The Company's reverse merger transaction has been accounted for as a recapitalization of the Company whereby the historical financial statements and operations of the acquired company become the historical financial statements of the Company, with no adjustment of the carrying value of the assets and liabilities.
The financial statements have been prepared as if the reverse merger transactions had occurred retroactively as of the periods presented. Share and share amounts reflect the effects of the recapitalization for all periods presented. Accordingly, all of the outstanding shares of the acquired company's common stock at the completion date of the reverse merger transaction have been exchanged for the Company's common stock for all periods presented.
| (2) | Subsequent to the reverse merger – |
| | | |
| | (i) | 1,728,000 shares were issued as settlement of debt of $275,000; |
| | (ii) | 3,000,000 shares and an additional 1,065,226 shares under anti-dilutive provisions were issued for strategic business services rendered. |
On December 29, 2011, the Company executed separate securities exchange agreements with thirteen certain non-related debenture holders regarding debentures owed by DEDC, a subsidiary of the Company, in the aggregate amount of $226,500, plus accrued interest of $45,300, for a total of $271,800. These debentures were acquired, as well as accrued interest due to the debenture holders in exchange for the private issuance to the thirteen debenture holders as a group of 1,494,915 shares of restricted common stock. The fair value of the share compensation was calculated as $271,800.
Stock Purchase Warrants
During the three months ended March 31, 2013, the Company issued a total of two warrants for the purchase of 2,000,000 shares of common stock with a total value of $110,000. The following discusses the issuance of warrants during 2013:
| (1) | On January 1, 2013, the Company incurred a warrant share issuance for the purchase of 1,000,000 Shares of common stock (‘Warrant Shares’) by an independent contractor (“Contractor”), per a January 1, 2012 Stock Purchase Warrant Agreement that gives Contractor right to purchase 1,000,000 shares (“Warrant Shares”) of common stock, after the first anniversary at exercise price of $0.20 per share, as discussed above. The fair value of the issued warrant is $60,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.72%, expected life of 4 years and expected volatility of 534.55%. |
| (2) | On January 11, 2013, the Company issued a warrant for the purchase of 1,000,000 shares of common stock to TMDS. As discussed above, TMDS receives a warrant to purchase 1,000,000 shares of common stock every ninety days during the term of the Contractor Agreement for a total of five (5) years. The fair value of the issued warrant is $50,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.80%, expected life of 4 years and expected volatility of 529.81%. |
During the year ended December 31, 2012, the Company issued a total of six warrants for the purchase of 5,500,000 shares of common stock with a total value of $570,000. The following discusses the issuance of warrants during 2012:
| (1) | On January 17, 2012, the Company issued a warrant for the purchase of 1,000,000 shares of common stock to TMDS, LLC ("TMDS"'), a company controlled by a director of the Company, as consideration for services rendered per a Contractor Agreement, dated July 9, 2011, and as further amended December 30, 2011. TMDS receives a warrant to purchase 1,000,000 shares of common stock every ninety days during the term of the Contractor Agreement for a total of five (5) years. The warrant is exercisable at $0.0001 per share, and has term expiring on the fifth anniversary date from the date of each issuance. A total of 25 warrants for the purchase of 25,000,000 million shares of common are issuable over the term of the agreement. The fair value of the issued warrant is $70,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.79%, expected life of 5 years and expected volatility of 473.82%. |
| (2) | On March 17, 2012, the Company issued a warrant for the purchase of 500,000 shares of common stock, at an exercise price of $0.001 per share, exercisable after twelve months from issue date, with a term expiring on the fifth anniversary date from the date of issuance, to a departing Chief Financial Officer, who resigned effective March 14, 2012. The fair value of the issued warrant is $70,000, based on Black-Scholes option-pricing model using risk free interest rate of 1.13%, expected life of 5 years and expected volatility of 460.03%. |
| (3) | On April 16, 2012, the Company issued a warrant for the purchase of 1,000,000 shares of common stock to TMDS. As discussed above, TMDS receives a warrant to purchase 1,000,000 Shares every ninety days during the term of the Contractor Agreement for a total of five (5) years. The fair value of the issued warrant is $160,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.85%, expected life of 5 years and expected volatility of 481.39%. |
| (4) | On July 1, 2012, the Company incurred a warrant share issuance for the purchase of 1,000,000 Shares of common stock (‘Warrant Shares’) by an independent contractor (“Contractor”), per a January 1, 2012 Stock Purchase Warrant Agreement that gives Contractor right to purchase 3,000,000 shares (“Warrant Shares”) of common stock, as consideration for services rendered per an Independent Contractor Agreement with the Company, effective January 1, 2012. The contractor is entitled to purchase 3,000,000 Warrant Shares as follows: |
| | - | 1,000,000 Warrant Shares after the first six month anniversary, at an exercise price of $0.10 per share with a term expiring on the four-year anniversary from the date of issuance; |
| | - | 1,000,000 Warrant Shares after the first year anniversary, at exercise price of $0.20 per share, with a term expiring on the four-year anniversary from the date of issuance; |
| | - | 1,000,000 Warrant Shares after the second year anniversary, at exercise price of $0.30 per share, with term expiring on the four-year anniversary from the date of issuance. |
| | |
| (5) | On July 15, 2012, the Company issued a warrant for the purchase of 1,000,000 shares of common stock to TMDS. As discussed above, TMDS receives a warrant to purchase 1,000,000 Shares every ninety days during the term of the Contractor Agreement for a total of five (5) years. The fair value of the issued warrant is $80,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.62%, expected life of 5 years and expected volatility of 488.56%. |
| (6) | On October 13, 2012, the Company issued a warrant for the purchase of 1,000,000 shares of common stock to TMDS. As discussed above, TMDS receives a warrant to purchase 1,000,000 shares of common stock every ninety days during the term of the Contractor Agreement for a total of five (5) years. The fair value of the issued warrant is $90,000, based on Black-Scholes option-pricing model using risk free interest rate of 0.67%, expected life of 5 years and expected volatility of 547.10%. |
During the year ended December 31, 2011, the Company issued a total of three warrants for the purchase of 15,000,000 shares of common stock with a total value of $1,624,052. The following discusses the issuance of warrants during 2011:
| (1) | On July 9, 2011, in connection with the Line of Credit established with a related party, Charles R. Cronin, a director of the Company (the “Lender”), the Company granted a stock purchase warrant, which entitles the warrant holder to privately purchase a total of 9,000,000 post forward split warrant shares at a purchase price of $0.033 per share. In lieu of a cash payment, the warrant holder may elect to exercise the warrant, in whole or in part, in the form of a cashless exercise. The warrant, including unexercised warrant shares, will expire on the four-year anniversary. As of December 31, 2011, the company had issued the warrant to purchase 9,000,000 shares of common stock to Lender related to the line of credit agreement. The fair value of the issued warrant is $964,297, based on Black-Scholes option-pricing model using risk free interest rate of 1.135.%, expected life of 4 years and expected volatility of 195.89%. |
