Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2011
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission file number: 333-167380
ENERGY TELECOM, INC.
(Exact name of registrant as specified in its charter)
Florida
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65-0434332
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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3501-B N. Ponce de Leon Blvd., #393
St. Augustine, Florida 32084
(Address of principal executive offices) (zip code)
(904) 819-8995
(Registrant’s telephone number, including area code)
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No 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 the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
As of November 7, 2011, there were 7,367,748 shares of the registrant’s common stock outstanding.
ENERGY TELECOM, INC.
INDEX
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PART I.
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FINANCIAL INFORMATION
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ITEM 1
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Financial Statements
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Condensed balance sheets as of September 30, 2011 (unaudited) and December 31, 2010
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3
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Condensed statements of operations for the three and nine months ended September 30, 2011 and 2010 (unaudited)
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4
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Condensed statement of changes in stockholders’ equity (deficiency) for the nine months ended September 30, 2011 (unaudited)
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5
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Condensed statements of cash flows for the nine months ended September 30, 2011 and 2010 (unaudited)
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6
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Notes to condensed financial statements (unaudited)
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7-10
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ITEM 2.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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11-16
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ITEM 3.
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Quantitative and Qualitative Disclosures about Market Risk
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16
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ITEM 4.
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Controls and Procedures
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16-17
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PART II.
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OTHER INFORMATION
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ITEM 1.
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Legal Proceedings
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18
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ITEM 1A.
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Risk Factors
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18
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ITEM 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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18
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ITEM 3.
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Defaults Upon Senior Securities
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18
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ITEM 4.
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(Reserved)
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18
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ITEM 5.
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Other Information
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18
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ITEM 6.
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Exhibits
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18
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SIGNATURES
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19
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2
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
ENERGY TELECOM, INC.
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CONDENSED BALANCE SHEETS
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September 30,
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December 31,
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2011
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2010
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(unaudited)
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ASSETS
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CURRENT ASSETS
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Cash
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$ | 186,754 | $ | 87,643 | ||||
Accounts receivable
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1,649 | - | ||||||
Total current assets
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188,403 | 87,643 | ||||||
Property and equipment, net
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3,643 | - | ||||||
Total assets
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$ | 192,046 | $ | 87,643 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
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CURRENT LIABILITIES
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Accounts payable and accrued liabilities
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$ | 52,378 | $ | 51,676 | ||||
Stockholder notes payable
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18,486 | 38,486 | ||||||
Total current liabilities
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70,864 | 90,162 | ||||||
STOCKHOLDERS' EQUITY (DEFICIENCY)
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Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 7,312,748 and 6,282,239 shares issued and outstanding as of September 30, 2011 and December 31, 2010, respectively
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731 | 628 | ||||||
Class B common stock, no par value, 10,000,000 shares authorized, 200,000 shares issued and outstanding as of September 30, 2011 and December 31, 2010
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- | - | ||||||
Additional paid in capital
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4,924,349 | 4,444,637 | ||||||
Accumulated deficit
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(4,803,898 | ) | (4,447,784 | ) | ||||
Total stockholders' equity (deficiency)
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121,182 | (2,519 | ) | |||||
Total liabilities and stockholders' equity (deficiency)
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$ | 192,046 | $ | 87,643 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements
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3
ENERGY TELECOM, INC.
