Attached files
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EX-32.2 - CERTIFICATION - Helix Wind, Corp. | helix_10q-ex3202.htm |
EX-31.2 - CERTIFICATION - Helix Wind, Corp. | helix_10q-ex3102.htm |
EX-31.1 - CERTIFICATION - Helix Wind, Corp. | helix_10q-ex3101.htm |
EX-32.1 - CERTIFICATION - Helix Wind, Corp. | helix_10q-ex3201.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
x ANNUAL REPORT UNDER
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
fiscal year ended December 31,
2009
OR
oTRANSITION REPORT
UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the
transition period from ___________ to ___________
Commission
File No. 000-52107
HELIX
WIND, CORP.
(Exact
name of registrant as specified in its charter)
Nevada
(State
or other jurisdiction of incorporation or organization)
|
20-4069588
(I.R.S.
Employer Identification No.)
|
1848 Commercial
Street, San Diego, California
(Address
of principal executive offices)
|
92113
(Zip
Code)
|
(877)
246-4354
Registrant's
telephone number
|
|
Securities
registered pursuant to Section 12(b) of the Exchange
Act:
|
|
Title of Each
Class
Common
Stock, Par Value $0.0001
|
Name of Each Exchange
on Which Registered
None
|
Securities
registered pursuant to Section 12(g) of the Exchange Act:
None
|
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes o No x
Indicate
by check mark whether the registrant (1) has 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 o
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files). Yes o No x
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definition of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer o
|
Accelerated
filer o
|
Non-accelerated
filer (Do not check if a smaller company) o
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes o No x
The
aggregate market value of the shares of common stock held by non-affiliates of
the issuer, based upon the closing price of the common stock as of the last
business day of the registrant's most recently completed second fiscal quarter
as reported on the OTC Bulletin Board ($3.01 per share), was approximately
$ $52,907,802
million. Shares of common stock held by each executive officer and
director and by each person who owned 10% or more of the outstanding common
stock have been excluded in that such persons may be deemed to be
affiliates. This determination of affiliate status is not necessarily
a conclusive determination for other purposes. The determination of
who was a 10% stockholder and the number of shares held by such person is based
on Schedule 13G filings with the Securities and Exchange Commission as of June
30, 2009.
As of
March 31, 2010, there were 60,895,662 shares of the issuer's common stock
outstanding. The common stock is the issuer's only class of stock
currently outstanding.
Page
|
||
PART
I
|
||
ITEM
1.
|
BUSINESS
|
4
|
ITEM
1A.
|
RISK
FACTORS
|
7
|
ITEM
1B.
|
UNRESOLVED
STAFF COMMENTS
|
12
|
ITEM
2.
|
PROPERTIES
|
13
|
ITEM
3.
|
LEGAL
PROCEEDINGS
|
13
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ITEM
4.
|
(REMOVED
AND RESERVED)
|
13
|
PART
II
|
||
ITEM
5.
|
MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
|
13
|
ITEM
6.
|
SELECTED
FINANCIAL DATA
|
14
|
ITEM
7.
|
MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
14
|
ITEM
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
|
22
|
ITEM
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
22
|
ITEM
9.
|
CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
|
22
|
ITEM
9A.
|
CONTROLS
AND PROCEDURES
|
22
|
ITEM
9B.
|
OTHER
INFORMATION
|
23
|
PART
III
|
||
ITEM
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
|
23
|
ITEM
11.
|
EXECUTIVE
COMPENSATION
|
24
|
ITEM
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
|
27
|
ITEM
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTION, AND DIRECTOR
INDEPENDENCE
|
31
|
ITEM
14.
|
PRINCIPAL
ACCOUNTANT FEES AND SERVICES
|
32
|
PART
IV
|
||
ITEM
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
32
|
SIGNATURES
|
35
|
|
CONSOLIDATED
FINANCIAL STATEMENTS
|
36
|
2
In this
report, unless the context indicates otherwise, the terms "Helix Wind,"
"Company," "we," "us," and "our" refer to Helix Wind, Corp., a Nevada
corporation, and its wholly-owned subsidiaries.
SPECIAL
NOTE REGARDING FORWARD-LOOKING STATEMENTS
This
report contains forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933, or the "Securities Act," and Section 21E of the
Securities Exchange Act of 1934 or the "Exchange Act." These forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from historical results or anticipated
results.
In some
cases, you can identify forward looking statements by terms such as "may,"
"intend," "might," "will," "should," "could," "would," "expect," "believe,"
"anticipate," "estimate," "predict," "potential," or the negative of these
terms. These terms and similar expressions are intended to identify
forward-looking statements. The forward-looking statements in this report are
based upon management's current expectations and belief, which management
believes are reasonable. In addition, we cannot assess the impact of each factor
on our business or the extent to which any factor or combination of factors, or
factors we are aware of, may cause actual results to differ materially from
those contained in any forward looking statements. You are cautioned not to
place undue reliance on any forward-looking statements. These statements
represent our estimates and assumptions only as of the date of this report.
Except to the extent required by federal securities laws, we undertake no
obligation to update any forward-looking statement to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events.
You
should be aware that our actual results could differ materially from those
contained in the forward-looking statements due to a number of factors,
including:
● |
new
competitors are likely to emerge and new technologies may further increase
competition;
|
|
● |
our
operating costs may increase beyond our current expectations and we may be
unable to fully implement our current business plan;
|
|
● |
our
ability to obtain future financing or funds when
needed;
|
|
● |
our
ability to successfully obtain a diverse customer base;
|
|
● |
our
ability to protect our intellectual property through patents, trademarks,
copyrights and confidentiality agreements;
|
|
● |
our
ability to attract and retain a qualified employee
base;
|
|
● |
our
ability to respond to new developments in technology and new applications
of existing technology before our competitors;
|
|
● |
acquisitions,
business combinations, strategic partnerships, divestures, and other
significant transactions may involve additional uncertainties;
and
|
|
● |
our
ability to maintain and execute a successful business strategy.
|
Other
risks and uncertainties include such factors, among others, as market acceptance
and market demand for our products and services, pricing, the changing
regulatory environment, the effect of our accounting policies, potential
seasonality, industry trends, adequacy of our financial resources to execute our
business plan, our ability to attract, retain and motivate key technical,
marketing and management personnel, and other risks described from time to time
in periodic and current reports we file with the United States Securities and
Exchange Commission, or the "SEC." You should consider carefully the statements
under "Item 1A. Risk Factors" and other sections of this report, which address
additional factors that could cause our actual results to differ from those set
forth in the forward-looking statements and could materially and adversely
affect our business, operating results and financial condition. All subsequent
written and oral forward-looking statements attributable to us or persons acting
on our behalf are expressly qualified in their entirety by the applicable
cautionary statements.
3
ITEM
1. BUSINESS
General
The
Company was incorporated under Nevada law on January 10, 2006 under the
corporate name Terrapin Enterprises, Inc. On December 6, 2006, the Company
merged its newly-formed, wholly-owned subsidiary, Black Sea Oil, Inc. into it
and changed its corporate name to Black Sea Oil, Inc. pursuant to a Plan and
Agreement of Merger dated December 6, 2006. Prior to the merger with Black Sea
Oil, Inc., the Company was focused on developing and offering
interactive educational enrichment media programming specifically designed for
children ages 6 to 12 years of age. Since December 2006, the Company has decided
to seek and investigate a business combination with a private entity whose
business presents an opportunity for its shareholders.
On
February 11, 2009, the Company (then called “Clearview Acquisitions, Inc.”)
completed its acquisition of Helix Wind, Inc., a Nevada corporation (“Helix
Wind”) which was incorporated in the State of Nevada on September 12, 2006, by
merging Helix Wind with and into Helix Wind Acquisition Corp., a wholly-owned
subsidiary of the Company. The Company then changed its name to our
current name, “Helix Wind, Corp.” The Company’s executive offices are
located at 1848 Commercial Street, San Diego, California 92113. The
Company is engaged in the small wind turbine renewable energy business offering
a paradigm breaking distributed power technology platform designed to produce
electric energy from the wind. In 2009, the
Company generated approximately $1,200,000 in revenues from sales of
its vertical axis wind turbines. The Company intends to utilize two
distinct distribution channels to market and sell its products: (i)
direct sales to end users and certified distributors; and (ii) indirect or
channel sales with certified distributors domestically and
internationally.
Small Wind Turbine
Business
The
Company provides energy independence utilizing wind for residential, commercial
and vertical market applications. Wind power is an abundant, renewable,
emissions free energy source that can be utilized on large and small scales. The
Company’s turbines offer a pollution free alternative to conventional energy
sources.
The
Company offers wind turbines in two sizes for electricity production. The S322
is rated at 2.0 kilowatts (kW) of power output while the S594 is rated at 4.0kW
of power output. The power output rating is based upon the
instantaneous power output of the units, which varies with wind speed that is
converted into electricity. Both units are suitable for residential
and commercial applications working as single unit installations or as an array
arrangement of multiple units. The Company’s products are positioned
as simple, inexpensive, and easy-to-assemble systems that work in a wide range
of wind conditions. All wind turbines require wind to
operate.
Vertical
market applications the Company plans to offer, include turbines for liquid
pumping for the petroleum industry, where injection pumping is required at off
grid and remote locations, water pumping industry for off grid drinking water
and agricultural applications in developing countries, Cell Tower installations,
Digital billboards, and a host of others.
The
Company’s business model is straightforward as it substantially out-sources its
manufacturing functions to countries with labor cost advantages. Multiple
vendors are intended to be utilized to minimize the risk of contractors copying
full-scale designs and infringing upon the Company’s patents. The Company’s U.S.
operations are expected to involve quality control, assembly, testing, and
shipping (initial quality assurance and quality control will be done overseas
during production and before shipment). The Company’s vendor manufacturers are
expected to be ISO9000 certified. The Company intends to focus on processes that
add greater value – design, development, and sales. The Company plans to
maintain a minimal inventory; systems will be assembled, tested, packed, and
shipped as orders flow in.
Small Wind Turbine Industry
Overview
The U.S.
small wind turbine market grew 78% and deployed an additional 17.3 megawatts
(MW) of new capacity in 2008 according to the American Wind Energy Association’s
Small Wind Turbine Market Study 2009. The resulting efforts stated in
the AWEA study include data that suggests the market deployed an additional
10,500 units and generated $77 million in additional sales over the
prior years reported revenue and unit volume growth. The AWEA study states that
80MW of cumulative installed small wind capacity has been installed in the US
alone. As outlined in this study, the industry projects a 30-fold growth within
as little as five years despite a global recession, for a cumulative US
installed capacity of 1,700 MW by the end of 2013. Much of this estimated growth
will be spurred by the new eight-year 30% federal Investment Tax Credit passed
by Congress in October 2008 and augmented in February 2009. Industry
challenges to meeting its full potential are generally considered to be
political, financial, and regulatory in nature, not technological.
4
The most
favorable markets exist in states where policies, regulations, and incentives
help lower the payback period. The leading domestic markets appear to be New
York, Massachusetts, Pennsylvania, Colorado, California, Connecticut,
Washington, Utah, Minnesota, Iowa and Illinois, but is changing rapidly as other
states are following suit with renewable energy grants and tax credits. Small
wind products manufactured by various US companies are mainly exported to
Europe, Canada, China, and India. Residential applications (1-10 kW) - on-grid
or off-grid - dominate the sales distribution. The grid-connected,
residential-scale models account for the fastest growing segment.
In
addition to distributed power generation for residences and businesses, the
Company’s turbines are also ideal for applications in the following
markets:
Cell
Phone Towers
Grid-tied
and off-grid cell phone towers, particularly in developing nations, often
utilize diesel generators and batteries for primary and backup power. The
Company’s turbines could be mounted in balanced pairs to generate primary and
backup electricity for this application. The Company is pursuing cell
tower mounting systems with partners in Argentina, India, Canada and the
U.S.
Liquids
Pumping (water and petroleum)
Water
Pumping: The Company’s turbines generate high amounts of torque, even at low
wind speeds, and can be utilized to drive pneumatic pumps for field
applications. Developing nations in South America and Sub-Saharan Africa are
predominately comprised of agrarian, off grid economies. The Company’s turbines
are ideally suited for water pumping installations in off-grid rural
areas.
Injection
Pumping: The petroleum industry increasingly finds itself operating in ever more
remote and harsh environments; however, many manufacturing processes require
reliable precision injection pumps at various stages. The Company turbines can
be utilized in conjunction with compressor technology to reliably serve this
function.
One of
the key factors which we expect to fuel the increased adoption of renewable
energy sources such as wind power is the increasing concerns of global warming
and the growing pressure on governments to curb it. Changing public
opinion in the face of global warming and the resulting legislative mandates
combined with falling net purchase costs of small wind systems and increasing
utility supplied fossil fuel energy costs drive the growth of the small scale
power generation segment. Federal and state policies, especially rebate programs
and property tax exemptions, are boosting demand. Improvements in
interconnection policies, net metering policies, local zoning statutes, and
permitting processes will also play a growing role in increasing the demand for
small scale power generation sources. Concerns about climate change and energy
security are giving further impetus to increasing the demand in this
market.
Digital
Signage
Another rapidly growing small wind
market is the billboard market and digital signage
markets. Billboards across the country can be easily powered by wind
as they exist in an analogue format today while making the transition to digital
sign billboards and displays over time.
Governmental
Regulation
Each
state is responsible for regulating the sale, installation and interconnection
of alternative energy within their state. Currently there is no
Federal-level regulation that specifically controls the sale, distribution and
installation of small wind turbines beyond general small business
regulations. The Public Utility Regulatory Policies Act of 1978, or
PURPA, requires utilities to interconnect and purchase energy from small wind
systems. Individual utilities are permitted to regulate that
process.
5
There is
a Federal tax credit available to installers of small wind
systems. Owners of small wind systems with 100 kW of capacity and
less can receive a credit for 30% of the total installed cost of the system, not
to exceed $4,000. The credit was available beginning October 3, 2008,
the day the bill was signed into law, through December 31, 2016. For
turbines used for homes the credit is additionally limited to the lesser of
$4,000 or $1,000 per kW of capacity.
Competition
The
Company competes with all energy suppliers and manufacturers of energy producing
equipment. The Company directly competes with manufacturers and suppliers of
other vertical axis wind turbine (“VAWT”) systems, such as WePower Sustainable
Energy Solutions, Windside Production Ltd., Mariah Power and OregonWind Inc., as
well as indirectly with traditional horizontal axis wind turbine (“HAWT”) wind
turbines. To a lesser extent, the Company competes with providers of
solar-thermal and solar-photovoltaic energy production systems (which still
remain significantly more expensive despite many financial incentive programs to
encourage adoption). We believe the Company’s aesthetic design; comparable
generation capacity and lower production cost lend the Company’ competitive
advantages over both traditional horizontal axis wind propeller designs and
emerging technologies. One of the main distinguishing advantages of the Company
is the ability to remotely monitor the wind turbine through our proprietary Wind
Turbine Monitoring System (WTMS.) The WTMS will monitor wind speed,
generator output and, via algorithms other turbine functions. The Company’s WTMS
can enable a turbine owner to remotely monitor the functionality of the turbine
from any computers web browser any time and from any location. The monitoring
system will also allow the Company to develop its own database of wind speed
data and performance metrics, facilitate customer demand side management and
enable predictive generation modeling. One disadvantage for the
Company currently is that several competitors have longer operating histories
and significantly more financial resources.
Intellectual
Property
The
Company owns all rights, title and interest in one currently pending U.S. patent
application, one currently pending Patent Cooperation Treaty (“PCT”) patent
application, and two U.S. federal trademark registrations.
The U.S.
and PCT patent applications both cover the same technology, namely vertical axis
wind turbines with segmented Savonius rotors. The Savonius rotor is
assembled by interlocking several relatively small and easily manageable
individual blade segments. This unique segmented design has several
advantages over traditional vertical axis wind turbine designs, including ease
of manufacturing, ease of assembly, and suitability for residential
use.
The U.S.
patent application (serial no. 11/705,844) was filed on February 13, 2007 and
first published on August 14, 2008 as U.S. patent application publication no.
2008/0191487. The application remains pending by the U.S. Patent
Office. Assuming a patent is granted and that no patent term
adjustments are made, the patent will expire on February 13, 2027.
The PCT
patent application (serial no. PCT/US2008/001983) was filed on February 13, 2008
and claims priority to the Company’s U.S. patent application serial no.
11/704,844. The International Searching Authority issued a Written
Opinion on July 1, 2008. Helix Wind responded to the Written Opinion
on September 30, 2008. The application has not yet entered the
national phase in any country, although Helix Wind may prosecute the application
in all 138 PCT contracting states. The term of any patent that issues
in a foreign country depends on the law of that country, but in general is 20
years from the filing date.
The
Company owns U.S. federal trademark registration no. 3,524,780 for “HELIX WIND,”
registered on October 28, 2008. The registration is due for renewal
on October 28, 2018. Helix Wind also owns U.S. federal trademark
registration no. 3,506,184 for “E2 ENERGY (R)EVOLUTION,” registered on September
23, 2008. The registration is due for renewal on September 23,
2018. Both of these U.S. federal trademark registrations are in
International Class 007 for use in connection with “wind turbines and
accessories for wind turbines.”
6
Research and
Development
Our
research and development initiatives have been directed at improving the
efficiency and reliability of our wind turbines, the development and completion
of the Wind Turbine Monitoring System (WTMS), Partnering with our inverter
manufacturer to improve on the inverters interaction with the turbine generator
and development of other power electronics. During 2009, our
research, development and engineering expenses were approximately $700,000,
primarily related to product development and testing. Future research
and development will focus on the continued improvement of our current wind
turbines performance. Enhancing the WTMS with new functionality and
developing proprietary power electronics. In addition we will focus on operating
process quality improvements within our manufacturing facilities and looking at
ways to reduce product cost of goods.
Employees
As of the
date of this report, we have 4 full-time employees, no part-time employees and 2
independent contractors. The Company had a reduction in
force in February to reduce its cost until it was able to close a capital raise
to sustain the operation and build its infrastructure. The Company
plans to bring back several of the employees provided it can raise additional
capital. We believe our relationships with our current employees are
good. We also retain a limited number of independent contractors to
perform projects. To implement our business strategy, we expect, over
time, continued growth in our employee and infrastructure requirements,
particularly as we expand our engineering, sales and marketing capacities going
forward.
Available
Information
A copy of
our annual report on Form 10-K for our fiscal year ended December 31, 2009 will
be furnished without charge upon receipt of a written request identifying the
person so requesting a report as a stockholder of the Company at such date to
any person who was a beneficial owner of our common stock on the record
date. Requests should be directed to the Corporate Secretary at the
address on the cover page to this report. Our annual and
quarterly reports, along with all other reports and amendments filed with or
furnished to the SEC are publicly available free of charge on the Investor
section of our website at www.helixwind.com as soon as reasonably practicable
after these materials are filed with or furnished to the SEC. The
information on our website is not part of this or any other report we file with,
or furnish to, the SEC. The SEC also maintains an Internet site that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The address
of that site is www.sec.gov.
This
report includes forward-looking statements about our business and results of
operations that are subject to risks and uncertainties. See
"Forward-Looking Statements," above. Factors that could cause or
contribute to such differences include those discussed below. In
addition to the risk factors discussed below, we are also subject to additional
risks and uncertainties not presently known to us or that we currently deem
immaterial. If any of these known or unknown risks or uncertainties
actually occur, our business could be harmed substantially.
Risks
Related To Our Financial Condition and Our Business
Our
auditors have expressed substantial doubt about our ability to continue as a
“going concern.” Accordingly, there is significant doubt about our
ability to continue as a going concern.
Our
business began recording revenues in 2009 and we may never become profitable. As
of December 31, 2009, we had an accumulated deficit of $55,909,285 and a
negative working capital of $33,495,333. A significant amount of capital will be
necessary to advance the development of our product to the point at which they
will become commercially viable and these conditions raise substantial doubt
about our ability to continue as a going concern.
If we
continue incurring losses and fail to achieve profitability, we may have to
cease our operations. Our financial condition raises substantial doubt that we
will be able to continue as a “going concern”, and our independent auditors
included an explanatory paragraph regarding this uncertainty in their report on
our financial statements as of December 31, 2009. These financial
statements do not include any adjustments that might result from the uncertainty
as to whether we will continue as a “going concern”. Our ability
to continue status as a “going concern” is dependent upon our generating
cash flow sufficient to fund operations. Our business plans may not
be successful in addressing these issues. If we cannot continue as a
“going concern”, you may lose your entire investment in us.
7
We
do not have sufficient cash on hand. If we do not generate sufficient revenues
from sales among other factors, we will be unable to continue our
operations.
We
estimate that within the next 12 months we will need $5,000,000 for operations,
and we do not have sufficient cash on hand to meet this requirement. Although we
are seeking additional sources of debt or equity financings, there can be no
assurances that we will be able to obtain any additional
financing. We recognize that if we are unable to generate sufficient
revenues or obtain debt or equity financing, we will not be able to earn profits
and may not be able to continue operations.
There is
limited history upon which to base any assumption as to the likelihood that we
will prove successful, and we may not be able to continue to generate enough
operating revenues or ever achieve profitable operations. If we are unsuccessful
in addressing these risks, our business will most likely fail.
