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UNITED STATES |
SECURITIES AND EXCHANGE COMMISSION |
Washington, d.c. 20549 |
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| FORM 10-Q | |
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934. |
Nevada | | 46-0525350 |
(State or Other Jurisdiction of Incorporation or Organization) | | (IRS Employer Identification No.) |
Large accelerated filer | ¨ | Accelerated filer | ¨ |
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Non-accelerated filer | ¨ | Smaller reporting company | x |
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Part I. Financial Information | 3 |
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Item 1. Financial Statements (unaudited): | 3 |
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Condensed Consolidated Balance Sheets September 30, 2013 (unaudited) and December 31, 2012 | 3 |
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Unaudited Condensed Consolidated Statements of Operations Three and Nine Months Ended September 30, 2013 and 2012 | 4 |
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Unaudited Condensed Consolidated Statements of Cash Flows Nine Months Ended September 30, 2013 and 2012 | 5 |
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Notes to Unaudited Condensed Consolidated Financial Statements September 30, 2013 | 6 |
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
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Item 3. Quantitative and Qualitative Disclosures About Market Risk | 25 |
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Item 4. Controls and Procedures | 25 |
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Part II. Other Information | 26 |
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Item 1. Legal Proceedings | 26 |
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | 26 |
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Item 3. Defaults Upon Senior Securities | 28 |
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Item 4. Mine Safety Disclosures | 28 |
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Item 5. Other Information | 28 |
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Item 6. Exhibits | 28 |
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Signatures | 29 |
| | September 30, 2013 | | December 31, 2012 | | ||
| | (Unaudited) | | | | ||
Assets | | | | | | | |
| | | | | | | |
Current assets: | | | | | | | |
Cash and cash equivalents | | $ | 763,170 | | $ | 93,285 | |
Restricted cash | | | 50,005 | | | | |
Inventories | | | 64,980 | | | | |
Prepaid expenses and other current assets | | | 302,068 | | | 8,970 | |
| | | | | | | |
Total current assets | | | 1,180,223 | | | 102,255 | |
| | | | | | | |
Property and equipment, net | | | 756,609 | | | 878,118 | |
Intangibles, net | | | 42,334 | | | 47,414 | |
Other | | | 53,674 | | | | |
Total assets | | | 2,032,840 | | | 1,027,787 | |
| | | | | | | |
Liabilities and Stockholders’ Equity | | | | | | | |
| | | | | | | |
Current liabilities: | | | | | | | |
Accounts payable | | | 245,452 | | | 33,234 | |
Accrued expenses | | | 265,603 | | | 385,855 | |
| | | | | | | |
Total current liabilities | | | 511,055 | | | 419,089 | |
| | | | | | | |
Other | | | 3,554 | | | | |
| | | | | | | |
Total liabilities | | | 514,609 | | | 419,089 | |
| | | | | | | |
Commitments and contingencies (Note 10) | | | | | | | |
| | | | | | | |
Stockholders’ equity : | | | | | | | |
Preferred stock, $0.0001 par value | | | | | | | |
Authorized shares: - 50,000,000 at September 30, 2013 and December 31, 2012 | | | | | | | |
Issued and outstanding shares - none at June 30, 2013 and December 31, 2012 | | | | | | | |
Common stock, $0.0001 par value: | | | | | | | |
Authorized shares: - 200,000,000 at September 30, 2013 and December 31, 2012 | | | | | | | |
Issued and outstanding shares - 71,054,174 at September 30, 2013 and 60,883,184 at December 31, 2012 | | | 7,105 | | | 6,088 | |
Additional paid in capital | | | 6,529,004 | | | 978,100 | |
Accumulated deficit | | | (5,017,878) | | | (375,490) | |
Total stockholders’equity | | | 1,518,231 | | | 608,698 | |
Total liabilities and stockholders’ equity | | $ | 2,032,840 | | $ | 1,027,787 | |
3 | ||
| | Successor | | Predecessor | Successor | | Predecessor | | |||||
| | Three Months Ended September 30, | | Nine Months Ended September 30, | | ||||||||