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CONDENSED STATEMENTS OF OPERATIONS
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(unaudited)
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Three months ended September 30,
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Nine months ended September 30,
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2011
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2010
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2011
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2010
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REVENUE:
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Sales
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$ | - | $ | 3,253 | $ | 950 | $ | 3,253 | ||||||||
Royalties
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1,649 | - | 1,649 | - | ||||||||||||
Total revenue
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1,649 | 3,253 | 2,599 | 3,253 | ||||||||||||
COST OF GOODS SOLD
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- | 3,179 | - | 3,179 | ||||||||||||
Gross profit
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1,649 | 74 | 2,599 | 74 | ||||||||||||
OPERATING EXPENSES:
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Selling, general and administrative expenses
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122,082 | 175,051 | 354,982 | 708,933 | ||||||||||||
Depreciation
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429 | - | 429 | - | ||||||||||||
Total operating expenses:
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122,511 | 175,051 | 355,411 | 708,933 | ||||||||||||
Loss from operations
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(120,862 | ) | (174,977 | ) | (352,812 | ) | (708,859 | ) | ||||||||
OTHER INCOME (EXPENSE):
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Interest income
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168 | 38 | 500 | 334 | ||||||||||||
Interest expense
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(1,245 | ) | (2,043 | ) | (3,802 | ) | (12,509 | ) | ||||||||
Loss from change in derivative liability
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- | (40,490 | ) | - | (39,545 | ) | ||||||||||
Total other income (expense):
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(1,077 | ) | (42,495 | ) | (3,302 | ) | (51,720 | ) | ||||||||
Net loss before provision for income taxes
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(121,939 | ) | (217,472 | ) | (356,114 | ) | (760,579 | ) | ||||||||
PROVISION FOR INCOME TAXES
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Income tax (benefit)
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- | - | - | - | ||||||||||||
NET LOSS
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$ | (121,939 | ) | $ | (217,472 | ) | $ | (356,114 | ) | $ | (760,579 | ) | ||||
Net loss per common share, basic and fully diluted
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$ | (0.02 | ) | $ | (0.03 | ) | $ | (0.05 | ) | $ | (0.12 | ) | ||||
Weighted average number of common shares outstanding, basic and fully diluted
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7,303,853 | 6,680,701 | 7,023,968 | 6,425,390 | ||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
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4
ENERGY TELECOM, INC.
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CONDENSED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIENCY)
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FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2011
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(unaudited)
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Total
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Additional
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Stockholders'
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Class A Common Stock
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Class B Common Stock
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Paid in
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Accumulated
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Equity
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Shares
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Amount
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Shares
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Amount
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Capital
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Deficit
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(Deficiency)
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Balance, January 1, 2011
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6,282,239 | $ | 628 | 200,000 | $ | - | $ | 4,444,637 | $ | (4,447,784 | ) | $ | (2,519 | ) | ||||||||||||||
Sale of common stock
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910,732 | 91 | - | - | 329,867 | - | 329,958 | |||||||||||||||||||||
Repurchase and cancelation of common stock
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(667 | ) | - | - | - | (5,000 | ) | - | (5,000 | ) | ||||||||||||||||||
Common stock issued for services rendered
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70,444 | 7 | - | - | 53,850 | - | 53,857 | |||||||||||||||||||||
Common stock issued for officer compensation
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50,000 | 5 | - | - | 50,495 | - | 50,500 | |||||||||||||||||||||
Common stock issuable for officer compensation
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- | - | - | - | 50,500 | - | 50,500 | |||||||||||||||||||||
Net loss
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- | - | - | - | - | (356,114 | ) | (356,114 | ) | |||||||||||||||||||
Balance, September 30, 2011
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7,312,748 | $ | 731 | 200,000 | $ | - | $ | 4,924,349 | $ | (4,803,898 | ) | $ | 121,182 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed financial statements
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5
ENERGY TELECOM, INC.
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CONDENSED STATEMENTS OF CASH FLOWS
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(unaudited)
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Nine months ended September 30,
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2011
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2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (356,114 | ) | $ | (760,579 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation expense
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429 | - | ||||||
Common stock issued for services rendered
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53,857 | 126,988 | ||||||
Common stock issued or to be issued for officer compensation
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101,000 | - | ||||||
Change in fair value of derivative liability
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- | 39,545 | ||||||
Share based compensation
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- | 354,911 | ||||||
Changes in operating assets and liabilities:
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Increase in accounts receivable
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(1,649 | ) | - | |||||
Increase in inventory
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- | (11,437 | ) | |||||
Increase in accounts payable and accrued liabilities
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702 | 12,622 | ||||||
Net cash used in operating activities
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(201,775 | ) | (237,950 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES:
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Purchase of property and equipment
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(4,072 | ) | - | |||||
Net cash used in investing activities
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(4,072 | ) | - | |||||
CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from sale of common stock
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329,958 | 225,100 | ||||||
Repurchase and cancellation of common stock
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(5,000 | ) | - | |||||
Repayments of shareholder loans
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(20,000 | ) | (3,000 | ) | ||||
Net cash provided by financing activities
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304,958 | 222,100 | ||||||
Net increase (decrease) in cash
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99,111 | (15,850 | ) | |||||
Cash beginning of period
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87,643 | 82,355 | ||||||
Cash end of period
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$ | 186,754 | $ | 66,505 | ||||
Supplemental disclosures of cash flow information:
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Interest paid
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$ | - | $ | - | ||||
Taxes paid
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$ | - | $ | - | ||||
Non-cash financing activities:
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Increase in derivative liability under anti-dilution agreement
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$ | - | $ | 140,356 | ||||
Assumption of promissory notes and accrued interest
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$ | - | $ | 93,057 | ||||
The accompanying notes are an integral part of these unaudited condensed financial statements
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6
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 1 — NATURE OF OPERATIONS/BASIS OF PRESENTATION
Energy Telecom, Inc. (the “Company”), formerly The Energy Corp., is an intellectual property exploitation company providing patent protection to its manufacturing business partners so they may manufacture, market, distribute and sell worldwide a family of eyewear products delivering a full range of audio and optical information to mobile workers and recreational eyewear users. The Company also manages and coordinates the process of its manufacturing business partners in manufacturing the product. The Company’s Class A common stock trades from time to time on the over-the-counter-bulletin-board under the symbol “ENRG.OB”.