We
have a limited operating history and if we are not successful in continuing to
grow the business, then we may have to scale back or even cease ongoing business
operations
We have a
very limited history of revenues from operations ($1,200,000 to date). We have
yet to generate positive earnings and there can be no assurance that we will
ever operate profitably. Operations will be subject to all the risks
inherent in the establishment of a developing enterprise and the uncertainties
arising from the absence of a significant operating history. We may be unable to
sign customer contracts or operate on a profitable basis. As we are in the early
production stage, potential investors should be aware of the difficulties
normally encountered in commercializing the product. If the business plan is not
successful, and we are not able to operate profitably, investors may lose some
or all of their investment in us.
If
we are unable to obtain additional funding, business operations will be harmed
and if we do obtain additional financing then existing shareholders may suffer
substantial dilution.
We
anticipate that we will require up to $5,000,000 to fund continued operations
for the next twelve months, depending on revenue, if any, from
operations. Additional capital will be required to effectively
support the operations and to otherwise implement overall business
strategy. We currently do not have any contracts or commitments for
additional financing. There can be no assurance that financing will
be available in amounts or on terms acceptable to us, if at all. The inability
to obtain additional capital will restrict our ability to grow and may reduce
our ability to continue to conduct business operations. If we are unable to
obtain additional financing, we will likely be required to curtail and possibly
cease operations. Any additional equity financing may involve substantial
dilution to then existing shareholders.
We have
significant debt obligations, and if we fail to restructure or repay or
outstanding indebtedness, the lenders may take actions that would have a
material adverse impact on the Company.
The
Company has significant outstanding indebtedness. As of the date of this
report, the Company had an aggregate outstanding balance of $3,479,500 in
convertible debt obligations (including accrued interest). If the lenders
under these convertible notes do not convert and demand repayment, the Company
does not have the cash to pay its debt obligations. Our failure to repay
this debt could result in events of default under the convertible notes which
provide the lenders with certain rights, including the right to institute an
involuntary bankruptcy proceeding against the Company. If the debt remains
unpaid past the due dates and the lenders choose to exercise their rights of
default, the Company may be forced to seek the protection afforded by
Chapter 7 of the federal bankruptcy laws which would have a material
adverse effect on the Company. The Company’s default on its debt obligations or
potential need to seek protection under the federal bankruptcy laws raise
substantial doubt about our ability to continue as a going concern.
Because
we are small and do not have much capital, we may have to limit business
activity which may result in a loss of your investment.
Because
we are small and do not have much capital, we must limit our business activity.
As such we may not be able to complete the sales and marketing efforts required
to drive our sales. In that event, if we cannot generate revenues, you will lose
your investment.
8
If
we are unable to continue to retain the services of Messrs. Scott Weinbrandt or
Kevin Claudio, or if we are unable to successfully recruit qualified managerial
and company personnel having experience in the small wind turbine industry, we
may not be able to continue operations.
Our
success depends to a significant extent upon the continued services of Mr. Scott
Weinbrandt, Chairman, CEO and President, and Kevin Claudio, Chief Financial
Officer. The loss of the services of Messrs. Weinbrandt or Claudio could have a
material adverse effect on our growth, revenues, and prospective business. Both
of these individuals are committed to devoting substantially all of their time
and energy to us through their respective employment agreements. Any of these
employees could leave us with little or no prior notice. We do not have “key
person” life insurance policies covering any of our employees. Additionally,
there are a limited number of qualified technical personnel with significant
experience in the design, development, manufacture, and sale of our wind
turbines, and we may face challenges hiring and retaining these types of
employees.
In order
to successfully implement and manage our business plan, we will be dependent
upon, among other things, successfully recruiting qualified managerial and
company personnel having experience in the small wind turbine business.
Competition for qualified individuals is intense. There can be no assurance that
we will be able to find, attract and retain existing employees or that we will
be able to find, attract and retain qualified personnel on acceptable
terms.
We
are a new entrant into the small wind turbine industry without profitable
operating history.
As of
December 31, 2009, we had an accumulated deficit of $55,909,285. We
expect to derive our future revenues from sales of our systems, however, these
revenues are highly uncertain. We continue to devote substantial
resources to expand our sales and marketing activities, further increase
manufacturing capacity, and expand our research and development
activities. As a result, we expect that our operating losses will
increase and that we may incur operating losses for the foreseeable
future.
If
we are unable to successfully achieve broad market acceptance of our systems, we
may not be able to generate enough revenues in the future to achieve or sustain
profitability.
We are
dependent on the successful commercialization of our systems. The
market for small wind turbines is at an early stage of
development. The market for our systems is unproven. The
technology may not gain adequate commercial acceptance or success for our
business plan to succeed.
If
we cannot establish and maintain relationships with distributors, we may not be
able to increase revenues.
In order
to increase our revenues and successfully commercialize our systems, we must
establish and maintain relationships with our existing and potential
distributors. A reduction, delay or cancellation of orders from one
or more significant customers could significantly reduce our revenues and could
damage our reputation among our current and potential customers. We
currently have approximately 33 signed distribution agreements throughout the
United States and international locations, however, the agreements have no
termination penalties.
We
were recently sued by one of our distributors and may face additional lawsuits
in the future
We were
recently named in a lawsuit by one of our distributors for claims which include
misrepresentation, breach of contact, breach of warranties and unfair practices
under consumer protection statutes relating to our products and performance
under the distribution agreement. While we believe we have defenses
to these claims, there is a potential that the claims could be decided against
us, which could result on our obligation to pay damages to the distributor,
which would have an adverse effect on our financial
condition. Additionally, we could face similar lawsuits from
distributors or customers in the future.
If
we can not assemble a large number of our systems, we may not meet anticipated
market demand or we may not meet our product commercialization
schedule.
To be
successful, we will have to assemble our systems in large quantities at
acceptable costs while preserving high product quality and
reliability. If we cannot maintain high product quality on a large
scale, our business will be adversely affected. We may encounter
difficulties in scaling up production of our systems, including problems with
the supply of key components, even if we are successful in developing our
assembly capability, we do not know whether we will do so in time to meet our
product commercialization schedule or satisfy the requirements of our
customers. In addition, product enhancements need to be implemented
to various components of the platform to provide better overall quality and
uptime in high wind regimes. The system is now rated to support 100
mph sustained winds. The implementation of the enhancements
to our system may also delay significant production by requiring additional
manufacturing changes and technical support to facilitate the manufacturing
process.
9
If
we are unable to raise sufficient capital, we may not be able to pay our key
suppliers.
Our
ability to pay key suppliers on time will allow us to effectively manage our
business. Currently we have a large outstanding liability with our
product manufacturer that is inhibiting us from receiving additional units at
this time. In addition, we have other large outstanding accounts
payable with key suppliers that may inhibit the Company from receiving system
product in the future.
If
we experience quality control problems or supplier shortages from component
suppliers, our revenues and profit margins may suffer.
Our
dependence on third-party suppliers for components of our systems involves
several risks, including limited control over pricing, availability of
materials, quality and delivery schedules. Any quality control
problems or interruptions in supply with respect to one or more components or
increases in component costs could materially adversely affect our customer
relationships, revenues and profit margins.
International
expansion will subject us to risks associated with international operations that
could increase our costs and decrease our profit margins.
International
operations are subject to several inherent risks that could increase our costs
and decrease our profit margins including:
-reduced
protection of intellectual property rights;
-changes
in foreign currency exchange rates;
-changes
in a specific country’s economic conditions;
-trade
protective measures and import or export requirements or other restrictive
actions by foreign governments; and
-changes
in tax laws.
If
we cannot effectively manage our internal growth, our business prospects,
revenues and profit margins may suffer.
If we
fail to effectively manage our internal growth in a manner that minimizes
strains on our resources, we could experience disruptions in our operations and
ultimately be unable to generate revenues or profits. We expect that
we will need to significantly expand our operations to successfully implement
our business strategy. As we add marketing, sales and build our
infrastructure, we expect that our operating expenses and capital requirements
will increase. To effectively manage our growth, we must continue to
expend funds to improve our operational, financial and management controls, and
our reporting systems and procedures. In addition, we must
effectively expand, train and manage our employee base. If we fail in
our efforts to manage our internal growth, our prospects, revenue and profit
margins may suffer.
Our
technology competes against other small wind turbine
technologies. Competition in our market may result in pricing
pressures, reduced margins or the inability of our systems to achieve market
acceptance.
We
compete against several companies seeking to address the small wind turbine
market. We may be unable to compete successfully against our current
and potential competitors, which may result in price reductions, reduced margins
and the inability to achieve market acceptance. The current level of
market penetration for small wind turbines is relatively low and as the market
increases, we expect competition to grow significantly. Our
competition may have significantly more capital than we do and as a result, they
may be able to devote greater resources to take advantage of acquisition or
other opportunities more readily.
10
Our
inability to protect our patents and proprietary rights in the United States and
foreign countries could materially adversely affect our business prospects and
competitive position.
Our
success depends on our ability to obtain and maintain patent and other
proprietary-right protection for our technology and systems in the United Stated
and other countries. If we are unable to obtain or maintain these
protections, we may not be able to prevent third parties from using our
proprietary rights.
If
we cannot effectively increase and enhance our sales and marketing capabilities,
we may not be able to increase our revenues.
We need
to further develop our sales and marketing capabilities to support our
commercialization efforts. If we fail to increase and enhance our
marketing and sales force, we may not be able to enter new or existing
markets. Failure to recruit, train and retain new sales personnel, or
the inability of our new sales personnel to effectively market and sell our
systems, could impair our ability to gain market acceptance of our
systems.
If
we encounter unforeseen problems with our current technology offering, it may
inhibit our sales and early adoption of our product.
We are in
the process of shipping our third production run of units and continue to
improve on the products performance capabilities, but any unforeseen problems
relating to the units operating effectively in the field could have a negative
impact on adoption, future shipments and our operating results.
We
are to establish and maintain required disclosure controls
and procedures and internal controls over financial reporting and to meet the
public reporting and the financial requirements for our business.
Our
management has a legal and fiduciary duty to establish and maintain disclosure
controls and control procedures in compliance with the securities laws,
including the requirements mandated by the Sarbanes-Oxley Act of 2002. The
standards that must be met for management to assess the internal control over
financial reporting as effective are new and complex, and require significant
documentation, testing and possible remediation to meet the detailed standards.
Because we have limited resources, we may encounter problems or delays in
completing activities necessary to make an assessment of our internal control
over financial reporting, and disclosure controls and procedures. In addition,
the attestation process by our independent registered public accounting firm is
new and we may encounter problems or delays in completing the implementation of
any requested improvements and receiving an attestation of our assessment by our
independent registered public accounting firm. If we cannot assess our internal
control over financial reporting as effective or provide adequate disclosure
controls or implement sufficient control procedures, or our independent
registered public accounting firm is unable to provide an unqualified
attestation report on such assessment, investor confidence and share value may
be negatively impacted.
Risks Related to Common
Stock
There
is a significant risk of our common shareholders being diluted as a result of
our outstanding convertible securities.
We have
60,895,662 shares of common stock issued and outstanding as of March 31, 2010,
and if all our outstanding options and warrants were exercised, we would
have 19,296,028 additional shares of common stock issued and
outstanding. We also have outstanding an aggregate of
$2,718,037 of 9% Convertible Notes as of March 31, 2010 which may be converted
into shares of common stock at the conversion rate as provided in the
convertible notes. In addition, we recently completed a financing
described in this report with St. George Investments, LLC pursuant to which we
issued a convertible note and warrants which, if exercised, would result in a
significant amount of additional shares of common stock
outstanding. Further, we anticipate the need to raise additional
capital which would also result in the issuance of additional shares of common
stock and/or securities convertible into our common
stock. Accordingly, a common shareholder has a significant risk of
having its interest in our company being significantly diluted.
The
large number of shares eligible for immediate and future sales may depress the
price of our stock.
Our
Articles of Incorporation authorize the issuance of 1,750,000,000 shares of
common stock, $.0001 par value per share and 5,000,000 shares of preferred
stock, $.0001 par value per share. As discussed above, we had
60,895,662 shares of common stock outstanding as of March 31, 2010, and a
significant amount of additional shares issuable upon exercise and conversion of
our outstanding warrants, stock options and convertible notes.
11
Because
we have available a significant number of authorized shares of common stock, we
may issue additional shares for a variety of reasons which will have a dilutive
effect on our shareholders and on your investment, resulting in reduced
ownership and in our company and decreased voting power, or may result in a
change of control.
Our board
of directors has the authority to issue additional shares of common stock up to
the authorized amount stated in our Articles of Incorporation. Our board of
directors may choose to issue some or all of such shares to acquire one or more
businesses or other types of property, or to provide additional financing in the
future. The issuance of any such shares may result in a reduction of the book
value or market price of the outstanding shares of our common stock. If we do
issue any such additional shares, such issuance also will cause a reduction in
the proportionate ownership and voting power of all other shareholders. Further,
any such issuance may result in a change of control of the company.
Additional
financings may dilute the holdings of our current shareholders.
In order
to provide capital for the operation of the business, we may enter into
additional financing arrangements. These arrangements may involve the issuance
of new shares of common stock, preferred stock that is convertible into common
stock, debt securities that are convertible into common stock or warrants for
the purchase of common stock. Any of these items could result in a material
increase in the number of shares of common stock outstanding, which would in
turn result in a dilution of the ownership interests of existing common
shareholders. In addition, these new securities could contain provisions, such
as priorities on distributions and voting rights, which could affect the value
of our existing common stock.
There
is currently a limited public market for our common stock. Failure to
develop or maintain a trading market could negatively affect its value and make
it difficult or impossible for you to sell your shares.
There has
been a limited public market for our common stock and an active public market
for our common stock may not develop. Failure to develop or maintain
an active trading market could make it difficult for you to sell your shares or
recover any part of your investment in us. Even if a market for our
common stock does develop, the market price of our common stock may be highly
volatile. In addition to the uncertainties relating to future
operating performance and the profitability of operations, factors such as
variations in interim financial results or various, as yet unpredictable,
factors, many of which are beyond our control, may have a negative effect on the
market price of our common stock.
“Penny
Stock” rules may make buying or selling our common stock difficult.
If the
market price for our common stock is below $5.00 per share, trading in our
common stock may be subject to the “penny stock” rules. The SEC has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to certain exceptions.
These rules would require that any broker-dealer that would recommend our common
stock to persons other than prior customers and accredited investors, must,
prior to the sale, make a special written suitability determination for the
purchaser and receive the purchaser’s written agreement to execute the
transaction. Unless an exception is available, the regulations would require the
delivery, prior to any transaction involving a penny stock, of a disclosure
schedule explaining the penny stock market and the risks associated with trading
in the penny stock market. In addition, broker-dealers must disclose commissions
payable to both the broker-dealer and the registered representative and current
quotations for the securities they offer. The additional burdens imposed upon
broker-dealers by such requirements may discourage broker-dealers from effecting
transactions in our common stock, which could severely limit the market price
and liquidity of our common stock.
ITEM
1B. UNRESOLVED STAFF
COMMENTS
None.
12
ITEM
2. PROPERTIES
The
Company maintains its principal office at 1848 Commercial Street, San Diego,
California 92113, pursuant to a lease entered into effective November 1, 2008,
basic monthly rent is $7,125 per month. Helix Wind’s current office
space consists of approximately 1,666 square feet and is believed to be suitable
and adequate to meet current business requirements. The lease term is
month to month and the Company has provided notice to its landlord that it
intends to vacate the premises as of April 30, 2010. The Company
intends to relocate its headquarters in San Diego, California and has identified
suitable facilities.
The
Company also leases a test site for its wind turbines in California for $450 per
month. The initial term of this lease was November 1, 2008
through October 31, 2009, with a one-year renewal option for each of the next
five years with no increase in rent during the renewal period. The
lease was renewed and now matures October 31, 2010.
ITEM
3. LEGAL PROCEEDINGS
On March
23, 2010, the Company received a Writ of Summons issued from the Superior Court
of the State of New Hampshire, Rockingham County, to respond to a lawsuit filed
by Alternative Energies, LLC (“Waterline”) relating to claims against the
Company under its distribution contract with Waterline. The lawsuit
does not specify an amount of damages claimed. As previously
announced, the Company did receive a claim from Waterline seeking damages of
approximately $250,000. The Company intends to defend
itself in the lawsuit. Waterline is currently a distributor of the
Company’s products.
On March
5, 2010, the Company received a summons to appear in the Supreme Court of the
State of New York, County of New York, in a lawsuit filed by Crystal Research
Associates, LLC (“Crystal”) alleging the Company failed to pay for services
rendered by Crystal in the amount of $33,750. The Company intends to
negotiate a payment plan to resolve the outstanding balance and is currently in
communication with Crystal management to reach agreement on terms.
Effective
April 1, 2010, the Company completed a Settlement Agreement and Mutual Release
with Kenneth O. Morgan pursuant to which the Company paid Kenneth O. Morgan the
amount of $150,000 in settlement of the previously announced litigation between
the parties. Pursuant to the terms of the Settlement Agreement,
Kenneth O. Morgan has agreed to dismiss his lawsuit against the Company and
Scott Weinbrandt, and the Company has agreed to dismiss its counterclaims
against Kenneth O. Morgan. This summary of the settlement agreement
is not complete, and is qualified in its entirety by reference to the full text
of the settlement agreement that is attached as an exhibit to our Current Report
on Form 8-K field with the SEC on April 6, 2010.
ITEM 4. (REMOVED AND
RESERVED)
PART
II
ITEM
5. MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
The
Company’s common stock is currently listed on the OTC Bulletin Board under the
symbol “HLXW.” Prior to April 24, 2009, the Company’s stock was listed on the
OTC Bulletin Board under the symbol “CVAC.” The high and low bid
quotations of our common stock as reported by NASDAQ and/or Yahoo Finance for
the periods indicated below, all prior to the merger, are:
Period
|
High
|
Low
|
||||||
Quarters
Ended:
|
||||||||
March
31, 2008
|
$ |
0.21
|
$ |
0.06
|
||||
June
30, 2008
|
$ |
0.25
|
$ |
0.07
|
||||
September
30, 2008
|
$ |
0.25
|
$ |
0.05
|
||||
December
31, 2008
|
$ |
10.00
|
$ |
0.01
|
||||
March
31, 2009
|
$ |
2.10
|
$ |
1.50
|
||||
June
30, 2009
|
$ |
3.03
|
$ |
1.60
|
||||
September
30, 2009
|
$ |
3.08
|
$ |
2.26
|
||||
December
31, 2009
|
$ |
3.30
|
$ |
2.19
|
13
The
foregoing reflects inter-dealer prices without retail mark-up, markdown or
commissions or may not represent actual transactions.
Dividend
Policy
The
Company has never paid any cash dividends on its capital stock and does not
anticipate paying any cash dividends on the Common Stock in the foreseeable
future. The Company intends to retain future earnings to fund ongoing operations
and future capital requirements. Any future determination to pay cash dividends
will be at the discretion of the Board of Directors and will be dependent upon
financial condition, results of operations, capital requirements and such other
factors as the Board of Directors deems relevant.
Holders
of Record
As of
March 31, 2010, 60,895,662 shares of our common stock were issued and
outstanding, and held by more than 3,000 stockholders of record.
Recent
Sales of Unregistered Securities
None,
other than as previously reported in our Forms 10Q and Forms 8-K.
ITEM
6. SELECTED FINANCIAL DATA
As a
smaller reporting company we are not required to provide the information
required by this item.
ITEM
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The
following discussion and analysis is intended as a review of significant factors
affecting the Company’s financial condition and results of operations for the
periods indicated. The discussion should be read in conjunction with
the Company’s consolidated financial statements and the notes presented
herein. See "ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA"
below. In addition to historical information, the following
Management’s Discussion and Analysis of Financial Condition and Results of
Operations contain forward-looking statements that involve risks and
uncertainties. Our actual results could differ significantly from
those anticipated in these forward-looking statements as a result of certain
factors discussed in this report. See "Forward-Looking Statements,"
above.
Basis of
Presentation
The
following management’s discussion and analysis is intended to provide additional
information regarding the significant changes and trends which influenced our
financial performance for the year ended December 31, 2009. This discussion
should be read in conjunction with the audited financial statements and notes as
set forth in this Report.
The
comparability of our financial information is affected by our acquisition of
Helix Wind, Inc. in February of 2009. As a result of the acquisition, financial
results reflect the combined entity beginning February 11, 2009. For further
discussion of the acquisition see note 1 of the financial
statements.
Certain
statements contained in this Form 10-K are forward-looking in nature and involve
known and unknown risks, uncertainties, and other factors that may cause our
actual results, performance or achievements to be materially different from any
future results.
Overview
The
Company is a small wind vertical axis turbine (VAWT) solutions
company focused on the renewable energy small wind market as defined by
less than 110kW by the AWEA. We develop or acquire small wind
products and solutions for different vertical markets worldwide. The
Company is engaged in the design, manufacturing and sale of small wind vertical
axis turbines designed to generate 2.0kW and 4.0kW of clean renewable
electricity.
14
The
Company provides energy independence utilizing wind as resource that never runs
out. Wind power is an abundant, renewable, emissions free energy
source that can be utilized on large and small scales. At the soul of
the Company lies the belief that energy self sufficiency is a responsible and
proactive goal that addresses the ever-increasing consequences of legacy energy
supply systems.
Plan of
Operations
The
Company’s strategy is to pursue selected opportunities that are characterized by
reasonable entry costs, favorable economic terms, high reserve potential
relative to capital expenditures and the availability of existing technical data
that may be further developed using current technology.
