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 JUNE 30, 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
------------------
(Exact name of registrant as specified in its charter)
Minnesota 41-1508703
--------- ----------
(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
--------------
(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 August 10, 2005, the registrant had 33,562,978 shares of its $.01 par
value per share 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 JUNE 30, 2005
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Interim Condensed Consolidated Financial Statements (Unaudited):
Condensed Consolidated Balance Sheets as of June 30, 2005................ 1
Condensed Consolidated Statements of Operations for the three and
six months ended June 30, 2005 and June 30, 2004......................... 2
Condensed Consolidated Statements of Cash Flows for the six months
ended June 30, 2005 and June 30, 2004.................................... 3
Notes to Interim Condensed Consolidated Financial Statements............. 4
Item 2. Management's Discussion and Analysis or Plan of Operation.......... 10
Item 3. Controls and Procedures............................................ 15
PART II. OTHER INFORMATION
Item 5. Other Information.................................................. 16
Item 6. Exhibits........................................................... 16
Signatures.................................................................. 17
Exhibit Index............................................................... 18
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNECO CORPORATION AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET
As of June 30, 2005
(Unaudited)
ASSETS
Current Assets
Cash ........................................................... $ 76,984
Other current assets ........................................... 43
-----------
Total Current Assets ......................................... 77,027
Property and equipment, net ...................................... 43,064
-----------
Other Assets
Deposits ....................................................... 566
Debt issue costs, net .......................................... 40,716
-----------
Total Other Assets ........................................... 41,282
Total Assets ................................................. $ 161,373
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Accounts payable ............................................... $ 130,583
Accrued compensation ........................................... 280,708
Accrued interest ............................................... 32,850
Other accrued liabilities ...................................... 6,446
Loan payable ................................................... 198,019
Loan payable - Bank ............................................ 3,769
Current maturity of notes payable - Shareholders ............... 37,161
Current maturity of capital lease obligations .................. 769
-----------
Total Current Liabilities .................................... 690,305
Long Term Liabilities
Loans payable - Bank, net of current portion ................... 18,236
Notes payable - Shareholders, net of current portion ........... 119,448
Convertible debentures, net of discount of $273,248 ............ 53,752
-----------
Total Long Term Liabilities .................................. 191,436
Total Liabilities ............................................ 881,741
-----------
Commitments and contingencies .................................... -
-----------
Stockholders' Deficit
Preferred stock, $0.01 par value, 20,000,000 shares authorized,
none issued and outstanding .................................. -
Common stock, $0.01 par value, 80,000,000 shares authorized,
33,562,978 shares issued and outstanding ..................... 335,630
Additional paid-in capital ..................................... 7,488,927
Stock receivable ............................................... (2,250)
Accumulated deficit ............................................ (8,542,675)
-----------
Total Stockholders' Deficit .................................. (720,368)
-----------
Total Liabilities and Stockholders' Deficit .................. $ 161,373
===========
See accompanying notes to unaudited financial statements
-1-
DYNECO CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three and Six Months Ended June 30, 2005 and 2004
(Unaudited)
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ---------------------------
2005 2004 2005 2004
---- ---- ---- ----
Revenues - Consulting ....................... $ - $ 75,000 $ - $ 150,000
Compressor prototypes ..................... - 5,103 - 5,103
------------ ------------ ------------ ------------
Total Revenues .......................... - 80,103 - 155,103
Cost of revenues ............................ - 10,035 - 10,035
------------ ------------ ------------ ------------
Gross Profit .............................. - 70,068 - 145,068
Operating Expenses
Compensation .............................. 52,758 42,310 88,102 85,020
General and administrative ................ 157,265 127,718 243,438 202,727
------------ ------------ ------------ ------------
Total Operating Expenses ................ 210,023 170,028 331,540 287,747
------------ ------------ ------------ ------------
Loss from Operations .................... (210,023) (99,960) (331,540) (142,679)
Other Income (Expense)
Interest income ........................... 721 128 1,059 149
Interest expense .......................... (54,655) (8,407) (77,367) (16,967)
------------ ------------ ------------ ------------
Total Other Expense, net ................ (53,934) (8,279) (76,308) (16,818)
------------ ------------ ------------ ------------
Net Loss ................................ $ (263,957) $ (108,239) $ (407,848) $ (159,497)
============ ============ ============ ============
Net Loss Per Share - Basic and Diluted ...... $ (0.01) $ - $ (0.01) $ (0.01)
============ ============ ============ ============
Weighted average number of shares outstanding
during the period - basic and diluted ..... 33,593,917 32,915,176 33,593,917 32,933,857
