UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 [_]
Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes ___ No _X_
As of August 14, 2007, the registrant had 14,244,495 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 JUNE 30, 2007
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheet as of June 30, 2007 (Unaudited) ....... 1
Consolidated Statements of Operations
for the three and six months ended June 30, 2007 (Unaudited) ..... 2
Consolidated Statement of Changes in Stockholders' Deficit
for the six months ended June 30, 2007 (Unaudited) ............... 3
Consolidated Statements of Cash Flows
for the six months ended June 30, 2007 (Unaudited) ............... 4
Notes to Consolidated Financial Statements (Unaudited) ........... 5
Item 2. Management's Discussion and Analysis or Plan of Operation ........ 33
Item 3. Controls and Procedures .......................................... 45
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 46
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 46
Item 5. Other Information ................................................ 47
Item 6. Exhibits ......................................................... 47
Signatures ................................................................ 48
Exhibit Index ............................................................. 48
i
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
JUNE 30, DECEMBER 31,
2007 2006
(UNAUDITED)
------------ ------------
Current Assets
Cash ........................................... $ 289,224 $ 203,911
Investments, restricted ........................ 127,097 127,842
Accounts receivable, net of an
allowance of $9,984 and $5,551 ............... 262,342 139,321
Prepaid travel ................................. 723,528 515,061
Other current assets ........................... 39,650 78,190
------------ ------------
Total Current Assets ......................... 1,441,841 1,064,325
------------ ------------
Property and equipment, net ...................... 1,014,200 1,076,669
------------ ------------
Other Assets
Goodwill ....................................... 2,902,196 2,902,196
Intangible assets, net ......................... 3,936,850 4,307,505
Deposits ....................................... 99,735 99,735
Debt issue costs, net .......................... 144,198 94,022
------------ ------------
Total Other Assets ........................... 7,082,979 7,403,458
------------ ------------
Total Assets ................................. $ 9,539,020 $ 9,544,452
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible promissory notes, net of
discount of $1,011,115 and $266,471 .......... $ 3,344,677 $ 2,046,187
Notes payable, current portion ................. 386,245 386,245
Acquisition payable ............................ 1,393,336 1,440,000
Accounts payable ............................... 1,407,135 752,152
Accounts payable to related parties ............ 282,017 65,930
Accrued compensation ........................... 32,010 74,707
Accrued interest ............................... 633,256 652,823
Other accrued liabilities ...................... 838,187 294,271
Capital lease obligation ....................... 34,804 34,152
Deferred revenue ............................... 111,680 673,936
Customer deposits .............................. 1,173,988 602,977
Due to employee ................................ 110,000 50,000
Warrant and option liability ................... 8,910,751 5,419,729
Embedded conversion option liability ........... 1,850,259 667,076
------------ ------------
Total Current Liabilities .................... 20,508,345 13,160,185
------------ ------------
Long-Term Liabilities
Convertible promissory notes, net of
current portion, net of discount
of $707,258 and $624,671 ..................... 292,742 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 57,574 73,448
------------ ------------
Total Long-Term Liabilities .................. 700,659 2,649,120
------------ ------------
Total Liabilities ............................ $ 21,209,004 $ 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, 14,044,495 and 12,101,195
issued and outstanding ....................... 140,445 121,012
Common stock issuable, at par value
(130,000 shares) ............................. 1,300 1,300
Additional paid-in capital, net of
deferred consulting fees of $106,000 ......... 7,167,232 5,107,537
Accumulated deficit ............................. (18,978,961) (11,494,702)
------------ ------------
Total Stockholders' Deficit .................. (11,669,984) (6,264,853)
------------ ------------
Total Liabilities and Stockholders' Deficit .. $ 9,539,020 $ 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 FOR THE SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- ---------------------------
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Total revenues ............................... $ 2,043,802 $ 1,904,547 $ 4,015,195 $ 2,997,045
Cost of revenues ............................. 1,766,439 1,340,248 3,241,873 2,157,572
------------ ------------ ------------ ------------
Gross Profit ............................... 277,363 564,299 773,322 839,473
Operating Expenses
Employee Compensation ...................... 518,965 625,778 1,079,194 1,023,078
Financial consulting, includes $270,316,
$26,538, $303,266 and $42,036
stock-based compensation ................. 280,237 57,036 471,164 102,505
Legal expense .............................. 64,375 10,513 104,459 25,911
Depreciation and amortization expense ...... 255,716 80,048 467,948 84,561
Internal accounting and external auditing
expense .................................. 95,500 215,492 207,850 346,787
Director fees, includes $62,500, $0,
$173,232 and $0 stock-based compensation . 62,500 - 197,348 -
Investor relations, includes $156,700, $0,
$313,800 and $0 stock-based compensation . 182,338 4,000 385,892 26,000
Other general and administrative expenses .. 434,665 542,006 867,746 757,059
------------ ------------ ------------ ------------
Total Operating Expenses ................. 1,894,296 1,534,873 3,781,601 2,365,901
------------ ------------ ------------ ------------
Loss from Operations ..................... (1,616,933) (970,574) (3,008,279) (1,526,428)
Other Income (Expense)
Interest income ............................ 645 6,557 1,500 13,042
Interest expense, includes $564,393 and
$1,076,770 in debt discount amortization . (791,803) (1,002,449) (1,555,685) (2,184,895)
Loss on extinguishment of debt ............. (76,635) - (76,635) (208,452)
Warrant and option valuation expense ....... (5,236,120) 1,441,491 (2,262,115) (778,551)
Embedded conversion option valuation expense (567,904) - (583,183) -
Other income (expense) ..................... 138 (8,020) 138 (8,020)
------------ ------------ ------------ ------------
Total Other Income (Expense), net ........ (6,671,679) (437,579) $ (4,475,980) $ (3,166,876)
------------ ------------ ------------ ------------
Net Loss ................................. $ (8,288,612) $ (532,995) $ (7,484,259) $ (4,693,304)
============ ============ ============ ============
Net Income (Loss) per Share:
Basic ...................................... $ (0.60) $ (0.06) $ (0.57) $ (0.53)
============ ============ ============ ============
Diluted .................................... $ (0.60) $ (0.06) $ (0.57) $ (0.53)
============ ============ ============ ============
Weighted average number of shares outstanding
during the period:
Basic .................................. 13,738,891 9,601,630 13,016,735 8,841,327
============ ============ ============ ============
Diluted ................................ 13,738,891 9,601,630 13,016,735 8,841,327
============ ============ ============ ============
See accompanying notes to the unaudited consolidated financial statements.
2
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Six Months Ended June 30, 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
promissory note
conversion ...... 1,090,000 10,900 - - 1,167,465 - 1,178,365
Common stock
issued in warrant
exercise ........ 33,300 333 - - 22,167 - 22,500
Common stock
issued for
services ........ 820,000 8,200 - - 760,500 - 768,700
Value of options
issued for
services ........ - - - - 24,116 - 24,116
Reclassification
from warrant
and option
liability ....... - - - - 85,447 - 85,447
Net Income (Loss) . - - - - - (7,484,259) (7,484,259)
---------- -------- ------- ------ ---------- ------------ ------------
BALANCE AT
JUNE 30, 2007 ... 14,044,495 $140,445 130,000 $1,300 $7,167,232 $(18,978,961) $(11,669,984)
========== ======== ======= ====== ========== ============ ============
See accompanying notes to the unaudited consolidated financial statements.