During the current year, the Company transitioned from a development stage enterprise to an operating company, as the Company’s manufacturing partner, Samsin USA, began producing the telecom eyewear product for delivery to a consumer-retail distributor for resale. The Company recognizes revenue when the product is sold and shipped by the distributor. The consumer-retail model of the eyewear is being sold through print and online advertising.
The accompanying unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim condensed financial information and Rule 8-03 of Regulation S-X. Accordingly, these interim financial statements do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
All adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in these unaudited interim condensed financial statements. Operating results for the three and nine month periods presented are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2010 has been derived from audited financial statements. The unaudited interim condensed financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2010.
NOTE 2 — GOING CONCERN
The accompanying unaudited interim condensed financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. As shown in the accompanying financial statements, the Company has earned minimal revenues, has had recurring net losses, and has an accumulated deficit through September 30, 2011 totaling $4,803,898. In addition, the Company’s stockholder notes payable are due on demand. If the notes were to be called, the Company may be unable to meet these obligations. Also, the Company is in a position where its current cash on hand
may not be adequate to cover all of its operating expenses.
Our independent registered public accounting firm, in their report dated March 10, 2011 on our financial statements as of and for the year ended December 31, 2010, have included an emphasis of matter paragraph with respect to our ability to continue as a going concern. The existence of such a report may adversely affect our stock price and our ability to raise capital. Further, no assurance can be given that the Company will maintain its cost structure as presently contemplated or raise additional capital on satisfactory terms. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. The unaudited interim condensed financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The Company plans on issuing authorized but unissued shares to the extent available and to obtain debt financing to generate cash to cover short-falls in working capital as it continues to develop its products and operations. The Company expects that as sales volume increases, operations will generate working capital sufficient to allow it to continue as a going concern.
7
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 3 — SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of these unaudited interim condensed financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the financial statements. Accordingly, actual results could differ from these estimates
REVENUE RECOGNITION
The Company recognizes revenue on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (4) is based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Revenue is earned for product shipped and sold by our distributor on a per unit basis or as royalties upon shipment by the manufacturer as third party sales.
Revenue recognized in the nine months ended September 30, 2011 relate to sales of product which had previously been expensed and used as sample units of $950 and royalties earned of $1,649; therefore, there is no cost of goods associated with these sales.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of three to five years.
SHARE-BASED COMPENSATION
Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. The Company measures the fair value of the share-based compensation issued to non-employees using the average stock price observed (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the
counterparty’s performance is complete.
NET LOSS PER COMMON SHARE
Basic loss per share (“EPS”) is computed by dividing the net loss attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using the “treasury stock” method), unless their effect on net loss per share is antidilutive. The effect of computing diluted loss per share is antidilutive and, as such, basic and diluted loss per share is
the same for the three and nine months ended September 30, 2011 and 2010.
RECENT ACCOUNTING PRONOUNCEMENTS
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
8
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 4 — FINANCIAL INSTRUMENTS
CONCENTRATIONS OF CREDIT RISK
The Company’s financial instrument that is exposed to a concentration of credit risk is cash. Effective December 31, 2010 and extending through December 31, 2012, all non-interest-bearing transaction accounts are fully insured by the Federal Deposit Insurance Corporation (FDIC), regardless of the balance of the account. On occasion, the Company’s cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.
NOTE 5 — STOCKHOLDER NOTES PAYABLE
The Company has received financing from the Company’s founder, Chief Executive Officer, President and majority stockholder (the “officer/director”). The stockholder notes bear interest of 10% per annum, compounding annually and are due on demand.
