Attached files

file filename
EX-31 - Kenergy Scientific, Inc.ex311.htm
EX-32 - Kenergy Scientific, Inc.ex321.htm

 

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K/A

Amendment No. 1

 

þ ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2008

 

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File No. 333-120507

 

KENERGY SCIENTIFIC, INC (FORMERLY SPEECHSWITCH, INC.)

(Exact name of registrant)

 

New Jersey

(State or other jurisdiction of incorporation or organization)

20-1862816

(I.R.S. Employer Identification No.)

 

6 Minneakoning Road, Flemington, New Jersey

(Address of principal executive offices)

08822

(Zip Code)

 
Issuer's telephone number 908-788-0077
 
Securities registered under Section 12(b) of the Exchange Act: None.

Securities registered under 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 þ

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Exchange Act. Yes o  No þ

 

Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 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 o  No þ

 

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 o  No þ

Check if there is no disclosure of delinquent filers in response to Item 405 of Regulation S-B contained in this form, and no disclosure will 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. þ

 

Large Accelerated filer o   Accelerated filer  o   Non-accelerated filer o    Smaller reporting Company  þ

                                                                   (Do not check if a smaller reporting company)   

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No þ

 

Issuer's revenues for its most recent fiscal year. $53,759

 

The aggregate market value of the voting stock held by non-affiliates as of June 30, 2008 based upon the average bid and ask prices on that date was $150,683.

 

Transitional Small Business Disclosure Format (Check one): Yes o  No þ

 

As of August 25, 2012, the Registrant had 226,278,298 shares outstanding of Class A Common Stock, no par value and 10,000 shares outstanding of Class B Common Stock, par value $.01 per share.

 

 

 
 

 

EXPLANATORY NOTE

 

 

This amendment is being filed in order to; i) provide audited financial statements audited by our independent registered public accounting firm; and ii) provide a retroactive restatement of basic and diluted shares outstanding to reflect the 1:800 reverse stock split. No other change has been made and the other information contained in this Report has not been updated.  For more current information regarding the Company, readers should refer to the more recent reports filed by the Company with the Securities and Exchange Commission.

 

2

 

 

 

 
 

 

 

 

Table of Contents

 

 

PART II
Item 5.Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. 4
   
Item 8. Financial Statements and Supplementary Data 5
   
PART IV
Item 15. Exhibits and Financial Statement Schedules 5

 

 

 

3

 

 

 

 
 

 

 

 PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.

 

 

DESCRIPTION OF SECURITIES

 

Pursuant to our certificate of incorporation, we are authorized to issue up to:  1,000,000 shares of preferred stock, par value of $1.00 per share, 625,000,000 shares of Class A common stock, no par value per share, 50,000,000 shares of Class B common stock, par value $.01 per share, and 20,000,000 shares of Class C common stock, par value $.01 per share. Below is a description of the Company’s outstanding securities, including Class A common stock, Class B common stock, Class C common stock, options, warrants and debt.

 

On May 5, 2011, the Company amended its Certificate of Incorporation to reflect the reverse stock split authorized by the Board of Directors and adopted by the shareholders on January 19, 2011. The retroactive effect of this amendment was: a) to reduce the authorized shares from 20,000,000,000 to 25,000,000; b) to reduce the outstanding shares from 1,400,096,193 to 1,750,120; and c) to reduce the unissued shares from 18,599,903,807 to 23,249,880.

 

On November 29, 2011, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 125,000,000, as authorized by the Board of Directors and adopted by the shareholders on November 17, 2011.

 

On March 5, 2012, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 625,000,000, as authorized by the Board of Directors and adopted by the shareholders on February 15, 2012.

 

PREFERRED STOCK

 

The Board of Directors expressly is authorized, subject to limitations prescribed by the New Jersey Business Corporations Act and the provisions of this Certificate of Incorporation, to provide, by resolution and by filing an amendment to the Certificate of Incorporation pursuant to the New Jersey Business Corporations Act, for the issuance from time to time of the shares of Preferred Stock in one or more series, to establish from time to time the number of shares to be included in each series, and to fix the designation, powers, preferences and other rights of the shares of each such series and to fix the qualifications, limitations and restrictions thereon, including, but without limiting the generality of the foregoing, the following:

 

a)the number of shares constituting that series and the distinctive designation of that series;
  
b)the dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of that series;
  
c)whether that series shall have voting rights, in addition to voting rights provided by law, and, if so, the terms of such voting rights;
  
d)whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of      Directors shall determine;
  
e)whether or not the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates;
  
f)whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund;
  
g)the rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and
  
h)any other relative powers, preferences and rights of that series, and qualifications, limitations or restrictions on that series.

 

In the event of any liquidation, dissolution or winding up of the Corporation, whether voluntary or involuntary, the holders of Preferred Stock of each series shall be entitled to receive only such amount or amounts as shall have been fixed by the certificate of designations or by the resolution or resolutions of the Board of Directors providing for the issuance of such series.

 

The Company is authorized to issue 1,000,000 shares of Preferred Stock, par value $1.00 per share. As of December 31, 2008, the Company has not issued any shares of Preferred Stock. The Company has no current plans to issue any shares of preferred stock.

 

4

 

 

 
 

 

CLASS A COMMON STOCK

 

Each holder of our Class A common stock is entitled to one vote for each share held of record. Holders of our Class A common stock have no preemptive, subscription, conversion, or redemption rights. Upon liquidation, dissolution or winding-up, the holders of Class A common stock are entitled to receive our net assets pro rata. Each holder of Class A common stock is entitled to receive ratably any dividends declared by our board of directors out of funds legally available for the payment of dividends. We have not paid any dividends on our common stock and do not contemplate doing so in the foreseeable future.  We anticipate that any earnings generated from operations will be used to finance our growth.

 

As of December 31, 2008, we had 1,750,120 (1,400,096,193 pre-reverse stock split) shares of Class A common stock issued and outstanding.

 

CLASS B COMMON STOCK

 

Each holder of Class B Common Stock has voting rights equal to 100 shares of Class A Common Stock. Holders of Class B Common Stock are entitled to receive dividends in the same proportion as the Class B Common Stock conversion rights have to Class A Common Stock. There are 50,000,000 shares of our Class B Common Stock authorized and 0 shares issued and outstanding.  A holder of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common Stock determined by dividing the number of shares of Class B Common Stock being converted by a 20% discount of the lowest price that the Company had ever issued its Class A Common Stock. Upon our liquidation, dissolution, or winding-up, holders of Class B Common Stock will be entitled to receive distributions.