3
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE SIX FOR THE SIX
MONTHS ENDED MONTHS ENDED
JUNE 30, 2007 JUNE 30, 2006
------------- -------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $(7,484,259) $(4,693,304)
Adjustments to reconcile net loss to net cash
used in operating activities:
Change in accounts receivable allowance .............. 4,433 -
Depreciation ......................................... 62,469 18,594
Amortization of intangible assets .................... 370,655 65,968
Amortization of debt issue costs ..................... 34,824 81,141
Loss on extinguishment of debt ....................... - 208,452
Amortization of debt discount to interest expense .... 1,038,891 2,019,746
Common stock and warrants for services ............... 841,048 42,035
Embedded conversion option valuation expense ......... 583,183 -
Warrant and option valuation expense (income) ........ 2,262,115 778,551
(Increase) decrease in assets and liabilities:
Accounts receivable .................................. (127,454) 196,703
Prepaid assets ....................................... (208,467) (16,558)
Other assets ......................................... 38,540 (105,125)
Accounts payable ..................................... 871,070 80,700
Accrued expenses ..................................... 1,103,151 55,813
Deferred revenue ..................................... (562,256) (77,476)
Customer deposit ..................................... 571,011 (384,088)
----------- -----------
Net Cash Used in Operating Activities ................ (601,046) $(1,728,848)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in investments .................................... 745 -
Acquisition of property and equipment .................... - (24,685)
Acquisition of business .................................. - (41,077)
----------- -----------
Net Cash Used in Investing Activities ................ 745 (65,762)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes ............... 750,000 2,060,000
Repayment of convertible promissory notes ................ - (344,632)
Proceeds from overdraft .................................. - 63,337
Proceeds from line of credit ............................. - 10,000
Proceeds from employee advances .......................... 60,000 -
Debt issue costs ......................................... (85,000) (176,223)
Repayment of acquisition payable ......................... (46,664) -
Repayment of capital leases .............................. (15,222) (2,600)
Proceeds from common stock issuance ...................... 22,500 285,805
----------- -----------
Net Cash Provided by Financing Activities ............ 685,614 1,895,687
----------- -----------
Net Increase (Decrease) in Cash ............................ 85,313 101,077
Cash at Beginning of Period ................................ 203,911 38,699
----------- -----------
Cash at End of Period ...................................... $ 289,224 $ 139,776
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............. $ - $ -
=========== ===========
Cash paid during the period for interest ................. $ 91,943 $ 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 ......................... $ - $ 116,540
=========== ===========
Discount on promissory notes ............................. $ 1,266,122 $ 2,000,000
=========== ===========
Conversion option liability related to promissory note ... $ 600,000 $ 1,793,382
=========== ===========
Reclassification of FV of warrants and options from equity $ 85,447 $ -
=========== ===========
Promissory notes converted to common stock ............... $ 825,000 $ -
=========== ===========
Accrued interest converted to promissory note principal .. $ 268,134 $ -
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
4
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 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 and six months ended June 30, 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 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 June 30, 2007, and December 31, 2006 were $32,227
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 six months ended June 30, 2007.
6
Letters of Credit and Restricted Investments
At June 30, 2007, the Company had two outstanding letters of credit
totaling approximately $112,100 payable to the Airlines Reporting Corporation
(ARC), which allows 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. Short-term investments at June 30, 2007, also includes $10,000 restricted
to cover a letter of credit for a seller of travel license.
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 six
months ended June 30, 2007 and 2006, the Company's advertising expense totaled
$19,585 and $17,275, respectively.
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".
7
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.
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 and six months
ended June 30, 2007 and 2006, does not include potential common shares as their
effect would be anti-dilutive.
8
Potential shares excluded from the weighted average share
calculations due to their anti-dilutive effect include:
- ---------------------------------------------------------
Upon exercise of plan options .................................... 99,762
Upon exercise of non-plan options ................................ 950,000
Upon exercise of warrants ........................................ 12,416,713
Upon conversion of convertible promissory notes .................. 6,109,372
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.
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.
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.
9
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 six months ended June 30, 2007, the Company had a loss from
operations of $3,008,279, used net cash in operations of $601,046, a working
capital deficiency of $19,066,504, and a stockholders' deficiency of
$11,669,984. In addition, the Company is in default on convertible promissory
notes totaling $1,482,500 as of June 30, 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 June 30, 2007, the Company had $5,355,792 in outstanding
Convertible Notes payable to third parties (including the notes in default as
described above), which are convertible into 6,109,372 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. As of June 30, 2007, the Company did not have
adequate working capital to meet these obligations with cash payments.
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.
10
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated
Useful Life June 30, December 31,
in Years 2007 2006
----------- ----------- ------------
Office furniture and equipment ... 3-5 $ 165,770 $ 165,770
Software ......................... 5-7 957,850 37,753
Software in development .......... - 920,097
----------- -----------
Total property and equipment ..... $ 1,123,620 $ 1,123,620
Less accumulated depreciation .... (109,420) (46,951)
----------- -----------
Property and equipment, net ...... $ 1,014,200 $ 1,076,669
=========== ===========
Depreciation expense was $62,469 for the six months ended June 30,
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. The
Company amortizes this software over seven years.
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 June 30, 2007, are as follows:
Accumulated Net Book
Life Cost Amortization Value
- -------------------------- -------- ---------- ------------ ----------
Airline contracts ........ 7 yrs. $2,820,000 $443,491 $2,376,509
Hotel contracts .......... 7 yrs. 422,500 49,884 372,616
URLs ..................... 10 yrs. 1,011,000 108,369 902,631
Mailing list ............. 3 yrs. 150,000 12,054 137,946
General service agreement 2.5 yrs. 348,413 201,265 147,148
--------- -------- ----------
$4,751,913 $815,063 $3,936,850
========== ======== ==========
Amortization expense for the six months ended June 30, 2007 totaled
$370,655. Amortization of intangible assets in future years is expected to be as
follows:
2007 $ 746,496 (includes $370,655 recognized
for six months ended 6/30/07)
2008 $ 607,132
2009 $ 607,132
2010 $ 607,132
2011 $ 607,132
Thereafter $ 1,132,481
11
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 June 30, 2007:
Original Debt Discount Components
------------------------------------ Cumulative
Beneficial Amortization
Interest Balance Notes Balance Conversion Warrant As Of
Rate 12/31/2006 Converted Borrowings 6/30/2007 Feature Liability Total 6/30/2007
- -------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
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 2,658,860
5% (U) 155,158 (150,000) 268,134 273,292 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 1,000,000 292,742
8% (U) - - 150,000 150,000 - - - -
10% (U) - - 50,000 50,000 50,000 - 50,000 8,242
10% (U) - - 150,000 150,000 150,000 - 150,000 24,725
---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
$5,162,658 $(825,000) $1,018,134 $5,355,792 $2,622,322 $4,129,268 $6,751,590 $ 5,033,217
========== ========= ========== ========== ========== ========== ========== ============
(S) - Secured
(U) - Unsecured
Unamortized Net Book
Principal Discount Value
----------- ----------- -----------
Current maturities ....... $ 4,355,792 $ 1,011,115 $ 3,344,677
Long-term portion ........ 1,000,000 707,258 292,742
----------- ----------- -----------
Total .................... $ 5,355,792 $ 1,718,373 $ 3,637,419
=========== =========== ===========
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 6/30/2007 Discount Date Payments Price Shares Price Life(Yr) tility Rate
- -------- ---------- ----------- -------- -------- ---------- --------- -------- -------- ------ --------
9% (S) $1,450,000 $ - 3/6/07 (A) $1.50 - $ - - - -
10% (S) 2,250,000 844,082 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%
5% (U) 273,292 - 12/4/07 (F) 0.75 304,000 0.90 3.0 354% 3.96%
10% (U) 10,000 - 6/30/06 (G) 0.90 - - - - -
10% (U) 10,000 - 6/30/06 (G) 0.90 - - - - -
10% (U) 12,500 - 6/30/06 (G) 0.90 - - - - -
6% (S) 1,000,000 707,258 10/25/09 (H) (H) 5,000,000 $1.50 3.0 154% 4.58%
8% (U) 150,000 - 8/13/07 (I) 1.00 - - - - -
10% (U) 50,000 41,758 10/15/07 (J) (J) 132,979 $0.376 0.3 218% 4.94%
10% (U) 150,000 125,275 10/15/07 (J) (J) 398,936 $0.376 0.3 218% 4.94%
---------- -----------
$5,355,792 $ 1,718,373
========== ===========
(A) - This note went into default for nonpayment on its maturity date.
