UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended: August 31, 2011
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission File No.: 000-53598
SAUER ENERGY, Inc.
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(Exact Name of Registrant as Specified in Its Charter)
Nevada --------------------------------------------------------- (State or Other Jurisdiction of Incorporation or Organization) | 26-3261559 -------------------------------------- (I.R.S. Employer Identification No.) |
2326 Teller Road, Newbury Park, California 91320
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(Address of Principal Executive Offices)
800-829-8748
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(Registrant’s telephone number, including area code)
N/A ------------------------------------------------------------------------------- |
(Former name, former address and former fiscal year, if changed since last report
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock, par value $0.001
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes o No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (s 229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company filer. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer Accelerated filer Non-accelerated Filer Smaller reporting company x
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of December 9, 2011: $20,490,019.
The number of shares of the registrant’s common stock outstanding as of December 9, 2011: 77,964,436
INDEX TO FORM 10-K ANNUAL REPORT
| Page | ||
| PART I | ||
| Item 1 | Business | 2 |
| Item 1A | Risk Factors | 12 |
| Item 1B | Unresolved Staff Comments | 18 |
| Item 2 | Properties | 18 |
| Item 3 | Legal Proceedings | 18 |
| Item 4 | (Removed and Reserved) | 18 |
| PART II | ||
| Item 5 | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 18 |
| Item 6 | Selected Financial Data | 19 |
| Item 7 | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 20 |
| Item 7A | Quantitative and Qualitative Disclosures About Market Risk | 21 |
| Item 8 | Financial Statements and Supplementary Data | 21 |
| Item 9 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 21 |
| Item 9A | Controls and Procedures | 21 |
| Item 9B | Other Information | 24 |
| PART III | ||
| Item 10 | Directors, Executive Officers and Corporate Governance | 24 |
| Item 11 | Executive Compensation | 26 |
| Item 12 | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 28 |
| Item 13 | Certain Relationships and Related Transactions, and Director Independence | 29 |
| Item 14 | Principal Accounting Fees and Services | 29 |
| PART IV | ||
| Item 15 | Exhibits, Financial Statement Schedules | 30 |
| SIGNATURES | 31 |
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FORWARD-LOOKING STATEMENTS
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS There are statements in this report that are not historical facts. These forward-looking statements can be identified by use of terminology such as believe, hope, may, anticipate, should, intend, plan, will, expect, estimate, project, positioned, strategy and similar expressions. You should be aware that these forward-looking statements are subject to risks and uncertainties that are beyond our control. For a discussion of these risks, you should read this entire Report carefully, especially the risks discussed under Risk Factors. Although management believes that the assumptions underlying the forward-looking statements included in this Report are reasonable, they do not guarantee our future performance, and actual results could differ from those contemplated by these forward-looking statements. The assumptions used for purposes of the forward-looking statements specified in the following information represent estimates of future events and are subject to uncertainty as to possible changes in economic, legislative, industry, and other circumstances. As a result, the identification and interpretation of data and other information and their use in developing and selecting assumptions from and among reasonable alternatives require the exercise of judgment. To the extent that the assumed events do not occur, the outcome may vary substantially from anticipated or projected results, and, accordingly, no opinion is expressed on the achievability of those forward-looking statements. In the light of these risks and uncertainties, there can be no assurance that the results and events contemplated by the forward-looking statements contained in this Report will in fact transpire. You are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. We do not undertake any obligation to update or revise any forward-looking statements.
PART I
References to “us”, “we” and “our” in this report refer to Sauer Energy, Inc. together with our subsidiary.
ITEM 1. BUSINESS.
General Development of Business
Organizational History
Business Development:
BCO Hydrocarbon Ltd. (“the Company”), was incorporated on August 19, 2008, in the State of Nevada, for the purpose of acquiring, exploring, and if warranted and feasible, developing natural resource assets. The Company began its business operations by executing a Farm-in Agreement providing the Company with the right to a 50.0% working interest in two Petroleum and Natural Gas Crown leases in Alberta, Canada. On July 25, the Company acquired all of the shares of Sauer Energy, Inc., a California corporation, and has since changed its business to that of Sauer Energy, Inc. On September 17, 2010 our majority shareholder and sole director approved a name change which was officially effected on October 15, 2010, when we became Sauer Energy, Inc.
Prior Operations:
The Company operated in the oil and gas industry and maintained a right to operate and a right to explore on two Crown Petroleum and Natural Gas Leases in the Province of Alberta through. The leases were for 640 gross acres or 320 net acres. The Company planned to appoint, Unitech as the operator, but Unitech advised the Company that the commodity price of gas was too low to consider undertaking any exploration activities. Based on that advice, the Company determined not to undertake any exploration activities on the leases until such time as the price of gas
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improved. We were required under the terms of our farm-in agreement to expend a total of $25,000 prior to January 10, 2010, however, based on the advice from our proposed operator, we were able to negotiate an extension of that commitment until gas prices should improve sufficiently to make exploration development activities advisable. After July 25, 2010, we were able to dispose of our interests in these Crown Petroleum Natural Gas Leases without further liability to us. Due to the limited prospects of its proposed oil and gas activities, the Company sought other acquisition activities and these efforts led to the acquisition of Sauer Energy, Inc. on July 25, 2010.
Prior Planned Principal Products or Services and Their Markets:
Our principal products were intended to be petroleum and natural gas and any related saleable by-products. Our initial market was to be the Province of Alberta. We never had any salable oil and gas production or products.
Prior Planned Distribution Methods of the Products or Services:
Once we had oil and gas production, we would have relied on the operator of our oil and gas wells to distribute any oil and gas and saleable by-products.
Competitive Business Conditions and Our Competitive Position In Prior The Industry and Methods of Competition:
In our former line of business our competition came from other oil and gas companies that were acquiring oil and gas assets that we contemplated acquiring due to its investment potential and capital expenditure. The sources and availability of acquiring oil and gas assets was contingent on our ability to finance opportunities as they became available. Since our financial resources were severely limited during the period we were engaged in the oil and gas business, we were at a distinct disadvantage when competing against companies with significant financing ability and significant asset backed financing.
Dependence On One Or A Few Major Customers:
We never produced any oil or gas and therefore had no customers.
Patents, Trademarks, Licenses, Franchises, Concessions, Royalty Agreements or Labor Contracts, Including Duration:
There were no inherent factors or circumstances associated with the oil and gas industry that would give cause for any patent, trademark or license infringements or violations. We had not entered into any franchise agreements or other contracts that have given, or could give rise to obligations or concessions.
We did not hold any intellectual property related to our prior operations.
Need For Any Government Approval of Principal Products or Services:
We never had any production, however, our operator was required to have government approvals for all drilling and production activities undertaken in the Province of Alberta and thus, if we had continued in the oil and gas business, we would have been required to ensure that all approvals were granted and complied with. We cannot ascertain what the associated costs might have been.
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Effects of Existing or Probable Government Regulations on our Prior Business:
In Canada, producers of oil negotiate sales contracts directly with oil purchasers, with the result that the market determines the price of oil. The price depends in part on oil quality, prices of competing fuels, distance to market, the value of refined products and the supply/demand balance. Oil exports may be made pursuant to export contracts with terms not exceeding 1 year in the case of light crude, and not exceeding 2 years in the case of heavy crude, provided that an order approving any such export has been obtained from the National Energy Board of Canada (“NEB”). Any oil export to be made pursuant to a contract of longer duration (to a maximum of twenty-five (25) years) requires an exporter to obtain an export license from the NEB and the issuance of such a license requires the approval of the Governor in Council.
In Canada, the price of natural gas sold in interprovincial and international trade is determined by negotiation between buyers and sellers. Natural gas exported from Canada is subject to regulation by the NEB and the Government of Canada. Exporters are free to negotiate prices and other terms with purchasers, provided that the export contracts continue to meet certain criteria prescribed by the NEB and the Government of Canada. Natural gas exports for a term of less than two years or for a term of 2 to 20 years (in quantities no greater than 30,000 m3/day) must be made pursuant to an NEB order. Any natural gas export to be made pursuant to a contract of longer duration (to a maximum of 25 years) or of a larger quantity requires an exporter to obtain an export license from the NEB and the issuance of such a license requires the approval of the Governor in Council.
The Government of Alberta also regulates the volume of natural gas which may be removed from the province for consumption elsewhere based on such factors as reserve availability, transportation arrangements and market considerations.
