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, 2006
[ ] 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
DYNAMIC LEISURE 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.)
2203 North Lois Avenue, Suite 900, Tampa, Florida 33607
On or about June 1, 2006, the Company shall relocate to
5680A W. Cypress Street
Tampa, FL 33607
-------------------------------------------------------
(Address of principal executive offices)
(813) 877-6300
--------------
(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, 2006, the registrant had 9,597,810 shares of its $.01 par value
common stock outstanding.
Transitional Small Business Disclosure Format: Yes [ ] No [X]
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
INDEX TO
QUARTERLY REPORT ON FORM 10-QSB
FOR THE FISCAL QUARTER ENDED MARCH 31, 2006
PAGE
------
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets as of March 31, 2006 (unaudited) ... 1
Consolidated Statements of Operations
for the three months ended March 31, 2006 (unaudited) .......... 2
Consolidated Statement of Changes in Stockholders' Deficit
for the three months ended March 31, 2006 (unaudited) .......... 3
Consolidated Statements of Cash Flows
for the three months ended March 31, 2006 (unaudited) .......... 4
Notes to Consolidated Financial Statements (unaudited) ......... 5
Item 2. Management's Discussion and Analysis or Plan of Operation ...... 24
Item 3. Controls and Procedures ........................................ 31
PART II. OTHER INFORMATION
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds .... 31
Item 6. Exhibits ....................................................... 32
Signatures .............................................................. 33
Exhibit Index ........................................................... 34
i
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
As of March 31, 2006
(unaudited)
ASSETS
Current Assets
Cash .......................................................... $ 722,318
Investments ................................................... 153,190
Accounts receivable, net ...................................... 375,522
Prepaid travel ................................................ 312,977
Other current assets .......................................... 154,412
Short term debt issue costs, net .............................. 138,082
------------
Total Current Assets ........................................ 1,856,501
Property and equipment, net ..................................... 738,503
Other Assets
Goodwill ...................................................... 7,255,922
Intangibles ................................................... 348,413
Deposits ...................................................... 51,520
------------
Total Other Assets .......................................... 7,655,925
Total Assets ................................................ $ 10,250,929
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible notes payable, net of discount of (see note 6)..... $ 1,277,749
Convertible notes payable - related parties (see note 6)....... 750,000
Notes payable, current portion ................................ 37,216
Accounts payable .............................................. 517,786
Accrued compensation .......................................... 57,891
Accrued interest .............................................. 127,962
Other accrued liabilities ..................................... 134,612
Short term capital lease ...................................... 2,467
Deferred revenue .............................................. 1,179,877
Loan payable .................................................. 217,608
Loan payable - Bank, current portion .......................... 204,653
Acquisition payable ........................................... 1,440,000
Due to employee ............................................... 50,000
Warrant liability ............................................. 4,246,368
------------
Total Current Liabilities ................................... 10,244,189
Long Term Liabilities
Loans payable - Bank, net of current portion .................. 15,501
Notes payable, net of current portion ......................... 119,218
Capital lease ................................................. 5,457
------------
Total Long Term Liabilities ................................. 140,176
Total Liabilities ........................................... $ 10,384,365
------------
Commitments and contingencies (see note 7)
Stockholders' Deficit
Preferred stock, $0.01 par value, 20,000,000 shares authorized,
none issued and outstanding ................................. $ -
Common stock, $0.01 par value, 300,000,000 shares authorized,
9,331,528 shares issued and outstanding ..................... 93,315
Additional paid-in capital .................................... 4,496,987
Stock subscription receivable ................................. (537)
Accumulated deficit ........................................... (4,723,201)
Total Stockholders' Deficit ................................. (133,436)
------------
Total Liabilities and Stockholders' Deficit ................. $ 10,250,929
============
See accompanying notes to the financial statements
1
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 2006
(unaudited)
Total Revenues .............................................. $ 1,081,733
Cost of Revenues ............................................ 806,559
-----------
Gross Profit .............................................. 275,174
Operating Expenses
General and administrative ................................ 826,515
Depreciation expense ...................................... 4,513
-----------
Total Operating Expenses ................................ 831,028
-----------
Loss from Operations .................................... (555,854)
Other (Income) Expense
Interest income ........................................... (6,485)
Interest expense .......................................... 1,260,024
Loss on extinguishment of debt ............................ 208,452
Warrant valuation expense ................................. 2,220,042
-----------
Total Other Expense, net ................................ 3,682,033
-----------
Net Loss ................................................ $(4,237,887)
===========
Net Loss Per Share - Basic and Diluted ...................... $ (0.52)
===========
Weighted average number of shares outstanding
during the period - basic and diluted ..................... 8,072,581
===========
See accompanying notes to the financial statements
2
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Three Months Ended March 31, 2006
(unaudited)
Common Stock Additional Total
Subscription Paid In Accumulated Stockholders'
Common Stock Receivable Capital Deficit Equity
------------------ ------------ ------------ ------------ -----------
Shares Amount Amount Amount Amount Deficit
--------- ------- ------------ ------------ ------------ -----------
BALANCE AT DECEMBER 31, 2005 ................... 6,566,667 $65,666 $ (537) $ (57,629) $ (485,314) $ (477,814)
Deemed issuance for prior shareholders of DynEco 1,157,951 11,580 - (867,284) - (855,704)
Common stock issued in acquisitions ............ 1,040,000 10,400 - 2,673,580 - 2,683,980
Common stock issued in modification
and waiver agreement ......................... 200,000 2,000 - 178,018 - 180,018
Common stock issued in warrant exercise ........ 133,332 1,333 - 88,667 - 90,000
Common stock issued in conversion of note
payable ...................................... 233,578 2,336 - 208,719 - 211,055
Beneficial conversion feature .................. - - - 2,032,324 - 2,032,324
Extinguishment of debt related warrant liability - - - 240,592 - 240,592
Net Loss for first quarter 2006 ................ - - - - (4,237,887) (4,237,887)
--------- ------- ----------- ------------ ------------ -----------
BALANCE AT MARCH 31, 2006 ...................... 9,331,528 $93,315 $ (537) $ 4,496,987 $ (4,723,201) $ (133,436)
See accompanying notes to the financial statements
3
DYNAMIC CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Three Months Ended March 31, 2006
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................... $(4,237,887)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization .......................... 4,513
Amortization of debt issue costs ....................... 36,918
Amortization of debt discount on notes payable ......... 1,076,770
Loss on extinguishment of debt ......................... 208,452
Warrant valuation expense .............................. 2,220,042
(Increase) decrease in assets:
Accounts receivable .................................... 87,456
Prepaid travel ......................................... (92,985)
Other current assets ................................... (103,411)
Other assets ........................................... 1,896
Increase (decrease) in liabilities:
Accounts payable ....................................... (50,309)
Accrued salaries ....................................... 20,987
Accrued interest payable ............................... 49,729
Deferred revenue ....................................... 26,522
Customer deposit ....................................... (130,022)
Taxes payable .......................................... (455)
Other accrued liabilities .............................. (17,621)
-----------
Net Cash Used In Operating Activities .................. (899,405)
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment ...................... (6,267)
Acquisition of business, net of cash acquired .............. (41,077)
-----------
Net Cash Used In Investing Activities .................. (47,344)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes ................. 2,060,000
Repayment of convertible promissory notes .................. (344,632)
Debt issue costs ........................................... (175,000)
Proceeds from common stock issuance ........................ 90,000
-----------
Net Cash Provided By Financing Activities .............. 1,630,368
-----------
Net Increase in Cash ......................................... 683,619
Cash at Beginning of Period .................................. 38,699
-----------
Cash at End of Period ........................................ $ 722,318
===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............... $ -
===========
Cash paid during the period for interest ................... $ 91,943
===========
Supplemental Disclosure of non-cash investing and
financing activities:
Debt and stock issued in acquisitions ...................... $ 6,173,980
===========
Assets received on Capital Lease ........................... $ 7,924
===========
Discount on promissory notes ............................... $ 3,748,334
===========
See accompanying notes to the financial statements
4
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(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.
All share and per share data in the accompanying consolidated financial
statements for the period ended March 31, 2006 have been adjusted for
the effect of a recapitalization transaction between DynEco Corporation
(DynEco), n/k/a Dynamic Leisure Corporation ("Dynamic"), and Dynamic
Leisure Group, Inc. ("DLG") in January 2006 and the subsequent
one-for-thirty reverse stock split. (See Note 12)
For further information, refer to the audited financial statements and
footnotes of DLG, Changes in L'Attitudes, Inc., and Island Resort
Tours, Inc and International Travel and Resorts, Inc. included in the
Company's 8-KA filings in 2006 and the Form 10-KSB for DynEco
Corporation for the year ended December 31, 2005.