| | 2013 | | 2012 | | 2013 | | 2012 | | ||||
| | | | | | | | | | | | | |
Sales | | | | | | | | | | | | | |
Sales | | $ | | | $ | | | $ | 7,310 | | $ | | |
Sales to related party | | | | | | | | | 8,530 | | | | |
Total sales | | | | | | | | | 15,840 | | | | |
| | | | | | | | | | | | | |
Cost of goods sold | | | | | | | | | | | | | |
Cost of goods sold | | | | | | | | | 6,006 | | | | |
Cost of goods sold to related party | | | | | | | | | 5,978 | | | | |
Total cost of goods sold | | | | | | | | | 11,984 | | | | |
Gross Profit | | | | | | | | | 3,856 | | | | |
| | | | | | | | | | | | | |
Operating expenses: | | | | | | | | | | | | | |
Selling, general and administrative | | | 1,302,643 | | | 512,254 | | | 3,250,536 | | | 2,562,363 | |
Research and development | | | 718,045 | | | 514,141 | | | 1,387,779 | | | 2,227,426 | |
Impairment loss of long-lived assets | | | | | | 329,079 | | | | | | 329,079 | |
Total operating expenses | | | 2,020,688 | | | 1,355,474 | | | 4,638,315 | | | 5,118,868 | |
Operating loss | | | (2,020,688) | | | (1,355,474) | | | (4,634,459) | | | (5,118,868) | |
| | | | | | | | | | | | | |
Other income (expense): | | | | | | | | | | | | | |
Other income | | | 812 | | | | | | 2,209 | | | | |
Interest expense related party | | | | | | (411,879) | | | (10,138) | | | (863,811) | |
Loss before income taxes | | | (2,019,876) | | | (1,767,353) | | | (4,642,388) | | | (5,982,679) | |
Income taxes | | | | | | | | | | | | | |
Net loss | | $ | (2,019,876) | | $ | (1,767,353) | | $ | (4,642,388) | | $ | (5,982,679) | |
| | | | | | | | | | | | | |
Loss per Share - Basic and Diluted | | $ | (0.03) | | | | | $ | (0.07) | | | | |
Weighted Average Common Shares - | | | | | | | | | | | | | |
Basic and Diluted | | | 68,888,810 | | | | | | 66,446,938 | | | | |
4 | ||
| | Successor | | | Predecessor | | ||
| | For the Nine Months Ended Septermber30, | | |||||
| | 2013 | | | 2012 | | ||
Cash flows from operating activities: | | | | | | | | |
Net loss | | $ | (4,642,388) | | | $ | (5,982,679) | |
| | | | | | | | |
Adjustments to reconcile net loss to net cash used in | | | | | | | | |
operating activities: | | | | | | | | |
Impairment of property and equipment | | | | | | | 329,079 | |
Depreciation and amortization | | | 158,585 | | | | 82,559 | |
Stock-based compensation | | | 688,355 | | | | 356,050 | |
Changes in assets and liabilities: | | | | | | | | |
Restricted cash | | | (50,005) | | | | | |
Inventories | | | (64,980) | | | | | |
Costs in excess of billings on uncompleted contracts | | | | | | | (705,171) | |
Prepaid expenses and other current assets | | | (293,098) | | | | (10,808) | |
Other assets | | | (53,674) | | | | | |
Accounts payable | | | 429,509 | | | | 241,456 | |
Accrued expenses and other | | | (120,985) | | | | (58,576) | |
Other liabilities | | | 2,637 | | | | | |
| | | | | | | | |
Net cash used in operating activities | | | (3,946,044) | | | | (5,748,090) | |
| | | | | | | | |
Cash flows from investing activity: | | | | | | | | |
Purchase of property and equipment | | | (21,996) | | | | (24,285) | |
| | | | | | | | |
Net cash used by investing activities | | | (21,996) | | | | (24,285) | |
| | | | | | | | |
Cash flows from financing activities: | | | | | | | | |
Cash contributions from Parent | | | | | | | 5,772,375 | |
Proceeds from issuance of common stock, net | | | 4,190,848 | | | | | |
Proceeds from exercise of unvested stock options | | | 2,827 | | | | | |
Repurchase of nonvested stock | | | (77) | | | | | |
Proceeds from related party notes | | | 560,200 | | | | | |
Payments on related party notes | | | (300,000) | | | | | |
Advance from related party | | | 184,127 | | | | | |
| | | | | | | | |
Net cash provided by financing activities | | | 4,637,925 | | | | 5,772,375 | |
Net increase in cash and cash equivalents | | | 669,885 | | | | | |
| | | | | | | | |
Cash and cash equivalents at beginning of period | | | 93,285 | | | | | |
Cash and cash equivalents at end of period | | $ | 763,170 | | | $ | | |
| | | | | | | | |
Cash for income taxes | | $ | | | | $ | | |
Cash paid for interest | | $ | 10,138 | | | $ | | |
| | | | | | | | |
Supplemental schedule of non-cash investing and financing activities: | | | | | | | | |
Conversion of notes payable into common stock | | $ | 260,200 | | | $ | | |
Conversion of advances from related party into common stock | | $ | 184,127 | | | $ | | |