The Government of Alberta regulates the royalty percent from Crown mineral leases for petroleum, natural gas and hydrocarbon by-products.
Research and Development Activities and Costs:
We did not incur any research and development costs in our prior business.
Costs and Effects of Compliance with Environmental Laws:
Our oil and gas earned working interest rights would have been subject to numerous federal, provincial and municipal laws and regulations relating to environmental protection from the time oil and gas projects commence until lease sites are abandoned, restored and reclaimed. These laws and regulations govern, among other things, the amounts and types of substances and materials that may be released into the environment, the issuance of permits in connection with exploration, drilling and production activities, the release of emissions into the atmosphere, the discharge and disposition of generated waste materials, offshore oil and gas operations, the abandonment, reclamation and restoration of wells and facility sites and the remediation of contaminated sites. In addition, these laws and regulations may impose substantial liabilities for the failure to comply with them or for any contamination resulting from the operations associated with our assets. Laws and regulations protecting the environment have become more stringent in recent years, and may in certain circumstances impose “strict liability,” rendering a person liable for environmental damage
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without regard to negligence or fault on the part of such person. Such laws and regulations may expose us to liability for the conduct of or conditions caused by others, or for our acts which were in compliance with all applicable laws at the time such acts were performed. The application of these requirements or the adoption of new requirements could have a material adverse effect on our financial position and results of operations.
Employees:
We did not have employees in our prior operations, but relied on consultants as required and then management, being the directors and officers, to direct our business. Should we have found an oil and gas property or properties of merit which would require an operator, we would have needed need to hire additional staff for operations.
Acquisition of Sauer Energy, Inc. and Related Matters
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 $55,200.00; (b) the contribution by DS of all of the shares of Sauer Energy, Inc., 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 68,067,500 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.
SEI, whose business is described more fully below, is a development stage California corporation formed in 2008 engaged in the design and manufacture of vertical axis wind turbine (VAWT) systems. Management believes that SEI’s innovative design and utility makes it highly efficient and cost effective to own and operate. The initial VAWTs to be sold by the Company will be designed to be sold as a kit to be mounted on a typical house or small building. As a result of the Closing, the Company is engaged in the business of SEI, but the Company will require substantial additional capital to complete the development stage of that business. Management can give no assurance that any additional capital will be raised or that SEI’s VAWT’s will be successfully marketed or that, if marketed, they can be marketed profitably. The Company does not have any commitments to raise additional capital. Mr. Sauer is the assignee of a design patent, No D597028S granted July 29, 2009 for a vertical axis wind turbine that is designed to be reliable, efficient and inexpensive.
Due to his acquisition of 39,812,500 shares in connection with the Closing and the return for cancellation of 68,067,500 shares, upon the consummation of the closing under the Agreement, Dieter Sauer, Jr. owned approximately 51.6% of the Company’s issued and outstanding shares.
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Current Operations and Development Plan
We are now a development stage company engaged in developing vertical axis wind turbines for commercial and residential uses.
Small Wind Turbine Industry Overview
According to the American Wind Energy Association, “The number of Americans generating their own electricity with small-scale wind turbines (those with rated capacities of 100 kilowatts and under) increased by just under 10,000 last year despite an economic downturn that impacted the heart of the small wind market: homeowners and small-business owners. In fact, 95% of all small wind turbines sold in the U.S. last year were made by U.S. manufacturers.”
Although the small wind turbine industry has operated for 80 years, half of the sales have occurred in the past 3 years. Both federal and state policies have contributed to this success and credit also goes to investors and to consumers looking for a way to cut their electricity bills. Management believes that these trends will continue for the foreseeable future.
Aside from the residential market, more specialized applications include, but are not limited to:
Industrial Applications
Management believes that VAWT System applications such as those offered by the Company are superior to traditional Horizontal Axis Wind Turbines “HAWT”. The size, cost and noise factor of the HAWT are prohibitive. Our vertical design will contribute to allowing the industrial sector to satisfy the need for consumption. Furthermore, due to our simplicity of design, our VAWT’s can be manufactured on a large scale in fabrication factories throughout the world. Lucrative incentives are being offered to encourage renewable energy production and use, in the form of rebates and tax credits which should enhance customer interest and sales.
Oil Rigs and Off-Shore Platforms
Many off-shore locations receive relatively steady reliable winds and our VAWT Systems could produce a continuous supply of energy reducing the need for hydrocarbon based electrical generation. Our systems could allow for auxiliary and emergency power needs in addition to maintaining daily functions.
Ships
Ships create an optimum use for our VAWT Systems. While travelling over water, Ships are also powering through the air, thus creating a reliable and steady supply of wind. VAWT’s could be mounted throughout a ship’s superstructure to produce continuous supplementary energy to offset fuel consumption or for emergency use. Various candidates include tankers, cruise ships, cargo ships and military vessels.
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Islands and Other Remote Facilities
All sizes of islands are extremely dependent upon fuel feed generators and importation of the fuel can be costly. Our VAWT Systems are ideal for islands and other remote facilities as they are being designed to withstand various climates.
Advantages are:
| · | Flexibility in various locations |
| · | Ease of installation |
| · | Strong and durable |
| · | Minimal maintenance |
| · | Withstand harsh environment |
Residential
Our small VAWT Systems are designed to be attached to any building. We foresee our systems being used in residences as back-up power for black outs, to reduce power grid consumption and for generation of power to be inserted into the grid for revenue.
Our End-of-the-line VAWT System is a micro power station attached to a number of homes and to the power grid.
Advantages are:
| · | Maintain normal services |
| · | No power lost to impurities in the transmission |
| · | Excess power re-injected into grid for revenue |
Commercial Buildings
Due to their height, large commercial buildings may be especially suitable for VAWT application as they are likely to have relatively steady winds at their roofs and their vertical walls also cause windy conditions.
Communications Towers and Bridges
Various towers and bridges are subject to Federal Aviation Authority requirements to provide 24/7 365 days per year illumination. Our VAWT Systems can easily be installed on any tower or bridge. They can operate the tower or bridge lights and/or provide a backup power supply as well as generating revenue if connected to the power grid.
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Future Applications
Off-Shore and Hydro
While our initial VAWT designs are smaller scale, we may design large VAWT Systems in the future that can be placed off-shore along a coastal environment to catch on and off shore wind. We believe that these systems will be more efficient, less noisy and more bird friendly than HAWTs currently considered for such projects.
The principals of our VAWT Systems could be used underwater to take advantage of tidal flows in the ocean, streams and rivers.
Governmental Regulation
There are no Federal-level regulations that specifically controls the sale, distribution and installation of small wind turbines beyond general small business regulations. However, each state regulates the sale, installation and interconnection of alternative energy within their state. Utilities are required to interconnect and purchase renewable energy from small wind systems under the Public Utility Regulatory Policies Act of 1978 (“PURPA”), and individual utilities are permitted to regulate that process.
Property owners can take advantage of tax credits at 30% of installed units, up to $4,000. This credit remains in place until December 31, 2016. Rebates and incentives are offered by most states. Property owners are also able to depreciate their units.
Local zoning laws and regulations may impose special requirements on the installation of our turbines now or in the future, but we are not aware of any specific regulations.
Competition
We compete with all energy suppliers, including utilities and manufacturers of energy producing equipment. We believe that there are 95 U.S. small wind turbine companies. Of those, the majority are in the start-up phase. However, a few have longer operating histories or greater name recognition such as WePower Sustainable Energy Solutions, Windside Production Ltd., Mariah Power, Helix Wind Corp., and OregonWind Inc. Companies in other countries also produce small wind turbines. We also compete with solar-thermal and solar-photovoltaics systems. However, solar power installations are significantly more expensive than our VAWT Systems.
We intend to compete on price and because our design is highly efficient, aesthetically pleasing, and reliable.
In 2006, President Bush emphasized the nation’s need for greater energy efficiency and a more diversified energy portfolio. This led to a collaborative effort involving the Department of Energy, National Renewable Energy Laboratories and others to explore a modeled energy scenario in which wind provides 20% of U.S. electricity by 2030. This has been endorsed by the American Wind Energy Association and has become our national goal as well. Currently, we are at just over 1%. Management believes we have the competitive advantage of offering the right product at the right time.
