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 SEPTEMBER 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 November 19, 2007, the registrant had 15,644,495 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 SEPTEMBER 30, 2007
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited):
Consolidated Balance Sheets
as of September 30, 2007, and December 31, 2006 (Unaudited) ...... 1
Consolidated Statements of Operations for the three and
and nine months ended September 30, 2007 and 2006 (Unaudited) .... 2
Consolidated Statement of Changes in Stockholders' Deficit
for the nine months ended September 30, 2007 (Unaudited) ......... 3
Consolidated Statements of Cash Flows
for the nine months ended September 30, 2007 (Unaudited) ......... 4
Notes to Consolidated Financial Statements (Unaudited) ........... 5
Item 2. Management's Discussion and Analysis or Plan of Operation ........ 37
Item 3. Controls and Procedures .......................................... 50
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................................ 51
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds ...... 52
Item 5. Other Information ................................................ 52
Item 6. Exhibits ......................................................... 52
Signatures ................................................................ 53
Exhibit Index ............................................................. 53
i
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
SEPTEMBER 30, DECEMBER 31,
2007 2006
(UNAUDITED)
------------ ------------
Current Assets
Cash ........................................... $ 213,215 $ 203,911
Investments, restricted ........................ 127,097 127,842
Accounts receivable, net of an
allowance of $5,551 and $5,551 ............... 163,126 139,321
Prepaid travel ................................. 592,051 515,061
Other current assets ........................... 58,591 78,190
------------ ------------
Total Current Assets ......................... 1,154,080 1,064,325
------------ ------------
Property and equipment, net ...................... 967,895 1,076,669
------------ ------------
Other Assets
Goodwill ....................................... 2,902,196 2,902,196
Intangible assets, net ......................... 3,750,968 4,307,505
Deposits ....................................... 100,595 99,735
Debt issue costs, net .......................... 311,358 94,022
------------ ------------
Total Other Assets ........................... 7,065,117 7,403,458
------------ ------------
Total Assets ................................. $ 9,187,092 $ 9,544,452
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Convertible promissory notes, net of
discount of $527,552 and $266,471 ............ $ 3,828,240 $ 2,046,187
Notes payable, current portion ................. 386,588 386,245
Acquisitions payable ........................... 1,288,793 1,440,000
Convertible promissory note to related party ... 350,000 -
Accounts payable ............................... 1,712,850 752,152
Accounts payable to related parties ............ 261,643 65,930
Accrued compensation ........................... 59,269 74,707
Accrued interest ............................... 687,056 652,823
Other accrued liabilities ...................... 232,959 294,271
Capital lease obligation ....................... 36,893 34,152
Deferred revenue and customer deposits ......... 1,250,077 1,276,913
Due to employee ................................ 110,000 50,000
Warrant and option liability ................... 2,697,044 5,419,729
Embedded conversion option liability ........... 3,458,891 667,076
------------ ------------
Total Current Liabilities .................... 16,360,303 13,160,185
------------ ------------
Long-Term Liabilities
Convertible promissory notes, net of
current portion, net of discount
of $1,612,480 and $624,671 ................... 697,520 2,225,329
Convertible promissory note to related party ... - 350,000
Notes payable, net of current portion .......... - 343
Capital lease obligation, net of current portion 49,584 73,448
------------ ------------
Total Long-Term Liabilities .................. 747,104 2,649,120
------------ ------------
Total Liabilities ............................ $ 17,107,407 $ 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, 14,844,495 and 12,101,195
issued and outstanding ....................... 148,445 121,012
Common stock issuable, at par value
(130,000 shares) ............................. 1,300 1,300
Additional paid-in capital, net of
deferred consulting fees of $51,536 .......... 7,487,696 5,107,537
Accumulated deficit ............................. (15,557,756) (11,494,702)
------------ ------------
Total Stockholders' Deficit .................. (7,920,315) (6,264,853)
------------ ------------
Total Liabilities and Stockholders' Deficit .. $ 9,187,092 $ 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 NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- ---------------------------
2007 2006 2007 2006
(unaudited) (unaudited) (unaudited) (unaudited)
------------ ------------ ------------ ------------
Total revenues ................................ $ 2,162,863 $ 1,299,505 $ 6,178,058 $ 4,307,315
Cost of revenues .............................. 1,778,193 876,138 5,020,066 3,041,475
------------ ------------ ------------ ------------
Gross Profit ................................ 384,670 423,367 1,157,992 1,265,840
Operating Expenses
Employee Compensation ....................... 546,874 592,152 1,626,068 1,615,230
Financial consulting, includes $84,750,
$663,576, $388,016 and $705,612
stock-based compensation .................. 120,786 702,777 591,950 805,282
Legal expense ............................... 51,478 50,412 155,937 76,323
Depreciation and amortization expense ....... 292,141 336,221 760,089 420,782
Internal accounting and external auditing
expense ................................... 83,555 142,949 291,405 489,736
Director fees, includes $54,116, $270,000,
$227,348 and $270,000 stock-based
compensation .............................. 54,116 272,000 251,464 272,000
Investor relations, includes $73,714,
$157,100, $387,514 and $157,100 stock-based
compensation .............................. 77,735 157,100 463,627 183,100
Other general and administrative expenses .. 300,408 235,281 1,168,154 992,340
------------ ------------ ------------ ------------
Total Operating Expenses .................. 1,527,093 2,488,892 5,308,694 4,854,793
------------ ------------ ------------ ------------
Loss from Operations ...................... (1,142,423) (2,065,525) (4,150,702) (3,588,953)
Other Income (Expense)
Interest income ............................. 746 2,668 2,246 15,710
Interest expense, includes $705,841,
$1,111,633, $1,744,732 and $2,688,414
in debt discount amortization ............. (1,193,809) (1,333,589) (2,749,494) (3,518,484)
Loss on extinguishment of debt .............. - - (76,635) (208,452)
Warrant and option valuation income ......... 7,365,323 817,101 5,103,208 38,550
Embedded conversion option valuation
(expense) ................................... (1,608,632) - (2,191,815) -
Loss on disposal of fixed assets ............ - (42,667) - (42,667)
Other income (expense) ...................... - - 138 (8,020)
------------ ------------ ------------ ------------
Total Other Income (Expense), net ......... 4,563,628 (556,487) $ 87,648 $ (3,723,363)
------------ ------------ ------------ ------------
Net Income (Loss) ......................... $ 3,421,205 $ (2,622,012) $ (4,063,054) $ (7,312,316)
============ ============ ============ ============
Net Income (Loss) per Share:
Basic ....................................... $ 0.24 $ (0.24) $ (0.30) $ (0.77)
============ ============ ============ ============
Diluted ..................................... $ 0.04 $ (0.24) $ (0.30) $ (0.77)
============ ============ ============ ============
Weighted average number of shares outstanding
during the period:
Basic ................................... 14,574,930 10,925,261 13,585,651 9,543,607
============ ============ ============ ============
Diluted ................................. 37,083,376 10,925,261 13,585,651 9,543,607
============ ============ ============ ============
See accompanying notes to the unaudited consolidated financial statements.