| (2) | On July 9, 2011, the Board of Directors of the Company approved and the Company executed a consulting agreement with TMDS, LLC (“TMDS”), a company controlled by a director of the Company, whereby TMDS will locate and assist in the Company’s development and construction of energy campus projects to be undertaken by the Company in the future. The consulting agreement is non-exclusive and runs for a period of five years. As consideration, the Company has agreed to pay compensation to TMDS in the form of restricted shares of common stock of the Company in an amount equal to 1,000,000 restricted pre-forward split shares every 90 days. In addition, TMDS is entitled to additional fees, including but not limited to, joint venture, partnership, consulting, developer, contractor and/or project management fees, to be negotiated separately, and agreed to in writing on a project-by-project basis. This agreement was amended on December 30, 2011, whereby the compensation payment was changed to a warrant for the purchase of 3,000,000 million post-forward split shares of common stock at $0.00003 per share, every 90 days, with the first payment of shares due within 10 days of the agreement signing of July 9, 2011, and the second payment of shares due on October 19, 2011. The Company and TMDS have mutually agreed that the common stock to be issued subsequent to 2011 will not be on a forward stock split basis. A total of 25 million warrants are issuable over the term of the agreement. Of these warrants, two warrants for the purchase of 6,000,000 shares of common stock have been issued at December 31, 2011. The fair value of the issued warrants is $659,755, based on Black-Scholes option-pricing model using risk free interest rate of 1.74.%, expected life of 5 years and expected volatility of 195.89%. |
Warrants outstanding at March 31, 2013 are as follows:
| | | Outstanding Warrants | |
| | | Number of Shares | | | Exercise Price | | | Fair Value | | | Remaining Contractual Term (Years) | | | Expense | |
| Issued in 2011 | | | | | | | | | | | | | | | |
| Issued July 9, 2011 | | | 9,000,000 | | | $ | 0.0330 | | | $ | 0.107 | | | | 3.27 | | | $ | 964,297 | |
| Issued July 21, 2011 | | | 3,000,000 | | | $ | 0.0001 | | | $ | 0.110 | | | | 2.31 | | | | * | |
| Issued October 19, 2011 | | | 3,000,000 | | | $ | 0.0001 | | | $ | 0.110 | | | | 2.55 | | | $ | 659,755 | |
| Issued and Outstanding at December 31, 2011 | | | 15,000,000 | | | | | | | | | | | | | | | $ | 1,624,052 | |
| * Included in October 19, 2011 issued warrants. | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Issued in 2012 | | | | | | | | | | | | | | | | | | | | |
| Issued January 17, 2012 | | | 1,000,000 | | | $ | 0.0001 | | | $ | 0.070 | | | | 2.80 | | | $ | 70,000 | |
| Issued March 17, 2012 | | | 500,000 | | | $ | 0.0010 | | | $ | 0.140 | | | | 2.96 | | | $ | 70,000 | |
| Issued April 16, 2012 | | | 1,000,000 | | | $ | 0.0001 | | | $ | 0.160 | | | | 3.05 | | | $ | 160,000 | |
| Issued July 1, 2012 | | | 1,000,000 | | | $ | 0.1000 | | | $ | 0.100 | | | | 3.25 | | | $ | 100,000 | |
| Issued July 15, 2012 | | | 1,000,000 | | | $ | 0.0001 | | | $ | 0.080 | | | | 3.29 | | | $ | 80,000 | |
| Issued October 13, 2012 | | | 1,000,000 | | | $ | 0.0001 | | | $ | 0.090 | | | | 3.54 | | | $ | 90,000 | |
| Issued in 2012 | | | 5,500,000 | | | | | | | | | | | | | | | $ | 570,000 | |
| Outstanding at December 31, 2012 | | | 20,500,000 | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Issued in 2013 | | | | | | | | | | | | | | | | | | | | |
| Issued January 1, 2013 | | | 1,000,000 | | | $ | 0.2000 | | | $ | 0.060 | | | | 3.76 | | | $ | 60,000 | |
| Issued January 11,2013 | | | 1,000,000 | | | $ | 0.0001 | | | $ | 0.050 | | | | 3.79 | | | $ | 50,000 | |
| Issued in 2013 | | | 2,000,000 | | | | | | | | | | | | | | | | 110,000 | |
| Outstanding at March 31, 2013 | | | 22,500,000 | | | | | | | | | | | | | | | | | |
Warrants outstanding and currently exercisable at March 31, 2013 are as follows:
| | | Warrants Outstanding | | | Warrants Exercisable | |
| | | Number of Shares | | | Remaining Life (Years) | | | Exercise Price | | | Number of Shares | | | Exercise Price | |
| Issued July 9, 2011 | | | 9,000,000 | | | | 3.27 | | | $ | 0.0330 | | | | 6,000,000 | | | $ | 0.0330 | |
| Issued July 21, 2011 | | | 3,000,000 | | | | 2.31 | | | $ | 0.0001 | | | | 3,000,000 | | | $ | 0.0001 | |
| Issued October 19, 2011 | | | 3,000,000 | | | | 2.55 | | | $ | 0.0001 | | | | 3,000,000 | | | $ | 0.0001 | |
| Issued January 17, 2012 | | | 1,000,000 | | | | 2.80 | | | $ | 0.0001 | | | | 1,000,000 | | | $ | 0.0001 | |
| Issued March 17, 2012 | | | 500,000 | | | | 2.96 | | | $ | 0.0010 | | | | 500,000 | | | $ | 0.0001 | |
| Issued April 16, 2012 | | | 1,000,000 | | | | 3.05 | | | $ | 0.0001 | | | | 1,000,000 | | | $ | 0.0001 | |
| Issued July 1, 2012 | | | 1,000,000 | | | | 3.25 | | | $ | 0.1000 | | | | 1,000,000 | | | $ | 0.1000 | |
| Issued July 15, 2012 | | | 1,000,000 | | | | 3.29 | | | $ | 0.1000 | | | | 1,000,000 | | | $ | 0.0001 | |
| Issued October 13, 2012 | | | 1,000,000 | | | | 3.54 | | | $ | 0.0001 | | | | 1,000,000 | | | $ | 0.0001 | |
| Issued January 1, 2013 | | | 1,000,000 | | | | 3.76 | | | $ | 0.2000 | | | | 1,000,000 | | | $ | 0.2000 | |
| Issued January 11,2013 | | | 1,000,000 | | | | 3.79 | | | $ | 0.0001 | | | | 1,000,000 | | | $ | 0.0001 | |
| | | | 22,500,000 | | | | | | | | | | | | 19,500,000 | | | | | |
| Note 8. | COMMITMENTS AND CONTRACTUAL OBLIGATIONS |
| a) | Strategic Business and Legal Services Agreement - NBN Enterprises, Inc. |
On April 25, 2011, the Company entered into an agreement with NBN Enterprises, Inc. (“NBN”), through to May 1, 2013, whereby NBN provides strategic business services to the Company and pays the cost of outside legal counsel who will advise the Company on securities, corporate and contract matters. The agreement provides for compensation to NBN in the form of issuance of restricted Company common stock equal to 5% of outstanding shares, with anti-dilution protection through the issuance of additional shares through the term and for the succeeding 12 months, and a non-accountable expense allowance of $3,500 per month.
On September 11, 2012, the Company executed an amendment to the NBN agreement which substantially changed the terms for compensation under the original agreement, and made certain other changes, as follows:
| (a) | The due and owing, but unissued Company 1,065,226 shares of common stock shall be issued to NBN with a private placement restriction. |
| (b) | NBN agreed to execute a separate Lock-up Agreement restricting the sale of the above referenced shares of common stock until September 21, 2013. |
| (c) | The Company and NBN agreed to modify the original agreement whereby the Company is no longer obligated to issue additional or catch-up shares to NBN in order to maintain total aggregate share issuances under original agreement to 5% of outstanding shares of common stock after September 21, 2012, provided that that the Company continues to pay the $3,500 per month payments through May 30, 2013. |
During the three months ended March 31, 2013 and 2012, the Company incurred legal expenses of $10,500 and $10,500, respectively, under this agreement. At March 31, 2013 and December 31, 2012, the Company has amounts due of $21,000 and $10,500, respectively, under the agreement.
| b) | Line of Credit - Cronin |
On July 9, 2011, the Company established a revolving line of credit (LOC – Cronin), bearing interest at 15% per annum, and payable with accumulated interest, and due December 31, 2011 with Charles R. Cronin, Jr., a shareholder and director of the Company, (the “Lender”). On September 11, 2011 and October 5, 2011, the Board of Directors of the Company approved and the Company executed approvals of credit limit amendments to increase the Company’s outstanding line of credit to $300,000. The Company is still seeking funding to fulfill its financial obligations under this agreement and is in default for non-payment. Without funds to settle this obligation or obtaining consent from the related party to defer payment of the amount owing, the related party has the right to demand payment from the Company.
On March 31, 2013 and December 21, 2012 the Company owed the Lender $123,663 and $119,139, respectively. During the During the three months ended March 31, 2013 and 2012, the Company recorded interest expense of $4,524 and $16,953, respectively, related to the line of credit.
| c) | Consulting Agreement – Key Services, Inc. |
On July 9, 2011, the Company executed a consulting agreement with Key Services, Inc. (“Key Services”), whereby Key Services will locate and assist in the Company’s development and construction of an energy campus project to be undertaken by the Company in the future. The Consulting Agreement is non-exclusive and runs for a period of five years. As consideration, the Company has agreed to pay compensation to Key Services in the form of cash in an amount equal to $20,000 per month or at the Company’s option (if funds are not available), restricted shares of the Company’s common stock, valued at the average closing price of Company’s common stock over the preceding 20 trading days. In addition, Key Services is entitled to additional fees, including but not limited to, joint venture, partnership, consulting, developer, contractor and/or project management fees, to be negotiated separately, and agreed to in writing on a project-by-project basis.