Conversion of accounts payable into common stock | | $ | 227,291 | | | $ | | |
5 | ||
6 | ||
7 | ||
8 | ||
9 | ||
Description | | Estimated Useful Lives | | |
Machinery and equipment | | 5 to 10 years | | |
Office furniture and equipment | | 7 years | | |
Computer equipment and software | | 3 years | |
10 | ||
11 | ||
12 | ||
| · | Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities; |
| · | Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability. |
| · | Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity). |
13 | ||
4. | Property and Equipment, Net |
| | September 30, 2013 | | December 31, 2012 | | ||
Machinery and equipment | | $ | 814,936 | | $ | 814,936 | |
Office furniture and fixtures | | | 189,351 | | | 174,351 | |
Computer equipment and software | | | 79,361 | | | 62,365 | |
Less accumulated depreciation | | | (327,039) | | | (173,534) | |
Net | | $ | 756,609 | | $ | 878,118 | |
5. | Intangibles, Net |
| | September 30, 2013 | | December 31, 2012 | | ||
Patents | | $ | 79,587 | | $ | 79,587 | |
Less accumulated amortization | | | (37,253) | | | (32,173) | |
| | $ | 42,334 | | $ | 47,414 | |
14 | ||
6. | Accrued Expenses |
| | September 30, 2013 | | December 31, 2012 | | ||
Accrued professional fees | | $ | 59,470 | | $ | 25,059 | |
Accrued payroll and related expenses | | | 130,231 | | | 64,222 | |
Accrued severance | | | | | | 41,900 | |
Accrued consulting | | | 39,400 | | | 50,000 | |
Accrued project expenses | | | 7,780 | | | | |
Accrued other | | | 24,897 | | | 927 | |
Liabilities owed by Parent - reimbursable under Contribution Agreement | | | 3,825 | | | 203,747 | |
| | $ | 265,603 | | $ | 385,855 | |
7. | Stockholders' Equity |
15 | ||
8. | Equity Incentive Plan |
| | September 30, 2013 | | |
Expected volatility | | | 73.60 | % |
Dividend yield | | | 0.00 | % |
Risk-free interest rate | | | 1.23 | % |
Expected life (in years) | | | 6.56 | |
16 | ||
| | | | | | | | Weighted- | | |
| | | | | Weighted- | | Average | | ||
| | | | | Average | | Remaining | | ||
| | | | | Excerise | | Contractual | | ||
Options | | Shares | | Price | | Life | | |||
Balance, December 31, 2012 | | | 3,220,735 | | $ | 0.001 | | | 5.00 | |
Exercise of unvested options into restricted stock | | | (3,220,735) | | | - | | | - | |
Balance, June 30, 2013 | | | - | | | - | | | - | |
Granted | | | 7,360,000 | | | 1.239 | | | 6.43 | |
Exercised | | | - | | | - | | | - | |
Forfeited, expired or repurchased | | | - | | | - | | | - | |
Balance, September 30, 2013 | | | 7,360,000 | | | 1.239 | | | 6.43 | |
| | | | | | | | | | |
Excerisable on September 30, 2013 | | | - | | $ | - | | | - | |
| | Shares | | |
Balance, December 31, 2012 | | | - | |
Exercise of unvested options during the three months ending March 31, 2013 | | | 3,220,735 | |
Repurchase of unvested options | | | (76,608) | |
Balance, March 31, 2013 | | | 3,144,127 | |
Vested | | | (1,048,042) | |
Balance, June 30, 2013 | | | 2,096,085 | |
Vested | | | (159,178) | |
Balance, September 30, 2013 | | | 1,936,907 | |
17 | ||
18 | ||
10. | Commitments and Contingencies |
19 | ||
2013 | | | 75,855 | |
2014 | | | 307,215 | |
2015 | | | 316,433 | |
2016 | | | 325,925 | |
| | | 1,025,428 | |
11. | Subsequent Events |
20 | ||
21 | ||
| · | Selling, general and administrative expenses of approximately $1.3 million, which were comprised of $0.7 million of payroll costs which included $0.4 million of stock based compensation expense and $0.1 million of payroll costs associated with payroll bonuses and penalty accrual provisions related to the nonqualified stock options granted to employees in December 2012; and |
| | |
| · | Research and development expenses of approximately $0.7 million, which included $0.2 million of payroll costs, $0.2 million of stock based compensation expense and other expenditures associated with Gradual Oxidizer development. |
| · | Selling, general and administrative expenses of approximately $0.5 million, which were predominantly payroll, legal fees associated with corporate matters, intellectual property costs, and employee travel; |
22 | ||
| · | Research and development expenses of approximately $0.5 million, which were largely employee, consultant costs and operating costs associated with the Gradual Oxidizer development; and |
| | |
| · | An asset impairment charge of $0.3 million on the FP250 beta development unit. |