 

As of December 31, 2008, there were 50,000,000 shares of our Class B Common Stock authorized and no shares were issued or outstanding.

 

CLASS C COMMON STOCK

 

Each holder of our Class C Common Stock is entitled to 1 vote for each 1,000 shares held of record. Holders of our Class C Common Stock have no preemptive, subscription, conversion, or redemption rights.  Shares of Class C Common Stock are not convertible into Class A Common Stock. Upon liquidation, dissolution or winding-up, the holders of Class C Common Stock are not entitled to receive our net assets pro rata.  We have not paid any dividends on our common stock and do not contemplate doing so in the foreseeable future. We anticipate that any earnings generated from operations will be used to finance our growth.

 

As of December 31, 2008, there were 20,000,000 shares of our Class C Common Stock authorized and no shares were issued or outstanding.

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

The financial statements and notes of this Form 10-KA appear after the signature page to this Form 10-KA.

 

 

 PART IV

 

 

ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

 

(a)   List the following documents filed as part of the report

 

1. All financial statements schedules required to be filed by Item 8 of this Report
2. Those exhibits required by Item 601 of Regulation S-K (17 CFR 229.601) and by paragraph (b) below.

 

(b)   Exhibits

 

No.               Description

 

3.1* Amended and Restated Certificate of Incorporation of SpeechSwitch, Inc. (filed as Exhibit 3.1 to SpeechSwitch, Inc.'s Amendment No. 1 to Form SB-2 Registration Statement, File No. 333-120507, filed on January 14, 2005, and incorporated herein by reference)

 

3.2*

By-laws of SpeechSwitch, Inc. (filed as Exhibit 3.2 to SpeechSwitch, Inc.'s Amendment No. 1 to Form SB-2 Registration Statement, File No. 333-120507, filed on January 14, 2005, and incorporated herein by reference)

 

 

5

 

 

 

 

 
 

3.3*Amendment to the Certificate of Incorporation of SpeechSwitch, Inc. (filed as Exhibit 3.1 to Kenergy Scientific, Inc.'s form 8-K, filed on February 3, 2011,File No. 333-120507, and incorporated herein by reference)

 

3.4*Amendment to the Certificate of Incorporation of Kenergy Scientific, Inc. (filed as Exhibit 3.1 to Kenergy Scientific, Inc.'s form 8-K, filed on May 5, 2011,File No. 333-120507, and incorporated herein by reference)

 

10.1* $1,000,000 Secured Convertible Debenture dated March 30, 2007 between SpeechSwitch, Inc and YA Global Investments (f/k/a/ YA Global Investments (f/k/a Cornell Capital Partners) (filed as Exhibit 10.1 to SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.2* Irrevocable Transfer Agent Instructions by and among SpeechSwitch, Inc., YA Global Investments (f/k/a/ YA Global Investments (f/k/a/ Cornell Capital Partners) and  Fidelity Transfer  Company (filed as Exhibit 10.2 to SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.3* Amendment to Amended and Restated Standby Equity Distribution Agreement, dated December 12, 2005 between SpeechSwitch, Inc. and YA Global Investments (f/k/a/ YA Global Investments (f/k/a/ Cornell Capital Partners) (filed as Exhibit  to  SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.
10.4* Security Agreement dated May 8, 2007 between SpeechSwitch, Inc. and Jerome Mahoney. (filed as Exhibit 10.4 to SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.5* Investor Relations Agreement dated May 4, 2007 by and between the SpeechSwitch, Inc and StoneRidge Capital, LLC, d/b/a UpTick ("UpTick"). (filed as Exhibit 10.1 to SpeechSwitch, Inc’s Form 8-K filed on May 16, 2007 and incorporated herein by reference.

 

10.6* Consulting Agreement between SpeechSwitch, Inc. and Jerome Mahoney dated February 1, 2008. (filed as Exhibit 10.1 to SpeechSwitch, Inc’s Form 100-Q filed on May 15, 2008 and incorporated herein by reference.)

 

10.7* Amendment No. 1 to Administrative Services Agreement, dated March 5, 2008, between SpeechSwitch, Inc. and iVoice, Inc. (filed as Exhibit 10.7 to SpeechSwitch, Inc’s Form 10-K filed on November 15, 2010 and incorporated herein by reference.)

 

10.8* Convertible Promissory Note from SpeechSwitch, Inc. to iVoice, Inc, dated March 5, 2008 (filed as Exhibit 10.8 to SpeechSwitch, Inc’s Form 10-K filed on November 15, 2010 and incorporated herein by reference.)

 

10.9* Security Agreement, dated March 5, 2008, between SpeechSwitch, Inc. and iVoice, Inc. (filed as Exhibit 10.9 to SpeechSwitch, Inc’s Form 10-K filed on November 15, 2010 and incorporated herein by reference.)

 

31.1 Rule 13a-14(a)/15d-14(a) Certifications.

 

32.1 Certification 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.

___________________

* Previously filed.

 

 

 

 

 

 

 

 

6

 

 

 

 
 

 

 

 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant caused this report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

                                                                                                                         

 Kenergy Scientific, Inc.   September 21, 2012

 

 By:     /s/ Kenneth P. Glynn
         Kenneth P. Glynn
         President, Chief Executive Officer and Chief Financial Officer

 

 

 

Pursuant to the requirements of  the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

 By:     /s/ Kenneth P. Glynn September 21, 2012
         Kenneth P. Glynn  
         President, Chief Executive Officer, Chief Financial Officer and Director  

 

 

Supplemental Information to be Furnished With Reports Filed Pursuant to Section 15(d) of the Act by Registrants Which Have Not Registered Securities Pursuant to Section 12 of the Act

 

 

 

No annual report or proxy material has been sent to security holders.

 

 

7

 

 

 

 

 

 
 

 

 

 

 

EXHIBIT INDEX

 

The following exhibits are filed as part of this annual report or, where indicated, were heretofore filed and are hereby incorporated by reference.