2
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
For the Nine Months Ended September 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 ......... 1,120,000 11,200 - - 945,964 - 957,164
Common stock
issued in
notes payable
waiver agreement . 500,000 5,000 - - 135,000 - 140,000
Value of options
issued for
services ......... - - - - 24,116 - 24,116
Reclassification
from warrant
and option
liability ........ - - - - 85,447 - 85,447
Net Income (Loss) .. - - - - - (4,063,054) (4,063,054)
---------- -------- ------- ------ ---------- ------------ -----------
BALANCE AT
SEPTEMBER 30, 2007 14,844,495 $148,445 130,000 $1,300 $7,487,696 $(15,557,756) $(7,920,315)
========== ======== ======= ====== ========== ============ ===========
See accompanying notes to the unaudited consolidated financial statements.
3
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
FOR THE NINE FOR THE NINE
MONTHS ENDED MONTHS ENDED
SEPTEMBER 30, 2007 SEPTEMBER 30, 2006
------------------ ------------------
(unaudited) (unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................ $(4,063,054) $(7,312,316)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation ......................................... 108,774 36,697
Amortization of intangible assets .................... 556,537 258,526
Amortization of debt issue costs ..................... 94,778 125,559
Loss on extinguishment of debt ....................... - 208,452
Amortization of debt discount to interest expense .... 1,744,732 3,131,379
Common stock and warrants for services ............... 1,053,628 965,676
Common stock for debt waiver ......................... 140,000 -
Embedded conversion option valuation expense ......... 2,191,815 -
Warrant and option valuation income .................. (5,103,208) (38,550)
Loss on disposal of assets ........................... - 42,667
(Increase) decrease in assets and liabilities:
Accounts receivable .................................. (23,805) 260,561
Prepaid assets ....................................... (76,990) (89,754)
Other assets ......................................... 18,739 (111,947)
Accounts payable ..................................... 1,156,411 291,396
Accrued expenses ..................................... 578,982 277,418
Deferred revenue and customer deposits................ (26,836) (427,310)
----------- -----------
Net Cash Used In Operating Activities ................ (1,649,497) $(2,381,546)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Change in investments .................................... 745 (44,200)
Acquisition of property and equipment .................... - (35,768)
Acquisition of business .................................. - (41,077)
----------- -----------
Net Cash Provided BY (Used In) Investing Activities .. 745 (121,045)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from convertible promissory notes ............... 2,060,000 2,310,000
Repayment of convertible promissory notes ................ - (345,158)
Proceeds from overdraft .................................. - (232)
Proceeds from line of credit ............................. - 75,214
Repayments of notes payable .............................. - (1,848)
Proceeds from employee advances .......................... 60,000 -
Debt issue costs ......................................... (312,114) (202,223)
Repayment of acquisition payable ......................... (151,207) -
Repayment of capital leases .............................. (21,123) (447)
Proceeds from common stock issuance ...................... 22,500 923,156
----------- -----------
Net Cash Provided By Financing Activities ............ 1,658,056 2,758,462
----------- -----------
Net Increase in Cash ....................................... 9,304 255,871
Cash at Beginning of Period ................................ 203,911 38,699
----------- -----------
Cash at End of Period ...................................... $ 213,215 $ 294,570
=========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for income taxes ............. $ - $ -
=========== ===========
Cash paid during the period for interest ................. $ 147,532 $ 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 ............................. $ 2,993,622 $ 2,030,202
=========== ===========
Conversion option liability related to promissory note ... $ 600,000 $ 1,954,950
=========== ===========
Reclassification of FV of warrants and options from equity $ 85,447 $ -
=========== ===========
Promissory notes converted to common stock ............... $ 825,000 $ 725,000
=========== ===========
Accrued interest converted to promissory note principal .. $ 268,134 $ 61,652
=========== ===========
See accompanying notes to the unaudited consolidated financial statements.
4
DYNAMIC LEISURE CORPORATION AND SUBSIDIARIES
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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" or
"the Company") (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 September 30, 2007, and December 31, 2006 were
$30,360 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. At September 30, 2007, the Company had one such amount that was in excess
of such limits by $145,442; however, the Company has not experienced any losses
on such accounts to date.
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 airlines and
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 nine months ended September 30, 2007.
6
Letters of Credit and Restricted Investments
At September 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 September 30, 2007, also includes
$10,000 restricted to cover a letter of credit for a seller of travel license.
Deferred Revenue And Customer Deposits
Deferred revenue and customer deposits 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 nine
months ended September 30, 2007 and 2006, the Company's advertising expense
totaled $29,761 and $15,367, 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.
8
Basic and Diluted Net Income (Loss) Per Share
Basic net income (loss) per common share (Basic EPS) excludes dilution
and is computed by dividing net income (loss) by the weighted average number of
common shares outstanding during the period. Diluted net income per share
(Diluted EPS) reflects the potential dilution that could occur if stock options
or other contracts to issue common stock, such as convertible notes, were
exercised or converted into common stock. Diluted loss per share for the three
months ended September 30, 2006, and the nine months ended September 30, 2007
and 2006, does not include potential common shares as their effect would be
anti-dilutive.
The following is a reconciliation of basic net income per share to
diluted net income per share for the three months ended September 30, 2007:
Earnings per share from continuing operations:
- ---------------------------------------------
Income from continuing operations ............................. $ 3,421,205
Preferred stock dividends ..................................... -
------------
Income from continuing operations applicable to common stock .. 3,421,205
Effect of dilutive securities:
Interest expense including debt discount amortization ....... (659,953)
Warrant/option valuation income ............................. (2,776,193)
Embedded conversion option valuation expense ................ 1,608,632
------------
Income - diluted .............................................. $ 1,593,691
============
Earnings per share:
Basic income per share ...................................... $ 0.24
============
Diluted income per share .................................... $ 0.04
============
Weighted average common shares outstanding - basic ............ 14,574,930
Potential shares exercisable - warrants ....................... 3,027,027
Potential shares exercisable - convertible notes .............. 19,481,419
------------
Weighted average shares outstanding - diluted ................. 37,083,376
============
Potential shares excluded from above weighted average share
calculations due to their anti-dilutive effect include:
- -----------------------------------------------------------
Upon exercise of plan options .................................. 99,762
Upon exercise of non-plan options .............................. 850,000
Upon exercise of warrants ...................................... 17,389,686
Upon conversion of convertible promissory notes ................ 7,564,268
Upon conversion of convertible promissory notes - related party 388,889
Fair Value of Financial Instruments
Statement of Financial Accounting Standards No. 107, "Disclosures about
Fair Value of Financial Instruments," requires disclosures of information about
the fair value of certain financial instruments for which it is practicable to
estimate the value. For purpose of this disclosure, the fair value of a
financial instrument is the amount at which the instrument could be exchanged in
a current transaction between willing parties, other than in a forced sale or
liquidation.
The Company's financial instruments include cash, accounts receivable,
accounts payable, accrued liabilities, notes payable and capital leases. The
fair values of cash, accounts receivable, accounts payable and accrued
liabilities approximated carrying values due to the short-term nature of these
instruments. Fair values for notes payable and capital leases are not readily
available, but the carrying values are believed to approximate fair value.
