presentation of comprehensive income, there are no changes to the components that are recognized in net income or other comprehensive income under current accounting guidance. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance will have an impact on our consolidated financial position, results of operations or cash flows.
Fair Value Measurement — In April 2011, the FASB issued new guidance to achieve common fair value measurement and disclosure requirements between GAAP and International Financial Reporting Standards. This new guidance amends current fair value measurement and disclosure guidance to include increased transparency around valuation inputs and investment categorization. This new guidance is effective for fiscal years and interim periods beginning after December 15, 2011. We do not believe our adoption of the new guidance will have an impact on our consolidated financial position, results of operations or cash flows.
Note 3 – Going Concern
The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company has accumulated a deficit of $1,392,005 as of May 31, 2011.
In view of the matters described above, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. Management plans to raise additional capital through the sale of stock to pursue business development activities.
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(Unaudited – Prepared by Management)
Note 4 - Loans payable:
As at August 31, 2010, the Company had received $89,022 from various lenders. During the nine month period ended May 31, 2011, the Company repaid a total of $49,337 against these loans. As at May 31, 2011, loan payables of $39,685 are unsecured, payable on demand and accrue no interest
During the nine month period ended May 31, 2011, the Company received $11,000 from a lender. This amount is unsecured, payable on demand and accrues no interest.
Note 5 – Property and equipment
Property and Equipment consisted of the following at May 31, 2011 and August 31, 2010.
| | | May 31, 2011 | | | August 31, 2010 | |
| Computer and equipment | | $ | 41,162 | | | $ | - | |
| Less accumulated depreciation/amortization | | | (1,561 | ) | | | - | |
| Property and equipment, net | | $ | 39,601 | | | $ | - | |
Note 6 – Related party transactions:
As at August 31, 2010, the Company owed $63,140 to Dieter Sauer, the Company’s president and shareholder. During the nine month period ended May 31, 2011, Mr. Sauer advanced $9,116 to the Company. The loan carries no interest, is unsecured and is payable upon demand. The Company was repaid in full in a total of $72,256 against his shareholders’ loan.
During the nine month period ended May 31, 2011, Mr. Sauer invoiced amount of $17,921 to the Company as consulting services. The Company paid full in cash.
During the nine month period ended May 31, 2011, a shareholder of the Company advanced $10,000 to the Company. The balance of the loan was $10,000 at May 31, 2011. The loan carries no interest, is unsecured and is payable upon demand.
During the nine month period ended May 31, 2011, the Company issued 40,000 shares to the Directors of the Company for director’s fee. The fair value of the common stock on the day it was issued was $1.20 per share. Based on the fair value at the date of the issuance $48,000 was charged to director fees.
Note 7 – Commitments and contingencies:
In February, 2010, the Company’s subsidiary leased office and laboratory space in Newbury Park, California for five years for monthly rental payments of $2,100 per month.
Lease Commitments – following five years:
| 2011 | | $ | 6,300 | |
| 2012 | | | 25,200 | |
| 2013 | | | 25,200 | |
| 2014 | | | 25,200 | |
| 2015 | | | 2,100 | |
| | | $ | 84,000 | |
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(Unaudited – Prepared by Management)
Note 8 – Common stock:
Starting on July 21, 2010, the Company entered into a series of private placement agreements with various investors. The arrangement involved issuing 800,000 units of securities at $0.25 per unit for a total amount of $200,000. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant expiring July 31, 2012 with an exercise price of $0.50 each. The private placement was oversubscribed and the Company accepted additional private placement funds. As of May 31, 2011, the Company issued 938,000 units of the securities in consideration of funds received of $234,500.
Starting on January 1, 2011, the Company entered into a series of private placement agreements with various investors. The arrangement involved issuing 666,667 units of securities at $0.30 per unit for a total amount of $200,000. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant expiring July 31, 2013 with an exercise price of $0.60 each. The private placement was oversubscribed and the Company accepted additional private placement funds. As of May 31, 2011, the Company issued 2,339,849 units of the securities in consideration of funds received of $701,953.
During the nine month period ended May 31, 2011, the Company issued a total of 362,900 shares of common stock to certain consultants as compensation for services. The range of fair value of the stock was $0.75 ~ $1.55. Based on the fair value of the common stock on the day of issuance, $436,730 was charged to consulting expenses.
During the nine month period ended May 31, 2011, the Company issued 150,000 shares of common stock to an investor relations firm for services to be provided. The fair value of the common stock on the day it was issued was $1.20 per share. Based on the fair value of the stock on the day of issuance, $180,000 was charged to investor relations expenses.
During the nine month period ended May 31, 2011, the Company issued 40,000 shares of common stock as directors’ fees to certain directors of the Company. The fair value of the common stock on the day it was issued was $1.20 per share. Based on the fair value of the common stock on the date of issuance, $48,000 was charged to director fees.