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Intellectual Property
Our CEO owns all rights, title and interest in U.S. Design and Utility Patents which will be assigned to the Company. The Utility Patent deals with the function of the blades for the maximum capture of the wind. The Design Patent deals with the uniqueness of the design of the blades. Both patents are approved and completed. We await the issuance of the Utility Patent. The expiration of the patents is 14 years. Therefore, the Utility Patent expires in 2024, and the Design Patent expires in 2023.
Research and Development
We have focused our research and development on the quality and efficiency of our wind turbine systems. Extensive technical development has been completed and is ongoing. We are targeting our market for sales expansion. Future research and development will be focusing on scaling up our turbine systems for service to larger buildings, like apartment complexes, hospitals and office buildings. We spent approximately $274,640 in fiscal 2011 on research and development and $82,893 on research and development in 2010. We anticipate that our research and development expenditures will continue to rise in the current year if we are able to secure financing so that we have the resources to pursue these efforts. In the year ended August 31, 2011 we conducted third party testing at the University of Washington Aeronautical Laboratory, a testing organization under the University's Department of Aeronautics and Astronautics. The primary aerodynamic testing facility is the F. K. Kirsten Wind Tunnel. We have done our third-party wind tunnel testing at their facility in the past and look forward to utilizing their facility for continued research and development testing.
Manufacturing
We have determined to use VEC Technologies, LLC of Greenville, Pennsylvania for manufacture of the blades for our products because of its reputation for consistent quality,materials and dependable production. The first resin composite blades have been received from VEC Technologies, LLC, as promised and to specifications.
The other components of our products are available from several sources at prices we deem reasonable. We plan to establish an assembly facility during 2012 and begin commercial assembly during 2012. Until our new facility is established we will manufacture within our existing facility.
Employees
As of August 31, 2011, we had 2 full-time employees and 13 independent contractors. We believe our relationships with our current employees are good. We also retain a limited number of independent contractors to perform projects. To implement our business strategy, we expect, over time, continued growth in our employee and infrastructure requirements, particularly as we expand our engineering, sales and marketing capacities going forward.
Company Philosophy
We strive to embrace, support and enact, within their sphere of influence, a set of core values that define us.
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Our Duty to Ourselves
With honesty and integrity at the heart of us as individuals and as a company, our sincerity will be evident.
Our Duty to Each Other
Working as a team with fairness and respect for each other and for our company as a whole will always produce a winning combination.
Our Duty to Our Shareholders
Our Shareholders are partnering alongside us and placing their faith in us. They share our expectations and vision for growth and diligent use of their investment in us and in our company.
Our Duty to Our Consumers
This business revolves around the Consumers, not the other way around. We must live up to their trust in the quality, value, effectiveness, reliability, and safety of our products, and also in the integrity of what we say and do.
Our Duty to Our Vendors
The list of those with whom we choose to do business is based on clarity, honesty, reliability, accountability and trust. Only then, will our product maintain the standards we have set for quality and dependability our consumers can expect.
Our Duty to Our Dealers and Distributors
These individuals represent our products and our company and deserve all the assistance we can give them. Their reliance on our honest representations regarding our products and our company sits at the center of our relationship with them.
Our Duty to Our Community, Our Nation, and Our World
Our commitment to the environment is paramount. We strive to create products that are least invasive in their output to the atmosphere, at less cost, with the smallest possible carbon footprint.
Management believes that the foregoing commitments will not only enhance the spheres in which we operate but will also result in returns to our investors.
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Item 1A. Risk Factors.
This report includes forward-looking statements about our business and results of operations that are subject to risks and uncertainties. See "Forward-Looking Statements," above. Factors that could cause or contribute to such differences include those discussed below. In addition to the risk factors discussed below, we are also subject to additional risks and uncertainties not presently known to us or that we currently deem immaterial. If any of these known or unknown risks or uncertainties actually occur, our business could be harmed substantially.
Risks Related To Our Financial Condition and Our Business
SEI is a start up business which has never realized any revenue and has a history of losses. If we continue incurring losses and fail to achieve profitability, we may have to cease our operations. SEI. Unless we bring our products to market and realize revenues from their sale, shareholders are likely to lose their entire investment.
We do not have sufficient cash on hand.
As at August 31, 2011, we had $74,559 cash on hand. These cash resources are not sufficient for us to execute our business plan. If we do not generate sufficient cash from our intended financing activities and sales, we will be unable to continue our operations. We estimate that within the next 12 months we will need $5,000,000 in cash from either investors or operations. While we intend to engage in several equity or debt financings there is no assurance that these will actually occur. Nor can we assure our shareholders that we will not be required to obtain additional financing on terms that are dilutive of their interests. During fiscal 2011 we conducted an offering of our common stock under regulation D which, through yielded proceeds of approximately $921,000. We recognize that if we are unable to generate sufficient revenues or obtain debt or equity financing, we will not be able to earn profits and may not be able to continue operations.
If we are unable to continue to retain the services of Dieter Sauer, Jr. or if we are unable to successfully recruit qualified managerial and company personnel having experience in the small wind turbine industry, we may not be able to continue operations.
Our success depends to a significant extent upon the continued services of Dieter Sauer, Jr. our CEO and President. The loss of the services of Mr. Sauer could have a material adverse effect on our growth, revenues, and prospective business. Mr. Sauer will enter into an employment agreement with us requiring him to devote substantially all of his time to us. We do not have a “key person” life insurance policy on Mr. Sauer. Additionally, there are a limited number of qualified technical personnel with significant experience in the design, development, manufacture, and sale of our wind turbines, and we may face challenges hiring and retaining these types of employees.
In order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully recruiting qualified managerial and company personnel having experience in the small wind turbine business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.
If we are unable to successfully achieve broad market acceptance of our systems, we may not be able to generate enough revenues in the future to achieve or sustain profitability.
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We are dependent on the successful commercialization of our systems. The market for small wind turbines is at an early stage of development. The market for our systems is unproven. The technology may not gain adequate commercial acceptance or success for our business plan to succeed.
If we cannot establish and maintain relationships with distributors, we may not be able to increase revenues.
In order to increase our revenues and successfully commercialize our systems, we must establish and maintain relationships with various third party distributors. We currently do not have any signed distribution agreements.
If we cannot assemble a large number of our systems, we may not meet anticipated market demand or we may not meet our product commercialization schedule.
To be successful, we will have to assemble our systems in large quantities at acceptable costs while preserving high product quality and reliability. If we cannot maintain high product quality on a large scale, our business will be adversely affected. We may encounter difficulties in scaling up production of our systems, including problems with the supply of key components. Even if we are successful in developing our assembly capability, we do not know whether we will do so in time to meet our product commercialization schedule or satisfy the requirements of our customers. In addition, product enhancements need to be implemented to various components of the platform to provide better overall quality and uptime in high wind regimes. The implementation of the enhancements to our system may also delay significant production by requiring additional manufacturing changes and technical support to facilitate the manufacturing process.
If we experience quality control problems or supplier shortages from component suppliers, our revenues and profit margins may suffer.
We do not plan to manufacture our wind turbine systems ourselves, but plan to outsource this part of our business. Our dependence on third-party suppliers for components of our turbine systems involves several risks, including limited control over pricing, availability of materials, quality and delivery schedules. Any quality control problems or interruptions in supply with respect to one or more components or increases in component costs could materially adversely affect our customer relationships, revenues and profit margins.
Technological advances could render our VAWT products uncompetitive.
While management believes that our current and proposed designs are sufficiently advanced to be commercially successful, we cannot assure you that any competitor will not design a superior product with which we cannot compete or that other energy production sources may not in the future prove superior to wind power generation. Those events could substantially harm our operations.
Any future international expansion will subject us to risks associated with international operations that could increase our costs and decrease our profit margins.
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International operations are subject to several inherent risks that could increase our costs and decrease our profit margins including:
| · | changes in foreign currency exchange rates; |
| · | changes in a specific country’s economic conditions; |
| · | trade protective measures and import or export requirements or other restrictive actions by foreign governments; and |
| · | changes in tax laws. |
If we determine to seek sales or contract for manufacturing outside the United States, we will be subject to these risks. However, we plan to be in a strong financial position before we would attempt to do so.
If we cannot effectively manage our internal growth, our business prospects, revenues and profit margins may suffer.