On July 18, 2012, the Company executed an amendment to the Key Services, Inc. consulting agreement which settled the accounts payable balance and substantially changed the terms for compensation under the original consulting agreement, and made certain other changes, as follows:
| (a) | The Company agreed to settle in full the past due and outstanding obligation for prior consulting fees to Key Services which aggregated $121,862, at July 18, 2012, by the immediate private issuance of 609,315 shares of the Company’s restricted Common Stock to Key Services. The shares of common stock were issued September 28, 2012. |
| (b) | Key Services agreed to execute a separate Lock-up Agreement restricting the related sale of the above referenced Shares for a period of twelve (12) months after the date of expiration of the customary SEC Rule 144 restriction period (normally 6 months). |
| (c) | The Company and Key Services agreed to terminate payment of a $20,000 monthly consulting fee during the remaining term of the consulting agreement, beginning July 1, 2012. |
| (d) | Reaffirmed the Parties agreement that the Company would pay Key Services additional fees to be separately negotiated, including site development, joint venture, partnership, consulting, developer, contractor and/or project management fees, on a project by project basis. |
| (e) | Provided that the Company has the right to assign its obligations under the consulting agreement to one or more wholly owned subsidiaries or related party entities. The Amendment contains customary warranties and representations and indemnification and confidentiality provisions and provides that the Key Services is subject to noncompetition and noninterference covenants. |
For the three months ended March 31, 2013 and 2012, the Company paid consulting services expense of $0 and $60,000, respectively, to Key Services. At March 31, 2013 and December 31, 2012, the Company has no amounts owing to Key Services.
| d) | Consulting Agreement – TMDS, LLC |
On July 9, 2011, as amended December 30, 2011, Company executed a consulting agreement with TMDS, LLC (“TMDS”), an entity controlled by a director and shareholder of the Company, whereby TMDS will locate and assist in the Company’s development and construction of energy campus projects to be undertaken by the Company in the future. The consulting agreement is non-exclusive and runs for a period of five years. As consideration, the Company has agreed to pay compensation to TMDS in the form of one or more Warrants for the purchase of 1,000,000 shares of restricted common stock of the Company (“Shares”) every 90 days, exercisable at $0.0001 per share, with an exercise term of five (5) years from the date of each issuance. In addition, TMDS is entitled to additional fees, including but not limited to, joint venture, partnership, consulting, developer, contractor and/or project management fees, to be negotiated separately, and agreed to in writing on a project-by-project basis.
During the three months ended March 31, 2013 and 2012, the Company recorded the issuance of one Warrant for 1,000,000 shares of common stock, valued at $50,000 and one Warrant for 1,000,000 shares of common stock, valued at $70,000, respectively, to TMDS under this agreement. As of March 31, 2013 and December 31, 2012, the Company is obligated to issue seven Warrants totalling 11,000,000 shares of common stock and six Warrants totaling 10,000,000 shares of common stocks, respectively, to TDMS under this agreement. See Note 7, Capital Stock – Common Stock Warrants, for discussion.
| e) | Consulting Agreement – Investor and Broker Dealer Relations and Financing Alternatives |
On March 14, 2012, the Company executed a consulting agreement with Undiscovered Equities, Inc. (“UEI”), pursuant to which UEI has agreed to provide various consulting services, including retention and supervision of various public relations services and investor relations services, strategic business planning, broker dealer relations, financing alternatives and sources, and due diligence meetings for the investor community. The agreement has a six month term, but may be terminated early after 60 days, and provides for the Company to pay consulting fees as follows: (i) the sum of $25,000 per month over the term of the agreement upon the Company procuring financing of $500,000 or more, and (ii) a signing bonus in the form of immediate issuance of 125,000 shares of the Company’s restricted Common stock (the “Stock Payments”).
On May 3, 2012, the Company and UEI executed a letter of execution (the “Letter of Extension”) of the consulting agreement to extend the payment terms of Cash Payments and Stock Payments from the May 7, 2012 to June 15, 2012.
On August 15, 2012, the Company and UEI executed Amendment No. 1 to the consulting agreement, whereby the commencement date for the services to be provided by UEI, including the obligation of the Company to pay the monthly compensation to UEI upon the Company procuring financing of $500,000 or more, was amended to reflect a commencement date of September 1, 2012 instead of June 15, 2012. The shares of common stock, valued at $17,500, were issued in November 2012.
On November 8, 2012, the Company and UEI executed Amendment No. 2 to the consulting agreement, whereby the commencement date for the services to be provided by UEI, including the obligation of the Company to pay the monthly compensation to UEI upon the Company procuring financing of $500,000 or more, was amended to reflect a commencement date of December 1, 2012 instead of September 1, 2012.
| f) | Stock Purchase Agreement – C.C. Crawford Retreading Company, Inc. (“CTR”) and Assignment and Assumption Agreement and Right of First Refusal and Option Agreement – IWSI PS Plan |
On March 20, 2012, the Company, through its wholly owned subsidiary, DEDC, entered into a stock purchase agreement (the “Stock Purchase Agreement”) with C.C. Crawford Tire Company, Inc. (“CTR”), pursuant to which DEDC agreed to acquire 100% of the issued and outstanding common shares of CTR, for an aggregate purchase price of $600,000 in cash, due and payable upon the date of closing, on or before April 20, 2012, subject to the completion of certain closing conditions precedent, to be performed by both the Seller and DEDC.
On June 1, 2012, the Company, through its wholly owned subsidiary, DEDC, entered into an assignment and assumption agreement (“Assignment Agreement”) with IWSI PS Plan (“IWSI PS”), an entity controlled by Charles R. Cronin, a shareholder and director of the Company, and the Seller pursuant to which DEDC assigned its rights to acquire CTR to IWSI PS Plan.
On October 2, 2012, the Company, through its wholly owned subsidiary, DEDC executed a right of first refusal and option agreement with IWSI PS for both an option to purchase and right of first refusal to purchase CTR.
The option to purchase granted to the Company extends for one year from the date of execution, and provides for certain terms and conditions as follows:
| 1. | An option exercise price equal to $1,032,500, the original purchase price paid by IWSI (the “Option Purchase Price”) with the following adjustments; |
| 2. | A quarterly option payment of $15,000 (the “Option Payment”, payable every 90 days during the Term of this Agreement; |
| 3. | An amount equal to any increased accounts receivable over the Term and amount equal to five percent (5%) per month of the original purchase price paid by IWSI; |
| 4. | All amounts expensed by CTR to advance the business, including tire pyrolysis, the amounts paid the Officers as employment bonuses, the closing costs on the original acquisition, and an amount equal to any increase in IWSI’s shareholder equity, less any amounts CTR received from the prior sale of any assets; |
| 5. | Amount equal to any decrease in accounts payable, and a monthly fee of $10,000 per month, accrued monthly, for each month of use of the facility by DEAC and/or its affiliates. |
After 180 days from the date of execution of the Assignment Agreement, if IWSI PS receives a bona fide offer or enters into a purchase agreement with a Third Party Offeree to purchase CTR and DEDC fails to execute the Right of First Refusal, then the Right of First Refusal is terminated. Further, the Right of First Refusal and Option Agreement is terminated if DEDC, or its affiliates, does not raise a minimum of $2,000,000 through paid in capital of debentures by March 31, 2013.
DEDC or its affiliates failed to raise the minimum of $2,000,000 as of March 31, 2013, and accordingly, the Right of First Refusal and Option agreement terminated March 31, 2013.
g) | License and Assignment Agreement – R.F.B., LLC |
On May 23, 2012, Dynamic Energy IP, LLC, a Delaware corporation, a wholly owned subsidiary of Dynamic Energy Alliance Corporation, a Florida corporation (“DEAC”), entered into a definitive agreement (the “Contract”) with R.F.B., LLC (“RFB”), pursuant to which RFB licensed and assigned to Dynamic Energy LP, a Non-Provisional Patent Application (the “Application”), and the World Wide exclusive right, license and privilege of utilizing certain RFB technology and expertise. In consideration, the Company has an obligation to issue RFB 100,000 shares of the Company’s restricted common when RFB completes certain provisions of the Contract. On September 13, 2012, RFB completed its contract provisions and the shares of common stock, valued at $6,000, were issued in November 2012.