Revenues
We
generate substantially all of our net sales from the sale of small wind
turbines. The Company uses a mix of direct and indirect sales as its
distribution model. Direct sales personnel are employed to offer a
direct face to face relationship with the customer as appropriate to manage
large opportunities that may later involve or be turned over to one of our
distributor partners. This model exits in the United States only. The
Company partners with key Distributors outside of the United States representing
the Company on a Global basis to provide a key selling presence directly to the
customer. We continue to add additional distributors by territory and region
depending on need and market requirements. Our structure is built on a
non-exclusivity of territory model. Therefore, we define a reasonable
territory the distributors can cover from a sales and service point of view. We
require each Distributor Partner to sell a minimum volume of product on an
annual basis in order to keep their relationship with the Company valid. A U.S.
retail price is established by the Company as the base line from which all
distributors quote prices, and which must be adhered to by all distributors as a
condition of their agreement with the Company. Pricing in the Euro zone is
subject to the fluctuation of the exchange rate between the euro and U.S.
dollar. Distributors must adhere to the price guidelines which are based on our
U.S. retail price. Confirmation of an order is given on receipt of a signed
purchase agreement with a 50% deposit in U.S. dollars. Sales are
recognized and title and risk is passed on delivery to customers in the United
States and by delivery CIF to international locations. Our customers do not have
extended payment terms or rights of cancellation under these
contracts. No single customer accounted for more than 15% of our
revenue for the year ended December 31, 2009.
Cost
of Sales
Our cost
of sales includes the cost of raw material and components such as blades,
rotors, invertors, and other components. Other items contributing to
our cost of sales are the direct assembly labor and manufactured overhead from
our component suppliers and East West, a Thailand company that manages the
manufacturing and distribution of our products. Overall, we currently
expect our cost of sales per unit to decrease as we increase production lots in
the future to meet the product demands from our customers.
Gross
Profit
Gross
profit is affected by numerous factors, including our average selling prices,
selling seasonality, distributor discounts, foreign exchange rates, and our
manufacturing costs. Another factor impacting gross profits is the
increase of production going forward. As a result of the above, gross
profits may vary from quarter to quarter and year to year.
Research
and Development
Research
and development expense consists primarily of salaries and personnel-related
costs and the cost of products, materials and outside services used in our
process and product research and development activities.
15
Selling, General and Administrative
Selling,
general and administrative expense consists primarily of salaries and other
personnel-related costs, professional fees, insurance costs, travel expense,
other selling expenses as well as share based compensation expense relating to
stock options. We expect these expenses to increase in the near term,
both in absolute dollars and as a percentage of net sales, in order to support
the growth of our business as we expand our sales and marketing efforts, improve
our information processes and systems and implement the financial reporting,
compliance and other infrastructure required by a public
company. Over time, we expect selling, general and administrative
expense to decline as a percentage of net sales as our net sales
increase.
Other
Expenses
Interest
expense, net of amounts capitalized, is incurred on various debt financings as
well as the amount recorded for the derivative liability associated with the 9%
convertible notes and warrants. Any interest income earned on our
cash, cash equivalents and marketable securities is netted in other expenses as
it is immaterial.
Use
of estimates
Our
discussion and analysis of our financial condition and results of operations are
based upon our audited consolidated financial statements, which have been
prepared in accordance with U.S. GAAP for interim financial
information. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported amount of assets,
liabilities, net sales and expenses and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates,
including those related to inventories, intangible assets, income taxes,
warranty obligations, marketable securities valuation, derivative financial
instrument valuation, end-of-life collection and recycling, contingencies and
litigation and share based compensation. We base our estimates on
historical experience and on various other assumptions that we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources.
Recent
Developments
On
February 2, 2010, the Company closed a financing transaction under a note and
warrant purchase agreement dated January 27, 2010 with St. George Investments,
LLC. The Company issued a convertible promissory note dated January
27, 2010 in the aggregate principal amount of $780,000 and a five year warrant
to purchase up to an aggregate of 300,000 shares of the Company’s common stock
subject to an exercise price of $1.25 per share.
On
February 2, 2010, the previously announced Asset Purchase Agreement executed
with Abundant Renewable Energy (ARE) on September 9, 2009 was terminated and as
a condition of the termination the Company had to issue 1,101,322 shares of
restricted common stock to ARE.
On
February 16, 2010, the previously announced Purchase Agreement executed with
Venco Power GmbH, a German company, on September 3, 2009 was
terminated.
On
February 16, 2010, the Company received notice from St. George Investments, LLC
notifying the Company that an event of default had occurred under the
convertible secured promissory note executed January 27, 2010. As a
result, 4,800,000 shares of common stock pledged to St. George by the Company’s
CEO were surrendered to St. George. Also, a trigger event under the
note occurred which results in a 125% increase in the outstanding amount under
the note and an increase in the interest rate under the note to
18%.
On March
5, 2010, the Company entered into a note purchase agreement and convertible
secured promissory note in the principal amount of $132,000 with St. George
Investments, LLC. The note accrues interest at a rate of 18% and the
note is due on the first to occur between the date that is three months from the
date of the note or the Company raises in excess of $500,000 from investors or
lenders subsequent to the date of the note.
Effective
March 8, 2010, the Company’s former Chief Executive Officer and a director, Ian
Gardner resigned, and a former director of the Company, Gene Hoffman
resigned. The Company entered into a Separation Agreement and Release
(the “Settlement Agreement”) with Mr. Gardner effective as of March 8, 2010
pursuant to which the Company agreed to (i) pay Mr. Gardner $188,722 for certain
historical obligations to him, of which $94,361 was paid upon execution of the
Separation Agreement, and the remaining $94,361 shall be payable upon the
completion of a Company financing resulting in gross proceeds of $1,000,000 of
more; (ii) execute the Convertible Note in the amount of $144,833 discussed
below; (iii) issue him 4,800,000 shares of Company common stock; and (iv)
certain other provisions as contained in the Separation
Agreement. The description of the terms of the Separation Agreement
is qualified by reference to the form of the Separation Agreement which is filed
as an exhibit to the Company’s Form 8-K filed on March 11, 2010. In
connection with the Separation Agreement, on March 8, 2010, the Company also
executed a Convertible Note (the “Convertible Note”) in the principal amount of
$144,833 in favor of Mr. Gardner. The Convertible Note accrues
interest at the rate of 9% and, unless converted into shares of Company common
stock as provided in the Convertible Note, is due and payable on August 22,
2012. The description of the terms of the Convertible Note is
qualified by reference to the form of the convertible note which is filed as an
exhibit to the Company’s Form 8-K filed on March 11, 2010.
Effective
March 8, 2010, Scott Weinbrandt, the Company’s Chairman & President, was
appointed as Chief Executive Officer.
On March
8, 2010, Gene Hoffman, a member of the Company’s Board of Directors since June
2009, resigned from the board.
16
Recent
Financing
Effective
as of April 1, 2010, the Company closed the financing transaction under a Note
and Warrant Purchase Agreement (the “Purchase Agreement”) with St. George
Investments, LLC, an Illinois limited liability company (the “Investor”)
pursuant to which, among other things, the Company issued (i) a convertible
secured promissory note in the aggregate principal amount of $779,500 (the
“Note”) and (ii) a five-year warrant (the “Warrant”) to purchase up to an
aggregate of 2,500,000 shares of the Company’s common stock, par value $0.0001
per share (“Common Stock”), subject to adjustment, with an exercise price of
$.75 per share. The Warrant contains a cashless exercise provision. The Purchase
Agreement also contains representations, warranties and indemnifications by the
Company and the Investor. The Company also entered into a
Registration Rights Agreement with the Investor in which the Company has agreed
to prepare and file with the SEC, as soon as practicable after the closing date,
but no later than sixty (60) days from the closing date, a registration
statement registering for resale by the Investor of no fewer than 20,000,000
shares of Common Stock.
The
Purchase Agreement also provides that, subject to meeting certain conditions,
including the Company’s filing of a registration statement with the SEC within
sixty (60) days of the initial closing date, and no Event of Default has
occurred under any of the notes, the Investor will loan to the Company an
additional $130,000 (the “Additional Notes”) on or about each monthly
anniversary of the issuance of the Note during the four consecutive calendar
months immediately following such issuance of the Note, for a total aggregate
additional net purchase price of $400,000 (after deducting the original issue
discount amounts). Upon the issuance of each additional note, the
Company would also issue to the Investor an additional five year Warrant to
purchase up to 250,000 shares of Common Stock with an exercise price of $.75 per
share (the “Additional Warrants”).
The
obligations of the Company to the Investor are secured by a pledge (the “Stock
Pledge Agreement”) made by Kenneth O. Morgan, a Company shareholder, of
4,800,000 of his shares of common stock of the Company. The Company also
executed and delivered a Confession of Judgment in favor of the
Investor.
In
connection with the Stock Pledge Agreement, the Company agreed to place
6,000,000 shares of Company Common Stock into escrow for the benefit of Kenneth
O. Morgan. Under the terms of the escrow agreement, Kenneth O. Morgan
would be entitled to receive the 6,000,000 shares of Company Common Stock in the
event his shares are forfeited to the Investor under the Pledge
Agreement.
In
connection with the financing, Dominick & Dominick, the placement agent,
received a cash payment of $48,000, and will receive an additional $8,000 upon
the issuance of each Additional Note, and the issuance of warrants to Dominick
& Dominick (or their designee) to purchase 80,000 shares of common stock.
The warrants have the same terms as those issued to Investor.
The
following is a brief summary of each of those agreements. These summaries are
not complete, and are qualified in their entirety by reference to the full text
of the agreements that are attached as exhibits to our Current Report on Form
8-K filed with the SEC on April 6, 2010. Readers should review those agreements
for a more complete understanding of the terms and conditions associated with
this transaction.
Purchase
Agreement
Pursuant
to the Purchase Agreement, so long as the Note is outstanding, the Company will
not (i) incur any new indebtedness for borrowed money without the prior written
consent of the Investor; provided, however the Company
may incur obligations under trade payables in the ordinary course of business
consistent with past practice without the consent of the Investor; (ii) grant or
permit any security interest (or other lien or other encumbrance) in or on any
of its assets; and (iii) enter into any transaction, including, without
limitation, any purchase, sale, lease or exchange of property or the rendering
of any service, with any affiliate of the Company, or amend or modify any
agreement related to any of the foregoing, except on terms that are no less
favorable, in any material respect, than those obtainable from any person who is
not an affiliate.
Note
and Additional Notes
The Note
has an original issue discount of $180,000 and an obligation to pay $7,500 of
the Investor’s transaction fees. Accordingly, the amount provided under the Note
is $592,000. The Note matures on the earlier of 6 months from the
date of issuance or when the Company raises in excess of $500,000. If there is a
default the Note will accrue interest at the rate of 15% per annum. The Note is
convertible into Common Stock at a price per share as calculated under the terms
provided in the Note based on the trading price of the Company's stock. The
number of shares the Note is convertible into is subject to customary
anti-dilution provisions.
17
The Note
provides that upon each occurrence of certain liquidity events, as defined in
the Note, (i) the outstanding balance of the Note shall accrue interest at
the rate of 15% per annum until this Note is repaid in full, and (ii) the
Investor shall have the right, at any time thereafter until the Note is repaid
in full, to accelerate the outstanding balance under the Note, and exercise
default remedies under and according to the terms of the Pledge
Agreement.
An Event
of Default under the Note includes (i) a failure to pay any amount
due under the Note when due; (ii) a failure to deliver shares upon conversion of
the Note; (iii) the Company breaches any covenant, representation or other term
or condition in the Purchase Agreement, Note or other transaction document; or
(vi) upon bankruptcy events. For so long as no Event of Default shall
have occurred under the Note, the Investor shall remain obligated to purchase
the Additional Notes and Additional Warrants according to the terms and subject
to the conditions of the Purchase Agreement.
Each of
the four Additional Notes in the principal amount of $130,000 each have
substantially similar terms to the terms of the Note; provided, however each
Additional Note matures on the earlier of 6 months from the date of issuance or
when the Company raises in excess of $1,000,000. The amount to be
provided under each Additional Note is $100,000 after the original issue
discount.
Warrant and Additional
Warrants
The
Warrant provides the holder the right to purchase up to 2,500,000 shares of
Common Stock, subject to adjustment as described in the Warrant, at an exercise
purchase price of $.75 per share. The Warrant is exercisable for five
years, commencing from the date of issuance. The Warrant has anti-dilution and
cashless exercise rights. If the Company fails to deliver shares issuable upon
exercise of the Warrant within three days, the Company shall pay the Investor
$100 per day for each $10,000 of exercise price subject to the delivery
default.
Each of
the four Additional Warrants to purchase up to 250,000 shares of Common Stock at
an exercise price of $.75 per share has substantially similar terms to the terms
of the Warrant.
Other
Terms
The Note,
Additional Notes, Warrant and Additional Warrants contain certain limitations on
conversion and exercise. They provide that no conversion or exercise may be made
if, after giving effect to the conversion and/or exercise, the Investor would
own in excess of 9.99% of the Company’s outstanding shares of Common
Stock.
Other
than Excepted Issuances (described below), if the Note, Additional Notes,
Warrant and Additional Warrants are outstanding, the Company agrees to issue
shares or securities convertible for shares at a price (including an exercise
price) which is less than the conversion price of the Note or exercise price of
the Warrant, then the conversion price and exercise price, as the case may be,
shall be reduced to the price of any such securities. The only Excepted
Issuances are (i) the Company’s issuance of securities to strategic licensing
agreements or other partnering agreements which are not for the purpose of
raising capital and no registration rights are granted and (ii) the Company’s
issuance to employee, directors and consultants pursuant to plans
outstanding.
The Note,
Additional Notes, Warrant and Additional Warrants were offered and sold in
reliance on the exemption from registration afforded by Rule 506 of Regulation D
promulgated under Section 4(2) of the Securities Act of 1933, as
amended. The offering was not conducted in connection with a public
offering, and no public solicitation or advertisement was made or relied upon by
the Investor in connection with the offering.
Revenues
Revenue
increased by $1,234,874 from $4,500 for the year ended December 31, 2008 to
$1,239,374 for the year ended December 31, 2009, primarily as a result of
shipping 66 S322 models and 60 S594 models to customers during
2009. The Company was in its development stage and did not generate
any revenues from product sales for the year ended December 31, 2008 but did
record $4,500 from three feasibility studies during 2008.
18
Cost
of Revenues
The cost
of revenues of $950,046 for the year ended December 31, 2009 represented the
direct product costs from the manufacturer associated with the bill of material
for the S-322 and the S-594 units received by customers for the year ended
December 31, 2009. There was no revenue from product sales and
therefore, no cost of revenues for the year ended December 31,
2008.
Gross
profit
Gross
profit increased by $284,828 from $4,500 for the year ended December 31, 2008 to
$289,328 for the year ended December 31, 2009, reflecting an increase in
revenue. The Company’s first product shipments to customers occurred in
2009. Prior to 2009, the Company was in its development
stage.
Research
and development
Cost
incurred for research and development are expensed as
incurred. Research and development expense increased by $973,240 from
$369,812 for the year ended December 31, 2008 to $1,343,052 for the year ended
December 31, 2009, primarily as a result of the increase of $279,167 relating to
product development and testing that continued to increase during the period as
well as $694,073 recorded for share based compensation expense related to
stock options.
Selling,
general and administrative
Selling,
general and administrative expense increased by $17,053,176 from $1,613,392 for
the year ended December 31, 2008 to $18,666,568 for the year ended December 31,
2009, primarily as a result of the increase of $14,604,027 recorded for share
based payments related to stock options, compensation to management and
employees increasing by $811,325, rent increasing by $50,953,
professional fees increasing by $450,234, insurance increasing
by $90,055, shipping increasing by $241,631, marketing and
advertising increasing by $422,300, warranty expenses increasing
by $109,750, outside services increasing by $210,522 and other
various expenses increasing by $62,379.
Other
income (expense)
Other
expenses increased by $33,237,378 from $139,828 for the year ended December 31,
2008 to $33,377,206 for the year ended December 31, 2009 primarily as a result
of interest expense recorded for the accrued interest and fair value of the 9%
convertible of $22,204,164, loss on debt extinguishment of $12,038,787 and a
favorable change in the fair value of derivative liability that decreased other
expenses by $1,005,573.
Provision
for income taxes
We made
no provision for income taxes for the years ended December 31, 2009 and 2008 due
to net losses incurred except for minimum tax liabilities. We have determined
that due to our continuing operating losses as well as the uncertainty of the
timing of profitability in future periods, we should fully reserve our deferred
tax assets.
Net
loss
The net
loss increased by $50,979,766 from $2,118,532 for the year ended December 31,
2008 to $53,098,298 for the year ended December 31, 2009, primarily as a result
of the change in the fair value of the derivative liability of $1,005,573,
interest expense of $22,204,164 recorded for the fair value and accrued interest
of the 9% convertible notes, recording of share based compensation of
$15,298,100, and loss on debt extinguishment of $12,038,687, all non-cash
charges. The remaining amount of net loss relates to various operational,
general and administrative and other expenses for growing existing
business.
19
Going
Concern
There is
substantial doubt about our ability to continue as a “going concern” because the
Company has incurred continuing losses from operations, has negative
working capital of approximately $33,495,333 and an accumulated deficit of
approximately $55,909,285 at December 31, 2009.
Liquidity
and Capital Resources
As
of December 31, 2009 and December 31, 2008, the Company had a working
capital deficit of approximately $33,495,333 and $2,742,000
respectively. The negative working capital in 2009 results
primarily from the derivative liability relating to the convertible notes and
fair value of the warrants of approximately $30,854,755, short term debt of
$930,528, accounts payable of approximately $1,120,020 and other changes to
various accounts totaling $590,030 and the negative balance in 2008 results
primarily from notes payable of $2,072,000, accounts payable of $449,215 and
various other accrued liabilities of $220,700. The net
loss of approximately $53,098,298 for the year ended December 31, 2009 was
comprised of approximately $921,392 for research and development, $756,676 for
sales and marketing, $15,298,100 for share based compensation expense for stock
options, $33,377,206 of interest, loss on debt extinguishment and change in fair
value of derivative liability relating to the convertible notes and
fair value of the warrants and the balance for working capital relating to
general and administrative expenses. The net loss of
approximately $2,118,532 for the year ended December 31, 2008 was comprised of
approximately $369,812 for research and development and the balance for working
capital relating to general and administrative expenses. Cash
provided by financing activities for the year ended December 31, 2009 totaled
$3,415,229 resulting primarily from funding from the issuance of convertible
notes payable and cash provided from financing activities at December 31, 2008
totaled $1,783,513 resulting primarily from the funding from the issuance
of convertible notes payable.
The
Company has funded its operations to date through the private offering of debt
and equity securities.
The
Company expects significant capital expenditures during the next 12 months,
contingent upon raising capital. We currently anticipate that we will need
$5,000,000 for operations for the next 12 months. These anticipated expenditures
are for manufacturing of systems, infrastructure, overhead, integration of
acquisitions and working capital purposes.
The
Company presently does not have any available credit, bank financing or other
external sources of liquidity. Due to its brief history and historical operating
losses, the Company’s operations have not been a source of liquidity. The
Company will need to obtain additional capital in order to expand operations and
become profitable. In order to obtain capital, the Company may need to sell
additional shares of its common stock or borrow funds from private lenders.
There can be no assurance that the Company will be successful in obtaining
additional funding.
The
Company will need additional investments in order to continue operations.
Additional investments are being sought, but the Company cannot guarantee that
it will be able to obtain such investments. Financing transactions
may include the issuance of equity or debt securities, obtaining credit
facilities, or other financing mechanisms. However, the trading price of the
Company’s common stock and a downturn in the U.S. stock and debt markets could
make it more difficult to obtain financing through the issuance of equity or
debt securities. Even if the Company is able to raise the funds required, it is
possible that it could incur unexpected costs and expenses, fail to collect
significant amounts owed to it, or experience unexpected cash requirements that
would force it to seek alternative financing. Further, if the Company issues
additional equity or debt securities, stockholders may experience additional
dilution or the new equity securities may have rights, preferences or privileges
senior to those of existing holders of the Company’s common stock. If additional
financing is not available or is not available on acceptable terms, the Company
will have to curtail its operations.
On
February 11, 2009, the Company exchanged existing convertible notes (12% notes)
for 9% convertible notes. In addition to the stated interest rate, the exchange
transaction also modified the conversion rate as well as the issuance of
5,753,918 warrants to the various convertible note holders. The total
amount of the 12% notes exchanged was $2,234,579. This amount
included principal plus accrued interest charges and other
charges. In addition, the Company issued new convertible 9%
notes subsequent to February 11, 2009 for $2,870,365 as of December 31,
2009.
20
Contractual
Obligations
The
Company exchanged 12% convertible notes of the Company for its own 9%
convertible notes during the first quarter as a part of the merger transaction
with the Company. The new notes are convertible into common shares of
the Company’s stock at a conversion price $0.50 per share, as such conversion
price is subject to adjustment as provided in the convertible
notes. In addition, for each share of common stock into which such
notes can convert, the noteholder received one warrant at an exercise price
of $0.75, as such exercise price is subject to adjustment as provided in the
warrants. In addition, subsequent to the reverse merger transaction
on February 11, 2009, the Company issued new 9% convertible notes and warrants
with the same terms and conditions described above.