If we fail to effectively manage our internal growth in a manner that minimizes strains on our resources, we could experience disruptions in our operations and ultimately be unable to generate revenues or profits. We expect that we will need to significantly expand our operations to successfully implement our business strategy. As we add marketing, sales and build our infrastructure, we expect that our operating expenses and capital requirements will increase. To effectively manage our growth, we must continue to expend funds to improve our operational, financial and management controls, and our reporting systems and procedures. In addition, we must effectively expand, train and manage our employee base. If we fail in our efforts to manage our internal growth, our prospects, revenue and profit margins may suffer.
Our technology competes against other small wind turbine technologies. Competition in our market may result in pricing pressures, reduced margins or the inability of our systems to achieve market acceptance.
We compete against several companies seeking to address the small wind turbine market. We may be unable to compete successfully against our current and potential competitors, which may result in price reductions, reduced margins and the inability to achieve market acceptance. The current level of market penetration for small wind turbines is relatively low and as the market increases, we expect competition to grow significantly. Our competition may have significantly more capital than we do and as a result, they may be able to devote greater resources to take advantage of acquisition or other opportunities more readily.
Our inability to protect our patents and proprietary rights in the United States and foreign countries could materially adversely affect our business prospects and competitive position.
Our vertical axis wind turbine designs are protected by a patent. However, the grant of a patents does not ensure against the possibility that our patent will not be found to infringe upon patents or other intellectual property rights held by others, nor does the grant of a patent does ensure that the patent will provide meaningful protection against potential or actual infringers by others.
If we encounter unforeseen problems with our current technology offering, it may inhibit our sales and early adoption of our product.
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We are in the process of setting a certification standard through extensive computer fluid dynamic testing and actual field testing to curb anomalies related to manufacturing before we finalize our process. We do not anticipate negative results based on our preliminary results. We are at a stage in development that we can perfect our design prior to going into production.
We are a technology development company and are in a production phase where we may encounter difficulties that we did not anticipate. Unforeseen problems relating to manufacture of the units or their operating effectively in the field could have a negative impact on adoption, future shipments and our operating results.
We are to establish and maintain required disclosure controls and procedures and internal controls over financial reporting and to meet the public reporting and the financial requirements for our business.
Our management has a legal and fiduciary duty to establish and maintain disclosure controls and control procedures in compliance with the securities laws, including the requirements mandated by the Sarbanes-Oxley Act of 2002. The standards that must be met for management to assess the internal control over financial reporting as effective are new and complex, and require significant documentation, testing and possible remediation to meet the detailed standards. Because we have limited resources, we may encounter problems or delays in completing activities necessary to make an assessment of our internal control over financial reporting, and disclosure controls and procedures. In addition, the attestation process by our independent registered public accounting firm is new and we may encounter problems or delays in completing the implementation of any requested improvements and receiving an attestation of our assessment by our independent registered public accounting firm. If we cannot assess our internal control over financial reporting as effective or provide adequate disclosure controls or implement sufficient control procedures, or our independent registered public accounting firm is is not expressly reporting on our internal controls and the lack of such report on such assessment, may cause investor confidence and share value may be negatively impacted. We currently do not have a sufficient number of management employees to establish adequate controls and procedures.
Our officers have no experience in managing a public company.
Our present officers have no previous experience in managing a public company and we do not have a sufficient number of employees to segregate responsibilities and may be unable to afford increasing our staff or engaging outside consultants or professionals to overcome our lack of employees. During the course of our testing, we may identify other deficiencies that we may not be able to remediate in time to meet the deadline imposed by the Sarbanes-Oxley Act for compliance with the requirements of Section 404. In addition, if we fail to achieve and maintain the adequacy of our internal controls, as such standards are modified, supplemented or amended from time to time, we may not be able to ensure that we can conclude on an ongoing basis that we have effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act. Moreover, effective internal controls, particularly those related to revenue recognition, are necessary for us to produce reliable financial reports and are important to help prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock, if a market ever develops, could drop significantly.
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Control by Management
Our company is effectively controlled by management, specifically Dieter Sauer, Jr., our CEO and sole director, who owns 39,812,500 shares or 51.6% of our 77,964,436 issued and outstanding shares of common stock as of December 9, 2011. Accordingly, he will be able to elect our board of directors and control our corporate affairs for the foreseeable future.
Risks Related to Common Stock
The large number of shares eligible for immediate and future sales may depress the price of our stock.
As of December 9, 2011 we had 77,964,436 shares of common stock outstanding. 32,995,200 shares are “free trading” and may serve to overhang the market and depress the price of our common stock.
Additional financings may dilute the holdings of our current shareholders.
In order to provide capital for the operation of the business, we may enter into additional financing arrangements. These arrangements may involve the issuance of new shares of common stock, debt securities that are convertible into common stock or warrants for the purchase of common stock. Any of these items could result in a material increase in the number of shares of common stock outstanding, which would in turn result in a dilution of the ownership interests of existing common shareholders. In addition, these new securities could contain provisions, such as priorities on distributions and voting rights, which could affect the value of our existing common stock.
There is currently a limited public market for our common stock. Failure to develop or maintain a trading market could negatively affect its value and make it difficult or impossible for you to sell your shares.
Our common stock trades on the OTCBB under the Symbol SENY. There has been a limited public market for our common stock and an active public market for our common stock may not develop. Failure to develop or maintain an active trading market could make it difficult for you to sell your shares or recover any part of your investment in us. Even if a market for our common stock does develop, the market price of our common stock may be highly volatile. In addition to the uncertainties relating to future operating performance and the profitability of operations, factors such as variations in interim financial results or various, as yet unpredictable, factors, many of which are beyond our control, may have a negative effect on the market price of our common stock.
“Penny Stock” rules may make buying or selling our common stock difficult.
Limitations upon Broker-Dealers Effecting Transactions in "Penny Stocks"
Trading in our common stock is subject to material limitations as a consequence of regulations which limit the activities of broker-dealers effecting transactions in "penny stocks." Pursuant to Rule 3a51-1 under the Exchange Act, our common stock is a "penny stock" because it (i) is not listed on any national securities exchange or The NASDAQ Stock Market™, (ii) has a market price of less than $5.00 per share, and (iii) its issuer (the Company) has net tangible assets less than $2,000,000 (if the issuer has been in business for at least three (3) years) or $5,000,000 (if the issuer has been in business for less than three (3) years).
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Rule 15g-9 promulgated under the Exchange Act imposes limitations upon trading activities on "penny stocks", which makes selling our common stock more difficult compared to selling securities which are not "penny stocks." Rule 15a-9 restricts the solicitation of sales of "penny stocks" by broker-dealers unless the broker first (i) obtains from the purchaser information concerning his financial situation, investment experience and investment objectives, (ii) reasonably determines that the purchaser has sufficient knowledge and experience in financial matters that the person is capable of evaluating the risks of investing in "penny stocks", and (iii) delivers and receives back from the purchaser a manually signed written statement acknowledging the purchaser's investment experience and financial sophistication.
Rules 15g-2 through 15g-6 promulgated under the Exchange Act require broker-dealers who engage in transactions in "penny stocks" first to provide their customers with a series of disclosures and documents, including (i) a standardized risk disclosure document identifying the risks inherent in investing in "penny stocks", (ii) all compensation received by the broker-dealer in connection with the transaction, (iii) current quotation prices and other relevant market data, and (iv) monthly account statements reflecting the fair market value of the securities.
There can be no assurance that any broker-dealer which initiates quotations for the Common Stock will continue to do so, and the loss of any such broker-dealer likely would have a material adverse effect on the market price of our common stock.
Shares Eligible for Future Sale
The sale of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. In addition, any such sale or perception could make it more difficult for us to sell equity, or equity related, securities in the future at a time and price that we deem appropriate. If and when this registration statement becomes effective and we become subject to the reporting requirements of the Exchange Act, we might elect to adopt a stock option plan and file a registration statement under the Securities Act registering the shares of common stock reserved for issuance there under. Following the effectiveness of any such registration statement, the shares of common stock issued under such plan, other than shares held by affiliates, if any, would be immediately eligible for resale in the public market without restriction.
The sale of shares of our common stock which are not registered under the Securities Act, known as “restricted” shares, typically are effected under Rule 144. At August 31, 2011 we had outstanding an aggregate of 44,969,236 shares of restricted common stock. All of our shares of common stock might be sold under Rule 144. No prediction can be made as to the effect, if any, that future sales of “restricted” shares of our common stock, or the availability of such shares for future sale, will have on the market price of our common stock or our ability to raise capital through an offering of our equity securities.