9
NOTE 3 GOING CONCERN
For the nine months ended September 30, 2007, the Company had a loss
from operations of $4,150,702, used net cash in operations of $1,649,497, a
working capital deficiency of $15,206,223, and a stockholders' deficiency of
$7,920,315. In addition, the Company is in default on convertible promissory
notes totaling $1,482,500 and unsecured promissory notes of $156,434 as of
November 19, 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 September 30, 2007, the Company had $6,665,792 in outstanding
Convertible Notes payable to third parties (see Note 6) including the notes in
default as described above, which are convertible into 27,045,687 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 September 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.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
Estimated
Useful Life September 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 ... (155,725) (46,951)
----------- -----------
Property and equipment, net ..... $ 967,895 $ 1,076,669
=========== ===========
Depreciation expense was $108,774 for the nine months ended September
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.
10
NOTE 5 INTANGIBLE ASSETS
Intangible assets at September 30, 2007, are as follows:
Accumulated Net Book
Life Cost Amortization Value
- ---------------------------- -------- ---------- ------------ ----------
Airline contracts .......... 7 yrs. $2,820,000 $ 548,338 $2,271,662
Hotel contracts ............ 7 yrs. 422,500 66,512 355,988
URLs ....................... 10 yrs. 1,011,000 134,659 876,341
Mailing list ............... 3 yrs. 150,000 16,072 133,928
General service agreement .. 2.5 yrs. 348,413 235,364 113,049
---------- ---------- ----------
$4,751,913 $1,000,945 $3,750,968
========== ========== ==========
Amortization expense for the nine months ended September 30, 2007
totaled $556,537. Amortization of intangible assets in future years is expected
to be as follows:
2007 $ 746,496 (includes $556,537 recognized
for nine months ended 9/30/07)
2008 $ 607,132
2009 $ 607,132
2010 $ 607,132
2011 $ 607,132
Thereafter $ 1,132,481
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 September 30, 2007:
Original Debt Discount Components
------------------------------------ Cumulative
Beneficial Amortization
Interest Balance Notes Balance Conversion Warrant As Of
Rate 12/31/2006 Converted Borrowings 9/30/2007 Feature Liability Total 9/30/2007
- -------- ---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
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 2,975,390
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 1,000,000 417,743
8% (U) - - 150,000 150,000 - - - -
10% (U) - - 50,000 50,000 50,000 - 50,000 50,000
10% (U) - - 150,000 150,000 150,000 - 150,000 150,000
12% (S) - - 1,310,000 1,310,000 - 1,127,500 1,127,500 97,277
---------- --------- ---------- ---------- ---------- ---------- ---------- ------------
$5,162,658 $(825,000) $2,328,134 $6,665,792 $2,622,322 $5,256,768 $7,879,090 $ 5,739,058
========== ========= ========== ========== ========== ========== ========== ============
(S) - Secured
(U) - Unsecured
11
Unamortized Net Book
Principal Discount Value
----------- ----------- -----------
Current maturities ....... $ 4,355,792 $ 527,552 $ 3,828,240
Long-term portion ........ 2,310,000 1,612,480 697,520
----------- ----------- -----------
Total .................... $ 6,665,792 $ 2,140,032 $ 4,525,760
=========== =========== ===========
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) 2,250,000 527,552 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) 1,000,000 582,257 10/25/09 (H) (H) 5,000,000 1.50 3.0 154% 4.58%
8% (U) 150,000 - 12/1/07 (I) 1.00 - - - - -
10% (U) 50,000 - 6/29/09 (J) (J) 132,979 0.376 0.3 218% 4.94%
10% (U) 150,000 - 6/29/09 (J) (J) 398,936 0.376 0.3 218% 4.94%
12% (S) 1,310,000 1,030,223 6/29/09 (K) (K) 3,000,000 0.85 2.0 218% 4.89%
---------- -----------
$6,665,792 $ 2,140,032
========== ===========
(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.
(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 $0.09 per share as of
September 30, 2007.
(I) - On October 25, 2007, the Company extended the maturity date of this debt
to December 1, 2007.
(J) - Balance is due at maturity plus all accrued interest. The debt is
convertible at the lower of $0.23 per share or 80% of the lowest daily
closing bid price of the Company's common stock for five (5) trading days
immediately prior to conversion.
(K) - Balance is due at maturity plus all accrued interest. The debt is
convertible at the lower of $0.23 per share or 80% of the lowest daily
closing bid price of the Company's common stock for five (5) trading days
immediately prior to conversion.
12
All debt discounts are amortized over the terms of the respective
Notes. The amortization of the debt discount was $1,744,732 and $2,688,414 for
the nine months ended September 30, 2007 and 2006, respectively, and was
included in interest expense in the accompanying consolidated financial
statements.
In total as of November 19, 2007, the Company was in default on
third-party convertible promissory notes of $1,482,500.
April 2007 - Miller Note
- ------------------------
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 matured on August 13, 2007.
On October 25, 2007, the Company entered into an agreement with Miller
Investments to extend the maturity date on the Note from August 15, 2007 to
December 15, 2007. In consideration for this loan extension, the Company agreed
to issue Miller Investments 150,000 shares of the Company's common stock valued
at $34,500 or $0.23 per share (the closing market price of the Company's common
stock on the day of issuance). This value will be recorded as debt discount and
amortized to interest expense over the extended term of the loan.
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.
June 2007 - Pisani and Seaside Capital 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 terms of these notes were structured so that if in the event the
Company consummated an equity or debt financing, prior to the maturity date of
October 15, 2007, pursuant to which it sells shares of its common stock (or
securities convertible into or exercisable for shares of its common stock) with
an 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 in the
Qualified Financing. On July 11, 2007, the Company consummated a Qualified
Financing with Trafalgar Capital Specialized Investment Fund, Luxembourg
("Trafalgar"), and the Qualified Financing was later amended on August 1, 2007.
As a result, the terms of these notes are identical to the convertible
debentures issued to Trafalgar, as amended.
The notes, as conformed to the Trafalgar debentures, mature on June 29,
2009, bear interest at 12% per annum, compounded monthly (9.5% after
effectiveness of a Registration Statement required under the Trafalgar
agreement) and are convertible into common stock at the lesser of (a) $0.23 per
share 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.
13
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.
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.
14
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.
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.
15
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
September 30, 2007; therefore, there was no effect of implementing this
standard.
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
16
(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.
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
17
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.
AJW - November 9, 2006 Convertible Term Notes
- ---------------------------------------------
On November 9, 2006, the Company entered into a Securities Purchase
Agreement with AJW Partners, LLC. ("Partners"), AJW Offshore, Ltd. ("Offshore"),
AJW Qualified Partners, LLC ("Qualified") and New Millenium Capital Partners,
II, LLC ("Millenium"). Partners, Offshore, Qualified and Millenium are
collectively referred to as the "Purchasers", whereby the Company sold to the
Purchasers Secured Convertible Term Notes (the "Notes") in the aggregate
principal amount of One Million Dollars ($1,000,000). The $1,000,000 was funded
in two tranches ($600,000 on November 9, 2006, and $400,000 on January 5, 2007).
The offering was made pursuant to Section 4(2) of the Act, as amended. The Notes
bear interest at 6% per annum, unless the common stock of the Company is greater
than $1.25 per share for each trading day of a month, in which event no interest
is payable during such month. The Company's obligations under the Notes are
collateralized by a security interest in substantially all of the Company's
assets. The proceeds of the offering were used to repay certain indebtedness and
for working capital.
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.
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.
The Company had an obligation to register shares of its common stock
pursuant to the terms of a Registration Rights Agreement with the note holders.
