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, 2007
[ ] 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.)
5680A West 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 15, 2007, the registrant had 13,654,495 shares of its $0.01 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, 2007
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheet as of March 31, 2007 (Unaudited) ....... 1
Consolidated Statements of Operations
for the three months ended March 31, 2007 (Unaudited) ............. 2
Consolidated Statement of Changes in Stockholders' Deficit
for the three months ended March 31, 2007 (Unaudited) ............. 3
Consolidated Statements of Cash Flows
for the three months ended March 31, 2007 (Unaudited) ............. 4
Notes to Consolidated Financial Statements (Unaudited) ............ 5
Item 2. Management's Discussion and Analysis or Plan of Operation ......... 31
Item 3. Controls and Procedures ........................................... 40
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................. 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ....... 41
Item 5. Other Information ................................................. 42
Item 6. Exhibits .......................................................... 42
Signatures ................................................................. 43
Exhibit Index .............................................................. 43
i
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, DECEMBER 31,
2007 2006
(UNAUDITED)
------------ ------------
Current Assets
Cash ........................................... $ 160,770 $ 203,911
Investments, restricted ........................ 117,097 127,842
Accounts receivable, net of an
allowance of $9,984 and $5,551 ............... 209,328 139,321
Prepaid travel ................................. 458,303 515,061
Other current assets ........................... 33,945 78,190
------------ ------------
Total Current Assets ......................... 979,443 1,064,325
------------ ------------
Property and equipment, net ...................... 1,061,891 1,076,669
------------ ------------
Other Assets
Goodwill ....................................... 2,902,196 2,902,196
Intangible assets, net ......................... 4,122,362 4,307,505
Deposits ....................................... 99,735 99,735
Debt issue costs, net .......................... 131,711 94,022
------------ ------------
Total Other Assets ........................... 7,256,004 7,403,458
------------ ------------
Total Assets ................................. $ 9,297,338 $ 9,544,452
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible promissory notes, net of
discount of $1,160,612 and $266,471 .......... $ 3,402,046 $ 2,046,187
Notes payable, current portion ................. 386,245 386,245
Acquisition payable ............................ 1,440,000 1,440,000
Accounts payable ............................... 1,121,716 752,152
Accounts payable to related parties ............ 94,337 65,930
Accrued compensation ........................... 120,432 74,707
Accrued interest ............................... 844,581 652,823
Other accrued liabilities ...................... 311,424 294,271
Capital lease obligation ....................... 35,398 34,152
Deferred revenue ............................... 312,408 673,936
Customer deposits .............................. 855,287 602,977
Due to employee ................................ 110,000 50,000
Warrant and option liability ................... 3,650,515 5,419,729
Embedded conversion option liability ........... 1,082,355 667,076
------------ ------------
Total Current Liabilities .................... 13,766,744 13,160,185
------------ ------------
Long-Term Liabilities
Convertible promissory notes, net of
current portion, net of discount
of $832,259 and $624,671 ..................... 167,741 2,225,329
Convertible promissory note to related party ... 350,000 350,000
Notes payable, net of current portion .......... 343 343
Capital lease obligation, net of current portion 64,281 73,448
------------ ------------
Total Long-Term Liabilities .................. 582,365 2,649,120
------------ ------------
Total Liabilities ............................ $ 14,349,109 $ 15,809,305
------------ ------------
Commitments and Contingencies (Note 13)
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, 12,234,495 and 12,101,195
issued and outstanding ....................... 122,345 121,012
Common stock issuable, at par value
(130,000 shares) ............................. 1,300 1,300
Additional paid-in capital, net of
deferred consulting fees of $208,900 ......... 5,514,933 5,107,537
Accumulated deficit ............................. (10,690,349) (11,494,702)
------------ ------------
Total Stockholders' Deficit .................. (5,051,771) (6,264,853)
------------ ------------
Total Liabilities and Stockholders' Deficit .. $ 9,297,338 $ 9,544,452
============ ============
See accompanying notes to the unaudited consolidated financial statements.
1
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
---------------------------
2007 2006
(unaudited) (unaudited)
------------ ------------
Total revenues ................................... $ 1,971,393 $ 1,081,733
Cost of revenues ................................. 1,475,434 806,559
------------ ------------
Gross Profit ................................... 495,959 275,174
Operating Expenses
Employee Compensation .......................... 560,229 -
Financial consulting, includes $32,950 and
$15,498 stock-based compensation ............. 190,927 -
Legal expense .................................. 40,084 -
Depreciation and amortization expense .......... 212,232 4,513
Internal accounting and external auditing
expense ...................................... 112,350 -
Director fees, includes $134,848 and $0
stock-based compensation ..................... 134,848 -
Investor relations, includes $157,100 and $0
stock-based compensation ..................... 203,554 -
Other general and administrative expenses ...... 433,081 826,515
------------ ------------
Total Operating Expenses ..................... 1,887,305 831,028
------------ ------------
Loss from Operations ......................... (1,391,346) (555,854)
Other Income (Expense)
Interest income ................................ 855 6,485
Interest expense, includes $564,393 and
$1,076,770 in debt discount amortization ..... (763,882) (1,182,446)
Loss on extinguishment of debt ................. - (208,452)
Warrant and option valuation income (expense) .. 2,974,005 (2,220,042)
Embedded conversion option valuation expense ... (15,279) -
------------ ------------
Total Other Income (Expense), net ............ 2,195,699 (3,604,455)
------------ ------------
Net Income (Loss) ............................ $ 804,353 $ (4,160,309)
============ ============
Net Income (Loss) per Share:
Basic .......................................... $ 0.07 $ (0.52)
============ ============
Diluted ........................................ $ 0.06 $ (0.52)
============ ============
Weighted average number of shares outstanding
during the period:
Basic....................................... 12,324,495 8,072,581
============ ============
Diluted..................................... 12,330,015 8,072,581
============ ============
See accompanying notes to the unaudited consolidated financial statements.
2
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Three Months Ended March 31, 2007
(UNAUDITED)
Additional
Common Stock Paid In Accumulated Total
Common Stock Issuable Capital Deficit Stockholders'
--------------------- ---------------- ----------- ------------ Equity
Shares Amount Shares Amount Amount Amount (Deficit)
---------- -------- ------- ------ ----------- ------------ ------------
BALANCE AT
DECEMBER 31, 2006 12,101,195 $121,012 130,000 $1,300 $ 5,107,537 $(11,494,702) $ (6,264,853)
Common stock
issued in warrant
exercise ........ 33,300 333 - - 22,167 - 22,500
Common stock
issued for
services ........ 100,000 1,000 - - 251,550 - 252,550
Value of options
issued for
services ........ - - - - 48,232 - 48,232
Reclassification
from warrant
and option
liability ....... - - - - 85,447 - 85,447
Net Income (Loss) - - - - - 804,353 804,353
---------- -------- ------- ------ ----------- ------------ ------------
BALANCE AT
MARCH 31, 2007 12,234,495 $122,345 130,000 $1,300 $ 5,514,933 $(10,690,349) $ (5,051,771)
========== ======== ======= ====== =========== ============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE THREE MONTHS ENDED
MARCH 31,
----------------------------
2007 2006
(unaudited) (unaudited)
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................... $ 804,353 $(4,160,309)
Adjustments to reconcile net loss to net cash used in
operating activities:
Change in accounts receivable allowance ......................... 4,433 -
Depreciation .................................................... 14,778 4,513
Amortization of intangible assets ............................... 185,143 -
Amortization of debt issue costs ................................ 12,311 36,918
Loss on extinguishment of debt .................................. - 208,452
Amortization of debt discount to interest expense ............... 564,393 1,076,770
Common stock and warrants for services .......................... 324,898 -
Embedded conversion option valuation expense .................... 15,279 -
Warrant and option valuation expense (income) ................... (2,974,005) 2,220,042
(Increase) decrease in assets and liabilities:
Accounts receivable ............................................. (74,440) 87,456
Prepaid assets .................................................. 56,758 (92,985)
Other assets .................................................... 44,245 (101,515)
Accounts payable ................................................ 397,971 (50,309)
Accrued expenses ................................................ 254,636 (24,938)
Deferred revenue ................................................ (361,528) 26,522
Customer deposit ................................................ 252,310 (130,022)
----------- -----------
Net Cash Used in Operating Activities ........................... (478,465) (899,405)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in investments ............................................... 10,745 -
Acquisition of property and equipment ............................... - (6,267)
Acquisition of business ............................................. - (41,077)
----------- -----------
Net Cash Provided by (Used in) Investing Activities ............. 10,745 (47,344)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes .......................... 400,000 2,060,000
Repayment of convertible promissory notes ........................... - (344,632)
Proceeds from employee advances ..................................... 60,000 -
Debt issue costs .................................................... (50,000) (175,000)
Repayment of capital leases ......................................... (7,921) -
Proceeds from common stock issuance ................................. 22,500 90,000
----------- -----------
Net Cash Provided by Financing Activities ....................... 424,579 1,630,368
----------- -----------
Net Increase (Decrease) in Cash ....................................... (43,141) 683,619
Cash at Beginning of Period ........................................... 203,911 38,699
----------- -----------
Cash at End of Period ................................................. $ 160,770 $ 722,318
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ........................ $ - $ -
=========== ===========
Cash paid during the period for interest ............................ $ 7,731 $ 91,943
=========== ===========
Supplemental Disclosure of non-cash investing and financing activities:
Debt and stock issue in acquisitions ................................ $ - $ 6,173,980
=========== ===========
Assets received on capital lease .................................... $ - $ 7,924
=========== ===========
Discount on promissory notes ........................................ $ 1,403,353 $ 2,000,000
=========== ===========
Conversion option liability related to promissory note .............. $ 400,000 $ 1,793,382
=========== ===========
Reclassification of FV of warrants and options from equity .......... $ 85,447 $ -
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
4
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2007
(UNAUDITED)
NOTE 1 NATURE OF OPERATIONS
Nature of Business
The Company is engaged in the business of marketing, selling and
distributing vacation packages that include cruises, domestic and international
airline tickets, car rental services and accommodation products and services on
a wholesale basis to travel agencies and other travel resellers and on a retail
basis directly to consumers. The Company also sells certain stand-alone travel
products on an agency basis. For the quarter ended March 31, 2007, substantially
all of the Company's travel products were for destinations in the Caribbean and
Mexico.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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
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 have been adjusted retroactively for the effect of a recapitalization
transaction between Dynamic Leisure Corporation ("Dynamic," "we," "us,"
"our")(formerly, DynEco Corporation), and Dynamic Leisure Group, Inc. ("DLG") in
January 2006 and a subsequent one-for-thirty reverse stock split (see Note 12).
For further information, refer to the Form 10-KSB for Dynamic Leisure
Corporation and subsidiaries for the year ended December 31, 2006.
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.
Reclassifications
Certain amounts in the 2006 financial statements have been reclassified
to conform with the 2007 presentation.
Use of Estimates
Our consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States ("GAAP"). These
accounting principles require us to 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.
5
These estimates, judgments and assumptions can affect the reported
amounts of assets and liabilities as of the date of our consolidated financial
statements as well as the reported amounts of revenues and expenses during the
periods presented. Our consolidated 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 2007 and 2006 include the valuation of accounts
receivable, valuation of goodwill, valuation and amortization of intangible
assets, 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.
Cash and Cash Equivalents
For the purpose of the cash flow statement, the Company considers all
highly liquid investments with original maturities of three months or less at
the time of purchase to be cash equivalents. In addition, receivables from
merchant banks for credit card transactions are included as cash equivalents as
they are considered deposits in transit. Credit card receivables included in
cash and cash equivalents at March 31, 2007, and December 31, 2006 were $30,662
and $20,769, respectively. The Company places its cash with a financial
institution and, at times, such deposits may be in excess of the FDIC insurance
limit. The Company has not experienced any losses on such accounts.
Accounts Receivable
Accounts Receivable result from either the sale of travel products or
agreements with various hotels, including co-op advertising support. The Company
evaluates the collectibility of accounts receivable while working with its
individual customers and vendors. A majority of the accounts receivable for
travel products are collected prior to travel departure.
Prepaid Travel
The Company is required to pay for certain travel (mainly hotels) in
advance. Payments made to these vendors in advance are recorded as an asset in
the prepaid travel account. The Company recognizes the expense when the
associated revenue is recognized.