The following table summarizes stockholder notes payable as of September 30, 2011 (unaudited) and December 31, 2010:
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September 30,
2011
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December 31,
2010
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Notes payable, due on demand, interest at 10%
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$
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18,486
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$
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38,486
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Accrued interest
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32,164
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28,362
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$
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50,650
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$
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66,848
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The Company recognized interest expense associated with the notes of $1,245 and $1,544 for the three months ended September 30, 2011 and 2010, respectively, and $3,802 and $4,601 for the nine months ending September 30, 2011 and 2010, respectively.
NOTE 6 — STOCKHOLDERS’ EQUITY
PRIVATE PLACEMENTS
During the nine month period ended September 30, 2011, the Company completed private placements of 910,732 shares of Class A common stock and has received proceeds totaling $329,958.
SHARES ISSUED TO CONSULTANTS
During the nine month period ended September 30, 2011, the Company issued an aggregate of 70,444 shares of Class A common stock to consultants in exchange for services rendered with a fair value totaling $53,857.
SHARES REPURCHASED
During the nine month period ended September 30, 2011, the Company re-acquired and canceled 667 shares of its common stock for $5,000.
SHARES ISSUED AS COMPENSATION
During the nine month period ended September 30, 2011, the Company issued 50,000 shares of Class A common stock as officer compensation with a fair value totaling $50,500 and as is obligated to issue an additional 50,000 as of September 30, 2011.
9
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011 AND 2010
(unaudited)
NOTE 7 — COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT-TOM RICKARDS
On May 3, 2011, the Company entered into a one year employment agreement with Tom Rickards, Chief Executive Officer, director and founder whereby Mr. Rickards shall receive an annual salary of $36,000, which may be increased up to $50,000 by mutual agreement by Mr. Rickards and the Board of Directors and dependent on the financial strength of the Company. In addition, Mr. Rickards is to receive 200,000 shares of series A common stock payable in equal installments at the end of each calendar quarter and a $600 per month car allowance.
LITIGATION
The Company may, from time to time, become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
NOTE 8— RELATED PARTY TRANSACTIONS
The Company has an operating lease agreement for office space with the Company's Chief Executive Officer and director who has agreed to sublet space to the Company for a fixed fee of $1,750 (increased to $2,750 as of September 2011) on a month-to-month basis. Total rent expense for the three months ended September 30, 2011 and 2010 was $7,250 and $5,250, respectively, and for the nine months ended September 30, 2011 and 2010 was $17,750 and $15,750, respectively.
As discussed in Note 5, the Company has received financing from the Company’s Chief Executive Officer, director, founder and majority stockholder. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand. During the nine months ended September 30, 2011, the Company paid an aggregate of $20,000 as partial payment against the notes.
NOTE 9 — DEPENDENCY ON KEY MANAGEMENT
The future success or failure of the Company is dependent primarily upon the continued services and efforts of its Chief Executive Officer, director and founder. The ability of the Company to pursue its business strategy effectively will also depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced managerial, marketing, engineering and technical personnel. There can be no assurance that the Company will be able to retain or recruit such personnel.
NOTE 10 — SUBSEQUENT EVENTS
On October 21, 2011, the company issued 5,000 shares of its Series A common stock to a consultant in exchange for services rendered valued at $3,650. In addition, the Company issued 50,000 shares of Class A common stock as officer compensation with a fair value totaling $50,500.
10
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based.
Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of
operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.
Overview
We were incorporated on September 7, 1993 under the laws of the State of Florida as The Energy Corp. On April 24, 2004, we changed our name to Energy Telecom, Inc.
We hold U.S. and foreign patents allowing for the manufacture, marketing and distribution of a hands-free, wireless communication eyewear providing quality sound and noise attenuation.
During the current year, we have transitioned from a development stage enterprise to an operating company, as our manufacturing partner, Samsin USA, begin producing our telecom eyewear product for delivery to Qmadix, a consumer-retail distributor, for resale. The consumer-retail model of the eyewear is being sold through print and online advertising, by Brookstone. As such, we began recognizing revenues from sales of our product in the third quarter of 2011.
