UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2005
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______ TO _______
COMMISSION FILE NUMBER 333-07953
DYNECO CORPORATION
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(Exact name of registrant as specified in its charter)
Minnesota 41-1508703
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
564 International Place, Rockledge, Florida 32955
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(Address of principal executive offices)
(321) 639-0333
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(Registrant's telephone number, including area code)
Check whether the issuer (1) 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 [_]
As of May 12, 2005, the registrant had 33,562,978 shares of its $.01 par
value common stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DYNECO CORPORATION
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED MARCH 31, 2005
PAGE
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PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of March 31, 2005............... 1
Condensed Consolidated Statements of Operations for the three months
ended March 31, 2005 and March 31, 2004.................................. 2
Condensed Consolidated Statements of Cash Flows for the three months
ended March 31, 2005 and March 31, 2004.................................. 3
Notes to Interim Condensed Consolidated Financial Statements............. 4-8
Item 2. Management's Discussion and Analysis or Plan of Operation..........9-13
Item 3. Controls and Procedures............................................ 14
PART II. OTHER INFORMATION
Item 2. Recent Sales of Unregistered Securities and Use of Proceeds........ 15
Item 6. Exhibits........................................................... 15
Signatures.................................................................. 16
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
AS OF MARCH 31, 2005
(UNAUDITED)
ASSETS
Current assets:
Cash ........................................................ $ 223,173
Accounts receivable ......................................... 1,802
Other current assets ........................................ 4,304
-----------
Total current assets ............................. 229,279
Property and equipment, net ..................................... 46,888
-----------
Other Assets:
Deposits .................................................... 566
Debt issue costs, net ....................................... 46,696
-----------
Total Other Assets ............................... 47,262
Total Assets ..................................... $ 323,429
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable ............................................ $ 132,696
Accrued compensation ........................................ 280,708
Accrued interest ............................................ 27,182
Other accrued liabilities ................................... 5,851
Loan payable ................................................ 192,535
Loan payable - bank ......................................... 3,988
Current maturity of notes payable - shareholders ............ 37,134
Current maturity of capital lease obligations ............... 1,153
-----------
Total Current Liabilities .............................. 681,247
Long Term Liabilities:
Loans payable - bank, net of current portion ................ 19,300
Notes payable - shareholders, net of current portion ........ 120,344
Convertible debentures, net of discount of $313,375 ......... 13,625
-----------
Total Long Term Liabilities ............................ 153,269
Total Liabilities ...................................... 834,516
-----------
Commitments and contingencies ................................... -
Stockholders' Deficit:
Preferred stock, $.01 par value; 20,000,000 authorized
none issued and outstanding
Common stock, $.01 par value; 80,000,000 authorized
33,562,978 issued and outstanding ...................... 335,630
Additional Paid-in capital ............................. 7,432,002
Accumulated deficit ......................................... (8,278,719)
-----------
Total Stockholders' Deficit ...................... (511,087)
-----------
Total Liabilities and Stockholders' Deficit ...... $ 323,429
===========
See accompanying notes to consolidated financial statements.
-1-
DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
----------- -----------
Revenues - consulting .............................. $ - $ 75,000
Cost of revenues ................................... - -
----------- -----------
Gross Profit .............................. - 75,000
Operating expenses:
Compensation ................................... 35,344 42,710
General and administrative ..................... 86,173 75,009
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Total operating expenses .................. 121,517 117,719
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Loss from operations ...................... (121,517) (42,719)
Other income (expenses):
Interest income ................................ 338 21
Interest expense ............................... (22,712) (8,560)
----------- -----------
Total other income (expense), net ......... (22,374) (8,539)
----------- -----------
Net loss .................................. $ (143,891) $ (51,258)
=========== ===========
Basic and diluted per share information:
Net loss per share ............................. $ - $ -
=========== ===========
Weighted average number of common shares outstanding 33,521,311 32,952,538
=========== ===========
See accompanying notes to consolidated financial statements.