Critical Accounting
Policies
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted
accounting principles in the United States 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 revenues and expenses during the
reporting periods. Actual results could differ from those estimates. Significant
estimates include those related to the debt discount, valuation of derivative
liabilities and stock based compensation, and those associated with the
realization of long-lived assets.
Long-lived
Assets
Long-lived
assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. For
purposes of the impairment review, assets are reviewed on an asset-by-asset
basis. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of each asset to future net cash flows expected to be
generated by such asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount which the carrying amount
of the assets exceeds the fair value of the assets. The Company has
appropriately evaluated its equipment and patents for impairment as of December
31, 2009 and 2008 and through each period and does not believe that the assets
are impaired as of each reporting date. Management will continue to assess the
valuation of its equipment and patents as it restructures.
Derivative
Liabilities and Classification
We
evaluate free-standing instruments (or embedded derivatives) indexed to the
Company’s common stock to properly classify such instruments within equity or as
liabilities in our financial statements. Accordingly, the classification of an
instrument indexed to our stock, which is carried as a liability, must be
reassessed at each balance sheet date. If the classification changes as a result
of events during a reporting period, the instrument is reclassified as of the
date of the event that caused the reclassification. There is no limit on the
number of times a contract may be reclassified.
Stock
Based Compensation
Stock-based
compensation cost is measured at the date of grant, based on the calculated fair
value of the stock-based award, and is recognized as expense over the employee’s
requisite service period (generally the vesting period of the
award).
Recent
Accounting Pronouncements
See “Note
1 – Description of Business and Summary of Significant Accounting Policies” of
the Notes to Consolidated Financial Statements included in "Item 8. Financial
Statements and Supplementary Data" of Part II of this report.
21
Off-Balance
Sheet Arrangements
We did
not have any off-balance sheet arrangements as of the year ended December 31,
2009, nor do we have any as of the date of this Form 10K.
As a
smaller reporting company we are not required to provide the information
required by this item.
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The
following consolidated financial statements are included beginning on page F-1
of this report:
Page
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
Consolidated
Balance Sheets as of December 31, 2009 and 2008
|
F-2
|
Consolidated
Statements of Operations for the years ended December 31, 2009 and
2008
|
F-3
|
Consolidated
Statements of Stockholders' Deficit for the years ended December 31, 2009
and 2008
|
F-4
|
Consolidated
Statements of Cash Flows for the years ended December 31, 2009 and
2008
|
F-5
|
Notes
to Consolidated Financial Statements
|
F-6
|
ITEM
9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
None.
Pursuant
to Rule 13a-15(b) under the Exchange Act, our management, under the supervision
and with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and
procedures (as defined under Rule 13a-15(e) under the Exchange Act) as of
December 31, 2009, the end of the period covered by this Form 10-K. Based upon
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of December 31, 2009, our disclosure controls and procedures
were not effective to ensure that information required to be disclosed by us in
the reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commission’s rules and forms and is accumulated
and communicated to our management, including our principal executive and
principal financial officer, as appropriate to allow timely decisions regarding
required disclosures.
We have
identified material weaknesses in our internal control over financial reporting
related to the following matters:
● |
We
identified a lack of sufficient segregation of duties. Specifically, this
material weakness is such that the design over these areas relies
primarily on detective controls and could be strengthened by adding
preventative controls to properly safeguard company
assets.
|
● |
Management
has identified a lack of sufficient personnel in the accounting function
due to our limited resources with appropriate skills, training and
experience to perform the review processes to ensure the complete and
proper application of generally accepted accounting principles,
particularly as it relates to valuation of share based payments, the
valuation of warrants, and other complex debt /equity transactions.
Specifically, this material weakness lead to segregation of duties issues
and resulted in audit adjustments to the annual consolidated financial
statements and revisions to related disclosures, share based payments,
valuation of warrants and other equity
transactions.
|
22
Our plan
to remediate those material weaknesses is as follows:
● |
Improve
the effectiveness of the accounting group by continuing to augment our
existing resources with additional consultants or employees to improve
segregation procedures and to assist in the analysis and recording of
complex accounting transactions. We plan to mitigate the segregation of
duties issues by hiring additional personnel in our accounting department
once we generate significantly more revenue, or raise significant
additional working capital.
|
● |
Improve
segregation procedures by strengthening cross approval of various
functions including quarterly internal audit procedures where
appropriate.
|
For the
year ended December 31, 2009, there were no changes in our internal control over
financial reporting that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
ITEM
9B. OTHER INFORMATION
None.
PART
III
ITEM
10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors and Executive
Officers
The
following table sets forth certain information regarding the members of our
board of directors and our executive officers as of the date of this
report:
Name
|
Age
|
Positions
and Offices Held
|
||
Scott
Weinbrandt
|
49
|
Chief
Executive Officer, President and Chairman of the
Board
|
||
Kevin
K. Claudio
|
53
|
Chief
Financial Officer and Vice
President
|
The
business address of our officers and directors is c/o Helix Wind, Corp., 1848
Commercial Street, San Diego, California 92113. Set forth below is a
summary description of the principal occupation and business experience of each
of our directors and executive officers for at least the last five
years.
Scott
Weinbrandt has been the President and Chairman of the Board of Helix Wind since
June 1, 2008, and our Chief Executive Officer since March 8, 2010. Prior to such
time, Mr. Weinbrandt held the position of founder, Chairman, and Chief Executive
Officer from 2006 through 2007 at GoPaperless Solutions, Inc., a solutions
provider of hardware and software for encrypted signature technology. After
being at Dell Computer for ten years, Mr. Weinbrandt worked as a Technology
Consultant in 2002 for Solana Capital Partners, a venture capital firm, and from
2003 through 2005 as Senior Vice President and General Manager, Enterprise
Systems Division and Senior Vice President, Gateway Business Division of Gateway
Inc. Mr. Weinbrandt holds a Bachelors of Science degree in Computer Science from
San Diego State University.
Kevin K.
Claudio has been Vice President and Chief Financial Officer of Helix Wind since
December 1, 2008. For two years beginning in 2006, Mr. Claudio was the CFO of
Remote Surveillance Technologies, a full service electronic security company
with remote video monitoring. From 2004 through 2005, he was the
acting CFO for cVideo, a spin off of Cubic Corporation that developed
software-based integrated digital video applications and surveillance and loss
prevention systems solutions for commercial and security applications. Mr.
Claudio, was previously the Vice President & CFO of a Titan subsidiary from
1999-2003. Mr. Claudio graduated from Fairmont State College in Fairmont, West
Virginia with a Bachelor of Science Degree in Accounting and is a Certified
Public Accountant (California-inactive).
During
the past five years none of our officers and directors has been involved in any
legal proceedings that are material to an evaluation of their ability or
integrity as director or an executive officer of us, and none of them have been
affiliated with any company that been involved in bankruptcy
proceedings.
Section 16(a) beneficial
reporting compliance
Pursuant
to Section 16(a) of the Securities Exchange Act of 1934, as amended, and the
rules issued thereunder, our directors and executive officers and any persons
holding more than 10% of our common stock are required to file with the SEC
reports of their initial ownership of our common stock and any changes in
ownership of such common stock. Copies of such reports are required
to be furnished to us. We are not aware of any instances in fiscal
year ended December 31, 2009 when an executive officer, director or any owner of
more than 10% of the outstanding shares of our common stock failed to comply
with the reporting requirements of Section 16(a) of the Securities Exchange Act
of 1934.
23
ITEM
11. EXECUTIVE COMPENSATION
Summary
Compensation
The
following table sets forth information concerning the compensation paid or
earned during the fiscal years ended December 31, 2009, 2008 and 2007 for
services rendered to our Company in all capacities by all individuals who served
as the principal executive officer or acting in a similar capacity during the
fiscal year ended December 31, 2009, regardless of compensation level. Other
than such persons, there are no individuals who served as officers at December
31, 2009 or at any time during the year and whose total compensation exceeded
$100,000 during the fiscal year ended December 31, 2009.
Name
and Principal Position
|
Year
|
Salary
($)
|
Bonus
($)
|
Stock
Awards
($)
|
Option
Awards
($)
|
Non-Equity
Incentive Plan Compensation ($)
|
Nonqualified
Deferred Compensation Earning
($)
|
All
Other Compensation
($)
|
Total
($)
|
Ian
Gardner(1)
|
2009
2008
2007
|
191,667(2)
126,000(3)
111,667(4)
|
4,338,325
|
2,644(5)
|
4,529,992
128,644
111,667
|
||||
Scott
Weinbrandt
|
2009
2008
2007
|
217,780(6)
133,333(7)
0
|
7,245,176
|
4,464(8)
|
7,462,956
137,797
0
|
||||
Kevin
Claudio
|
2009
2008
2007
|
167,708(9)
39,583
0
|
2,087,273
|
840(10)
|
2,254,981
40,423
0
|
(1)
|
Ian
Gardner was the Chief Executive Officer and a director of the Company
until his resignation effective March 8,
2010.
|
(2)
|
Mr.
Gardner was paid $191,667 in 2009 and $29,166 accrued in 2009, a portion
of which was paid on March 8, 2010 in connection with his Settlement
Agreement.
|
(3)
|
Mr.
Gardner was paid $62,000 in 2008 and $64,000 accrued in 2008, a portion of
which was paid on March 8, 2010 in connection with his Settlement
Agreement.
|
(4)
|
Mr.
Gardner was paid $36,000 in 2007 and $75,667 accrued in 2007, a portion of
which was paid on March 8, 2010 in connection with his Settlement
Agreement.
|
(5)
|
Comprised
of health insurance benefits.
|
(6)
|
Mr.
Weinbrandt was paid $217,780 in 2009 which included payment of a past
accrual of $26,114 and accrued $29,166 which was not
paid.
|
(7)
|
Mr.
Weinbrandt was paid $107,219 in 2008 and accrued $26,114, which was not
paid.
|
(8)
|
Comprised
of reimbursement of relocation expenses of $3,200 and health insurance
benefits of $1,264.
|
(9)
|
Mr.
Claudio was paid $167,708 in 2009 and accrued $7,292 which was not
paid.
|
(10)
|
Comprised
of health insurance benefits.
|
We have
no pension, annuity, bonus, insurance, equity incentive, non-equity incentive,
stock options, profit sharing or similar benefit plans, other than the Share
Employee Incentive Stock Option Plan for 13,700,000 shares of common stock of
the Company.
Except as
otherwise may be provided in their individual agreements, each of the officers
is appointed by the Board of Directors to a term of one (1) year and serves
until his successor is duly elected and qualified, or until he is removed from
office.
24
Employment Agreements with Executive Officers
As of
December 31, 2009, the Company had employment agreements with Ian Gardner, Kevin
Claudio and Scott Weinbrandt with the following terms:
Ian
Gardner
The
Company had an employment agreement with Mr. Gardner to serve as Chief Executive
Officer, effective June 1, 2008, as amended January 26, 2009, and effective
for an initial term until December 31, 2010. The employment agreement was
terminated as of March 8, 2010 in connection with Mr. Gardner’s resignation.
Pursuant to the agreement, Mr. Gardner will receive: $100,000 annually from
January 1, 2007 through July 31, 2008; $200,000 annually August 1, 2008 through
July 31, 2009; $250,000 annually from August 1, 2009 through July 31, 2010; and
$300,000 annually from August 1, 2010 through December 31, 2010. Mr.
Gardner is also entitled to participate in the Company’s incentive compensation
plan, if any, may receive an annual bonus at the discretion of the Board of
Directors and a $75,000 signing bonus upon the closing of a series A
financing. In addition, Mr. Gardner is entitled to participate in
certain benefit plans in effect for the Company employees, along with a vehicle
allowance, vacation, sick and holiday pay in accordance with policies
established and in effect from time to time. Mr. Gardner has also
been granted an option to purchase 3,253,740 shares of the Company’s common
stock pursuant to the Company’s new stock option plan. In the event
that Mr. Gardner terminates the employment agreement for “Good Reason” (as
defined therein) or the Company terminates the employment agreement without
“Cause” (as defined therein), Mr. Gardner will be entitled to a severance
payment of the amount of the sum of Mr. Gardner’s base salary that would have
been earned through the greater of the remainder of the initial term or three
hundred and sixty five (365) days, and an amount equal to his average bonus for
the immediately preceding two years.
Kevin
Claudio
The
Company has an employment agreement with Mr. Claudio to serve as Chief Financial
Officer, effective December 1, 2008, as amended January 26, 2009. Pursuant to
the agreement, Mr. Claudio will receive compensation of $14,583.33 per month. In
addition, Mr. Claudio is entitled to participate in certain benefit plans in
effect for the Company employees, along with vacation, sick and holiday pay in
accordance with policies established and in effect from time to
time. Mr. Claudio has also been granted an option to purchase 610,000
shares of the Company’s common stock pursuant to the Company’s new stock option
plan upon the Company’s successful completion of a $2 million financing and a
bonus of up to $50,000 upon the Company’s successful completion of a $3 million
financing.
Scott
Weinbrandt
The
Company has an employment agreement with Mr. Weinbrandt to serve as President,
effective June 1, 2008, as amended January 26, 2009, and effective for an
initial term until December 31, 2010. Pursuant to the agreement, Mr. Weinbrandt
will receive: $100,000 annually from February 1, 2008 through July 31, 2008;
$200,000 annually August 1, 2008 through July 31, 2009; $250,000 annually
from August 1, 2009 through July 31, 2010; and $300,000 annually from August 1,
2010 through December 31, 2010. Mr. Weinbrandt is also entitled to
participate in the Company’s incentive compensation plan, if any, may receive an
annual bonus at the discretion of the Board of Directors and a $75,000 signing
bonus upon the closing of a series A financing. In addition, Mr.
Weinbrandt is entitled to participate in certain benefit plans in effect for the
Company employees, along with a vehicle allowance, reimbursement for relocation
expenses, and vacation, sick and holiday pay in accordance with policies
established and in effect from time to time. Mr. Weinbrandt has also
been granted an option to purchase 5,337,500 shares of the Company’s common
stock pursuant to the Company’s new stock option plan. In the event that Mr.
Weinbrandt terminates the employment agreement for “Good Reason” (as defined
therein) or the Company terminates the employment agreement without Cause (as
defined therein), Mr. Weinbrandt will be entitled to a severance payment of the
amount of the sum of Mr. Weinbrandt’s base salary that would have been earned
through the greater of the remainder of the initial term or three hundred and
sixty five (365) days, and an amount equal to his average bonus for the
immediately preceding two years. The employment agreement
automatically renews for three year periods thereafter unless terminated
pursuant to the agreement.
25
Director
Compensation
Messrs.
Gardner and Weinbrandt each entered into Board of Directors Service and
Indemnification Agreements with the Company, pursuant to which, each of them are
entitled to receive an annual stipend of $10,000 annually to be paid on a
quarterly basis of $2,500 and an option to purchase 25,000 shares of the common
stock of the Company for their service on the Board of
Directors. Under their respective agreement, each of them is
also entitled to additional stipends of $5,000 per year if serving as Chairman
of the Board of Directors, $2,500 per year if serving as Chairman of any
committee of the Board of Directors and further compensation upon an initial
public offering. Mr. Gardner’s Board of Directors and Service and
Indemnification Agreement was terminated as of March 8, 2010 in connection with
the Settlement Agreement
The
following table sets forth summary information concerning compensation paid or
accrued for services rendered to us in all capacities by our non-employee
directors for the fiscal year ended December 31, 2009. Other than as set forth
below and the reimbursement of actual and ordinary out-of-pocket expenditures,
we did not compensate any of our directors for their services as directors
during the fiscal year ended December 31, 2009.
2009
Director Compensation
|
||||||||||||||||||
Name
|
Fees
Earned or
Paid
in Cash
($)
|
Stock
Awards
($)
|
Options
Awards
($)
(1)
|
Non-Equity
Incentive
Plan Compensation
($)
|
Change
in Pension Value and Nonqualified Deferred Compensation
Earnings
($)
|
All
Other Compensation
($)
|
Total
($)
|
|||||||||||
Gene
Hoffman
|
$ | 0 | 246,518 | 246,518 |
______________________
(1)
|
This
column represents the aggregate grant-date fair value of the awards
computed in accordance with FASB ASC Topic 718. These amounts reflect our
accounting value for these awards and do not necessarily correspond to the
actual value that may be realized by the named executive officer. The
assumptions used in the calculation of these amounts are described in note
8 to our consolidated financial statements included in this annual report
on Form 10-K.
The
table below discloses for each non-employee director the aggregate number
of shares of our common stock subject to option awards outstanding at 2009
fiscal year end:
|
Gene
Hoffman
|
300,000(2)
|
(2)
|
As
of December 31, 2009, 75,000 of these options were vested. On March
8, 2010, the remaining 225,000 options expired in connection with his
resignation.
|
Our
Board of Directors
Our
directors hold office until the next annual meeting of our shareholders or until
their successors are duly elected and qualified. There have been no
material changes to the procedures by which stockholders can nominate
directors.
The
Company has not adopted a written code of ethics.
Director
Independence
We are
not subject to listing requirements of any national securities exchange or
national securities association and, as a result, we are not at this time
required to have our Board comprised of a majority of “independent directors,”
nor is our sole director considered to be independent under the definition of
independence used by any national securities exchange or any inter-dealer
quotation system.
Leadership
Structure
The
chairman of our board of directors also serves as our chief executive officer.
Our board of directors does not have a lead independent director. Our board of
directors has determined that its leadership structure is appropriate and
effective in light of the limited number of individuals in our management team
and that we currently only have one director. Our board of directors believes
that having a single individual serve as both chairman and chief executive
officer provides clear leadership, accountability and promotes strategic
development and execution as our company executes our strategy as a more
communications-focused enterprise. Our board of directors also believes that
there is a high degree of transparency among directors and company
management.
26
Risk
Management
Our board
of directors oversees the risk management of our company and each of our
subsidiaries. Our board of directors regularly reviews information provided by
management in order for our board of directors to oversee the risk
identification, risk management and risk mitigation strategies. Our board
considers, as appropriate, risks among other factors in reviewing our strategy,
business plan, budgets and major transactions.
Meetings
Our board
of directors held regularly scheduled monthly meetings during fiscal year 2009
and special BOD meetings as appropriate throughout 2009 to address business
issues as they arose. No director who served as a director during the past
year attended fewer than 75% of the aggregate of the total number of meetings of
our board of directors.
Committees
of Our Board of Directors
The Board
of Directors has no nominating, or compensation committee, and does not have an
“audit committee financial expert”. Our board of directors currently acts as our
audit committee. There are no family relationships among members of management
or the Board of Directors of the Company.
Director
Nomination Process
The
formal process used during fiscal year 2009 was for existing BOD members and
executive management including officers of the company to nominate and elect BOD
members. In evaluating director nominees, our board of
directors will consider, among others, the following factors:
Integrity | |
Independence
|
|
Diversity of viewpoints and backgrounds | |
Extent of experience | |
Length of service | |
Number of other board and committee
memberships
|
|
Leadership
qualities
|
|
Ability
to exercise sound judgment
|
The Company is currently seeking
additional members for its board of directors.
Compensation Committee
Interlocks and Insider Participation
The
Company does not currently have a compensation committee.
ITEM
12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The
following table sets forth certain information regarding beneficial ownership of
Common Stock (1) by each person who is known by us to beneficially own more than
5% of Common Stock, (2) by each of the named executive officers and directors;
and (3) by all of the named executive officers and directors as a group, as of
March 31, 2010.
Unless
otherwise indicated in the footnotes to the following table, each person named
in the table has sole voting and investment power and that person’s address is
c/o Helix Wind, Corp., 1848 Commercial Street, San Diego, California
92113.
27
NAME
OF OWNER
|
TITLE
OF
CLASS
|
NUMBER
OF
SHARES
OWNED (1)
|
PERCENTAGE
OF
COMMON
STOCK (2)
|
|
Scott
Weinbrandt
|
Common
Stock
|
4,475,463(3)
|
6.87%
|
|
Kevin
Claudio
|
Common
Stock
|
682,710(4)
|
1.12%
|
|
All
Officers and Directors
|
Common
Stock
|
5,158,173
|
7.99%
|
|
As
a Group (2 persons)
|
||||
Ian
Gardner
|
Common
Stock
|
11,004,392(5)
|
17.17%
|
|
3039
Palm Street
|
||||
San
Diego, CA 92104
|
||||
Kabir
M. Kadre
|
Common
Stock
|
4,199,946(6)
|
6.83%
|
|
C/O
Alia Kadre
1904
39th st
San
Diego CA 92105
|
||||
Ken
Morgan
|
Common
Stock
|
7,443,355(7)
|
12.20%
|
|
c/o
Bill Eigner
530
B Street, 21st Floor
San
Diego, CA 92101
|
||||
Quercus
Trust
|
Common
Stock
|
3,417,258
|
5.42%
|
|
2309
Santiago Drive
Newport
beach, CA
|
(1)
Beneficial Ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities. Shares
of common stock subject to options or warrants currently exercisable or
convertible, or exercisable or convertible within 60 days of March 31, 2010 are
deemed outstanding for computing the percentage of the person holding such
option or warrant but are not deemed outstanding for computing the percentage of
any other person.