As of May 31, 2011, the Company was authorized to issue 200,000,000 shares of par value $0.0001 common stock, of which 75,330,749 shares of common stock are issued and outstanding.
Note 9 – Warrants
During the nine month period ended May 31, 2011, the Company entered into two series of private placement agreements with various investors. (Refer: Note 8 - Common stock)
Under the first private placement, the Company issued 938,000 Units of securities at $0.25 per unit for total cash proceeds of $234,500. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant expiring July 31, 2012 with an exercise price of $0.50.
Under the second private placement, the Company issued 2,339,849 Units of securities at $0.30 per unit for total cash proceeds of $701,953. Each unit consisted of one (1) share of common stock, par value $0.0001 per share and one (1) common stock purchase warrant expiring July 31, 2013 with an exercise price of $0.60.
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
(Unaudited – Prepared by Management)
Note 9 – Warrants (continued):
The following table is a summary of information about the warrants outstanding at May 31, 2011.
| Shares Underlying Warrants Outstanding | |
| Range of Exercise Price | | Shares Underlying Warrants Outstanding | | Weighted Average Remaining Contractual Life | | Weighted Average Exercise Price | |
| $0.50 ~ $0.60 | | | 3,277,849 | | 1.88 years | | $ | 0.57 | |
The following table is a summary of activity of outstanding stock warrants:
| | | Number of Shares | | | Weighted Average Exercise Price | |
| Balance, August 31, 2010 | | | -0- | | | $ | -0- | |
| Warrants expired | | | -0- | | | | -0- | |
| Warrants cancelled | | | -0- | | | | -0- | |
| Warrants Granted | | | 3,277,849 | | | | 0.57 | |
| Warrants exercised | | | -0- | | | | -0- | |
| Balance, May 31, 2011 | | | 3,277,849 | | | $ | 0.57 | |
Note 10 – Subsequent Events
On July 5, 2011, the Company issued a total of 260,000 units of the securities in consideration of funds received of $78,000 under the second private placement.
Item 2 – Management’s Discussion and Analysis or Plan of Operation
Overview
We caution you that reliance on any forward-looking statement involves risks and uncertainties, and that although we believe the assumptions on which our forward-looking statements are based are reasonable, any of those assumptions could prove to be inaccurate, and as a result, the forward-looking statements based on those assumptions could be incorrect. In light of these and other uncertainties, you should not conclude that we will necessarily achieve any plans and objectives or projected financial results referred to in any of the forward-looking statements. We do not undertake to release the results of any revisions of these forward-looking statements to reflect future events or circumstances. Some of the factors that may cause actual results, developments and business decisions to differ materially from those contemplated by such forward-looking statements include the following:
RESULTS OF OPERATIONS
We did not have material operations prior to the current year so any year to year comparison is not meaningful.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities for the nine months ended May 31, 2011 was $443,826 which was offset by net proceeds of $687,776 provided from financing activities, principally the sale of stock and warrants.
We had cash resources of $247,099 at May 31, 2011 and intend to rely on the sale of stock in private placements to increase liquidity to enable us to execute on our plan to manufacture and market vertical axis wind turbines. If we are unable to raise cash through the sale of our stock, we may be required to severely restrict our operations. During the period June 1, 2011 to July 11, 2011 we have realized $78,000 from the sale of our securities in a private placement.
Critical Accounting Policies
Financial Reporting Release No. 60 of the SEC encourages all companies to include a discussion of critical accounting policies or methods used in the preparation of the financial statements. There are no current revenue generating activities that give rise to significant assumptions or estimates. Our financial statements filed as part of our November 30, 2010 Annual Report on Form 10-K include a summary of the significant accounting policies and methods used in the preparation of our financial statements.
Off-Balance Sheet Arrangements
We have never entered into any off-balance sheet financing arrangements and have not formed any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.
Item 3. - Quantitative and Qualitative Disclosures About Market Risk
The information called for by this item is not required as we are a smaller reporting company.
Item 4T. -Controls and Procedures
Disclosure Controls and Procedures
Regulations under the Securities Exchange Act of 1934 (the “Exchange Act”) require public companies to maintain “disclosure controls and procedures,” which are defined as controls and other procedures that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. 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 Exchange 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.
We conducted an evaluation, with the participation of our Chief Executive Officer who is also our principal financial officer, of the effectiveness of our disclosure controls and procedures as of May 31, 2011. Based on that evaluation, our Chief Executive Officer has concluded that as of May 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level due to the material weaknesses described below.
In light of the material weaknesses described below, we performed additional analysis and other post-closing procedures to ensure our financial statements were prepared in accordance with generally accepted accounting principles. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented.
A material weakness is a control deficiency (within the meaning of the Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 2) or combination of control deficiencies that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. Management has identified the following two material weaknesses which have caused management to conclude that, as of May 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level:
1. We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us for the year ending August 31, 2010 and the quarter ended November 30, 2010. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
2. We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and has concluded that the control deficiency that resulted represented a material weakness.