============ ============ ============ ============
See accompanying notes to unaudited financial statements
-2-
DYNECO CORPORATION AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 2005 and 2004
(Unaudited)
2005 2004
---- ----
Cash Flows from Operating Activities:
Net loss ...................................................................... $(407,848) $(159,497)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................................. 17,396 16,811
Amortization of debt issue costs ........................................... 8,010 -
Amortization of debt discount .............................................. 53,752 -
Interest accretion on loan payable ......................................... 10,968 9,290
Bad debt expense ........................................................... 2,150 -
Common stock issued for services ........................................... - 24,000
Stock option grant for consultants ......................................... 56,925 -
(Increase) decrease in current assets:
Accounts receivable ........................................................ 6,875 (1,878)
Other current assets ....................................................... 700 1,840
Increase (decrease) in current liabilities:
Accounts payable ........................................................... 4,343 645
Accrued expenses ........................................................... 587 (6,016)
Accrued Interest Payable ................................................... 8,000 -
--------- ---------
Net Cash Used In Operating Activities ...................................... (238,142) (114,805)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ......................................... (1,011) -
Decrease in other assets ...................................................... - (2,172)
--------- ---------
Net Used In Investing Activities ........................................... (1,011) (2,172)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note repayments ............................................................... (2,215) (989)
Loan repayments ............................................................... (1,042) -
Proceeds from convertible debentures .......................................... 300,000 -
Repayment of capital lease obligation ......................................... (769) (10,641)
Debt issue costs .............................................................. (21,726) -
Issuance of common stock for cash ............................................. 25,000 -
--------- ---------
Net Cash Provided By (Used In) Financing Activities ........................ 299,248 (11,630)
--------- ---------
Net Increase (Decrease) in Cash ................................................. 60,095 (128,607)
Cash at Beginning of Period ..................................................... 16,889 199,441
--------- ---------
Cash at End of Period ........................................................... $ 76,984 $ 70,834
========= =========
Supplemental disclosure of cash flow information
- ------------------------------------------------
Cash paid during the period for interest ...................................... $ 5,004 $ 14,342
========= =========
Supplemental Disclosure of non-cash 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 discussed in the Notes.
Exchange of employee receivable for stock receivable .......................... $ 2,250 $ -
========= =========
See accompanying notes to unaudited financial statements
-3-
DYNECO CORPORATION AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005
(UNAUDITED)
NOTE 1 BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of DynEco
Corporation and Subsidiaries ("DynEco", "the Company", "we", "us", "our") 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 condensed consolidated
financial information. Accordingly, they do not include all the information and
footnotes necessary for a comprehensive presentation of condensed 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
condensed 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 June 30:
-4-
2005 2004
----------- ------------
Net loss, as reported .................... $ (407,848) $ (159,497)
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 ........................ $ (407,848) $ (135,146)
=========== ===========
Basic and diluted per share information:
Net loss per share, as reported ........ $ (.01) $ (.01)
=========== ===========
Net loss per share, pro forma .......... $ (.01) $ (.01)
=========== ===========
NOTE 3 GOING CONCERN AND MANAGEMENT'S PLAN
The Company has a net loss of $407,848 and net cash used in operations
of $238,142 for the six months ended June 30, 2005, a working capital
deficiency of $613,278, accumulated deficit of $8,542,675, and a
stockholders' deficiency of $720,368 at June 30, 2005. Additionally,
the Company was in default of the repayment terms on notes payable
aggregating $35,000 at June 30, 2005. 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 forced to curtail its present
operations. The condensed consolidated 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 six months ended June 30, 2005, the Company recognized
$10,968 of interest accretion on a loan payable.
The Company also repaid $2,215 on a loan payable to a Bank for the six
months ended June 30, 2005. The loan was used to refinance a capital
lease obligation in December 2004.
NOTE 5 NOTES PAYABLE - SHAREHOLDERS
During the six months ended June 30, 2005, the Company repaid $1,060 of
notes payable - shareholders. Total notes payable - shareholders at
June 30, 2005 aggregated $156,610.
-5-
NOTE 6 NOTES PAYABLE - CONVERTIBLE PROMISSORY NOTES & 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 plus accrued interest, are to
be paid in 19 equal monthly installments, commencing July 2, 2005 (see
default and waiver in Note 12). 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 warrants 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 exercise the
warrants on a cashless basis. The exercise price of the warrants
described in subparagraph (b) was reduced to $.18 per share subsequent
to June 30, 2005.