The Company believes that it no longer has an obligation to register these
shares as a result of the July 31, 2007 settlement described below and the
acquisition of Notes by Trafalgar Capital Specialized Investment Fund as
described below. 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.
18
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 anti-dilution provision c) to provide the
holders of the warrants the right to receive securities or assets which may be
issued or payable upon 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.
On August 18, 2007, Trafalgar Capital Specialized Investment Fund,
Luxembourg acquired the notes held by the Subscribers rather than the Company
repaying the notes directly as agreed to in the Company's July 31, 2007
settlement agreement with the Subscribers. On August 6, 2007,the Company issued
the Subscribers 500,000 shares of its common stock valued at $140,000 or $0.28
per share (the closing market price of the Company's common stock on the day of
issuance) as provided for in the settlement agreement and on August 18, 2007
paid the Subscribers $210,000 in cash from proceeds from the issuance of a
convertible debenture to Trafalgar in settlement of all accrued interest due the
Subscribers and claims arising from the Notes. The value of the common stock and
cash consideration totaled $350,000, and $43,160 was applied to accrued interest
and the balance related to settlement charges recorded as interest expense
totaling $306,840 recorded in August 2007.
Trafalgar - July 11, 2007 Secured Convertible Debentures
- --------------------------------------------------------
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 with all
outstanding principal and accrued interest due two years from the date each
tranch is funded. 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.
On August 18, 2007, the Company closed on the remaining funding, issued two-year
convertible debentures aggregating $610,000 to Trafalgar and, as dicussed above,
Trafalgar acquired the secured convertible debentures formerly held by AJW
Partners, LLC, AJW Offshore, Ltd., AJW Qualified Partners, LLC and New Millenium
Capital Partners, II, LLC. The debentures bear 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 LP 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 connection
19
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 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 trade 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.
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 September 30, 2007, the Note had an outstanding
balance of $350,000.
Other Notes Payable
- -------------------
Notes payable consisted of the following:
SEPTEMBER 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 .................... (386,588) (386,245)
--------- ---------
Notes payable, net of current portion $ - $ 343
========= =========
20
At September 30, 2007, the Company was in default of the repayment
terms on certain 5% to 15% unsecured notes aggregating $156,434. This amount is
included in notes payable, current portion on the accompanying consolidated
balance sheet at September 30, 2007.
Capital Lease Obligation
- ------------------------
The Company's capital leases consisted of the following:
SEPTEMBER 30, DECEMBER 31,
2007 2006
------------- ------------
Total Capital Leases .................... $ 86,477 $ 107,600
Less Current Capital Leases ............. (36,893) (34,152)
--------- ---------
Long-term portion of Capital Leases .. $ 49,584 $ 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 nine months ended September 30, 2007, the warrant and option
liability was increased for the fair value of options granted to a director to
purchase 150,000 shares of the common stock that vested during the period,
warrants to purchase 3,000,000 shares of common stock granted on March 5, 2007
pursuant to the MMA Capital, LLC note modification agreement and warrants to
purchase 3,000,000 and 5,000,000 shares of common stock granted on July 11,
2007, and August 1, 2007, respectively, pursuant to the Trafalgar financing.
During the same period, the fair value of warrants exercised and options
forfeited were 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.
21
The Company's warrant and option liability and related revaluation
assumptions are as follows:
11/9/06 Warrant
3/2/05 Variable All Other Total and Option
Convertible Conversion Trafalgar Warrants Warrant Valuation
Note MMA Price Capital and and Option (Income)
Holders Capital Notes Notes Options Liability Expense
----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at
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 at
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 at
6/30/2007 ....... $ 192,006 $ 3,386,604 $ 3,270,960 $ - $ 2,061,181 $ 8,910,751 $ 2,262,115
Value of options
granted for
compensation .... - - - - 24,116 24,116 -
Value of warrants
granted with
debt issuance ... - - - 2,371,981 - 2,371,981 1,244,481
Change in Value ... (163,339) (2,854,267) (2,718,720) (1,187,008) (1,686,470) (8,609,804) (8,609,804)
----------- ----------- ----------- ---------- ----------- ----------- -----------
Balance at
9/30/2007 ....... $ 28,669 $ 532,337 $ 552,240 $1,184,973 $ 398,827 $ 2,697,044 $(5,103,208)
=========== =========== =========== ========== =========== =========== ===========
22
11/9/06
3/2/05 Variable All Other
Convertible Conversion Trafalgar Warrants
Note MMA Price Capital and
Holders Capital Notes Notes Options
----------- -------------- ----------- ---------- ----------------
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 0.5 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 0.2 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 2,812,213
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%
July 11, 2007 Debt Issuance and August 1, 2007 Debt Modification
- ----------------------------------------------------------------
Warrants/options .... 8,000,000
Exercise price ...... $0.23
Market price ........ $0.30
Expected life (years) 5.0
Volatility .......... 218%
Discount rate ....... 4.89%
September 30, 2007
- ------------------
Warrants/options .... 304,500 5,250,000 5,000,000 8,000,000 2,862,213
Exercise price ...... $1.00 $1.00 to $1.50 $1.50 $0.23 $0.485 to $11.25
Market price ........ $0.15 $0.15 $0.15 $0.15 $0.15
Expected life (years) 1.4 1.1 to 2.2 2.0 4.8 1.0 to 3.7
Volatility .......... 232% 232% 232% 232% 232%
Discount rate ....... 3.9% 3.9% 4.01% 4.2% 4.01%
23
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,
June 15, 2007, July 11, 2007, and August 18, 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:
Trafalgar
11/9/06 1/5/07 6/15/07 Capital Total
Variable Variable Variable Variable Embedded Conversion
Conversion Conversion Conversion Conversion Conversion Option
Price Price Option Price Option (Income)
Note Note Note Notes 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
Debt issued to
Trafalgar ........... $ - $ - $ - $1,869,351 $1,869,351 $1,869,351
Change in Value ........ $ (64,971) $ (53,954) $ 17,322 $ (159,116) $ (260,719) $ (260,719)
---------- ---------- ---------- ---------- ---------- ----------
Balance at 9/30/2007 ... $ 893,495 $ 595,664 $ 259,497 $1,710,235 $3,458,891 $2,191,815
========== ========== ========== ========== ========== ==========
24
Trafalgar
11/9/06 1/5/07 6/15/07 Capital
Variable Variable Variable Variable
Conversion Conversion Conversion Conversion
Price Price Option Price
Note Note Note Notes
---------- ---------- ---------- --------------
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%
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%
August 2007 Issued and Amended
- ------------------------------
Principal ............ $1,310,000
Shares upon conversion 8,583,333
Exercise price ....... $0.12 to $0.20
Market price ......... $0.20 to $0.30
Expected life (years) 2.0
Volatility ........... 218%
Discount rate ........ 4.94%
September 30, 2007
- ------------------
Principal ............ $600,000 $400,000 $200,000 $1,310,000
Shares upon conversion 6,417,112 4,278,075 1,923,077 12,596,154
Exercise price ....... $0.09 $0.09 $0.10 $0.10
Market price ......... $0.15 $0.15 $0.15 $0.15
Expected life (years) 2.0 2.0 1.8 1.8
Volatility ........... 232% 232% 232% 232%
Discount rate ........ 4.01% 4.01% 4.01% 4.1%
25
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 nine months ended September
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 nine months
ended September 30, 2007, a total of $155,000 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 nine months ended September 30, 2007, a
total of $397,200 was recorded as equity and charged to operations as an expense
for shares issued in 2006. The remaining unamortized balance of $51,536 as of
September 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.