In 2005, DLG had been presented as a development stage company. During
the three months ended March 31, 2006, the Company acquired operating
companies with revenue and is not in the development stage.
NOTE 2 NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
The Company is focusing on entering the wholesale travel business,
specializing in leisure travelers to popular destinations in the US,
Caribbean, Mexico, the UK, and Europe. A growth strategy was
developed to grow revenue by establishing a scalable, single
operating system platform to assimilate and leverage a combination
of strategic acquisitions and internal growth, the first of which
occurred in the first quarter, 2006. On February 8, 2006 Changes in
L'Attitudes, Inc. ("CLA") was purchased, and on March 6, 2006,
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
("IRT/ITR") were purchased. (See Note 13)
Activities during the development stage include developing a
business plan, raising capital, acquisition of assets, and due
diligence on potential business combinations.
Use of Estimates
Our condensed consolidated financial statements are prepared in
accordance with accounting principles generally accepted in the
United States ("GAAP"). These accounting principles require us to
5
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
make certain estimates, judgments and assumptions. We believe that
the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that
these estimates, judgments and assumptions are made. These
estimates, judgments and assumptions can affect the reported amounts
of assets and liabilities as of the date of our condensed financial
statements as well as the reported amounts of revenues and expenses
during the periods presented. Our condensed financial statements
would be affected to the extent there are material differences
between these estimates and actual results. In many cases, the
accounting treatment of a particular transaction is specifically
dictated by GAAP and does not require management's judgment in its
application. There are also areas in which management's judgment in
selecting any available alternative would not produce a materially
different result. Significant estimates in 2006 include the
valuation of accounts receivable, valuation of goodwill, valuation
of stock based transactions, valuation of derivatives, estimates of
allowances for customer refunds and the estimate of the valuation
allowance on deferred tax assets.
Fair Value of Financial Instruments
The fair value of cash and cash equivalents, trade receivables,
trade payables and debt approximates carrying value due to the short
maturity of such instruments.
Accounts Receivable
Accounts Receivable result from amounts for either the sale of
travel products or agreements with various hotels, for amounts such
as co-op advertising support. The Company evaluates the
collectibility of accounts receivable while working with its vendors
and customers. Accounts receivable for travel products are collected
prior to travel departure.
Goodwill and Other Intangibles
The Company accounts for goodwill in a purchase business combination
as the excess of the cost over the fair value of net assets
acquired. Business combinations can also result in other intangible
assets being recognized. Amortization of intangible assets, if
applicable, occurs over their estimated useful lives. Statement of
Financial Accounting Standard No. 142, "Goodwill and Other
Intangible Assets" ("SFAS 142") requires testing goodwill for
impairment on an annual basis (or interim basis if an event occurs
that might reduce the fair value of a reporting unit below its
carrying value). The Company conducts this review for all of its
reporting units during the fourth quarter of the calendar year.
Revenue Recognition
The Company follows the criteria for the United States Securities
and Exchange Commission Staff Accounting Bulletin 104 and EITF 99-19
"Reporting Revenue Gross as a Principal versus Net as an Agent" for
revenue recognition. The Company recognizes revenue when persuasive
evidence of an arrangement exists, delivery of product has occurred,
the sales price is fixed or determinable, and collectibility is
reasonably assured.
6
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
The Company records merchant sales transactions at the gross
purchase price generally at the date of travel. For transactions
recorded at gross, the Company acts as the merchant of record in the
wholesale transaction, is the primary obligor to the customer,
controls selling prices, and is solely responsible for making
payments to vendors.
The Company records revenue and related costs of products when
travel occurs or for certain products, when the service is
completed. It is the Company's policy to be paid by the customer in
advance, with monies received in advance of travel recorded as a
deferred revenue liability.
Principles of Consolidation
The consolidated financial statements include the accounts of
Dynamic and its subsidiaries. All significant intercompany balances
and transactions have been eliminated in consolidation.
Accounting for Derivatives
The Company evaluates its convertible debt, options, warrants or
other contracts to determine if those contracts or embedded
components of those contracts qualify as derivatives to be
separately accounted for under Statement of Financial Accounting
Standards 133 "Accounting for Derivative Instruments and Hedging
Activities" and related interpretations including EITF 00-19
"Accounting for Derivative Financial Instruments Indexed to, and
Potentially Settled in, a Company's Own Stock".
The result of this accounting treatment is that the fair value of
the embedded derivative is marked-to-market each balance sheet date
and recorded as a liability. In the event that the fair value is
recorded as a liability, the change in fair value is recorded in the
consolidated statement of operations as an other income or expense.
Upon conversion or exercise of a derivative instrument, the
instrument is marked to fair value at the conversion date and then
that fair value is reclassified to equity. Equity instruments that
are initially classified as equity that become subject to
reclassification under SFAS 133 are reclassified to liability at the
fair value of the instrument on the reclassification date.
Concentration of Credit Risk and Other Concentrations
Nearly all of the Company's current travel products are for
destinations in the Caribbean and Mexico. This concentration
potentially exposes us to both political and weather risks of this
region.
The Company has a diverse US customer base, including consumers
purchasing products through travel agencies and purchasing directly
via the Internet.
The Company has very little credit risk since the vast majority of
its travel products are paid for in advance.
7
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Stock-Based Compensation
The Company has three stock-based compensation plans. On January 1,
2006, Dynamic implemented Statement of Financial Accounting Standard
123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment" which
replaced SFAS 123 "Accounting for Stock-Based Compensation" and
superseded APB Opinion No. 25, "Accounting for Stock Issued to
Employees." SFAS 123(R) requires the fair value of all stock-based
employee compensation awarded to employees to be recorded as an
expense over the related vesting period. The statement also requires
the recognition of compensation expense for the fair value of any
unvested stock option awards outstanding at the date of adoption.
Effective January 1, 2006, all employee stock compensation is
recorded at fair value using the Black Scholes Pricing Model. In
adopting SFAS 123(R), the Company used the modified prospective
application ("MPA"). MPA requires us to account for all new stock
compensation to employees using fair value. For any portion of
awards prior to January 1, 2006 for which the requisite service has
not been rendered and the options remain outstanding as of January
1, 2006, the Company shall recognize the compensation cost for that
portion of the award for which the requisite service was rendered on
or after January 1, 2006. The fair value for these awards is
determined based on the grant-date. There was no cumulative effect
of applying SFAS 123R at January 1, 2006.
NOTE 3 GOING CONCERN
The Company has a net loss of $4,237,887 and net cash used in
operations of $899,405 for the quarter ended March 31, 2005, a working
capital deficiency of $8,387,688 accumulated deficit of $4,732,201, and
a stockholders' deficiency of $133,436 at March 31, 2006. Because the
Company has not yet achieved or acquired sufficient operating capital
and given these financial results along with the Company's expected
cash requirements in 2006, additional capital investment will be
necessary to develop and sustain the Company's operations.
As of March 31, 2006, the Company has issued $4,462,658 in convertible
Notes Payable. While the Company expects substantially all of the note
holders to convert the receipt of cash to a receipt of common stock,
there is no guarantee that this will occur. As of March 31, 2006 the
Company did not have adequate working capital to meet these obligations
with cash payments.
Management believes that its plans will allow for adequate funding of
the Company's cash requirements through December 31, 2006, although
there is no assurance regarding this belief nor the success of these
efforts.
The Company is working on trying to secure additional capital. 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 PREPAID TRAVEL
The Company is required to pay for certain travel (mainly hotels) in
advance. Payments made to these vendors in advance are recorded to the
prepaid travel. The Company recognizes the expense when the associated
revenue is recognized. As of March 31, 2006, the Company had $312,977
in prepaid travel.
8
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
NOTE 5 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at March 31, 2006:
Estimated
March 31, Useful Life
2006 in Years
--------- -----------
Office furniture and equipment .... $ 45,946 3-5
Software .......................... 15,075 5
Leasehold Improvements ............ 41,422 10
Software in Development ........... 641,347
---------
Total property and equipment ...... $ 743,790
Less accumulated depreciation ..... (5,287)
---------
Property and equipment, net ....... $ 738,503
=========
Depreciation expense was $4,513 for the first quarter of 2006.