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 and effective within 90
days from the filing date or we will incur liquidated damages equal to
2% of the promissory note principal balance per 30 days of
non-compliance. Repayment of the notes is collateralized by a general
security interest in all of our assets. The registration statement was
timely filed and is currently available to permit resales by the note
and warrant holders.
If the Company does not issue unlegended shares under the provisions of
the agreements, the Company may be liable for damages, including
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.
-6-
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, five-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. In addition, the promissory notes that
were issued to the finders were identical to the aforementioned
promissory notes equal to 9% of the promissory notes, and were for
$27,000. The value was accounted for in the same manner as the $300,000
promissory notes.
Convertible promissory notes .................... $327,000
Debt discount ................................... 273,248
--------
Convertible promissory notes, net of discount ... $ 53,752
========
Debt issue costs ................................ $ 48,726
Amortization of costs thru June 30, 2005 ........ 8,010
--------
Debt issue costs, net of amortization ........... $ 40,716
========
NOTE 7 CAPITAL LEASES
During the six months ended June 30, 2005, the Company repaid $769 of
capital leases. Total leases payable at June 30, 2005 aggregated $769.
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 June 30, 2005, no royalty payments were incurred or due as no
related sales have yet occurred.
-7-
NOTE 9 STOCKHOLDERS' DEFICIENCY
During January 2005, the Company sold 250,000 common 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.
NOTE 10 STOCK RECEIVABLE
The Company has elected to write off a portion of an employee
receivable, due from a former employee, that has been deemed
uncollectible as of June 30, 2005. The receivable was collateralized by
25,000 shares of the Company's common stock owned by the employee. The
Company recorded a common stock receivable, a deferred component of
equity in the amount of $2,250. This figure was computed by multiplying
the number of shares to be cancelled upon return of the collateral by
the fair value of the Company's common stock as of June 30, 2005. The
remaining $2,150 was charged to bad debt expense.
NOTE 11 STOCK OPTIONS AND WARRANTS
On April 7, 2005 the Company issued stock options to the Company's
employees, directors, counsel and consultants that expire three years
from the grant date. The options were issued as follows:
1993 Corporate Stock Option Plan
--------------------------------
Directors 300,000
Consultants 75,000
Employees 131,667
Chief Executive Officer (CEO) 100,000
2001 Equity Incentive Plan
--------------------------
Consultant 500,000
Employees 168,333
All of the options were granted at Fair Market Value ($.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.
The options granted to 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 has recorded
an expense of $56,925.
On April 7, 2005, the Company's board extended the expiration date of
4,000,000 warrants owned by two holders who previously purchased those
warrants as part of a unit purchase, from November 2005 to November
2006. In addition, the board extended the expiration date of 33,333
options owned by an employee from June 2005 to June 2007. There was no
financial effect of these transactions.
-8-
NOTE 12 SUBSEQUENT EVENTS
On July 1, 2005, the Company failed to make the required installment
payments under the secured convertible promissory notes (see Note 6).
The delinquent payments to the five note holders aggregated $17,211 of
principal plus accrued interest. On August 3, 2005, the note holders
waived the Company's default in making the July 1, 2005 payments and
agreed not to assert any remedies they have under the notes and related
loan agreements. As consideration for the waivers and agreements on the
part of the note holders, the Company:
>> Paid two note holders a total of $18,333 representing the July 1,
2005 installment of principal and agreed upon accrued interest
under their notes;
>> Reduced the exercise price of warrants to purchase a total of
1,500,000 shares of the Company's common stock issued to the two
note holders, from $.25 per share to $.18 per share; and
>> Agreed with the other three note holders to defer repayment of
the unpaid principal installment of $1,421 plus accrued interest
on their notes until the March 2, 2007 maturity date of the
notes, and agreed that those note holders could convert the
deferred payments into shares of our common stock at the lesser
of $.06704 per share or the then applicable conversion price of
the note.
-9-
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, 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; whether a
third-party can successfully develop, manufacture and market products that
incorporate our technology; 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 (as supplemented on August 4, 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 six months ended June 30, 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 theUniVane is
incorporated.
-10-
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 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.
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.
We recorded and charged to operations impairment losses of $144,603 and
$0, relating to patent rights, for the years ended December 31, 2004 and 2003,
respectively.
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 3,736,167 at June 30,
2005. In April of 2005, the Company granted 1,275,000 options under the plans.
All of the options were granted at Fair Market Value on the grant date.