The sale of a substantial number of shares of our common stock, or the perception that such sales could occur, could adversely affect prevailing market prices for our common stock. In addition, any such sale or perception could make it more difficult for us to sell equity, or equity related,
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securities in the future at a time and price that we deem appropriate. If and when this registration statement becomes effective and we become subject to the reporting requirements of the Exchange Act, we might elect to adopt a stock option plan and file a registration statement under the Securities Act registering the shares of common stock reserved for issuance thereunder. Following the effectiveness of any such registration statement, the shares of common stock issued under such plan, other than shares held by affiliates, if any, would be immediately eligible for resale in the public market without restriction.
No Dividends
We never have paid any dividends on our common stock and we do not intend to pay any dividends in the foreseeable future.
.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None
ITEM 2. PROPERTIES.
We currently occupy approximately 950 square feet of office and storage space within the residence of our CEO. We are allocated one half of his rental costs of $2,100 per month so we pay $1,050 per month. We believe our facilities are adequate for our present needs and the lease runs to the end of January 2015. If we require additional space, management believes that suitable space can be found at comparable costs in the vicinity of our present offices. In addition, we from time to time rent storage space on a month to month basis from commercial facilities on an as needed basis.
ITEM 3. LEGAL PROCEEDINGS.
We currently have no legal proceedings pending nor have any legal proceeding been threatened against us or any of our officers, directors or control persons of which we are aware.
ITEM 4. REMOVED AND RESERVED.
PART II
ITEM 5. MARKET for REGISTRANT’S COMMON EQUITY and ISSURER PURCHASES of EQUITY SECURITIES.
Market Information
Since August 13, 2009, our common stock has been quoted on the Over the Counter Bulletin Board under the symbol “BCOZ” through October 19, 2010 and the Symbol “SENY”, thereafter. During the period ended year ended August 31, 2010, there were no trades prior to June 1, 2010. Thereafter our common stock traded was quoted on the Over the Counter Bulletin Board at prices ranging from $0.10 to $1.60. These prices represent interdealer quotations and may not represent actual trades.
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The following chart sets forth certain information regarding the closing prices of our stock for the period indicated.
Fiscal Year Ended August 31, 2011
| High Closing Price | Low Closing Price | |
| First Quarter | $1.20 | $1.00 |
| Second Quarter | $1.30 | $0.77 |
| Third Quarter | $1.15 | $0.42 |
| Fourth Quarter | $0.68 | $0.41 |
Reports to Shareholders
We plan to furnish our shareholders with an annual report for each fiscal year ending August 31 containing financial statements audited by our independent certified public accountants. Additionally, we may, in our sole discretion, issue unaudited quarterly or other interim reports to our shareholders when we deem appropriate. We intend to maintain compliance with the periodic reporting requirements of the Securities Exchange Act of 1934.
Holders
As of December 9, 2011, we had 122 shareholders of record and 77,964,436 common shares issued and outstanding. The number of holders does not include the shareholders for whom shares are held in a "nominee" or "street" name.
Dividend Policy
We have not declared or paid any dividends on our common stock to date. We anticipate that any future earnings will be retained as working capital and used for business purposes. Accordingly, it is unlikely that we will declare or pay any such dividends in the foreseeable future.
Securities Authorized for Issuance under Equity Compensation Plans
None
Recent Sales of Unregistered Securities
None.
ITEM 6. SELECTED FINANCIAL DATA.
Not applicable
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ITEM 7. MANAGEMENT’S DISCUSSION and ANALYSIS of FINANCIAL CONDITIONS and REULTS 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:
We did not have material operations prior to the prior year so any year to year comparison is not meaningful.
Fiscal Year 2011 vs. Fiscal Year 2010
Operations
We have not realized any revenue to date. Our operating expenses increased from $214,899 in FY 2010 to $1,366,199 in FY 2011 as professional fees, largely related to being a public company with significant activity went from $4,030 in FY 2010 to $57,994 in FY 2011; research and development costs went from $82,893 in FY 2010 to $274,640 in FY 2011 and our general and administrative expense went from $127,976 in FY 2010 to $1,022,304 in FY 2011. These increases expense, which reflect our higher level of operations in FY 2011 resulted in our net loss increasing from $(102,783) in FY 2010 to $(1,366,199) in FY 2011. We anticipate continued increased costs associated with increased levels of operation and our manufacturing and marketing processes which will begin in the current fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash flows used in operating activities for the fiscal year ended August 31, 2011 was $679,672 which was offset by net proceeds of $920,829 from the sale of our stock. We had $74,559 of cash on hand at the end of the year ended August 31, 2011. This is not sufficient to fund our operations and we intend to rely on the sale of stock in private placements to increase liquidity. If we are unable to raise cash through the sale of our stock, we may be required to severely restrict our operations.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and supplementary data required by this Item 8 are listed in Item 15(a) (1) and begin at page F-1 of this Annual Report on Form 10-K.
ITEM 9. CHANGES in and DISAGREEMENTS with ACCOUNTANTS on ACCOUNTING and FINANCIAL DISCLOSURE.
None
ITEM 9A. 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 August 31, 2011. Based on that evaluation, our Chief Executive Officer has concluded that as of August 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 August 31, 2011, our disclosure controls and procedures were not effective at the reasonable assurance level:
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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, 2011. 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
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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 year, 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 August 31, 2011, 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 August 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 annual 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
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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 $50,000 to $100,000 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 fourth quarter of the year ended August 31, 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION.
We do not have any information that was required to be reported on Form 8-K during the fourth quarter.
PART 1II
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS and CORPORATE GOVERNANCE.
Our directors and officers as of August 31, 2011 are:
| Name | Age | Position(s) | �� | ||||
| Dieter R. Sauer, Jr. | 56 | Director and CEO | |||||
| Ana Sauer | 61 | Secretary | |||||
| Jeff Massey | 56 | Director | |||||
| Zohreh Hashemi | 58 | Director | |||||
Dieter R Sauer, Jr., was elected a director and our CEO and president on July 25, 2010. Mr. Sauer founded our operating subsidiary, Sauer Energy, Inc., a California corporation, in August 2008 and has worked for that company since then.
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Prior thereto from 2001 he was an independent marketing, sales and business development consultant. We have not paid any compensation to Mr. Sauer to date.
Ana Sauer was appointed Secretary of the Company to serve at the pleasure of the Board on August 5, 2010. Ms. Sauer is a co-founder of our operating subsidiary Sauer Energy, Inc., a California corporation, and serves as its secretary and a director. She has been licensed as a real estate agent since October of 2007. From 2004 to 2007, Ms. Sauer was President of Cielle Enterprises, a privately held company, engaged in developing and marketing cosmeciuticals.
Jeff Massey joined our board on December 8, 2010. Mr. Massey is President and Chief Executive Officer of Asbuilt Information Systems, which he founded in 1990 and built to become one of the largest privately held U.S. professional services firms specializing in a wide variety of software implementation and turnkey solutions for building measurement, tenant and corporate space accounting.
Zohreh Hashemi joined our board on December 8, 2010. Ms. Hashemi worked for Amgen, Inc., from 2000 through 2009 as a Senior System Engineer. Prior thereto she held management positions with Sony Pictures Entertainment, BAX Global, Universal Studios and Hughes Aircraft. As an engineer, she has lead departments in development and implementation controls and procedures and has spent the majority of her career in development of various products. She also has established strategic manufacturing relationships.
Family Relationships
Dieter R. Sauer, Jr. and Ana Sauer are husband and wife. There are no arrangements or understandings between or among any of the directors, executive officers or other person pursuant to which such person was selected to serve as a director or officer.
Involvement in certain legal proceedings
Our directors, executive officers and control persons have not been involved in any of the following events during the past five years:
any bankruptcy petition filed by or against any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining, barring, suspending or otherwise limiting his involvement in any type of business, securities or banking activities; or
being found by a court of competent jurisdiction (in a civil action), the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated.
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Term of Office
The term of office of the current directors shall continue until new directors are elected or appointed at an annual meeting of shareholders.
Committees of the Board and Financial Expert
We do not have a separately-designated audit or compensation committee of the Board or any other Board-designated committee. Audit and compensation committee functions are performed by our Board of Directors. We will form such committees in the future as the need for such committees may arise. In addition, at this time we have determined that we do not have an “audit committee financial expert” as defined by the SEC on our Board.