Property and Equipment
Property and equipment is stated at cost. Depreciation is computed
using the straight-line method and is expensed based upon the estimated useful
lives of the assets which ranges from three to seven years. Expenditures for
additions and improvements are capitalized, while repairs and maintenance are
expensed as incurred.
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
the annual review during the fourth quarter of the calendar year. No impairment
was recognized during the three months ended March 31, 2007.
6
Impairment of Other Long-Lived Assets
The Company reviews other long-lived assets and certain identifiable
assets related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recoverable. If the undiscounted future cash flows of the long-lived
assets are less than their carrying amounts, their carrying amounts are reduced
to fair value and an impairment loss is recognized. No impairment was recognized
during the three months ended March 31, 2007.
Surety Bond and Restricted Investments
At March 31, 2007, the Company had outstanding a surety bond for
approximately $75,000 in favor of the Airlines Reporting Corporation (ARC),
which allows the Company to purchase airline tickets through ARC's computerized
ticket system. The terms of the surety bond agreement with ARC requires the
Company to maintain a collateral deposit of $22,500 with ARC. The deposit is
included in Other Assets--Deposits on the accompanying consolidated balance
sheet. The Company also maintains restricted investments at March 31, 2007 of
$74,997 related to its ARC agreement.
Letters of Credit
At March 31, 2007, the Company had two outstanding letters of credit
totaling approximately $112,000 payable to ARC to allow the Company to purchase
airline tickets through ARC's computerized ticket system. The terms of the
letter of credit agreements require the Company to maintain certificates of
deposit with the issuer of the letters of credit in the amount of the letters of
credit. These certificates of deposit are reflected as short-term investments,
restricted, on the accompanying balance sheet.
Deferred Revenue
Deferred revenue primarily represents money received from customers as
either a deposit on, or full payment for, trips not yet traveled or services not
yet earned.
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.
The Company records merchant sales transactions at the gross purchase
price generally on the date of travel. The Company considers a transaction to be
a "merchant sales transaction" where the Company is the primary obligor to the
customer and the Company acts as the merchant of record in the package
transaction, which consists of several products from different vendors. In these
transactions the Company also controls selling prices, and is solely responsible
for making payments to vendors. The Company records transactions at the net
purchase price where the Company is not the merchant of record or the product is
not sold as a package. 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. The
Company may receive cash or hotel room credits in exchange for providing
cooperative advertising for its vendors. The Company records accounts receivable
for these amounts and offsets the applicable advertising expense. Once the
advertising expense is reduced to zero, any excess cooperative advertising fees
are recorded as revenue.
Advertising Costs
The Company expenses advertising costs as incurred. During the three
months ended March 31, 2007 and 2006, the Company's advertising expense totaled
$12,190 and $3,325, respectively.
7
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. If the fair value is recorded as a liability, the change in fair
value is recorded in the consolidated statement of operations as other income or
expense. Upon conversion or exercise of a derivative instrument, the instrument
is marked to fair value at the conversion date and its 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.
Stock-Based Compensation
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.
The Company had no unvested stock option awards on January 1, 2006. 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. There was no cumulative effect of applying SFAS 123(R) at January 1,
2006.
Concentration of Credit Risk and Other Concentrations
Nearly all of the Company's travel products sold year-to-date in 2007
and in 2006 were 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.
The Company has negotiated contracts with airlines that allow the
Company to price certain products more favorably than its competitors. The loss
of such contracts could have a negative effect on the Company.
Income Taxes
The Company accounts for income taxes under the Financial Accounting
Standards No. 109 "Accounting for Income Taxes" ("Statement 109"). Under
Statement 109, deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period, which includes the enactment date.
8
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per common share (Basic EPS) excludes dilution
and is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the year. Diluted net income per share (Diluted
EPS) reflects the potential dilution that could occur if stock options or other
contracts to issue common stock, such as convertible notes, were exercised or
converted into common stock. Diluted loss per share for the three months ended
March 31, 2006, does not include potential common shares as their effect would
be anti-dilutive.
The following is a reconciliation of basic net income per share to
diluted net income per share for the three months ended March 31, 2007:
Earnings per share from continuing operations:
- ---------------------------------------------
Income from continuing operations ............................ $ 804,353
Preferred stock dividends .................................... -
-----------
Income from continuing operations applicable
to common stock ............................................ 804,353
Effect of dilutive securities:
Warrant/option valuation income ............................ (9,819)
-----------
Income - diluted ............................................. $ 794,534
===========
Earnings per share:
Basic income per share ..................................... $ 0.07
===========
Diluted income per share ................................... $ 0.06
===========
Weighted average common shares outstanding - basic ........... 12,324,495
Potential shares exercisable under non-plan option ........... 5,520
-----------
Weighted average shares outstanding - diluted ................ 12,330,015
===========
Potential shares excluded from above weighted average share
calculations due to their anti-dilutive effect include:
- -----------------------------------------------------------
Upon exercise of plan options ................................ 101,206
Upon exercise of non-plan options ............................ 850,000
Upon exercise of warrants .................................... 12,821,217
Upon conversion of convertible promissory notes .............. 8,075,220
Upon conversion of convertible promissory
notes - related party ...................................... 388,889
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of information about
the fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The Company's financial instruments include cash, accounts receivable,
accounts payable, accrued liabilities, notes payable and capital leases. The
fair values of cash, accounts receivable, accounts payable and accrued
liabilities approximated carrying values due to the short-term nature of these
instruments. Fair values for notes payable and capital leases are not readily
available, but the carrying values are believed to approximate fair value.
9
Recent Accounting Pronouncements
FASB Statement No. 156, "Accounting for Servicing of Financial Assets
- -- an amendment of FASB Statement No. 140" ("FASB Statement No. 156"): In March
2006, the FASB issued Statement No. 156 which amends FASB Statement No. 140,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," with respect to the accounting for separately recognized
servicing assets and servicing liabilities. FASB Statement No. 156 was effective
for years beginning after September 15, 2006. The adoption of SFAS 156 has not
had a material effect on the Company's financial position or results of
operations.
FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes
- -- an Interpretation of FASB Statement No. 109" ("FIN 48"): In June 2006, the
FASB issued this statement which clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements in accordance
with SFAS No. 109, "Accounting for Income Taxes." FIN 48 prescribes a
recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48, which was effective for fiscal years beginning after
December 15, 2006, also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. The adoption of FIN 48 has not had a material effect on the
Company's financial position or results of operations.
FASB Statement No. 157, "Fair Value Measurements" ("FASB Statement No.
157"): In September 2006, the FASB issued FASB Statement No. 157 which defines
fair value, establishes a framework for measuring fair value in generally
accepted accounting principles (GAAP), and expands disclosures about fair value
measurements. FASB Statement No. 157 applies under other accounting
pronouncements that require or permit fair value measurements, the FASB having
previously concluded in those accounting pronouncements that fair value is the
relevant measurement attribute. Accordingly, this Statement does not require any
new fair value measurements.
10
Staff Accounting Bulletin No. 108, "Considering the Effects of Prior
Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements" ("SAB 108"): In September 2006, the Securities and Exchange
Commission issued SAB 108 which provides guidance on consideration of the
effects of prior year misstatements in quantifying current year misstatements
for the purpose of a materiality assessment. SAB 108 was effective for fiscal
years ending after November 15, 2006. The adoption of SAB 108 did not have an
impact on our consolidated financial statements.
FASB Staff Position EITF 00-19-2, "Accounting for Registration Payment
Arrangements" ("FSP EITF 00-19-2"): In December 2006, the FASB issued FSP EITF
00-19-2 which specifies that the contingent obligation to make future payments
or otherwise transfer consideration under a registration payment arrangement,
whether issued as a separate agreement or included as a provision of a financial
instrument or other agreement, should be separately recognized and measured in
accordance with FASB Statement No. 5, "Accounting for Contingencies." A
registration payment arrangement is defined in FSP EITF 00-19-2 as an
arrangement with both of the following characteristics: (1) the arrangement
specifies that the issuer will endeavor (a) to file a registration statement for
the resale of specified financial instruments and/or for the resale of equity
shares that are issuable upon exercise or conversion of specified financial
instruments and for that registration statement to be declared effective by the
US SEC within a specified grace period, and/or (b) to maintain the effectiveness
of the registration statement for a specified period of time (or in perpetuity);
and (2) the arrangement requires the issuer to transfer consideration to the
counterparty if the registration statement for the resale of the financial
instrument or instruments subject to the arrangement is not declared effective
or if effectiveness of the registration statement is not maintained. FSP EITF
00-19-2 was effective for registration payment arrangements and the financial
instruments subject to those arrangements that are entered into or modified
subsequent to December 21, 2006. For registration payment arrangements and
financial instruments subject to those arrangements that were entered into prior
to the issuance of FSP EITF 00-19-2, this guidance is effective for financial
statements issued for fiscal years beginning after December 15, 2006, and
interim periods within those fiscal years. The adoption of FSP EITF 00-19-2 has
not had a material impact on our consolidated financial statements.
SFAS No. 159, "The Fair Value Option for Financial Assets and Financial
Liabilities" ("SFAS 159"): In February 2007, the FASB issued SFAS 159 which
permits entities to choose to measure many financial instruments and certain
other items at fair value that are not currently required to be measured at fair
value. SFAS 159 will be effective for us on January 1, 2008. The adoption of
SFAS 159 is not expected to have a material effect on the Company's financial
statements.
NOTE 3 GOING CONCERN
For the three months ended March 31, 2007, the Company had a loss from
operations of $1,391,346, used net cash in operations of $478,465, a working
capital deficiency of $12,787,301, and a stockholders' deficiency of $5,051,771.
In addition, the Company is in default on convertible promissory notes totaling
$1,637,658 as of March 31, 2007. These matters raise substantial doubt about our
ability to continue as a going concern. 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 2007, additional capital
investment will be necessary to develop and sustain the Company's operations.
As of March 31, 2007, the Company had $5,562,658 in outstanding
Convertible Notes payable to third parties (including the notes in default as
described above), which are convertible into 8,075,220 shares of the Company's
common stock. While the Company expects substantially all of these note holders
to convert the Notes into shares of the Company's common stock, there is no
guarantee that this will occur. Subsequent to March 31, 2007, the Company
converted promissory notes and accrued interest of approximately $675,000 and
$242,600, respectively, into 890,000 shares of common stock. As of March 31,
2007 the Company did not have adequate working capital to meet these obligations
with cash payments.
11
Management believes that its plans to raise additional capital will
allow for adequate funding of the Company's cash requirements through December
31, 2007, although there is no assurance regarding this belief or that the
Company will be successful in these efforts. 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 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated
Useful Life March 31, December 31,
in Years 2007 2006
----------- ----------- ------------
Office furniture and equipment ... 3-5 $ 165,770 $ 165,770
Software ......................... 5 37,753 37,753
Software in development .......... 920,097 920,097
----------- -----------
Total property and equipment ..... $ 1,123,620 $ 1,123,620
Less accumulated depreciation .... (61,729) (46,951)
----------- -----------
Property and equipment, net ...... $ 1,061,891 $ 1,076,669
=========== ===========
Depreciation expense was $14,778 for the three months ended March 31,
2007.
Software in Development consists of the purchase of worldwide rights
and source code to TourScape, proprietary software for use in the wholesale
travel industry, for $500,000 and the purchase of third party database software
and related implementation costs of $420,097. The software was fully operational
upon purchase and accordingly is capitalizable as internal use software pursuant
to Statement of Position 98-1 "Accounting for Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1). The Company completed its
implementation of the software and placed it in service on March 31, 2007.
If the Company determines at a future date to sell or license the
software, proceeds received from the license of the software, net of direct
incremental costs of marketing, will be applied against the carrying value of
the software in accordance with SOP 98-1.