We have developed the world's first hands-free two-way, sound attenuating wireless telecommunication eyewear. The eyewear is designed for use on a recreational and professional basis. Our recreational eyewear is equipped with wireless two-way Bluetooth voice communication that is compatible with any cellular telephone that is Bluetooth enabled and is capable of streaming stereo music from any Bluetooth enabled music device. In addition, our eyewear works with handheld Bluetooth- enabled VHF and UHF walkie-talkies and Bluetooth adaptors. It contains built-in dual microphones to cancel out background noise and noise-isolating ear plugs that reduce noise levels by up to 42
decibels. In addition, the safety lenses come in clear, gray and amber colors, allowing them to be used indoor and outside.
We have a professional model, which is similar to the recreational model, but contains additional safety features and is intended to be marketed to the Personal Protective Equipment markets (commonly expressed as PPE) for use by police, fire, rescue, military and security personnel as well as companies in bio-hazardous, mining, construction and heavy manufacturing that utilize VHF and UHF radio communication. We have obtained numerous certifications for our telecommunications eyewear. We have obtained the necessary certifications to sell our product as personal protective equipment. We contracted with Colts
Laboratories, an independent testing facility that is accredited by the Safety Equipment Institute to complete and verify standard tests.
Within the PPE market, our telecommunication eyewear competes primarily in the markets represented by hearing and eye protection and communication headset products and will be targeted towards the following end-markets:
•
|
Police and fire rescue, security services and military: To protect the eyes and ears during the use of firearms, explosives and other weaponry, to provide hands-free communication among personnel and allow for real-time viewing of intelligence;
|
|
•
|
Manufacturing: To protect workers from plant hazards such as industrial noise and flying particles that may cause eye injuries; and
|
|
•
|
Construction, Mining and Logging Operations: To protect workers from airborne dust and debris and construction equipment noise and to provide two-way, instant communication.
|
Current Operating Trends and Financial Highlights
Management currently considers the following events, trends and uncertainties to be important in understanding our results of operations and financial condition during the current fiscal year:
|
·
|
Qmadix presented our eyewear at the Consumer Electronics Show in Las Vegas, Nevada in January 2011 and at the International CTIA Wireless convention in Orlando, Florida in March 2011. At the show, Qmadix presented the ready-to-market eyewear to various cellular network and cellular retail suppliers which expressed interest in selling the eyewear for business-to-business commercial customers. As a result, Qmadix has entered into agreements with three retailers, including Brookstone, to test the marketability of the eyewear;
|
|
·
|
Samsin Innotec and Samsin USA are developing samples of polarized and 3D eyewear lenses for use with our telecom eyewear, which we anticipate will be ready for initial testing by the end of 2011. These new lenses would be able to be secured into place and removed at the user’s convenience. Samples of both lenses have been submitted for testing;
|
|
·
|
We expect that additional purchase orders for the telecom eyewear will be received in the next few months as Qmadix continues to feature the eyewear and discussions with interested retailers are completed;
|
|
·
|
We have one patent application pending in the United States, which we expect to receive communication regarding from the USPTO in the fourth quarter of 2011. In addition, we have made the necessary filings to allow us to file a patent application in certain European and Asian counties if our pending patent application is granted by the USPTO; and
|
|
·
|
Escalating tensions between North Korea and South Korea could disrupt our operations. The telecommunication eyewear frames are manufactured by Samsin Innotec, which has plants in South Korea. In addition, all the components are shipped to South Korea, where they are assembled and tested, and then shipped out as a product ready for sale.
|
Results of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
11
Three months ended September 30, 2011 compared to the three months ended September 30, 2010
Revenue
We generated $1,649 in revenues for the three months ended September 30, 2011 as compared to $3,253 for the three months ended September 30, 2010. We expect to have an increase in revenue later in Q4 2011 as we have completed our primary research and development, the product is ready for sale, and we have received product orders from a national marketer. In addition, we continue to seek distributors for our product, and have an informal relationship with Qmadix that we anticipate memorialized in writing in the near future.
Cost of goods sold
Cost of goods sold for the three months ended September 30, 2011 were $-0-, our revenues for the three months ended September 30, 2011 were generated as royalty income on products shipped and sold by our distributor, netted us a gross profit of $1,649. Our cost of sales was $3,179 for the three months ended September 30, 2010, netting a gross profit of $74.
Expenses
For the three months ended September 30, 2011 and 2010, selling, general and administrative expenses totaled $122,081 and $175,051, respectively.