 

No.               Description

 

3.1* Amended and Restated Certificate of Incorporation of SpeechSwitch, Inc. (filed as Exhibit 3.1 to SpeechSwitch, Inc.'s Amendment No. 1 to Form SB-2 Registration Statement, File No. 333-120507, filed on January 14, 2005, and incorporated herein by reference)

 

 

3.2* By-laws of SpeechSwitch, Inc. (filed as Exhibit 3.2 to SpeechSwitch, Inc.'s Amendment No. 1 to Form SB-2 Registration Statement, File No. 333-120507, filed on January 14, 2005, and incorporated herein by reference)

 

3.3* Amendment to the Certificate of Incorporation of SpeechSwitch, Inc. (filed as Exhibit 3.1 to Kenergy Scientific, Inc.'s form

8-K,filed on February 3, 2011,File No. 333-120507, and incorporated herein by reference)

 

3.4* Amendment to the Certificate of Incorporation of Kenergy Scientific, Inc. (filed as Exhibit 3.1 to Kenergy Scientific, Inc.'s

form 8-K, filed on May 5, 2011,File No. 333-120507, and incorporated herein by reference)

 

 

10.1* $1,000,000 Secured Convertible Debenture dated March 30, 2007 between SpeechSwitch, Inc and YA Global Investments (f/k/a/ YA Global Investments (f/k/a Cornell Capital Partners) (filed as Exhibit 10.1 to SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.2* Irrevocable Transfer Agent Instructions by and among SpeechSwitch, Inc., YA Global Investments (f/k/a/ YA Global Investments (f/k/a/ Cornell Capital Partners) and  Fidelity Transfer  Company (filed as Exhibit 10.2 to SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.3* Amendment to Amended and Restated Standby Equity Distribution Agreement, dated December 12, 2005 between SpeechSwitch, Inc. and YA Global Investments (f/k/a/ YA Global Investments (f/k/a/ Cornell Capital Partners) (filed as Exhibit  to  SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.4* Security Agreement dated May 8, 2007 between SpeechSwitch, Inc. and Jerome Mahoney. (filed as Exhibit 10.4 to SpeechSwitch, Inc.’s Form 8-K filed on May 15, 2007 and incorporated herein by reference.

 

10.5* Investor Relations Agreement dated May 4, 2007 by and between the SpeechSwitch, Inc and StoneRidge Capital, LLC, d/b/a UpTick ("UpTick"). (filed as Exhibit 10.1 to SpeechSwitch, Inc’s Form 8-K filed on May 16, 2007 and incorporated herein by reference.

 

10.6* Consulting Agreement between SpeechSwitch, Inc. and Jerome Mahoney dated February 1, 2008. (filed as Exhibit 10.1 to SpeechSwitch, Inc’s Form 100-Q filed on May 15, 2008 and incorporated herein by reference.)

  

10.7* Amendment No. 1 to Administrative Services Agreement, dated March 5, 2008, between SpeechSwitch, Inc. and iVoice, Inc. (filed as Exhibit 10.7 to SpeechSwitch, Inc’s Form 10-K filed on November 15, 2010 and incorporated herein by reference.)

 

10.8* Convertible Promissory Note from SpeechSwitch, Inc. to iVoice, Inc, dated March 5, 2008(filed as Exhibit 10.8 to SpeechSwitch, Inc’s Form 10-K filed on November 15, 2010 and incorporated herein by reference.)

 

10.9* Security Agreement, dated March 5, 2008, between SpeechSwitch, Inc. and iVoice, Inc. (filed as Exhibit 10.9 to SpeechSwitch, Inc’s Form 10-K filed on November 15, 2010 and incorporated herein by reference.)

 

31.1 Rule 13a-14(a)/15d-14(a) Certifications.

 

32.1 Certification 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.

 

_________________

*   Previously filed.

 

  

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

 

FINANCIAL STATEMENTS

 

CONTENTS

 

 

 

       Page
     
FINANCIAL STATEMENTS  
     
  Reports of Independent Registered Public Accounting Firms     F-1 to F-2
   Balance Sheets as of December 31, 2008 and 2007       F-3
     
   Statements of Operations for the years ended December 31, 2008 and 2007      F-4
     
   Statements of Changes in Stockholders' Deficit for the two years ended December 31, 2008      F-5
     
   Statements of Cash Flows for the years ended December 31, 2008 and 2007  F-6 to F-7
     
   Notes to Financial Statements   F-8 to F-26
     

 

 

 
 

 

 

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders

Kenergy Scientific, Inc. (f/k/a SpeechSwitch, Inc.)

Flemington, New Jersey

 

We have audited the accompanying balance sheets of Kenergy Scientific, Inc. as of December 31, 2008 and the related statements of operations, changes in stockholders' deficit, and cash flows for the year 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 standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits 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 audit included 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 financial position of Kenergy Scientific, Inc. as of December 31, 2008 and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred substantial accumulated deficits, negative working capital, and negative cash flows from operations. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also discussed in Note 3. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

 

 

New York, New York  
 Date: September 20, 2012 By /s/RBSM LLP

 

 

 

 

 

 

 

F-1

 
 

 

 

BAGELL, JOSEPHS, LEVINE & COMPANY, LLC

406 Lippincott Drive, Marlton, NJ 08053

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

 

To the Board of Directors and Stockholders’of SpeechSwitch, Inc.

Matawan, New Jersey

 

We have audited the accompanying balance sheet of SpeechSwitch, Inc. as of December 31, 2007, and the related statements of operations, changes in stockholders' deficit, and cash flows for the year 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 audit.

 

We conducted our audit in accordance with 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 audit included 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of SpeechSwitch, Inc. as of December 31, 2007, and the results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 3 to the financial statements, the Company has incurred substantial accumulated deficits, negative working capital, and negative cash flows from operations. These issues raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regards to these matters are also discussed in Note 3. The financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

 

 

 
 Date: March 24, 2008   By /s/ Bagell, Josephs, Levine & Company, LLC
   
Marlton, NJ
   

 

 

 

 

 
 

 

 

F-2
KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

 

Balance Sheets as of December 31

 

ASSETS  2008  2007
Current assets:          
Cash and cash equivalents  $8,371   $185,581 
Accounts receivable, net of allowance for doubtful accounts of $2,862 at
December 31, 2008 and 2007
   617    5,500 
        Prepaid expenses and others   904    11,115 
           Total current assets   9,892    202,196 
Intangible assets, net   2,315    5,720 
           
Total assets  $12,207   $207,916 

 