NOTE 5 INTANGIBLE ASSETS
Intangible assets at March 31, 2007, are as follows:
Accumulated Net Book
Life Cost Amortization Value
- -------------------------- -------- ---------- ------------ ----------
Airline contracts ........ 7 yrs. $2,820,000 $338,644 $2,481,356
Hotel contracts .......... 7 yrs. 422,500 33,256 389,244
URLs ..................... 10 yrs. 1,011,000 82,079 928,921
Mailing list ............. 3 yrs. 150,000 8,036 141,964
General service agreement 2.5 yrs. 348,413 167,536 180,877
--------- -------- ----------
$4,751,913 $629,551 $4,122,362
========== ======== ==========
Amortization expense for the three months ended March 31, 2007 totaled
$185,143. Amortization of intangible assets in future years is expected to be as
follows:
2007 $ 746,496
2008 $ 607,132
2009 $ 607,132
2010 $ 607,132
2011 $ 607,132
Thereafter $ 1,132,481
12
NOTE 6 CONVERTIBLE NOTES PAYABLE WITH WARRANTS, NOTES PAYABLE, LOANS PAYABLE
AND CAPITAL LEASES PAYABLE
Convertible Promissory Notes
- ----------------------------
Convertible notes consisted of the following at March 31, 2007:
Original Debt Discount Components
------------------------------------ Cumulative
Beneficial Amortization
Interest Balance Notes Balance Conversion Warrant As Of
Rate 12/31/2006 Converted Borrowings 3/31/2007 Feature Liability Total 3/31/2007
- -------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
9% (S) $1,450,000 $ - $ - $1,450,000 $1,208,332 $ - $1,208,332 $ 1,208,332
9% (S) 600,000 - - 600,000 480,000 - 480,000 480,000
10% (S) 2,250,000 - - 2,250,000 206,618 3,296,324 3,502,942 2,342,330
10% (U) 155,158 - - 155,158 77,372 232,944 310,316 310,316
10% (U) 10,000 - - 10,000 - - - -
10% (U) 75,000 - - 75,000 - - - -
10% (U) 10,000 - - 10,000 50,000 - 50,000 50,000
10% (U) 12,500 - - 12,500 - - - -
6% (S) 600,000 - 400,000 1,000,000 400,000 600,000 1,000,000 167,741
---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
$5,162,658 $ - $ 400,000 $5,562,658 $2,422,322 $4,129,268 $6,551,590 $ 4,558,719
========== ========= ========== ========== ========== ========== ========== ============
(S) - Secured
(U) - Unsecured
Unamortized Net Book
Principal Discount Value
----------- ----------- -----------
Current maturities ....... $ 4,562,658 $ 1,160,612 $ 3,402,046
Long-term portion ........ 1,000,000 832,259 167,741
----------- ----------- -----------
Total .................... $ 5,562,658 $ 1,992,871 $ 3,569,787
=========== =========== ===========
Terms and Original Debt Discount Assumptions:
Original Warrant and Option Liability
Convertible Promissory Notes Black-Scholes Valuation Assumptions
- ---------------------------------------------------------------------- ---------------------------------------------------
Interest Balance Unamortized Maturity Conversion Exercise Expected Vola- Discount
Rate 3/31/2007 Discount Date Payments Price Shares Price Life(Yr) tility Rate
- -------- ---------- ----------- -------- -------- ---------- --------- -------- -------- ------ --------
9% (S) $1,450,000 $ - 3/6/07 (A) $1.50 - $ - - - -
9% (S) 600,000 - 4/13/07 (B) 1.50 - - - - -
10% (S) 2,250,000 1,160,612 3/5/08 (C) 1.00 2,000,000 1.00 3.0 271% 5.07%
- - - - - (D) 1.00 250,000 1.00 2.25 142% 5.03%
- - - - - (E) 1.00 3,000,000 1.50 3.0 190% 4.60%
10% (U) 155,158 - 6/30/07 (F) .75 304,000 0.90 3.0 354% 3.96%
10% (U) 10,000 - 6/30/06 (G) .90 - - - - -
10% (U) 75,000 - 6/30/06 (G) .90 - - - - -
10% (U) 10,000 - 6/30/06 (G) .90 - - - - -
10% (U) 12,500 - 6/30/06 (G) .90 - - - - -
6% (S) 1,000,000 832,259 10/25/09 (H) (G) 5,000,000 $1.50 3.0 154% 4.58%
---------- -----------
$5,562,658 $ 1,992,871
========== ===========
13
(A) - This note went into default for nonpayment on its maturity date.
(B) - This note was converted to common stock on April 13, 2007. A second cash
payment representing down payment was due 6/6/2006 totaling $440,000. No
payment was made on the $440,000 (see Note 13 and 14).
(C) - Maturity date of note was extended on March 5, 2007 to March 5, 2008.
(D) - Relates to $250,000 additional borrowings from MMA on 9/20/2006 and part
of the original $2,000,000 convertible note payable.
(E) - Relates to Note Modification Agreement for issuance of warrants to
purchase 3,000,000 shares of the Company's common stock.
(F) - Monthly principal payments of $29,700 were to commence 6/1/2006. No
payments have been made and the loan is in default.
(G) - Balance is past due and loan is in default. The Company is in
negotiations to extend the maturity date or have the note converted. On
April 12, 2007, the note for $75,000 and all accrued interest was
converted into 120,000 shares of common stock (see Note 14).
(H) - Balance is due on the maturity date plus all accrued interest. The debt
is convertible at a 45% discount to market or $0.198 per share as of March
31, 2007.
All debt discounts are amortized over the terms of the respective
Notes. The amortization of the debt discount was $564,393 and $1,076,770 for the
three months ended March 31, 2007 and 2006, respectively, and was included in
interest expense in the accompanying consolidated financial statements.
In total as of May 15, 2007, the Company was in default on third-party
convertible promissory notes of $1,637,658.
Convertible Promissory Note, Related Party
- ------------------------------------------
On January 3, 2006, the Company issued a Convertible Promissory Note
with an annual interest rate of 10% in the principal amount of $350,000 to
Street Venture Partners, LLC, a related party, in conjunction with the purchase
of the Casual Car General Service Agreement (GSA). The Note went into default
for nonpayment on January 3, 2007, and the maturity date was extended on March
30, 2007 to July 1, 2008. As of March 31, 2007, the Note had an outstanding
balance of $350,000.
Other Notes Payable
- -------------------
Notes payable consisted of the following:
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Notes Payable - Bearing interest
at rates ranging from 5% to 15%
unsecured and due at various
dates through August 2007 .............. $ 156,434 $ 156,434
Notes payable assumed from DynEco ....... 20,154 20,154
Line of credit - IRT/ITR ................ 210,000 210,000
--------- ---------
$ 386,588 $ 386,588
Less current portion .................... (386,245) (386,245)
--------- ---------
Notes payable, net of current portion $ 343 $ 343
========= =========
14
At March 31, 2007, the Company was in default of the repayment terms on
certain 5% to 15% unsecured notes aggregating $35,000. This amount is included
in notes payable, current portion on the accompanying consolidated balance sheet
at March 31, 2007.
Capital Lease Obligation
- ------------------------
The Company's capital leases consisted of the following:
MARCH 31, DECEMBER 31,
2007 2006
--------- ------------
Total Capital Leases .................... $ 99,679 $ 107,600
Less Current Capital Leases ............. (35,398) (34,152)
--------- ---------
Long-term portion of Capital Leases .. $ 64,281 $ 73,448
========= =========
Future maturities of capital lease obligations as of December 31, 2006,
are as follows:
2007 $34,619
2008 $37,958
2009 $20,998
2010 $11,897
2011 $ 2,128
MMA Capital, LLC Financings
- ---------------------------
On January 13, 2006, the Company issued a Secured Convertible
Promissory Note with the principal balance of $2,000,000 to MMA Capital, LLC
("MMA"). As described below, on September 20, 2006, the parties amended this
Note to increase the principal amount by $250,000 to a total of $2,250,000.
On August 16, 2006, the Company entered into an agreement with MMA to
defer interest payments due on the Note each quarter until January 11, 2007, the
maturity date of the loan. On March 5, 2007, the maturity date of this note was
extended to March 5, 2008.
In consideration for this August 16, 2006 deferral, the Company agreed
to increase the interest rate retroactively from 8% to 10% and to issue MMA
100,000 shares of the Company's common stock. In accordance with EITF 96-19,
this transaction was treated as a modification of debt since the extra
consideration given in the agreement did not amount to more than a ten percent
change in the present value of the amount due to MMA over the life of the
promissory note. As a result, the increase in interest rate and the additional
consideration will be accounted for prospectively from the date of the
modification.
At the option of the holder, the outstanding principal amount of the
Note and accrued but unpaid interest may be converted into shares of the
Company's common stock at the conversion rate of $1.00 per share, subject to
adjustment in the event the Company issues shares for a consideration less than
$1.00 per share and to reflect the occurrence of forward or reverse stock
splits, corporate reorganizations or certain other corporate events. In
connection with this transaction, the Company agreed to file a registration
statement under the Securities Act of 1933, as amended, (the "Act") to register
the shares issuable upon conversion of the Note. It constitutes an event of
default under the Note and subjects the Company to liquidated damages if the
Company does not complete an effective registration statement within 180 days of
the effective date of the execution of a common stock subscription agreement,
which would be executed when the lender provides notice of conversion of all or
a portion of the debt, and if the Company does not maintain that effective
registration statement for at least 90 days. For each week of non-compliance,
liquidated damages are 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 the Company'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.
15
In connection with the transaction, the Company issued to MMA a warrant
to purchase up to 2,000,000 shares of the Company's common stock at an exercise
price of $1.00 per share. The warrant is exercisable for a period of three years
and the number of warrant shares and the exercise price are subject to
adjustment in the event the Company issues shares for a consideration less than
$1.00 per share and to reflect the occurrence of forward or reverse stock
splits, corporate reorganizations or certain other corporate events. If, at the
time of exercise, there is not an effective registration statement covering the
sale 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 finder's fee equal to 8% of the proceeds ($160,000) was paid in cash
to Forte Capital Partners LLC, in connection with the transaction. The
transaction was exempt from the registration requirements of the Act by reason
of Section 4(2) 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.
On September 20, 2006, the Company and MMA entered into a Second
Modification of Secured Convertible Promissory Note, pursuant to which the
principal of the Note was increased by $250,000 to $2,250,000. Further, on
September 20, 2006, the Company and MMA entered into a Modification of Warrant
to Purchase Shares of Common Stock, pursuant to which the number of warrant
shares was increased by 250,000 shares to 2,250,000 shares.
On March 5, 2007, the Company entered into a Settlement Agreement with
MMA pursuant to which in consideration for the Company's issuance to MMA of a
warrant exercisable for 3,000,000 shares of the Company's Common Stock with an
exercise price of $1.50 per share (the "MMA Warrant"), MMA agreed to (i) extend
the maturity date of the Company's outstanding promissory note payable to MMA to
March 5, 2008; and (ii) to dismiss its action against the Company filed on
November 22, 2006 in the United States District Court for the Northern District
of California entitled MMA Capital, LLC v. Dynamic Leisure Corporation, Case No.
C 06 7263 CRB (the "Action") with prejudice and to fully and finally waive all
contract breaches alleged in the Action.
In addition, with respect to the registration statement on Form SB-2
filed with the Commission on December 18, 2006 (Commission File No. 333-139438)
(the "MMA Registration Statement"), the Company agreed to use its commercially
reasonable efforts to respond to any comments issued by the Staff of the
Commission within ten (10) business days and to file any required amendments
within five business days of receiving notice from the Commission that the
Post-Effective Amendment to Registration Statement on Form SB-2 (Commission File
No. 333-124283) is effective. In addition, the Company agreed not to withdraw
the MMA Registration Statement without first obtaining written approval from
MMA, to use commercially reasonable efforts to cause the MMA Registration
Statement to become effective, and to maintain the effectiveness of the MMA
Registration Statement, subject to certain exceptions, until the earlier of (i)
one year; (ii) the date on which all securities covered by the MMA Registration
Statement as amended from time to time, have been sold; or (iii) the date on
which all the securities covered by the MMA Registration Statement as amended
from time to time, can be sold in any three-month period without registration in
compliance with Rule 144 of the Securities Act of 1933, as amended (the
"Securities Act").
The Company's failure to comply with the provisions of Settlement
Agreement shall be deemed to be an event of default, which if not cured within
fifteen (15) days after receipt of written notice of such event of default,
entitles MMA to nominate one person to the Company's Board of Directors (the
"First MMA Nominee") and the Company is required to appoint MMA's nominee to its
Board of Directors within two days thereafter. MMA is entitled to nominate one
additional person to the Company's Board of Directors and the Company is
required to appoint such nominee to its Board of Directors within two days
thereafter, if an event of default is not cured by the Company within fifteen
(15) days of the date the First MMA Nominee is nominated. The maximum number of
nominees that MMA is entitled to under this provision is two.