Software in Development consists of the purchase of worldwide rights
and source code to proprietary software for use in the wholesale travel
industry. The Company intends to configure and deploy the software in
the second half of 2006 and use it as the basis for an integrated
operating system platform. Per the terms of the purchase agreement for
the Software, the Company agreed not to sell or license the Software to
any unaffiliated third party until approximately June 30, 2006 without
the prior written consent of the seller.
NOTE 6 CONVERTIBLE NOTES PAYABLE WITH WARRANTS, NOTES PAYABLE, and LOANS
PAYABLE
Notes payable consisted of the following at March 31, 2006. Since all
Convertible Notes are due within the next 12 months, prior to March 31,
2007, they are reported as current liabilities.
Convertible Promissory Notes
Convertible Promissory notes, interest rate 5%, unsecured $ 155,158
Convertible Promissory note, interest rate 8%, secured ... 2,000,000
Convertible Promissory notes, interest rate 9%, secured .. 1,450,000
Convertible Promissory note, interest rate 9%, secured ... 600,000
Convertible Promissory note, interest rate 10%, unsecured 75,000
Convertible Promissory note, interest rate 10%, unsecured 75,000
Convertible Promissory note, interest rate 10%, unsecured 50,000
Convertible Promissory note, interest rate 10%, unsecured 25,000
Convertible Promissory notes, interest rate 10%, unsecured 20,000
Convertible Promissory note, interest rate 10%, unsecured 12,500
-----------
Total Convertible notes payable .......................... 4,462,658
Debt Discounts ........................................... (3,184,909)
-----------
Total notes payable ...................................... $ 1,277,749
===========
9
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Related Party Convertible Promissory Notes
Convertible Promissory note, interest rate 10%, unsecured $ 400,000
Convertible Promissory note, interest rate 10%, unsecured 350,000
-----------
Total Convertible notes payable related parties........... $ 750,000
===========
Convertible notes above due at March 31, 2006 to Street Venture
Partners, LLC and to a related party principal stockholder were
$350,000 and $400,000, respectively. (See Note 11)
Two convertible promissory notes totaling $60,000 were issued to two
individual investors during the three months ended March 31, 2006. The
Company recorded a debt discount of $60,000, which will be amortized
over the life of the notes.
The Maturity dates of the Convertible notes payable and notes payable
range from June 30, 2006 to March 6, 2007. There were repayments during
the first quarter of $50,000 of convertible promissory notes and
$140,000 of non-convertible promissory notes. In addition, there were
conversions to common stock of promissory notes of $200,000. The
weighted average interest rate of all interest bearing notes was 8.8 %
at March 31, 2006.
The convertible note holders have the right to convert the debt to
common stock at a fixed conversion rate ranging from $0.75 to $1.50.
Additionally, the convertible note holders and note holders who have
been repaid hold detachable warrants to purchase up to 3,370,554 shares
of the Company's stock at prices ranging from $0.68 to $1.00.
Notes Payable
Notes payable consist of the following:
Interest bearing at rates ranging from
5% to 15% unsecured and due at various
dates through August 2007 .............................. $ 156,434
Less Current maturities .................................. (37,216)
-----------
Long-term portion of notes payable .................... $ 119,218
===========
At March 31, 2005, the Company was in default of the repayment terms on
notes aggregating $35,000. This amount is included in the current
maturities of notes payable on the accompanying consolidated balance
sheet at March 31, 2006.
10
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
MMA Capital, LLC
On January 13, 2006, DynEco executed a series of documents with MMA
Capital, LLC, under which the Company borrowed $2,000,000 and issued
to MMA Capital a Secured Convertible Promissory Note in the
principal amount of $2,000,000. Interest is payable quarterly at the
rate of 8% per annum and the outstanding principal amount of the
note, together with accrued but unpaid interest, becomes due and
payable on January 11, 2007. In the event of default, the interest
rate is the maximum amount permitted by applicable law from the date
of the Event of Default until paid in full.
At the option of the holder, the outstanding principal amount of the
promissory note and accrued but unpaid interest may be converted
into shares of common stock of Dynamic at the rate of $1.00 per
share, subject to adjustment in the event Dynamic issues shares for
a consideration of less than $1.00 per share and to reflect the
occurrence of forward or reverse stock splits, corporate
reorganization or certain other corporate events. The Company agreed
to file a registration statement under the Securities Act of 1933,
as amended, to register the shares issuable upon conversion of the
promissory note. It constitutes an event of default under the note,
and subjects the Company to the payment of liquidated damages, if
the registration statement does not become effective on or before
July 12, 2006, and does not remain effective for a period of at
least 90 days. For each week of non-compliance, liquidated damages
will be 2% of the product of (a) the sum of the holder's shares of
stock not registered on a timely basis and (b) the weekly average
closing price of the shares of Dynamic's common stock. The Company's
obligations under the promissory note are collateralized by a
security interest in substantially all of the Company's assets.
In connection with the transaction, a common stock purchase warrant
in favor of MMA Capital was issued to purchase up to 2,000,000
shares of common stock, exercisable for a period of three years, at
an exercise price of $1.00 per share, subject to adjustment in the
event shares are issued for a consideration of less than $1.00 per
share and to reflect the occurrence of forward or reverse stock
splits, corporate reorganization or certain other corporate events.
If, at the time of exercise, there is not an effective registration
statement covering resale of the shares issuable upon exercise of
the warrant, the warrant holder may exercise the warrant on a
cashless basis, whereby the holder surrenders a portion of the
warrants in lieu of paying the exercise price in cash.
A fee equal to 8% of the proceeds ($160,000) was paid to Forte
Capital Partners LLC, an unaffiliated third party, who assisted MMA
Capital in connection with the transaction. The transaction was
exempt from the registration requirements of the Securities Act by
reason of Section 4(2) thereunder as a transaction by an issuer not
involving any public offering. The $160,000 was recorded as a
deferred debt issuance cost asset and is being amortized over the
debt term.
11
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Per SFAS 133 and EITF 00-19, the convertible note will be classified
as one financial instrument as it is considered conventional
convertible debt. In addition, the warrants are classified as a
liability at their initial fair value of approximately $1,793,382
with a corresponding charge to debt discount. The beneficial
conversion value of $206,618 associated with the convertible debt is
recorded as a debt discount and additional paid in capital. The debt
discount will be amortized over the term of the debt, and was
$421,918 for the three months ended March 31, 2006.
The warrant liability revaluation at March 31, 2006 indicated an
increase from the initial recording on January 13, 2006. The
estimated fair value of the warrant liability was $3,675,573, and a
corresponding credit to change in fair value of warrant liability
was recorded. Accordingly, the net change in the fair value of the
warrant liability during the three months ended March 31, 2006
resulted in warrant valuation expense of $1,882,191.
March 2, 2005 Convertible Notes and Modification and Waiver Agreement
On January 13, 2006, DynEco entered into a Modification and Waiver
Agreement with Alpha Capital Aktiengesellschaft, JM Investors, LLC,
Libra Finance, S.A. and RG Prager Corporation. The parties to the
Modification and Waiver Agreement are also parties to a series of
agreements dated March 2, 2005, as amended, under which DynEco
issued convertible promissory notes aggregating of $327,000. At the
time of execution of the Modification and Waiver Agreement, DynEco
was in default of its obligations under the March 2, 2005
agreements.
Under the Modification and Waiver Agreement, interest on the
convertible promissory notes at the rate of 5% per annum will be
paid quarterly, commencing March 31, 2006. Monthly principal
amortization payments of approximately $29,700 are to commence on
June 1, 2006. In accordance with the terms of the Modification and
Waiver Agreement, upon receipt of the funding of $2 million in a
January 13, 2006 Financing Transaction, the note holders opted to
receive payment, and were paid a total of $232,210, consisting of
$154,631 in principal amount of promissory notes and a premium in
the amount of $77,579. The premium was recorded as additional
interest expense in the first quarter. The notes are convertible at
$0.75 per share, subject to certain adjustments under control of the
Company. As part of the terms of the Financing Transaction, the note
holders released their security interest in the Company's assets.
As additional consideration to induce the note holders to enter into
the Modification and Waiver Agreement, DynEco issued an aggregate of
200,000 shares of common stock to the two investors under the March
2, 2005 transaction documents. Pursuant to the terms of the
Modification and Waiver Agreement (a) those provisions of the
transaction documents dated March 2, 2005 providing exceptions to
the adjustment provisions of the notes and warrants have been
eliminated, (b) the exercise price of the warrants to purchase up to
259,000 shares of common stock issued under the March 2, 2005
transaction documents was changed to $1.00 per share and the
12
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
warrants are exercisable until 3 years from the filing of the Form
8-K announcing the recapitalization of DynEco and DLG, (c) the
number of shares issuable upon exercise of those warrants to the
investors cannot be reduced to less than 300,000 shares, resulting
in an issuance of 45,000 additional warrants. Under the Modification
and Waiver Agreement, under certain circumstances, the Company may
require the investors to exercise the 300,000 warrants. The Company
may prepay the note at 150% of the principle due, plus interests and
other amounts due, through the redemption date but only if an
effective registration statement exists.