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.
26
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 nine months
ended September 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.
On July 15, 2007, the Company issued Dana Salvo 100,000 vested shares
of the Company's common stock valued at $51,000 or $0.51 per share determined
using the market stock price as of the date of the grant for consulting services
rendered to the Company. The fair value of $51,000 was charged to consulting
fees on July 15, 2007.
On July 20, 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 $53,000 or $0.53 per share determined using the
market stock price as of the date of the agreement. The agreement is for a term
of six months commencing July 1, 2007, and is renewable at the option of the
Company. The fair value of $53,000 will be amortized to operating expenses over
the six-month term of the agreement.
Common Stock Issued For Debt Modification and Waiver Agreements
- ---------------------------------------------------------------
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 which the Company issued an aggregate of 500,000 shares of the Company's
common stock to the Subscribers as further described in Note 6. These shares
were valued at $140,000 or $0.28 per share (the closing market price of the
Company's common stock on the day of issuance) and this value was charged to
interest expense on July 31, 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.
27
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 vested and unvested warrants and options as
follows:
SEPTEMBER 30,
Exercisable Securities 2007
---------------------- -------------
Warrants ............. $ 20,416,713
Options .............. 1,149,762
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 September 30, 2007 200,000 $ 1.25 5.00 -
========== ====== ==== ====
Exercisable at September 30, 2007 200,000 $ 1.25 5.00 -
========== ====== ==== ====
28
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 ......................... 11,000,000 $ 0.58 3.00 -
Exercised ....................... (33,300) $ 0.68 - -
Forfeited or expired ............ (404,537) $ 0.68 - -
---------- ------ ---- ----
Outstanding at September 30, 2007 20,216,713 $ 0.92 3.05 -
========== ====== ==== ====
Exercisable at September 30, 2007 20,216,713 $ 0.92 3.05 -
========== ====== ==== ====
The weighted average valuation assumptions for grants other than with
the sale of common stock or issuance of debt 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.
On July 11, 2007, pursuant to Trafalgar Capital Specialized Investment
Fund, Luxembourg's purchase of secured convertible debentures, 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.
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 trade 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.
29
Non-Plan Common Stock Options to Non-Employees
- ----------------------------------------------
At September 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 1,000,000 $ 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 cancelled ................................. - $ 0.48
Options forfeited ................................. (150,000) $ 0.70
--------- --------
Non-plan options outstanding at September 30, 2007 1,050,000 $ 0.66
========= ========
Weighted average fair value of options granted
during the nine months ended September 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. An
expense for director fees of $96,464 was recognized 25% on January 8, 2007 with
the balance (excluding the $24,226 related to cancelled options) 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 150,000 shares were vested as of September 30, 2007.
30
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 September 30, 2007; however, 800,000 shares of common stock have been
granted under this plan as of this period end.
At September 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 September 30, 2007 .... 99,762 $ 7.30
========= ========
Plan options exercisable at September 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 September 30, 2007, options to purchase
22,278 shares are outstanding under the 2001 Equity Incentive Plan.
31
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 September 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 September 30,
2007, a total of 800,000 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 September 30, 2007.
Share-Based Compensation
- ------------------------
For the nine months ended September 30, 2007 and 2006, the Company
recognized compensation costs for employees, directors, consultants and others
totaling $1,002,878 and $1,090,676, respectively. These amounts increased the
Company's operating expenses and equity during these periods.
As of September 30, 2007, the Company has $51,536 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 two (2)
months. These costs included $51,536 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.
32
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 nine months ended September 30, 2007. Mr. Dyer, a
former 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 was to pay E. H. Winston & Associates a consulting fee of $10,000 per
month plus reimbursement of all reasonable out-of-pocket expenses. The Company
has recorded $60,000 in professional fees related to the agreement during fiscal
year 2007.
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 was to pay 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 recorded
$50,000 in expenses related to this agreement during fiscal year 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
September 30, 2007, Street Venture Partners LLC owned 1,066,666 shares or
approximately 7.2% 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 September 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 September 30, 2007, Brian J. Brandano owned 292,243 shares or
approximately 2.0% 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.
33
Payable to Employee (Stephen A. Hicks)
- --------------------------------------
At September 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
September 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 nine months ending September
30, 2007 and 2006 was $324,566 and $194,921, respectively.
34
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
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. On October 30, 2007, Stephen Hicks filed
an answer and counterclaim to the Company's complaint filed March 2, 2007,
alleging breach of the Agreement regarding the convertible debenture payable and
other financial matters pursuant to the Agreement. The Company has classified
the convertible debenture as a current liability and has recorded accrued
interest of $204,420 related to this obligation on its consolidated balance
sheet as of September 30, 2007. The Company believes it has recorded all other
financial obligations due under the Agreement.
35
The Company is currently in discussions with Mr. Hicks regarding the
settlement of the matters arising on March 2, 2007 and October 30, 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.
NOTE 14 SUBSEQUENT EVENTS
On October 1, 2007, the Company entered into a six-month consulting
agreement with Pro345, LLC to provide financial and management consulting
services to the Company. Pursuant to this agreement, the Company issued Pro345,
LLC 350,000 vested shares of the Company's common stock valued at $52,500 or
$0.15 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 $52,500 will be amortized to operating
expenses over the six-month term of the agreement beginning October 1, 2007.
On October 15, 2007, the Company issued director David Shapiro 100,000
shares of the Company's common stock valued at $17,000 or $0.17 per share
determined using the market stock price as of the date of grant for professional
services rendered to the Company. The fair value of $17,000 will charged to
operating expenses.
On October 16, 2007, the Company's Board of Director granted 200,000
fully vested shares of the Company's common stock to Dan Brandano, Chairman and
Chief Executive Officer, pursuant to an employment agreement. The common stock
was valued at $18,000 or $0.18 per share (the closing market price of the
Company's common stock on the day of issuance). This value was charged to
director fees in October 2007 for prior service.
On October 25, 2007, the Company entered into an agreement with Miller
Investments to extend the maturity date of a $150,000 promissory note from
August 15, 2007 to December 15, 2007 as further described in Note 6. In
consideration for this note extension, the Company agreed to issue Miller
Investments 150,000 shares of its common stock valued at $34,500 or $0.23 per
share (the closing market price of the Company's common stock on the day of
issuance). This value will be recorded as debt discount and amortized to
interest expense over the extended term of the loan.
36
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 nine months ended September 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.
37
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.
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 September
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 September 30, 2007, a total of 800,000 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
38
January 1, 2006, the Company shall recognize the compensation cost for that
portion of the award for which the requisite service was rendered on or after
January 1, 2006. The fair value for these awards is determined based on the
grant date. As of the date of the recapitalization, there was no further service
obligations related to outstanding options. There was no cumulative effect of
applying SFAS 123(R) at January 1, 2006.
Goodwill and Other Intangibles
The Company accounts for goodwill in a purchase business combination as
the excess of the cost over the fair value of net assets acquired. Business
combinations can also result in other intangible assets being recognized.