LIABILITIES AND STOCKHOLDERS’  DEFICIT

          
           
Current liabilities:          
Accounts payable and accrued expenses  $682,366   $670,527 
Due to related parties   319,910    227,482 
Deferred maintenance contracts   3,786    5,291 
Notes payable to related parties   71,756    124,268 
Convertible promissory note, net of unamortized debt discount of $66,759   13,177    —   
Convertible debenture, net of unamortized debt discount of $381,650 and $729,419
as of December 31, 2008 and 2007, respectively
   539,690    245,821 
Derivative liability   935,451    2,536,646 
             Total current liabilities   2,566,136    3,810,035 
Commitments and contingencies
 
Stockholders’ Deficit:
          
Preferred stock, $1.00 par value; authorized 1,000,000 shares; no shares issued and outstanding as of December 31, 2008 and 2007   —      —   
Common  stock:          
Class A – no par value; authorized 625,000,000 Shares; 1,750,120 and 479,824 shares issued and outstanding at December 31, 2008  and December 31, 2007, respectively   806,814    606,787 
Class B - $0.01 par value; authorized 50,000,000 Shares; no shares issued and outstanding at December 31, 2008 and 2007   —      —   
Class C - $0.01 par value; authorized 20,000,000 Shares;  no shares issued and outstanding at December 31, 2008 and 2007   —      —   
Additional paid-in capital   2,119,085    2,125,375 
Accumulated deficit   (5,479,828)   (6,334,281)
             Total stockholders’ deficit   (2,553,929)   (3,602,119)
           
Total liabilities and stockholders’ deficit  $12,207   $207,916 
           

 

 

 

 

 

The accompanying notes are an integral part of these financial statements

 

 

 

F-3

 

 

 

 
 

 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

Statements of Operations

For the Years Ended December 31

 

 

   

2008

 

   

2007

 

 
             
Net sales   $ 53,759     $ 68,881  
                 
Cost of sales     15,769       23,916  
                 
        Gross profit     37,990       44,965  
                 
Operating expenses:                
 Selling and marketing expenses     67,087       119,097  
 General and administrative expenses     272,385       413,709  
 Depreciation and amortization     3,405       3,405  
 Research and development expenses      52,057        77,160  
                 
    Total operating expenses     394,934       613,371  
                 
Loss from operations     (356,944 )     (568,406 )
                 
Other income(expense):                
Interest income     1,529       2,319  
Interest expense     (142,021 )     (115,341 )
Other income     31,704       167,422  
Amortization of debt discount     (360,946 )     (270,581 )
Gain (loss) on change in the fair valuation of derivative liability     1,681,131       (1,536,646 )
                 
Total other income (expense)     1,211,397       (1,752,827 )
                 
Profit (loss) before provision for income taxes     854,453       (2,321,233 )
                 
Provision for income taxes     -       -  

 

Net income (loss) attributable to common shares

  $ 854,453     $ (2,321,233 )
                 
Basic income (loss) per common share   $ 0.65     $ (17.63 )
Diluted income (loss) per common share   $ 0.06     $ (17.63 )
                 
Weighted average number of shares outstanding:                
Basic     1,304,581       131,580  
Diluted     13,627,379       131,580  

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

 

 

F-4

 

 

 

 
 

 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

Statements of Changes in Stockholders’ Deficit

for the two years ended December 31, 2008

   

 

Preferred Stock

   

 

Common Stock A

   

 

Common Stock B

   

 

Common Stock C

    Additional           Total  
    Shares     Amount     Shares     Amount     Shares     Amount     Shares     Amount     Paid-In Capital    

Accumulated

Deficit

    Stockholders’ Deficit    
Balance at January     -     $ -       38,301     $ 343,311       -     $ -       -     $ -     $ 2,147,688     $ (4,013,048 )   $ (1,522,049 )  
Issuance of common stock pursuant to terms of the Equity Line of Credit with YA Global       -         -         267,083         128,645         -         -         -         -       (22,313 )       -         106,332    
Common stock issued for repayment of convertible debenture     -       -       79,111       32,425       -       -       -       -       -       -       32,425    
Common stock issued for repayment of debt     -       -       55,250       26,771       -       -       -       -       -       -       26,771    
Common stock issued for legal fees     -       -       9,875       14,436       -       -       -       -       -       -       14,436    
Common stock issued for investor relations costs and consulting fees     -       -       21,250       51,000       -       -       -       -       -       -       51,000    
Common stock issued in lieu of cash compensation     -       -       8,953       10,199       -       -       -       -       -       -       10,199    

Net loss for the year ended

December, 31, 2007

    -       -       -       -       -       -       -       -       -       (2,321,233 )     (2,321,233 )  
Balance at December 31, 2007     -       -       479,824       606,787       -       -       -       -       2,125,375       (6,334,281 )     (3,602,119 )  
                                                                                           
Issuance of common stock pursuant to terms of the Equity Line of Credit with YA Global (f/k/a/ Cornell Capital Partners)          -           -        168,463            36,355           -           -           -           -       (6,290 )         -           30,065    
Common stock issued for repayment of convertible debenture     -       -       510,583       76,111       -       -       -       -       -       -       76,111    
Common stock issued for repayment of promissory note     -       -       188,750       18,875       -       -       -       -       -       -       18,875    
Common stock issued for repayment of debt     -       -       245,000       52,306       -       -       -       -       -       -       52,306    
Common stock issued in lieu of cash compensation     -       -       157,500       16,380       -       -       -       -       -       -       16,380    

Net income for the year ended

December, 31, 2008

    -       -       -       -       -       -       -       -       -        854,453        854,453    
Balance at December 31, 2008     -     $ -       1,750,120     $ 806,814       -     $ -       -     $ -     $ 2,119,085     $ (5,479,828 )   $ (2,553,929 )  

 

  

The accompanying notes are an integral part of these financial statements.