| · | Selling, general and administrative expenses of approximately $3.3 million, primarily associated with payroll costs of $1.2 million including stock based compensation expense of $0.5 million, occupancy and insurance expenses of $0.4 million and $1.6 million associated with professional fees, of which $1.0 million were carve out, and Merger related costs; and |
| | |
| · | Research and development expenses of approximately $1.4 million were comprised of employee related costs of $0.5 million, including $0.2 million of stock based compensation, $0.9 million expenditures associated with Gradual Oxidizer development including $0.1 million costs associated with the relocation of the FP250 beta test development unit from Portsmouth, New Hampshire, to the University Of California, Irvine. |
| · | Selling, general and administrative expenses of approximately $2.6 million, primarily associated with payroll costs, including $0.3 million of stock compensation expense, legal fees associated with corporate matters, intellectual property costs, and employee travel; and |
| | |
| · | Research and development expenses of approximately $2.2 million, which were primarily employee and consultants costs and operating costs associated with the Gradual Oxidizer development. |
| · | During the third quarter of 2013, we had no interest expense and during the nine months ended September 30, 2013, we incurred approximately $10,000 of interest expense on a note payable to an investor. |
| | |
| · | For Predecessor during the nine months ended September 30, 2012, we incurred approximately $0.9 million in interest expense, which was the portion of the prior parent company’s debt that was allocated to us. During the three months ended September 30, 2012, allocated interest expense was $0.4 million. Management believes these allocations are reasonable but not necessarily indicative of the cost that would have incurred if the Company had been operating on a stand-alone basis. |
23 | ||
24 | ||
| · | Employee, occupancy and related costs: $5.2 million |
| · | Professional fees and business development costs: $1.0 million |
| · | Research and development programs: $3.1 million |
| · | Corporate filings : $0.5 million |
| · | Working capital : $1.5 million |
Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
Item 4. | Controls and Procedures |
25 | ||
Item 1. | Legal Proceedings. |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
26 | ||
Investor | | Investment Amount | | No. of Shares Purchased | | ||
Blue Ox Capital, LLC | | $ | 250,000 | | | 333,333 | |
Michael Stone | | $ | 300,000 | | | 400,000 | |
Stanley Silver | | $ | 100,000 | | | 133,333 | |
Paul Rosenberg | | $ | 50,000 | | | 66,666 | |
Sub LP | | $ | 1,000,000 | | | 1,333,333 | |
Aleksandar Jovanovic | | $ | 100,000 | | | 133,333 | |
Lawrence M. Richman MD, Inc., Profit Sharing Trust dated 01/01/1992 | | $ | 100,000 | | | 133,333 | |
Lion Gate Capital | | $ | 200,000 | | | 266,666 | |
Gary Shapiro | | $ | 150,000 | | | 200,000 | |
Colt Ventures, Ltd. | | $ | 100,000 | | | 133,333 | |
William Shamlian | | $ | 50,000 | | | 66,666 | |
Cobrador Multi Strategy Partners, LP | | $ | 50,000 | | | 66,666 | |
Craig Fingold | | $ | 50,000 | | | 66,666 | |
Khashayar Mokhber and Soheyla Mokhber Family Trust | | $ | 10,000 | | | 13,334 | |
Soheil and Kathy Rabbani Trust | | $ | 150,000 | | | 200,000 | |
Thomas S. Bridges Revocable Trust | | $ | 75,000 | | | 100,000 | |
Kevin K. Leung | | $ | 100,000 | | | 133,333 | |
David Gross | | $ | 75,000 | | | 100,000 | |
Delos Investment Management LLC | | $ | 150,000 | | | 200,000 | |
Rami Rostami/American Investment Group LLC | | $ | 175,000 | | | 233,333 | |
Theodore D. Roth | | $ | 10,125 | | | 13,500 | |
John Weber | | $ | 10,001 | | | 13,334 | |
Mark Mays | | $ | 50,025 | | | 66,700 | |
Peter Geddes | | $ | 100,000 | | | 133,333 | |
BTG Investments, LLC | | $ | 100,001 | | | 133,334 | |
Steve Arnold | | $ | 30,000 | | | 40,000 | |
Susan Richards | | $ | 25,000 | | | 33,334 | |
Total Private Placement July 17 - July 31, 2013 | | $ | 3,560,152 | | | 4,746,863 | |
Investor | | Investment Amount | | No. of Shares Purchased | | ||
Perry Theodoros | | $ | 30,000 | | | 40,000 | |
Barry Rooth | | $ | 30,000 | | | 40,000 | |
Rami Rostami/American Investment Group LLC | | $ | 75,000 | | | 100,000 | |
Joseph & Maria Schwawrtz | | $ | 50,000 | | | 66,667 | |
Michael & Sonja Ogrizovich | | $ | 75,000 | | | 100,000 | |
Gerard Casale | | $ | 50,000 | | | 66,667 | |