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DYNECO CORPORATION AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
(UNAUDITED)
2005 2004
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ....................................... $(143,891) $ (51,258)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization .............. 12,560 8,406
Amortization of debt issue costs ........... 2,030 -
Amortization of debt discount .............. 13,625 -
Interest accretion on loan payable ......... 5,484 4,645
Bad debt expense ........................... 454 -
(Increase) decrease in current assets:
Accounts receivable ........................ 5,073 -
Other current assets ....................... 385 2,358
Increase (decrease) in current liabilities:
Accounts payable ........................... 6,456 (641)
Accrued expenses ........................... 2,324 (4,257)
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Net cash used in operating activities ...... (95,500) (40,747)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............. - -
Increase in other assets ....................... - -
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Net cash used in investing activities ...... - -
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CASH FLOWS FROM FINANCING ACTIVITIES:
Note repayments ................................ (1,105) (491)
Proceeds from convertible debentures ........... 300,000 -
Repayment of capital lease obligation .......... (385) (5,248)
Debt issue costs ............................... (21,726) -
Issuance of common stock ....................... 25,000 -
--------- ---------
Net cash provided by (used in) financing
activities ................................ 301,784 (5,739)
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Net increase (decrease) in cash .................. 206,284 (46,486)
Cash - beginning of period ....................... 16,889 199,441
--------- ---------
Cash - end of period ............................. $ 223,173 $ 152,955
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest ......... $ 1,629 $ 2,541
========= =========
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
On March 2, 2005 the Company issued $300,000 of convertible debentures and
$27,000 of promissory notes and warrants that had debt discounts equal to
the full value under the Black Scholes option pricing models as dicussed in
the Notes.
See accompanying notes to consolidated financial statements.
-3-
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2005
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the United States
of America and the rules and regulations of the United States of America
Securities and Exchange Commission for interim consolidated financial
information. Accordingly, they do not include all the information and footnotes
necessary for a comprehensive presentation of consolidated financial position
and results of operations.
It is management's opinion, however, that all material adjustments (consisting
of normal recurring adjustments) have been made which are necessary for a fair
consolidated financial statement presentation. The results for the interim
period are not necessarily indicative of the results to be expected for the
year.
For further information, refer to the audited consolidated financial statements
and footnotes of the Company for the year ending December 31, 2004 included in
the Company's Form SB-2.
NOTE 2 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION
The Company has three stock-based compensation plans, The Company
accounts for stock options issued to employees in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related
interpretations. As such, compensation cost is measured on the date of
grant as the excess of the current market price of the underlying stock
over the exercise price. Such compensation amounts are amortized over
the respective vesting periods of the option grant.
The Company adopted the disclosure provisions of SFAS No. 123
"Accounting for Stock-Based Compensation," and SFAS No. 148 "Accounting
for Stock Based Compensation - Transition and Disclosure," which
permits entities to provide pro forma net income (loss) and pro forma
earnings (loss) per share disclosures for employee stock option grants
as if the fair-valued based method defined in SFAS No. 123 had been
applied.
The Company accounts for stock options or warrants issued to
non-employees for goods or services in accordance with the fair value
method of SFAS 123. Under this method, the Company records an expense
equal to the fair value of the options or warrants issued. The fair
value is computed using an options pricing model.
The following table illustrates the effect on net income and earnings
per share if the company had applied the fair value recognition
provisions of FASB Statement No. 123, Accounting for Stock-Based
Compensation, to stock-based employee compensation as of March 31:
-4-
2005 2004
----------- ---------
Net loss, as reported .............................. $ (143,891) $ (51,258)
Add: Stock-based employee compensation expense
included in reported net income, net of related
tax effects .................................... - -
---------- ---------
Deduct: Total stock-based compensation expense,
determined under fair value based method for all
awards, net of related tax effects ............. - -
---------- ---------
Proforma net loss .................................. $ (143,891) $ (51,258)
========== =========
Basic and diluted per share information:
Net loss per share, as reported ................ $ - $ -
========== =========
Net loss per share, pro forma .................. $ - $ -
========== =========
NOTE 3 GOING CONCERN AND MANAGEMENT'S PLAN
The Company has a net loss of $143,891 and net cash used in operations
of $95,500 for the three months ended March 31, 2005, a working capital
deficiency of $451,968, accumulated deficit of $8,278,719, and a
stockholders' deficiency of $511,087 at March 31, 2005. Additionally,
the Company was in default of the repayment terms on notes payable
aggregating $35,000 at March 31, 2005. The Company plans to settle the
balance owed on these notes payable through issuance of common stock.
The Company's developmental contracts generate insufficient operating
capital and given the above financial results along with the Company's
expected cash requirements in 2005, additional capital investment will
be necessary to develop and sustain the Company's operations. These
matters raise substantial doubt about the Company's ability to continue
as a going concern.