Amortization of intangible assets, if applicable, occurs over their estimated
useful lives. Statement of Financial Accounting Standard No. 142, "Goodwill and
Other Intangible Assets" ("SFAS 142") requires testing goodwill for impairment
on an annual basis (or interim basis if an event occurs that might reduce the
fair value of a reporting unit below its carrying value). The Company conducts
the annual review for all of its reporting units during the fourth quarter of
the calendar year.
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.
39
Accounting for Derivatives
The Company evaluates its convertible debt, options, warrants or other
contracts to determine if those contracts or embedded components of those
contracts qualify as derivatives to be separately accounted for under Statement
of Financial Accounting Standards 133 "Accounting for Derivative Instruments and
Hedging Activities" and related interpretations including EITF 00-19 "Accounting
for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company's Own Stock".
The result of this accounting treatment is that the fair value of the
embedded derivative is marked-to-market each balance sheet date and recorded as
a liability. In the event that the fair value is recorded as a liability, the
change in fair value is recorded in the consolidated statement of operations as
an "other income or expense." Upon conversion or exercise of a derivative
instrument, the instrument is marked to fair value at the conversion date and
then that fair value is reclassified to equity. Equity instruments that are
initially classified as equity that become subject to reclassification under
SFAS 133 are reclassified to liability at the fair value of the instrument on
the reclassification.
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 nine months ended September 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.
40
Three-Month Periods Ended September 30, 2007 and 2006 (third quarter)
- ---------------------------------------------------------------------
REVENUE
Revenues increased for the quarter ended September 30, 2007, compared
to the quarter ended September 30, 2006 as follows:
Percent Percent
of of
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $1,940,075 90% $1,044,177 80% 86%
Airline tickets and related fees 222,788 10% 248,093 20% (10%)
General service agreement fees . - -% 7,235 -% 100%
---------- ------- ---------- ------- ------
Total .......................... $2,162,863 100% $1,299,505 100% 66%
========== ======= ========== ======= ======
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 September 30, 2007,
compared to the quarter ended September 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue
---------- ------- ---------- -------
Vacation packages .............. $1,772,459 91% $ 835,374 80%
Airline tickets and related fees 5,734 3% 40,764 16%
---------- ------- ---------- -------
Total .......................... $1,778,193 82% $ 876,138 67%
========== ======= ========== =======
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 September 30, 2007 as compared to the corresponding period of
2006, and the percentage of cost of revenues to revenues increased 15% 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.
41
GROSS PROFIT
Gross profit decreased for the quarter ended September 30, 2007,
compared to the quarter ended September 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $ 167,616 9% $ 208,803 20% (20%)
Airline tickets and related fees 217,054 97% 209,829 85% 3%
General service agreement fees . - -% 4,735 65% -%
---------- ------- ---------- ------- ------
Total .......................... $ 384,670 18% $ 423,367 33% (9%)
========== ======= ========== ======= ======
Our gross profit decreased for the three months ended September 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.
OPERATING EXPENSES
Our operating expenses decreased throughout the Company for the quarter
ended September 30, 2007, compared to the quarter ended September 30, 2006 as
follows:
2007 2006
----------------------------- -------------------------------
Stock- Stock-
Percent Based Percent Based
of Compen- of Compen-
Total Revenue sation Total Revenue sation
---------- ------- -------- ---------- ------- ----------
Employee compensation .......... $ 546,874 25% $ - $ 592,152 46% $ -
Financial consulting ........... 120,786 6% 84,750 702,777 50% 663,576
Legal expense .................. 51,478 2% - 50,412 4% -
Depreciation & amortization .... 292,141 14% - 336,221 26% -
Internal accounting and external
auditing expense .............. 83,555 4% - 142,949 11% -
Director fees .................. 54,116 3% 54,116 272,000 21% 270,000
Investor relations ............. 77,735 4% 73,714 157,100 3% 157,100
Other G&A expenses ............. 300,408 14% - 235,281 32% -
---------- ------- -------- ---------- ------- ----------
Total .......................... $1,527,093 71% $212,580 $2,488,892 192% $1,090,676
========== ======= ======== ========== ======= ==========
Operating expenses for the quarter ended September 30, 2007 were
$1,527,093 compared to $2,488,892 for the corresponding period for 2006. As a
result, our total operating expenses as a percentage of revenues was 71% for the
three months ended September 30, 2007 as compared to 192% for the corresponding
period of 2006. Financial consulting expense decreased as result of less
amortization of consulting agreements entered into in the current and prior
quarters than in 2006. Internal accounting and external auditing expense
42
decreased as the 2006 auditing expense included additional accounting and
auditing services related to the CIL and IRT/ITR acquisitions and filing of a
registration statement. Director fees decreased as a result of less amortization
of share-based compensation in the current quarter compared to the corresponding
period of the prior year. Investor relations expense decreased as a result of
less amortization of service agreements being expensed during the three months
ended September 30, 2007, compared to the same period in 2006. 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 third
quarter of 2007 included $212,580 in stock-based compensation representing the
fair value of grants to common stock, warrants and options to these parties as
compared to $1,090,676 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 September 30,
2007, compared to the quarter ended September 30, 2006 as follows:
2007 2006
---- ----
Regular interest expense ............................. $ 487,968 $ 221,956
Amortization of debt discount on convertible debt .... 705,841 1,111,633
---------- ----------
Total ................................................ $1,193,809 $1,333,589
========== ==========
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 third quarter of 2007. The
increase in regular interest expense on outstanding debt obligations is a result
of greater borrowing levels during the quarter ended September 30, 2007 compared
to the corresponding period of the prior year.
The fair value adjustment for outstanding warrants and options as of
September 30, 2007 resulted in the recognition of non-cash income of $7,365,323
for the three months ended September 30, 2007, compared to non-cash income for
the corresponding period of the prior year of $817,101. 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 September 30, 2007 and 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 $0.15 and $1.16
per share and the volatility factor was 232% and 142%, respectively.
The embedded conversion option valuation for the quarter ended
September 30, 2007 resulted in expense of $1,608,632. This expense is the result
of the change in value of conversion option associated with the issuance of
convertible notes totaling $2,310,000 with a conversion price at a 20% to 45%
discount off the trading price of the Company's common stock. The valuation of
the embedded conversion option is a non-cash expense to the Company.
43
NET INCOME (LOSS)
The Company had net income during the quarter ended September 30, 2007,
of $3,421,205 compared to a net loss of $2,622,012 in the corresponding period
in 2006. The net income for the quarter ended September 30, 2007, includes
non-cash income from warrant and option liability revaluation of $7,365,323,
non-cash general and administrative expenses of $212,580 from stock-based
compensation, depreciation and amortization expense of $292,141, non-cash
interest expense of $705,841 attributed to the issuance of securities and
related amortization of the resulting debt discount and non-cash embedded
conversion option revaluaton expense of $1,608,632.
The net loss for the quarter ended September 30, 2006, was 2,622,012
and includes non-cash general and administrative expenses of $1,090,676 from
stock-based compensation, depreciation and amortization expense of $336,221,
non-cash loss on disposal of fixed assets of $42,667 and non-cash interest
expense of $1,111,633 attributed to the issuance of securities and related
amortization of the resulting debt discount. The non-cash expenses were partly
offset by non-cash income from warrant and option liability revaluation of
$817,101.