16
The MMA Warrant is exercisable for a term of three years for up to
3,000,000 shares of the Company's Common Stock at an initial exercise price of
$1.50 per share. The exercise price and number of shares of Common Stock
issuable upon exercise of the Warrant (the "Warrant Shares") are subject to
adjustment for stock splits, stock combinations and certain reorganizations. The
Warrant exercise price, but not the number of Warrant Shares is subject to a
"full-ratchet" adjustment upon the issuance by the Company of shares of Common
Stock for no consideration or for a consideration per share less than the
Warrant exercise price, subject to certain enumerated exceptions. The Company
has agreed to register the sale of the Warrant Shares on a registration
statement pursuant to the Securities Act. The MMA Warrant was issued in a
private placement transaction, exempt from registration under the Securities
Act, pursuant to Section 4(2) of the Securities Act and Regulation D promulgated
thereunder.
Per SFAS 133 and EITF 00-19 and related interpretations, the
convertible note at the January 13, 2006 issuance date was classified as one
financial instrument as it is considered conventional convertible debt. In
addition, the warrant was classified as a liability ("warrant liability") (see
Note 7) due to the liquidated damages provision in the registration rights
agreement at its initial fair value with a corresponding charge to debt
discount. The beneficial conversion value associated with the convertible debt
is recorded as a debt discount and additional paid in capital.
In accordance with SFAS 133, the warrants underlying the warrant
liability were and are revalued quarterly based on assumptions in effect on that
date using the Black-Scholes model. See Note 7 for the assumptions related to
the revaluation and the related effect on the warrant liability and warrant
valuation income (expense) during the period.
In December 2006, the FASB issued FSP EITF 00-19-2, "Accounting for
Registration Payments" which was effective immediately. This FSP amends EITF
00-19 to require potential registration payment arrangements be treated as a
contingency pursuant to FASB Statement 5 rather than at fair value. We
considered the effect of this standard on the above warrant classification as a
liability and determined that the accounting may have changed as a result of
this standard; however, due to the new financing that occurred on November 9,
2006 as discussed below, the warrants must remain classified as a liability at
March 31, 2007; therefore, there was no effect of implementing this standard.
DynEco March 2, 2005 Convertible Notes and Modification and Waiver Agreement
- ----------------------------------------------------------------------------
On January 13, 2006, the Company and Alpha Capital Aktiengesellschaft,
JM Investors, LLC, Libra Finance, S.A. and RG Prager Corporation entered into a
Modification and Waiver Agreement pursuant to which Convertible Promissory Notes
issued by the Company to these parties in the aggregate principal balance of
$327,000 on March 2, 2005 were amended to provide that interest on these Notes
at the rate of 5% per annum would be paid quarterly, commencing March 31, 2006.
Monthly principal amortization payments of approximately $29,700 were to
commence on June 1, 2006. As of March 31, 2007, the Company is in default of the
terms of the Modification and Waiver Agreement. Accordingly, the Company has
accrued default interest at the rate of 10% from the date of default of June 1,
2006.
As consideration for the Modification and Waiver Agreement, the Company
paid these noteholders a total of $232,210, consisting of $154,632 in principal
payments and a premium in the amount of $77,578. The Company recorded the
premium as additional expense in the fourth quarter of 2005. The notes are
convertible at the conversion rate of $0.75 per share, subject to adjustments,
including anti-dilution adjustments and an adjustment if the Company issues
common stock or rights to purchase common stock at a price below $0.75 per
share. As part of the terms of the Financing Transaction, the note holders
released their security interest in the Company's assets. As of March 31, 2007,
and December 31, 2006, there was $155,158 in outstanding principal remaining on
these notes.
17
As additional consideration to induce the note holders to enter into
the Modification and Waiver Agreement, the Company issued the investors an
aggregate of 200,000 shares of its common stock. 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 were eliminated, (b) the exercise price of the
warrants to purchase up to 259,000 shares of the Company's common stock issued
under the March 2, 2005 transaction documents was changed to $1.00 per share and
the warrants are exercisable for three years from January 23, 2006 and (c) the
number of shares issuable upon exercise of these warrants 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 warrants in
full. The Company may prepay the remaining principal balance of the notes at
150% of the principle, 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 the sale of the shares issuable upon conversion of these
notes and exercise of the warrants. 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 would be subject to the payment of
liquidated damages to the note holders. The registration statement was filed on
April 12, 2006 and was required to become effective by June 13, 2006. In
addition, the Company agreed to file a new registration statement covering the
sale of the shares issuable pursuant to the Modification and Waiver Agreement
the sale of which was 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 the Company
would be subject to the payment of liquidated damages. The registration
statement was filed on May 12, 2006 and was required to become effective by July
13, 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
post-effective amended registration statement and the additional registration
statement did not become effective in the required 60 days due to comments
received from the SEC with respect to the registration statement. The
Modification and Waiver Agreement provides for liquidated damages payable to the
note holders of an amount equal to two percent (2%) of the Purchase Price of the
Notes remaining unconverted for each thirty (30) days or part thereof, that a
registration statement is not effective. The Company must pay the liquidated
damages in cash. The liquidated damages must be paid within ten (10) days after
the end of each thirty (30) day period or shorter part thereof for which
liquidated damages are payable. As of this filing, the note holders have not
taken any action on this deficiency and the Company has accrued $118,572 as of
March 31, 2007, in accrued interest, liquidated damages and a 50% premium on the
remaining outstanding balance.
During the first quarter of 2006, the Company recorded a non-cash loss
relating to (i) the extinguishment of debt of $208,442, (ii) the value of the
200,000 shares of common stock issued (valued at $0.90 per share on the date of
the Modification and Waiver Agreement, based on the closing price of common
stock), (iii) issuance of additional warrants, and (iv) the write-off of
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 $232,944 at the modification date.
In accordance with SFAS 133, the warrants underlying the warrant
liability are revalued quarterly based on assumptions in effect on that date
using the Black-Scholes model. See Note 7 for the assumptions related to the
revaluation and the related effect on the warrant liability and warrant
valuation income (expense) during the period.
18
Convertible Promissory Notes with Variable Conversion Price
- -----------------------------------------------------------
On November 9, 2006, the Company entered into a Securities Purchase
Agreement with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"),
AJW Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners,
II, LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are
collectively referred to as the "Purchasers", whereby the Company sold to the
Purchasers Secured Convertible Term Notes (the "Notes") in the aggregate
principal amount of One Million Dollars ($1,000,000). The $1,000,000 was funded
in two tranches ($600,000 on November 9, 2006, and $400,000 on January 5, 2007).
The offering was made pursuant to Section 4(2) of the Act, as amended. The Notes
bear interest at 6% per annum, unless the common stock of the Company is greater
than $1.25 per share for each trading day of a month, in which event no interest
is payable during such month. The Company's obligations under the Notes are
collateralized by a security interest in substantially all of the Company's
assets.
The Notes are convertible into common stock of the Company at a 50%
discount to the average of the three lowest trading prices of the common stock
during the 20 trading day period prior to conversion; provided, however, that
the Notes are convertible into common stock of the Company at a 45% discount in
the event that the Registration Statement covering the resale of securities
underlying the Notes ("Registration Statement"), is filed on or before December
11, 2006; and (ii) a 40% discount in the event that the Registration Statement
becomes effective on or before March 9, 2007. In connection with the offering,
the Company issued an aggregate of 5,000,000 warrants to purchase common stock
at a price of $1.50 per share ("Warrants"). The Warrants are exercisable for a
period of seven years. The number of shares subject to the Warrant and the
exercise price are subject to adjustment for stock splits, stock combinations
and certain dilutive issuances, including the issuance of shares of Common Stock
for no consideration or for a consideration per share (before deduction of
reasonable expenses or commissions or underwriting discounts or allowances in
connection therewith) less than the 5-day average of the last reported sales of
the Company's Common Stock. In addition, in certain circumstances the warrant
exercise price will be adjusted if after the Registration Statement is declared
effective, the closing price for the Company's Common Stock closes below $1.00.
The Company has an obligation to register shares of its common stock
pursuant to the terms of a Registration Rights Agreement with the note holders.
The Company has the right to redeem the Notes under certain circumstances, as
well as the right to pay monthly cash payments to prevent any conversion of the
Notes during such month. The Notes are secured by all of the Company's assets
pursuant to the terms of a Security Agreement and Intellectual Property Security
Agreement. The proceeds of the offering will be used to repay certain
indebtedness and for working capital.
Due to the variable conversion price, the secured convertible term
notes were bifurcated and recorded as two liability instruments, a debt
instrument and an embedded conversion option liability at fair value.
NOTE 7 WARRANT AND OPTION LIABILITY
The Company recorded a warrant liability related to Convertible Notes
in connection with the Modification and Waiver Agreement of January 13, 2006 and
the MMA Capital LLC financing due to the liquidated damages provision in the
registration rights agreement requiring liability treatment under EITF 00-19
(see Note 6 and discussion within FSP EITF 00-19-2). The Company also recorded
warrant and option liability related to the Convertible Notes with a variable
conversion price issued on November 9, 2006. EITF 00-19 requires liability
treatment for all outstanding warrants and non-employee options as a result of
the variable conversion price provision contained in these Convertible Notes. As
a result, warrants for 5,000,000 shares of common stock were recorded as warrant
liability and warrants for 2,300,050 shares and non-employee options for
1,000,000 shares of the Company's common stock were reclassified from equity and
recorded as liabilities on the Company's consolidated balance sheet on November
9, 2006, the issuance date of the convertible notes with the variable conversion
price.
19
During the three months ended March 31, 2007, the warrant and option
liability was increased for the fair value of options to purchase 50,000 shares
of the common stock that vested on January 5, 2007 and warrants to purchase
3,000,000 shares of common stock granted on March 5, 2007 pursuant to the MMA
Capital, LLC note modification agreement. During the same period, the fair value
of warrants exercised and options forfeited was reclassified to equity.
The remaining warrant and option liability will continue to be revalued
until the expiration date of the debt or at such time EITF 00-19 and related
interpretations provide for the reclassification of these financial instruments
to equity, with any changes in valuation recorded as warrant and option
valuation income or expense.
The Company's warrant and option liability and related revaluation
assumptions are as follows:
11/9/06 Warrant
3/2/05 Variable All Other Total and Option
Convertible Conversion Warrants Warrant Valuation
Note MMA Price and and Option (Income)
Holders Capital Notes Options Liability Expense
----------- ----------- ----------- ----------- ----------- -----------
Balance 12/31/2006 $ 148,287 $ 1,046,770 $ 2,498,578 $ 1,726,094 $ 5,419,729 $ -
Value of options
granted for
compensation .... - - - 24,116 24,116 -
Value of warrants
granted in Note
Modification
Agreement ....... - 1,266,122 - - 1,266,122 -
Reclassification
to equity value
of exercised
warrants and
forfeited options - - - (85,447) (85,447) -
Change in Value ... (71,203) (938,953) (1,172,922) (790,927) (2,974,005) (2,974,005)
----------- ----------- ----------- ----------- ----------- -----------
Balance 3/31/2007 $ 77,084 $ 1,373,939 $ 1,325,656 $ (873,836) $ 3,650,515 $(2,974,005)
=========== =========== =========== =========== =========== ===========
December 31, 2006
- -----------------
Warrants/options .... 304,500 2,250,000 5,000,000 3,300,050
Exercise price ...... $0.90 $1.00 $1.50 $0.675 to $11.25
Market price ........ $0.65 $0.65 $0.65 $0.65
Expected life (years) 2.25 2.0 2.8 .5 to 4.9
Volatility .......... 166% 166% 166% 166%
Discount rate ....... 4.78 4.78 4.78 4.66
March 5, 2007 - Note Modification Agreement
- -------------------------------------------
Warrants/options .... 3,000,000
Exercise price ...... $1.50
Market price ........ $0.50
Expected life (years) 3.0
Volatility .......... 190%
Discount rate ....... 4.60
March 31, 2007
- --------------
Warrants/options .... 304,500 5,250,000 5,000,000 3,166,717
Exercise price ...... $0.90 $1.00 $1.50 $0.675 to $11.25
Market price ........ $0.65 $0.65 $0.65 $0.65
Expected life (years) 2.25 2.0 2.8 .5 to 4.9
Volatility .......... 190% 190% 190% 190%
Discount rate ....... 4.65 4.67 4.60 4.90
20
NOTE 8 EMBEDDED CONVERSION OPTION LIABILITY
The Company recorded an embedded conversion option liability related to
Convertible Notes with variable conversion prices issued on November 9, 2006.