(2) Each
percentage is based upon, the total number of shares outstanding at March 31,
2010, which is 60,895,662, and the total number of shares beneficially owned and
held by each individual at March 31, 2010, plus the number of shares that such
individual has the right to acquire within 60 days of March 31,
2010.
(3)Includes
205,463 shares as to which Mr. Weinbrandt has sole voting and investment power;
and 4,270,000 shares that may be acquired through exercise of stock
options.
(4)Includes
438,710 shares as to which Mr. Claudio has sole voting and investment power; and
244,000 shares that may be acquired through exercise of stock
options.
(5)
Includes 7,820,662 held by the Fidelis Charitable Remainder Trust, of which Mr.
Gardner is a Co-Trustee and has shared voting and shared investment power;
145,536 shares that may be acquired through exercise of warrants; 435,202 shares
that may be acquired through the conversion of convertible debt; and 2,602,992
shares that may be acquired through exercise of stock options.
(6)
Includes 3,623,696 shares as to which Mr. Kadre has sole voting and investment
power; 288,125 shares that may be acquired through exercise of warrants; and
288,125 shares that may be acquired through the conversion of convertible
debt.
(7)
Includes 7,433,355 shares as to which Mr. Morgan has sole voting and investment
power (which includes the 4,800,000 shares Mr. Morgan has pledged to St. George
Investments, LLC, and excludes the 6,000,000 shares in escrow to be received by
Mr. Morgan in the event of a default under the pledge Agreement with St. George
Investments, LLC for which he would forfeit the 4,800,000 shares pledged);
58,963 shares that may be acquired through exercise of warrants; and 58,963
shares that may be acquired through the conversion of convertible
debt.
(8)
Includes 2,156,446 shares that may be acquired through exercise of warrants, and
1,260,812 shares that were acquired through the conversion of convertible debt,
all of to which Quercus Trust has sole voting and investment power.
28
DESCRIPTION
OF SECURITIES
Common
Stock
We are
authorized to issue up to 1,750,000,000 shares of common stock, par value
$0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001
per share.
The
outstanding shares of Common Stock are validly issued, fully paid and
non-assessable. There are currently 60,895,662 shares of Common Stock
issued and outstanding and 13,700,000 shares of Common Stock reserved for
issuance under our Employee Stock Ownership Plan.
St.
George Investments, LLC, the purchaser of convertible notes in our current
private placement of such securities which closed on April 1, 2010, is entitled
to include the shares of common stock pursuant to which the notes can be
converted, as well as the shares of common stock underlying the warrants being
sold with the convertible notes, in a registration statement to be filed by the
Company, which shall include 20,000,0000 shares. Such registration must be filed
within 60 days from April 1, 2010. If the filing of a registration statement is
not made by such date, or the SEC has not declared such registration statement
effective 120 calendar days after the registration statement has been filed,
then a triggering event shall occur under the convertible notes and the Company
shall pay as a penalty the amount of $100 per day.
The
holders of our Common Stock (i) have equal ratable rights to dividends from
funds legally available therefore, when, as and if declared by our Board of
Directors; (ii) are entitled to share ratably in all of our assets available for
distribution to holders of common stock upon liquidation, dissolution or winding
up of our affairs; (iii) do not have pre-emptive, subscription or conversion
rights and there are no redemption or sinking fund provisions or rights; and
(iv) are entitled to one non-cumulative vote per share on all matters on which
shareholders may vote.
The
shares of our Common Stock are not subject to any future call or assessment and
all have equal voting rights. There are no special rights or restrictions of any
nature attached to any of the shares of our Common Stock and they all rank at
equal rate or “pari passu”, each with the other, as to all benefits, which might
accrue to the holders of the shares of our Common Stock. All registered
shareholders are entitled to receive a notice of any general annual meeting to
be convened.
At any
general meeting, subject to the restrictions on joint registered owners of
shares of our Common Stock, on a showing of hands every shareholder who is
present in person and entitled to vote has one vote, and on a poll every
shareholder has one vote for each share of our Common Stock of which he is the
registered owner and may exercise such vote either in person or by proxy.
Holders of shares of our Common Stock do not have cumulative voting rights,
which means that the holders of more than 50% of the outstanding shares, voting
for the election of directors, can elect all of the directors to be elected, if
they so choose, and, in such event, the holders of the remaining shares will not
be able to elect any of our directors.
Preferred
Stock
Our Board
of Directors is authorized to issue preferred stock in one or more series, from
time to time, with each such series to have such designation, relative rights,
preferences or limitations, as shall be stated and expressed in the resolution
or resolutions providing for the issue of such series adopted by the Board of
Directors, subject to the limitations prescribed by law and in accordance with
the provisions of our Articles of Incorporation, the Board of Directors being
expressly vested with authority to adopt any such resolution or
resolutions.
Shares of
voting or convertible preferred stock could be issued, or rights to purchase
such shares could be issued, to create voting impediments or to frustrate
persons seeking to effect a takeover or otherwise gain control of our Company.
The ability of the Board to issue such additional shares of preferred stock,
with rights and preferences it deems advisable, could discourage an attempt by a
party to acquire control of our Company by tender offer or other means. Such
issuances could therefore deprive shareholders of benefits that could result
from such an attempt, such as the realization of a premium over the market price
for their shares in a tender offer or the temporary increase in market price
that such an attempt could cause. Moreover, the issuance of such additional
shares of preferred stock to persons friendly to the Board could make it more
difficult to remove incumbent managers and directors from office even if such
change were to be favorable to shareholders generally. There are
currently no shares of Preferred Stock issued and outstanding.
29
Securities
Authorized for Issuance under Equity Compensation Plans
On
February 9, 2009, the Company adopted the 2009 Equity Incentive Plan authorizing
the Board of Directors or a committee to issue options exercisable for up to an
aggregate of 13,700,000 shares of common stock. The table below sets forth
information as of December 31, 2009, with respect to compensation plans under
which our common stock is authorized for issuance:
Number
of securities to be
issued
upon exercise of
outstanding
options
|
Weighted-average
exercise price
of
outstanding options
|
Number
of securities remaining
available
for future issuance
under
equity compensation plans
|
11,054,240
|
$0.58
|
2,648,760
|
Other
than as described above, we do not currently have any long-term compensation
plans or stock option plans. No individual grants of stock options, whether or
not in tandem with stock appreciation rights known as SARs or freestanding SARs,
have been made to any executive officer or any director since our inception;
accordingly, no stock options have been granted or exercised by any of the
officers or directors since we were founded.
Warrants
As of
March 31, 2010, the Company has issued warrants to investors to purchase an
aggregate of 11,796,028 shares of common stock. The warrants expire five years
after their issuance and are each exercisable into a share of common stock at an
exercise price of ranging from $0.75 to $1.25 per share, which exercise prices
are subject to adjustment as provided in the warrants.
Convertible
Securities
As of
March 31, 2010, the Company has outstanding an aggregate of $2,718,037 of 9%
Convertible Notes. The Notes mature in January of 2012 and are convertible at
the option of the Company or the holder at a conversion rate of $0.50, which
conversion rate is subject to adjustment as provided in the Notes.
In
addition, the Company issued convertible notes to St. George Investments, LLC on
April 1, 2010 as described above in “ITEM 7. Managements Discussion and Analysis
of Financial Condition and Results of Operations—Recent
Financings”.
Transfer
Agent
The
transfer agent for the Common Stock is Island Stock Transfer. The transfer
agent’s address is 100 2nd
Avenue South, St. Petersburg, FL 33701, and its telephone number is
727-289-0010.
INDEMNIFICATION
OF DIRECTORS AND OFFICERS
The
Nevada Revised Statutes permits indemnification of directors, officers, and
employees of corporations under certain conditions subject to certain
limitations. The indemnification provided by the Company’s bylaws is
intended to be to the fullest extent permitted by the laws of the State of
Nevada.
The
Company’s bylaws provide that the Company will indemnify any of its officers or
directors who is a party or is threatened to be made a party to any suit by
reason of his being a director or officer, if he acted in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was
unlawful. However, indemnification will not be made for any claims to
which such a person has been adjudged by a court of competent jurisdiction to be
liable to the Company, unless and only to the extent that the court determines
the person is fairly and reasonably entitled to indemnity for such
expenses.
30
The
Company has entered into indemnification agreements with Mr. Ian Gardner (the
Company’s former CEO) and Mr. Scott Weinbrandt which provide that the Company
will indemnify each of them to the fullest extent permitted by law, and as soon
as practicable, against all expenses, judgments, fines, penalties and amounts
paid in settlement of any claim to which such party was or is a party or other
participant in because of his role as a director, officer or other agent of the
Company, and which may be indemnified under applicable Nevada law.
The
foregoing summaries are necessarily subject to the complete text of the statute,
articles of incorporation, bylaws and agreements referred to above and are
qualified in their entirety by reference thereto.
Insofar
as indemnification for liabilities arising under the Securities Act of 1933, as
amended, may be permitted to directors, officers or persons controlling us
pursuant to the foregoing provisions, or otherwise, the Company has been advised
that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act of
1933, as amended, and is, therefore, unenforceable.
ITEM
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Review
of Related Party Transactions
It is our
policy and procedure to have all transactions with a value above $120,000,
including loans, between us and our officers, directors and principal
stockholders and their affiliates, reviewed and approved by a majority of our
board of directors, including a majority of the independent and disinterested
members of our board of directors, and that such transactions be on terms no
less favorable to us than those that we could obtain from unaffiliated third
parties. We believe that all of the transactions described below were reviewed
and approved under the foregoing policies and procedures.
Related
Party Transactions
Other
than as disclosed below, since January 1, 2009 there have been no transactions,
or proposed transactions, which have materially affected or will materially
affect us in which any director, executive officer or beneficial holder of more
than 10% of the outstanding common stock, or any of their respective relatives,
spouses, associates or affiliates, has had or will have any direct or material
indirect interest. We have no policy regarding entering into transactions with
affiliated parties.
Ian
Gardner and Scott Weinbrandt have entered into Board of Directors Service and
Indemnification Agreements with the Company, which terms include the payment of
compensation to them for their service as directors. See the
“Director Compensation” section. Ian Gardner, Kevin Claudio and Scott
Weinbrandt have also entered into employment agreements the Company, which terms
include the payment of compensation to them for their employment with the
Company. See the “Executive Compensation”
section. Mr. Gardner’s Board of Directors Service and
Indemnification Agreement and Employment Agreement were both terminated as of
March 8, 2010 in connection with his resignation and Separation Agreement and
Release.
Scott
Weinbrandt entered into an agreement with the Company regarding his service on
the Company’s board of advisors, which has since been terminated.
Mr. Weinbrandt received 205,463 shares of the Company’s Common Stock
under this agreement.
The
Company has a Lease dated September 19, 2008 for the Company’s headquarters in
San Diego with Brer Ventures, LLC (“Brer”). The monthly lease payment
is $7,125. Ian Gardner, the former CEO and a director of the Company,
owns 50% of Brer. The Company provided notice to Brer of its intent
to terminate the lease as of April 30, 2010.
As of
December 31, 2009 and 2008, the Company had a related party receivable from a
Company director for $3,356. The receivable carried no interest and is due on
demand.
31
At
December 31, 2008, the Company had an unsecured related party payable to
Lab4Less, LLC, bearing no interest, payable on demand, in the amount of
$22,433. The Company’s former Chief Executive Officer and director,
Ian Gardner, was a 50% owner of Lab4Less, LLC. During the quarter
ended March 31, 2009, the Company repaid such note payable in full.
At
December 31, 2008, convertible notes payable to related parties were
$567,633. Such notes were held by the Company’s former Chief
Executive Officer and director, Ian Gardner, and certain shareholder founders
and co-founders of the Company. During the quarter ended March 31,
2009, $392,268 of such convertible notes payable were converted to the newly
issued 9% convertible debt. The remaining $175,365 of such notes did not convert
and remain as part of the 12% convertible debt.
In
January 2009, the Company received $37,000 from a trust controlled by Ian
Gardner; said sum to be repaid pursuant to the terms of the Settlement
Agreement.
The
Company has an outstanding indebtedness to East West Consulting, Ltd. in the
amount of approximately $450,000 as of February 9, 2009. The president of East
West Consulting was the vice president of manufacturing of the Company. The
Company plans to repay the liability in 2010.
On March
8, 2010, the Company entered into the Separation Agreement with Ian Gardner, the
Company’s former CEO and a director, described above in above in “ITEM
7--MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.”
We have
purchased a policy of directors' and officers' liability insurance that insures
our directors and officers against the cost of defense, settlement or payment of
a judgment in some circumstances.
ITEM
14. PRINCIPAL ACCOUNTING SERVICES AND FEES
Squar,
Milner, Peterson, Miranda and Williamson, LLP (“Squar Milner”) served as our
independent registered public accounting firm for fiscal year 2009 and 2008. On
April 1, 2010, we dismissed Squar Milner as our public accounting firm and
engaged Anton & Chia, LLP (“Anton & Chia”) to serve as our public
accounting firm.
The
following table presents the fees billed for professional services rendered by
each of Squar Milner and Anton & Chia, for the audits of our annual
financial statements and audit-related matters for the years ended December 31,
2009 and December 31, 2008, respectively. All fees related to fiscal year 2009
and 2008 were paid to Squar Milner.
FY2009
($)
|
FY2008
($)
|
|||||||
Audit
fees
|
$ | 189,396 | $ | 86,357 |
(1)
|
Audit
fees include fees and expenses for professional services rendered for the
audits of our annual financial statements for the year indicated and for
the review of the financial statements included in our quarterly reports
for that year.
|
Our board
of directors has determined that the rendering of all non-audit services by
Squar Milner is compatible with maintaining the auditor's independence. All
non-audit related services in the above table were pre-approved and/or ratified
by our board of directors. Our board of directors approves non-audit services by
our auditor on an ad hoc basis.
PART
IV
ITEM
15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Documents
filed as part of this Report:
(1) Financial
Statements—all consolidated financial statements of the Company as set forth
under Item 8, on page 22 of this Report.
(2) Financial
Statement Schedules— As a smaller reporting company we are not required to
provide the information required by this item.
32
(3) Exhibits
Exhibit
Number
|
Description
|
2.1
|
Agreement
dated as of January 28, 2009, by and among Clearview Acquisitions, Inc.,
Helix Wind Acquisition Corp. and Helix Wind, Inc.
(1)
|
3.1
|
Articles
of Incorporation of the Company(2)
|
3.2
|
Amendment
to Articles of Incorporation of the Company effective April 16, 2009.
(3)
|
3.2
|
Bylaws
of the Company (4)
|
3.3
|
Plan
and Agreement of Merger of Helix Wind Acquisition Corp. and Helix Wind,
Inc.(5)
|
4.1
|
Form
of Registration Rights Agreement among the Company and the investors
signatory thereto in the 9% Convertible Note
offering.(5)
|
4.2
|
Form
of Warrant for the 9% Convertible Note
offering.(5)
|
10.1
|
Company
Share Employee Incentive Stock Option Plan. (5)
|
10.2
|
Form
of Lock-Up Letter delivered to the Company by each of Ian Gardner, Scott
Weinbrandt, Kevin Claudio, Paul Ward and Steve
Polaski.(5)
|
10.3
|
Employment
Agreement, dated as of June 1, 2008, as amended January 26, 2009, by and
between Helix Wind, Inc. and Ian Gardner.(5)
|
10.4
|
Employment
Agreement, dated as of June 1, 2008, as amended January 26, 2009, by and
between Helix Wind, Inc. and Scott Weinbrandt.
(5)
|
10.5
|
Employment
Agreement, dated as of December 1, 2008, as amended January 26, 2009, by
and between Helix Wind, Inc. and Kevin
Claudio.(5)
|
10.6
|
Form
of 9% Convertible Note. (5)
|
10.7
|
Board
of Directors Service and Indemnification Agreement dated as of March 12,
2008, by and between Helix Wind, Inc. and Ian Gardner, as amended March
13, 2008. (5)
|
10.8
|
Board
of Directors Service and Indemnification Agreement dated as of March 13,
2008, by and between Helix Wind, Inc. and Scott Weinbrandt, as amended
March 13, 2008. (5)
|
10.9
|
Lease
dated September 19, 2008, between Helix Wind, Inc. and Brer Ventures, LLC
(5)
|
10.10
|
Assignment
and Assumption Agreement dated February 11, 2009, by and between Helix
Wind, Inc., and the Company (6)
|
10.11
|
Subscription
Agreement dated March 31, 2009, between the Company and Whalehaven Capital
Fund Limited. (6)
|
10.12
|
Convertible
Promissory Note dated March 31, 2009, issued by the Company to Whalehaven
Capital Fund Limited. (6)
|
10.13
|
Service
and Indemnification Agreement dated as of June 16, 2009 with Gene Hoffman
(7)
|
10.14
|
Form
of Subscription Agreement dated July 8, 2009 (8)
|
10.15
|
Form
of Convertible Promissory Note dated July 8, 2009
(8)
|
10.16
|
Form
of Common Stock Purchase Warrant dated July 8, 2009
(8)
|
10.17
|
Placement
Agency Agreement dated August 4, 2009 between Helix Wind, Corp. and
Dominick & Dominick LLC (9)
|
10.18
|
Purchase
Agreement, dated September 2, 2009, by and among Helix Wind Corp., Venco
Power GmbH, Fiber-Tech Products GmbH, Weser Anlagentechnik Beteiligungs
GmbH, CLANA Power Systems GmbH, Reinhard Caliebe, Andreas Gorke and
Matthias Pfalz (10)
|
10.19
|
Form
of Secured Promissory Note (10)
|
10.20
|
Form
of Lock Up Agreement (10)
|
10.21
|
Form
of Put Right Agreement (10)
|
10.22
|
Purchase
Agreement, dated as of September 9, 2009, by and among Helix Wind, Corp.,
Helix Wind, Inc., Abundant Renewable Energy, LLC, Renewable Energy
Engineering, LLC, Robert W. Preus and Helen M. Hull
(11)
|
10.23
|
Form
of Lock Up Agreement (11)
|
10.24
|
Note
and Warrant Purchase Agreement, dated as of January 27, 2010, is entered
into by and between Helix Wind, Corp., a Nevada corporation and St. George
Investments, LLC, an Illinois limited liability company
(12)
|
10.25
|
Convertible
Secured Promissory Note dated as of January 27, 2010, in the aggregate
principal amount of $780,000 issued to St. George Investments, LLC
(12)
|
10.26
|
Warrant
to purchase shares of common stock of Helix Wind, Corp.
(12)
|
33
10.27
|
Stock
Pledge Agreement is entered into as of the 27th day of January, 2010 by
and between St. George Investments, LLC and Ian Gardner
(12)
|
10.28
|
Amendment
to Note and Warrant Purchase Agreement, dated as of February 4, 2010, by
and between the Company and St. George Investments, LLC
(13)
|
10.29
|
Note
Purchase Agreement dated March 5, 2010 (14)
|
10.30
|
Convertible
Secured Promissory Note dated March 5, 2010 (14)
|
10.31
|
Separation
Agreement dated March 8, 2010 (14)
|
10.32
|
Convertible
Note dated February 28, 2010 (14)
|
10.33
|
Amendment
No. 3 to Placement Agent Agreement dated March 8, 2010
(14)
|
10.34
|
Note
and Warrant Purchase Agreement dated March 30, 2010
(15)
|
10.35
|
Convertible
Secured Promissory Note dated March 30, 2010 (15)
|
10.36
|
Warrant
to Purchase Shares of Common Stock dated March 30, 2010
(15)
|
10.37
|
Form
of Additional Note (15)
|
10.38
|
Form
of Additional Warrant (15)
|
10.39
|
Registration
Rights Agreement dated March 30, 2010 (15)
|
10.40
|
Consent
to Entry of Judgment by Confession dated March 30, 2010
(15)
|
10.41
|
Irrevocable
Transfer Agent Instruction Letter dated March 30, 2010
(15)
|
10.42
|
Pledge
Agreement dated March 30, 2010 (15)
|
10.43
|
Settlement
Agreement and Mutual Release dated March 30, 2010 (15)
|
10.44
|
Escrow
Agreement dated March 30, 2010 (15)
|
31.1
|
Certification
by Principal Executive Officer pursuant to Rule 13a- 14 and Rule 15d-14 of
the Securities Exchange Act of 1934.*
|
31.2
|
Certification
by Principal Financial Officer pursuant to Rule 13a- 14 and Rule 15d-14 of
the Securities Exchange Act of 1934.*
|
32.1
|
Certification
by Principal Executive Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 USC 1350).*
|
32.1
|
Certification
by Principal Financial Officer pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 (18 USC
1350).*
|
(1)
|
Incorporated
by reference from Exhibit 10.1 to the Company’s Form 8-K filed on January
28, 2009.
|
(2)
|
Incorporated
by reference from Exhibit 3.1 to the Company’s Registration
Statement on Form SB-2 filed on June 1,
2006.
|
(3)
|
Incorporated
by reference from the Company’s Form 8-K filed April 24,
2009
|
(4)
|
Incorporated
herein by reference to Exhibit 3.2 to the Company’s Registration Statement
on Form SB-2 2 filed on June 1,
2006.
|
(5)
|
Incorporated
by reference from the Company’s Form 8-K filed February 11,
2009
|
(6)
|
Incorporated
by reference from the Company’s Form 8-K filed April 3,
2009
|
(7)
|
Incorporated
by reference from the Company’s Form 8-K filed June 17,
2009
|
(8)
|
Incorporated
by reference from the Company’s Form 8-K filed July 15,
2009
|
(9)
|
Incorporated
by reference from the Company’s Form 8-K filed August 6,
2009
|
(10)
|
Incorporated
by reference from the Company’s Form 8-K filed September 3,
2009
|
(11)
|
Incorporated
by reference from the Company’s Form 8-K filed September 15,
2009
|
(12)
|
Incorporated
by reference from the Company’s Form 8-K filed February 8,
2010
|
(13)
|
Incorporated
by reference from the Company’s Form 8-K filed February 10,
2010
|
(14)
|
Incorporated
by reference from the Company’s Form 8-K filed March 11,
2010
|
(15)
|
Incorporated
by reference from the Company’s Form 8-K filed April 6,
2010
|
* Filed
herewith.