(B) - Not used.
(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.
12
(E) - Relates to Note Modification Agreement for issuance of warrants to
purchase 3,000,000 shares of the Company's common stock.
(F) - This note was modified on June 4, 2007, whereby the note's maturity date
was extended to December 4, 2007, interest rate reduced to 5% per annum,
all accrued interest was added to the principal balance and $150,000 of
the note balance was converted into 200,000 shares of common stock.
(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.
(H) - Balance is due on the maturity date plus all accrued interest. The debt
is convertible at a 45% discount to market or $0.44 per share as of June
30, 2007.
(I) - Balance is past due as of August 13, 2007, and the loan is in default.
The Company is in negotiations to extend the maturity date or have the
note converted.
(J) - Balance is due on the maturity date plus all accrued interest. The debt
is convertible at the same rate or price established based upon the
Company's next financing in excess of $1,000,000.
All debt discounts are amortized over the terms of the respective
Notes. The amortization of the debt discount was $1,038,891 and $2,019,746 for
the six months ended June 30, 2007 and 2006, respectively, and was included in
interest expense in the accompanying consolidated financial statements.
In total as of August 14, 2007, the Company was in default on
third-party convertible promissory notes of $1,482,500.
On April 16, 2007, the Company issued unsecured convertible promissory
notes in the principal amount totaling $150,000 to Miller Investments, LLC. The
notes bear interest at 8% per annum and mature August 13, 2007. At the option of
the holder, the notes are 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 notes. 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 the notes.
On June 15, 2007, the Company issued unsecured convertible promissory
notes in the principal amount totaling $50,000 and $150,000 to Michael Pisani
and Seaside Capital II, LLC, respectively. The notes bear interest at 10% per
annum and mature October 15, 2007. In the event the Company consummates prior to
its maturity date, an equity or debt financing pursuant to which it sells shares
of its common stock (or securities convertible into or exercisable for shares of
its common stock) with a aggregate sales price of not less than $1,000,000,
excluding these notes (a "Qualified Financing"), then the outstanding principal
amount of and all accrued interest under these notes shall automatically convert
into securities identical to and at the same price and on the same terms as the
securities issued to in the Qualified Financing. If no Qualified Financing takes
place prior to the maturity date, than all or a portion of the outstanding
principal amount of and all accrued interest under these notes shall be
converted at the option of the holders into that number of shares of the
Company's common stock at a 50% discount to market, as defined.
MMA Capital, LLC Convertible Debt
- ---------------------------------
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.
13
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.
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. The fair value of the warrant to
purchase 3,000,000 shares of the Company's common stock of $1,266,122 was
recorded as debt discount and warrant liability on the Company's consolidated
balance sheet and the debt discount is being amortized over the remaining term
of the promissory note.
14
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.
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
June 30, 2007; therefore, there was no effect of implementing this standard.
15
DynEco March 2, 2005 Convertible Notes and Modification and Waiver Agreements
- -----------------------------------------------------------------------------
On January 13, 2006, and June 4, 2007, the Company and Alpha Capital
Aktiengesellschaft, JM Investors, LLC, Libra Finance, S.A. and RG Prager
Corporation entered into Modification and Waiver Agreements 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. Pursuant to the
January 13, 2006 Modification and Waiver Agreement, interest on these Notes at
the rate of 5% per annum was to be paid quarterly, commencing March 31, 2006,
and monthly principal amortization payments of approximately $29,700 were to
commence on June 1, 2006.
The Company was in default of the terms of this Modification and Waiver
Agreement for nonpayment of its quarterly interest payments. Accordingly, the
Company began accruing default interest at the rate of 10% from the date of
default of June 1, 2006.
As consideration for the January 13, 2006, 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 additional consideration to induce the note holders to enter into
the January 13, 2006, 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.
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.
16
On January 13, 2006, 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 January 13, 2006, 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 Modification and Waiver Agreement required the Company 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.
On June 4, 2007, the Company entered into a second Modification and
Waiver Agreement with the note holders that combined all accrued interest and
penalties on these notes as of June 4, 2007, aggregating $268,134 with the
outstanding principal amount of the Notes of $155,158 and provided that interest
would accrue on the new principal amount at the rate of 5% per annum beginning
June 4, 2007. Penalties of $142,236 were recorded as interest expense on the
settlement date. Interest is payable on any conversion date or on the maturity
dates of the Notes, which have been extended to December 4, 2007. All principal
and accrued interest is convertible at any time into shares of the Company's
common stock at a fixed conversion price of $0.75, subject to adjustment. As
long as the Notes are outstanding, if the Company issues any Common Stock, other
than for certain enumerated exceptions as set forth in the Modification and
Waiver Agreement, prior to the complete conversion of the Notes for a
consideration less than $0.485 per share, the conversion price shall be reduced
to such other lower issue price. In addition, the purchase price of the warrants
is subject to adjustment if the Company issues any Common Stock other than for
certain enumerated exceptions set forth in the Modification and Waiver
Agreement, for a consideration less than $0.485 per share. In connection with
the June 4, 2007 Modification and Waiver Agreement, the investors agreed to
convert an aggregate of $150,000 due and payable under the Notes into 200,000
shares of the Company's common stock effective as of June 4, 2007.
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.
17
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.
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 June 30, 2007, the Note had an outstanding
balance of $350,000.
Other Notes Payable
- -------------------
Notes payable consisted of the following:
JUNE 30, 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
========= =========
At June 30, 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 June 30, 2007.
18
Capital Lease Obligation
- ------------------------
The Company's capital leases consisted of the following:
JUNE 30, DECEMBER 31,
2007 2006
--------- ------------
Total Capital Leases .................... $ 92,378 $ 107,600
Less Current Capital Leases ............. (34,804) (34,152)
--------- ---------
Long-term portion of Capital Leases .. $ 57,574 $ 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
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.