The Company agreed to file an amendment to the existing registration
statement covering resale of the shares issuable under the
transaction documents dated March 2, 2005. Such registration
statement was required to be filed on or before April 13, 2006 and
become effective not later than 60 days after the date of filing, or
the Company will be subject to the payment of liquidated damages to
the note holders. This document was filed on April 12, 2006. In
addition, the Company agreed to file a new registration statement
covering the resale of those shares issuable under the Modification
and Waiver Agreement the resale of which are not covered by the
existing registration statement. Such additional registration
statement was required to be filed by May 13, 2006 and become
effective not later than 60 days after the date of filing, or will
be subject to the payment of liquidated damages to the note holders.
This document was filed on May 12, 2006. A Form 8-K/A, including the
audited financial statements of the Company was filed on March 29,
2006, prior to April 5, 2006 as required.
The Company recorded a non-cash loss of extinguishment of debt for
$208,442 for the value of the 200,000 shares of common stock issued
(valued at $.90 per share on the date of the Modification and Waiver
Agreement, based on the closing price of common stock), additional
warrants issued, and to write off deferred debt issue costs. The
Company treated the modification as a cancellation of warrants
(which resulted in a reclassification of $240,592 of warrant
liability to equity) and issuance of new warrants. The new warrants
were valued at $233,227 at the modification date.
At March 31, 2006 in accordance with SFAS 133, the Company revalued
the total 304,000 warrants underlying the warrant liability which
total value was $570,795 using the following Black-Scholes
assumptions: common stock price of $1.85, 3.0 years expected term,
zero expected dividends, volatility of 354% and a discount rate of
3.96%.
In addition, the Company recorded a beneficial conversion value of
$77,371, to be amortized over the debt term.
In accordance with SFAS 133, the Company intends to continue to
evaluate the nature of the Convertible Notes and Warrants in the
future, and record any changes as appropriate.
13
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
NOTE 7 COMMITMENTS AND CONTINGENCIES
There are no material commitments or contingencies by the Company or
its subsidiaries, for purchasing goods or services that are not
reported in the consolidated financial statements, notes, or other
disclosures at March 31, 2006.
NOTE 8 STOCKHOLDERS' DEFICIT
Stock Subscription Receivable:
On May 16, 2005, DLG issued 833,333 shares of common stock, and on
December 23, 2005, DLG issued 5,133,334 shares of common stock to
principals for $.0001 per share, or $537, which is reflected as a
subscription receivable at March 31, 2006.
Modification and Waiver Agreement
On January 13, 2006 DynEco issued 200,000 shares to convertible note
holders as part of the Modification and Waiver Agreement (See Note
6).
Common Stock Issued Pursuant to Recapitalization
The Company is deemed to have issued 1,157,951 shares of common
stock to the shareholders of DynEco common stock, as part of the
Stock Exchange Agreement. Liabilities of $855,704 were also assumed
(See Note 12).
Common Stock Issued in Acquisitions
On March 6, 2006, the Company issued 340,000 shares of common stock
to Raymon Valdes, as part of the acquisition price of Changes in
L'Attitudes, Inc. The shares were valued at a total of $850,680,
$2.50 per share, the average closing price of the Company's stock on
the 5 days before and 5 days after the acquisition date.
On March 6, 2006 the Company issued 700,000 shares of Dynamic's
common stock to Stephen A. Hicks, as part of the acquisition price
of IRT-ITR. The shares were valued at a total of $1,833,300, $2.62
per share, the average closing price of the Company's stock on the 5
days before and 5 days after the acquisition date.
Common Stock Issued in Warrant Exercise
On March 15, 2006, the Company issued 133,332 shares of common stock
for $90,000, on a conversion of common stock warrants at $0.675 per
share.
Common Stock Issued in Conversion of Convertible Notes Payable
The Company issued a total of 233,578 shares of common stock on the
conversion of four convertible notes payable, totaling $200,000 plus
accrued interest, at $.90 per share.
14
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Common Stock Warrants:
At March 31, 2006, the Company had immediately exercisable warrants
outstanding as follows:
Common Shares Exercise Price Expiration
Under Warrant Per Share Date
------------- -------------- --------------
133,333 $ 5.40 November 2006
3,333 $ 5.40 September 2006
7,500 $ 4.50 December 2006
406,171 $ 5.40 June 2007
40,000 $ 3.00 September 2008
2,000,000 $ 1.00 January 2009
109,000 $ 4.31 March 2010
50,000 $ 5.40 March 2010
100,000 $ 3.00 March 2010
133,333 $ 0.90 June 2010
3,333 $ 3.75 June 2010
3,333 $ 7.50 June 2010
3,334 $ 11.25 June 2010
100,000 $ 0.675 July 2010
66,666 $ 0.675 August 2010
444,444 $ 0.675 September 2010
200,000 $ 0.675 October 2010
13,333 $ 0.675 November 2010
13,889 $ 0.675 December 2010
10,000 $ 0.75 January 2011
388,889 $ 0.90 January 2011
---------
4,229,891
=========
A summary of changes in stock warrants during 2006:
2006
----
Outstanding at beginning of year ........ 1,104,989
Stock Exchange Agreement ................ 859,337
Granted ................................. 2,398,897
Exercised ............................... (133,332)
Expired or Cancelled .................... -
----------
Balance at March 31, 2006 ............... 4,229,891
==========
NOTE 9 WARRANT LIABILITY
The Company recorded a warrant liability related to Convertible Notes
Payable in the Modification and Waiver Agreement and the financing with
MMA Capital LLC (See Note 6).
The remaining warrant liability will continue to be valued up until
expiration date with ranges from March 2009 to January 2011, with any
increases in valuation recorded as warrant valuation income or expense.
15
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
NOTE 10 DEFERRED REVENUE
Deferred revenue represents primarily money received from customers as
either a deposit or full payment for trips not yet traveled or services
earned. The balance at March 31, 2006 was $1,179,877.
NOTE 11 RELATED PARTIES AND SIGNIFICANT SHAREHOLDERS
Diversified Acquisition Trust, LLC
Geoffrey J. Eiten is the sole beneficial owner of Diversified
Acquisition Trust, LLC ("DAT"). Mr. Eiten, through the Trustee,
exercises sole investment and voting powers over the Trust. On
September 5, 2005 for an investment of $400,000, the Trust was
issued a convertible Promissory Note, bearing 10% annual interest,
convertible to Dynamic's common stock at a $0.68 per share. In
addition, the Company issued a warrant to purchase common stock at a
price of $0.68 per share.
DAT had also provided the Company with short-term loans and at March
31, 2006 held unsecured promissory notes in the amounts of $10,000,
$30,000, and $25,000 all with a maturity date of February 28, 2006,
and bearing an annual interest rate of 10.0%.
DAT owns 1,906,667 shares of the Company's stock as of March 31,
2006.
Mr. Eiten was a shareholder and investor but was not employed by the
Company at any time through March 31, 2006.
Street Venture Partners, LLC
Street Venture Partners, LLC is a privately-held company owned
equally by Daniel G. Brandano, the Company's CEO and Chairman, and
his spouse. As of March 31, 2006, Street Venture Partners LLC owned
1,066,667 shares of Dynamic's common stock.
See Note 13 for purchase of asset from this related party.
Claudale Ltd.
Claudale Limited is a Gibraltar-based company that manages a family
trust (which owns no shares of the Company's common stock) for Mr.
Daniel G. Brandano, the Company's CEO and Chairman. Mr. Brandano has
no ownership interest in Claudale Limited and disclaims beneficial
ownership or control of any shares of the Company's common stock
owned by Claudale Limited.
At March 31, 2006, Claudale Ltd. owned 693,333 shares of the
Company's common stock.
Brian J. Brandano
At March 31, 2006, Brian J. Brandano owned 333,333 shares of the
Company's common stock. Brian J. Brandano was employed by the
Company at March 31, 2006, and is the son of Daniel G. Brandano, the
Company's CEO and Chairman.
16
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Payable to Stephen A. Hicks.