Total Private Placement August 1 - August 26, 2013 | | $ | 310,000 | | | 413,334 | |
27 | ||
Item 3. | Defaults Upon Senior Securities. |
Item 4. | Mine Safety Disclosures. |
Item 5. | Other Information. |
Item 6. | Exhibits. |
21.1* | | Subsidiaries of the Registrant |
| | |
31.1* | | Certification of Chief Executive Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
31.2 | | Certification of Chief Finacial Officer Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| | |
32.1* | | Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| | |
32.2 | | Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
28 | ||
Date: November 8, 2013 | | |
| | |
Ener-Core, Inc. | | |
By: / s / Alain Castro | | |
Alain Castro Chief Executive Officer | | |
29 | ||
1. | I have reviewed this Form 10-Q of Ener-Core, Inc.; |
| |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d 15(f)) for the registrant and have: |
| |
| a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| |
| b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| |
| c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
| |
| d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and |
| |
5. | The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions): |
| |
| a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| |
| b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
November 8, 2013 | By: | /s/ Alain Castro |
| | Alain Castro |
| | Chief Executive Officer |
November 8, 2013 | By: | /s/ James Thorburn |
| | James Thorburn |
| | Chief Financial Officer |
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 8, 2013 | | By: | /s/ Alain Castro |
| | | Alain Castro |
| | | Chief Executive Officer |
1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 8, 2013 | | By: | /s/ James Thorburn |
| | | James Thorburn |
| | | Chief Financial Officer |
Significant Accounting Policies (Policies)
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9 Months Ended | |||||||||||||||||||||
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Sep. 30, 2013
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Accounting Policies [Abstract] | ||||||||||||||||||||||
Segments | Segments The Company operates in one segment. All of the Company’s operations are located domestically. |
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Use of Estimates | Use of Estimates The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant items subject to such estimates and assumptions include the allocation of operations during the carve-out period, valuation of certain assets, useful lives, and carrying amounts of property and equipment, equity instruments, and stock-based compensation; provision for contract losses; valuation allowances for deferred income tax assets; and exposure to warranty and other contingent liabilities. Actual results may differ from these estimates. |
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Cash and Cash Equivalents | Cash and Cash Equivalents The Company considers all highly liquid investments available for current use with an initial maturity of three months or less to be cash equivalents. |
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Restricted Cash | Restricted Cash As of September 30, 2013, the Company had $50,005 of restricted cash held at Union Bank. The Company is required to keep a minimum balance at this level in order to offset a business credit card account held by the Company. |
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Accounts Receivable | Accounts Receivable The Company has a policy of reserving for uncollectible accounts based on its best estimate of the amount of probable credit losses in its existing accounts receivable. The Company periodically reviews its accounts receivable to determine whether an allowance is necessary based on an analysis of past due accounts and other factors that may indicate that the realization of an account may be in doubt. Account balances deemed to be uncollectible are charged to the allowance after all means of collection have been exhausted and the potential for recovery is considered remote. The Company did not reserve any accounts receivable during the three and nine month periods ended September 30, 2013 and 2012. |