Code of Ethics
In December 2010 we adopted a code of ethics, which is attached to this report as an exhibit. As required by SEC rules, we will report the nature of any change or waiver of our code of ethics.
Section 16(A) Beneficial Ownership Reporting Compliance
Based on a review of Forms 3, furnished to the registrant during its most recent fiscal year, it appears that these reports were filed untimely. However, all reports have been filed and no transactions were engaged in which would give rise to any liability under Section 16(b) of the Exchange Act during the most recent fiscal year: The untimely filings of the initial reports was occasioned by difficulties in obtaining the required filing codes.
ITEM 11. EXECUTIVE COMPENSATION.
Compensation of Executive Officers
Executive Compensation
The following table sets forth all compensation earned during the fiscal years ended August 31, 2011 and August 31, 2010 by (i) our Chief Executive Officer (principal executive officer), (ii) our Chief Financial Officer (principal financial officer), (iii) the three most highly compensated executive officers other than our CEO and CFO who were serving as executive officers at the end of our last completed fiscal year, whose total compensation exceeded $100,000 during such fiscal year ends, and (iv) up to two additional individuals for whom disclosure would have been provided but for the fact that the individual was not serving as an executive officer at the end of our last completed fiscal year, whose total compensation exceeded $100,000 during such fiscal year ends. We refer to all of these officers collectively as our “named executive officers”.
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Summary Compensation Table
| Name & Principal Position | Year | Salary | Stock | Option Awards | Non-Equity Incentive Plan Compensation | Oher Comp. | All other comp. | |||||||
| Bonus | Awards | |||||||||||||
| Dieter R. Sauer Jr., | 2011 | $ | 17,921 | - | - | - | - | - | - | |||||
| CEO (and CFO) | 2010 | - | - | - | - | - | - | - | ||||||
| Ana Sauer, | 2011 | - | - | - | - | - | - | - | ||||||
| Secretary | 2010 | - | - | - | - | - | - | - | ||||||
| Malcolm Albery | 2011 | - | - | - | - | - | - | - | ||||||
| CEO (and CFO) (Former | 2010 | - | - | - | - | - | - | - | ||||||
Compensation of Directors
The Company has no standard arrangements in place or currently contemplated to compensate the Company’s directors for their service as directors or as members of any committee of directors.
Employment Agreements
We do not have employment agreements with any of our executive officers or directors. .
Termination of Employment
There are no compensatory plans or arrangements, including payments to be received from the Company, with respect to any person named in the Summary Compensation Table set forth above that would in any way result in payments to any such person because of his or her resignation, retirement or other termination of such person’s employment with us.
Employee Benefit Plans
None
Indemnification of Directors and Executive Officers and Limitation of Liability
Nevada law generally permits us to indemnify our directors, officers, employees and agents. Pursuant to the provisions of Nevada Revised Statutes 78.7502, we, as a corporation organized in Nevada, may indemnify our directors, officers, employees and agents in accordance with the following:
(a) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any action, except an action by or in the right of the corporation, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation, against expenses, actually and reasonably incurred by him in connection with the action, suit or proceeding if he: (a) is not liable for breach of his fiduciary duties as a director or officer pursuant to Nevada Revised Statutes 78.138; or (b) acted in good
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faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful.
(b) A corporation may indemnify any person who was or is a party or is threatened to be made a party to any action by or in the right of the corporation to procure a judgment in its favor, by reason of the fact that he is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation against expenses actually and reasonably incurred by him in connection with the defense or settlement of the action or suit if he: (a) is not liable for breach of his fiduciary duties pursuant to Nevada Revised Statutes 78.138; or (b) acted in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the corporation. Indemnification may not be made for any claim, issue or matter as to which such a person has been adjudged by a court of competent jurisdiction, after exhaustion of all appeals there from, to be liable to the corporation or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which the action or suit was brought or other court of competent jurisdiction determines upon application that in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such expenses as the court deems proper.
(c) To the extent that a director, officer, employee or agent of a corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding, or in defense of any claim, issue or matter therein, the corporation shall indemnify him against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.
Charter Provisions, Bylaws and Other Arrangements of the Registrant
Our Certificate of Incorporation, as amended, does not contain any specific language enhancing or limiting the Nevada statutory provisions referred to above.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to our directors, officers and controlling persons pursuant to the foregoing provisions, or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy and is, therefore, unenforceable.
ITEM 12. SECURITY OWNERSHIP of CERTAIN BENEFICIAL OWNERS and MANAGEMENT and RELATED STOCKHOLDER MATTERS.
Security Ownership of Certain Beneficial Owners
The following table sets forth information regarding beneficial ownership of our common stock as of August 31, 2010 by (i) any person or group with more than 5% of any class of voting securities, (ii) each director, (iii) our chief executive officer and each other executive officer whose cash compensation for the most recent fiscal year exceeded $100,000 and (iv) all such executive officers and directors as a group. Unless otherwise specified, the address of each of the persons set forth below is in care of the Company, 2326 Teller Road, Newbury Park, California 91320. Except as indicated in the footnotes to this table and subject to applicable community property laws, the persons named in the table to our knowledge have sole voting and investment power with respect to all shares of securities shown as beneficially owned by them.
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| NAME and ADDRESS OF BENEFICIAL OWNER | OFFICE | AMOUNT and NATURE of BENEFICIAL OWNERSHIP | PERCENT OF CLASS (1) |
| Dieter Sauer, Jr. | Director, CEO, President | 39,812,500 common shares held directly | 51.6% |
| Ana Sauer | Secretary | 0 | 0% |
| Jeff Massey | Director | 20,000 | |
| Zoreh Hashemi | Director | 20,000 | |
| All Officers and Directors as a group (4 Persons) | 39,852,500 common shares held directly | 52.1% |
Dieter Sauer, Jr. and Ana Sauer are husband and wife.
The Company does not have any change of control or retirement arrangements with its executive officers.
Changes in Control
We know of no contractual arrangements which may at a subsequent date result in a change of control in the Company.
ITEM 13. CERTAIN RELATIONSHIPS and RELATED TRANSACTIONS, and DIRECTOR INDEPENDENCE.
As disclosed under, Item 1. Business- Acquisition of Sauer Energy, Inc. and Related Matters, Dieter R. Sauer, Jr. acquired 39,812,500 shares of our common stock from our then CEO Malcolm Albery, in exchange for (i) $55,200; (ii) the contribution of his shares in our operating subsidiary to us; and (iii) and the assignment of certain patents to us.
Upon their appointment as directors each of Jeff Massey and Zohreh Hashemi were awarded 20,000 shares of our common stock.
Director Independence
We believe that our Jeff Massey and Zohreh Hashemi are considered “independent” under Rule 400(a)(15) of the National Association of Securities Dealers listing standards due to his positions with and stock ownership in us.
ITEM 14. PRINCIPAL ACCOUNTANT FEES and SERVICES.
Audit Fees
The aggregate fees billed by the Company’s auditors for professional services rendered in connection with the audit of the Company’s annual financial statements and reviews of the financial statements included in the Company’s Form 10-Q or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for fiscal year ended August 31, 2011 was $14,500.
29
Audit Related Fees
None
Tax Fees
None
All Other Fees
None
Pre-Approval Policies and Procedures
The board of directors has not adopted any pre-approval policies and approves all engagements with the Company’s auditors prior to performance of services by them.
PART IV
ITEM 15. EXHIBITS and FINANCIAL STATEMENT SCHEDULES
Exhibit No. Description
3.1 Articles of Incorporation. Incorporated by reference to the Exhibits attached to the Company's Form S-1 filed with the SEC on October 30, 2008
| 3.2 | Bylaws. Incorporated by reference to the Exhibits attached to the Company's Form S-1 filed with the SEC on October 30, 2008 |
| 3.3 | Articles of Amendment to the Articles of Incorporation filed with the Secretary of State of Nevada on October 15, 2010 Incorporated by reference to the like numbered exhibit to the Company’s Annual Report on Form 10-K for the year ended August 31, 2010 |
| 10.1 | Farm-In Agreement dated August 29, 2008 between Unitech Energy Resources Inc. and BCO Hydrocarbon Ltd. Incorporated by reference to the Exhibits attached to the Company's Form S-1 filed with the SEC on October 30, 2008 |
| 10.2 | Agreement and Plan of Reorganization, dated June 23, 2010, by and among the Registrant, Dieter R. Sauer, Jr., and Malcolm Albery. Incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K filed June 25, 2010. |
22.1 Subsidiaries of the Registrant. Filed herewith
| 31.1 | Section 302 Certification- Principal Executive Officer and Principal Financial Officer Filed herewith |
| 32.1 | Certification Pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith |
30
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.