At March 31, 2006 there is $50,000 payable to Stephen A. Hicks,
former 100% shareholder of IRT-ITR, for advances made to IRT-ITR
prior to the acquisition by the Company. There is currently no
interest being charged for the use of the advance, nor is any
interest anticipated to be paid.
NOTE 12 RECAPITALIZATION OF DYNAMIC LEISURE GROUP
On January 13, 2006, DynEco entered into an agreement with the former
shareholders of DLG, under which DynEco acquired all of the outstanding
capital stock of DLG, and DLG became a wholly-owned subsidiary of
DynEco.
As consideration for its acquisition of the outstanding capital stock
of DLG, DynEco issued an aggregate of 197,000 shares of its Series A
Preferred Stock to the former shareholders of DLG.
Issuance of the Series A Preferred Stock in exchange for the
outstanding capital stock of DLG pursuant to the Stock Exchange
Agreement resulted in a change in control of DynEco where (a) the
former shareholders of DLG acquired voting rights over approximately
83% of the currently outstanding voting securities of DynEco, and (b)
the designees of the former shareholders of DLG were appointed as the
executive officers and a majority of the board of directors of DynEco.
The Series A Preferred Stock converted into 6,566,667 shares of the
common stock of DynEco when DynEco's Articles of Incorporation were
amended to increase the number of authorized shares of DynEco common
stock sufficient to permit full conversion of the Series A Preferred
Stock. DynEco also agreed that the currently outstanding options and
warrants of DLG would be exchanged for options and warrants to purchase
an aggregate of 1,493,887 post-reverse shares of common stock of
DynEco, and that the then-outstanding convertible promissory notes of
DLG would become convertible into 1,386,111 post-reverse shares of
common stock of DynEco.
The transaction was exempt from the registration requirements of the
Securities Act by reason of Section 4(2) thereunder as a transaction by
an issuer not involving any public offering.
The transaction is treated as a recapitalization of DLG. Accordingly,
the financial statements of the Company just subsequent to the
recapitalization consists of the balance sheets of both companies at
historical cost, the historical operations of DLG, and the operations
of DynEco from the recapitalization date.
NOTE 13 BUSINESS ACQUISITIONS AND ACQUISITION LIABILITIES
Casual Car
On January 3, 2006, Street Venture Partners, LLC (See Note 9), sold
the US rights to the Casual Car General Service Agreement ("GSA") to
DLG for an unsecured convertible Promissory Note in the amount of
$350,000, and a warrant to purchase 388,889 shares of common stock
at a fixed price of $.90 per share. The Promissory Note is
convertible to Dynamic's common stock at $.90 per share and paying
17
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
10% interest annually. The agreement was recorded as an Intangible
Asset at a value of $348,413, and a short term deposit of $1,587 and
will be amortized over 3 years. The GSA allows the Company to sell
car rental products to leisure travelers primarily in Europe and the
United Kingdom, through Skycars International Rent a Car, Middlesex,
United Kingdom.
The Company plans to continue with the Casual Car GSA, selling
direct to the final consumer via the Internet, under the Casual Car
rental brand. The Casual Car GSA allows the Company to begin to
establish a foundation in certain desired leisure travel markets
with multiple product offerings.
Changes in L'Attitudes, Inc.
On February 8, 2006, the Company consummated the purchase of all of
the issued and outstanding capital stock of Changes in L'Attitudes,
Inc. ("CLA"), for a purchase price of $2,090,680. CLA is in the
travel industry, specializing in providing resort destination travel
packages to the Caribbean and Eastern Mexico. Almost all of its
business originates through the Internet via its on-line site. CLA
is located in Largo, Florida. The purchase price consists of a
combination of cash ($640,000), 340,000 shares of Dynamic's common
stock, valued at $2.50 per share or the average closing price of
Dynamic's common stock 5 days before and after the purchase
($850,680), and a one-year secured Convertible Promissory Note in
the principal amount of $600,000. The cash portion consists of
$200,000 delivered at closing, with the balance to be delivered on
or before June 9, 2006, following completion of audits of the
financial statements of CLA for the years ended December 31, 2004,
and December 31, 2005. The balance of the cash payment will be
reduced by any trade payables in excess of short term liquid assets,
using a measurement date of May 31, 2006.
Additional shares of common stock may be issued if the Company, as
part of any subsequent business acquisitions on or before December
31, 2006, issues to the acquiree/seller Dynamic's common stock at a
rate of less than $1.50 per share. The Company agreed to include
resale of the shares issued and those issuable upon conversion of
the Note in the next registration statement filed by the Company.
That registration statement was filed with the SEC on May 12, 2006.
The Convertible Promissory Note is payable with interest at the rate
of 9% per annum, and matures on February 7, 2007 ("Maturity Date").
The Note is convertible into Dynamic common stock, on or before the
Maturity Date, at a rate of $1.50 per share. The conversion rate may
be adjusted downward if the Company, in subsequent acquisitions on
or before December 31, 2006, provides consideration that includes
convertible securities with a conversion rate of less than $1.50 per
share. In the event of any such adjustment, the conversion rate will
be adjusted to the most favorable rate offered, but no lower than
$1.00 per share. Subsequent to the Closing Date, if the Company
obtains cumulative net external financing of $2,500,000 or more,
early repayment of 50% of the outstanding balance on the Promissory
Note may be required. If the Company receives in excess of
18
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
$5,000,000 in cumulative net external financing, an early repayment
of the full outstanding balance on the Promissory Note may be
required. The Company has agreed to include resale of the shares
issued, and those issuable upon conversion of the Note in the next
registration statement filed by the Company. The Convertible
Promissory Note is secured by a lien on the assets of CLA. A
beneficial conversion value of $480,000 was recorded as a debt
discount to be amortized over the life of the debt term.
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition.
The allocation includes estimates that were not finalized at March
31, 2006. Purchase price adjustments following the closing are
customary.
February 8, 2006
----------------
Current assets ....................... $ 836,330
Other assets ......................... 53,011
Goodwill ............................. 2,200,336
----------
Total assets ......................... 3,089,677
Current liabilities .................. 998,997
----------
Net assets acquired .................. $2,090,680
==========
The goodwill of $2,200,336 is expected to be deductible over 15
years for tax purposes.
The results of CLA operations are included in the consolidated
financial statements beginning with the date of acquisition.
Island Resort Tours, Inc. and International Travel and Resorts, Inc.
On March 6, 2006, the Company purchased all of the issued and
outstanding capital stock of Island Resort Tours, Inc. ("IRT") and
International Travel and Resorts, Inc. ("ITR"), for a purchase price
of $4,783,300. The acquisition of IRT and ITR is expected to
increase the Company's presence in the desired Caribbean leisure
travel market, provide access to key travel industry products, and
add to the expertise of the Company's management team. IRT and ITR
are both located in New York, New York.
The purchase price consists of a combination of cash ($1,500,000),
700,000 shares of Dynamic common stock ($1,833,300), and a one-year
secured Convertible Promissory Note in the principal amount of
$1,450,000. The cash portion consists of $500,000 delivered at
closing, with the balance to be delivered on or before May 5, 2006,
following completion of audits of the financial statements of IRT
and ITR for the years ended December 31, 2004 and 2005. The balance
of the cash payment will be reduced by any trade payables in excess
of short-term liquid assets as of April 30, 2006. As of May 12,
2006, the additional cash payment had not been made pending the
completion of the audits for, and final determination of amount if
any of adjustment, to the balance of the cash payment.
19
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
Additional shares of Dynamic common stock may be issued if the
Company, as part of any subsequent business acquisitions on or
before December 31, 2006, issues Dynamic common stock to an
acquiree/seller at a rate less than $1.50 per share. In such event,
additional shares may be issued equivalent to the most favorable
rate, but in no event at a rate less than $1.00 per share. Up to an
additional 350,000 shares of Dynamic common stock could be issued as
a result of this adjustment provision.
The common stock was valued at $2.62 based on the average closing
price of Dynamic's common stock for the five days before and after
the date of acquisition, multiplied by the number of shares of
common stock issued.
The Promissory Note is payable with interest at the rate of 9% per
annum and matures on March 6, 2007 (the "Maturity Date"). The Note
is convertible into Dynamic's common stock on or before the Maturity
Date at a rate of $1.50 per share. The conversion rate may be
adjusted downward if the Company, in subsequent acquisitions on or
before December 31, 2006, provides consideration that includes
convertible securities with a conversion rate of less than $1.50 per
share. In the event of any such adjustment, the conversion rate will
be adjusted to the most favorable rate offered, but no lower than
$1.00 per share. A beneficial value of $1,208,334 was recorded as a
debt discount to the amortized over the life of the debt term.