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Inventories | Inventories Inventories consist of work in progress for the Company's contract for the EECT Attero Project which the Company anticipates shipping to the customer in November 2013. Inventories are stated at the lower of cost or market and the inventory is valued at the actual unit cost. Market is determined based on net realizable value. Appropriate consideration is given to obsolescence, excessive levels, deterioration, and other factors in evaluating net realizable value. |
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Costs in Excess of Billings on Uncompleted Contracts | Costs in Excess of Billings on Uncompleted Contracts Costs in excess of billings on uncompleted contracts in the accompanying consolidated balance sheets represents accumulation of costs for labor, materials and others costs that have been incurred in excess of a provision for contract loss that has previously been recognized as further discussed below under the section "Southern Research Contract". These costs were subsequently recognized as costs of goods sold in the period from November 12 through December 31, 2012, when the contract was considered complete in accordance with the completed-contract method. |
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Property and Equipment | Property and Equipment Property and equipment are stated at cost less accumulated depreciation. Depreciation is calculated using the straight-line method over the estimated useful lives of the assets ranging from three to seven years. The estimated useful lives of the assets are as follows:
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Revenue Recognition | Revenue Recognition The Company generates revenue from the sale of its clean power energy systems and from consulting services. Revenue is recognized in accordance with Accounting Codification subtopic 605-10, Revenue (“ASC 605-10”) and Staff Accounting Bulletin Topic 13, Revenue Recognition, which requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the selling price is fixed or determinable; and (4) collectability is reasonably assured. With regards to the sale of products, delivery is not considered to have occurred, and therefore no revenues are recognized until the customer has taken title to the products and assumed the risks and rewards of ownership of the products specified in the purchase order or sales agreement. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the selling prices of the services delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related revenue is recorded. The Company defers any revenue for which the services has not been performed or is subject to refund until such time that the Company and the customer jointly determine that the services have been performed or no refund will be required. Revenues under long-term construction contracts are generally recognized using the completed-contract method of accounting (under FASB ASC 605-35). Long-term construction-type contracts for which reasonably dependable estimates cannot be made or for which inherent hazards make estimates difficult are accounted for under the completed-contract method. Revenues under the completed-contract method are recognized upon substantial completion that is acceptance by the customer, compliance with performance specifications demonstrated in a factory acceptance test or similar event. Anticipated losses on contracts are recognized in full in the period in which losses become probable and estimable. Changes in estimate of profit or loss on contracts are included in earnings on a cumulative basis in the period the estimate is changed. The accompanying unaudited condensed consolidated financial statements include revenues from the Southern Research Contract which was recognized on a completed-contract method. Therefore, there were no arrangements for which multiple deliverables were accounted for separately. Southern Research Contract In April 2009, the Company entered into an initial contract with Southern Research Institute (“SRI”) to perform all detailed design, fabrication, installation and site integration of a Turbine/Thermal Oxidizer demonstration unit. The scope of work also required the Company to commission and start up the demonstration unit including operator and maintenance training. In January 2010, the Company and SRI amended the contract to a fixed price contract value at $1,226,776, which required the Company to provide two 200kw Flex Powerstations (respectively, “Turbine 