 

 

 

F-5

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

Statements of Cash Flows

For the Years Ended December 31

       
   2008  2007
Cash flows from operating activities:          
    Net income (loss)  $854,453   $(2,321,233)
    Adjustments to reconcile net income (loss) to net cash          
       (used in) operating activities:          
          Amortization of intangibles   3,405    3,405 
          (Gain) loss on change in the fair valuation of derivative liability   (1,681,131)   1,536,646 
          Amortization of discount on debt   360,946    270,581 
          Non cash interest   66,100    22,328 
          Common stock issued for investor relations costs   —      21,000 
          Common stock issued for consulting services   —      30,000 
          Common stock issued for compensation   10,080    10,199 
          Common stock issued for legal fees   —      14,436 
          Changes in operating assets and liabilities:          
          Decrease in accounts receivable   4,883    8,801 
          Decrease (increase) in prepaid expenses   10,211    (2,140)
            Increase in accounts payable and accrued expenses   103,855    159,996 
           Increase in due to related parties   92,428    72,569 
           (Decrease) increase in deferred maintenance contracts   (1,505)   3,754 
                  Net cash (used in) operating activities   (176,275)   (169,658)
           
Cash flows from investing activities   —      —   
           
Cash flows from financing activities:          
   Net proceeds from the issuance of common stock through equity     financing   30,065    106,332 
   Repayment of notes payable to related party   (31,000)   (7,000)
   Net cash (used in) provided by financing activities   (935)   99,332 
           
Net (decrease) in cash and cash equivalents   (177,210)   (70,326)
           
Cash and cash equivalents, beginning of year   185,581    255,907  
           
Cash and cash equivalents, end of year  $8,371   $185,581  
           
Supplemental Schedule of Cash Flow Information:          
Cash Paid During the Year:
          
     Taxes Paid  $—     $—-  
     Interest Paid  $—     $  
           
           

 

 

 

 

 

 

 

The accompanying notes are an integral part of these financial statements.

 

F-6

 

 

 

 
 

 

 

 

KENERGY SCIENTIFIC, INC. 

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

Statements of Cash Flows

 

Supplemental Schedule of Non-Cash Investing and Financing Activities:

 

For the Year Ended December 31, 2008:

 

  
a)The Company issued 245,000 shares of Class A common stock with a fair market value of $52,306 to an officer to reduce the promissory note by $21,512. The difference in the market value and the loan reduction was charged to non-cash interest in the amount of $30,794.
  
  
b)The Company issued 510,583 shares of Class A common stock for repayment of convertible debenture in lieu of cash, valued at $76,111 to reduce the convertible debenture by $53,900. The difference in the market value and the reduction in debt were charged to non-cash interest in the amount of $22,211.
  
c)The Company issued 188,750 shares of Class A common stock with a fair market value of $18,875 to iVoice, Inc. to reduce the convertible promissory note by $12,080. The difference in the market value and the reduction in debt were charged to non-cash interest in the amount of $6,795.
  
d)The Company reclassified the administrative services payable to convertible promissory note amounting to $92,016.
  
e)The Company recorded a beneficial conversion feature on the convertible promissory note issued for administrative services payable amounting to $79,936.

 

For the Year Ended December 31, 2007:

 

a)The Company issued 9,875 shares of Class A common stock with a fair market value of $14,436 for legal expenses valued at $5,688. The difference in the market value and the value of the services was charged to beneficial interest in the amount of $8,748.
  
b)The Company issued 8,750 shares of Class A common stock of the Company as repayment of investor relations expenses. The value of the stock was $21,000.
  
c)The Company issued 8,953 shares of Class A common stock of the Company with a fair market value of $10,199 to an officer of the Company for compensation expense of $5,157. The difference in the market value and the value of the services was charged to beneficial interest in the amount of $5,042.
  
d)The Company issued 12,500 shares of Class A common stock of the Company as repayment of consulting fees. The value of the stock was $30,000.
  
  
e)The Company issued 55,250 shares of Class A common stock with a fair market value of $26,771 to an officer to reduce the promissory note by $12,108. The difference in the market value and the loan reduction was charged to non-cash interest in the amount of $14,663.
  
f)The Company issued 267,083 shares of Class A common stock for fees pursuant to the Equity Line of Credit with YA Global Investments (f/k/a Cornell Capital Partners) valued at $128,645. Issuance costs of $22,313 were incurred and charged to additional paid-in capital for net proceeds of $106,332.
  
  
g)The Company issued 79,111 shares of Class A common stock for repayment of convertible debenture in lieu of cash, valued at $32,425. The difference in the market value and the reduction in debt were charged to non-cash interest in the amount of $6,965.
  
h)The Company converted a note payable into convertible debenture amounting to $1,000,000.

 

 

The accompanying notes are an integral part of these financial statements.

 

 

F-7

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC. 

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS

DECEMBER 31, 2008 and 2007

 

 

NOTE 1 - BACKGROUND

 

Kenergy Scientific, Inc (f/k/a SpeechSwitch, Inc.) (“Kenergy” or “Company”) was incorporated under the laws of New Jersey on November 10, 2004 as a wholly owned subsidiary of iVoice, Inc. ("iVoice").  The Company received by assignment all of the interests in and rights and title to, and assumed all of the obligations of, all of the agreements, contracts, understandings and other instruments of iVoice Technology 3, Inc., a Nevada corporation and affiliate of the Company.  When we refer to or describe any agreement, contract or other written instrument of the Company in these notes, we may also be referring to an agreement, contract or other written instrument that had been entered into by iVoice Technology 3 and thereafter assigned to the Company.

 

In September 2004, the Board of Directors of iVoice, Inc., the former parent of the Company, resolved to pursue the separation of iVoice software business into three publicly owned companies.  Kenergy intends to continue to develop, market and license the automated speech attendant software, which runs on industry-standard hardware and performs speech recognition.

 

The Spin-off transaction was accomplished, on August 5, 2005, by the assignment, contribution and conveyance of certain intellectual property, representing the software codes of speech recognition, and certain accrued liabilities and related party debt into Kenergy (the "Spin-off").  The Class A Common Stock shares of the Company were distributed to iVoice shareholders in the form of a taxable special dividend distribution.

 

In conjunction with the Spin-off, Kenergy entered into a temporary administrative service agreement with iVoice.  This agreement will continue on a month-to-month basis until such time as we are able to replace any or all of the services currently being provided by iVoice.

 

On August 5, 2005, Kenergy assumed $190,000 in accrued liabilities and related party debt incurred by iVoice.  The debt assumed is convertible into Kenergy Class B Common Stock at the option of the holder as later described in these notes.

 

On August 4, 2005, the Company received notice from the SEC that the registration statement to effectuate the Spin-off of the Kenergy from iVoice was declared effective and the Company immediately embarked on the process to spin off the Kenergy from iVoice.