Subsequent to the Closing Date, if the Company obtains cumulative
net external financing of $3,500,000 or more prior to the maturity
date, early repayment of 50% of the outstanding balance on the Note
may be required. If the Company receives in excess of $7,000,000 in
cumulative net external financing prior to the maturity date, an
early repayment of the full outstanding balance on the Note may be
required. The Company agreed to include resale of the shares issued
and those issuable upon conversion of the Note in the next
registration statement filed by the Company. That registration
statement was filed with the SEC on May 12, 2006.
The Convertible Note is secured by a lien on assets of IRT and ITR
The following table summarizes the estimated fair values of the
assets acquired and liabilities assumed at the date of acquisition.
The allocation includes estimates that were not finalized at March
31, 2006. Purchase price adjustments following the closing are
customary.
March 6, 2006
-------------
Current assets ........................ $ 708,167
Other assets .......................... 80,236
Goodwill .............................. 5,055,656
----------
Total assets .......................... 5,844,059
Current liabilities ................... 1,060,759
----------
Net assets acquired ................... $4,783,300
==========
20
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
The goodwill of $5,055,656 is expected to be deductible over 15
years for tax purposes.
The results of IRT/ITR operations are included in the consolidated
financial statements beginning with the date of acquisition.
The table below summarizes the unaudited pro forma information of
The consolidated results of operations for the three months end
March 31, 2006 as though the CLA and IRT-ITR business combinations
had been completed as of the beginning of the period reported on:
2006
----
Revenues .................................... $ 2,023,034
Cost of Revenue.............................. 1,377,261
Gross Profit ................................ 645,773
Operating Expenses ......................... 1,163,447
Operating Loss .............................. (517,674)
Other Expenses .............................. 3,656,645
Net Loss .................................... (4,174,319)
Net Loss per share .......................... $0.52
Pro forma information for 2005 is not shown since the date of
inception for DLG was May 16, 2005.
As of March 31, 2006 the remaining cash payable due to the former
owners of CLA and IRT-ITR amount to $1,440,000 and is shown as
acquisition payable.
NOTE 14 OTHER MATTERS
Separation Agreement dated January 13, 2006
In connection with the transactions contemplated by the Stock
Exchange Agreement described elsewhere in this Report, DynEco and
Dr. Thomas Edwards entered into a Separation Agreement dated January
13, 2006 under which:
o The Employment Agreement dated as of January 1, 2004 by and
between DynEco Corporation and Dr. Edwards was terminated;
o Dr. Edwards irrevocably waived, forfeited and relinquished any
right to receive any accrued or deferred compensation in
connection with his prior services rendered to Dynamic
Corporation. As of March 31, 2006, $283,625 in deferred
compensation payable to Dr. Edwards was accrued;
o The parties confirmed that they entered into a modification
agreement relating to the Exclusive Patent License and Know-How
Agreement dated February 4, 2004;
o DynEco irrevocably waived, forfeited and relinquished any right,
title or interest in any intellectual property created by Dr.
Edwards during the course of his services to DynEco, other than
the intellectual property covered by the Exclusive Patent License
and Know-How Agreement dated February 4, 2004;
21
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
o DynEco transferred and assigned to Dr. Edwards, all of DynEco's
right, title and interest in the lease covering Dynamic's
facilities in Rockledge, Florida, and Dr. Edwards assumed all of
Dynamic's obligations thereunder; and
o DynEco transferred and assigned to Dr. Edwards, all of DynEco's
right, title and interest in the furniture, property and
equipment located at DynEco's facilities in Rockledge, Florida,
and Dr. Edwards has assumed all of DynEco's obligations
thereunder.
The Separation Agreement resulted in the forfeiture of accrued
compensation by Dr. Edwards, and was recorded as part of the
recapitalization that occurred on January 13, 2006.
MANAGEMENT OF DYNAMIC
In connection with the transactions contemplated by the Stock
Exchange Agreement dated January 13, 2006 described elsewhere in
this Note, Thomas C. Edwards resigned as an officer (President and
Chief Executive Officer) and director of DynEco Corporation, and
Kevin Hooper resigned as a director of DynEco Corporation. In
accordance with the terms of the Stock Exchange Agreement, Leonard
Sculler, who has served as a director of DynEco Corporation since
June 2003, continues to serve as a director of Dynamic for a period
of at least one year. George R. Schell, who served as a director of
DynEco since 1998, confirmed in a January 2006 telephone
conversation with the Company's General Counsel that he had
informally resigned as a director of DynEco Corporation, and was not
re-elected at a January 31, 2006 Meeting of Shareholders.
At the Meeting of Shareholders, the following persons were elected
to serve as directors of DynEco Corporation until the next annual
meeting of shareholders and until their successors are duly elected
and qualified:
Daniel G. Brandano
Thomas W. Busch
Robert A.G. LeVine
Leonard Sculler
In connection with the transactions contemplated by the Stock
Exchange Agreement dated January 13, 2006 described elsewhere in
this Report, the following persons were appointed to serve as
officers of DynEco, in the capacities indicated, until the next
annual meeting of the board of directors and until their successors
are duly elected and qualified:
Daniel G. Brandano - President
Thomas W. Busch - Vice President and Treasurer
Robert A.G. LeVine - Secretary
22
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006
(unaudited)
EXCLUSIVE PATENT AND KNOW-HOW LICENSE AGREEMENT DATED JANUARY 12, 2006
On January 12, 2006, DynEco and Dr. Thomas C. Edwards, then CEO
entered into an Exclusive Patent and Know-How License Agreement that
amends and superseded the Exclusive Patent and Know-How License
Agreement dated February 4, 2004, by and between DynEco and Dr.
Edwards. The 1994 Agreement granted DynEco the exclusive license to
use certain patented technology owned by Dr. Edwards, in return for
a royalty payment to Dr. Edwards based upon a percentage of revenues
generated from sales of products incorporating the licensed
technology. The Company subsequently granted the Parker-Hannifin
Corporation an exclusive license to use the technology covered by
1994 License Agreement in UniVane(R) products developed by
Parker-Hannifin.
Under the January 12, 2006 Exclusive Patent and Know-How License
Agreement, Dr. Edwards has relinquished any entitlement to royalty
payments under the Exclusive Patent and Know-How License Agreement
dated February 4, 2004 and has assigned and transferred to DynEco
all of his right, title and interest under the Exclusive Patent and
Know-How License Agreement dated February 4, 2004. The Company
acquired the right, title and interest as part of the Stock Exchange
Agreement.
ARTICLES OF CORRECTION TO CHANGE DYNECO CORPORATION'S NAME
On February 28, 2006, DynEco filed Articles of Correction with the
Secretary of State of Minnesota, to change DynEco's name to Dynamic
Leisure Corporation. These Articles were effective in the State of
Minnesota at the close of business on March 3, 2006.
There was no financial effect related to this filing.
23
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 10KSB filed on March 31, 2006..
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, 2006 should be read
in conjunction with the Consolidated Financial Statements and other information
presented elsewhere in this report and in the Company's 10-KSB annual report
filed March 31, 2006.
All information included in this report has been restated to consider
the effect of a 1 for 30 reverse stock split that occurred on the close of
business March 3, 2006.
GENERAL
DLG was formed in Tampa, Florida in May 2005, with the intention of
entering the wholesale leisure travel industry. Our primary strategy was to
align ourselves with established businesses in key leisure travel destinations
through acquisition, mergers, or strategic alliances, then grow revenues through
improved service and product offerings selling directly to consumers, primarily
over the Internet, and also through the travel agencies and other third parties.
24
Since January 2006, the Company has proceeded to follow a plan of
strategic acquisitions to obtain technology, or revenue streams primarily in the
travel industry. The Stock Exchange Agreement between DynEco and DLG on January
13, 2006 included the patent rights to UniVane Technology. The UniVane
technology may have a number of future applications in various markets and
potential commercialization, including in combinations with fuel cells, and
aquaculture. DynEco had previously agreed to license the technology to Parker
Hannifin, in order to minimize certain development costs and potentially
increase time and uses to market. On February 8, 2006, the Company acquired
Changes in L'Attitudes, Inc. (CLA) a Largo, Florida online leisure travel
company. On March 6, 2006, the Company acquired Island Resort Tours, Inc. and
International Travel and Resorts, Inc (collectively "IRT-ITR"), two New York
based wholesale tour operators. CLA, and IRT-ITR, are primarily focused on
leisure travel in the Caribbean and Mexico.