34
Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Helix
Wind, Corp.
(Registrant)
|
||||
Date: April
15, 2010
|
/s/
Scott Weinbrandt
|
|||
By:
|
Scott
Weinbrandt
|
|||
Title:
|
Chief
Executive Officer
|
POWER
OF ATTORNEY
KNOW ALL
MEN BY THESE PRESENTS , that each of the undersigned, being a director or
officer of Helix Wind, Corp., a Nevada corporation, hereby constitutes and
appoints Kevin Claudio, acting individually, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him and in his name, place and stead in any and all capacities, to sign any
and all amendments to this annual report on Form 10-K and to file the same, with
all exhibits thereto and all other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorney-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done that such annual report
and its amendments shall comply with the Securities Act, and the applicable
rules and regulations adopted or issued pursuant thereto, as fully and to all
intents and purposes as he or she might or could do in person, hereby ratifying
and confirming all that said attorneys-in-fact and agents, or any of them or
their substitute or resubstitute, may lawfully do or cause to be done by virtue
hereof.
In
accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant in the capacities and on the dates
indicated.
Signature
|
Title
|
Date
|
/s/ SCOTT
WEINBRANDT
Scott
Weinbrandt
|
Chief
Executive Officer, President and Director (Principal Executive
Officer)
|
April
15, 2010
|
/s/ KEVIN
CLAUDIO
Kevin
Claudio
|
Chief
Financial Officer (Principal Financial Officer and Principal Accounting
Officer)
|
April
15, 2010
|
35
INDEX
TO FINANCIAL STATEMENTS
Report
of Independent Registered Public Accounting Firm
|
F-1 |
Consolidated
Balance Sheets
|
F-2 |
Consolidated
Statements of Operations
|
F-3 |
Consolidated
Statements of Stockholders’ Deficit
|
F-4 |
Consolidated
Statements of Cash Flows
|
F-5 |
Notes
to Consolidated Financial Statements
|
F-6 |
36
REPORT OF INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders of Helix Wind, Corp.
We have
audited the accompanying consolidated balance sheets of Helix Wind, Corp. (the
"Company"), as of December 31, 2009 and 2008, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audits include consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Helix Wind, Corp. as
of December 31, 2009 and 2008, and the consolidated results of its operations
and its cash flows for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
The
accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. The Company has a loss from operations and an
accumulated deficit of $55,909,285 at December 31, 2009. As discussed in Note 2
to the financial statements, a significant amount of additional capital will be
necessary to advance operations to the point at which Company is profitable.
These conditions, among others, raise substantial doubt about the Company’s
ability to continue as a going concern. Management’s plans regarding these
matters are described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ Anton
& Chia, LLP
Newport
Beach, California
April 15,
2010
F-1
HELIX
WIND, CORP.
CONSOLIDATED
BALANCE SHEETS
December
31, 2009 and 2008
2009
|
2008
|
|||||||
ASSETS
|
||||||||
CURRENT
ASSETS
|
||||||||
Cash
|
$ | - | $ | 5,980 | ||||
Accounts
receivable, net
|
44,861 | - | ||||||
Related
party receivable
|
3,356 | 3,356 | ||||||
Inventory
|
202,119 | 213,085 | ||||||
Prepaid
inventory
|
- | 193,010 | ||||||
Prepaid
NRE tooling
|
- | 21,734 | ||||||
Prepaid
expenses and other expenses
|
10,600 | 51,592 | ||||||
Total
current assets
|
260,936 | 488,757 | ||||||
EQUIPMENT,
net
|
414,668 | 187,517 | ||||||
PATENTS
|
63,930 | 18,928 | ||||||
Total
assets
|
$ | 739,534 | $ | 695,202 | ||||
LIABILITIES
AND STOCKHOLDERS’ DEFICIT
|
||||||||
CURRENT
LIABILITIES
|
||||||||
Accounts
payable
|
$ | 1,120,020 | $ | 449,215 | ||||
Accrued
compensation
|
350,264 | 149,094 | ||||||
Accrued
interest
|
401,057 | 142,844 | ||||||
Accrued
other liabilities
|
11,493 | 11,936 | ||||||
Accrued
taxes
|
- | 10,156 | ||||||
Deferred
revenue
|
28,244 | 373,598 | ||||||
Related
party payable
|
59,904 | 22,433 | ||||||
Short
term debt
|
930,528 | - | ||||||
Convertible
notes payable to related party, net of discount
|
- | 567,633 | ||||||
Convertible
notes payable, net of discount
|
4 | 1,504,180 | ||||||
Derivative
liability
|
30,854,755 | - | ||||||
Total
current liabilities
|
33,756,269 | 3,231,089 | ||||||
COMMITMENTS
AND CONTINGENCIES
|
||||||||
STOCKHOLDERS’
DEFICIT
|
||||||||
Preferred
stock, $0.0001 par value, 5,000,000 shares authorized, no shares issued or
outstanding
|
||||||||
Common
stock, $0.0001 par value, 1,750,000,000 shares authorized, 39,256,550 and
20,546,083, shares issued and outstanding as of December 31, 2009 and
2008, respectively
|
3,926 | 2,055 | ||||||
Additional
paid in capital
|
22,888,624 | 273,045 | ||||||
Accumulated
deficit
|
(55,909,285 | ) | (2,810,987 | ) | ||||
Total
stockholders’ deficit
|
(33,016,735 | ) | (2,535,887 | ) | ||||
Total
liabilities and stockholders’ deficit
|
$ | 739,534 | $ | 695,202 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-2
HELIX
WIND, CORP.
CONSOLIDATED
STATEMENTS OF OPERATIONS
For
the Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
REVENUE
|
$ | 1,239,374 | $ | 4,500 | ||||
COST
OF SALES
|
950,046 | - | ||||||
GROSS
MARGIN
|
289,328 | 4,500 | ||||||
OPERATING
EXPENSES
|
||||||||
Research
and development
|
1,343,052 | 369,812 | ||||||
Selling,
general and administrative
|
18,666,568 | 1,613,392 | ||||||
Total
operating expenses
|
20,009,620 | 1,983,204 | ||||||
LOSS
FROM OPERATIONS
|
(19,720,292 | ) | (1,978,704 | ) | ||||
OTHER
INCOME (EXPENSE)
|
||||||||
Interest
income
|
81 | 2,087 | ||||||
Interest
expense
|
(22,344,073 | ) | (141,915 | ) | ||||
Loss
on debt extinguishment
|
(12,038,787 | ) | - | |||||
Change
in fair value of derivative liability
|
1,005,573 | - | ||||||
Total
other income (expense)
|
(33,377,206 | ) | (139,828 | ) | ||||
LOSS
BEFORE PROVISION FOR INCOME TAXES
|
(53,097,498 | ) | (2,118,532 | ) | ||||
PROVISION
FOR INCOME TAXES
|
(800 | ) | – | |||||
NET
LOSS
|
$ | (53,098,298 | ) | $ | (2,118,532 | ) | ||
Basic
and diluted net loss per share attributable to common
stockholders
|
$ | (1.58 | ) | $ | (0.10 | ) | ||
Weighted
average number of common shares outstanding
|
33,523,571 | 20,546,083 |
The
accompanying notes are an integral part of these consolidated financial
statements.
F-3
HELIX
WIND, CORP.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ DEFICIT
For
the Years Ended December 31, 2009 and 2008
Common
Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Stockholder’s
|
|||||||||||||||||
Shares
|
Par
Value
|
Capital
|
Deficit
|
Deficit
|
||||||||||||||||
BALANCE
– December 31, 2007(1)
|
20,546,083 | 2,055 | 273,045 | (692,455 | ) | (417,355 | ) | |||||||||||||
Net
loss
|
– | – | – | (2,118,532 | ) | (2,118,532 | ) | |||||||||||||
BALANCE
– December 31, 2008 (1)
|
20,546,083 | $ | 2,055 | $ | 273,045 | $ | (2,810,987 | ) | $ | (2,535,887 | ) | |||||||||
Stock
issued upon reverse merger
|
16,135,011 | 1,614 | (68,028 | ) | - | (66,414 | ) | |||||||||||||
Share
based payments
|
- | - | 15,298,100 | - | 15,298,100 | |||||||||||||||
Stock
issued upon note conversion
|
753,632 | 75 | 1,654,491 | - | 1,654,566 | |||||||||||||||
Stock
issued upon note conversion and warrant exercise
|
1,718,217 | 172 | 5,731,026 | - | 5,731,198 | |||||||||||||||
New
stock issuance
|
103,607 | 10 | (10 | ) | - | - | ||||||||||||||
Net
loss
|
- | - | - | (53,098,298 | ) | (53,098,298 | ) | |||||||||||||
BALANCE
– December 31, 2009
|
39,256,550 | $ | 3,926 | $ | 22,888,624 | $ | (55,909,285 | ) | $ | (33,016,735 | ) |
(1)
|
The
December 31, 2008 and 2007 capital accounts of the Company have been
retroactively restated to reflect the equivalent number of common shares
based on the exchange ratio of the merger transaction. See note
2.
|
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
HELIX
WIND, CORP
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2009 and 2008
2009
|
2008
|
|||||||
CASH
FLOWS FROM OPERATING ACTIVITIES
|
||||||||
Net
loss
|
$ | (53,098,298 | ) | $ | (2,118,532 | ) | ||
Adjustments
to reconcile net loss to net cash used in operations:
|
||||||||
Depreciation
|
146,522 | 33,405 | ||||||
Write
off of accounts receivable
|
36,607 | - | ||||||
Write
off of debt discount on converted debt
|
700,232 | - | ||||||
Stock
based compensation expense
|
15,298,100 | - | ||||||
Change
in fair value of derivative warrant liability
|
(1,005,600 | ) | - | |||||
Interest
booked in relation with the derivative liability
|
21,614,066 | |||||||
Loss
on debt extinguishment
|
12,038,787 | |||||||
Issuance
of a note in lieu of expenses incurred on behalf of the
Company
|
28,164 | |||||||
Issuance
of convertible notes payable for services
|
- | 107,300 | ||||||
Changes
in operating assets and liabilities:
|
||||||||
Accounts
receivable
|
(81,468 | ) | – | |||||
Inventory
|
203,976 | (213,085 | ) | |||||
Prepaid
inventory
|
- | (193,010 | ) | |||||
Prepaid
NRE tooling
|
21,734 | (21,734 | ) | |||||
Other
current assets
|
40,992 | (40,038 | ) | |||||
Accounts
payable
|
926,080 | 284,056 | ||||||
Accrued
compensation
|
201,170 | 149,094 | ||||||
Accrued
interest
|
245,740 | 142,844 | ||||||
Deferred
revenue
|
(345,354 | ) | 373,598 | |||||
Accrued
other liabilities
|
(1,299 | ) | (23,782 | ) | ||||
Accrued
taxes
|
(10,156 | ) | 10,156 | |||||
Related
party payable
|
37,471 | (68,144 | ) | |||||
Net
cash used in operating activities
|
(3,002,534 | ) | (1,577,872 | ) | ||||
CASH
FLOWS FROM INVESTING ACTIVITIES
|
||||||||
Purchase
of equipment
|
(373,673 | ) | (202,070 | ) | ||||
Patents
|
(45,002 | ) | – | |||||
Cash
used in investing activities
|
(418,675 | ) | (202,070 | ) | ||||
CASH
FLOWS FROM FINANCING ACTIVITIES
|
||||||||
Cash
from merger with Clearview
|
270,229 | - | ||||||
Proceeds
from notes payable to related party
|
- | 428,633 | ||||||
Proceeds
from short term notes payable
|
790,000 | - | ||||||
Principal
payments on short term notes
|
(75,000 | ) | - | |||||
Proceeds
from convertible notes
|
2,430,000 | 1,354,880 | ||||||
Net
cash provided by financing activities
|
3,415,229 | 1,783,513 | ||||||
NET
INCREASE (DECREASE) IN CASH
|
(5,980 | ) | 3,571 | |||||
CASH BALANCE – beginning
of year
|
5,980 | 2,409 | ||||||
CASH BALANCE – end of
year
|
$ | - | $ | 5,980 | ||||
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
||||||||
Cash paid for taxes | $ | 800 | $ | - | ||||
SUPPLEMENTAL
DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
|
||||||||
Exchange
of 12% notes to 9% notes
|
2,047,214 | |||||||
Conversion
of convertible debt to non-convertible debt
|
187,365 | |||||||
Convertible
notes in lieu of payables
|
291,057 | |||||||
Debt
discount on embedded conversion features
|
4,893,033 | |||||||
Conversion
of accrued interest to convertible debt
|
199,439 | |||||||
Common
stock issued upon merger with Clearview
|
1,614 | |||||||
Net
liabilities assumed in Clearview merger
|
66,414 | |||||||
Conversion
of debt security to common stock
|
140 | |||||||
Conversion
of warrant to common stock
|
64 | |||||||
Common
stock issued
|
10 | |||||||
Conversion
of accrued compensation to convertible notes payable to related
party
|
$ | - | $ | 124,000 |
The accompanying notes are an
integral part of these consolidated financial statements.
F-5
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
1.
|
ORGANIZATION
|
Helix
Wind, Corp. (“Helix Wind”) (formerly Clearview Acquisitions, Inc.) was
incorporated under the laws of the State of Nevada on January 10, 2006
(Inception) and has its headquarters located in San Diego,
California. Helix Wind was originally named Terrapin Enterprises,
Inc. On December 6, 2006, Helix Wind merged its newly-formed wholly-owned
subsidiary, Black Sea Oil, Inc., into itself and changed its corporate name to
Black Sea Oil, Inc. pursuant to a Plan and Agreement of Merger dated December 6,
2006. On November 14, 2008, Helix Wind changed its name from Black
Sea Oil, Inc. to Clearview Acquisitions, Inc. pursuant to Amended and Restated
Articles of Incorporation filed with the Secretary of State of
Nevada. On February 11, 2009, Helix Wind’s wholly-owned subsidiary,
Helix Wind Acquisition Corp. was merged with and into Helix Wind, Inc.
(“Subsidiary”), which survived and became Helix Wind’s wholly-owned subsidiary
(the “Merger”). On April 16, 2009, Helix Wind changed its name from
Clearview Acquisitions, Inc. to Helix Wind, Corp., pursuant to an Amendment
to its Articles of Incorporation filed with the Secretary of State of
Nevada. Unless the context specifies otherwise, as discussed in Note
2, references to the “Company” refers to Subsidiary prior to the Merger, and
Helix Wind, Corp. and the Subsidiary combined thereafter.
Helix
Wind was formed to engage in any lawful corporate undertaking, including, but
not limited to, selected mergers and acquisitions. Helix Wind had no operations
up until the Merger, other than issuing shares of its common stock to its
original shareholders and conducting a private offering of shares of its common
stock. The Company is now engaged through the Subsidiary in the
alternative energy business offering a distributed power technology platform
designed to produce electric energy from the wind. Subsidiary was primarily
engaged in the research and development of its proprietary products until the
third quarter of the year ended December 31, 2008, when it began selling its
products. The Company has commenced the outsourcing process to
manufacture its products and has begun to receive purchase orders from
customers. The Company utilizes two distinct distribution channels to market and
sell its products: (i) direct sales to end users and installers and (ii)
indirect or channel sales with resellers domestically and
internationally.
Helix
Wind is authorized to issue up to 1,750,000,000 shares of common stock, par
value $0.0001 per share, and 5,000,000 shares of preferred stock, par value
$0.0001 per share. On November 3, 2008, Helix Wind (formerly Clearview
Acquisitions, Inc.) effected a reverse stock split (the “Stock Split”), as a
result of which each 1,000 shares of Helix Wind’s common stock then issued and
outstanding was converted into one share of Helix Wind’s common
stock.
Immediately
prior to the Merger, Helix Wind had 5,135,011 shares of its common stock issued
and outstanding. In connection with the Merger, Helix Wind issued 20,546,083
shares of its common stock in exchange for the issued and outstanding shares of
common stock of the Subsidiary. Included in the Merger recapitalization of Helix
Wind there were 11,000,000 shares of its common stock issued pursuant to the
settlement of the dispute described in the Company’s Form 8-K filed December 22,
2008 with Securities and Exchange Commission (“SEC”). Helix Wind also reserved
5,753,917 shares of its common stock for issuance upon the conversion of certain
convertible notes of Subsidiary that were converted into new convertible notes
of Helix Wind in connection with the Merger. Subsequent to the
reverse merger in February 2009, Helix Wind issued 2,471,849 shares of its
common stock upon conversion of certain convertible notes and warrants of
Subsidiary. The Company also granted 103,607 new shares of its common
stock during 2009. At December 31, 2009 and 2008, there were
39,256,550 and 20,546,083 shares respectively of Helix Wind’s common stock
issued and outstanding.
F-6
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
2.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Reverse
Merger Accounting
Since
former Subsidiary security holders owned, after the Merger, approximately 80% of
Helix Wind’s shares of common stock, and as a result of certain other factors,
including that all members of the Company’s executive management are from
Subsidiary, Subsidiary is deemed to be the acquiring company for accounting
purposes and the Merger was accounted for as a reverse merger and a
recapitalization in accordance with generally accepted accounting principles in
the United States (“GAAP”). These consolidated financial statements reflect the
historical results of Subsidiary prior to the Merger and that of the combined
Company following the Merger, and do not include the historical financial
results of Helix Wind (formerly Clearview Acquisitions, Inc.) prior to the
completion of the Merger. Common stock and the corresponding capital amounts of
the Company pre-Merger have been retroactively restated as capital stock shares
reflecting the exchange ratio in the Merger. In conjunction with the Merger, the
Company received cash of $270,229 and assumed net liabilities of
$66,414.
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance
with generally accepted accounting principles (“GAAP”) as promulgated in the
United States of America.
In July
2009, the Financial Accounting Standards Board (“FASB”) issued Accounting
Standards Codification (“ASC”) 105-10, formerly Statement of Financial
Accounting Standards ("SFAS") No. 168, The FASB Accounting Standards
Codification and Hierarchy of Generally Accepted Accounting Principles,
which became the single source of authoritative GAAP recognized by the
FASB. ASC 105-10 does not change current U.S. GAAP, but on the
effective date, the FASB ASC superseded
all then existing non-SEC accounting and reporting standards. The ASC
is effective for interim and annual reporting periods ending after September 15,
2009. The Company adopted ASC 105-10 during the year ended December
31, 2009 and revised its referencing of GAAP accounting standards in these
financial statements to reflect the new standards.
Consolidated
Financial
Statements
The
accompanying audited consolidated financial statements primarily reflect the
financial position, results of operations and cash flows of Subsidiary (as
discussed above). The accompanying audited consolidated financial statements of
Subsidiary have been prepared in accordance with GAAP pursuant to the
instructions to Form 10-K and Article 10 of Regulation S-X of the Securities and
Exchange Commission.
Use
of Estimates
In
preparing these consolidated financial statements, management is required to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and contingent assets and liabilities as of the date of the
consolidated financial statements and the reported amount of revenues and
expenses during the reporting periods. Actual results could differ from those
estimates. Significant estimates and assumptions included in the Company’s
consolidated financial statements relate to the recognition of revenues, the
estimate of the allowance for doubtful accounts, the estimate of inventory
reserves, estimates of loss contingencies, valuation of long-lived assets,
deferred revenues, accrued other liabilities, and valuation assumptions related
to share based payments and derivative liabilities.
F-7
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
2.
|
BASIS OF PRESENTATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Going
Concern
The
accompanying consolidated financial statements have been prepared under the
assumption that the Company will continue as a going concern. Such assumption
contemplates the realization of assets and satisfaction of liabilities in the
normal course of business. The Company has an accumulated deficit of
approximately $57,000,000 and $2,800,000 at December 31, 2009 and 2008
respectively, recurring losses from operations and negative cash flow from
operating activities from inception to December 31, 2009. These factors, among
others, raise substantial doubt about the Company’s ability to continue as a
going concern. The condensed consolidated financial statements do not include
any adjustments that might be necessary should the Company be unable to continue
as a going concern.
The
Company’s continuation as a going concern is dependent upon its ability to
generate sufficient cash flow to meet its obligations on a timely basis, to
obtain additional financing as may be required, and ultimately to attain
profitability. During 2008 and for the year ended December 31, 2009, the Company
raised funds through the issuance of convertible notes payable to investors and
through a private placement of the Company’s securities to investors to provide
working capital to finance the Company’s operating and investing
activities. In addition, as disclosed in the Form 8K filed with the
SEC on February 8, 2010 and April 6, 2010, the Company closed financing
transactions under a note and warrant purchase agreement with St. George
Investments, LLC. Currently, these two transactions have
resulted in funding of $1,199,500 with the potential to receive an additional
$400,000 over the next 120 days. The Company plans to obtain
additional financing through the sale of debt or equity securities. There can be
no assurance that such financings will be available on acceptable terms, or at
all.