 

On January 19, 2011, the Board of Directors and shareholders, through written consent representing a majority of the total voting Class A and Class B common stock, voted to change the name of the Company to Kenergy Scientific, Inc. and to increase the number of authorized Class A common stock from 10 billion shares to 20 billion shares. On February 3, 2011, the Company filed an Amendment to the Certificate of Incorporation with the State of New Jersey to officially change the name of the Company and to increase the Class A common stock. On February 25, 2011, the Company’s new trading symbol was changed from SSWC to KNSC.

On May 5, 2011, the Company amended its Certificate of Incorporation to reflect the reverse stock split authorized by the Board of Directors and adopted by the shareholders on January 19, 2011. The effect of this amendment was to reduce the authorized shares from 20,000,000,000 to 25,000,000.

 

On November 29, 2011, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 125,000,000, as authorized by the Board of Directors and adopted by the shareholders on November 17, 2011.

 

On March 5, 2012, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 625,000,000, as authorized by the Board of Directors and adopted by the shareholders on February 15, 2012.

 

All references in the financial statements and the notes to financial statements and number of shares outstanding have been retroactively restated to reflect the 1:800 reverse stock splits.

 

F-8

 

 

 

 
 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

NOTE 2 - BUSINESS OPERATIONS

 

Products and Services

 

Our products use standard open-architecture PC platforms and Microsoft Windows 2000 operating systems, thereby facilitating the rapid adoption of new PC-based technologies while reducing overall product costs. We concentrate our product development efforts on software rather than hardware because we believe that the most efficient way to create product value is to emphasize software solutions that meet customers' needs. We have recently adapted our applications to integrate with different manufacturer telephone switches through the use of Telephony Application Program Interface or ("TAPI"). The use of TAPI, allows us to integrate our applications into different telephone manufacturers Private Branch Exchange systems or "PBX's", eliminating the need for costly additional external hardware. We have traditionally used standard PC-related hardware components in our products, in part, to limit our need to manufacture components. Our manufacturing operations consist only of the installation of our proprietary software and, if required, a voiceboard, into a fully assembled PC system which we obtain from several different vendors. We obtain system components such as PCs, circuit boards, application cards, faxboards, and voiceboards from various suppliers.

 

 

Our flagship product is our Speech-enabled Auto Attendant product. The Auto Attendant engages callers in a natural language dialog and is ready to transfer a caller to an extension for the party the caller is trying to reach at any time. Callers can interrupt the Auto Attendant at any time by barging in on the prompts and simply saying the name of the person or department they wish to speak to.

 

We have met interoperability standards with several leading PBX manufacturers for Auto Attendant. To date, rigorous testing and compatibility studies have developed into co-marketing arrangements with Avaya for its Partner, Magic and IP Office Platforms, 3Com, for its NBX® platform, Artisoft for its TeleVantage® Communication server, and AltiGen's AltiServ® for its phone systems. These recent platform integrations add to several others previously completed, including a Siemens Ready™ certification, NEC Fusion Strategic Alliance, Toshiba Stratus, and Sprint North Supply.

 

Through these co-marketing arrangements and strategic alliances, we will attempt to capture significant market share in the business communication solution market by expanding distribution through these manufacturers' authorized reseller networks. To date, no significant revenues have been generated as a result of any such co-marketing arrangements or alliances.

 

Our Name Dialer product is an automatic phone dialing system. The system imports the necessary contact information for dialing (names and phone numbers) from a variety of sources including, but not limited to, Microsoft Outlook, ACT, and Gold Mine. The imported names are then transcribed, through software, into a set of phonemes that are used for voice recognition. When the end user picks up the handset, the call is automatically transferred through the PBX, to the Name Dialer application running on a server machine. The user simply says the name of the person (whose name came from the contact list) and the Name Dialer places the call.

 

Our Speech SDK product is a unique tool for software application developers, which provides the ability to convert common command and control functions to speech commands. The SDK allows software developers to write applications that can treat a user's voice as an input device, such as mouse, keyboard, or joystick. In addition to telephony applications, the SDK can be used to incorporate speech recognition into games, handheld devices and even household appliances.

 

The following is a list of Speech-enabled applications, which the Company has developed, and are available for sale:

 

Speech Enabled Auto Attendant. Any business can improve customer service and streamline the call handling process by allowing callers to reach their intended party by simply saying the appropriate name. Our speech recognition system is extremely accurate and reliable. The Speech Enabled Auto Attendant can significantly reduce or eliminate cumbersome dial by name or extension number menus and can be implemented without duplicating an organizations existing voicemail application.

 

iVoice Name Dialer is an automatic phone dialing system. The system imports the necessary contact information for dialing (names and phone numbers) from a variety of sources including, but not limited to, Microsoft Outlook, ACT, and Gold Mine. The imported names are then transcribed, through software, into a set of phonemes that are used for voice recognition. When the end user picks up the handset, the call is automatically transferred through the PBX, to the Name Dialer application running on a server machine. The user simply says the name of the person (whose name came from the contact list) and the Name Dialer places the call. This system has not been fully developed, and, as such, it not yet available for sale.

 

F-9

 

 

 

 
 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

iVoice Speech Directory allows employees to pick up their phone, say the name of a co-worker they wish to speak to, and the Speech Directory will transfer the call. Just by speaking the person's name, the Speech Directory can also return an internal pager number, cell numbers and email listings through a voice activated telephony directory.

 

iVoice Speech Software Developers Kit (SDK) iVoice Speech SDK is a unique tool for software application developers, which provides the ability to convert common command and control functions to speech commands. The SDK allows software developers to write applications that can treat a user's voice as an input device, such as mouse, keyboard, or joystick. In addition to telephony applications, the SDK can be used to incorporate speech recognition into games, handheld devices and even household appliances.

 

Distribution

 

As a product line of iVoice, Inc., our speech recognition software has produced sales revenues for the past three fiscal years. In the past, iVoice devoted limited resources to the marketing of our speech recognition software. The Company’s future revenues depend on its ability to develop a customer base through the establishment of a reseller channel using various marketing and sales promotions.

 

SpeechSwitch will market its products directly, with a sales force, and through more than 100 domestic and international re-sellers. SpeechSwitch intends to enter into arrangements with resellers to broaden distribution channels and to increase its sales penetration to specific markets and industries. Distributors will be selected based on their access to the markets, industries and customers that are candidates for the products.