During the six months ended June 30, 2007, the warrant and option
liability was increased for the fair value of options to purchase 50,000 and
50,000 shares of the common stock that vested on January 5, 2007, and April 5,
2007, respectively, 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:
19
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)
Value of options
granted for
compensation..... - - - 24,116 24,116 -
Change in Value ... 114,922 2,012,665 1,945,304 1,163,229 5,236,120 5,236,120
----------- ----------- ----------- ----------- ----------- -----------
Balance 6/30/2007 $ 192,006 $ 3,386,604 $ 3,270,960 $ 2,061,181 $ 8,910,751 $ 2,262,115
=========== =========== =========== =========== =========== ===========
December 31, 2006
- -----------------
Warrants/options .... 304,500 2,250,000 5,000,000 3,300,050
Exercise price ...... $1.00 $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 ...... $1.00 $1.00 to $1.50 $1.50 $0.485 to $11.25
Market price ........ $0.65 $0.65 $0.65 $0.65
Expected life (years) 2.25 1.7 to 2.9 2.5 .2 to 4.3
Volatility .......... 190% 190% 190% 190%
Discount rate ....... 4.65% 4.67% 4.60% 4.90%
June 30, 2007
- -------------
Warrants/options .... 304,500 5,250,000 5,000,000 1,862,213
Exercise price ...... $1.00 $1.00 to $1.50 $1.50 $0.485 to $11.25
Market price ........ $0.76 $0.76 $0.76 $0.76
Expected life (years) 2.0 1.4 to 2.6 2.2 1.2 to 4.0
Volatility .......... 218.2% 218.2% 218.2% 218.2%
Discount rate ....... 4.65% 4.87% 4.89% 4.89%
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,
and June 15, 2007. Such variable conversion prices require liability treatment
for embedded conversion option consisting of conversion prices equal to a 45% to
50% 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 6/15/07 Total
Variable Variable Variable Embedded Conversion
Conversion Conversion Conversion Conversion Option
Price Price Option Option (Income)
Note 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
Debt issued 6/15/07 .... - - 349,792 349,792 149,792
Change in Value ........ 305,316 220,413 (107,617) 418,112 418,112
--------- --------- --------- ---------- ---------
Balance at 6/30/2007 ... $ 958,466 $ 649,618 $ 242,175 $1,850,259 $ 583,183
========= ========= ========= ========== =========
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%
21
June 15, 2007
- -------------
Principal ............ $200,000
Shares upon conversion 531,915
Exercise price ....... $0.376
Market price ......... $0.94
Expected life (years) 0.3
Volatility ........... 218.2%
Discount rate ........ 4.94%
June 30, 2007
- -------------
Principal ............ $600,000 $400,000 $200,000
Shares upon conversion 802,506 527,467 500,000
Exercise price ....... $0.44 $0.44 $0.40
Market price ......... $0.76 $0.76 $0.76
Expected life (years) 2.2 2.5 0.3
Volatility ........... 218.2% 218.2% 218.2%
Discount rate ........ 4.89% 4.89% 4.94%
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.
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 six months ended June 30,
2007, a total of 200,000 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 six months
ended June 30, 2007, a total of $125,000 was recorded as equity and charged to
operations as an expense.
During 2006, the Company has 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 six months ended June 30, 2007, a total of
$376,200 was recorded as equity and charged to operations as an expense for
shares issued in 2006. The remaining unamortized balance of $106,000 as of June
30, 2007, has been recorded as deferred consulting fees treated as a reduction
in additional paid-in capital and will be expensed in future periods.
On March 15, 2007, the Company entered into an agreement with Uptick
Capital, LLC to provide financial consulting services pursuant to a consulting
agreement with a 14-day advance notice termination provision. Shares to be
granted under this agreement vested at the end of each 30-day period. On May 18,
2007, the Company gave written notice of its termination of the consulting
agreement and the agreement terminated June 1, 2007. Pursuant to the terms of
this agreement, the Company issued Uptick Capital 20,000 shares of vested common
stock valued at $7,000 or $0.35 per share determined using the market stock
price as of the date the shares became vested under this agreement. The fair
value of these shares was charged to operations.
22
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 was amortized to operating expenses over the
three-month term of the 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 was amortized to operating expenses over the three-month term of the
agreement.
On May 1, 2007, the Company entered into an agreement with Pro345, LLC
to provide financial and management consulting services to the Company. Pursuant
to this agreement, the Company issued Pro345, LLC 150,000 vested shares of the
Company's common stock valued at $127,500 or $0.85 per share determined using
the market stock price as of the date of the agreement. The agreement is for a
term of six months and is renewable at the option of either party. The fair
value of $42,500 will be amortized to operating expenses during the six months
ended June 30, 2007.
On June 6, 2007, the Company transferred 200,000 shares of the
Company's common stock to an escrow account of Crone Rozynko, LLP. Pursuant to
an Escrow Agreement, the shares are to remain in the escrow account until
granted by the Company's Board of Directors to Crone Rozynko for payment of
legal fees, and any unissued shares remaining in the escrow account on June 15,
2009, are to be returned to the Company. These shares are not considered issued
and outstanding in the accompanying consolidated financial statements.
On June 30, 2007, the Company issued 50,000 shares of its common stock
from its 2007 Stock Option/Stock Issuance Plan with a fair value on the date of
grant of $38,000 or $0.76 per share in settlement of a legal dispute with MBN
Consulting, LLC. The Company has previously accrued $29,333 related to this
matter and charged an additional $8,667 to operations on June 30, 2007.
Common Stock Issued Upon Conversion of Debt
- -------------------------------------------
On April 12, 2007, the Company issued a total of 120,000 shares of its
common stock on conversion of a convertible promissory note aggregating $75,000,
accrued interest of $10,870 and damages totaling $34,130, based on a conversion
rate of $1.00 per share or total consideration of $120,000.
On April 13, 2007, the Company settled a dispute with Raymond Valdes
and issued a total of 770,000 shares of common stock on conversion of a
convertible note aggregating $600,000, and accrued interest of $61,730. The
additional stock consideration of 328,847 shares, after considering the original
note conversion terms of $1.50 per share, was valued at $245,235 based on the
$0.75 quoted trading price on the settlement date and resulted in a loss on
settlement of $76,635. The aggregate value of this settlement was $908,365.
On June 4, 2007, holders of 5% convertible promissory notes converted
$150,000 of these notes into 200,000 shares the Company's common stock at a
conversion rate of $0.75 per share.
Common Stock Warrants, Options and Valuation
- --------------------------------------------
The Company had outstanding warrants and options as follows:
JUNE 30,
Exercisable Securities 2007
---------------------- -----------
Warrants ............. $12,416,713
Options .............. 1,049,762
23
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.
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 June 30, 2007 . 200,000 $ 1.25 5.00 -
========== ====== ==== ====
Exercisable at June 30, 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 ......... (404,537) $ 0.68 - -
---------- ------ ---- ----
Outstanding at June 30, 2007 . 12,216,713 $ 1.38 3.05 -
========== ====== ==== ====
Exercisable at June 30, 2007 . 12,216,713 $ 1.38 3.05 -
========== ====== ==== ====
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.