Management believes that its plans will allow for adequate funding of
the Company's cash requirements through December 31, 2005, although no
assurance regarding this belief nor the success of these efforts can be
provided at this time.
In the event that management's plans as described above are not
successful, the Company may be required to delay or curtail its fuel
cell compressor development and commercialization programs or be forced
to further reduce its present operations. The financial statements do
not contain any adjustments which might be necessary if the Company is
unable to continue as a going concern.
NOTE 4 LOANS PAYABLE
During the three months ended March 31, 2005, the Company recognized
$5,484 of interest accretion on a loan payable.
The Company also repaid $933 on a loan payable to a Bank for the three
months ended March 31, 2005. The loan was used to refinance a capital
lease obligation in December 2004.
NOTE 5 NOTES PAYABLE - SHAREHOLDERS
During the three months ended March 31, 2005, the Company repaid $191
of notes payable - shareholders. Total notes payable - shareholders at
March 31, 2005 aggregated $157,478.
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NOTE 6 NOTES PAYABLE - CONVERTIBLE DEBENTURES & OTHER
On March 2, 2005, the Company completed a $300,000 financing consisting
of secured convertible promissory notes and common stock purchase
warrants. The notes mature on March 2, 2007. The notes are convertible
at the option of the two holders into shares of our common stock, at a
price of $.10 per share, subject to adjustment. The notes are payable
with interest at the rate of 5% per annum. Principal amortization
payments, each in the amount of $15,789.47 plus accrued interest, are
to be paid in 19 equal monthly installments, commencing July 2, 2005.
Amortization payments may be made in cash (accompanied by a 10%
premium) or, at our option, in registered common stock, at a 20%
discount to market. Amortization payments in stock are subject to (a) a
limitation based upon the weighted average trading volume of the common
stock for the 20 trading days preceding the payment date and (b) a
4.99% cap on the beneficial ownership that each investor may have at
any point in time while the notes and warrants are outstanding.
We also issued the investors immediately exercisable common stock
purchase warrants to purchase an aggregate of 7,500,000 shares of
common stock, consisting of (a) five year warrants to purchase
3,000,000 shares at an exercise price of $.14375 per share, subject to
adjustment, (b) five-year warrants to purchase 1,500,000 shares at an
exercise price of $.25 per share, subject to adjustment and (c) five
year warrans to purchase 3,000,000 shares at $.10 per share, subject to
adjustment. We may require the investors to exercise the warrants
described in (c) if the closing price for our common stock is $.15 or
more for 30 consecutive trading days, and average daily volume during
such period is at least 250,000 shares. The exercise of warrants is
also subject to the 4.99% cap on the beneficial ownership that each
investor may have at any point in time while the notes and warrants are
outstanding. If certain registration statement requirements as
discussed below are not met, the warrants holders may cashless exercise
the warrants.
We agreed to file a registration statement covering the shares issuable
upon conversion or payment of the notes and exercise of the warrants.
The registration statement must be filed by April 30, 2005 and
effective within 90 days from the filing date or we will incur
liquidated damages equal to 2% of the promissory note princial balance
per 30 days of non-compliance. Repayment of the notes is collateralized
by a general security interest in all of our assets.
If the Company does not issue unlegended shares under the provisions of
the agreements, the Company may incur additional liquidated damages of
$100 per day for each $10,000 of purchase price per 30 days of
non-compliance.
We paid unaffiliated finders a total $27,000, by the issuance of
promissory notes payable in the same manner as the investor notes, and
issued the finders five-year warrants to purchase a total of 270,000
shares of common stock, excercisable at $.14375 per share, subject to
adjustment. The warrants are valued at $27,000 and a debt discount of
$27,000 was recorded (see valuation method and assumptions below). The
total debt issue costs of $48,726 is amortized over the debt term.
The value of the 7,500,000 warrants issued with the convertible
promissory notes exceeded the $300,000 promissory note value and
accordingly, the full amount of the note $300,000 was allocated to the
warrant value by recording a debt discount of $300,000 and a credit to
additional paid-in capital. The debt discount will be amortized to
interest expense over the debt term. The warrants were valued using the
Black-Scholes option pricing method with a common stock price of $.10
based on recent offering by the Company, 5 year expected term, zero
expected dividends, volatility of 294% and a discount rate of 3.99%. As
there was no value allocated to the debt, there was no beneficial
conversion amount to record.