Nine-Month Periods Ended September 30, 2007 and 2006 (nine months)
- ------------------------------------------------------------------
REVENUE
Revenues increased for the nine months ended September 30, 2007,
compared to the corresponding period ended September 30, 2006 as follows:
Percent Percent
of of
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $5,493,283 89% $3,547,323 83% 55%
Airline tickets and related fees 684,775 11% 706,012 16% (3%)
General service agreement fees . - -% 53,980 1% -%
---------- ------- ---------- ------- ------
Total .......................... $6,178,058 100% $4,307,315 100% 43%
========== ======= ========== ======= ======
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 nine months of operation in 2007
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 nine months ended September 30,
2007, compared to the corresponding period ended September 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue
---------- ------- ---------- -------
Vacation packages .............. $4,991,677 91% $2,858,710 81%
Airline tickets and related fees 28,389 4% 182,765 26%
---------- ------- ---------- -------
Total .......................... $5,020,066 81% $3,041,475 71%
========== ======= ========== =======
44
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 nine
months ended September 30, 2007 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 nine 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 nine months ended September 30, 2007,
compared to the corresponding period ended September 30, 2006 as follows:
Percent Percent
of of
Related Related
2007 Revenue 2006 Revenue Change
---------- ------- ---------- ------- ------
Vacation packages .............. $ 501,606 9% $ 688,613 19% (27%)
Airline tickets and related fees 656,386 96% 525,747 74% 25%
General service agreement fees . - -% 51,480 95% -%
---------- ------- ---------- ------- ------
Total .......................... $1,157,992 19% $1,265,840 29% (9%)
========== ======= ========== ======= ======
Our gross profit decreased for the nine months ended September 30, 2007
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 percentages.
45
OPERATING EXPENSES
Our operating expenses increased throughout the Company for the nine
months ended September 30, 2007, compared to the corresponding period ended
September 30, 2006 as follows:
2007 2006
------------------------------- -------------------------------
Stock- Stock-
Percent Based Percent Based
of Compen- of Compen-
Total Revenue sation Total Revenue sation
---------- ------- ---------- ---------- ------- ----------
Employee compensation .......... $1,626,068 26% $ - $1,615,230 38% $ -
Financial consulting ........... 591,950 10% 388,016 805,282 19% 705,612
Legal expense .................. 155,937 3% - 76,323 2% -
Depreciation & amortization .... 760,089 12% - 420,782 10% -
Internal accounting and external
auditing expense .............. 291,405 5% - 489,736 11% -
Director fees .................. 251,464 4% 227,348 272,000 - 270,000
Investor relations ............. 463,627 8% 387,514 183,100 4% 157,100
Other G&A expenses ............. 1,168,154 19% - 992,340 23% -
---------- ------- ---------- ---------- ------- ----------
Total .......................... $5,308,694 86% $1,002,878 $4,854,793 113% $1,132,712
========== ======= ========== ========== ======= ==========
Operating expenses for the nine months ended September 30, 2007 were
$5,308,694 compared to $4,854,793 for the corresponding period for 2006. This
increase is the result of having a full nine months of operation in 2007
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 86% for the nine months ended
September 30, 2007 compared to 113% 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 changed as a result of the
vesting of securities granted to directors during the periods. 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 nine
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 nine
months ended September 30, 2007 included $1,002,878 in stock-based compensation
representing the fair value of grants to common stock, warrants and options to
these parties compared to $1,132,712 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.
46
OTHER INCOME / EXPENSE
Our interest expense decreased for the nine months ended September 30,
2007, compared to the quarter ended September 30, 2006 as follows:
2007 2006
---- ----
Regular interest expense ............................. $1,004,762 $ 830,070
Amortization of debt discount on convertible debt .... 1,744,732 2,688,414
---------- ----------
Total ................................................ $2,749,494 $3,518,484
========== ==========
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 nine months of 2007.
The increase in regular interest expense on outstanding debt obligations is a
result of greater borrowing levels during the nine months ended September 30,
2007 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 nine 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
September 30, 2007 resulted in the recognition of non-cash income of $5,103,208
for the nine months ended September 30, 2007 as compared to a non-cash income
for the corresponding period of the prior year of $38,550. 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 September 30, 2007 and 2006,
the Company had 21,416,713 and 2,304,500 options and warrants subject of
liability treatment, the trading value of the Company's common stock was $0.15
and $1.16 per share and the volatility factor was 232% and 142%, respectively.
The embedded conversion option valuation for the nine months ended
September 30, 2007 resulted in expense of $2,191,815. This expense is the result
of the change in value of conversion option associated with the issuance of
convertible notes totaling $2,310,000 with a conversion price at a 20% to 45%
discount off the trading price of the Company's common stock. The valuation of
the embedded conversion option is a non-cash expense to the Company.
47
NET INCOME (LOSS)
The Company a net loss during the nine months ended September 30, 2007,
of $4,063,054 compared to a net loss of $7,312,316 in the corresponding period
in 2006. The net loss for the nine months ended September 30, 2007, includes
non-cash general and administrative expenses of $1,002,878 from stock-based
compensation, depreciation and amortization expense of $760,089, non-cash
interest expense of $1,744,732 attributed to the issuance of securities and
related amortization of the resulting debt discount and non-cash embedded
conversion option revaluation expense of $2,191,815. These non-cash expenses
were partly offset by non-cash income from warrant and option liability
revaluation of $5,103,208.
The net loss for the nine months ended September 30, 2006, was
$7,312,316 and includes non-cash general and administrative expenses of
$1,132,712 from stock-based compensation, depreciation and amortization expense
of $420,782, non-cash interest expense of $2,688,414 attributed to the issuance
of securities and related amortization of the resulting debt discount, non-cash
extinguishment of debt and non-cash loss on disposal of fixed assets of $42,667.
The non-cash expenses were partly offset by non-cash income from warrant and
option liability revaluation of $38,550.
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 September 30, 2007
At September 30, 2007, we had cash of $213,215. The following table
reflects the cash flow activities during the first nine months of 2007 and 2006:
2007 2006
---- ----
Cash used by operating activities ............. $(1,649,497) $(2,381,546)
Cash provided by (used in) investing activities 745 (121,045)
Cash provided by financing activities ......... 1,658,056 2,758,462
----------- -----------
Increase (decrease) in cash ................... $ 9,304 $ 255,871
=========== ===========
Operating activities
For the nine months ended September 30, 2007, the Company used cash in
operating activities of $1,649,497. Cash was used to fund the Company's loss
from operations of $4,150,702 offset by non-cash expenses consisting of general
and administrative expenses of $1,002,878 from stock-based compensation and
depreciation and amortization expense of $760,089. Cash used for operations
included an increase in accounts receivable of $23,805 and prepaid customer
travel costs of $76,990 and a decrease in deferred revenues and customer
deposits of $26,836. Cash was generated from operations by decreasing other
assets by $18,739 and increasing accounts payable and accrued expenses by
$1,735,393.
48
Investing activities
For the nine months ended September 30, 2007, the Company provided cash
from investing activities of $745 by converting investments to cash.
Financing activities
For the nine months ended September 30, 2007, the Company provided cash
from financing activities of $1,658,056. Cash was received from the proceeds of
a $2,060,000 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 $312,114, $151,207
repayment of an acquisition payable and principal payments on capital leases of
$21,123.