24
Non-Plan Common Stock Options to Non-Employees
- ----------------------------------------------
At June 30, 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
- --------------- ----------- --------- -------- ----------- --------
$0.485 to $0.70 1,050,000 5.5 Years $ 0.66 950,000 $ 0.66
=========== ===========
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 June 30, 2007 ..... 1,050,000 $ 0.66
========= ========
Weighted average fair value of options granted
during the six months ended June 30, 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. Options to purchase a total of 100,000 shares were vested as of June 30,
2007.
25
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.
In May 2007, the Company's Board of Directors approved the 2007 Stock
Option/Stock Issuance Plan. No grants of options have been made from this plan
as of June 30, 2007.
At June 30, 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
- -------- ----------- --------- -------- ----------- --------
$ 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
------- -------
99,762 99,762
======= =======
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 ................................. (1,444) $ 2.63
--------- --------
Plan options outstanding at June 30, 2007 ......... 99,762 $ 7.30
========= ========
Plan options exercisable at June 30, 2007 ......... 99,762
=========
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 June 30, 2007, options to purchase
22,278 shares are outstanding under the 2001 Equity Incentive Plan.
26
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 June 30, 2007, options to
purchase 70,817 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 under the above plans 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.
In May 2007, the Company's Board of Directors approved the 2007 Stock
Option/Stock Issuance Plan and reserved a total of 5,500,000 shares of common
stock for issuance under this plan. On May 23, 2007, the Company filed a Form S8
registering the shares issuable under this plan with the Securities and Exchange
Commission. The plan allows the issuance of stock options and outright grants of
common stock, from time-to-time, to its officers, directors, employees and
independent contractors who provide services to the Company. As of June 30,
2007, a total of 600,000 shares of common stock have been granted to independent
contractors/consultants and accounted for as described in Note 9 above. No
grants of options have been made from the Plan as of June 30, 2007.
Share-Based Compensation
- ------------------------
For the six months ended June 30, 2007 and 2006, the Company recognized
compensation costs for employees, directors, consultants and others totaling
$790,298 and $42,036, respectively. These amounts increased the Company's
operating expenses and equity during these periods.
As of June 30, 2007, the Company has $106,000 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 five (5)
months. These costs included $54,116 related to director fees, and $106,000
related to consulting agreements. This additional compensation cost will
increase the Company's operating expenses in future periods.
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,
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.
27
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 six months ended June 30, 2007. Mr. Dyer, a member of
the Company's Board of Directors, owns 75% of Innovations Publishing.
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 six months ended June
30, 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
June 30, 2007, Street Venture Partners LLC owned 1,066,666 shares or
approximately 7.5% 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 June 30, 2007, Claudale Ltd. owned 693,333 shares or approximately
4.9% of the Company's issued and outstanding common stock.
Brian J. Brandano
- -----------------
At June 30, 2007, Brian J. Brandano owned 333,333 shares or
approximately 2.3% 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.
28
Payable to Employee (Stephen A. Hicks)
- --------------------------------------
At June 30, 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.
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 June
30, 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 six months ending June 30,
2007 and 2006 was $159,585 and $101,833, 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
29
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.
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 was 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. On June 30, 2007, this matter was
resolved and the Company issued 50,000 shares of its common stock with a fair
value on the date of grant of $38,000 or $0.76 per share in settlement of this
dispute. The Company has previously accrued $29,333 related to this matter and
charged an additional $8,667 to operations on June 30, 2007.
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 $171,795 related to this obligation on its consolidated balance sheet as of
June 30, 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.
30
NOTE 14 SUBSEQUENT EVENTS AND CONTINGENCIES
The Company entered into a Securities Purchase Agreement (the
"agreement")with Trafalgar Capital Specialized Investment Fund, Luxembourg
("Trafalgar") with respect to the purchase by Trafalgar of up to $2,400,000 of
secured convertible debentures to be funded in three tranches. On July 11, 2007,
the Company closed on the first portion of the funding and issued a two-year
$700,000 convertible debenture to Trafalgar. The debenture bears interest at 12%
per annum, compounded monthly (9.5% after effectiveness of a Registration
Statement required under the agreement-see below), and is convertible into
common stock at the lesser of (a) an amount equal to 100% of the Volume Weighted
Average Price ("VWAP") as quoted by Bloomberg L.P. as of June 29, 2007 (the
"Fixed Conversion Price"), or (b) an amount equal to 80% of the lowest daily
closing bid price of the Company's Common Stock, as quoted by Bloomberg, LP, for
the five (5) trading days immediately prior to conversion. The Company has the
right to redeem the debenture at 120% of principal and accrued and unpaid
interest. The funding is subject to customary commitment and other fees
approximating an aggregate 10% of the funded amount, as defined in the
agreement. In addition, the second and third tranches are contingent upon the
Company obtaining additional investments of $600,000 and transfer of a senior
lien to Tragalger on substantially all assets of the Company, pursuant to a
Security Agreement. In connection with the offering, the Company issued an
aggregate of 3,000,000 warrants to purchase common stock at a price of 85% of
the Fixed Conversion Price component of the convertible debentures, per share.
The warrants are exercisable for a period of five 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 less than warrant price in effect immediately prior to such issuance.
In connection with the agreement, the Company entered into a registration rights
agreement requiring the Company to register the securities underlying the
convertible debentures and warrants. The Company must file within 55 days of
June 29, 2007 and the registration statement must be effective within 90 days of
June 29, 2007. If the filing or effectiveness dates are not complied with, or
maintenance of effectiveness or other defaults occur, as defined in the
Registration Rights Agreement, the Company will incur liquidated damages of 2%
of the outstanding debenture value for each 30 days the default remains uncured.
On August 1, 2007, the Company entered into an Amendment to Securities
Purchase Agreement, Secured Convertible Debenture and Security Agreement with
Trafalgar Capital Specialized Investment Fund, Luxembourg ("Trafalgar") under
which (i) the exercise price of the Warrants issued to Trafalgar pursuant to the
convertible debt financing which closed on July 11, 2007 (the "Financing") was
reduced to $0.23 per share, provided, however, that if after registration of the
shares issuable upon exercise of the Warrants, shares of the Company's common
stock trade above $0.75 per share for 30 consecutive trading days, the exercise
price of the Warrants will be increased to $0.50 per share; (ii) the Company
agreed to issue to Trafalgar a warrant exercisable for an additional 5 million
shares at $0.23 per share, provided, however, that if after registration of the
shares issuable upon exercise of the Warrants, shares of the Company's common
stock trades above $0.75 per share for 30 consecutive trading days, the exercise
price of this Warrant will be increased to $0.646 per share and the number of
shares exercisable pursuant to the Warrant will be reduced to 2 million; and
(iii) the Fixed Price component of the variable conversion price discussed above
of the Convertible Debenture was reduced to $0.23, provided, however, that if
after registration of the shares issuable upon conversion of the debentures,
shares of the Company's common stock trades above $0.75 per share for 30
consecutive trading days, the fixed conversion price component of the variable
conversion price of this Warrant will be increased to $0.646 per share
31
Due to the variable conversion price, the secured convertible term note
will be bifurcated and recorded as two liability instruments, a debt instrument
and an embedded conversion option liability at fair value.