A summary comparison for the three months ended September 30, 2011 and 2010 is as follows:
|
2011
|
2010
|
||||||
Professional fees
|
$
|
38,365
|
$
|
41,821
|
||||
Office and utilities
|
13,554
|
12,559
|
||||||
Travel and promotion
|
3,506
|
4,397
|
||||||
Salaries and related taxes
|
9,808
|
7,337
|
||||||
Equity based compensation
|
50,500
|
77,610
|
||||||
Patents and trademarks
|
5,878
|
27,805
|
||||||
Other
|
470
|
3,522
|
||||||
Total
|
$
|
122,081
|
$
|
175,051
|
The primary decease in selling, general and administrative is due to share based compensation for the three months ended September 30, 2011 of $50,500 as compared to $77,610 for the same period last year, a decrease of $27,110 and our patent and trademark expenses which for the three months ended September 30, 2011 were $5,878 as compared to $27,805 for the same period last year, a decrease of $21,927.
Depreciation
During the three months ended September 30, 2011, we acquired office furniture and equipment and as such recorded depreciation of $429 for the period as compared to nil for the same period last year.
Other Income and Expenses
For the three months ended September 30, 2011, we incurred $1,245 in interest expense which was offset by $168 in interest income compared to $2,043 in interest expense and derivative instrument expenses of $40,490, which were offset by $38 in interest income for the three months ended September 30, 2010.
Interest expense decreased by $798, primarily due to reduction in notes payable in 2011 and 2010. The increase in derivative instrument expense during 2010 was a result of the adjustments in our past obligation under a shareholder anti-dilution agreement, which was treated as a derivative instrument and has since been settled.
12
Net Loss
For the three months ended September 30, 2011, we incurred a net loss of $121,939 ($0.02 per share of common stock) as a result of the foregoing, compared to a net loss of $217,472 ($0.03 per share of common stock) for the three months ended September 30, 2010.
Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010
Revenue
We generated $2,599 in revenue for the nine months ended September 30, 2011 compared to $3,253 for the nine months ended September 30, 2010.
Cost of goods sold
Cost of goods sold for the nine months ended September 30, 2010 were $3,179, netting a gross profit of $74. Our cost of sales was $-0- for the nine months ended September 30, 2011 since our limited sales were from our sample/ product testing supplies previously expensed, netting a gross profit of $950. We earned $1,649 as royalty income on products shipped and sold by our distributor.
Expenses
For the nine months ended September 30, 2011 and 2010, selling, general and administrative expenses totaled $354,981 and $708,933, respectively.
A summary comparison for the nine months ended September 30, 2011 and 2010 is as follows:
|
2011
|
2010
|
||||||
Professional fees
|
$
|
144,793
|
$
|
215,169
|
||||
Office and utilities
|
34,969
|
39,420
|
||||||
Travel and promotion
|
17,604
|
17,557
|
||||||
Salaries and related taxes
|
29,313
|
27,000
|
||||||
Equity based compensation
|
101,000
|
358,097
|
||||||
Patents and trademarks
|
23,109
|
50,316
|
||||||
Other
|
4,193
|
1,374
|
||||||
Total
|
$
|
354,981
|
$
|
708,933
|
The primary decease in selling, general and administrative is due to share based compensation for the nine months ended September 30, 2011 of $101,000 as compared to $358,097 for the same period last year, a decrease of $257,097. During the nine months ended September 30, 2010, we issued an aggregate of 1,500,000 fully vested options to our President and a consultant with a fair value of $277,301.
In addition, professional fees for the nine months ended September 30, 2011 totaled $144,793 as compared to $215,169 for the same period last year, a $70,376 decrease. During the nine months ended September 30, 2010, we incurred higher professional fees in connection with the filing of a Form S-1 registration statement as compared to the nine months ended September 30, 2011.
Depreciation
During the nine months ended September 30, 2011, we acquired office furniture and equipment and as such recorded depreciation of $429 for the period as compared to nil for the same period last year.
13
Other Income and Expenses
For the nine months ended September 30, 2011, we incurred $3,802 in interest expense which was offset by $500 in interest income compared to $12,509 in interest expense and $39,545 in derivative instrument expense which was offset by $334 in interest income for nine months ended September 30, 2010.
Interest expense decreased by $8,707, primarily due to reduction in notes payable in 2011 and 2010. The increase in derivative instrument expense during 2010 was a result of the adjustments in our past obligation under a shareholder anti-dilution agreement, which was treated as a derivative instrument and has since been settled.
Net Loss
For the nine months ended September 30, 2011, we incurred a net loss of $356,114 ($0.05 per share of common stock) as a result of the foregoing, compared to a net loss of $760,579 ($0.12 per share of common stock) for the nine months ended September 30, 2010.