Further, the Contract provides for payment by the Company to RFB of specified license fees based on both gallons of high value organics produced utilizing the RFB technology, and a formula percentage of net profits realized from the recovery of all energy products from oil sands or tar sands over the term of the Contract by the Company (regardless of technology used) The Contract has a term of 25 years, or 20 years from the date of issuance of patents, whichever is shorter. As of March 31, 2013 and December 31, 2012, there are no obligations due under the Contract.
h) | Industry Consulting and Nondisclosure Agreement and Amendments – Practical Sustainability LLC |
On May 25, 2012, Dynamic Energy Development Company, LLC, (“DEDC’”) a wholly owned subsidiary of Dynamic Energy Alliance Corporation, modified a prior agreement, Industry Consulting and Nondisclosure Agreement (“ICNA”), with Practical Sustainability, LLC (“PS”), an entity controlled by Dr. Earl Beaver, a director of the Company, dated November 19, 2010, whereby services and compensation were amended to reflect PS’s role that was effective March 1, 2011. Changes under the amended agreement include:
| - | Nature of Services: Development of Life Cycle Analysis Models, Research of Government Information on Technology for Tire Pyrolysis Oil, Analysis of various tire pyrolysis operations, evaluation of the marketability of tire pyrolysis oil and carbon black produced by vendors of tire pyrolysis processes, participation in the development of the roll-out plan for tire pyrolysis plants, participation on the analysis of vended solutions of the manufacturing of tire pyrolysis plants. Analysis of fuels produced by third party propriety processed that reportedly produce gasoline, diesel, jet fuel and other similar fuels for the use in combustion engines. Provide and manage a central laboratory for DEDC or its parent. |
| - | Compensation: The Company or DEDC shall pay to PS a flat fee of $5,000 per month. Compensation has been paid through January 2012. |
On January 17, 2013, the ICNA agreement was further amended to terminate the agreement effective February 1, 2012. Under this amendment, DEDC and PS have agreed that all work under the ICNA agreement has been performed for those services through January 2012, and there are no obligations due PS as of March 31, 2013 and December 31, 2012.
| i) | Consulting Agreement – Financing and Acquisitions Advisor |
On June 1, 2012, the Company executed a corporate advisory agreement (“Agreement”) with Heartland Capital Markets, LLC (“Heartland”), pursuant to which Heartland agreed to provide various advisory services, including equity and/or debt financings, strategic planning, merger and acquisition possibilities and business development activities that include various investor relations services, strategic business planning, broker dealer relations, financing alternatives and sources, and due diligence meetings for the investor community. The agreement has a three month term which is renewable for additional three month periods, and provides for the Company to pay an advisory fee of two hundred and fifty thousand (250,000) restricted shares of the Company’s restricted common stock (“Stock”). The advisory fee is considered fully earned pro rata over the course of the term of the agreement and due to Heartland at the execution of the agreement.
On August 17, 2012, the Company and Heartland amended the Agreement, whereby the commencement date for the services to be provided by Heartland was changed to September 1, 2012. Further, the amendment changed the date that the advisory fee consisting of 250,000 restricted shares of the Company’s restricted common stock (“Stock”) was considered fully earned to the date that Heartland was issued the Stock. The Company issued the common stock, valued at $15,000, on August 8, 2012.
| j) | Non-Binding Letter of Intent – Terpen Kraftig, LLC |
On October 10, 2012, the Company, through its wholly owned subsidiary, Dynamic Energy IP Corporation (“DEIP”), executed a non-binding letter of intent (“LOI”) with Terpen Kraftig LLC (TK), a company managed by two of the Company’s Directors, Charles R. Cronin, Jr. and Dr. Earl Beaver, contemplating a definitive agreement within 45 days from said letter of intent under which TK would assign to DEIP the exclusive, worldwide license and right in and to Licensor’s catalyst(s), reactor and fractionator technology relating to the recovery of high valued organics from the processing of waste tires (the “Licensed Technology”).
The LOI sets forth terms for a future definitive agreement that anticipates that the term of the license and assignment to Licensor of the Licensed Technology shall be the greater of (a) twenty-five (25) years, or (b) twenty (20) years from the issuance of the Licensed IP patent(s), whichever is greater, and that compensation payable to TK from the Company and DEIP would consist of:
| 1. | A non-refundable deposit in the amount of $100,000 to secure the exclusivity of the term sheet, payable within 30 days and prior to preparation and execution of the Definitive Agreement, which shall, upon execution of the Definitive Agreement, be allocated towards to costs associated with the purchase of the equipment required to construct a prototype unit (the “Prototype”) of the Licensed Technology. |
| 2. | A payment to Licensor in the amount of Four Hundred Thousand and No/100 Dollars (USD$400,000), on or before December 31, 2012, for the purchase of the equipment required to construct a pilot plant with input of a minimum of 50/gallons per day (the “Pilot Plant”). If Licensee fails to fund the Pilot Plant on or before December 31, 2012, the Licensor shall have the right cancel and rescind the licensing rights of the Licensed IP granted to Licensee under the Definitive Agreement. |
| 3. | A minimum royalty cash payment of Thirty-Five Thousand and No/100 Dollars (USD $35,000) per month, from the date of execution of the Definitive Agreement forward over the term of the license, until and except when the royalty stream exceeds $35,000 per month (the “Minimum Licensing Fee”). |
The letter of intent contains customary warranties and representations and confidentiality provisions, including specific terms which are considered trade secrets, and are therefore not being released.
The Company is still seeking funding and is in default on this agreement due to non-payment. Without funds to secure the exclusivity of the term sheet or obtain consent from TK to defer payment of the amount required, there is no formal agreement between TK and the Company at this time. The Definite Agreement is still being negotiated.
Potential benefits of income tax losses and other tax assets are not recognized in the accounts until realization is more likely than not. As of March 31, 2013 and December 31, 2012, the Company has net operating losses carryforwards of approximately $1,310,000 and $1,262,000, respectively, for tax purposes in various jurisdictions subject to expiration as described below. Pursuant to ASC 740, Income Taxes, the Company is required to compute tax asset benefits for net operating losses carried forward and other items giving rise to deferred tax assets. Future tax benefits which may arise as a result of these losses and other items have not been recognized in these financial statements, as their realization is determined not likely to occur and accordingly, the Company has recorded a valuation allowance for the deferred tax asset relating to these items.
The actual income tax provisions differ from the expected amounts calculated by applying the combined income tax statutory rates applicable in each jurisdiction to the Company’s loss before income taxes and non-controlling interest. The components of these differences are as follows:
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | |
| Corporate income tax rate | | | 34% | | | | 34% | |
| | | | | | | | | |
| Expected income tax (recovery) | | $ | (70,818 | ) | | $ | (81,163 | ) |
| Non-deductible stock based compensation | | | 37,400 | | | | 47,600 | |
| Change in valuation allowance | | | 33,418 | | | | 33,563 | |
| State income tax net of federal benefit | | | - | | | | - | |
| Income tax (benefit) expense | | $ | - | | | $ | - | |
The Company's tax-effected deferred income tax assets and liabilities are estimated as follows:
| | | March 31, 2013 | | | December 31, 2012 | |
| | | | | | | |
| Net operating loss carryforward | | $ | 445,332 | | | $ | 429,039 | |
| Accrued expenses | | | 98,346 | | | | 81,220 | |
| Total deferred assets | | | 543,678 | | | | 510,259 | |
| Less: valuation allowance | | | (543,678 | ) | | | (510,259 | ) |
| Net deferred tax assets | | $ | - | | | $ | - | |
The Company has approximately $1,310,000 of net operating lossses carried forward for United States income tax purposes which will expire, if not utilized, in 2030.
| Note 10. | SEGMENT INFORMATION |
The Company follows FASB ASC 280, Segment Reporting, and currently has two reportable segments as follows:
Through its wholly owned subsidiary TC, the Company receives revenues from a related party based on billings received from certain of its direct to consumer membership club products after merger on March 9, 2011. During the three months ended March 31, 2013 and 2012, TC gross revenues totaled $0 and $301,704, respectively.
Through its wholly owned subsidiary DEDC, the Company’s energy sector involves a plan for commencement of a business to develop, commercialize, and sell innovative technologies in the recoverable energy industry.