SAUER ENERGY, INC. | |||
| Date: December 14, 2011 | By: | /s/ Dieter R. Sauer Jr. | |
| Name: Dieter R. Sauer Jr. | |||
| Title: Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date | ||
| /s/ Dieter R. Sauer Jr. | Director, CEO and President | December 14, 2011 | ||
| Dieter R. Sauer Jr. | ||||
| /s/ Jeff Massey | Director | December 14, 2011 | ||
| Jeff Massey | ||||
| /s/ Zohreh Hashemi | Director | December 14, 2011 | ||
| Zohreh Hashemi |
31
SAUER ENERGY, INC.
(A Development Stage Company)
CONSOLIDATED FINANCIAL STATEMENTS
(Audited)
FOR THE PERIOD FROM INCEPTION (AUGUST 7, 2008) TO
FISCAL YEAR END AUGUST 31, 2011
REPORTED IN UNITED STATES DOLLARS
| Page | |
| Audited Financial Statements | |
| Report of Independent Registered Public Accounting Firm | F-2 |
| Consolidated Balance Sheets | F-3 |
| Consolidated Statements of Operations | F-4 |
| Consolidated Statement of Changes In Stockholders’ Equity (Deficit) | F-5 |
| Consolidated Statements of Cash Flows | F-6 |
| Notes to Consolidated Financial Statements | F-7 to F-13 |
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To: The Board of Directors and Stockholders
Sauer Energy Inc.
Newbury Park, California
I have audited the accompanying consolidated balance sheets of Sauer Energy, Inc. as of August 31, 2011 and 2010 and the related statements of operations, deficit and cash flows for the years then ended, and for the period since inception, (August 7, 2008), to August 31, 2011. These financial statements are the responsibility of the Company’s management. My responsibility is to express an opinion on these financial statements based on my audit.
I conducted my audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor was I engaged to perform, an audit of its internal control over financial reporting. My audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, I express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion.
In my opinion the financial statements referred to above present fairly, in all material respects, the financial position of Sauer Energy, Inc. as of August 31, 2011 and 2010 and the results of its operations, changes in stockholders’ deficit and cash flows for the years then ended, and for the period since inception, (August 7, 2008), to August 31, 2011 in conformity with United States generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As discussed in Note 3 to the financial statements, the Company has incurred significant losses and has no revenue. This raises substantive doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/ s / John Kinross-Kennedy
John Kinross-Kennedy
Certified Public Accountant
Irvine, California
November 25, 2011
F-2
Sauer Energy, Inc. (A Development Stage Enterprise) Consolidated Balance Sheets |
| August 31, 2011 | August 31, 2010 | |||||||
| Assets | ||||||||
| Current assets | ||||||||
| Cash | $ | 74,559 | $ | 44,311 | ||||
| Prepaid expense | - | 10,000 | ||||||
| Total current assets | 74,559 | 54,311 | ||||||
| Property, plant and equipment, net of depreciation | 57,820 | - | ||||||
| Total assets | $ | 132,379 | $ | 54,311 | ||||
| Liabilities and Stockholders’ Equity (Deficit) | ||||||||
| Current liabilities | ||||||||
| Accounts payable and accrued expenses | $ | 6,091 | $ | 5,555 | ||||
| Loan payable | - | 89,022 | ||||||
| Shareholders’ loan | 10,000 | 63,140 | ||||||
| Total current liabilities | 16,091 | 157,717 | ||||||
| Stockholders' Deficit | ||||||||
| Common stock, $0.0001 par value, 200,000,000 shares authorized, 75,590,749 and 71,500,000 shares issued and outstanding on May 31, 2011 and August 31, 2010. | 7,559 | 7,150 | ||||||
| Shares subscription | 63,910 | |||||||
| Additional paid-in capital | 1,684,124 | 162,550 | ||||||
| Deficit accumulated during the exploration stage | (1,639,305) | (273,106) | ||||||
| Total stockholders' equity (deficit) | 116,288 | (103,406) | ||||||
| Total Liabilities and Stockholders' Equity (Deficit) | $ | 132,379 | $ | 54,311 | ||||
The accompanying notes are an integral part of these consolidated audited financial statements
F-3
Sauer Energy, Inc. (A Development Stage Enterprise) Consolidated Statements of Operations | ||||||||||||
| Inception | ||||||||||||
| Fiscal Year Ended | (August 7, 2008) | |||||||||||
| August 31, | Through | |||||||||||
| 2011 | 2010 | August 31, 2011 | ||||||||||
| Revenues | $ | - | $ | - | $ | - | ||||||
| General and administrative expense: | ||||||||||||
| Professional fees | 57,994 | 4,030 | 62,024 | |||||||||
| Research and development expense | 274,640 | 82,893 | 375,293 | |||||||||
| Depreciation | 11,261 | - | 11,261 | |||||||||
| Other general and administrative expenses | 1,022,304 | 127,976 | 1,190,727 | |||||||||
| Total operating expenses | 1,366,199 | 214,899 | 1,639,305 | |||||||||
| (Loss) from operations | (1,366,199 | ) | (214,899 | ) | (1,639,305 | ) | ||||||
| Other income (expense): | - | - | - | |||||||||
| (Loss) before taxes | (1,366,199 | ) | (214,899 | ) | (1,639,305 | ) | ||||||
| Provision (credit) for taxes on income | - | - | ||||||||||
| Net (Loss) | $ | (1,366,199 | ) | $ | (102,783 | ) | $ | (1,639,305 | ) | |||
| Basic earnings (loss) per common share | $ | (0.02 | ) | $ | (0.00 | ) | ||||||
| Weighted average number of common shares outstanding | 73,534,702 | 121,939,555 | ||||||||||
The accompanying notes are an integral part of these consolidated audited financial statements
F-4
Sauer Energy, Inc. (A Development stage enterprise) Statement of Changes in Stockholders' Equity (Deficit) | ||||||||||||||||||||||||
| Additional | Total | |||||||||||||||||||||||
| Common Stock | Paid in | Shares | Accumulated | Stockholders’ | ||||||||||||||||||||
| Shares | Amount | Capital | Subscription | Deficit | Equity (Deficit) | |||||||||||||||||||
| Inception, August 7, 2008 | - | $ | - | $ | - | $ | - | $ | - | $ | - | |||||||||||||
| Shares issued for cash | 500,000 | 500 | 12,000 | - | - | 12,500 | ||||||||||||||||||
| Recapitalization on July 25, 2010 | (499,675 | ) | (500 | ) | 500 | - | - | - | ||||||||||||||||
| Development stage net (loss) | - | - | - | - | (45,541 | ) | (45,541 | ) | ||||||||||||||||
| Balances, August 31, 2008 | 325 | - | 12,500 | - | (45,541 | ) | (33,041 | ) | ||||||||||||||||
| Shares issued for cash | 138,937,175 | 13,894 | (13,894 | ) | - | - | - | |||||||||||||||||
| Development stage net (loss) | - | (12,666 | ) | (12,666 | ) | |||||||||||||||||||
| Balances, August 31, 2009 | 138,937,500 | 13,894 | (1,394 | ) | - | (58,207 | ) | (45,707 | ) | |||||||||||||||
| Shares cancellation | (67,437,500 | ) | (6,744 | ) | 6,744 | - | - | |||||||||||||||||
| Shares subscription for cash | - | - | 157,200 | - | 157,200 | |||||||||||||||||||
| Development stage net (loss) | - | - | - | (214,899 | ) | (214,899 | ) | |||||||||||||||||
| Balance, August 31, 2010 | 71,500,000 | 7,150 | 162,550 | - | (273,106 | ) | (103,406 | ) | ||||||||||||||||
| Shares issued for services fee | 552,900 | 55 | 664,675 | - | - | 664,730 | ||||||||||||||||||
| Shares subscription for cash | - | - | - | 63,910 | - | 63,910 | ||||||||||||||||||
| Shares issued for cash | 3,537,849 | 354 | 856,899 | - | - | 857,253 | ||||||||||||||||||
| Development stage net (loss) | - | - | - | - | (1,366,199 | ) | (1,366,199 | ) | ||||||||||||||||
| 75,590,749 | $ | 7,559 | $ | 1,684,124 | $ | 63,910 | $ | (1,639,305 | ) | 116,288 | ||||||||||||||
The accompanying notes are an integral part of these consolidated audited financial statements
F-5
Sauer Energy, Inc. (A Development Stage Enterprise) Consolidated Statements of Cash Flows | ||||||||||||
| Inception | ||||||||||||
| Fiscal year ended | (August 7,2008) | |||||||||||
| August 31, | Through | |||||||||||
| 2011 | 2010 | August 31, 2011 | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net (loss) | $ | (1,366,199 | ) | $ | (214,899 | ) | $ | (1,639,305 | ) | |||
| 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 | 436,730 | - | 436,730 | |||||||||
| Investor relation fees issued by shares | 180,000 | - | 180,000 | |||||||||
| Depreciation | 11,261 | - | 11,261 | |||||||||
| Changes in operating assets and liabilities | ||||||||||||
| Prepaid expense | 10,000 | (10,000 | ) | - | ||||||||
| Accounts payable and accrued expenses | 536 | 5,555 | 6,091 | |||||||||
| Net cash flows used by operating activities | (679,672 | ) | (219,344 | ) | (957,223 | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of furniture and equipment | (69,081 | ) | - | (69,081 | ) | |||||||