Trade
Accounts Receivable
The
Company records trade accounts receivable when its customers are invoiced for
products delivered and/or services provided. Management develops its
estimate of the allowance for doubtful accounts based on the Company’s current
economic circumstances and its own judgment as to the likelihood of ultimate
payment. Management believes that they did not require an allowance for doubtful
accounts, as there are no customer accounts with material collection risk at
December 31, 2009 and December 31, 2008. Although the Company expects to collect
amounts due, actual collections may differ from these estimated amounts. Actual
accounts receivables are written off against the allowance for doubtful accounts
when the Company has determined the balance will not be collected. During the
year ended December 31, 2009, the Company wrote off $36,607 of outstanding
accounts receivable as it was considered uncollectible. There was no bad debts
or uncollectible receivables as of or during the year ended December 31,
2008.
The
Company does not require collateral from its customers, but performs ongoing
credit evaluations of its customers’ financial condition. Credit risk with
respect to the accounts receivable is limited because of the large number of
customers included in the Company’s customer base and the geographic dispersion
of those customers.
Patents
Patents
represent external legal costs incurred for filing patent applications and their
maintenance, and purchased patents. Amortization for patents is recorded using
the straight-line method over the lesser of the life of the patent or its
estimated useful life. No amortization has been taken on these expenditures in
accordance with Company policy not to depreciate patents until the patent has
been approved and issued by the United States Patent Office. The Company
accounts for its patents in accordance with ASC 350-30 and ASC 360 (formerly
SFAS No. 142, Goodwill and Other Intangible Assets).
Inventory
The
Company contracts with East West Consulting, Ltd. (“East West”) in Thailand to
manage the outsourcing of manufacturing for the Company’s wind turbines. East
West directly places orders with suppliers based on a demand schedule provided
by the Company. Each supplier holds various quantities in their finished goods
inventory for a specified period before it is shipped on behalf of the Company.
For finished goods, inventory title passes to the Company when payments have
been made to East West for these items. Payments that the Company makes to East
West for inventory that is still in process are recognized as prepaid inventory.
The suppliers bear the risk of loss during manufacturing as they are fully
insured for product within their warehouse. The Company records its finished
goods inventory at the lower of cost (first in first out) or net realizable
value. At December 31, 2009 and December 31, 2008, inventory at various
suppliers or at the Company totaled $202,119 and $213,085, respectively. In
addition, the Company makes progress payments to East West for inventory being
manufactured but not yet completed in the form of prepaid
inventory. There was no prepaid inventory at December 31,
2009.
F-8
HELIX
WIND, CORP
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
2.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Impairment
of Long-Lived Assets
In
accordance with ASC 350-30 (formerly SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets), the Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that their
net book value may not be recoverable. When such factors and circumstances
exist, the Company compares the projected undiscounted future cash flows
associated with the related asset or group of assets over their estimated useful
lives against their respective carrying amount. Impairment, if any, is based on
the excess of the carrying amount over the fair value, based on market value
when available, or discounted expected cash flows, of those assets and is
recorded in the period in which the determination is made. The Company’s
management currently believes there is no impairment of its long-lived assets.
There can be no assurance, however, that market conditions will not change or
demand for the Company’s products under development will continue. Either of
these could result in future impairment of long-lived assets.
Equipment
Equipment
is stated at cost, and is being depreciated using the straight-line method over
the estimated useful lives of the related assets ranging from three to five
years. Non Recurring Equipment (NRE) tooling that was placed in service and paid
in full as of December 31, 2009 is recognized as fixed assets and being
depreciated over 5 years. Tooling that has been partially paid for as of
December 31, 2009 is recognized as a prepaid asset. Costs and expenses incurred
during the planning and operating stages of the Company’s website are expensed
as incurred. Costs incurred in the website application and infrastructure
development stages are capitalized by the Company and amortized to expense over
the website’s estimated useful life or period of benefit. Expenditures for
repairs and maintenance are charged to expense in the period incurred. At the
time of retirement or other disposition of equipment and website development,
the cost and related accumulated depreciation are removed from the accounts and
any resulting gain or loss is recorded in results of operations.
Research
and Development Costs
Costs
incurred for research and development are expensed as incurred. Purchased
materials that do not have an alternative future use and the cost to develop
prototypes of production equipment are also expensed. Costs incurred after the
production process is viable and a working model of the equipment has been
completed will be capitalized as long-lived assets.
Derivative
Liabilities and Classification
We
evaluate free-standing instruments (or embedded derivatives) indexed to the
Company’s common stock to properly classify such instruments within equity or as
liabilities in our financial statements. Accordingly, the classification of an
instrument indexed to our stock, which is carried as a liability, must be
reassessed at each balance sheet date. If the classification changes as a result
of events during a reporting period, the instrument is reclassified as of the
date of the event that caused the reclassification. There is no limit on the
number of times a contract may be reclassified.
Basic
and Diluted Loss per Share
The
Company calculates basic and diluted net loss per share using the weighted
average number of common shares outstanding during the periods
presented.
We
incurred a net loss in each period presented, and as such, did not include the
effect of potentially dilutive common stock equivalents in the diluted net loss
per share calculation, as their effect would be anti-dilutive for all
periods. Potentially dilutive common stock equivalents would include
the common stock issuable upon the exercise of warrants, stock options and
convertible debt. As of December 31, 2009 and 2008, all potentially
dilutive common stock equivalents not included in diluted loss per share as they
would be anti-dilutive amount to 26,257,314 and 0, respectively.
F-9
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
2.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
Fair Value of Financial Instruments
ASC 820-10 (formerly SFAS No. 157,
Fair
Value Measurements )
requires entities to disclose the fair value of financial instruments, both
assets and liabilities recognized and not recognized on the balance sheet, for
which it is practicable to estimate fair value. ASC 820-10 defines the fair
value of a financial instrument as the amount at which the instrument could be
exchanged in a current transaction between willing parties.
As of
December 31, 2009, and 2008, the carrying value of the Company’s financial
instruments approximated fair value due to their short-term nature and
maturity.
Revenue
Recognition
The
Company recognizes revenue on arrangements in accordance with FASB ASC No. 605,
“Revenue Recognition”. The Company recognizes revenue when persuasive evidence
of an arrangement exists, delivery has occurred, the fee is fixed or
determinable, and collectability is reasonably assured. In instances
where final acceptance of the product is specified by the customer or is
uncertain, revenue is deferred until all acceptance criteria have been
met.
The
Company receives a deposit for up to 50% of the sales price when the purchase
order is received from a customer, which is recorded as deferred revenue until
the product is shipped. The Company had received purchase orders from various
domestic and international customers to purchase approximately 131 wind turbines
and the Company has shipped 126 units as of December 31, 2009. The Company had
deferred revenue of $28,244 and $373,598 as of December 31, 2009 and 2008,
respectively, relating deposits received for the unshipped units.
Stock
Based Compensation
The
Company accounts for its share-based compensation in accordance with ASC 718-20
(formerly SFAS 123-R, Share
Based Payment). Stock-based compensation cost is measured at the date of
grant, based on the calculated fair value of the stock-based award, and is
recognized as expense over the employee’s requisite service period (generally
the vesting period of the award).
The
Company estimates the fair value of employee stock options granted using the
Black-Scholes Option Pricing Model. Key assumptions used to estimate the fair
value of stock options include the exercise price of the award, the fair value
of the Company’s common stock on the date of grant, the expected option term,
the risk free interest rate at the date of grant, the expected volatility and
the expected annual dividend yield on the Company’s common stock.
Recent
Accounting Pronouncements
Accounting
standards promulgated by the FASB change periodically. Changes in such standards
may have an impact on the Company’s future financial statements. The following
are a summary of recent accounting developments.
In May
2009, the FASB issued additional guidance related to ASC 855, Subsequent Events. ASC 855
establishes that management must evaluate, as of each reporting period, events
or transactions that occur for potential recognition or disclosure in the
financial statements and the circumstances under which an entity should
recognize events or transactions occurring after the balance sheet date through
the date that the financial statements are issued or available to be issued. It
also requires the disclosure of the date through which an entity has evaluated
subsequent events. The Company adopted ASC 855 during the year ended December
31, 2009. The required disclosures are included in Note 11, "Subsequent
Events".
F-10
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
2.
|
BASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Continued)
|
In April
2009, the FASB issued additional guidance related to ASC 820, Fair Value Measurements and
Disclosures. ASC 820 provisions define fair value, establish a
framework for measuring fair value and expand disclosure requirements. The new
guidance emphasizes that even if there has been a significant decrease in the
volume and level of activity, the objective of a fair value measurement remains
the same. Fair value is the price that would be received to sell an asset or
paid to transfer a liability in an orderly transaction (that is, not a forced
liquidation or distressed sale) between market participants. The guidance
provides a number of factors to consider when evaluating whether there has been
a significant decrease in the volume and level of activity for an asset or
liability in relation to normal market activity. In addition, when transactions
or quoted prices are not considered orderly, adjustments to those prices based
on the weight of available information may be needed to determine the
appropriate fair value. The guidance also requires increased disclosures. The
Company adopted the new guidance for the year ended December 31, 2009 with no
resulting impact on the Company’s financial statements.
In June
2009, the FASB issued additional guidance related to ASC 810, Consolidation, which requires
an enterprise to determine whether its variable interest or interests give it a
controlling financial interest in a variable interest entity. The primary
beneficiary of a variable interest entity is the enterprise that has both
(1) the power to direct the activities of a variable interest entity that
most significantly impact the entity's economic performance, and (2) the
obligation to absorb losses of the entity that could potentially be significant
to the variable interest entity or the right to receive benefits from the entity
that could potentially be significant to the variable interest entity. ASC 810
also amends FASB Interpretation No 46(R) to require ongoing reassessments of
whether an enterprise is the primary beneficiary of a variable interest entity.
ASC 810 is effective for interim and annual reporting periods beginning after
November 15, 2009. The Company is evaluating the impact of this
pronouncement but does not expect the adoption to have a material impact on its
financial statements.
F-11
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
3.
|
RELATED
PARTY TRANSACTIONS AND CONVERTIBLE NOTES PAYABLE TO RELATED
PARTIES
|
As of
December 31, 2009 and 2008, the Company had a related party receivable from a
Company director for $3,356. The receivable carried no interest and is due on
demand.
At
December 31, 2008, the Company had an unsecured related party payable to
Lab4Less, LLC, bearing no interest, payable on demand, in the amount of
$22,433. The Company’s Chief Executive Officer and director was a 50%
owner of Lab4Less, LLC. During the quarter ended March 31, 2009, the
Company repaid such note payable in full.
At
December 31, 2008, convertible notes payable to related parties were
$567,633. Such notes were held by the Company’s Chief Executive
Officer and certain shareholder founders and co-founders of the
Company. During the quarter ended March 31, 2009, $392,268 of such
convertible notes payable were converted to the newly issued 9% convertible
debt. The remaining $175,365 of such notes did not convert and remain as part of
the 12% convertible debt (see Note 6).
4.
|
EQUIPMENT
|
Equipment
consisted of the following as of December 31, 2009 and December 31,
2008:
2009
|
2008
|
|||||||
Equipment
|
$
|
49,260
|
$
|
27,409
|
||||
NRE
tooling
|
424,903
|
124,287
|
||||||
Test
facility
|
100,560
|
56,856
|
||||||
Leasehold
improvements
|
10,254
|
2,752
|
||||||
Web
site development costs
|
13,566
|
13,566
|
||||||
598,543
|
224,870
|
|||||||
Accumulated
depreciation
|
(183,875
|
)
|
(37,353
|
)
|
||||
$
|
414,668
|
$
|
187,517
|
5.
|
DEBT
|
Short
Term Debt
Short
term debt was $930,528 and $0 as of December 31, 2009 and December 31, 2008,
respectively. At December 31, 2009, short term debt represents a
Subsidiary 12% related party note totaling $115,365 and two non-related party
Subsidiary 12% note holders totaling $72,000 that elected not to convert as part
of the note exchange offered with the Merger. In addition, short term debt
includes $568,164 and $100,000 received from two non-related parties during
2009. The two promissory notes have a term of 1 year and accrue
interest at prime (3.25% at December 31, 2009) plus 1%. Also included
in short term debt was the receipt of $37,500 each from each of the two non
related parties in fourth quarter 2009. The promissory notes had a
term of 90 days and an interest of 20%.
Convertible
Notes Payable and Convertible Notes Payable to Related Party
Convertible
notes payable totaled $4,404,712 and $2,071,813, as of December 31, 2009 and
December 31, 2008, respectively, as described below. In
connection with the convertible notes payable issued during the year ended
December 31, 2009, the Company issued an aggregate of 11,419,888 warrants.
All of the convertible notes payable and warrants contain an anti-dilution
provision which “re-set” the related conversion rate and exercise price, if any,
subsequent equity linked instruments are issued with rates lower than those of
the outstanding equity linked instruments. The accounting
literature related to the embedded conversion feature and warrants issued in
connection with the convertible notes payable is discussed under note 6
below.
F-12
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
5.
|
DEBT
(Continued)
|
Amount
|
Discount
|
Convertible
Notes Payable,
net
of discount
|
Convertible
Notes Payable Related Party, net of
discount
|
|||||||||||||
Exchange
Notes
|
2,209,347
|
(2,209,347
|
)
|
-
|
-
|
|||||||||||
Reverse
Merger Notes
|
200,000
|
(200,000
|
)
|
-
|
-
|
|||||||||||
New
Convertible Notes
|
1,920,365
|
(1,920,365
|
)
|
-
|
-
|
|||||||||||
Other
Convertible Notes
|
75,000
|
(75,000
|
)
|
-
|
-
|
|||||||||||
4,404,712
|
(4,404,712
|
)
|
-
|
-
|
Exchange
Notes – Convertible Notes Payable and Convertible Notes Payable to Related
Party, net of discount
On
February 11, 2009, in connection with and as part of the Merger, the Company
exchanged existing convertible notes (“12% notes”) for 9% convertible notes (
the “Exchange Notes”). Prior to the Merger, the total amount of the 12% notes
exchanged was $2,234,579. This amount included principal of
$1,874,448 plus accrued interest charges of $146,866 and other premiums of
$213,265. The Exchange Notes had a principal amount at December 31,
2009, of $2,209,347, bearing interest at 9% per annum, with principal and
interest due three years from the date of issuance. The Exchange Notes required
no payment of principal or interest during the term and may be converted to our
common stock at the conversion price of $0.50 per share at any time at the
option of the note holder. In addition to the stated interest rate; the exchange
transaction also modified the conversion rate as well as the issuance of
5,469,158 warrants to the various convertible note holders, the warrants have an
exercise price of $0.75 per share for each share of the Company issuable upon
conversion of the note. The warrants expire 5 years from issuance and
contain cashless exercise provisions which are settled in shares. The
warrants and notes were issued in connection with a registration rights
agreement.
The
Company concluded that the changes in the note agreements,
conversion feature and warrants were considered substantive and accordingly
the transaction should be accounted for as an extinguishment of debt and an
issuance of new debt. As such, the Company recorded a loss on
extinguishment of debt of approximately $12,038,787 which is recorded in other
expenses in the accompanying consolidated statements of operations, during the
year ended December 31, 2009.
The
Company initially recorded a discount to the Exchange Notes of $2,234,579.
During the year ended December 31, 2009, $25,232 of the Exchange Notes was
converted into common stock (the unamortized debt discount related to the
converted note was immediately charged to interest expense on the day the note
was converted). The Company amortized the debt discount using the
effective interest method over the term of the convertible notes payable which
is three years. During the year ended December 31, 2009 there was $0 amortized
under this amortization method.
Reverse
Merger Notes-Convertible Notes Payable, net of discount
On
February 11, 2009 upon completion of the Merger, the Company issued $650,000 of
convertible notes payable to 3 different note holders (“Reverse Merger
Notes”). The Reverse Merger Notes had a principal amount at December
31, 2009, of $200,000 (after the conversion of $450,000 into the Company’s
common stock, bearing interest at 9% per annum, with principal and interest due
three years from the date of issuance. The Reverse Merger Notes required no
payment of principal or interest during the term and may be converted to the
Company’s common stock at the conversion price of $0.50 per share at any time at
the option of the note holder. The Company also issued 1,300,000
warrants to the various note holders; the warrants have an exercise price of
$0.75 per share for each share of the Company issuable upon conversion of the
note. The warrants expire 5 years from issuance and contain cashless
exercise provisions which are settled in shares. The warrants
and notes were issued in connection with a registration rights
agreement.
The
Company has initially recorded a debt discount to the Reverse Merger Notes in
the amount of $650,000. During the year ended December 31,
2009, $450,000 of the Reverse Merger Notes was converted into common stock (the
unamortized debt discount related to the converted note was immediately charged
to interest expense on the day the note was converted). The Company
amortized the debt discount using the effective interest method over the term of
the convertible notes payable which is three years. During the year ended
December 31, 2009 there was $0 amortized under this amortization
method.
F-13
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
5.
|
DEBT
(Continued)
|
New Convertible
Notes-Convertible Notes Payable, net of discount
During
the year ended December 31, 2009, the Company also issued additional convertible
notes payable in the amount of $2,145,365 (“New Convertible Notes”).
The New Convertible Notes had a principal amount at December 31, 2009 of
$1,920,365 (after the conversion of $225,000 into the company's common
stock). The New Convertible Notes bear interest at 9% per annum, with
principal and interest due three years from the date of issuance, required no
payment of principal or interest during the term and may be converted to our
common stock at the conversion price of $0.50 per share at any time at the
option of the note holder. The Company also issued 5,200,730 warrants
to the various note holders. The warrants have an exercise price of $0.75 per
share for each share of the Company issuable upon conversion of the
note. The warrants expire 5 years from issuance and contain cashless
exercise provisions which are settled in shares. The warrants
and notes were issued in connection with a registration rights
agreement.
The
Company has recorded a debt discount in the amount of
$2,145,365. During the year ended December 31, 2009, $225,000 of the
New Convertible Notes was converted into common stock (the unamortized debt
discount related to the converted notes was immediately charged to interest
expense on the day the note was converted). The Company amortized the debt
discount using the effective interest method over the term of the convertible
notes payable which is three years. During the year ended December 31, 2009
there was $0 amortized under this amortization method.
Other
Convertible Notes-Convertible Notes Payable, net of discount
On
February 11, 2009 upon completion of the Merger, the Company also issued $25,000
of related party convertible notes and $50,000 of non-related party convertible
notes in exchange for equipment and inventory (“Other Convertible Notes”) for a
total of $75,000. The Other Convertible Notes bear interest at 9% per
annum, with principal and interest due three years from the date of issuance,
require no payment of principal or interest during the term and may be converted
to our common stock at the conversion price of $0.50 per share at any time at
the option of the note holder. The Company also issued 150,000
warrants to the various note holders. The warrants have an exercise price of
$0.75 per share for each share of the Company issuable upon conversion of the
note. The warrants expire 5 years from issuance and contain cashless
exercise provisions which are settled in shares. The warrants
and notes were issued in connection with a registration rights
agreement.
The
Company initially recorded a debt discount in the amount of
$75,000. The Company amortized the debt discount using the effective
interest method over the term of the convertible notes payable which is three
years. During the year ended December 31, 2009 there was $0 amortized under this
amortization method.
At
December 31, 2009, the fair value of all warrants issued in connection with
convertible notes payable and convertible notes payable to related party is
estimated to be $17,490,219. Management estimated the fair value of
the warrants based upon the application of the Black-Sholes option-pricing model
using the following assumptions: expected life of three to five years; risk free
interest rate of (1.32% - 2.69%); volatility of (75%) and expected dividend
yield of zero. At the date of issuance of the exchange notes, the
related Black-Sholes assumptions were: expected life of three years; risk free
interest rate of 1.32%; volatility of 59% and expected dividend yield
of zero.
6.
|
DERIVATIVE
LIABILITIES
|
As
described in Note 5, the Company issued financial instruments in the form of
warrants and convertible notes payable with conversion features. All
of the convertible notes payable and warrants contain an anti-dilution provision
which “re-set” the related conversion rate and exercise price if any subsequent
equity linked instruments are issued with rates lower than those of the
outstanding equity linked instruments.
The
conversion features of both the convertible notes payable and warrants were
analyzed for derivative liabilities under GAAP and the Company has determined
that they meet the definition of a derivative liability due to the contracts
obligations. Derivative instruments shall also be measured at fair
value at each reporting period with gains and losses recognized in current
earnings. The Company calculated the fair value of these instruments
using the Black-Scholes pricing model. The significant assumptions used in the
calculation of the instruments fair value are detailed in the table
below.
F-14
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
6.
|
DERIVATIVE
LIABILITIES (Continued)
|
Derivative
Liability - Embedded Conversion Features
During
the year ended December 31, 2009, the Company recorded a derivative liability of
$18,568,497 for the issuance of convertible notes payable. During the
year ended December 31, 2009, $700,232 of convertible notes payable was
converted into common stock of the Company. The Company performed a
final mark-to-market adjustment for the derivative liability related to the
convertible notes and the carrying amount of the derivative liability related to
the conversion feature of $2,944,965 was re-classed to additional paid in
capital on the date of conversion in the accompanying statements of
shareholders’ deficit. During the year ended December 31, 2009, the
Company recognized a charge of $578,194 based on the change in fair value
(mark-to-market adjustment) of the derivative liability associated with the
embedded conversion features in the accompanying statement of
operations. The value of the derivative liability associated with the
embedded conversion features was $16,201,726 at December 31, 2009.