Such variable conversion prices require liability treatment for embedded
conversion option consisting of a conversion price equal to a 45% discount to
the market price of the Company's common stock as of the end of each accounting
period. The remaining embedded conversion option liability will continue to be
revalued until the expiration date of the debt with any changes in valuation
recorded as conversion option valuation income or expense.
The Company's embedded conversion option liability and related
revaluation assumptions are as follows:
11/9/06 1/5/07 Total
Variable Variable Embedded Conversion
Conversion Conversion Conversion Option
Price Price Option (Income)
Note Note Liability Expense
---------- ---------- ---------- ----------
Balance at 1/1/2007 .... $ 667,076 $ - $ 667,076 $ -
Debt issued 1/5/2007 ... - 440,293 440,293 40,293
Change in Value ........ (13,926) (11,088) (25,014) (25,014)
--------- --------- ---------- ---------
Balance at 3/31/2007 ... $ 653,150 $ 429,205 $1,082,355 $ 15,279
========= ========= ========== =========
December 31, 2006
- -----------------
Principal ............ $600,000
Shares upon conversion 1,026,271
Exercise price ....... $0.2925
Market price ......... $0.65
Expected life (years) 2.8
Volatility ........... 166%
Discount rate ........ 4.79
January 5, 2007 - Debt Issued
- -----------------------------
Principal ............ $400,000
Shares upon conversion 863,320
Exercise price ....... $0.2295
Market price ......... $0.51
Expected life (years) 3.0
Volatility ........... 166%
Discount rate ........ 4.79
March 31, 2007
- --------------
Principal ............ $600,000 $400,000
Shares upon conversion 1,484,432 975,465
Exercise price ....... $0.242 $0.242
Market price ......... $0.44 $0.44
Expected life (years) 2.5 2.8
Volatility ........... 190% 190%
Discount rate ........ 4.60 4.60
NOTE 9 STOCKHOLDERS' DEFICIT
- ------------------------------
Common Stock Issued Pursuant to Warrant Exercise
- ------------------------------------------------
On March 6, 2007, the Company issued 33,300 shares of its common stock
pursuant to the exercise of common stock warrants at an exercise price of $0.675
per share for an aggregate exercise price of $22,500.
21
Common Stock Issued For Services
- --------------------------------
During 2006, the Company granted common stock to certain directors that
vest at a rate of 25% every three months. During the three months ended March
31, 2007, a total of 100,000 shares of common stock vested and were recorded as
issued and outstanding. The fair value of the shares of common stock on the
grant dates are being recognized over the vesting period. During the three
months ended March 31, 2007, a total of $62,500 was recorded as equity and
charged to operations as an expense.
During 2006, the Company entered into agreements with third parties to
provide various services including investor relation services, equity research
about the Company and financial consulting services. Pursuant to these
agreements, the Company issued vested shares of common stock. The fair value of
the shares of common stock on the grant dates are being recognized over the
terms to the agreements. During the three months ended March 31, 2007, a total
of $188,300 was recorded as equity and charged to operations as an expense. The
remaining unamortized balance of $208,900 as of March 31, 2007 has been recorded
as deferred consulting fees treated as a reduction in additional paid-in
capital.
On March 15, 2007, the Company engaged Uptick Capital, LLC to provide
financial consulting services pursuant to a consulting agreement with a 14-day
advance notice termination provision. On May 18, 2007, the Company gave written
notice of its termination of the consulting agreement. Pursuant to the terms of
this agreement, Uptick Capital was to be compensated through the issuance of
shares of the Company's common stock vesting in 10,000-share increments each
30-day period following March 15, 2007. In accordance with EITF 96-18, the
Company amortized the estimated value of the stock-based compensation over the
service period and recognized $1,750 as equity and operating expenses based on
the closing market price of the Company's common stock on March 31, 2007. A
total of 20,000 fully vested shares of the Company's common stock will be due
under this agreement as of June 1, 2007, the termination date.
Common Stock Warrants, Options and Valuation
- --------------------------------------------
The Company had outstanding warrants and options as follows:
MARCH 31,
Exercisable Securities 2007
---------------------- -----------
Warrants ............. $12,821,217
Options .............. 1,151,206
The Company estimates the value of awards of share-based payments using
the Black-Scholes option pricing method that uses assumptions in effect on the
date of grant. The assumptions of volatility are based on historical volatility
since the Company does not have traded options on which to base any estimate of
implied volatility. The assumptions of expected term are based on the
contractual term since the Company has no reliable history to measure the
expected term. The risk-free rate for periods within the expected term of the
option is based on the U.S. treasury yield curve in effect at the time of the
grant.
22
Common Stock Warrants Issued to Non-Employees
- ---------------------------------------------
The following is a summary of warrant activity:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Non-Employee Warrants Shares Price Term Value
- --------------------- ---------- -------- ----------- ---------
Outstanding at January 1, 2007 200,000 $ 1.25 5.00 -
Granted ...................... - $ - - -
Exercised .................... - $ - - -
Forfeited or expired ......... - $ - - -
---------- ------ ---- ----
Outstanding at March 31, 2007 200,000 $ 1.25 5.00 -
========== ====== ==== ====
Exercisable at March 31, 2007 200,000 $ 1.25 5.00 -
========== ====== ==== ====
Warrants Issued for Cash or Related to Debt
- -------------------------------------------
The following is a summary of warrant activity for warrants sold for
cash or related to debt:
Weighted
Weighted Average
Average Remaining Aggregate
Exercise Contractual Intrinsic
Warrants Issued for Cash Shares Price Term Value
- ------------------------ ---------- -------- ----------- ---------
Outstanding at January 1, 2007 9,654,550 $ 1.00 3.22 -
Granted ...................... 3,000,000 $ 1.50 3.00 -
Exercised .................... (33,300) $ 0.68 - -
Forfeited or expired ......... (33) $ 0.68 - -
---------- ------ ---- ----
Outstanding at March 31, 2007 12,621,217 $ 0.99 2.73 -
========== ====== ==== ====
Exercisable at March 31, 2007 12,621,217 $ 0.99 2.73 -
========== ====== ==== ====
The weighted average valuation assumptions for grants other than with
the sale of common stock for cash during 2006 are as follows:
Expected volatility .......... 190%
Weighted average volatility .. 190%
Expected dividends ........... 0
Expected term (in years) ..... 3
Risk-free rate ............... 4.60%
On March 5, 2007, pursuant to the modification of the MMA Capital, LLC
convertible promissory note, the Company issued warrants exercisable for
3,000,000 shares of its common stock at an exercise price of $1.50 per share.
The warrant has an expiration date of March 5, 2010.
23
Non-Plan Common Stock Options to Non-Employees
- ----------------------------------------------
At March 31, 2007, the Company had the following non-plan options
outstanding and exercisable:
Outstanding Options Exercisable Options
--------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- -------- -------------- --------- -------- -------------- --------
$ 0.70 1,050,000 5.5 Years $ 0.66 900,000 $ 0.68
========= =======
A summary of the changes in non-plan stock options outstanding is
presented below:
Weighted
Average
Shares Exercise Price
--------- --------------
Options outstanding as of January 1, 2007 ......... 1,000,000 $ 0.70
Options granted ................................... 200,000 $ 0.48
Options exercised ................................. - $ -
Options forfeited ................................. (150,000) $ 0.70
--------- --------
Non-plan options outstanding at March 31, 2007 .... 1,050,000 $ 0.66
========= ========
Weighted average fair value of options granted
during the three months ended March 31, 2007 .... $ 0.48
========
The weighted average valuation assumptions for grants during 2007 are
as follows:
Expected volatility .......... 166%
Weighted average volatility .. 166%
Expected dividends ........... 0
Expected term (in years) ..... 5
Risk-free rate ............... 4.75%
The Company estimates the value of awards of share-based payments using
the Black-Scholes option pricing method that uses assumptions in effect on the
date of grant. The assumptions of volatility are based on historical volatility
since the Company does not have traded options on which to base any estimate of
implied volatility. The assumptions of expected term are based on the
contractual term since the Company has no reliable history to measure the
expected term. The risk free rate for periods within the expected term of the
option are based on the U.S. treasury yield curve in effect at the time of the
grant.
On January 8, 2007, the Company's Board of Directors appointed David
Shapiro as a Board member. The Company granted David Shapiro an option to
purchase 200,000 shares of the Company's common stock at a purchase price of
$0.485 per share, the average of the opening and closing price of the stock on
the date of grant. 50,000 shares subject to the option vested immediately and an
additional 50,000 shares subject to the option vest each quarter thereafter. The
stock options have an expiration date of January 8, 2012. An expense for
director fees of $96,464 was recognized 25% on January 8, 2007 with the balance
recognized over the remaining vesting period based in a Black-Scholes option
pricing model using the following assumptions: stock price $0.485, expected term
five (5) years, volatility 166%, zero expected dividends and a 4.75% discount
rate.
24
Stock-Based Compensation Plans
- ------------------------------
On January 13, 2006, in conjunction with the recapitalization, the
Company assumed DynEco's obligations under DynEco's outstanding non-qualified
option plans consisting of the 2001 Equity Incentive Plan and two expired plans,
the 1993 Corporate Stock Option Plan and the 1993 Advisors Stock Option Plan.
There were no grants under these plans during 2006 or year-to-date 2007. The
Company does not anticipate issuing any options under the former DynEco
non-qualified option plans and the Company has not adopted any plans during the
three months ended March 31, 2007.
At March 31, 2007, the Company had the following plan options
outstanding and exercisable:
Outstanding Options Exercisable Options
--------------------------------------- --------------------------
Weighted Weighted Weighted
Range of Average Average Average
Exercise Number Remaining Exercise Number Exercise
Price Outstanding Life Price Exercisable Price
- -------- -------------- --------- -------- -------------- --------
$ 1.50 1,111 0.5 Years $ 1.50 1,111 $ 1.50
$ 11.40 333 0.4 Years $ 11.40 333 $ 11.40
$ 3.00 42,500 1.3 Years $ 3.00 42,500 $ 3.00
$ 11.40 50,595 1.9 Years $ 11.40 50,595 $ 11.40
$ 3.60 6,667 2.0 Years $ 3.60 6,667 $ 3.60
------- -------
101,206 101,206
======= =======
The following is a summary of the changes in plan options outstanding:
Weighted
Average
Shares Exercise Price
--------- --------------
Options outstanding at January 1, 2006 ............ 101,206 $ 7.25
Options exchanged in recapitalization ............. - $ -
Options granted ................................... - $ -
Options exercised ................................. - $ -
Options forfeited ................................. - $ -
--------- --------
Plan options outstanding at March 31, 2007 ........ 101,206 $ 7.25
========= ========
Plan options exercisable at March 31, 2007 ........ 101,206
=========
Weighted average fair value of options granted
during the period ............................... $ -
========
Former DynEco 2001 Equity Incentive Plan
Under the 2001 Equity Incentive Plan, DynEco reserved a total of 33,333
shares of our common stock for issuance upon exercise of incentive and
non-qualified stock options, stock bonuses and rights to purchase awarded from
time-to-time, to our officers, directors, employees and consultants. Absent
registration under the Securities Act of 1933, as amended, or the availability
of an applicable exemption therefrom, shares of common stock issued upon the
exercise of options or as restricted stock awards will be subject to
restrictions on sale or transfer. As of March 31, 2007, options to purchase
22,278 shares are outstanding under the 2001 Equity Incentive Plan.
25
Former DynEco 1993 Corporate Stock Option Plan
Under the 1993 Corporate Stock Option Plan, DynEco reserved a total of
25,000 shares of our common stock for issuance upon exercise of stock options
granted, from time-to-time, to our officers, directors, and employees. This
Corporate Stock Option Plan has expired. As of March 31, 2007, options to
purchase 72,261 shares are outstanding under the 2001 Equity Incentive Plan.
Former DynEco 1993 Advisors Stock Option Plan
Under the 1993 Advisors Stock Option Plan, DynEco reserved a total of
6,667 shares of our common stock for issuance upon exercise of stock options
granted, from time-to-time, to our advisors and consultants.
Absent registration under the Securities Act of 1933, as amended, or
the availability of an applicable exemption therefrom, shares of common stock
issued upon the exercise of options are subject to restrictions on sale or
transfer. As of the date of this report, options to purchase 6,667 shares had
been granted and are outstanding under the 1993 Advisors Stock Option Plan. The
1993 Advisors Stock Option Plan has terminated, and no further awards may be
made thereunder; however, outstanding awards of 6,667 shares are outstanding
under this plan until their termination date on December 31, 2008.