-6-
Convertible debentures .......................... $327,000
Debt discount ................................... 313,375
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Convertible debentures, net of discount ......... $ 13,625
========
Debt issue costs ................................ $ 48,726
Amortization of costs thru March 31, ............ 2,030
--------
Debt issue costs, net of amortization ........... $ 46,696
========
NOTE 7 CAPITAL LEASES
During the three months ended March 31, 2005, the Company repaid $385
of capital leases. Total leases payable at March 31, 2005 aggregated
$1,153.
NOTE 8 RELATED PARTY TRANSACTIONS
Edwards Employment Agreement
On January 1, 2004, the Company entered into an employment agreement
with an individual acting as the Company's Chief Technical Officer
and Chief Executive Officer. Under the terms of the agreement, the
individual will receive a salary as follows:
Year ended December 31,
-----------------------
2005 $ 70,000
2006 $ 80,000
2007 $ 90,000
2008 $100,000
Edwards Technology License Agreement:
During February 2004, under an amendment to a 1992 license
agreement, the Company was granted an exclusive license to utilize
certain compressor technology, which includes the current UniVanetm
technology, developed by a current officer/director in exchange for
future royalty payments based on the underlying technology-producing
income. The Company is obligated to pay the officer/director
quarterly royalties equal to one percent of sales of related
products and sublicensed products and ten percent of any royalty
income received from sublicense agreements. The agreement expires in
December 2009, or upon six months written notice by the Company. As
of March 31, 2005, no royalty payments were incurred or due as no
related sales have yet occurred.
NOTE 9 STOCKHOLDERS' DEFICIENCY
During January 2005, the Company issued 250,000 shares and 125,000
warrants exercisable at $.15 per share for two years in exchange for
$25,000 cash.
On March 9, 2005, the transfer agent issued the above certificates and
the certificates for the stock that was issuable from December 15,
2004. Accordingly, the shares have been reclassified from issuable to
issued.
-7-
NOTE 10 SUBSEQUENT EVENTS
On April 7, 2005 the Company issued stock options to the Company's
employees, directors, counsel and consultants that expire three years
from the grant date. Under the 1993 Corporate Option Plan, the options
were issued as follows:
Directors ..................................... 300,000
Counsel and Consultants ....................... 75,000
Employees ..................................... 131,667
Chief Executive Officer (CEO) ................. 100,000
Under the 2001 Incentive Stock Option Plan the options were issued as
follows:
Consultant ................................ 500,000
Employees ................................. 168,333
All of the options were granted at Fair Market Value ($.10) on the
grant date and thus under APB 25 there is no expense for the options
issued to the directors, employees and the CEO. Had the Company used
the Fair Value Method under SFAS 123 method for directors, employees
and the CEO, the expense would have been 69,300 to be recognized over
the 3-year term.
The options granted to Counsel and Consultants were valued under the
Fair Value Method of SFAS 123 using the Black Scholes option pricing
method with a common stock price of $.10 based on price for April 7,
2005 (grant date), 3 year expected term, zero expected dividends,
volatility of 294% and a discount rate of 3.90%. Therefore, the Company
will record an expense of $56,925 over the 3-year term.
On April 7th 2005, the Company's board extended the expiration date of
4,000,000 warrants owned by 2 holders from November 2005 to November
2006. There was no financial effect of this transaction.
-8-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Certain disclosures in this Quarterly Report on Form 10-QSB include certain
forward-looking statements within the meaning of the safe harbor protections of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Statements that include words such
as "believe," "expect," "should," intend," "may," "anticipate," "likely,"
"contingent," "could," "may," "estimate," or other future-oriented statements,
are forward-looking statements. Such forward-looking statements include, but are
not limited to, statements regarding our business plans, strategies and
objectives, and, in particular, statements referring to our expectations
regarding our ability to continue as a going concern, generate increased market
awareness of our cholesterol monitor, realize improved gross margins, and timely
obtain required financing. These forward-looking statements involve risks and
uncertainties that could cause actual results to differ from anticipated
results. The forward-looking statements are based on our current expectations
and what we believe are reasonable assumptions given our knowledge of the
markets; however, our actual performance, results and achievements could differ
materially from those expressed in, or implied by, these forward-looking
statements. Factors, within and beyond our control, that could cause or
contribute to such differences include, among others, the following: the success
of our capital-raising and cost-cutting efforts, developing and marketing new
technology devices, including technological advancements and innovations;
consumer receptivity, preferences and availability and affordability; political
and regulatory environments and general economic and business conditions; the
effects of our competition; the success of our operating, marketing and growth
initiatives; development and operating costs; the amount and effectiveness of
our advertising and promotional efforts; brand awareness; the existence of
adverse publicity; changes in business strategies or development plans; quality
and experience of our management; availability, terms and deployment of capital;
labor and employee benefit costs, as well as those factors in our filings with
the Securities and Exchange Commission, particularly the discussions under "Risk
Factors" in our final prospectus dated May 6, 2005, filed pursuant to Rule
424(b)(3) of the Securities Act of 1933, as amended. Readers are urged to
carefully review and consider the various disclosures made by us in this report
and those detailed from time to time in our reports and filings with the SEC.