To address these material weaknesses, management performed additional analyses and other procedures to ensure that the financial statements included herein fairly present, in all material respects, our financial position, results of operations and cash flows for the periods presented.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, the issuer’s principal executive and principal financial officers and effected by the issuer’s board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America and includes those policies and procedures that:
Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the issuer;
Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the issuer; and
Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the issuer’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Because of the inherent limitations of internal control, there is a risk that material misstatements may not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.
As of the end of our most recent fiscal quarter, management assessed the effectiveness of our internal control over financial reporting based on the criteria for effective internal control over financial reporting established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO") and SEC guidance on conducting such assessments. Based on that evaluation, they concluded that, as of November 30, 2010, such internal control over financial reporting was not effective. This was due to deficiencies that existed in the design or operation of our internal control over financial reporting that adversely affected our internal controls and that may be considered to be material weaknesses.
The matters involving internal control over financial reporting that our management considered to be material weaknesses under the standards of the Public Company Accounting Oversight Board were: (1) lack of a functioning audit committee due to a lack of a majority of independent members and a lack of a majority of outside directors on our board of directors, resulting in ineffective oversight in the establishment and monitoring of required internal controls and procedures; and (2) inadequate segregation of duties consistent with control objectives of having segregation of the initiation of transactions, the recording of transactions and the custody of assets. The aforementioned material weaknesses were identified by our Chief Executive Officer in connection with the review of our financial statements as of May 31, 2011.
Management believes that the material weaknesses set forth in items (1) and (2) above did not have an effect on our financial results. However, management believes that the lack of a functioning audit committee and the lack of a majority of outside directors on our board of directors results in ineffective oversight in the establishment and monitoring of required internal controls and procedures, which could result in a material misstatement in our financial statements in future periods.
This quarterly report 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 attestation by the Company's registered public accounting firm pursuant to temporary rules of the SEC that permit the Company to provide only the management's report in this annual report.
Management's Remediation Initiatives
In an effort to remediate the identified material weaknesses and other deficiencies and enhance our internal controls, we have initiated, or plan to initiate, the following series of measures:
We will increase our personnel resources and technical accounting expertise within the accounting function when funds are available to us. First, we will create a position to segregate duties consistent with control objectives of having separate individuals perform (i) the initiation of transactions, (ii) the recording of transactions and (iii) the custody of assets. Second, we will create a senior position to focus on financial reporting and standardizing and documenting our accounting procedures with the goal of increasing the effectiveness of the internal controls in preventing
and detecting misstatements of accounting information. Third, we plan to appoint one or more outside directors to our board of directors who shall be appointed to an audit committee resulting in a fully functioning audit committee who will undertake the oversight in the establishment and monitoring of required internal controls and procedures such as reviewing and approving estimates and assumptions made by management when funds are available to us. Although there is substantial uncertainty in any such estimate, we anticipate the costs of implementing these remediation initiatives will be approximately $150,000 to $200,000 a year in increased salaries, legal and accounting expenses.
Management believes that the appointment of one or more outside directors, who shall be appointed to a fully functioning audit committee, will remedy the lack of a functioning audit committee and a lack of a majority of outside directors on our Board.
We anticipate that these initiatives will be at least partially, if not fully, implemented by August 31, 2012.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15 (f) under the Exchange Act) during the quarter ended May 31, 2011 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
Item 1 – Legal Proceedings
The Company is not currently a party to any legal proceedings.
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
During the nine month period ended May 31, 2011, we realized $779,253 from the sale of shares of common stock and warrants in units in private placements. The common stock and warrants were sold in units with each unit consist of one share of common stock and one common stock purchase warrant with an exercise price of $0.60 and an expiration date of July 31, 2012. The sales were exempt from regulation by reason of Regulation D under the Securities Act of 1933, specifically Rule 506 there under. Each of the purchasers represented that they were and accredited investor and each certificate issued in the private placement has an appropriate restrictive legend and our transfer agent maintains stop transfer instructions with respect thereto. All sales were affected by our officer and we did not pay any commissions with respect thereto.
Item 3 – Defaults Upon Senior Securities
None.
Item 4 – REMOVED AND RESERVED
Item 5 – Other Information
None.
Item 6 – Exhibits
The following documents are filed as part of this Report.
Exhibit Number Exhibit Description
| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a) of the Securities Exchange Act, as amended. * |
| 32.1 | Certificate (Pursuant to 18 U.S.C. Section 1350 as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002) of Principal Financial Officer. * |
* Filed herewith
SIGNATURE
In accordance with the requirements of the Securities Exchange Act of 1934, as amended, the registrant caused this Report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| | Sauer Energy, Inc. | |
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| Date: July 12, 2011 | By: | /s/Dieter R. Sauer, Jr. | |
| | | Name: Dieter R. Sauer, jr. | |
| | | Title: CEO (Principal Executive, Accounting and Financial Officer) | |
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