Share-Based Compensation
- ------------------------
For the three months ended March 31, 2007 and 2006, the Company
recognized compensation costs for employees, directors, consultants and others
totaling $300,782 and $15,498, respectively. These amounts increased the
Company's operating expenses and equity during these periods.
As of March 31, 2007, the Company has $349,632 in compensation costs
related to nonvested share-based awards not yet recognized as expense and the
weighted average period the Company expects to recognize these costs is six (6)
months. These costs included $140,732 related to director fees and $208,632
related to consulting agreements. This additional compensation cost will
increase the Company's operating expenses for this future period.
NOTE 10 INCOME TAXES
For financial statement purposes, no tax expense or benefit has been
reported as the Company has had cumulative net operating losses since inception
that exceeded net income for the three months ended March 31, 2007 and
realization of tax benefits on accumulated net operating losses is uncertain.
Accordingly, a valuation allowance has been established for the full amount of
the deferred tax asset.
The utilization of net operating loss carryforwards are dependent upon
the Company's ability to generate sufficient taxable income during the
carryforward period. In addition, utilization of the carryforward may be limited
due to ownership changes as defined in the Internal Revenue Code.
NOTE 11 RELATED PARTIES AND SIGNIFICANT SHAREHOLDERS
Consulting Contracts with Directors
- -----------------------------------
The Company entered into a consulting agreement with Innovations
Publishing, LLC, pursuant to which the Company has recognized consulting fee
expense of $5,000 for the three months ended March 31, 2007. Mr. Dyer, a member
of the Company's Board of Directors, owns 75% of Innovations Publishing.
26
On November 3, 2006, the Company entered into a consulting agreement
with E. H. Winston & Associates, pursuant to which Mr. Winston, a director of
the Company, provides the Company with general business consulting services and
advice. The initial term of the consulting agreement was three months. On
February 5, 2007, the parties extended the agreement until June 5, 2007. The
Company pays E. H. Winston & Associates a consulting fee of $10,000 per month
plus reimbursement of all reasonable out-of-pocket expenses related to this
November 3, 2006 agreement.
On November 17, 2006, the Company entered into another consulting
services agreement with E. H. Winston & Associates pursuant to which Mr. Winston
would identify and introduce the Company to prospective investors and would
assist the Company in preparing introductory materials in connection therewith.
The term of this agreement is six months unless terminated earlier by either
party. The Company may terminate this agreement for any reason on 14 days' prior
written notice. The Company pays E. H. Winston & Associates a consulting fee of
$10,000 per month plus reimbursement of all reasonable out-of-pocket expenses
related to this November 17, 2006 agreement. In addition, if the Company enters
into a financial commitment with any prospective investor introduced by E. H.
Winston & Associates, the Company will pay an additional fee of $8,000 for each
$100,000 of financial commitment or part thereof. In addition, if the Company
issues warrants in connection with such financial commitment, the Company will
issue to E. H. Winston & Associates a warrant exercisable for a number of shares
equal to 10% of the warrants issued by the Company in connection with such
financial commitment.
The Company has recognized $60,000 in consulting fee expense under
these two contracts with E.H. Winston & Associates for the three months ended
March 31, 2007.
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, 2007, Street Venture Partners LLC owned 1,066,666 shares or
approximately 9% of the Company's issued and outstanding common stock.
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, 2007, Claudale Ltd. owned 693,333 shares or approximately
5.8% of the Company's issued and outstanding common stock.
Brian J. Brandano
- -----------------
At March 31, 2007, Brian J. Brandano owned 333,333 shares or
approximately 2.8% of the Company's issued and outstanding common stock. Brian
J. Brandano is the son of Daniel G. Brandano, the Company's CEO and Chairman and
was employed by the Company until July 2006.
Payable to Employee (Stephen A. Hicks)
- --------------------------------------
At March 31, 2007, the Company owed $110,000 to Stephen A. Hicks, the
former 100% shareholder of IRT/ITR, for advances made to IRT/ITR prior to its
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.
27
NOTE 12 RECAPITALIZATION OF DYNAMIC LEISURE GROUP
On January 13, 2006, DynEco entered into an agreement with the former
shareholders of DLG, pursuant to 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 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 common stock of
the Company when the Company's Articles of Incorporation were amended to
increase the number of authorized shares of the Company's 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 (after taking into account the
Company's 1 for 30 reverse stock split affected on January 13, 2006).
The transaction was exempt from the registration requirements of the
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 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 COMMITMENTS AND CONTINGENCIES
Neither the Company nor its subsidiaries have material commitments or
contingencies for purchasing goods or services that are not reported in the
Company's consolidated financial statements, notes, or other disclosures at
March 31, 2007.
Operating Leases
- ---------------
The Company currently leases office space in its Tampa, Florida, and
New York City locations. Monthly rent expense under the Tampa, Florida lease is
approximately $13,700 per month, and the lease expires June 2011. Monthly rent
expense under the New York City lease is approximately $11,500 per month, and
the lease expires April 2008. Rent expense for the three months ending March 31,
2007 and 2006 was $71,283 and $31,156, respectively.
Future lease obligations are as follows as of December 31, 2006:
2007 ..... $302,304
2008 ..... $210,270
2009 ..... $163,798
2010 ..... $163,798
2011 ..... $ 95,549
28
Legal Proceedings
- -----------------
The Company has been named as a principal party to proceedings brought
by Raymon Valdes and Changes in L'Attitudes, Inc. in Hillsborough County,
Florida, Circuit Court. The proceedings began on November 13, 2006. This matter
was resolved on April 13, 2007 when the parties entered into a Settlement
Agreement pursuant to which (i) Mr. Valdes agreed to convert the outstanding
$600,000 convertible promissory note issued by the Company pursuant to the
acquisition by the Company of Changes in L'Attitudes, Inc. into 600,000 shares
of the Company's common stock; (ii) the Company agreed to pay the remaining
approximately $411,000 owed to Mr. Valdes in 52 weekly installments commencing
on the earlier to occur of 75 days from the settlement date or the receipt by
the Company of outside financing in a minimum amount of $750,000; and (iii) the
Company agreed to issue to Mr. Valdes an additional 170,000 shares of its common
stock. On April 13, 2007, the Company issued 770,000 shares of common stock for
the conversion of the $600,000 promissory note and settlement of all accrued
interest at a conversion rate of $1.00 per share.
The Company was named as a principal party to proceedings brought by
MMA Capital, LLC in United States District Court for the Northern District of
California. The proceedings began on November 22, 2006. The matter was resolved
on March 5, 2007 when the parties entered into a Settlement Agreement that
provided for the issuance of a warrant to MMA and MMA agreed to (i) extend the
maturity date of the Company's outstanding promissory note payable to MMA to
March 5, 2008; and (ii) to dismiss its action against the Company. Note 6
further describes the terms of settlement.
The Company has been named as a principal party to proceedings brought
by MBN Consulting, LLC in Hillsborough County, Florida, Circuit Court. The
proceedings began on November 22, 2006. The complaint seeks approximately
$75,500 on the grounds of an alleged breach of consulting agreement. The Company
has responded to this complaint and believes the consultant agreement was
properly terminated in accordance with the terms of the agreement. As of March
31, 2007, the Company had included $29,333 related to this matter in accounts
payable.
The Company filed a lawsuit in Hillsborough County, Florida, Circuit
Court on March 2, 2007 against Stephen Hicks. The complaint seeks recovery of
damages or alternative relief arising from breach of a contract under which the
Company acquired IRT/ITR. The complaint alleges non-compliance with certain
terms and conditions providing for integration of the companies.
On March 5, 2007, counsel for Stephen Hicks notified the registrant
that it was allegedly in breach of a convertible debenture payable under the
March 6, 2006 Purchase Agreement between the registrant and Hicks (the
"Agreement") that provided for the registrant's acquisition of IRT/ITR. The
Agreement calls for payment of a convertible debenture in the amount of
$1,450,000 as of March 6, 2007. In the event of any failure to pay on the
convertible debenture, the Agreement provides for a continuing obligation to pay
interest at a nine percent annual rate. The Company has classified the
convertible debenture as a current liability and has recorded accrued interest
of $139,170 related to this obligation on its consolidated balance sheet as of
March 31, 2007.
The Company is currently in discussions with Mr. Hicks regarding the
settlement of the matters arising on March 2, 2007 and March 5, 2007.
From time to time, we may become subject to proceedings, lawsuits and
unasserted claims in the ordinary course of business. Such matters are subject
to many uncertainties, and outcomes are not predictable with assurance. As of
the date of this report, we do not believe that any of these matters would be
material to the Company's financial condition or operation.
29
NOTE 14 SUBSEQUENT EVENTS AND CONTINGENCIES
On April 1, 2007, the Company entered into an agreement with Peter H.
Clark to provide financial and management consulting services to the Company.
Pursuant to this agreement, the Company issued Peter H. Clark 300,000 vested
shares of the Company's common stock valued at $135,000 or $0.45 per share
determined using the market stock price as of the date of the agreement. The
agreement is for a term of three months and is renewable at the option of the
Company. The fair value of $135,000 will be amortized to operating expenses over
the three-month term of agreement.
On April 1, 2007, the Company entered into an agreement with Brett Gold
to provide financial and management consulting services to the Company. Pursuant
to this agreement, the Company issued Brett Gold 100,000 vested shares of the
Company's common stock valued at $45,000 or $0.45 per share determined using the
market stock price as of the date of the agreement. The agreement is for a term
of three months and is renewable at the option of the Company. The fair value of
$45,000 will be amortized to operating expenses over the three-month term of
agreement.
On April 12, 2007, the Company issued a total of 120,000 shares of
common stock on conversion of a convertible note aggregating $75,000, accrued
interest of $10,870 and damages charged to interest expense on the date of the
conversion of $22,130, based on a conversion rate of $0.90 per share.
On April 13, 2007, the Company issued a total of 770,000 shares of
common stock on conversion of a convertible note aggregating $600,000 and
accrued interest of $170,000, based on a conversion rate of $1.00 per share.
On April 16, 2007, the Company issued an unsecured convertible
promissory note in the principal amount of $100,000 to Miller Investments, LLC,
an accredited investor (the "Holder"). The note bears interest at 8% per annum
and matures August 13, 2007. At the option of the Holder, the note is
convertible at any time into shares of the Company's common stock at the lesser
of (i) $1.00 per share or (ii) the price per share paid by investors in the
Company's next financing transaction. The Holder is entitled to piggyback
registration rights, subject to certain limitations as described in the note. In
addition, the Company has granted the Holder the right to purchase additional
notes from the Company in the principal amount of $150,000 on the same terms and
conditions within thirty (30) days after the date of this note.
30
ITEM 2. MANAGEMENT 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 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, and implementing new
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." 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, 2007 and 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.
GENERAL
On January 13, 2006, we entered into a Stock Exchange Agreement with
the former shareholders of Dynamic Leisure Group, Inc. ("Dynamic"), a privately
held Florida corporation, under which we acquired all of the outstanding capital
stock of Dynamic, and Dynamic became a wholly-owned subsidiary of the Company
formerly known as DynEco Corporation ("DynEco"), in a transaction for accounting
purposes that was treated as a recapitalization. As part of the Stock Exchange
Agreement, we issued 6,566,667 shares of our common stock (after taking into
account the 1 for 30 reverse split of the Company's common stock affected on
March 3, 2006).
Dynamic Leisure Group (DLG) was formed in Tampa, Florida on May 16,
2005, with the intention of entering the wholesale leisure travel industry. Our
primary strategy was to align ourselves with established businesses with
products in key leisure travel destinations through acquisition, mergers, or
strategic alliances, then grow revenues through product offerings selling
directly to consumers, primarily over the Internet as well as through the brick
and mortar travel agencies and other third parties and improved service
delivered by Company's personnel from its customer service support center. From
May 16, 2005 (inception) through January 13, 2006 DLG had limited operations and
related financial results.
Following the recapitalization, the Company changed the focus of its
business strategy to pursue opportunities in the leisure travel market,
primarily as a wholesaler of bundled travel packages to frequently traveled
destinations such as Florida, Las Vegas, California, Hawaii, the Caribbean,
Mexico, Central and South America, and the United Kingdom and Europe.
31
On February 8, 2006, the Company acquired Changes in L-Attitudes, Inc.