Financial information for each segment is presented in the following table. The accounting policies of each reportable segment are the same as those of the consolidated company, as described in Note 5, Summary of Significant Accounting Policies.
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| Operating income (loss) | | | | | | |
| Consulting services | | $ | ( 67,000) | | | $ | 197,298 | |
| Recoverable energy | | | (130,676 | ) | | | (419,059) | |
| Total | | $ | (197,920 | ) | | $ | (221,761) | |
As disclosed in Form 8-K, dated April 22, 2013, the Company and a financial advisory firm and its affiliates (“Third Party”) are in a dispute over the status of various draft agreements related to the Third Party’s providing access to funding for the Company to meet its obligations and fund its ventures. The Third Party contributed $151,000 of working capital funds to the Company from August 2012 to February 2013 in contemplation of a letter of credit and other related agreements.
As disclosed in Form 8-K, dated May 8, 2013, effective May 7, 2013, Charles R. Cronin, Jr. (“Cronin”), a Director of the Company, accepted the Company’s offer to have Cronin deposit funds for fees due the Auditors, Anton & Chia, LLP, and for deferral of due dates for specific payments on the TCI Agreement, previously due in 2012. In exchange for the deferral of $1,015,362 to May 26, 2013 and the deposits for the Auditors fees, the Company assumes all of the TCI related debt under the TCI Agreement on a joint and several liability basis with its subsidiary DEDC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Basis of Presentation
The following management’s discussion and analysis is intended to provide additional information regarding the significant changes and trends which influenced our financial performance for the three month period ended March 31, 2013 and 2012. This discussion should be read in conjunction with the unaudited financial statements and notes as set forth in this report.
Company Overview
Dynamic Energy Alliance Corporation (“DEAC”) was formerly Mammatech Corporation (“MAMM”) (or the “Company”), and was incorporated in the State of Florida on November 23, 1981 as Mammatech Corporation.
Through its wholly owned subsidiary, Dynamic Energy Development Corporation (“DEDC”), the Company has a business plan to develop, commercialize, and sell innovative technologies in the recoverable energy sector. Specifically, it is focused on identifying, combining and enhancing existing industry technologies with proprietary recoverable production and finishing processes to produce synthetic oil, carbon black, gas, and carbon steel from discarded or waste tires waste. This process will be accomplished with limited residual waste product and significant reductions in greenhouse gases, compared to traditional processing. To maximize this opportunity, the Company has developed a scalable, commercial development strategy to build "Energy Campuses" with low operational costs and long-term, recurring revenues.
Transformation Consulting (”TC”), a wholly-owned subsidiary of DEDC, provides business development, marketing and administrative consulting services. Through a January 2010 management services and agency agreement (“Agency Agreement”), TC receives revenues from a related party based on billings received from certain of TC’s direct to consumer membership club products that were transferred to the related party under the Agency Agreement.
Plan of Operations
The Company’s business plan is focused on developing and implementing recoverable energy technologies. DEDC, the Company’s wholly owned subsidiary, is currently seeking to locate joint venture partners or other financing partners (hereinafter collectively “joint venture partners”), on a project by project basis, for the purpose of development, construction and operation of free standing plants which provide full cycle processing to convert discarded tires into shelf ready, saleable synthetic oil and solvents and carbon products (hereinafter referred to as “plants”). Although, the Company has identified various plant locations and potential joint venture opportunities, as of today, it has not executed any agreements for the development of a plant.
The Company proposes to develop a full cycle process plant for converting discarded tires to saleable synthetic oil and solvents and carbon products. To accomplish this plan and other milestones, management intends to secure one or more partnerships, on a site-by-site basis, with local joint venture partners and/or financing sources, including companies who produce shredded tire feedstock usable in the plants. The Company’s business plan anticipates the creation of a state-of-the-art production facility called the “Pyrol Black Energy Campus” in 2013 and early 2014, as one of its initial milestones. Specifically, the Company plans to acquire, combine and optimize a variety of existing proven and potentially innovative “Renewable Energy” technologies currently available in the market. Once a demonstration plant has been completed and is in operation, the Company’s plan includes the development of similar freestanding facilities at different US locations (and, possibly other global markets). Creation of such an initial plant requires obtaining a location that has a dependable supply of waste feed stock for the plant, obtaining the necessary capital to develop, construct and set in operation the plant (likely with local joint venture partners and/or other financing sources), and establishment of markets for the resale of resulting products. The Company will seek to partner with other companies who can provide tire feedstock, land for a plant, and/or capital, on a joint venture basis. As of this date, the Company has identified a location in Ennis, Texas as a potential site upon which it could develop its first Energy Campus, and has announced its intention to purchase such site, pending the completion of favorable due diligence and the obtaining of the necessary capital required to proceed, the source for which is uncertain at this date.
Requirements and Utilization of Funds
To implement our plan of operations, including some or all of the above described milestones (objectives), we will need to continue to raise capital (“equity”) in an amount between $2,500,000 and $5,000,000 in equity from restricted stock sales or other acceptable financing options over the 12 month period beginning in the second quarter of 2013 on terms and conditions to be determined. Management may elect to seek subsequent interim or “bridge” financing in the form of debt (corporate loans) as may be necessary.
We anticipate the need to raise additional capital for the first 6 months of operations, if at least $2.5 million has not been raised by the end of such period, subject to the successful implementation of our initial milestones over the first 180 days of operations and our revenue growth cycle thereafter. At this time, management is unable to determine the specific amounts and terms of such future financings.
We foresee the proceeds from capital raised to be allocated as follows: (a) consolidation and integration; (b) growth capital; (c) research and due diligence; (d) pre-development plant costs; (e) product enhancements and technology partners; (f) new business development; (g) legal, audit, SEC filings and compliance fees; (h) financing costs; (i) working capital (general and administrative); (j) reserve capital for costs of acquisition and market expansion.
At such time as these funds are required, management would evaluate the terms of such debt financing and determine whether the business could sustain operations and growth and manage the debt load. To date management has not identified the source for such additional capital, and whether the Company will be able to raise sufficient capital, and do so on commercially reasonable terms, in uncertain. If we cannot raise additional proceeds via a private placement of our common stock or secure debt financing we would be required to cease business operations. As a result, investors in our common stock would lose all of their investment.
Management has plans for the staged development of our business over the next twelve months. Other than engaging and/or retaining independent consultants to assist the Company in various administrative and marketing related needs, we do not anticipate a significant change in the number of our employees, if any, unless we are able to obtain adequate financing.
In our 2012 Form 10-K, our auditors have issued a “going concern” opinion. This means that there is substantial doubt that we can continue as an on-going business for the next twelve months unless we obtain additional capital to pay our expenses. This is because we have not generated enough revenues and no substantial revenues are anticipated in the near-term. Accordingly, we must seek to raise cash from sources other than from the sale of our products.
Our operating results for the three months ended March 31, 2013 and 2012 are summarized as follows:
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| Revenue | | $ | - | | | $ | 301,704 | |
| Operating expenses | | | 197,920 | | | | 523,465 | |
| Net operating (loss) income | | $ | (197,920 | ) | | $ | (221,761) | |
Revenue represents TC commission revenues earned after Merger on March 9, 2011 from a management service agreement that the TC had in place prior to the merger. The decrease in 2013 is primarily due to the decrease in new business activity since the business was acquired in 2011.
Operating expenses for the three months ended March 31, 2013 and 2012 are outlined in the table below:
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| Project development costs | | $ | - | | | $ | 149,391 | |
| Consulting services | | | 50,000 | | | | 130,000 | |
| General and administrative expenses | | | 147,920 | | | | 244,074 | |
| Total operation expenses | | $ | 197,920 | | | $ | 523,465 | |
The decrease in project development costs from 2012 to 2013 is primarily due to no project development activities during the first quarter of 2013. The decrease in consulting services from 2012 to 2013 is primarily due to the termination of monthly consulting fees to Key Services on July 1, 2012. The decrease in general and administrative expenses from 2012 to 2013 is primarily due to decrease in in public company related costs, such as accounting, auditing, legal and investor related activities.
Liquidity and Capital Resources
As of March 31, 2013, we had no cash and our working capital deficit is $1,704,766. During the three months ended March 31, 2013, we generated no revenues and have a net loss of $208,290. As of March 31, 2013, we have a cumulative net loss of $6,203,848. We are illiquid and need cash infusions from investors and/or current shareholders to support our proposed marketing and sales operations.