Product Development

 

Our research and development efforts focus on enhancing our existing product line and the development of new products that integrate with our existing products. We continually seek to improve our core speech recognition technology through ease of use, broader application and increased accuracy. We employ qualified technical personnel to strengthen our product line.

 

 

Business Development

 

Business development objectives at SpeechSwitch will be to focus on two primary functions as listed below:

1.Negotiate and secure strategic alliances related to our speech recognition products; and
2.Negotiate, secure and manage Original Equipment Manufacturer (OEM) and reseller accounts.

Strategic Alliances

 

SpeechSwitch’s business development efforts will seek to engage and secure strategic alliances with related telecommunications businesses and professional organizations in order to develop co-marketing programs that will expand market share for our products and develop brand recognition. By entering into strategic alliances with companies that offer telecommunications devices or services to businesses or professional organizations whereby appointment setting and scheduling are of vital importance, we will seek to obtain access to an installed customer base as well as new sales opportunities of our products. SpeechSwitch has recently entered into certain of these strategic alliances, and is currently negotiating additional strategic alliances. To date no significant revenues have been generated as a result of any such co-marketing arrangements or alliances.

 

 

F-10

 

 

 

 

 
 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

Manage OEM and Reseller Accounts

 

While we have traditionally sold our product primarily on a direct basis, with our existing officers and employees fulfilling orders received by telephone and the internet, we will seek to obtain new OEM and reseller relationships that will serve as an extension of our sales team which has yet to be hired. We currently have no strategic alliances with any OEMs or resellers other than the existing relationship between iVoice’s resellers and iVoice that are being transferred to us by iVoice for our benefit, nor do we have any current material negotiations with any OEM or other reseller. Ideally, an OEM agreement, which provides distribution of our software product along with the manufacturers own telecommunication equipment, could produce the most widespread distribution and acceptance of our product at minimal distribution costs. Many of the OEMs have extensive and established reseller channels that could provide an avenue of distribution for our software. To effectively manage these accounts, we will need to provide these resellers with product literature, pricing, and sales leads as well as technical training and support.

 

Sales and Marketing

 

The speech recognition enterprise market is characterized by a business environment that has goals to improve customer communication and personalization as well as reduce the costs of customer contact, a historically time-and-money intensive operation. Furthermore, consumers are increasingly taking charge of this important interaction between enterprise and consumer; deciding where, when and how they want this communication. To address this new business paradigm, enterprises are increasingly applying innovative wireless, speech and web technologies to leverage existing customer service infrastructures in the creation of interactive, self-directed service applications. These new applications are designed to put the customer in control of the delivery of the information while allowing the enterprise control of the data. This serves to address the enterprise’s objectives of improving the customer experience and reducing operating costs.

The Company’s strengths are reflected in the speech recognition enterprise market as part of a suite of offerings that can be delivered as components or as part of a total, turnkey solution. These speech recognition solutions use the latest in technology to allow enterprises to automate increasingly complex interactions, enabling businesses to provide quick and timely communications with customers and business partners. Such technology enables enterprises to communicate with their customers through voice, web, e-mail, facsimile and other forms of communication on a variety of devices, including telephones, PCs, mobile phones and personal digital assistants (“PDAs”).

Our marketing strategy emphasizes our user-friendly PC-based processing applications that offer integrated access to a broad range of communication mediums with other people and information sources. Our strategy is built around the following basic elements:

 

EMPHASIZE SOFTWARE, NOT HARDWARE. We concentrate our development efforts on software that meets our clients' needs rather than on designing or modifying hardware. This allows us to create the most value from our products and results in significantly higher profit margins than systems and applications that require expensive hardware components.

 

USE OF STANDARD, MICROSOFT WINDOWS-BASED ARCHITECTURE, OPEN SYSTEMS AND HARDWARE. Our products use standard, open-architecture PC platforms and operating systems rather than proprietary computer hardware and operating systems. As a result, we can quickly adapt to new PC-based technologies, leveraging the substantial investments made by third parties in developing these new technologies for the PC environment. In addition, using readily available hardware components and software minimizes our manufacturing activity and thereby reduces the overall cost of our products.

 

FOCUS ON SMALL TO MEDIUM SIZED BUSINESSES AND CORPORATE DEPARTMENT. Our products are designed for use by small to medium sized businesses and corporate departments utilizing telephones in a wide range of markets, including manufacturing, retail, service, healthcare, and government. Our products include features offered by large proprietary call processing systems, but at a more affordable price.

 

DEVELOP USER-FRIENDLY PRODUCTS. We aim to make our products as easy as possible to install, maintain, and use. We accomplish this by incorporating product features that can be used without special training or manuals. Our products use a familiar graphical user interface that makes system administration and maintenance possible for almost any common PC user.

 

 

 

 

 

F-11

 

 

 
 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

MINIMIZE DISTRIBUTION OVERHEAD. We are able to achieve broad market coverage in the U.S. via a nationwide network of independent telephone system dealers, and original-equipment-manufacturers, or "OEMs." This structure both minimizes our selling overhead and maximizes our product exposure, and allows us to focus our resources on product development.

 

SpeechSwitch will market its products directly and through more than 100 domestic and international re-sellers. The Company intends to enter into arrangements with resellers to broaden distribution channels and to increase its sales penetration to specific markets and industries. Distributors will be selected based on their access to the markets, industries and customers that are candidates for the products.

The Company is actively seeking strategic relationships with companies to build its developing partner program. The partner program will be built by establishing relationships in basic areas consisting of software and technology solution partners and system integration partners. These relationships will enhance the Company’s technological strength, improve its market position, facilitate shorter time-to-market, enhance its ability to deliver end-to-end solutions, and broaden its market coverage.

Developing market possibilities will be crucial to our success. However, we cannot provide any assurance that we will be able to effectively market and sell our products for these uses or that they will be accepted by our perceived market.