Primary source of liquidity
As of September 30, 2007, our primary source of liquidity was $213,215
of cash and $163,126 of accounts receivable. At September 30, 2007, the Company
had a working capital deficit of $15,206,223, primarily due to warrant and
option liability of $2,697,044, embedded conversion option liability of
$3,458,891, acquisitions payable of $1,288,793, and convertible notes payable of
$4,355,792 partially offset by debt discount of $527,552. The convertible notes
payable consists of promissory notes convertible into approximately 27,045,687
shares of the Company's common stock as of September 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 September 30, 2007,
the Company has vested and outstanding warrants, non-plan and plan options to
purchase 20,416,713, 1,000,000 and 99,762 shares of the Company's common stock
with weighted average exercise prices of $0.92, $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 September 30, 2007, the Company had total assets of $9,187,092, of
which non-current assets consisted of $8,033,012; goodwill of $2,902,196;
intangible assets of $3,750,968; deposits of $100,595; debt issue cost of
$311,358 and $967,895 of property and equipment. Total liabilities were
$17,107,407, including long-term liabilities of $747,104. Total shareholders'
deficit was $7,920,315. On September 30, 2007, we were in default on $1,482,500
in convertible promissory notes and $156,434 in notes payable. We anticipate
settling the balance owing on the convertible promissory notes through issuance
of common stock also; however, as of November 19, 2007, this had not yet
occurred nor is there any assurance that this will take place.
We have relied upon convertible debt and equity financing in order to
fund our operating deficit. 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 September 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
49
the exercise of outstanding warrants and attract new sources of financing. We
have no understandings or commitments from anyone with respect to external
financing, and we cannot predict whether we will be able to secure necessary
funding when needed, or at all. As we continue to expand our business and deploy
our technology in our leisure travel business, our current monthly cash flow
requirements will exceed our near-term cash flow from operations. Even if we are
not required to meet our financing and interest payment needs from cash, and
instead our investors convert their outstanding convertible notes to common
stock, our available cash resources and anticipated cash flow from operations
are insufficient to satisfy our anticipated costs associated with new product
development and expansion into new markets in the near future. There can be no
assurance that we will be able to generate sufficient cash from operations in
future periods to satisfy our capital requirements; therefore, we will have to
continue to rely on external financing activities, including the sale of our
equity securities, to satisfy our capital requirements for the foreseeable
future. Due, in part, to our lack of historical earnings, our prior success in
attracting additional funding has been limited to transactions in which our
equity is used as currency. In light of the availability of this type of
financing, and the lack of alternative proposals, our board of directors has
determined that the continued use of our equity for these purposes may be
necessary if we are to sustain operations. Equity financings of the type we have
been required to pursue are dilutive to our stockholders and may adversely
impact the market price for our shares. However, we have no commitments for
borrowings or additional sales of equity, the precise terms upon which we may be
able to attract additional funding is not known at this time, and there can be
no assurance that we will be successful in consummating any such future
financing transactions on terms satisfactory to us, or at all.
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.
50
As of the evaluation date, the Company's Chief Executive Officer and
its Chief Financial Officer concluded that the Company maintains disclosure
controls and procedures that are effective in providing reasonable assurance
that information required to be disclosed in the Company's reports under the
Exchange Act is recorded, processed, summarized and reported within the time
periods prescribed by SEC rules and regulations, and that such information is
accumulated and communicated to the Company's management, including its Chief
Executive Officer and its Chief Financial Officer, as appropriate, to allow
timely decisions regarding required disclosure.
There have been no significant changes in the Company's internal
controls or in other factors that could significantly affect these controls
subsequent to the evaluation date.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as a principal party to proceedings brought by
Raymon Valdes and Changes in L'Attitudes, Inc. in Hillsborough County, Florida,
Circuit Court. The proceedings began on November 13, 2006. This matter was
resolved on April 13, 2007 when the parties entered into a Settlement Agreement
pursuant to which (i) Mr. Valdes agreed to convert the outstanding $600,000
convertible promissory note issued by the Company pursuant to the acquisition by
the Company of Changes in L'Attitudes, Inc. into 600,000 shares of the Company's
common stock; (ii) the Company agreed to pay the remaining approximately
$411,000 owed to Mr. Valdes in 52 weekly installments commencing on the earlier
to occur of 75 days from the settlement date or the receipt by the Company of
outside financing in a minimum amount of $750,000; and (iii) the Company agreed
to issue to Mr. Valdes an additional 170,000 shares of its common stock. On
April 13, 2007, the Company issued 770,000 shares of common stock for the
conversion of the $600,000 promissory note and settlement of all accrued
interest at a conversion rate of $1.00 per share.
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. On October 30, 2007, Stephen Hicks filed
51
an answer and counterclaim to the Company's complaint filed March 2, 2007,
alleging breach of the Agreement regarding the convertible debenture payable and
other financial matters pursuant to the Agreement. The Company has classified
the convertible debenture as a current liability and has recorded accrued
interest of $204,420 related to this obligation on its consolidated balance
sheet as of September 30, 2007. The Company believes it has recorded all other
financial obligations due under the Agreement.
The Company is currently in discussions with Mr. Hicks regarding the
settlement of the matters arising on March 2, 2007 and March 5, 2007.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES
On October 16, 2007, the Company's Board of Director granted 200,000
fully vested shares of the Company's common stock to Dan Brandano, Chairman and
Chief Executive Officer, pursuant to an employment agreement. The common stock
was valued at $18,000 or $0.18 per share (the closing market price of the
Company's common stock on the day of issuance). This value was charged to
director fees in October 2007 for prior service. The issuance of the common
stock was exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder as transactions
by an issuer not involving any public offering.
On October 25, 2007, the Company entered into an agreement with Miller
Investments to extend the maturity date of a $150,000 promissory note from
August 15, 2007 to December 15, 2007, as further described in Note 6. In
consideration for this note extension, the Company agreed to issue Miller
Investments 150,000 shares of its common stock valued at $34,500 or $0.23 per
share (the closing market price of the Company's common stock on the day of
issuance). This value will be recorded as debt discount and amortized to
interest expense over the extended term of the loan. The issuance of the common
stock was exempt from the registration requirements of the Act by reason of
Section 4(2) of the Act and the rules and regulations thereunder as transactions
by an issuer not involving any public offering.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
10.1 Settlement Agreement dated July 31, 2007 by and between the Company and
the Subscribers named therein and Form of Amended and Restated Stock
Purchase Warrant (incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed on August 6, 2007)
10.2 Modification and waiver agreement dated October 25, 2007 between the
Company and Miller Investments, LLC related to a convertible promissory
note dated May 1, 2007.
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.
52
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: November 19, 2007 DYNAMIC LEISURE CORPORATION
By: /s/ Daniel G. Brandano
----------------------
Daniel G. Brandano
Chief Executive Officer
EXHIBIT INDEX
10.1 Settlement Agreement dated July 31, 2007 by and between the Company and
the Subscribers named therein and Form of Amended and Restated Stock
Purchase Warrant (incorporated by reference to Exhibit 10.1 to the
Company's Form 8-K filed on August 6, 2007)
10.2 Modification and waiver agreement dated October 25, 2007 between the
Company and Miller Investments, LLC related to a convertible promissory
note dated May 1, 2007.
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.
53