Our fiscal year ends on December 31. References to a fiscal year refer to the
calendar year in which such fiscal year ends.
The following analysis of our consolidated financial condition and
results of operations for the three months ended March 31, 2005 and 2004, should
be read in conjunction with the Consolidated Financial Statements and other
information presented elsewhere in this prospectus.
GENERAL
We are engaged primarily in developing and commercializing patented
high efficiency low-pressure non-lubricated air compressors and hydrogen
circulators, known collectively as UniVane(R) devices. The basic UniVane
compressor technology development has been carried out by DynEco and is based
upon the concepts, innovations and embodiments of the patents Dr. Edwards has
exclusively licensed to us. That license agreement was entered into in January
2004, which replaced a license agreement entered into in 1992. Under the license
agreement, we are required to pay Dr. Edwards one percent of revenues we receive
from sales of products incorporating the licensed technology, and ten percent of
gross royalty fees in excess of $500,000 per calendar year received by us from
sublicenses of the licensed technology. The underlying UniVane patent
#6,623,261, filed July 21, 2001 has a term of twenty years and expires on July
21, 2021. During May 2003, we granted an exclusive, world-wide patent license to
Parker-Hannifin Corporation to further develop, enhance, manufacture and market
our UniVane devices for all product applications into which the UniVane is
incorporated.
Under the license agreement, Parker-Hannifin is responsible for
generating production UniVane compressor engineering designs and producing and
marketing them. As a result, our technical efforts have been
-9-
re-directed to generating potentially improved UniVane manufacturing designs,
decreasing costs, increasing UniVane operational speeds and capacities and
creating initial engineering conceptual layouts for different size UniVanes. In
addition to engineering efforts to improve UniVane machines, we are also
identifying non-fuel cell markets for UniVane compressors and designing systems
that would employ the machines in those markets. Presently, we are designing and
testing aeration systems that could be applied to pond water reclamation and the
aquaculture industry. Much the same system could be used in dental offices to
produce vacuum for patient saliva ejection; UniVanes contain little or no
lubricant thus avoiding contamination of the medical system.
We have historically incurred losses primarily resulting from
expenditures related to the research, development, testing and preliminary
marketing of our proprietary technology. To date, no products incorporating our
UniVane technology have been commercially manufactured and we have not yet
generated revenues, including royalty income, from the sale of products
incorporating our UniVane technology. Until we established our relationship with
Parker-Hannifin, we were unable to identify manufacturers who were willing to
aid in the commercialization of products incorporating our UniVane technology.
However, we expect that operating losses will continue until such time as either
our future royalty income generates sufficient revenues to fund continuing
operations or a combination of royalties and profits that may be generated from
the sale of systems, such as aerators, that use UniVane air compressors.
Under the Parker License Agreement, DynEco was being paid $25,000 per
month for 18-months primarily to transfer UniVane technology to Parker and to
aid in the transition from prototype production to commercial manufacturing. The
consulting services ceased in December 2004. Prior to 2003, DynEco was
developing and attempting to commercialize the licensed UniVane technology with
its own limited resources.
CRITICAL ACCOUNTING ESTIMATES
Valuation of Patent Rights
The valuation of patent rights has a material impact on our reported
financial condition and operating performance. Patent rights consist of the
costs incurred to obtain patent rights associated with compressor technology.
Patent rights are amortized using the straight-line method over their seventeen
to twenty year lives commencing upon patent issuance and the generation of
revenues utilizing the underlying technology. Future revenues, if any, generated
by these patents will be in the form of royalties from Parker-Hannifin. There is
no assurance that commercial applications will be developed.