Therefore there was no compensation expense for the 700,000 options granted to
the employees, directors and chief executive officer in accordance with the
provisions of Accounting Principles Board Opinion No. 25 and
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no pro forma disclosures required under the provisions of SFAS No. 123. The
575,000 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 a price for April 7, 2005 (grant date), 3
year expected term, zero expected dividends, volatility of 294% and a discount
rate of 3.9%. Therefore, the Company recorded an operating expense of $56,925.
On April 7, 2005, the Company's board extended the expiration date of
4,000,000 warrants owned by 2 holders from November 2005 to November 2006. In
addition, the board extended the expiration date of 33,333 options owned by an
employee. There was no financial effect of these transactions.
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.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2004.
We had no revenues in the first six months of 2005 as compared to
$150,000 in consulting revenues in the first six months of 2004. The 2004
revenues related to the Parker-Hannifin consulting agreement. We also had no
prototype sales in the first six months of 2005 as compared to $5,103 in the
first six months of 2004.
Operating expenses increased 15.2% to $331,540 for the first six months
of 2005 from $287,747 for the first six months of 2004. Legal and professional
fees for the first six months decreased to $64,966 for 2005 from $85,820 in 2004
primarily because the Company classified $21,726 of legal fees as debt issue
costs. Research and development costs for the first six months decreased to
$30,897 in 2005 from $43,510 in 2004. Interest expense increased for the first
six months to $77,367 for 2005 from $16,967 for 2004, primarily because of the
amortization of the debt discount on the convertible debentures. Our net loss
increased $248,351 for the first six months of 2005 to $407,848 from $159,497
for the first six 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.
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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. 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.
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 June 30, 2005, our primary source of liquidity was $76,984 of
cash. The working capital deficit was $(613,278). We had total assets of
$161,373, of which long-term assets consisted of other assets of $41,282, and
$43,064 of property and equipment, net. Our liabilities totaling $881,741
included $130,583 of accounts payable, $320,004 of accrued liabilities, $198,019
of loan payables and $41,699 of current maturities of long-term debt. Total
shareholders' deficit was $(720,368). At June 30, 2005, we had an accumulated
deficit of $(8,542,675).
We are in default of the repayment terms on notes payable aggregating
$35,000 at June 30, 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.
On July 1, 2005, the Company failed to make the required installment
payments under its secured promissory notes in the aggregate principal amount of
$327,000. The delinquent payments to the five note holders aggregated $17,211 of
principal plus accrued interest. On August 3, 2005, the note holders waived the
Company's default in failing to make the July 1, 2005 payments and agreed no to
assert any remedies they have under the notes and related loan agreements. As
consideration for the waivers and agreements on the part of the note holders,
the Company:
Paid two note holders a total of $18,333 representing the July 1, 2005
installment of principal and agreed upon accrued interest:
Reduced the exercise price of warrants to purchase a total of 1,500,000
shares of the Company's common stock issued to the two note holders,
from $.25 per share to $.18 per share; and
Agreed with the other three note holders to defer repayment of the
unpaid principal installment of $1,421 plus accrued interest on their
notes until the March 2, 2007 maturity date of the notes, and agreed
that those note holders could convert the deferred payments into shares
of our common stock at the lesser of $.06704 per share or the then
applicable conversion price of the note.
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Net cash used in operating activities was $238,142 for six months ended
June 30, 2005 compared to $114,805 for 2004. The cash provided by financing
activities in first six months of 2005 of $299,248 was due to the proceeds from
secured convertible promissory notes 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 June 30, 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
for $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 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 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 capital
requirements for the next two to three 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 two to three 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;
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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.
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 was no change in our internal control over financial reporting
identified in connection with our evaluation that occurred during our last
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On July 1, 2005, we failed to make required installment payments under
our promissory notes in the aggregate principal amount of $327,000 issued to
five persons. The aggregate principal amount of the monthly installments that
were not paid was $17,210.53 plus accrued interest.
As consideration for the note holders' waiver of our default, we (a)
paid a total of $18,333.33 including agreed upon accrued interest, to two of the
note holders, (b) reduced the exercise price of warrants to purchase a total of
1,500,000 shares of our common stock issued to those two note holders, from $.25
per share to $.18 per share and (c) agreed with the other note holders to defer
repayment of the unpaid $1,479.76 installments of principal and accrued interest
on their notes until the March 2, 2007 maturity date of the notes, and agreed
that those note holders could convert the deferred payments into shares of our
common stock at the lesser of $.06704 per share or the then applicable
conversion price of the note.
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.
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SIGNATURES
In accordance with the requirements of the Exchange Act the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 15, 2005 DYNECO CORPORATION
By: /s/ Thomas C. Edwards
---------------------
Thomas C. Edwards
Chief Financial and
Accounting Officer
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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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