Derivative
Liability - Warrants
During
the year ended December 31, 2009, the Company recorded a derivative liability of
$19,977,389 for the issuance of warrants. During the year ended
December 31, 2009, 865,000 warrants were exercised on a cashless basis and
700,000 warrants were cancelled. The Company performed a final
mark-to-market valuation for the derivative liability associated with the
exercised and cancelled warrants and the fair value carrying amount of the
derivative liability on the date of exercise of $3,578,225 was reclassified to
additional paid in capital in the accompanying statement of shareholders’
deficit. During the year ended December 31, 2009, the Company
recognized a gain of $1,746,136 based on the change in fair value
(mark-to-market adjustment) of the derivative liability associated with the
warrants in the accompanying statement of operations. The value of
the derivative liability associated with the warrants was $14,653,028 at
December 31, 2009.
These
derivative liabilities have been measured in accordance with fair value
measurements, as defined by GAAP. The valuation assumptions are
classified within Level 1 inputs and Level 2 inputs. The following
table represents the Company’s derivative liability activity for both the
embedded conversion features and the warrants:
December
31, 2008
|
$
|
---
|
||
Issuance
of derivative financial instruments
|
20,343,262
|
|||
Mark-to-market
adjustment to fair value at March 31, 2009
|
2,431,015
|
|||
March
31, 2009
|
$
|
22,774,277
|
||
Issuance
of derivative financial instruments
|
8,098,443
|
|||
Conversion
of derivative financial instrument
|
(1,279,333)
|
|||
Mark-to-market
adjustment to fair value at June 30, 2009
|
11,489,557
|
|||
June
30, 2009
|
$
|
41,082,944
|
||
Issuance
of derivative financial instruments
|
10,104,180
|
|||
Conversion
of derivative financial instruments
|
(3,297,024)
|
|||
Mark-to-market
adjustment to fair value at September 30, 2009
|
(5,158,406)
|
|||
September
30, 2009
|
$
|
42,731,694
|
||
Conversion
or cancellation of derivative financial instruments
|
(1,946,834)
|
|||
Mark-to-market
adjustment to fair value at December 31, 2009
|
(9,930,105)
|
|||
December
31, 2009
|
$
|
30,854,755
|
These
instruments were not issued with the intent of effectively hedging any future
cash flow, fair value of any asset, liability or any net investment in a foreign
operation. The instruments do not qualify for hedge accounting, and
as such, all future changes in the fair value will be recognized currently in
earnings until such time as the instruments are exercised, converted or
expire. The following assumptions were used to determine the
fair value of the warrants as of December 31, 2009 and at date of issuance of
February 11, 2009:
F-15
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
6.
|
DERIVATIVE
LIABILITIES (Continued)
|
December
31,
2009
|
|||
Weighted-
average volatility
|
59%
- 75%
|
||
Expected
dividends
|
0.0%
|
||
Expected
term
|
3
to 5 years
|
||
Risk-free
rate
|
1.32%
to 2.95%
|
7.
|
INCOME
TAXES
|
The items
accounting for the difference between income taxes computed at the federal
statutory rate and the provision for income taxes were as follows:
For
the Year Ended December 31
|
||||||||
2009
|
2008
|
|||||||
Federal
Statutory Rate
|
34.00% | 34.00% | ||||||
State
Tax, Net of Federal Benefit
|
9.00% | 8.96% | ||||||
Valuation
Allowance
|
(43.00%) | (43.00%) | ||||||
Effective
Income Tax Rate
|
0.00% | 0.00% |
Significant
components of deferred tax assets and (liabilities) using the Company’s
effective tax rate are as follows:
|
For
the Year Ended December 31
|
|||||||
2009
|
2008
|
|||||||
Loss
Carryforwards
|
$ | 54,197,000 | $ | 2,118,000 | ||||
Less
– Valuation Allowance
|
(54,197,000 | ) | (2,118,000 | ) | ||||
State
Tax, Net of Federal Benefit
|
$ | - | $ | - |
The
Company periodically evaluates the likelihood of the realization of deferred tax
assets, and adjusts the carrying amount of the deferred tax assets by a
valuation allowance to the extent the future realization of the deferred tax
assets is not judged to be more likely than not. The Company
considers many factors when assessing the likelihood of future realization of
our deferred tax assets, including recent cumulative earnings experience by
taxing jurisdiction, expectations of future taxable income or loss, the
carry-forward periods available to us for tax reporting purposes, and other
relevant factors.
At
December 31, 2009, based on the weight of available evidence, including
cumulative losses in recent years and expectations of future taxable income, the
Company determined that it was more likely than not that its deferred tax assets
would not be realized. Accordingly, the Company has recorded a
valuation allowance equivalent to 100% of its cumulative deferred tax
assets.
As a
result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN
48, Accounting for Uncertainty
in Income Taxes – An Interpretation of FASB Statement No. 109), the
Company performed an analysis of its previous tax filings and determined that
there were no positions taken that it considered uncertain. Therefore, there was
no provision for uncertain tax positions for the year
ended December 31, 2009 and December 31, 2008.
Future
changes in uncertain tax positions are not expected to have an impact on the
effective tax rate due to the existence of the valuation
allowance. The Company will continue to classify income tax penalties
and interest, if any, as part of interest and other expenses in its statements
of operations. The Company has incurred no interest or penalties as of December
31, 2009 and 2008.
8.
|
STOCK
BASED COMPENSATION
|
On
February 9, 2009, the Company’s Board of Directors adopted the 2009 Equity
Incentive Plan authorizing the Board of Directors or a committee to issue
options exercisable for up to an aggregate of 13,700,000 shares of common stock.
There were 11,651,240 options granted during the year ended December 31, 2009,
at an exercise prices ranging from $0.50 to $2.70 per share.
F-16
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
8.
|
STOCK
BASED COMPENSATION (Continued)
|
The
Company's Share Employee Incentive Stock Option Plan was approved by the
shareholders of the Company and the definitive Schedule 14C Information
Statement was filed with the SEC on July 14, 2009.
The
following weighted average assumptions were used in estimating the fair value of
certain share-based payment arrangements:
Year
ended
|
|||
December
31, 2009
|
|||
Annual
dividends
|
-
|
||
Expected
volatility
|
59%
-75%
|
||
Risk-free
interest rate
|
1.76%
- 2.70%
|
||
Expected
life
|
5
years
|
Since
there is insufficient stock price history that is at least equal to the expected
or contractual terms of the Company’s options, the Company has calculated
volatility using the historical volatility of similar public entities in the
Company’s industry. In making this determination and identifying a
similar public company, the Company considered the industry, stage, life cycle,
size and financial leverage of such other entities. This
resulted in an expected volatility of 59% to 75% for the year ended December 31,
2009.
The
expected option term in years is calculated using an average of the vesting
period and the option term, in accordance with the “simplified method” for
“plain vanilla” stock options allowed under GAAP.
The risk
free interest rate is the rate on a zero-coupon U.S. Treasury bond with a
remaining term equal to the expected option term. The expected
volatility is derived from an industry-based index, in accordance with the
calculated value method.
The
Company is required to estimate the number of forfeitures expected to occur and
record expense based upon the number of awards expected to vest. At
December 31, 2009, the Company expects all awards issued will be fully vested
over the expected life of the warrants. During the year ended
December 31, 2009, 600,000 employee options were exercised on a cashless basis
in which the Company issued net shares of 438,710. The Company had
previously expensed the full amount of the grant date fair value of $1,506,337
related to these instruments as these instruments were fully vested upon
issuance.
Stock
Option Activity
A summary
of stock option activity for the year ended December 31, 2009 is as
follows:
Weighted
|
||||||||
Average
|
||||||||
Number
|
Exercise
|
|||||||
Shares
|
Price
|
|||||||
Options
outstanding at December 31, 2008
|
-
|
$
|
-
|
|||||
Granted
|
11,651,240
|
0.58
|
||||||
Exercised
|
600,000
|
0.75
|
||||||
Forfeited
|
-
|
-
|
||||||
Options
outstanding at December 31, 2009
|
11,051,240
|
$
|
0.58
|
The
following table summarizes information about stock options outstanding and
exercisable as of December 31, 2009:
Outstanding
|
Exercisable
|
|||||||
Number
of shares
|
11,051,240
|
9,721,114
|
||||||
Weighted
average remaining contractual life
|
4.12
|
4.12
|
||||||
Weighted
average exercise price per share
|
$
|
0.58
|
$
|
0.56
|
||||
Aggregate
intrinsic value (December 31, 2009 closing price of $2.28)
|
$
|
18,748,610
|
$
|
16,679,089
|
F-17
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
8.
|
STOCK
BASED COMPENSATION (Continued)
|
The
aggregate intrinsic value in the preceding table represents the total pre-tax
intrinsic value (the difference between the Company’s closing stock price as of
December 31, 2009 and the weighted average exercise price multiplied by the
number of shares) that would have been received by the option holders had all
option holders exercised their options on December 31, 2009. This intrinsic
value will vary as the Company’s stock price fluctuates.
Compensation
expense arising from stock option grants was $15,298,100 for the year ended
December 31, 2009.
The
amount of unrecognized compensation cost related to non-vested awards at
December 31, 2009 was $2,943,820. The weighted average period in
which this amount is expected to be recognized is 4.46 years.
Stock
options outstanding and exercisable at December 31, 2009, and the related
exercise price and remaining contractual life are as follows:
Options
Outstanding
|
Options
Exercisable
|
|||||||||||||||||||
Weighted
|
Weighted
|
|||||||||||||||||||
Average
|
Average
|
|||||||||||||||||||
Weighted
|
Remaining
|
Weighted
|
Remaining
|
|||||||||||||||||
Number
of
|
Average
|
Contractual
|
Number
of
|
Average
|
Contractual
|
|||||||||||||||
Exercise
|
Options
|
Exercise
|
Life
of Options
|
Options
|
Exercise
|
Life
of Options
|
||||||||||||||
Price
|
Outstanding
|
Price
|
Outstanding
|
Exercisable
|
Price
|
Exercisable
|
||||||||||||||
$
|
0.50-$0.75
|
10,751,240
|
$
|
0.52
|
4.12
yrs
|
9,571,537
|
$
|
0.53
|
4.12
yrs
|
|||||||||||
$
|
2.70
|
300,000
|
$
|
2.70
|
4.46
yrs
|
149,577
|
$
|
2.70
|
4.46
yrs
|
|||||||||||
11,051,240
|
$
|
0.58
|
4.12
yrs
|
9,721,114
|
$
|
0.56
|
4.12
yrs
|
9.
|
COMMON
STOCK
|
Common
Stock Issued
We are
authorized to issue up to 1,750,000,000 shares of common stock, par value
$0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001
per share. During the year ended December 31, 2009, the Company
issued 2,471,849 restricted shares of the Company’s common stock to certain
holders of the 9% convertible notes and warrants who elected to
convert.. The Company also granted 103,607 new restricted common
shares during the year. The Company’s common stock outstanding at
December 31, 2009 was 39,256,550. The Company also reserved 5,713,918 shares of
common stock for issuance upon the conversion of certain convertible notes of
Subsidiary that were converted into new convertible notes of the Company in
connection with the Merger. The outstanding shares of common stock
are validly issued, fully paid and nonassessable.
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
The
Company leases its corporate office located at 1848 Commercial Street, San
Diego, California under a lease agreement with a partnership that is affiliated
with a principal stockholder, who is also an executive officer, founder and a
director of the Company. The lease expired on October 31, 2008, monthly rent was
$200 per month for the period January 1, 2007 through February 29, 2008, and
then increased to $2,000 per month for the period March 1, 2008 through October
31, 2008. The Company entered into a new lease effective November 1, 2008. The
initial term of this lease for the period November 1, 2008 through October
31, 2009, provides for a monthly base rent of $7,125. The lease
automatically renewed for one year under the same terms and conditions. The
total lease expense was $85,000 and $30,750 during the years ended December 31,
2009 and 2008, respectively.
F-18
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
10.
|
COMMITMENTS
AND CONTINGENCIES (Continued)
|
The
Company leases a test facility in California for $300 per month under a lease
which expired on October 31, 2008. Under a new lease effective November 1, 2008,
the rent increased to $450 per month. The initial term of this lease
is November 1, 2008 through October 31, 2009, with a one-year renewal option for
each of the next five years with no increase in rent during the renewal
periods. The lease was renewed and now matures October 31,
2010.
At
December 31, 2009, future minimum lease payments under noncancelable operating
leases approximate $7,575 per month.
Manufacturing
Agreement
The
Company entered into a three year contract with East West of Thailand on June
14, 2008 to manage the manufacturing and distribution of its products. The
contract can be cancelled due to gross nonperformance from East West or the
failure to meet milestones. Milestones disclosed in the contract include:
development of supply chain, understanding of design package of product to be
manufactured, identifying approved suppliers, placing orders based on production
planning and managing the implementation of a logistics warehouse for customer
orders. If the contract is cancelled due to nonperformance or failure to meet
the documented milestones, the Company is not obligated to pay the remainder of
the contract. The monthly management fee payable to East West is $16,270. The
Company paid $130,160 and $81,350 in management fees to East West during the
year ended December 31, 2009 and 2008, respectively. The East West
accounts payable was $89,485 at December 31, 2009 and the Company had a
commitment to pay East West $237,505 for cost related to the prospective
manufacturing of inventory and tooling. The Company will record the $237,505 as
part of its inventory and tooling when legal title transfers from East West to
the Company consistent with the Company’s policy for inventory as described in
Note 2.
Legal
Matters
From time
to time, claims are made against the Company in the ordinary course of business,
which could result in litigation. Claims and associated litigation are subject
to inherent uncertainties and unfavorable outcomes could occur, such as monetary
damages, fines, penalties or injunctions prohibiting the Company from selling
one or more products or engaging in other activities. The occurrence of an
unfavorable outcome in any specific period could have a material adverse effect
on the Company’s results of operations for that period or future
periods.
In
December of 2008, we entered into a settlement agreement and release
(“Settlement Agreement”) with Bluewater Partners, S.A., IAB Island Ventures,
S.A., CAT Brokerage AG, and David Lillico (collectively, “Bluewater”) in order
to settle a lawsuit with Bluewater originally filed in the Supreme Court of New
York State, County of New York on December, 17, 2008, and subsequently moved to
the Circuit Court for th1
15th
Judicial Circuit in Palm Beach County, Florida on February 20,
2009. In this lawsuit, Bluewater alleged that the Company failed to
pay approximately $96,000 due under certain promissory notes issued to Bluewater
by the Company. Among other things, the Settlement Agreement required
us to issue 11,000,000 shares of our common stock to Bluewater pursuant to
Section 3(a) (10) of the Securities Act of 1933, as amended, and to obtain the
approval of a court with appropriate jurisdiction of the terms and conditions
for such issuance after a hearing upon the fairness of such terms and
conditions. On March 25, 2009, the Circuit Court for the 15 the
Judicial Circuit in Palm Beach County, Florida approved the terms and conditions
of the issuance of the 11,000,000 shares in accordance with the Settlement
Agreement and the Settlement Agreement became final.
On
October 9, 2009, a former employee served a complaint in San Diego Superior
Court against the Company, Scott Weinbrandt, our Chairman and President, and Ian
Gardner, our Chief Executive Officer. The Complaint allegations include breach
of the plaintiff’s employment agreement, unpaid wages, and related
claims. All of these claims relate to Plaintiff’s allegation that he
was unfairly forced out of the Company. Although no specific amount
of damages are alleged, the Company believes the amount of back wages being
sought is approximately $98,500 and the Company has accrued such amount at
December 31, 2009. For settlement of the lawsuit please see Note 11.
Subsequent Events.
F-19
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
10.
|
COMMITMENTS
AND CONTINGENCIES
|
Executive
Compensation
Employment
agreements executed with two of the Company’s executives call for base salary
for each executive as shown below.
● |
$200,000
per annum August 1, 2008 through July 31, 2009
|
|
● |
$250,000
per annum August 1, 2009 through July 31, 2010
|
|
● |
$300,000
per annum August 1, 2010 through December 31,
2010
|
In
addition to the salary shown above, each executive is entitled to a $75,000
bonus payable upon closing of the Company’s series A financing.
F-20
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
11.
|
SUBSEQUENT
EVENTS
|
In
preparing these financial statements, the Company has evaluated events and
transactions for potential recognition or disclosure through April 15, 2010, the
date the financial statements were issued.
On
January 28, 2010, the Company entered into an Extension Amendment with two
non-related parties to amend their promissory notes. The maturity
date was extended by 90 days for each $37,500 promissory note. Also,
each additional 30 day extension of the maturity date results in the Company
increasing the principal amount of the note by $5,000.
On
February 2, 2010, the Company closed a financing transaction under a note and
warrant purchase agreement dated January 27, 2010 with St. George Investments,
LLC. The Company issued a convertible promissory note dated January
27, 2010 in the aggregate principal amount of $780,000 and a five year warrant
to purchase up to an aggregate of 300,000 shares of the Company’s common stock
subject to an exercise price of $1.25 per share. See Form 8K filed
with the SEC on February 8, 2010 for further details of the
transaction.
On
February 2, 2010, the Asset Purchase Agreement executed with Abundant Renewable
Energy (ARE) on September 9, 2009 was terminated and as a condition of the
termination the Company had to issue 1,101,322 shares of restricted common stock
to ARE.
On
February 16, 2010, the Purchase Agreement executed with Venco Power GmbH, a
German company, on September 3, 2009 was terminated.
On
February 16, 2010, the Company received notice from St. George Investments, LLC
notifying the Company that an event of default had occurred under the
convertible secured promissory note executed January 27, 2010. As a
result, 4,800,000 shares of common stock pledged to St. George by the Company’s
CEO were surrendered to St. George. Also, a trigger event under the
note occurred which results in a 125% increase in the outstanding amount under
the note and an increase in the interest rate under the note to
18%.
On March
5, 2010, the Company entered into a note purchase agreement and convertible
secured promissory note in the principal amount of $132,000 with St. George
Investments, LLC. The note accrues interest at a rate of 18% and the
note is due on the first to occur between the date that is three months from the
date of the note or the Company raises in excess of $500,000 from investors or
lenders subsequent to the date of the note.
On March
8, 2010, the Company entered into a separation agreement and release with Ian
Gardner, the Company’s former CEO and director. The Company agreed to
pay Mr. Gardner a total of $188,722 in cash, execute a 9% convertible note in
the amount of $144,833 and issue him 4,800,000 shares of the Company’s common
stock as part of the separation. See Form 8K filed with the SEC on
March 11, 2010 for further details of the separation agreement.
On March
8, 2010, Gene Hoffman, a member of the Company’s Board of Directors since June
2009, resigned from the board.
On March
23, 2010, the Company received a summons from Waterline Alternative Energies,
LLC, a distributor of the Company’s products, alleging failure to perform on its
distribution contract with Waterline and potentially seeking damages of
approximately $250,000.
On April
1, 2010, the Company closed a financing transaction under a note and warrant
purchase agreement dated March 30, 2010 with St. George Investments,
LLC. The Company issued a convertible secured promissory note dated
March 30, 2010 in the aggregate principal amount of $779,500 and a five year
warrant to purchase up to an aggregate of 2,500,000 shares of the Company’s
common stock, subject to adjustment, with an exercise price of $0.75 per
share. See Form 8K filed with the SEC on April 6, 2010 for further
details of the transaction.
F-21
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
For
the Years Ended December 31, 2009 and 2008
11.
|
SUBSEQUENT
EVENTS (Continued)
|
On April
1, 2010, the Company closed a settlement and mutual release agreement dated
March 30, 2010 with Kenneth Morgan. The Company paid the sum of
$150,000 to settle the action filed by Kenneth Morgan. See Form 8K
filed with the SEC on April 6, 2010 for further details of the settlement
agreement.
On April
12, 2010, the Company received a demand letter from legal counsel for Ian
Gardner, the Company’s former CEO and a director, alleging the Company breached
the terms of his Separation Agreement and Release. The demand letter
demands payment from the Company in the amount of approximately $223,000 for
monies which Mr. Gardner believes he is owed under the Separation Agreement and
Release, which includes approximately $72,000 under his convertible note.
The demand letter also includes allegations that the Company settled its
litigation with Kenneth Morgan without including full payment to Mr. Gardner for
$57,0000 in damages to which he believes he is entitled to for his unrelated
owned entities. In addition, the demand letter alleges that the Company
failed to honor its obligations to pay him $94,361 upon the closing of an equity
financing resulting in minimum gross proceeds of $1,000,000 when the Company
completed the financing described in this report with St. George Investments LLC
in which the Company has received only $592,000. The Company is reviewing
the demand letter and intends to respond and/or defend itself should the demand
result in a lawsuit.
On April
13, 2010, the Company signed a revocable license agreement with Apex Telecom,
LLC to rent office space at 13125 Danielson Street, Poway, CA,
92064. The license period is on a month to month basis beginning
effective April 19, 2010 through March 31, 2011, subject to certain provisions,
at a rate of $3,230 per month.
F-22