("CIL") a Florida-based direct-to-consumer online seller of vacation packages
primarily to the Caribbean and Mexico. 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. CIL and
IRT/ITR were primarily focused on leisure travel in the Caribbean and Mexico.
Our strategy now is focused primarily on the acquisition and
integration of key assets in the leisure travel industry to provide an ongoing
business base, including the implementation of our proprietary dynamic packaging
travel software, TourScape. We expect our revenues to grow via opportunities in
the leisure travel market, including developing a more prominent Internet
presence.
Our executive offices are located at 5680A Cypress Street Tampa,
Florida 33607, and our telephone number there is (813) 877-6300.
CRITICAL ACCOUNTING ESTIMATES
Stock-Based Compensation Plans
On January 13, 2006, in conjunction with the recapitalization, the
Company assumed DynEco's obligations under one active and two expired
stock-based non-qualified compensation plans. The Board of Directors administers
these plans. There were no grants under these plans during 2007. Terms and
prices are determined by the compensation committee or the board. At March 31,
2007, options exercisable for 101,206 shares of common stock were outstanding
pursuant to these plans.
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.
Beginning 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 the
Company 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. As
of the date of the recapitalization, there was no further service obligations
related to outstanding options. There was no cumulative effect of applying SFAS
123(R) at January 1, 2006.
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
the annual review for all of its reporting units during the fourth quarter of
the calendar year.
32
Impairment of Other Long-Lived Assets
The Company reviews other long-lived assets and certain identifiable
assets related to those assets for impairment whenever circumstances and
situations change such that there is an indication that the carrying amounts may
not be recoverable. If the undiscounted future cash flows of the long-lived
assets are less than their carrying amounts, their carrying amounts are reduced
to fair value and an impairment loss is recognized. No impairment was recognized
on the carry value of these assets.
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.
The Company records merchant sales transactions at the gross purchase
price generally on the date of travel. The Company considers a transaction to be
a "merchant sales transaction" where the Company is the primary obligor to the
customer and the Company acts as the merchant of record in the package
transaction, which consists of several products from different vendors. In these
transactions the Company also controls selling prices, and is solely responsible
for making payments to vendors. The Company records transactions at the net
purchase price where the Company is not the merchant of record or the product is
not sold as a package. 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. The
Company may receive cash or hotel room credits in exchange for providing
cooperative advertising for its vendors. The Company records accounts receivable
for these amounts and offsets the applicable advertising expense. Once the
advertising expense is reduced to zero, any excess cooperative advertising fees
are recorded as revenue.
The Company is not required to buy a specific number of lodging
occupancies but has pre-purchased lodging occupancies, creating inventory risk,
over the past several years. The Company is not expressly required to buy a
specific number of bulk airline tickets, although the Company's primary airline
supplier eliminated approximately 80% of bulk rate contracts, which creates an
implied minimum of ticket sales requirement.
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.
33
Warrant and Option Liability and Embedded Conversion Option 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 and one
issuance of convertible debt contains a variable conversion price. Per SFAS 133
and EITF 00-19 we are required to record the fair value of all outstanding
warrants and-non employee options and the fair value of the embedded conversion
option as liabilities.
The valuation of these liabilities 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 in the price of the
Company common stock, and the market price of our common stock. Changes in the
valuation of the warrant and option liability and the embedded conversion option
liability are recorded as other income or expense in the period of the change.
The valuation of the warrant and option liability and embedded conversion option
liability are non-cash income or expense items to the Company.
The change in volatility is a result of the change in the expected term
of outstanding warrants and options due to the passage of time, which results in
a change in the time frame from which the stock price data points to compute
volatility were selected. Since volatility has been computed based on historical
volatility of the corporation, less data points are selected from the beginning
of the period and more data points are selected from the end of the period being
measured.
RESULTS OF OPERATIONS
Overview
From January 1, 2006 to the acquisition of CIL on February 8, 2006 the
Company had limited operations and no revenues. Revenues for the three months
ended March 31, 2006 were derived from DLG, CIL and IRT/ITR as we began to
expand in the leisure travel market through acquisitions. Operating expenses for
the three months ended March 31, 2007, are a combination of the operating
expenses of DLG, CIL and IRT/ITR and expenses incurred to establish the
corporate infrastructure, technology, and operational functions of the Company
as a whole to support the planned growth of the business.
REVENUE
Revenues increased for the quarter ended March 31, 2007, compared to
the quarter ended March 31, 2006 as follows:
Percent Percent
of of
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $1,755,555 89% $ 958,641 89% 55%
Airline tickets and related fees 215,838 11% 105,092 10% 49%
General service agreement fees . - -% 18,000 2% (100%)
---------- ------- ---------- ------- ------
Total .......................... $1,971,393 100% $1,081,733 100% 55%
========== ======= ========== ======= ======
Our revenue was primarily derived from the sale of vacation packages,
the sale of airline tickets, recorded on a net revenue basis. Our increase in
revenues is the result of our having a full three months of operation in 2007 as
compared to revenues that commenced on February 8, 2006 and March 6, 2006
related to our acquisitions of CIL and IRT/ITR, respectively.
34
COST OF REVENUE
Cost of revenues increased for the quarter ended March 31, 2007,
compared to the quarter ended March 31, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue
---------- ------- ---------- -------
Vacation packages .............. $1,424,251 81% $ 776,498 81%
Airline tickets and related fees 51,183 24% 30,061 29%
---------- ------- ---------- -------
Total .......................... $1,475,434 75% $ 806,559 75%
========== ======= ========== =======
Cost of revenues related to the sale of vacation packages include the
cost of hotel room, airline tickets, rental cars, transfers and other related
fees bundled into a single travel product purchased by our customers. Cost of
revenues related to the sale of airline tickets and related fee revenue reported
on a net basis consists of commissions payable to independent travel agents and
certain third-party processing fees. The cost of revenues increased for the
three months ended March 31, 2007 as compared to the corresponding period of
2006 and the percentage of cost of revenues to revenues remained constant. The
increase in cost of revenues is the result of our having a full three months of
operations in 2007 as compared to revenues that commenced on February 8, 2006
and March 6, 2006 related to our acquisitions CIL and IRT/ITR, respectively.
The Company expects its cost of revenues related to vacation packages
to decrease as a percentage of revenues in the future through improved
utilization of its wholesale bulk air contracts, expanded product offerings and
the full deployment of its TourScape software system.
GROSS PROFIT
Gross profit increased for the quarter ended March 31, 2007, compared
to the quarter ended March 31, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $ 331,304 19% $ 182,143 19% 55%
Airline tickets and related fees
164,655 76% 75,031 71% 46%
General service agreement fees . - -% 18,000 100% (100%)
---------- ------- ---------- ------- ------
Total .......................... $ 495,959 25% $ 275,174 25% 55%
========== ======= ========== ======= ======
Our gross profit increased for the three months ended March 31, 2007 as
compared to the corresponding period of 2006 and the percentage of gross profit
to revenues remained constant. Our increase in gross profit is the result of
having a full three months of operation in 2007 as compared to revenues
subsequent to our acquisitions in 2006 of CIL and IRT/ITR on February 8, 2006
and March 6, 2006, respectively.
35
OPERATING EXPENSES
Our operating expenses increased throughout the Company for the quarter
ended March 31, 2007, compared to the quarter ended March 31, 2006 as follows:
2007 2006
------------------------------- ----------------------------
Stock- Stock-
Percent Based Percent Based
of Compen- of Compen-
Total Revenue sation Total Revenue sation
---------- ------- -------- -------- ------- -------
Employee compensation .......... $ 560,229 28% $ - $397,300 37% $ -
Financial consulting ........... 190,927 10% 32,950 45,469 4% 15,498
Legal expense .................. 40,084 2% - 15,398 1% -
Depreciation & amortization .... 212,232 11% - 4,513 - -
Internal accounting and external
auditing expense .............. 112,350 6% - 131,295 12% -
Director fees .................. 134,848 7% 134,848 - - -
Investor relations ............. 203,554 10% 157,100 22,000 2% -
Other G&A expenses ............. 433,081 22% - 215,053 20% -
---------- ------- -------- -------- ------- -------
Total .......................... $1,887,305 96% $324,898 $831,028 77% $15,498
========== ======= ======== ======== ======= =======
Operating expenses for the quarter ended March 31, 2007 were $1,887,305
compared to $831,028 for the corresponding period for 2006. This increase is the
result of having a full three months of operation in 2007 as compared to
revenues subsequent to our acquisitions in 2006 of CIL and IRT/ITR on February
8, 2006 and March 6, 2006, respectively, and the addition of corporate expenses
to execute our business plan. As a result, our total operating expenses as a
percentage of revenues was 96% for the three months ended March 31, 2007 as
compared to 77% for the corresponding period of 2006. This increase is the
result of increased employee head count in the areas of marketing/product
development, supplier contract administration and executive management. Legal
expense increased as result of the Company's Securities and Exchange Commission
filing requirements and the handling of various legal matters. Internal
accounting and external auditing expense decreased as the 2006 auditing expense
included additional accounting and auditing services related to the CIL and
IRT/ITR acquisitions. Director fees increased as a result of the vesting of
securities granted to directors during the period. Investor relations expense
increased as a result of the amortization of service agreements entered into in
2006 and cash-based expense incurred in 2007. Other general and administrative
expenses increased as a result of having a full three months of operations with
all the acquired companies. As we increase the volume of our business, enter
into additional contracts with suppliers, and sell more products directly to
customers over the Internet, we anticipate general and administrative expenses
as a percentage of revenue to decrease.
The Company has utilized its securities as consideration to purchase
certain services from business and financial consultants, investor relation
firms, attorneys and directors. As a result, operating expenses for the first
quarter of 2007 included $300,782 in stock-based compensation representing the
fair value of grants to common stock, warrants and options to these parties as
compared to $15,498 in the corresponding period in 2006. The Company expects to
continue to use its securities to purchase services in the future as the board
of directors deems appropriate. Should this occur, the Company will recognize
stock-based compensation expense based on the fair value of securities issued
for services.
36
OTHER INCOME / EXPENSE
Our interest expense decreased for the quarter ended March 31, 2007,
compared to the quarter ended March 31, 2006 as follows:
2007 2006
---- ----
Regular interest expense ............................. $ 199,489 $ 105,675
Amortization of debt discount on convertible debt .... 564,393 1,076,770
---------- ----------
Total ................................................ $ 763,882 $1,182,446
========== ==========
Interest expense decreased between periods as a result of a reduction
in debt discount amortization partly offset by an increase in accrued interest
on outstanding debt obligations. The decrease in debt discount amortization is a
result of debt discounts recognized on financing that occurred in 2006 that were
fully amortized during but prior to the end of the first quarter of 2007. The
increase in accrued interest on outstanding debt obligations is a result of
greater borrowing levels during the quarter ended March 31, 2007 as compared to
the corresponding period of the prior year.
The Company recorded a non-cash loss on extinguishment of debt of
$208,442 during the first quarter of 2006. The loss included $180,000
representing the value of 200,000 shares of common stock issued to convertible
note holders pursuant to the January 13, 2006 Modification and Waiver Agreement
and $28,442 representing the value of additional warrants issued to the
convertible note holders and the write off of certain 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 valued at $233,227 on the modification date.
The fair value adjustment for outstanding warrants and options as of
March 31, 2007 resulted in the recognition of non-cash income of $2,974,005 for
the three months ended March 31, 2007 as compared to a non-cash expense for the
corresponding period of the prior year of $2,220,042. The fair value of
outstanding warrants and options recorded as liabilities and the related
increase or decrease in warrant and option valuation income (expense) is
directly related to the number of potentially dilutive securities being valued,
the trading price of the Company's common stock at the balance sheet date and
the Company's common stock volatility factor. At March 31, 2007 and March 31,
2006, the Company had 13,721,217 and 2,304,500 options and warrants subject of
liability treatment, the trading value of the Company's common stock was $0.35
and $1.85 per share and the volatility factor was 190% and 354%, respectively.
The embedded conversion option valuation for the quarter ended March
31, 2007 resulted in expense of $15,279. This expense is the result of the
change in value of conversion option associated with the issuance of convertible
notes totaling $1,000,000 with a conversion price at a 45% discount off the
trading price of the Company's common stock. The valuation of the embedded
conversion option is a non-cash expense to the Company.