Liquidity and Capital Resources
As of September 30, 2011, we had working capital of $117,539. For the nine months ended September 30, 2011, we generated a net cash flow deficit from operating activities of $201,775 consisting primarily of a year to date loss of $356,114. Non cash adjustments included $429 for depreciation, $154,857 for share based compensation and an increase in accounts payable and accrued liabilities of $702 offset by an increase in accounts receivable of $1,649. Cash used in investing activities totaled $4,072 from the purchase of property and equipment. Cash provided by financing activities totaled $304,958 primarily from the sale of common stock, net
of repayments of shareholder loans of $20,000. From time to time since our formation in 1993, we have sold shares to investors in private placement transactions. For the nine months ended September 30, 2011, we sold an aggregate of 910,065 shares of our common stock for $324,958 in 13 different transactions. Except for anti-dilution protection provided to one shareholder in connection with investments made in 2007 and 2008, our financing transactions have not contained additional equity components (such as warrants) nor provide the investors with rights (such as piggyback or demand registration rights).
We expect to incur expenditures during the next 12 months, contingent upon raising capital. These anticipated expenditures are for marketing, advertising, equipment and overhead. We believe that we have sufficient funds to conduct our proposed operations for approximately six months, depending on revenues, but not for 12 months or more. If we are unable to raise any additional funds, we have sufficient capital for about six months of operation. There can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all. However, based on years of experience of financing operations through the sale of securities, we believe we will generate sufficient capital to
meet our needs for the next 12 months.
Although there are no assurances that we will be able to raise additional funds through the sale of securities, in the first nine months of 2011 we raised $324,958, which is more funds than from the sale of securities that we achieved for the for the same period last year. In addition, as we have moved from development stage to actual operations, investors may be more willing to fund operations in the short-term. The private placements that occurred since January 2011 were with accredited investors that contacted us, either because they previously invested with us or were referred to us by word of mouth from existing investors, with approximately 50% of the investors in that period representing
investors who had previously invested in our company. For each private placement, we negotiate the price per share with such potential investor, based upon the amount of money the potential investor desires to invest, recent trading activity and the current price of our common stock.
Other than possible family relationships between the existing and new investors, we are not aware of any material relationships between new and existing investors. We have not engaged in any sort of solicitation of potential investors. None of our advisors or consultants have been involved in any sort of fundraising activities on our behalf.
14
We do not currently have a sufficient amount of cash to cover our proposed operating costs. Our fixed operating expenses have been and are expected to continue to outpace revenue resulting in additional losses in the near term. By adjusting our operations to our current level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits for at least six months. However, if during that period, or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial
condition.
As of September 30, 2011, we had working capital of $117,539. At our current rate, we use about $22,400 per month for continuing operations, which includes general operating expenses (office lease, utilities, salary and insurance), promotion and marketing (travel, entertainment, meals and website development), research and development (parts, engineering and testing), and professional services (accounting, legal, professional and state fees and intellectual property fees). We expect that our burn rate will increase to $30,000 per month by the end of the 2011, as we anticipate increased promotion and marketing expenses as we promote and market our products, including the attendance at
approximately three to five industry trade shows and events.
If we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, it could have a material adverse effect on our business, results of operations, liquidity and financial condition.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to develop operations and become profitable. In order to obtain capital, we may need to sell additional shares of common stock or borrow funds from private lenders pursuant to instruments which are junior to our outstanding secured debt instruments. There can be no assurance that we will be successful in obtaining additional funding.
We will need additional financing in order to continue operations. Additional financings are being sought, but we cannot guarantee that we will be able to obtain such financings. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the low trading price of our common stock and a downturn in the U.S. stock and debt markets is likely to make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses or experience unexpected cash requirements that would force us
to seek alternative financing. Further, if we issue 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 common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail or cease our operations
Our independent registered public accounting firm, in their report dated March 10, 2011 on our financial statements as of and for the year ended December 31, 2010, have included an emphasis of matter paragraph with respect to our ability to continue as a going concern. The existence of such a report may adversely affect our stock price and our ability to raise capital.
Stockholder Notes Payable
We previously received financing from Thomas Rickards, our Chief Executive Officer and sole Director. The outstanding stockholder loans bear interest of 10% per annum, compounding annually and are due on demand. We have not received any loans from Mr. Rickards since 2010 and do not have any agreement for or expectation of future loans.