Working Capital
| | | As of March 31, 2013 | | | As of December 31, 2012 | |
| | | | | | | |
| Current assets | | $ | - | | | $ | 592 | |
| Current liabilities | | | 1,704,766 | | | | 1,607,094 | |
| Working capital deficit | | $ | (1,704,766 | ) | | $ | (1,606,502 | ) |
Cash Flows
| | | Three Months Ended March 31, | |
| | | 2013 | | | 2012 | |
| | | | | | | | | |
| Net cash used in operating activities | | $ | (592 | ) | | $ | (30,504) | |
| Net cash provided by financing activities | | | - | | | | (29,354 | ) |
| Net decrease in cash | | $ | (592 | ) | | $ | (1,150) | |
Cash Flows - Operating Activities
Cash used in operating activities of $592 in the three months ended March 31, 2013 is primarily due to net loss of $208,290, offset by non-cash warrant expenses for consulting services of $110,000 and an increase in accounts payable and accrued expenses of $93,412. Cash used in operating activities of $30,504 in the three months ended March 31, 2012 is primarily due to net loss of $238,714, offset by non-cash warrant expenses for consulting services of $140,000 and an increase in accounts payable and accrued expenses of $63,257.
Cash Flows - Financing Activities
There were no financing activities in the three months ended March 31, 2013. Cash provided by financing activities in the three months ended March 31, 2012 is due to cash received from contingent consideration of $29,354.
Going Concern Uncertainties
Management believes that our current financial condition, liquidity and capital resources may not satisfy our cash requirements for the next 12 months and as such we will need to either raise additional proceeds and/or our officers and/or directors will need to make additional financial commitments to our company, neither of which is guaranteed. We plan to satisfy our future cash requirements, primarily the working capital required to execute on our objectives, including marketing and sales of our product, and legal and accounting fees, through financial commitments from future debt/equity financings, if and when possible.
Management believes that we may generate more sales revenue within the next 12 months, but that these sales revenues will not satisfy our cash requirements to implement our business plan, including, but not limited to, project acquisitions, engineering, and integration costs, and other operating expenses and corporate overhead (which is subject to change depending upon pending business opportunities and available financing).
We have no committed source for funds as of this date. No representation is made that any funds will be available when needed. In the event that funds cannot be raised when needed, we may not be able to carry out our business plan, may never achieve sales, and could fail to satisfy our future cash requirements as a result of these uncertainties.
If we are unsuccessful in raising the additional proceeds from officers and/or directors, we may then have to seek additional funds through debt financing, which would be extremely difficult for an early stage company to secure and may not be available to us. However, if such financing is available, we would likely have to pay additional costs associated with high-risk loans and be subject to above market interest rates.
The Company and has a cumulative net loss of $6,203,848. The Company currently has only limited working capital with which to continue its operating activities. The amount of capital required to sustain operations is subject to future events and uncertainties, but the Company anticipates it will need to obtain approximately $2,500,000 in additional capital in the form of debt or equity in order to cover its current expenses over the next 12 months and continue to implement its business plan. Whether such capital will be obtainable, or obtainable on commercially reasonable terms is at this date uncertain. These circumstances raise substantial doubt about the Company's ability to continue as a going concern.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements that are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operation, liquidity, capital expenditures or capital resources that is deemed by our management to be material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
ITEM 4. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of management, including the Company’s principal executive officer and principal financial officer, the Company has evaluated the effectiveness of its disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under Securities Exchange Act of 1934, as amended (the “Exchange Act”), for the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Company’s principal executive officer and principal financial officer have concluded that these controls and procedures are effective in all material respects, including those to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission, and is accumulated and communicated to management, including the principal executive officer and the principal financial officer, as appropriate, to allow for timely decisions regarding required disclosure.
A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
In the three months ended March 31, 2013, there had been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
We are not currently a party to any material, pending legal proceedings, other than ordinary, routine litigation incidental to our business.
ITEM 1A. RISK FACTORS
The following important factors, and the important factors described elsewhere in this report or in our other filings with the SEC, could affect (and in some cases have affected) our results and could cause our results to be materially different from estimates or expectations. Other risks and uncertainties may also affect our results or operations adversely. The following and these other risks could materially and adversely affect our business, operations, results or financial condition.
An investment in the Company is highly speculative in nature and involves an extremely high degree of risk. A prospective investor should consider the possibility of the loss of the investor's entire investment and evaluate all information about us and the risk factors discussed below in relation to his financial circumstances before investing in us.
Risks Related to the Business and Financial Condition
Our auditors have expressed substantial doubt about our ability to continue as a “going concern.” Accordingly, there is significant doubt about our ability to continue as a going concern.
Our business began recording revenues in first quarter 2011. As of March 31, 2013, we had an accumulated deficit of $6,203,848 and no cash on hand. A significant amount of capital will be necessary to initiate our business plan to the point where we have one or more plants up and operating which are commercially viable. The source and availability of such capital is uncertain, and we may be unable to obtain such capital, or obtain it on commercially reasonable terms. These conditions raise substantial doubt about our ability to continue as a going concern.
If we continue incurring losses, fail to achieve profitability, or are unable to locate additional capital on commercially reasonable terms to implement our business plans, we may have to cease activities. Our financial condition raises substantial doubt that we will be able to operate as a “going concern”, and our independent auditors included an explanatory paragraph regarding this uncertainty in their report on our financial statements as of December 31, 2012. These financial statements do not include any adjustments that might result from the uncertainty as to whether we will achieve status as a “going concern”. Our ability to achieve status as a “going concern” is dependent upon our generating cash flow sufficient to fund operations. Our business plans may not be successful in addressing these issues. If we cannot achieve status as a “going concern”, you may lose your entire investment in the Company.
We are currently dependent on external financing, the source of which is uncertain.
Currently, we are dependent upon external financing to fund implementation of our business plan. We estimate that over the next 12 months we will need $2,500,000 to $5,000,000 to implement our business plan, including, but not limited to, project acquisitions, engineering, and development and integration costs, and other operating expenses and corporate overhead (which is subject to change depending upon pending business opportunities and available financing). We will also need to negotiate, joint venture arrangements and/or other financing arrangements to provide capital for development, construction and initial operation of our first plant, which we estimate will cost approximately $15,000,000 to build out and establish commercial operations. We do not have such capital available at this date. It is imperative that we receive this external financing to implement our business plan and to finance start-up operations. New capital may not be available, adequate funds may not be sufficient to implement our business plan, or capital may not be available when needed or on commercially reasonable terms. Our failure to obtain adequate additional financing would require us to delay, curtail or scale back some or all of our efforts to implement our business plan and could jeopardize our ability to continue in business.
We may not be able to establish joint venture or financing arrangements, obtain the capital to market our technology, or otherwise successfully operate our business.
We believe that part of the key to establishing revenues is to successfully establish joint venture or financing arrangements with local joint venture partners, and/or other local financing sources, and with public and private entities who have the need to dispose of waste products which will serve as the feedstock for operation of our Energy Campuses tm. We have not as yet negotiated such joint ventures or arrangements, and our ability to do so, and do so on favorable terms to our proposed business is uncertain. Our success in this regard will depend in large part on how our technology works, market acceptance of our proposed technology and our efforts to educate potential joint venture and financing partners on the advantages of teaming with us to develop, build out and operate our proposed plants. Acceptance of such proposals requires marketing expenditures and education and awareness on the part of potential joint venture partners who might serve as partners in our development of plants. We may not have the resources required to promote our technology, or to promote proposals to develop plants and to promote their potential benefits. Such efforts will require additional capital, and the availability, sources and terms for such capital are uncertain. If we are unable to obtain the necessary capital, or unable to successfully promote our technology and/or proposed plant development, or unable to develop profitable joint venture arrangements with producers of waste feed stock, we will be unable to implement our business plan or continue in business.
We have limited operating history and may be unsuccessful in our efforts to implement our expanded business plan.
We have limited history of revenues from operations. We have yet to generate positive earnings and there can be no assurance that we will ultimately establish profitable operations. Our business plan is subject to all the risks inherent associated with project development, financing and implementation. We may be unable to locate sites, locate joint venture and/or financial partners, locate the required additional capital, our technology may not work as anticipated, we may find it difficult to obtain waste feed stock at reasonable prices, our end products may not find market acceptance, and/or we may fail to operate on a profitable basis. Potential investors should be aware of the difficulties normally encountered in commercializing our technology and plan proposals. If the business plan is not successful and we are not able to operate profitably, investors may lose some or all of their investment.