On July 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 $80,000 or $0.80 per share determined using the
market stock price as of the date of the agreement. The agreement is for a term
of six months and is renewable at the option of the Company. The fair value of
$80,000 will be amortized to operating expenses over the six-month term of the
agreement.
On July 1, 2007, the Company entered into an agreement with Dana Salvo
to provide financial and management consulting services to the Company. Pursuant
to this agreement, the Company issued Dana Salvo 100,000 vested shares of the
Company's common stock valued at $80,000 or $0.80 per share determined using the
market stock price as of the date of the agreement. The agreement is for a term
of six months and is renewable at the option of the Company. The fair value of
$80,000 will be amortized to operating expenses over the six-month term of the
agreement.
On July 31, 2007, the Company entered into a settlement agreement with
AJW Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New
Millenium Capital Partners, II, LLC, (collectively, the "Subscribers"). Pursuant
to the settlement agreement, the Company agreed to pay $1,200,000 and to issue
an aggregate of 500,000 shares of the Company's common stock to the Subscribers,
in full satisfaction of all of the Company's obligations under the Securities
Purchase Agreement, Security Agreement, Intellectual Property Security Agreement
and Registration Rights Agreement dated November 9, 2006, by and between the
Company and the Subscribers and secured convertible term notes in the aggregate
principal amount of $1,000,000 issued by the Company in favor of the
Subscribers. In addition, pursuant to the settlement agreement, the Company
amended and restated the stock purchase warrants issued to the Subscribers
pursuant to the warrant purchase agreement as follows: a) to remove the
Company's obligation to secure the listing of the shares of common stock
issuable upon the exercise of up to 5,000,000 warrants with a national
securities exchange or automated quotation system upon which the Company common
stock is then listed, b) to remove the antidilution provision c) to provide the
holders of the warrants the right to receive securities or assets which may be
issued or payable up a consolidation, merger or sale of the Company, d) to
provide the holders of the warrants the right to receive distribution of assets
of the Company, including cash and e) to remove the cashless exercise option.
Closing on this transaction had not occurred as of August 14, 2007.
32
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 six months ended June 30, 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.
33
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 June 30,
2007, options exercisable for 99,762 shares of common stock were outstanding
pursuant to these plans.
In May 2007, the Company's Board of Directors approved the 2007 Stock
Option/Stock Issuance Plan and reserved a total of 5,500,000 shares of common
stock for issuance under this plan. On May 23, 2007, the Company filed a
Registration Statement on Form S-8 with the Securities and Exchange Commission
to register the shares issuable under this plan. The plan allows the issuance of
stock options and outright grants of common stock, from time-to-time, to its
officers, directors, employees and independent contractors who provide services
to the Company. As of June 30, 2007, a total of 600,000 shares of common stock
have been granted to independent contractors/consultants and accounted for as
described in Note 9 to the consolidated financial statements.
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 granted to employees at its
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.
34
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.
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".
35
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.
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 and six months ended June 30, 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.
Three-Month Periods Ended June 30, 2007 and 2006 (second quarter)
- -----------------------------------------------------------------
REVENUE
Revenues increased for the quarter ended June 30, 2007, compared to the
quarter ended June 30, 2006 as follows:
Percent Percent
of of
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $1,797,653 88% $1,533,740 80% 17%
Airline tickets and related fees 246,149 12% 352,827 19% (30%)
General service agreement fees . - -% 17,980 1% -%
---------- ------- ---------- ------- ------
Total .......................... $2,043,802 100% $1,904,547 100% 7%
========== ======= ========== ======= ======
36
Our revenue was primarily derived from the sale of vacation packages,
the sale of airline tickets, recorded on a net revenue basis.
COST OF REVENUE
Cost of revenues increased for the quarter ended June 30, 2007,
compared to the quarter ended June 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue
---------- ------- ---------- -------
Vacation packages .............. $1,794,967 100% $1,236,073 81%
Airline tickets and related fees (28,528) (12)% 104,175 29%
---------- ------- ---------- -------
Total .......................... $1,766,439 86% $1,340,248 70%
========== ======= ========== =======
Cost of revenues related to the sale of vacation packages includes 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 June 30, 2007 as compared to the corresponding period of
2006, and the percentage of cost of revenues to revenues increased 16% between
periods. The increase in the percentage of cost of revenue to revenue is the
result of certain vacation packages sold at or below cost stemming from employee
training issues causing late procurement of certain vacation package components
thus increasing product costs to the Company. The Company believes it has
resolved these training issues and expects cost of revenues as a percentage of
revenues to return to its historical percentages.
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 utilization of its TourScape software system.
GROSS PROFIT
Gross profit decreased for the quarter ended June 30, 2007, compared to
the quarter ended June 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- -------
Vacation packages .............. $ 2,686 -% $ 297,667 19% (99%)
Airline tickets and related fees 274,677 112% 248,652 70% 10%
General service agreement fees . - -% 17,980 100% -%
---------- ------- ---------- ------- -------
Total .......................... $ 277,363 14% $ 564,299 30% (51%)
========== ======= ========== ======= =======
Our gross profit decreased for the three months ended June 30, 2007 as
compared to the corresponding period of 2006 and the percentage of gross profit
to revenues decreased. The decrease in gross profit is the result of certain
vacation packages sold at or below cost stemming from employee training issues
causing late procurement of certain vacation package components thus increasing
product costs to the Company. The Company believes it has resolved these
training issues and expects the gross profit percentage to return to its
historical percentages
37
OPERATING EXPENSES
Our operating expenses increased throughout the Company for the quarter
ended June 30, 2007, compared to the quarter ended June 30, 2006 as follows:
2007 2006
------------------------------- ----------------------------
Stock- Stock-
Percent Based Percent Based
of Compen- of Compen-
Total Revenue sation Total Revenue sation
---------- ------- -------- ---------- ------- -------
Employee compensation .......... $ 518,965 25% $ - $ 625,778 33% $ -
Financial consulting ........... 280,237 13% 270,316 57,036 3% 26,538
Legal expense .................. 64,375 3% - 10,513 1% -
Depreciation & amortization .... 255,716 12% - 80,048 4% -
Internal accounting and external
auditing expense .............. 95,500 5% - 215,492 11% -
Director fees .................. 62,500 3% 62,500 - - -
Investor relations ............. 182,338 9% 156,700 4,000 - -
Other G&A expenses ............. 434,665 21% - 542,006 29% -
---------- ------- -------- ---------- ------- -------
Total .......................... $1,894,296 93% $489,516 $1,534,873 81% $26,538
========== ======= ======== ========== ======= =======
Operating expenses for the quarter ended June 30, 2007 were $1,894,296
compared to $1,534,873 for the corresponding period for 2006. As a result, our
total operating expenses as a percentage of revenues was 93% for the three
months ended June 30, 2007 as compared to 81% for the corresponding period of
2006. Financial consulting expense increased as result of amortization of
consulting agreements entered into in the current and prior quarters. 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 decreased as a result of a cost reduction effort by management. 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 second
quarter of 2007 included $489,516 in stock-based compensation representing the
fair value of grants to common stock, warrants and options to these parties as
compared to $26,538 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.