NET INCOME (LOSS)
The Company had net income during the quarter ended March 31, 2007 of
$804,353 as compared to a net loss of $4,160,309 in the corresponding period in
2006. The net income for the quarter ended March 31, 2007 includes non-cash
income from warrant and option liability revaluation of $2,974,005, non-cash
general and administrative expenses of $324,898 from stock-based compensation,
depreciation and amortization expense of $212,232, and non-cash interest expense
of $564,393 attributed to the issuance of securities and related amortization of
the resulting debt discount.
The net loss for the quarter ended March 31, 2006 includes non-cash
general and administrative expenses of $15,498 from stock-based compensation,
depreciation and amortization expense of $4,513, and non-cash loss on
extinguishment of debt of $208,452 and non-cash interest expense of $1,076,770
attributed to the issuance of securities and related amortization of the
resulting debt discount.
37
LIQUIDITY AND CAPITAL RESOURCES
Our capital requirements consist of general working capital needs,
scheduled principal payments on our debt obligations and capital leases, planned
capital expenditures and, currently, the funding of deficit operations. Our
capital resources consist of cash generated from operations, short-term
borrowings under promissory notes payable and the sale of our common stock. Our
capital resources are impacted by our deficit operations and changes in the
volume of advance payments from customers and the timing of related payments to
suppliers. Our financial condition relies on continuing debt and equity
investment until the Company is able to achieve profitability in our wholesale
leisure travel business.
Period from January 1, 2007 to March 31, 2007
At March 31, 2007, we had cash of $160,770. The following table
reflects the cash flow activities during the first quarter of 2007 and 2006:
2007 2006
---- ----
Cash used by operating activities ............. $ (478,465) $ (899,405)
Cash provided by (used in) investing activities 10,745 (47,344)
Cash provided by financing activities ......... 424,579 1,630,368
----------- -----------
Increase (decrease) in cash ................... $ (43,141) $ 683,619
=========== ===========
Operating activities
For the three months ended March 31, 2007, the Company used cash in
operating activities of $478,465. Cash was used to fund the Company's loss from
operations of $1,391,346 offset by non-cash expenses consisting of general and
administrative expenses of $324,898 from stock-based compensation and
depreciation and amortization expense of $212,232. Cash used for operations
included an increase in accounts receivable of $74,440 and prepaid customer
travel costs of $56,758 and a decrease in deferred revenues of $361,528. Cash
was generated from operations by decreasing other assets by $44,245 and
increasing current liabilities by $904,917.
Investing activities
For the three months ended March 31, 2007, the Company provided cash
from investing activities of $10,745 by converting investments to cash.
Financing activities
For the three months ended March 31, 2007, the Company provided cash
from financing activities of $424,579. Cash was received from the proceeds of a
$400,000 convertible promissory note, $22,500 from the issuance of common stock
from the exercise of a warrant and $60,000 advanced from an employee. The
Company used cash for the payment of debt issuance costs of $50,000 and
principal payment on capital leases of $7,921.
Primary source of liquidity
As of March 31, 2007, our primary source of liquidity was $160,770 of
cash and $209,328 of accounts receivable. At March 31, 2007, the Company had a
working capital deficit of $12,787,301, primarily due to warrant and option
liability of $3,650,515, embedded conversion option liability of $1,082,355,
acquisitions payable of $1,440,000, convertible notes payable of $4,562,658
partially offset by debt discount of $1,160,612, and convertible notes payable -
related party of $350,000. The convertible notes payable and convertible notes
payable to a related party consist of promissory notes convertible into
approximately 8,500,000 shares of the Company's common stock as of March 31,
2007. While we expect these notes to be converted into the Company's common
stock, thereby reducing liabilities, there is no assurance this will occur. As
of March 31, 2007, the Company has outstanding warrants, non-plan and plan
options to purchase 12,821,217, 900,000 and 101,206 shares of the Company's
38
common stock with weighted average exercise prices of $1.00, $0.66 and $7.25 per
share, respectively. Exercise of any of these securities would provide cash to
the Company without additional financing fees. There is no assurance that any of
these securities will be exercised.
At March 31, 2007, the Company had total assets of $9,297,338, of which
non-current assets consisted of $8,317,895, goodwill of $2,902,196, intangible
assets of $4,122,362, deposits of $99,735, debt issue cost of $131,711 and
$1,061,891 of property and equipment, including $920,097 relating to the
purchase and implementation of our TourScape software. Total liabilities were
$14,349,109, including long-term liabilities of $582,365. Total shareholders'
deficit was $5,051,771. On March 31, 2007, we were in default on $2,237,658 in
notes payable and as of April 8, 2007 we had settled $600,000 of these notes
through the issuance of common stock. We anticipate settling the balance owing
on these notes payable through issuance of common stock also; however, as of May
15, 2007, this had not yet occurred nor is there any assurance that this will
take place.
We have limited historical results, and only a limited time of combined
operations with Dynamic, DLG, CIL, and IRT/ITR. We have relied upon equity
financing in order to fund operations. During 2006 and year to date in 2007,
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 has created a situation where we will 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.
As of March 31, 2007, our sources of internal and external financing
are limited. Additionally, as part of the acquisitions of IRT/ITR, we issued
700,000 shares of the Company's common stock, agreed to pay up to $1,000,000 in
additional cash, and issued a $1,450,000 secured Convertible Note Payable. While
we anticipate that all of our Convertible Note Payables will convert to shares
of the Company's common stock, which would reduce our potential cash payment for
the notes, the issuance of additional shares of our common stock 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 the Company'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 in the leisure travel market will 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. 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 and expansion into new markets in the near future. There can be no
assurance that we will be able to generate sufficient cash from operations in
future periods to satisfy our capital requirements; therefore, we will have to
continue to rely on external financing activities, including the sale of our
equity securities, to satisfy our capital requirements for the foreseeable
future. Due, in part, to our lack of 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.
39
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
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 1. LEGAL PROCEEDINGS
The Company was named as a principal party to proceedings brought by
Raymon Valdes and Changes in L'Attitudes, Inc. in Hillsborough County, Florida,
Circuit Court. The proceedings began on November 13, 2006. This matter was
resolved on April 13, 2007 when the parties entered into a Settlement Agreement
pursuant to which (i) Mr. Valdes agreed to convert the outstanding $600,000
convertible promissory note issued by the Company pursuant to the acquisition by
the Company of Changes in L'Attitudes, Inc. into 600,000 shares of the Company's
common stock; (ii) the Company agreed to pay the remaining approximately
$411,000 owed to Mr. Valdes in 52 weekly installments commencing on the earlier
to occur of 75 days from the settlement date or the receipt by the Company of
outside financing in a minimum amount of $750,000; and (iii) the Company agreed
to issue to Mr. Valdes an additional 170,000 shares of its common stock. On
April 13, 2007, the Company issued 770,000 shares of common stock for the
conversion of the $600,000 promissory note and settlement of all accrued
interest at a conversion rate of $1.00 per share.
40
The Company was named as a principal party to proceedings brought by
MMA Capital, LLC in United States District Court for the Northern District of
California. The proceedings began on November 22, 2006. The matter was resolved
on March 5, 2007 when the parties entered into a Settlement Agreement that
provided for the issuance of a warrant to MMA and MMA agreed to (i) extend the
maturity date of the Company's outstanding promissory note payable to MMA to
March 5, 2008; and (ii) to dismiss its action against the Company. Note 6
further describes the terms of settlement.
The Company filed a lawsuit in Hillsborough County, Florida, Circuit
Court on March 2, 2007 against Stephen Hicks. The complaint seeks recovery of
damages or alternative relief arising from breach of a contract under which the
Company acquired IRT/ITR. The complaint alleges non-compliance with certain
terms and conditions providing for integration of the companies.
On March 5, 2007, counsel for Stephen Hicks notified the registrant
that it was allegedly in breach of a convertible debenture payable under the
March 6, 2006 Purchase Agreement between the registrant and Hicks (the
"Agreement") that provided for the registrant's acquisition of IRT/ITR. The
Agreement calls for payment of a convertible debenture in the amount of
$1,450,000 as of March 6, 2007. In the event of any failure to pay on the
convertible debenture, the Agreement provides for a continuing obligation to pay
interest at a nine percent annual rate. The Company has classified the
convertible debenture as a current liability and has recorded accrued interest
of $139,170 related to this obligation on its consolidated balance sheet as of
March 31, 2007.
The Company is currently in discussions with Mr. Hicks regarding the
settlement of the matters arising on March 2, 2007 and March 5, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
On March 15, 2007, the Company engaged Uptick Capital, LLC to provide
financial consulting services pursuant to a consulting agreement with a 14-day
advance notice termination provision. On May 18, 2007, the Company gave written
notice of its termination of the consulting agreement. Pursuant to the terms of
this agreement, Uptick Capital was to be compensated through the issuance of
shares of the Company's common stock vesting in 10,000-share increments each
30-day period following March 15, 2007. In accordance with EITF 96-18, the
Company amortized the estimated value of the stock-based compensation over the
service period and recognized $1,750 as equity and operating expenses based on
the closing market price of the Company's common stock on March 31, 2007. A
total of 20,000 fully vested shares of the Company's common stock will be due
under this agreement as of June 1, 2007, the termination date.
On April 1, 2007, the Company issued 300,000 shares of its common stock
to Peter H. Clark for consulting services valued at $135,000 or $0.45 per share
(the closing market price of the Company's common stock on the day of issuance).
The offer and sale of the shares were made pursuant to an exemption from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, as transactions by an issuer not involving
any public offering.
On April 1, 2007, the Company issued 100,000 shares of its common stock
to Brett Gold for consulting services valued at $45,000 or $0.45 per share (the
closing market price of the Company's common stock on the day of issuance). The
offer and sale of the shares were made pursuant to an exemption from the
registration requirements of the Act by reason of Section 4(2) of the Act and
the rules and regulations thereunder, as transactions by an issuer not involving
any public offering.
On April 12, 2007, the Company issued a total of 120,000 shares of
common stock on conversion of a convertible note aggregating $75,000, accrued
interest of $10,870 and damages totaling of $47,463, based on a conversion rate
of $0.90 per share. The issuance of the shares was exempt from the registration
requirements of the Act by reason of Section 3(a)(9) of the Act and the rules
and regulations thereunder.
41
On April 13, 2007, the Company issued a total of 770,000 shares of
common stock on conversion of a convertible note aggregating $600,000 and
accrued interest of $170,000, based on a conversion rate of $1.00 per share. The
issuance of the shares was exempt from the registration requirements of the Act
by reason of Section 3(a)(9) of the Act and the rules and regulations
thereunder.
On April 16, 2007, the Company issued an unsecured convertible
promissory note in the principal amount of $100,000 to Miller Investments, LLC,
an accredited investor (the "Holder"). The note bears interest at 8% per annum
and matures August 13, 2007. At the option of the Holder, the note is
convertible at any time into shares of the Company's common stock at the lesser
of (i) $1.00 per share or (ii) the price per share paid by investors in the
Company's next financing transaction. The Holder is entitled to piggyback
registration rights, subject to certain limitations as described in the note. In
addition, the Company has granted the Holder the right to purchase additional
notes from the Company in the principal amount of $150,000 on the same terms and
conditions within thirty (30) days after the date of this note.
ITEM 5. OTHER INFORMATION
On April 16, 2007, the Company issued an unsecured convertible
promissory note in the principal amount of $100,000 to Miller Investments, LLC,
an accredited investor (the "Holder"). The note bears interest at 8% per annum
and matures August 13, 2007. At the option of the Holder, the note is
convertible at any time into shares of the Company's common stock at the lesser
of (i) $1.00 per share or (ii) the price per share paid by investors in the
Company's next financing transaction. The Holder is entitled to piggyback
registration rights, subject to certain limitations as described in the note. In
addition, the Company has granted the Holder the right to purchase additional
notes from the Company in the principal amount of $150,000 on the same terms and
conditions within thirty (30) days after the date of this note.
ITEM 6. EXHIBITS
10.26 Unsecured Convertible Promissory Note dated March 16, 2007 to Miller
Investments, LLC
31.1 Certification of Chief Executive Officer and Chief Financial pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
42
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 21, 2007 DYNAMIC LEISURE CORPORATION
By: /s/ Daniel G. Brandano
----------------------
Daniel G. Brandano
Chief Executive Officer
EXHIBIT INDEX
10.26 Unsecured Convertible Promissory Note dated March 16, 2007 to Miller
Investments, LLC
31.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer and Chief Financial Officer
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
43