If we are unable to obtain additional funding, business operations will be harmed and if we do obtain additional financing then existing shareholders may suffer substantial dilution.
We anticipate that we will require up to approximately $2,500,000 to fund continued operations for the next twelve months, depending on revenue, if any, from operations. Additional capital will be required to effectively support the operations and to otherwise implement an overall business strategy. This is in addition to substantial additional capital we are proposing to raise from local joint venture partners and other financing participants on a project-by-project basis. We currently do not have any contracts or commitments for additional financing or for plant project joint ventures. There can be no assurance that financing will be available in required amounts or on commercially reasonable terms. The inability to obtain additional capital will restrict our ability to implement our business plan. If we are unable to obtain additional financing, we will likely be required to cease activities. Any additional equity financing which involves the sale of our corporate securities may involve substantial dilution to then existing shareholders, while participation arrangements in joint ventures and other arrangements will dilute the ownership interest in, and profit potential of each plant, since the ownership and fruits of plant operation will have to be shared among participating capital sources.
Because we are small and do not have much capital, we may have to limit marketing activity which may result in a loss of your investment.
Because we are small and do not have much capital, we must limit our business activity. As such we may not be able to complete the sales and marketing efforts required to create opportunities and then enter into joint venture arrangements to develop, construct and operate plants. If we cannot successfully negotiate and enter into contracts for the development, construction and operation of plants, either in joint venture form, or though financing arrangements, then the Company will not be successful and you will lose your investment.
If we are unable to continue to retain the services of our current executive personnel and key consultants, or if we are unable to successfully recruit qualified managerial and company personnel having experience in our renewable energy industry, it would be detrimental to our business.
Our success depends to a significant extent upon the continued services of our current executive personnel and key consultants, including specifically James Michael Whitfield, Charles R. Cronin, Jr. and Tracy Williams. The loss of the services of any of these key persons could have a material adverse effect on our growth, revenues, and prospective business. None of these individuals currently have employment agreements and are paid compensation and they could leave us with little or no prior notice. We do not have “key person” life insurance policies covering any of our employees. Additionally, there are a limited number of qualified technical personnel with significant experience in the design, development, manufacture, and sale of our recoverable energy, and we may face challenges hiring and retaining these types of employees.
In order to successfully implement and manage our business plan, we will be dependent upon, among other things, successfully retaining and recruiting qualified managerial and company personnel having experience in our recoverable energy business. Competition for qualified individuals is intense. There can be no assurance that we will be able to find, attract and retain existing employees or that we will be able to find, attract and retain qualified personnel on acceptable terms.
We are a new entrant into the “Renewable Energy” industry without profitable operating history.
As of March 31, 2012, we had an accumulated deficit of $6,203,848. We expect to derive our future revenues by implementation of our business plan, which contemplates establishment of joint ventures and other financing arrangements for the development, construction and operation of plants, and the sales of our systems. Success in implementing this business plan and thereby generating revenues is highly uncertain. We expect to continue to devote available resources to implement our business plan. As a result, we expect that our operating losses will increase and that we may incur operating losses for the foreseeable future.
We may not be successful in our efforts to build and profitably operate production facilities, with the result that we will be able to generate enough future revenues to achieve or sustain profitability.
We are dependent on the successful execution of acquiring, combining and maximizing a variety of existing, proven and unproven but innovative “Recoverable Energy” technologies which we plan to build and to use in operation of what management believes will be profitable production facilities (“Energy Campuses TM”). The market for our concept of combining technologies is unproven, and certain of the technologies are unproven as well. The technology may not work, or may not work properly in conjunction with other technologies, or may not gain adequate commercial acceptance. Thus, there is no assurance that our business plan will succeed.
If We Do Not Obtain And Maintain Necessary Domestic Regulatory Registrations, Approvals And Comply With Ongoing Regulations, We May Not Be Able To Develop, Construct or Operate Our Energy Campuses.
The Energy Campuses we propose to develop, construct and operate, will be subject to extensive Federal, State and Local laws and regulations. Compliance with such laws and regulations may involve the submission of a substantial volume of data and may require lengthy substantive review. This will increase costs and could reduce profitability. We may not be able to comply with future regulatory requirements. Moreover, the cost of compliance with government regulations may adversely affect revenue and profitability on a continuing basis once we have established plants, which are operating. Failure to comply with applicable regulatory requirements can result in, among other things, in injunctions, operating restrictions, civil fines and criminal prosecution. Delays or failure to obtain registrations could have a material adverse effect on the marketing and sales of services and impair the ability to operate profitably in the future.
Because Our Industry Is Subject To Rapid Technological Changes And New Developments, Our Future Success Will Depend On Our Ability To Respond To The Changes And Keep Out Technology updated.
The creation of plants and technology utilized to convert waste materials to energy and other usable products is a relatively new technology and is subject to potentially revolutionary technological changes and new developments. Future technological developments could render the plants we propose to build and operate, and/or the equipment therein, obsolete. Future success will depend largely on our ability to anticipate or adapt to such changes in the development, operation and subsequent adaption of our plants.
Our Markets Are Increasingly Competitive And, In The Event We Are Unable To Compete Against Larger Competitors, Our Business Could Be Adversely Affected.
The conversion of waste products and materials to energy and alternative new products is becoming an increasingly competitive business. We will compete against several companies seeking to address the conversion of low cost scrap tires into renewable synthetic oil and consumer products. Competitors with greater access to financial resources may enter our proposed markets and compete with us. Many of our competitors will have longer operating histories, larger customer bases, longer relationships with clients, and significantly greater financial, technical, marketing, and public relations resources than we do. We do not have any research and development underway, relying instead on a combination of current state of the art technology for the initial plants we propose to develop, build and operate, while other competitors have established budgets for such R&D. Established competitors, who have substantially greater financial resources and longer operating histories than us, are able to engage in more substantial marketing and promotion and attract a greater number of joint venture opportunities for the development, construction and operation of plants. In the event that we are not able to compete successfully, our business will be adversely affected and competition may make it more difficult for us to raise capital, establish joint ventures for plant development and implement our business plan.
The Company’s Implementation of Its Plan May Be impacted by the health and stability of the general economy.
Unfavorable changes in general economic conditions, such as the current recession, or economic slowdown in the geographic markets in which the Company seeks to establish business may have the effect of making it difficult to raise the required additional capital, or to locate potential joint venture partners which serve as a key part of our business plan. Markets for our anticipated by products may disappear, or prices may fall. These factors could adversely affect the Company’s implementation of its business plan and the ultimate establishment of profitable operations.
Failure to establish and maintain effective internal controls over financial reporting could have an adverse effect on our business, operating results and stock price.
Maintaining effective internal control over financial reporting is necessary for us to produce reliable financial reports and is important in helping to prevent financial fraud. If we are unable to maintain adequate internal controls, our business and operating results could be harmed.
Risks Related to Common Stock
Additional financings may dilute the holdings of our current shareholders.
In order to provide capital for the operation of the business, we may enter into additional financing arrangements. These arrangements may involve the issuance of new shares of common stock, preferred stock that is convertible into common stock, debt securities that are convertible into common stock or warrants for the purchase of common stock. Any of these items could result in a material increase in the number of shares of common stock outstanding, which would in turn result in a dilution of the ownership interests of existing common shareholders. In addition, these new securities could contain provisions, such as priorities on distributions and voting rights, which could affect the value of our existing common stock.
There is currently a limited public market for our common stock. Failure to develop or maintain a trading market could negatively affect its value and make it difficult or impossible for you to sell your shares.
There has been a limited public market for our common stock and an active public market for our common stock may not develop. Failure to develop or maintain an active trading market could make it difficult for you to sell your shares or recover any part of your investment in us. Even if a market for our common stock does develop, the market price of our common stock may be highly volatile. In addition to the uncertainties relating to future operating performance and the profitability of operations, factors such as variations in interim financial results or various, as yet unpredictable, factors, many of which are beyond our control, may have a negative effect on the market price of our common stock.
Risks Associated with Control of Our Company through Outstanding Preferred Stock.