Due to: (a) uncertainties in the developing fuel cell industry, (b)
inherent risk of competing future technologies, and (c) our reliance on
Parker-Hannifin, we recognized an impairment loss of the entire net carrying
value of patent rights of $144,603 in 2004. This loss is reflected as an
operating expense and an increased the stockholders' deficit to $719,196 at
December 31, 2004.
Stock Based Compensation Plans
We have two stock based compensation plans. The board of directors
administers these plans and may grant options to key individuals at their
discretion. Terms and prices are to be determined by the compensation committee
or the board. These plans have an aggregate of 2,500,000 shares of common stock
reserved for issuance. Total options outstanding were 2,461,167 at March 31,
2005. No options were granted during the three months ended March 31, 2005.
Therefore there was no compensation expense in accordance with the provisions of
Accounting Principles Board Opinion No. 25 and no pro forma disclosures required
under the provisions of SFAS No. 123. If, however, we were to grant significant
options to key individuals in the future, there may be an expense, which could
be material, determined under the fair value based method to arrive at pro forma
net income (loss). In April 2005, we granted options to purchase 1,275,000
shares under these plans.
-10-
RESULTS OF OPERATIONS
Our historical results of operations prior to 2003 are not indicative
of our current operations due to a shift in business operations, commencing with
the licensing of our UniVane patent rights to the Parker-Hannifin Corporation
along with the associated consulting agreement. Revenues for the near term will
depend upon our receipt of royalty payments, if any, related to the sale of
systems that employ our UniVane technology.
In May 2003, we licensed our UniVane patent rights to the
Parker-Hannifin Corporation. At the same time we commenced providing services
under an associated product consulting agreement with Parker-Hannifin. The
product development and marketing and distribution resources of Parker-Hannifin
are, of course, far greater than those of DynEco, and, in the long-term we
anticipate that these resources will enable us to realize a greater level of
revenues without the related costs that we would incur if we were to undertake
these activities on our own. Moreover, our limited resources do not enable us to
undertake performance of these activities.
Our revenues for 2004 and 2003 were primarily derived from consulting
fees under the agreement with Parker-Hannifin. Our consulting fees terminated in
December of 2004.
To date, there have been no sales of UniVane products that generated
any royalty fees. In general, our license agreement with Parker-Hannifin does
not expire until the later to occur of the last licensed UniVane patent
expiration (i.e., July 21, 2021), or the final use of UniVane-related technology
by Parker-Hannifin.
THREE MONTHS ENDED MARCH 31, 2005 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2004.
We had no revenues in the first three months of 2005 as compared to
$75,000 in consulting revenues in first three months of 2004. The 2004 revenues
related to the Parker-Hannifin consulting agreement.
Operating expenses increased 3.2% to $121,517 for the first three
months of 2005 from $117,719 for the first three months of 2004. Legal and
professional fees for the first three months decreased to $783 for 2005 from
$33,306 in 2004 because the Company classified $21,726 of legal fees as debt
issue costs in 2005. Research and development costs for the first three months
decreased to $17,259 in 2005 from $21,546.
Interest expense increased for the first three months to $22,712 for
2005 from $8,560 for 2004, primarily because of the amortization of the debt
discount on the convertible debentures. Our net loss increased $92,633 for the
first three months of 2005 to $143,891 from $51,258 for the first three months
of 2004.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
DynEco Corporation is a developmental stage company. Our financial
condition relies on continuing equity investment until, if ever, Parker-Hannifin
is successful in commercializing the UniVane technology. During 2004 and 2003
equity funding was augmented by prototype sales and consulting fees.
From time-to-time, we issue stock, options and warrants to satisfy
operating expenses, which provides us with a form of liquidity. For example,
during February 2004, the Company settled an outstanding legal services
agreement from August 1, 2001, in which the holder was owed $10,000 payable with
100,000 shares of issuable common stock, which had been reflected in the
Company's records as common stock issuable. In February 2004, the Company
granted a stock option in lieu of issuing shares. In April 2004, the Company
issued 200,000 shares of common stock to a director for services rendered.