Our strategy will change to focus primarily on the acquisition and
integration of key assets in the leisure travel industry to provide an ongoing
business base, including the implementation of its proprietary Tourscape dynamic
packaging travel software. We expect to produce initial revenue growth via
opportunities in the leisure travel market, including developing a more
prominent Internet presence, as well as continue to look for the most
advantageous and efficient way to accelerate or enhance the development and
commercialization of UniVane Technology under our Parker Hannifin licensing
agreement.
Our executive offices are currently located at 2203 N. Lois Avenue, 9th
Floor, Tampa, Florida 33607, and our telephone number there is (813) 877-6300.
On or about June 1, 2006, our executive offices will relocate to 5680A W.
Cypress Street, Tampa, Florida 33607.
CRITICAL ACCOUNTING ESTIMATES
Valuation of Patent Rights
Due to the uncertainty in the realization of future benefits from the
licensing agreement with Parker-Hannifin, DynEco had previously recognized an
impairment loss for the entire carrying value of the UniVane patent rights.
There is no value recorded for the UniVane patent rights at March 31, 2006.
Stock Based Compensation Plans
The Company has two active 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 83,333 shares of common
stock reserved for issuance. Total options outstanding were 104,539 at March 31,
2006. No options were granted during the three months ended March 31, 2006.
On January 1, 2006, the Company implemented Statement of Financial
Accounting Standard 123 (revised 2004) ("SFAS 123(R)"), "Share-Based Payment"
which replaced SFAS 123 "Accounting for Stock-Based Compensation" and superseded
APB Opinion No. 25, "Accounting for Stock Issued to Employees." SFAS 123(R)
requires the fair value of all stock-based employee compensation awarded to
employees to be recorded as an expense over the related vesting period. The
statement also requires the recognition of compensation expense for the fair
value of any unvested stock option awards outstanding at the date of adoption.
During 2006, all employee stock compensation is recorded at fair value using the
Black Scholes Pricing Model. In adopting SFAS 123(R), the Company used the
modified prospective application ("MPA"). MPA requires the Company to account
for all new stock compensation to employees using fair value. For any portion of
25
awards prior to January 1, 2006 for which the requisite service has not been
rendered and the options remain outstanding as of January 1, 2006, the Company
shall recognize the compensation cost for that portion of the award for which
the requisite service was rendered on or after January 1, 2006. The fair value
for these awards is determined based on the grant-date. There was no cumulative
effect of applying SFAS 123R at January 1, 2006.
Warrant Liability
During our efforts to raise capital from external investments, we have
issued secured and unsecured Convertible Promissory Notes that include
provisions requiring us to register related shares of common stock. Per SFAS 133
and EITF 00-19 we are required to record the value of warrants issued in
connection with these Promissory Notes as a warrant liability.
The value of the warrant liability was $4,246,368 at March 31, 2006.
The valuation of the warrant liability is based on a Black Scholes model and
will vary, potentially significantly, based on factors such as the remaining
time left to exercise the warrants, recent volatility (change) in the price of
Dynamic's common stock, and the market price of our common stock. Changes in the
valuation of the warrant liability are recorded as income or expense in the
period. During the three months ended March 31, 2006 there was $2,220,042
charged to warrant valuation expense.
RESULTS OF OPERATIONS
Because DLG was founded in May 2005, there exists limited operating and
no comparable financial results in prior years for the three months ended March
31, 2005. The operating results of Dynamic are included beginning January 13,
2006, CLA are included beginning February 8, 2006 and IRT-ITR beginning March 6,
2006, the respective dates of acquisition occurring during the three-month
period ended March 31, 2006. 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, and our ability to continue existing revenue streams
from leisure travel businesses and execute our plans for additional revenue
growth.
Our revenues for 2006 were derived from the acquisitions of Changes in
L'Attitudes, Inc. and IRT-ITR as we begin to expand in the leisure travel
market. Operating expenses for the three months ended March 31, 2006 are a
combination of the operating expenses included in the acquisitions and the
concurrent establishment of administrative technology, and operations functions
to support the planned growth of the business.
A net loss of $4,237,887 was reported for the period, primarily as a
result of significant expenses recognized for the recording of warrant valuation
expense and related liability for detachable warrants issued with convertible
notes payable, interest expense from amortization of discounts on convertible
promissory notes and charges incurred for the extinguishment of debt for part of
the outstanding balance of a convertible note payable from investors in the
Company.
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO THE THREE MONTHS ENDED MARCH 31,
2005.
Due to the inception of DLG in May 2005, there exists no comparable
financial information for the three months ended March 31, 2005. Since the
three-month period includes significant acquisition, financing and
administrative costs, and there are no prior comparison periods, the financial
results presented may not be representative of future periods.
26
Following the Stock Exchange Agreement on January 13, 2006, the Company
acquired Changes in L'Attitudes, Inc. on February 8, 2006 and IRT-ITR on March
6, 2006. The operating results for our three months ended March 31, 2006 include
activity from the date of these acquisitions to March 31, 2006.
We had $1,081,733 in revenues, and gross profit of $275,174 in the
first three months of 2006. Our revenue is derived primarily from the value of
travel packages paid for and traveled during the period, the sale of certain
airline tickets when issued, and certain fees or commissions considered earned
by the customer during the period. As we increase the volume of our business and
relationships with suppliers, and sell more products directly to the traveling
customer over the Internet, we anticipate the gross profit as a percentage of
sales will begin to increase and operating expenses as a percentage of revenue
to decrease.
Operating expenses were $831,028 for the first three months of 2006, as
the Company builds its infrastructure to support a larger multi-location
organization.
Interest expense for the first three months of 2006 was $1,260,024.
Interest expense through March 31, 2006 included $1,076,770 of amortization of
debt discount on notes payable and discounts of notes payable. The holders of
the outstanding convertible notes have the option to receive the interest
payments in either cash or common stock. While we expect the interest to be paid
with our common stock, there is no guarantee that will occur.
For the three months ended March 31, 2006, we incurred a $208,452 loss
on extinguishment of debt, and $2,220,042 of warrant valuation expense related
to the issuance of new warrants as part of a financing transaction in the three
months ended March 31, 2006 and the revaluation of warrants previously issued.
The amounts recorded for loss on extinguishment of debt, and warrant valuation
expense were non-cash transactions, which did not affect our use of cash
resources, but created significant increases in other expenses during the
period. Therefore, our net loss was $4,237,887 for the first three months of
2006.
FINANCIAL CONDITION - LIQUIDITY AND CAPITAL RESOURCES
During the three months ended March 31, 2006, the Company came to own
proprietary software technology, proprietary engineering technology, and
operations in the wholesale leisure travel market. Our financial condition
relies on continuing equity investment until, if ever, Parker-Hannifin is
successful in commercializing the UniVane technology and/or the Company is able
profitably to grow our wholesale leisure travel business. During the first three
months of 2006 travel revenue and income from operations was not enough to
offset financing expenses related to the Stock Exchange Agreement, subsequent
financing expenses related to an investment by MMA Capital, acquisition costs
for CLA and IRT-ITR, and professional fees.
From time-to-time, we have issued stock, options and warrants to
satisfy operating expenses, which provides us with a form of liquidity. Due, in
part, to our prior lack of earnings, our current net losses, and our current
debt level 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, the continued use of our equity for
these purposes may be necessary if we are to sustain operations, prior to
reaching operating profitability. 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.
27
For the three months ended March 31, 2006, we had a net loss of
$4,237,887. The loss was primarily the result of other expense of $3,682,033 for
the three months ended March 31, 2006. The other income/loss consisted of
interest expense $1,260,024, loss on extinguishment of debt $208,452, and
$2,220,042 in warrant valuation expense. While the warrant valuation expense was
charged to expense it did not result in cash outlays as of March 31, 2006. In
addition, amortization of debt discount for the quarter was $1,076,770 which is
also a non-cash charge.
As of March 31, 2006, our primary source of liquidity was $722,318 of
cash and $375,522 of accounts receivable. There is a working capital deficit of
$8,387,688 at March 31, 2006, primarily due to a warrant liability of
$4,246,368, acquisitions payable of $1,440,000, convertible notes payable, net
of discount of $1,277,749, and convertible notes payable - related party of
$750,000. The warrant liability will not result in future cash payments by the
Company. The convertible notes payable and convertible notes payable - related
parties, consists of promissory notes convertible to Dynamic's common stock.