Critical Accounting Policies
The accounting policies identified as critical are as follows:
Revenue Recognition
We recognize revenue on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (4) is based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Revenue is earned for product shipped and sold by our distributor on a per unit basis or as royalties upon shipment by the manufacturer as third party
sales.
15
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Share-Based Compensation
Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. We measure the fair value of the share-based compensation issued to non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn
the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
Net Loss per Common Share
Basic loss per share computed by dividing the net loss attributable to the common stockholders (the numerator) by the weighted average number of shares of common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into common stock, such as stock options and warrants (using the “treasury stock” method), unless their effect on net loss per share is antidilutive. The effect of computing diluted loss per share is antidilutive and, as such, basic and diluted loss per share is the same for the three
and nine months ended September 30, 2011 and 2010.
Recently Issued Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on our financial position, results of operations or cash flows.
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 4 - CONTROLS AND PROCEDURES
a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of September 30, 2011. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating
the benefits of possible controls and procedures relative to their costs.
16
Based on our evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of September 30, 2011, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:
a)
|
We did not have sufficient personnel in our accounting and financial reporting functions. As a result we were not able to achieve adequate separation of duties and were not able to provide for adequate reviewing of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis; and
|
|
|
b)
|
We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with out complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result.
|
We are committed to improving our accounting and financial reporting functions. As part of this commitment, we will create a segregation of duties consistent with control objectives and will look to increase our personnel resources and technical accounting expertise within the accounting function by the end of fiscal 2011 to appropriately address non-routine or complex accounting matters. In addition, we have engaged an outside consultant to provide additional knowledgeable personnel with technical accounting expertise to further support the current accounting personnel at the Company.
Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties; and (B) insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complexity and our financial accounting and reporting requirements.
Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Chief Financial Officer and an accounting consultant, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will
greatly decrease any control and procedure issues we may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
(b) Changes in internal control over financial reporting.
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes. There were no changes in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rule 13a-15 or Rule 15d-15 that materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
17
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are currently not a party to any material legal proceedings or claims.
Item 1A. Risk Factors
Not required under Regulation S-K for “smaller reporting companies.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the three month period ended September 30, 2011, we issued an aggregate of 15,000 shares of Class A common stock to consultants in exchange for services rendered with an aggregate fair value of $12,880. The securities were issued in transactions pursuant to Section 4(2) and/or Regulation D under the Securities Act of 1933, as amended.
* All of the above offerings and sales were deemed to be exempt under either rule 506 of Regulation D and Section 4(2) or Rule 902 of Regulation S of the Securities Act of 1933, as amended. No advertising or general solicitation was employed in offering the securities. The offerings and sales were made to a limited number of persons, all of whom were accredited investors, business associates of Energy Telecom or executive officers of Energy Telecom, and transfer was restricted by Energy Telecom in accordance with the requirements of the Securities Act of 1933. In addition to representations by the above-referenced persons, we have made independent determinations that all of the above-referenced
persons were accredited or sophisticated investors, and that they were capable of analyzing the merits and risks of their investment, and that they understood the speculative nature of their investment. Except as expressly set forth above, the individuals and entities to whom we issued securities as indicated in this section are unaffiliated with us.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Reserved
Item 5. Other Information.
Item 6. Exhibits
31.01
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
31.02
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
32.01
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
101 INS
|
XBRL Instance Document*
|
101 SCH
|
XBRL Schema Document*
|
101 CAL
|
XBRL Calculation Linkbase Document*
|
101 LAB
|
XBRL Labels Linkbase Document*
|
101 PRE
|
XBRL Presentation Linkbase Document*
|
101 DEF
|
XBRL Definition Linkbase Document*
|
*
|
The XBRL related information in Exhibit 101 shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability of that section and shall not be incorporated by reference into any filing or other document pursuant to the Securities Act of 1933, as amended, except as shall be expressly set forth by specific reference in such filing or document.
|
18
SIGNATURES
Pursuant to the requirements 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.
ENERGY TELECOM, INC.
|
||
Date: November 9, 2011
|
By:
|
/s/ THOMAS RICKARDS
|
Thomas Rickards
|
||
Chief Executive Officer (Principal Executive Officer)
|
||
Date: November 9, 2011
|
By:
|
/s/ RONNY HALPERIN
|
Ronny Halperin
|
||
Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
|
19