1” and “Turbine 2”) to be installed at two Department of Defense locations in the United States. In addition, the contract, as amended, required the Company to provide field integration, basic operator and maintenance training including on-site support for the first year of operation and also to maintain, operate and train operators of the equipment. The Company delivered Turbine 1 and installed the equipment in November 2011 and completed the operations and training phase in November 2012. The third amendment to the contract provided for the Company to deliver a second Turbine/Thermal Oxidizer unit and upgrade the engine of Turbine 1. The contract required the customer to identify a site for the second unit by December 31, 2012. However, a suitable site was not selected and the customer cancelled its order for the second unit. The SRI contract has been accounted for in accordance with the completed-contract method. The Company deferred all amounts received on this contract for Turbine 1 and Turbine 2 until the contract was completed on December 31, 2012, at which time all revenue received on the contract ($990,652) was recorded as revenue and the remaining deferred costs of $990,652 were recorded as cost of goods sold. The Company recorded total contract costs of $4,377,337 over the duration of the contract. |
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Research and Development Costs | Research and Development Costs Research and development costs are expensed as incurred. |
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Stock Based Compensation | Stock Based Compensation FASB ASC 718 “Compensation Stock Compensation” prescribes accounting and reporting standards for all stock-based payments award to employees, including employee stock options, restricted stock, employee stock purchase plans and stock appreciation rights, may be classified as either equity or liabilities. The Company determines if a present obligation to settle the share-based payment transaction in cash or other assets exists. A present obligation to settle in cash or other assets exists if: (a) the option to settle by issuing equity instruments lacks commercial substance or (b) the present obligation is implied because of an entity's past practices or stated policies. If a present obligation exists, the transaction should be recognized as a liability; otherwise, the transaction should be recognized as equity The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of FASB ASC 505-50 “Equity - Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date. |
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Income Taxes | Income Taxes The Company accounts for income taxes under FASB ASC 740 “Income Taxes.” Under the asset and liability method of FASB ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statements 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 FASB ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period the enactment occurs. A valuation allowance is provided for certain deferred tax assets if it is more likely than not that the Company will not realize tax assets through future operations. |
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Long-Lived Assets | Long-Lived Assets In accordance with ASC 360-10-35, “Impairment or Disposal of Long-Lived Assets,” the Company reviews for impairment of long-lived assets and certain identifiable intangibles whenever events or circumstances indicate that the carrying amount of assets may not be recoverable. The Company considers the carrying value of assets may not be recoverable based upon its review of the following events or changes in circumstances: the asset’s ability to continue to generate income from operations and positive cash flow in future periods; loss of legal ownership or title to the assets; significant changes in our strategic business objectives and utilization of the asset; or significant negative industry or economic trends. An impairment loss would be recognized when estimated future cash flows expected to result from the use of the asset are less than its carrying amount. We have evaluated our intangible asset for impairment at each balance sheet date and, despite significant losses on the SRI contract, conclude that no impairment of the intangible asset is appropriate. In 2010 the Company started the construction of the FP250 beta development test