Our Capital Structure as currently evolved places effective control of Certain Significant Decisions in the hands of four Series A Convertible Preferred Shareholders
We currently have outstanding 11,720,966 shares of Series A Convertible Preferred Stock, which is held by four shareholders as follows (hereinafter the “Series A Shareholders”):
| Charles R. Cronin | 7,554,968 Shares |
| James Michael Whitfield | 1,674,662 Shares |
| Harvey Dale Cheek | 1,966,613 Shares |
| Dr. Earl Beaver | 524,723 Shares |
The Certificate of Designation for these shares provides among other rights and privileges the requirement that 75% of the outstanding Series A Convertible Preferred must give their prior consent, before the Company can elect members to the Board of Directors, issue any securities of the Company or affect any fundamental transaction (defined as acquisitions, mergers, sale or purchase of substantially all assets, etc.).
As a result, the Company’s Board of Directors cannot act to issue additional securities to raise capital or for other purposes, nor may the common shareholders remove, replace or re-elect directors to the Board of Directors, nor may the Company affect any acquisitions, without the approval of at least 75% of its outstanding Series A Preferred Stock.
Series A Shareholders may have interests or goals different from, or even adverse to the interests of the Company and its business in some circumstances. As a result the Company may find it difficult or impossible to obtain such consent from the Series A Shareholders, should it need to raise capital by the sale of securities, or undertake one of the other specified actions. Common shareholders may be essentially blocked under these provisions from changing the members of the Board of Directors, despite the fact that Directors may not be performing their duties in an adequate manner in the view of a majority of the common shareholders. These provisions preclude or discourage outside take over or sale of the Company or its assets, unless approved by 75% of the outstanding Series A Convertible Preferred Shares. There may be potentially other adverse consequences arising from these restrictions on the Company and its Board of Directors.
Trading of our stock is restricted by the Securities Exchange Commission’s penny stock regulations, may limit a stockholder’s ability to buy and sell our stock.
The Securities and Exchange Commission has adopted regulations which generally define “penny stock” to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and “accredited investors”. The term “accredited investor” refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth exclusive of home in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the Securities and Exchange Commission, which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer’s account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser’s written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of our common stock.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Unregistered Sales of Equity Securities
As part of the merger (acquisition) transaction completed on March 16, 2009, we issued 17,622,692 shares of the common stock of the Company, $.0001 par value per share, to the shareholders of Dynamic Energy Development Corporation in a share exchange on a one for one basis. Subsequently, Verdad Telecom returned 44,786,188 shares of common stock in the Company, $.0001 par value per share, in exchange for a cash payment of $322,000 (the “Purchase Price”). This transaction closed on March 10, 2011. The shares were issued pursuant to an exemption from the registration requirements of the Securities Act provided by Section 3(a)(10) of the Securities Act.
Purchases of equity securities by the issuer and affiliated purchasers
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION.
N/A
ITEM 6. EXHIBITS.
Those exhibits marked with an asterisk (*) refer to exhibits filed herewith. The other exhibits are incorporated herein by reference, as indicated in the following list.
| Exhibit Number | | Description of Exhibit |
| | | |
| 3.1 | | Articles of Incorporation |
| 3.2 | | Articles of Amendment to Articles of Incorporation |
| 3.3 | | By-Laws |
| 3.4 | | Amendments to By-Laws |
| 10.1 | | Share Exchange Agreement, dated March 9, 2011, by and among Dynamic Energy Development Corporation, Mammatech Corporation and Verdad Telecom (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated March 16, 2010). |
| 10.2 | | Share Purchase Agreement Dated July 9, 2010 by and between the Company and Verdad Telecom, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated July 14, 2010) |
| 10.3 | | Amendment to Share Purchase Agreement, dated July 23, 2010 by and between the Company and Verdad Telecom, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated July 27, 2010) |
| 10.4 | | Strategic Consulting Services Agreement with NBN Enterprises, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q, dated July 22, 2011) |
| 10.5 | | Consulting Agreement with TMDS, LLC (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q dated, July 22, 2011) |
| 10.6 | | Consulting Agreement with Key Services, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q, dated July 22, 2011) |
| 10.7 | | Line of Credit with Charles R. Cronin, Jr. (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q, dated July 22, 2011) |
| 10.8 | | Stock Warrant Agreement with Charles R. Cronin, Jr. (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q , dated July 22, 2011) |
| 10.9 | | Consulting Agreement with Enertech R.D., LLC (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q, dated November 21, 2011) |
| 10.10 | | Certificate of Designation of Series A Convertible Preferred Stock (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q, dated November 21, 2011) |
| 10.11 | | Line of Credit – Amendment #1 and Amendment #2 (incorporated by reference to Exhibit 10.1 of the Company's Form 10-Q, dated November 21, 2011) |
| 10.12 | | Securities Exchange Agreements with thirteen debenture holders (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated January 6, 2012) |
| 10.13 | | Consulting Agreement with Undiscovered Equities, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated March 19, 2012) |
| 10.14 | | Stock Purchase Warrant to Pamela Griffin, the Company’s former CFO (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated March 19, 2012) |
| 10.15 | | Stock Purchase Agreement with C.C. Crawford Tire Company, Inc. (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated March 21, 2012) |
| 10.16 | | Term Sheet with R.F.B., LLC (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K dated, March 31, 2012) |
| 10.17 | | Definitive Agreement – R.F.B., LLC (incorporated by reference to Exhibit 99.1 of the Company's Form 8-K dated, May 24, 2012) |
| 10.18 | | Amendment No.1 to the Project Location and Consulting Agreement and Mutual Indemnification and Release Agreement (incorporated by reference to Exhibit 9.01of the Company's Form 8-K, dated July 18, 2012) |
| 10.19 | | Amendment No.1 to the Consulting Agreement – Undiscovered Equities Inc., dated August 15, 2012 (incorporated by reference by reference to Exhibit 10.19 of the Company’s Form 10-Q, dated August 20, 2012) |
| 10.20 | | Amendment No.1 to Corporate Advisory Agreement - Heartland Capital Markets, LLC, dated August 17, 2012 (incorporated by reference to Exhibit 10.20 of the Company’s Form 10-Q, dated August 20, 2012) |
| 10.21 | | Right of first refusal and option agreement to purchase C.C. Crawford Retreading Company, Inc. with IWSI PS Plan, dated October 2, 2012 (incorporated by reference to Exhibit 9.01 of the Company’s Form 8-K, dated October 2, 2012) |
| 10.22 | | Non-binding letter of intent with Terpen Kraftig, LLC contemplating a definitive agreement, dated October 10, 2012 (incorporated by reference to Exhibit 9.01 of the Company’s Form 8-K, dated October 10, 2012) |
| 10.23 | | Change of Address for relocation of the Company’s headquarters to 10000 North Central Expressway, Suite 400, Dallas, Texas 75231 (incorporated by reference to the Company’s Form 8-K, dated November 6, 2012) |
| 10.24 | | Other Events, dated April 22, 2013 (incorporated by reference to Company’s Form 8-K, dated April 22, 2013) |
| 10.25 | | Other Events, dated May 8, 2013 (incorporated by reference to Company’s Form 8-K, dated May 8, 2013) |
| 21.1 | | List of Subsidiaries |
| 99.1 | | Audited financial statements of DYNAMIC for the fiscal year ended December 31, 2010 (incorporated by reference to Exhibit 99.1 of the Company's Form 8-K, dated March 16, 2011). |
| 99.2 | | Audited financial statements of TC for the fiscal years ended December 31, 2010 and December 31, 2009 (incorporated by reference to Exhibit 10.1 of the Company's Form 8-K, dated March 16, 2011). |
| 101** | | Interactive Data File |
| 31.1* | | Certification of the registrant's Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| 31.2* | | Certification of the registrant's Chief Accounting Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| 32.1* | | Certification of the Company's Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
| 32.2* | | Certification of the Company's Chief Accounting Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (filed herewith) |
___________
* In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
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.
| | DYNAMIC ENERGY ALLIANCE CORPORATION (formerly Mammatech Corporation) | |
| | | | |
| Date: May 15, 2013 | By: | /s/ James Michael Whitfield | |
| | | James Michael Whitfield, | |
| | | Chief Executive Officer | |
| | | (Duly Authorized and Principal Executive Offer) | |
| Date: May 15, 2013 | By: | /s/ James Michael Whitfield | |
| | | James Michael Whitfield, | |
| | | Chief Financial Officer | |
| | | (Duly Authorized and Principal Financial Officer) | |
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