During 2003 we issued 60,000 shares of common stock valued at $7,200 and 120,000
warrants to purchase common stock at $.18 per share, in settlement of $15,000 of
accounts payable. Also during 2003, we issued 2,775,000 shares of common stock
valued at $333,000 in exchange for consulting, legal, directors and employee
services. Due, in part, to our lack of earnings, our success in attracting
additional funding has been limited to transactions in which our equity is
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used as currency. In light of the availability of this type of financing, and
the lack of alternative proposals, our board of directors has determined that
the continued use of our equity for these purposes may be necessary if we are to
sustain operations. Equity financings of the type we have been required to
pursue are dilutive to our stockholders and may adversely impact the market
price for our shares.
In November 2002, we entered into an agreement with the Technological
Research and Development Authority that provided $150,000 in funding for the
development and commercialization of DynEco's UniVane compressors and hydrogen
circulators for fuel cell applications. In consideration of the funding, we are
obligated to make royalty payments to the Authority equal to five percent of
future UniVane-related sales up to an amount equal to three times the amount
DynEco receives from the Authority. During 2003, the entire $150,000 funding
commitment was received. The agreement expires in November 2012. We do not
anticipate any additional funding from the Technological Research and
Development Authority.
As of March 31, 2005, our primary source of liquidity was $223,173 of
cash and $1,802 of accounts receivable. The working capital deficit was
$(451,968). We had total assets of $323,429, of which long-term assets consisted
of other assets of $47,262, and $46,888 of property and equipment, net. Our
liabilities totaling $834,516 included $132,696 of accounts payable, $313,741 of
accrued liabilities, $196,523 of loan payables and $38,287 of current maturities
of long-term debt. Total shareholders' deficit was $(511,087). At March 31,
2005, we had an accumulated deficit of $(8,278,719).
We are in default of the repayment terms on notes payable aggregating
$35,000 at March 31, 2005, and no extension has been granted by the debt
holders. The notes were issued to David O'Brien and Edward Werner, neither of
whom is affiliated with us. The proceeds of the loans were used for general
working capital purposes. Currently, there have been no actions taken by the
debt holders to foreclose since the notes payable were unsecured. We anticipate
settling the balance owing on these notes payable through issuance of common
stock in 2005 but there is no assurance that this will take place.
Net cash used in operating activities was $95,500 for three months
ended March 31, 2005 compared to $40,747 for 2004. The cash provided by
financing activities in first three months of 2005 of $301,784 was due to the
proceeds from convertible debentures and the sale of common stock, less
repayments of shareholder loans and capital lease obligations and the debt issue
costs that were incurred.
Historically, we have relied upon limited revenues from consulting fees
and equity financing in order to fund operations. While these activities have
provided limited resources, they have never resulted in cash flow in excess of
immediately needed funding. Our inability to generate cash flow in excess of
immediately needed funds was, in large part responsible for our decision to
enter into the strategic relationship with Parker-Hannifin as a means to develop
commercially viable products and a potential source of revenue generation.
As of March 31, 2005, and the date of this filing, our sources of
internal and external financing are limited. In January 2005, the Company issued
250,000 common shares and 125,000 warrants exercisable for two years in exchange
$25,000 cash. In March 2005, the Company completed a $300,000 financing
consisting of secured convertible promissory notes and common stock purchase
warrants. It is not expected that the internal sources of liquidity will improve
until net cash is provided from operating activities, and until such time, we
will rely upon external sources of liquidity, including additional private
placements of our common stock and exercise of various outstanding stock
warrants and stock options. We are hopeful the recent listing of our shares on
the OTC Bulletin Board might help increase the Company's market capitalization,
encourage the exercise of outstanding warrants and attract new sources of
financing. We have no understandings or commitments from anyone with respect to
external financing, and we cannot predict whether we will be able to secure
necessary funding when needed, or at all.
We project our current monthly cash flow requirement to be
approximately $35,000. While our cash and anticipated receipt of funds from the
financing agreement in March 2005, should be sufficient to satisfy our
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capital requirements for the next six to nine months, they are insufficient to
satisfy our anticipated costs associated with new product development. There can
be no assurance, however, that we will be able to generate sufficient cash from
operations, if any, in future periods beyond this six to nine month period to
satisfy our capital requirements. Therefore, we will have to continue to rely on
external financing activities, including the sale of our equity securities, to
satisfy our capital requirements for the foreseeable future. Due, in part, to
our lack of earnings, our success in attracting additional funding has been
limited to transactions in which our equity is used as currency. In light of the
availability of this type of financing, and the lack of alternative proposals,
our board of directors has determined that the continued use of our equity for
these purposes may be necessary if we are to sustain operations. Equity
financings of the type we have been required to pursue are dilutive to our
stockholders and may adversely impact the market price for our shares. However,
we have no commitments for borrowings or additional sales of equity, the precise
terms upon which we may be able to attract additional funding is not known at
this time, and there can be no assurance that we will be successful in
consummating any such future financing transactions on terms satisfactory to us,
or at all.