unit at the Portsmouth, New Hampshire manufacturing facility of FlexEnergy for the purpose of completing the second development phase for software, controls, systems, and components and to serve as a demonstration unit for potential customers. In July 2012, the construction of the FP250 beta development test unit was completed and the asset was placed in service at the Portsmouth location. The Company had accumulated costs significantly higher than the amount originally expected in constructing the FP250 beta development test unit. As a result, the Company performed an evaluation of the FP250 beta development test unit for impairment as this was an indication that the book value of the asset may not be recoverable. The total accumulated cost of constructing the FP250 was $1,089,079 as of July 2012, the date the asset was placed in service at the Portsmouth location. As part of the Company’s review, the fair market value of the FP250 beta development test unit was determined to be $760,000. This determined fair market value was assessed to be the realizable value the Company could expect to receive on the sale of such equipment in a current transaction between willing parties, which is based on the sales price negotiated in the agreement with EECT. As further discussed in Note 10, the Company has entered into an agreement with EECT, an unrelated party, for the sale of a unit with the same functionality as the FP250 beta development unit for a selling price of $760,000. The pricing is a one-time special price which considers this is the first unit of its kind being sold to be placed into the conventional commercial and industrial environment for long-term continuous commercial operation. An impairment charge of $329,079 was recorded in July 2012, which represented the difference between the fair value and the carrying value of the FP250 beta development unit. The FP250 beta development test unit was a contributed asset pursuant to the terms of the Contribution Agreement. The unit was dismantled in June 2013 and relocated to the University of California, Irvine, in July 2013 where it will continue to be used as a development and demonstration unit. There were no other indicators of impairment related to long-lived assets that resulted in additional impairment analysis. |
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Financial Instruments | Financial Instruments The Company determines the fair value of our financial instruments based on the hierarchy established by FASB ASC 820, “Fair Value Measurements and Disclosures.” The three levels of inputs used to measure fair value are as follows:
The carrying amounts of the financial instruments are reasonable estimates of their fair values due to their short-term nature or proximity to market rates for similar debt. |
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Fair Value Measurements | Fair Value Measurements The Company’s financial instruments consist primarily of cash and cash equivalents, accounts payable and accrued expenses. These items are recorded in the financial statements at historical cost. The historical cost basis for these amounts is estimated to approximate their respective fair values due to the short maturity of these instruments. |
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Earnings (Loss) per Share | Earnings (Loss) per Share Basic earnings (loss) per common share is computed by dividing earnings (loss) to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share includes potentially dilutive securities such as outstanding options using various methods such as the treasury stock or modified treasury stock method in determination of dilutive shares outstanding during each reporting period. Stock options and warrants were excluded for purposes of calculating weighted average common share equivalents in the computation of diluted (loss) from continuing operations per share as their effect would have been anti-dilutive for the three and nine month periods ended September 30, 2013. |
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Comprehensive Income (Loss) | Comprehensive Income (Loss) The Company has no items of other comprehensive income (loss) in any period presented. Therefore, net loss as presented in the Company’s Consolidated Statements of Operations equals comprehensive loss. |
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