OTHER INCOME / EXPENSE
Our interest expense decreased for the quarter ended June 30, 2007,
compared to the quarter ended June 30, 2006 as follows:
2007 2006
---- ----
Regular interest expense ............................. $ 317,305 $ 59,473
Amortization of debt discount on convertible debt .... 474,498 942,976
---------- ----------
Total ................................................ $ 791,803 $1,002,449
========== ==========
38
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 second quarter of 2007. The
increase in accrued interest on outstanding debt obligations is a result of
greater borrowing levels during the quarter ended June 30, 2007 as compared to
the corresponding period of the prior year.
The Company recorded a non-cash loss on extinguishment of debt of
$76,635 during the first six months of 2007. The 2007 loss of $76,635
represented the value of shares of common stock issued to a convertible note
pursuant to an April 13, 2007 settlement.
The fair value adjustment for outstanding warrants and options as of
June 30, 2007 resulted in the recognition of non-cash expense of $5,236,120 for
the three months ended June 30, 2007 as compared to a non-cash income for the
corresponding period of the prior year of $1,441,491. 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 June 30, 2007 and June 30,
2006, the Company had 12,416,713 and 2,304,500 options and warrants subject of
liability treatment, the trading value of the Company's common stock was $0.76
and $1.25 per share and the volatility factor was 218% and 271%, respectively.
The embedded conversion option valuation for the quarter ended June 30,
2007 resulted in expense of $567,904. This expense is the result of the change
in value of conversion option associated with the issuance of convertible notes
totaling $1,200,000 with a conversion price at a 45% to 50% 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 a net loss during the quarter ended June 30, 2007 of
$8,288,612 as compared to a net loss of $532,995 in the corresponding period in
2006. The net loss for the quarter ended June 30, 2007 includes non-cash expense
from warrant and option liability revaluation of $5,236,120, non-cash general
and administrative expenses of $489,516 from stock-based compensation,
depreciation and amortization expense of $225,716, non-cash loss on
extinguishment of debt of $76,635 and non-cash interest expense of $474,498
attributed to the issuance of securities and related amortization of the
resulting debt discount.
The net loss for the quarter ended June 30, 2006, of $532,995 includes
non-cash general and administrative expenses of $26,538 from stock-based
compensation, depreciation and amortization expense of $80,048, and non-cash
interest expense of $942,976 attributed to the issuance of securities and
related amortization of the resulting debt discount.
Six-Month Periods Ended June 30, 2007 and 2006 (six months)
- -----------------------------------------------------------
REVENUE
Revenues increased for the six months ended June 30, 2007, compared to
the corresponding period ended June 30, 2006 as follows:
Percent Percent
of of
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $3,553,208 88% $2,503,146 84% 42%
Airline tickets and related fees 461,987 12% 457,919 15% 1%
General service agreement fees . - -% 35,980 1% -%
---------- ------- ---------- ------- ------
Total .......................... $4,015,195 100% $2,997,045 100% 34%
========== ======= ========== ======= ======
39
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 six 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.
COST OF REVENUE
Cost of revenues increased for the six months ended June 30, 2007,
compared to the corresponding period ended June 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue
---------- ------- ---------- -------
Vacation packages .............. $3,219,218 91% $2,023,336 81%
Airline tickets and related fees 22,655 5% 134,236 29%
---------- ------- ---------- -------
Total .......................... $3,241,873 81% $2,157,572 72%
========== ======= ========== =======
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 six
months ended June 30, 2007 as compared to the corresponding period of 2006 and
the percentage of cost of revenues to revenues increased. The increase in cost
of revenues is the result of our having a full six 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 increase in the
percentage of cost of revenue to revenue is the result of certain vacation
packages sold at or below cost stemming from employee training issues causing
late procurement of certain vacation package components thus increasing product
costs to the Company. The Company believes it has resolved these training issues
and expects cost of revenues as a percentage of revenues to return to its
historical percentages.
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 decreased for the six months ended June 30, 2007, compared
to the corresponding period ended June 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $ 333,990 9% $ 479,810 19% (30%)
Airline tickets and related fees 439,332 95% 323,683 71% 36%
General service agreement fees . - -% 35,980 100% -%
---------- ------- ---------- ------- ------
Total .......................... $ 773,322 19% $ 839,473 28% (8%)
========== ======= ========== ======= ======
40
Our gross profit decreased for the six months ended June 30, 2007 as
compared to the corresponding period of 2006 and the percentage of gross profit
to revenues decreased. The decrease in gross profit between periods is the
result certain vacation packages sold at or below cost stemming from employee
training issues causing late procurement of certain vacation package components
thus increasing product costs to the Company. The Company believes it has
resolved these training issues and expects the gross profit percentage to return
to its historical
OPERATING EXPENSES
Our operating expenses increased throughout the Company for the six
months ended June 30, 2007, compared to the corresponding period ended June 30,
2006 as follows:
2007 2006
------------------------------- ----------------------------
Stock- Stock-
Percent Based Percent Based
of Compen- of Compen-
Total Revenue sation Total Revenue sation
---------- ------- -------- ---------- ------- -------
Employee compensation .......... $1,079,194 27% $ - $1,023,078 34% $ -
Financial consulting ........... 471,164 12% 303,266 102,505 3% 42,036
Legal expense .................. 104,459 3% - 25,911 1% -
Depreciation & amortization .... 467,948 12% - 84,561 3% -
Internal accounting and external
auditing expense .............. 207,850 5% - 346,787 12% -
Director fees .................. 197,348 5% 173,232 - - -
Investor relations ............. 385,892 9% 313,800 26,000 1% -
Other G&A expenses ............. 867,746 21% - 757,059 25% -
---------- ------- -------- ---------- ------- -------
Total .......................... $3,781,601 94% $790,298 $2,365,901 79% $42,036
========== ======= ======== ========== ======= =======
Operating expenses for the six months ended June 30, 2007 were
$3,781,601 compared to $2,365,901 for the corresponding period for 2006. This
increase is the result of having a full six 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 94% for the six months ended
June 30, 2007 as compared to 79% 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 six 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 six
months ended June 30, 2007 included $790,298 in stock-based compensation
representing the fair value of grants to common stock, warrants and options to
these parties as compared to $42,036 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.
41
OTHER INCOME / EXPENSE
Our interest expense decreased for the six months ended June 30, 2007,
compared to the quarter ended June 30, 2006 as follows:
2007 2006
---- ----
Regular interest expense ............................. $ 516,794 $ 165,149
Amortization of debt discount on convertible debt .... 1,038,891 2,019,746
---------- ----------
Total ................................................ $1,555,685 $2,184,895
========== ==========
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 six months of 2007. The
increase in accrued interest on outstanding debt obligations is a result of
greater borrowing levels during the six months ended June 30, 2007 as compared
to the corresponding period of the prior year.
The Company recorded a non-cash loss on extinguishment of debt of
$76,635 during the first six months of 2007. The 2007 loss of $76,635
represented the value of shares of common stock issued to a convertible note
holder pursuant to an April 13, 2007 settlement. The 2006 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
June 30, 2007 resulted in the recognition of non-cash expense of $2,262,115 for
the six months ended June 30, 2007 as compared to a non-cash expense for the
corresponding period of the prior year of $778,551. 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 June 30, 2007 and June 30,
2006, the Company had 12,416,713 and 2,304,500 options and warrants subject of
liability treatment, the trading value of the Company's common stock was $0.76
and $1.25 per share and the volatility factor was 218% and 271%, respectively.