| Net cash flows used in investing activities | (69,081 | ) | - | (69,081 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from loan | 11,000 | 89,022 | 100,022 | |||||||||
| Repayment on loan | (100,022 | ) | - | (100,022 | ) | |||||||
| Proceeds from shareholders’ loan | 19,116 | 16,614 | 82,256 | |||||||||
| Repayment on shareholders’ loan | (72,256 | ) | - | (72,256 | ) | |||||||
| Proceeds from issuance of common stock, net of costs | 921,163 | 157,200 | 1,090,863 | |||||||||
| Net cash flows provided by financing activities | 779,001 | 262,836 | 1,100,863 | |||||||||
| Net increase in cash and cash equivalents | 30,248 | 43,492 | 74,559 | |||||||||
| Cash and cash equivalents, beginning of period | 44,311 | 819 | - | |||||||||
| Cash and cash equivalents, end of period | $ | 74,559 | $ | 44,311 | $ | 74,559 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for interest | $ | - | $ | - | $ | - | ||||||
| Cash paid for income taxes | $ | - | $ | - | $ | - | ||||||
The accompanying notes are an integral part of these consolidated audited financial statements
F-6
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
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 and anticipated acquiring, exploring, and if warranted and feasible, developing natural resource assets. BCO had the right to acquire a 50% working interest in an oil and gas lease in Alberta, 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. 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 2010 and 2009 include the Company and its wholly-owned subsidiary. All significant inter-company accounts and transactions have been eliminated.
Basic of presentation – Our accounting and reporting policies 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.
F-7
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
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. When, in the opinion of management, it is more likely than not that some part or all of the deferred tax assets will not be realized. Interest and penalties on tax deficiencies recognized in accordance with ASC accounting standards are classified as income taxes in accordance with ASC Topic 740-10-50-19.
Advertising and Marketing Costs - The Company expenses costs of advertising and marketing as incurred. Advertising and marketing expenses for the fiscal year ended August 31, 2011 and 2010 was $76,836 and $9,237 respectively.
F-8
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
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 August 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 $1,639,305. 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 $1,639,305 as of August 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.
F-9
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
Note 4 - Loans payable:
As at August 31, 2010, the Company had received $89,022 from various lenders. During the fiscal year ended August 31, 2011, the Company further received $11,000 from a lender. This amount is unsecured, payable on demand and accrues no interest. The Company repaid in full in a total of $100,022 against these loans.
Note 5 – Property and equipment
Property and Equipment consisted of the following at August 31, 2011 and August 31, 2010.
| August 31, 2011 | August 31, 2010 | |||||||
| Computer and equipment | $ | 69,081 | $ | - | ||||
| Less accumulated depreciation/amortization | (11,261 | ) | - | |||||
| Property and equipment, net | $ | 57,820 | $ | - | ||||
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 year ended August 31, 2011, Mr. Sauer advanced $9,116 to the Company. The loan carries no interest, is unsecured, has no maturity date and is payable upon demand. The Company repaid full in a total of $72,256 against his shareholders’ loan.
During the year ended August 31, 2011, Mr. Sauer invoiced amount of $17,921 to the Company as consulting services. The Company paid full in cash.
During the year ended August 31, 2011, a shareholder of the Company advanced $10,000 to the Company. The balance of the loan was $10,000 at August 31, 2011. The loan carries no interest, is unsecured, has no maturity date and is payable upon demand.
During the year ended August 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:
| 2012 | $ | 25,200 | ||
| 2013 | 25,200 | |||
| 2014 | 25,200 | |||
| 2015 | 2,100 | |||
| $ | 77,700 |
F-10
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
Note 8 - Federal income tax:
No provision was made for federal income tax, since the Company had a significant net operating loss. Net operating loss carryforwards may be used to reduce taxable income through the year 2030. The availability of the Company’s net operating loss carryforwards are subject to limitation if there is a 50% or more positive change in the ownership of the Company’s stock, unless the same or similar business is carried on. The net operating loss carryforward for federal and state income tax purposes was approximately $1,639,305 as of August 31, 2011.
The Company has recorded a 100% valuation allowance for the deferred tax asset since it is more likely than not that some part or all of the deferred tax asset will not be realized.
The components of the net deferred tax asset are summarized below for the fiscal years ended August 31:
| 2011 | 2010 | 2009 | ||||||||||
| Deferred tax asset – tax affected net operating loss | $ | 584,000 | $ | 92,400 | $ | 5,400 | ||||||
| Less valuation allowance | (584,000 | ) | (92,400 | ) | (5,400 | ) | ||||||
| Net deferred tax asset – N.O.L. | $ | - | $ | - | $ | - | ||||||
The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations for the fiscal years ended August 31:
| 2011 | 2010 | 2009 | ||||||||||
| Tax expense (credit) at statutory rate-federal | (34 | )% | (34 | )% | (34 | )% | ||||||
| State tax expense | (9 | ) | (9 | ) | (9 | ) | ||||||
| Total | 43 | % | 43 | % | 43 | % | ||||||
| Tax expense at actual rate | - | - | - | |||||||||
Income tax expense consisted of the following in the fiscal years ended August 31,
| 2011 | 2010 | 2009 | ||||||||||
| Tax expense | $ | 0 | $ | 0 | $ | 0 | ||||||
The Company has no tax position at August 31, 2011 and August 31, 2010 for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. The Company’s utilization of any net operating loss carry forward may be unlikely as a result of its intended exploration stage activities.
Note 9 – 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 August 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 August 31, 2011, the Company issued 2,599,849 units of the securities in consideration of funds received of $779,955.
F-11
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
Note 9 – Common stock: (cont’d)
During the fiscal year ended August 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 fiscal year ended August 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 fiscal year ended August 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 August 31, 2011, the Company was authorized to issue 200,000,000 shares of par value $0.0001 common stock, of which 75,590,749 shares of common stock are issued and outstanding.
Note 10 – Warrants
During the fiscal year ended August 31, 2011, the Company entered into two series of private placement agreements with various investors. (Refer: Note 9 - 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 2,599,849 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.
The following table is a summary of information about the warrants outstanding at August 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 | 3,537,849 | 1.65 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 | 3,537,849 | 0.57 | ||||||
| Warrants exercised | -0- | -0- | ||||||
| Balance, August 31, 2011 | 3,537,849 | $ | 0.57 | |||||
F-12
Sauer Energy, Inc.
(A Development Stage Enterprise)
Notes to the Consolidated Financial Statements
August 31, 2011 and 2010
Note 11 – Loss Contingencies, Legal Proceedings
There were no loss contingencies or legal proceedings against the Company with respect to matters arising in the ordinary course of business. Neither the Company nor any of its officers or directors is involved in any litigation either as plaintiffs or defendants, and have no knowledge of any threatened or pending litigation against them or any of the officers or directors.
Note 12 – Subsequent Events
The Company has evaluated subsequent events from the balance sheet date through the date that the financial statements were issued and determined that there are no other items that require disclosure.
F-13