While we expect these notes to be converted into Dynamic's common stock,
reducing the amount of cash payments for the liabilities, we have no guarantee
that this will occur. We had total assets of $10,250,929 of which long-term
assets of $7,655,925 consisted of goodwill of $7,255,992 intangible assets of
$348,413 other assets of $51,520 and $738,503 of property and equipment. Of our
total liabilities of $10,384,365, long term liabilities total $140,176 including
$119,218 of notes payable. Total shareholders' deficit was $133,436. At March
31, 2006, we had an accumulated deficit of $4,723,201.
We are in default of the repayment terms on unsecured notes payable
aggregating $35,000 at June 30, 2005, initially issued by DynEco. No extension
has been granted by the debt holders. We had anticipated settling the balance
owing on these notes payable through issuance of common stock in 2005 however as
of March 31, 2006 this had not yet occurred nor is there any assurance that this
will take place.
Net cash used in operating activities was $899,405 for three months
ended March 31, 2006. The cash provided by financing activities in first three
months of 2006 of $1,630,368 was due to the proceeds from convertible promissory
notes of $2,060,000 and the sale of common stock for $90,000, less repayments of
promissory notes of $344,632 and debt issue costs of $175,000 that were
incurred.
We received $2.0 million in financing from MMA Capital LLC, in exchange
for us issuing a $2.0 million secured Convertible Promissory Note, and issuing
$2.0 million of common stock warrants, exercisable for 5 years from the date of
issuance at $1.00 per share. Proceeds from the financing were used for
professional fees related to the financing ($160,000), the acquisition of CLA
($200,000), the acquisition of IRT-ITR ($500,000), partial repayment of
convertible promissory notes and notes payable of $344,632, and the balance of
$699,368 for funding our operating deficit needs.
We have limited historical results, and only a limited time of combined
operations with Dynamic, DLG, CLA, and IRT-ITR. We have relied upon equity
financing in order to fund operations. During the three months ended March 31,
2006, there were limited activities or resources to provide cash flow in excess
of immediately needed funding. Our inability to generate cash flow in excess of
immediately needed funds may create a situation where we are likely to require
additional capital from external sources. There is no guarantee that we will be
able to obtain any necessary financing on terms favorable to us, if at all.
28
As of March 31, 2006, and the date of this filing, our sources of
internal and external financing are limited. Additionally, as part of the
acquisitions of CLA and IRT-ITR, we issued an additional 1,040,000 shares of
Dynamic common stock, agreed to pay $1,440,000 in additional cash, and
$2,050,000 of secured Convertible Notes payable. While we anticipate all of the
Convertible Notes Payable to convert to shares of Dynamic's common stock, should
this occur and reduce our potential cash payment for the notes, we would issue
additional shares of stock that would further dilute our existing shareholders
holdings. 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 Dynamic's common stock and exercise of various outstanding stock
warrants and stock options. We are hopeful that the continued listing of our
shares on the OTC Bulletin Board and expansion of our business opportunities
beyond Univane technology to include the leisure travel market, should 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.
As we continue to expand our business and deploy our technology in our
leisure travel business, our current monthly cash flow requirements will exceed
our near term cash flow from operations. We are still unable to quantify the
amount of revenue anticipated from commercializing UniVane products through
Parker Hannifin. Even if we are not required to meet our financing and interest
payment needs from cash, and instead our investors convert their outstanding
convertible notes to common stock, our available cash resources and anticipated
cash flow from operations are insufficient to satisfy our anticipated costs
associated with new product development, deployment of software technology and
integration of acquisitions. There can be no assurance, however, that we will be
able to generate sufficient cash from operations, if any, in future periods to
satisfy our capital requirements, or anticipated additional acquisitions.
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 historical earnings,
our prior 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.
29
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.
On May 15, 2006, the Company entered into a five-year lease of the
premises located at 5680A W. Cypress Street, Tampa, Florida 33607. These
premises are expected to become the Company's executive offices in June 2006.
This lease is not reasonably likely to have a material effect on the Company's
current and future financial condition.
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
The fuel cell business related to our UniVane technology is not
considered to be seasonal in nature, and management does not believe that our
operations have been materially affected by inflationary forces. If the increase
in oil prices continues, we believe the interest in alternative energy sources
such as fuel cell development will only increase.
Our leisure travel business is currently concentrated in the Caribbean
islands and certain destinations in primarily eastern Mexico, while are
customers are primarily from the United States . The leisure travel in this
market typically is greater in the first four or five months of the calendar
year, as people travel to warmer and resort destinations, The summer and early
fall months between June and November may be negatively affected by the weather,
such as in 2005 when a record 28 named tropical storms developed in the area,
including 7 storms classified as either category 4 or 5. Travel in the Caribbean
and Mexico involves traveling to different countries which can have
significantly different rates of inflation or currency valuation compared to the
US dollar, with certain destinations considered to be more luxury oriented and
relatively more expensive, and others more price or value oriented. A reduction
in disposable income for inflation, has recently meant a reduction of the
overall spending on a leisure travel, which could affect our revenue or gross
margin.
30
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.
PART II. OTHER INFORMATION
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
On January 13, 2006, DynEco entered into a Stock Exchange Agreement
(the "reverse merger") with all of the shareholders of Dynamic Leisure Group,
Inc., a Florida corporation (now known as Dynamic Leisure Group North America,
Inc.). As part of the reverse merger transaction, and to cure a default with two
of the selling security holders, the Company entered into Restructured
Financing, (See Note 6), under which 100,000 (post-reverse split) shares of
common stock were issued to Alpha Capital Aktiengesellschaft and another 100,000
(post-reverse split) shares of common stock were issued to JM Investors, LLC.
Under the terms of the Restructured Financing, the Company is required to
register shares sufficient to cover one hundred fifty percent (150%) of the
common stock issued. In addition, under the terms of the anti-dilution terms of
the Restructured Financing, Alpha Capital Aktiengesellschaft has been granted an
additional 29,800 warrants, and JM Investors, LLC has been granted an additional
15,700 warrants, both covered by the registration statement.
31
Also as part of the reverse merger transaction, the Company entered
into a new financing, (See Note 6), including issuance of a Secured Convertible
Promissory Note to MMA Capital LLC, a Delaware limited liability company, in the
amount of $2,000,000, with simple interest at the rate of eight percent (8%) per
annum, convertible into shares of common stock at a conversion price of one
dollar ($1.00) per share. In addition, the Company issued warrants to MMA
Capital, LLC to purchase 2,000,000 shares of common stock at an exercise price
of one dollar ($1.00) per share.
In connection with the Stock Exchange Agreement of January 13, 2006, on
March 6, 2006 the Company issued the former shareholders of Dynamic Leisure
Group, Inc. an aggregate of 6,566,667 shares of Dynamic's common stock.
In connection with the Company's purchase of Changes in L'Attitudes,
Inc., on March 6, 2006 the Company issued 340,000 shares of Dynamic's common
stock to Raymon Valdes. In addition, under the Purchase Agreement governing that
transaction, the Company issued Mr. Valdes a convertible promissory note in the
amount of $600,000, bearing an annual interest rate of 9%, maturing one year
from the acquisition date, and convertible into Dynamic's common stock at the
rate of $1.50 per share.
In connection with the purchase of Island Resort Tours, Inc. and
International Travel and Resorts, Inc., on March 6, 2006 the Company issued
700,000 shares of Dynamic common stock to Stephen A. Hicks. In addition, under
the Purchase Agreement governing that transaction, the Company issued Mr. Hicks
a convertible promissory note in the amount of $1,450,000, bearing an annual
interest rate of 9%, maturing one year from the acquisition date, convertible
into Dynamic's common stock at the rate of $1.50 per share.
Also between January 1, 2006 and March 24, 2006, the Company issued an
aggregate of 366,910 shares of common stock to holders who converted promissory
notes and exercised warrants of DLG and to investors in the Company. The notes
were sold to a total of two investors, each of whom we had reasonable grounds to
believe was an "accredited investor" within the meaning of Regulation D under
the Securities Act. Each investor was provided access to business and financial
information about the Company and had such knowledge and experience in business
and financial matters that it was able to evaluate the risks and merits of an
investment. Each certificate evidencing securities issued to the investors
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 from registration. No general
solicitation or advertising was used in connection with the transactions.
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.
32
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: May 22, 2006 DYNAMIC LEISURE CORPORATION
By: /s/ Daniel G. Brandano
----------------------
Daniel G. Brandano
Chief Executive Officer
33
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
34