OFF BALANCE SHEET ARRANGEMENTS
Under SEC regulations, we are required to disclose our off-balance
sheet arrangements that have or are reasonably likely to have a current or
future effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors. An off-balance sheet
arrangement means a transaction, agreement or contractual arrangement to which
any entity that is not consolidated with us is a party, under which we have:
o Any obligation under certain guarantee contracts;
o Any retained or contingent interest in assets transferred to an
unconsolidated entity or similar arrangement that serves as credit,
liquidity or market risk support to that entity for such assets;
o Any obligation under a contract that would be accounted for as a
derivative instrument, except that it is both indexed to our stock and
classified in stockholder's equity in our statement of financial
position; and
o Any obligation arising out of a material variable interest held by us
in an unconsolidated entity that provides financing, liquidity, market
risk or credit risk support to us, or engages in leasing, hedging or
research and development services with us.
As of the date of this Report, the Company has no 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.
SEASONALITY AND INFLATION
Our business is not seasonal in nature, and management does not believe
that our operations have been materially affected by inflationary forces. If the
recent increase in oil prices proves to be long lasting, we believe the interest
in fuel cell development will only increase. As previously stated, our future
success is dependent upon the successful development and market acceptance of
fuel cell systems.
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ITEM 3. CONTROLS AND PROCEDURES
The Company's management has concluded its evaluation of the
effectiveness of the design and operation of the Company's disclosure controls
and procedures. Disclosure controls and procedures are controls and procedures
designed to reasonably assure that information required to be disclosed in our
reports filed under the Securities Exchange Act of 1934, such as this Quarterly
Report, is recorded, processed, summarized and reported within the time periods
prescribed by SEC rules and regulations, and to reasonably assure that such
information is accumulated and communicated to our management, including the
Chief Executive Officer and Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
The Company's management, including the Chief Executive Officer and
Chief Financial Officer, does not expect that our disclosure controls and
procedures will prevent all error and all fraud. A control system, no matter how
well designed and operated, can provide only reasonable, not absolute, assurance
that the control system's objectives will be 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, have been detected. These inherent limitations include the realities that
judgments in decision-making can be faulty, and that breakdowns can occur
because of simple error or mistake. The design of any system of controls is
based in part upon certain assumptions about the likelihood of future events,
and there can be no assurance that any design will succeed in achieving its
stated goals under all potential future conditions.
As of the evaluation date, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company maintains disclosure
controls and procedures that are effective in providing reasonable assurance
that information required to be disclosed in the Company's reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods prescribed by SEC rules and regulations, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the evaluation date.
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PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In January 2005, we issued 250,000 shares of common stock and warrants
to purchase 125,000 shares to two accredited investors, for an aggregate
purchase price of $25,000. The warrants are exercisable for two years at an
exercise price of $.15 per share, subject to adjustment. Each investor was
provided access to business and financial about us and represented that it had
such knowledge and experience in business and financial matters that it was able
to evaluate the risks and merits of its investment. Each certificate evidencing
securities issued in the transaction included a legend to the effect that the
securities were not registered under the Securities Act and could not be resold
absent registration or the availability of an applicable exemption therefrom. No
general solicitation or advertising was used in connection with the transaction.
The transaction was exempt from the registration requirements of the Securities
Act by reason of Section 4(2) thereunder and Rule 506 of Regulation D. No
commissions or similar compensation were paid in connection with this
transaction.
In March 2005, we completed a $300,000 financing consisting of our
promissory notes and common stock purchase warrants. Information concerning this
transaction is described elsewhere in this Quarterly Report, and was previously
disclosed in our Current Report on Form 8-K filed March 3, 2005.
ITEM 6. EXHIBITS
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002. *
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002. *
_________________
* Filed Herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, in the City of
Rockledge, State of Florida, on this 13th day of May 2005.
DYNECO CORPORATION
By: /s/ Thomas C. Edwards
---------------------
Thomas C. Edwards
Chief Financial and Accounting Officer
EXHIBIT INDEX
31.1 Certification of Chief Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Chief Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
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