The embedded conversion option valuation for the six months ended June
30, 2007 resulted in expense of $583,183. This expense is the result of the
change in value of conversion option associated with the issuance of convertible
notes totaling $1,200,000 with a conversion price at a 45% to 50% 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 a net loss during the six months ended June 30, 2007 of
$7,484,259 as compared to a net loss of $4,693,304 in the corresponding period
in 2006. The net loss for the six months ended June 30, 2007 includes non-cash
expense from warrant and option liability revaluation of $2,262,115, non-cash
general and administrative expenses of $790,298 from stock-based compensation,
depreciation and amortization expense of $467,948, and non-cash interest expense
of $1,038,891 attributed to the issuance of securities and related amortization
of the resulting debt discount.
42
The net loss for the quarter ended June 30, 2006 includes non-cash
expense from warrant and option liability revaluation of $778,551, non-cash
general and administrative expenses of $42,036 from stock-based compensation,
depreciation and amortization expense of $84,561, non-cash loss on
extinguishment of debt of $208,452 and non-cash interest expense of $2,019,746
attributed to the issuance of securities and related amortization of the
resulting debt discount.
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 June 30, 2007
At June 30, 2007, we had cash of $289,224. The following table reflects
the cash flow activities during the first six months of 2007 and 2006:
2007 2006
---- ----
Cash used by operating activities ............. $ (601,046) $(1,728,848)
Cash provided by (used in) investing activities 745 (65,762)
Cash provided by financing activities ......... 685,614 1,895,687
----------- -----------
Increase (decrease) in cash ................... $ 85,313 $ 101,077
=========== ===========
Operating activities
For the six months ended June 30, 2007, the Company used cash in
operating activities of $601,046. Cash was used to fund the Company's loss from
operations of $3,781,601 offset by non-cash expenses consisting of general and
administrative expenses of $790,298 from stock-based compensation and
depreciation and amortization expense of $467,948. Cash used for operations
included an increase in accounts receivable of $127,454 and prepaid customer
travel costs of $208,467 and a decrease in deferred revenues of $562,256. Cash
was generated from operations by decreasing other assets by $38,540 and
increasing current liabilities by $2,545,232.
Investing activities
For the six months ended June 30, 2007, the Company provided cash from
investing activities of $745 by converting investments to cash.
Financing activities
For the six months ended June 30, 2007, the Company provided cash from
financing activities of $685,614. Cash was received from the proceeds of a
$750,000 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 $85,000, $46,664
repayment of an acquisition payable and principal payments on capital leases of
$15,222.
43
Primary source of liquidity
As of June 30, 2007, our primary source of liquidity was $289,224 of
cash and $262,342 of accounts receivable. At June 30, 2007, the Company had a
working capital deficit of $19,066,504, primarily due to warrant and option
liability of $8,910,751, embedded conversion option liability of $1,850,259,
acquisitions payable of $1,393,336, and convertible notes payable of $4,355,792
partially offset by debt discount of $1,011,115. The convertible notes payable
consists of promissory notes convertible into approximately 6,500,000 shares of
the Company's common stock as of June 30, 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 June 30, 2007, the Company has
outstanding warrants, non-plan and plan options to purchase 12,416,713, 950,000
and 99,762 shares of the Company's common stock with weighted average exercise
prices of $1.25, $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 June 30, 2007, the Company had total assets of $9,539,020, of which
non-current assets consisted of $8,097,179, goodwill of $2,902,196, intangible
assets of $3,936,850, deposits of $99,735, debt issue cost of $144,198 and
$1,014,200 of property and equipment, including $920,097 relating to the
purchase and implementation of our TourScape software. Total liabilities were
$21,209,004, including long-term liabilities of $700,659. Total shareholders'
deficit was $11,669,984. On June 30, 2007, we were in default on $1,482,500 in
notes payable. We anticipate settling the balance owing on these notes payable
through issuance of common stock also; however, as of August 14, 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 convertible
debt and 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 June 30, 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
44
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.
OFF BALANCE SHEET ARRANGEMENTS
The Company has no off balance sheet arrangements.
ITEM 3. CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including the Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Securities Exchange Act of 1934, as amended. Based upon that
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that, as of the end of the period covered in this report, our disclosure
controls and procedures were effective to ensure that information required to be
disclosed by the Company in reports that it files under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods prescribed by SEC rules, regulations and forms, and that material
information relating to our consolidated operations 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 during the period when our periodic reports are being prepared.
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.
45
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.
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. On June 30, 2007 this matter was
resolved and the Company issued 50,000 shares of its common stock with a fair
value on the date of grant of $38,000 or $0.76 per share in settlement of this
dispute. The Company has previously accrued $29,333 related to this matter and
charged an additional $8,667 to operations on June 30, 2007.
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
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ITEM 5. OTHER INFORMATION
On August 1, 2007, the Company entered into an Amendment to Securities
Purchase Agreement, Secured Convertible Debenture and Security Agreement with
Trafalgar Capital Specialized Investment Fund, Luxembourg ("Trafalgar") under
which (i) the exercise price of the Warrants issued to Trafalgar pursuant to the
convertible debt financing which closed on July 11, 2007 (the "Financing") was
reduced to $0.23 per share, provided, however, that if after registration of the
shares issuable upon exercise of the Warrants, shares of the Company's common
stock trade above $0.75 per share for 30 consecutive trading days, the exercise
price of the Warrants will be increased to $0.50 per share; (ii) the Company
agreed to issue to Trafalgar a warrant exercisable for an additional 5 million
shares at $0.23 per share, provided, however, that if after registration of the
shares issuable upon exercise of the Warrants, shares of the Company's common
stock trades above $0.75 per share for 30 consecutive trading days, the exercise
price of this Warrant will be increased to $0.646 per share and the number of
shares exercisable pursuant to the Warrant will be reduced to 2 million; and
(iii) the Fixed Price of the Convertible Debenture was reduced to $0.23.
ITEM 6. EXHIBITS
10.1 Unsecured Convertible Promissory Note dated June 15, 2007 to Michael
Pisani.
10.2 Unsecured Convertible Promissory Note dated June 15, 2007 to Seaside
Capital II, LLC.
10.3 Amendment to Securities Purchase Agreement, Secured Convertible
Debenture and Security Agreement dated August 1, 2007, with Trafalgar
Capital Specialized Investment Fund, Luxembourg.
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.
47
SIGNATURES
In accordance with the requirements of the Exchange Act the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: August 14, 2007 DYNAMIC LEISURE CORPORATION
By: /s/ Daniel G. Brandano
----------------------
Daniel G. Brandano
Chief Executive Officer
EXHIBIT INDEX
10.1 Unsecured Convertible Promissory Note dated June 15, 2007 to Michael
Pisani.
10.2 Unsecured Convertible Promissory Note dated June 15, 2007 to Seaside
Capital II, LLC.
10.3 Amendment to Securities Purchase Agreement, Secured Convertible
Debenture and Security Agreement dated August 1, 2007, with Trafalgar
Capital Specialized Investment Fund, Luxembourg.
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.
48