Intellectual Property Rights

 

We regard some features of our speech recognition software and documentation to be proprietary intellectual property. We have been and will be dependent in part on our ability to protect our proprietary technology. We will seek to use copyright, trademarks, trade secret laws, confidentiality agreements and other measures if necessary to establish and protect our rights in our proprietary technology. We continue to review our technologies and processes with our patent attorneys to determine if it is possible to obtain any patents or statutory copyrights on any of our proprietary technology, which we believe to be material to our future success. If we were to file for any additional patent or copyright protection, we cannot be certain that others will not develop substantially equivalent or superseding proprietary technology before any patent or copyright protection is awarded to us. Any provisional patent application requires that we file one or more non-provisional patent applications within 12 months from the date of filing to specify the claims asserted for patent protection. Furthermore, there can be no assurance that any confidentiality agreements between our employees and us will provide meaningful protection of our proprietary information in the event of any unauthorized use or disclosure of such proprietary information.

Pursuant to a Patent Purchase Agreement, dated April 20, 2006, we completed the sale of certain United States Letters Patents and/or applications for United States Letters Patents and/or foreign patents and applications to Lamson Holdings LLC. The patents and/or patent applications sold relate to various Voice Activated/Voice Responsive systems developed by SpeechSwitch, including item locators for retail stores utilizing various unique identifying, data gathering and organizing, as well as user feedback techniques.

We received net proceeds of $144,000 in 2006, after paying a commission to GlynnTech, Inc., which served as SpeechSwitch’s licensing agent and assisted in the sale of the patents. However, the Company retained the rights to market the product.

We have three issued U.S. patents and one pending U.S. patent application. We believe that our patent strategy will provide a competitive advantage in our target markets, but our patents may not be broad enough to cover our competitors’ products and may be subject to invalidation claims.

 

Our first patent, for our Speech-Enabled Automatic Telephone Dialer, was issued in May 2003. This invention is a speech enabled automatic telephone dialer device system that uses a spoken name that corresponds to the name and telephone number data of computer-based address book programs. The Speech Enabled Name Dialer imports all of the names and telephone numbers from a user’s existing Microsoft Outlook, ACT, Gold Mine or other contact management software and can automatically connect a caller with anyone the caller asks for. The caller simply picks up the phone, tells the Name Dialer the name of the person the caller wants to contact, and the Name Dialer finds the telephone number and dials for the caller.

Our second patent for our Speech-Enabled Automatic Telephone Dialer without the need for a Private Branch Exchange (PBX), was issued in December 2003. Although this patent is similar to our first patent, however, the PBX requirement is circumvented through the use of software.

F-12

 

 

 

 
 

 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

Our third patent for our Speech-Enabled Automatic Telephone Dialer Name Dialer utilizing a Telephone Application Programming Interface (TAPI), was issued on September 6, 2005. This patent seeks to protect the use of the Name Dialer utilizing a Telephone Application Programming Interface (TAPI). The use of TAPI allows SpeechSwitch to integrate into different telephone PBX systems, eliminating the need for additional external hardware. Each phone system hardware provider provides a specific software driver that interfaces directly with the SpeechSwitch Name Dialer.

There can be no assurance that we will not become the subject of claims of infringement with respect to intellectual property rights associated with our products. In addition, we may initiate claims or litigation against third parties for infringement of our proprietary rights or to establish the validity of our proprietary rights. Any such claims could be time consuming and could result in costly litigation or lead us to enter into royalty or licensing agreements rather than disputing the merits of such claims.

Employees

 

As of December 31, 2008, we had one full-time employee and one part-time employee. None of our employees are represented by a labor organization and we are not a party to any collective bargaining agreements. We consider our relationship with our employees generally to be good.

 

We have entered into employment agreements with our President and Chief Executive Officer (Mr. Knef) and our Non-Executive Chairman of the Board (Mr. Mahoney). Mr. Knef will devote substantially all of his time to SpeechSwitch. Many services that would be provided by employees are currently being provided to SpeechSwitch by iVoice under the administrative services agreement. We do not currently have any plans to hire additional personnel and we expect our current officers and directors to continue to fulfill orders received by telephone and the Internet for SpeechSwitch products. However, if SpeechSwitch can obtain funds under the equity line of credit, SpeechSwitch will be able to devote more resources to expanding its personnel.

 

On February 7, 2008, the Company announced that it had accepted the resignation of Jerry Mahoney as Non-Executive Chairman of the Company. From February 2008 until October 2008, the Company engaged the services to Mr. Mark Meller to act as the Non-Executive Chairman of the Board.

 

Within the industry, competition for key technical and management personnel is intense, and there can be no assurance that we can retain our future key technical and managerial employees or that, should we seek to add or replace personnel, we can assimilate or retain other highly qualified technical and managerial personnel in the future.

 

Properties

 

We do not own any real property. We currently co-occupy the same space as iVoice and are subleasing from iVoice some of the office space located at 750 Highway 34, Matawan, New Jersey. The rent payment for the sublease is currently included in the administrative services agreement. We intend to continue subleasing such space pursuant to the administrative services agreement for the foreseeable future. We are unaware of any environmental problems in connection with this location, and, because of the nature of our activities, do not anticipate such problems.

 

 

NOTE 3 - GOING CONCERN

 

The accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America, which contemplates continuation of the Company as a going concern. The Company has relied on iVoice, Inc. for administrative, management, research and other services.

 

As of December 31, 2008, the Company had a negative cash flow from operations, negative working capital and limited availability to raise new capital.  These matters raise substantial doubt about the Company's ability to continue as a going concern.  Therefore, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheets is dependent upon continued operations of the Company, which in turn, is dependent upon the Company's ability to raise capital and/or generate positive cash flow from operations.

 

F-13

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

Management plans on developing new products and increasing their sales to existing customers, to achieve profitability and to generate a positive cash flow. However, these plans are dependent upon obtaining additional capital.

 

The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts and classification of liabilities that might be necessary in the event the Company cannot continue in existence.

 

NOTE 4 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

a) Basis of Presentation

 

The accompanying financial statements included herein have been prepared in conformity with accounting principles generally accepted in the United States of America for annual financial statements and with Form 10-K and article 8 of the Regulation S-X of the United States Securities and Exchange Commission ("SEC").

 

 

b) 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 of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period.  Actual results could differ from those estimates.

 

 

c) Revenue Recognition

 

The Company derives its revenues from the licensing of its software product and optional customer support (maintenance) service.  The Company's standard license agreement provides for a one-time fee for use of the Company's product in perpetuity for each computer or CPU in which the software will reside.  The Company's software application is fully functional upon delivery and implementation and does not require any significant modification or alteration.  The Company also offers customers an optional annual software maintenance and support agreement for the subsequent one-year periods.  Such maintenance and support services are free for the first year the product is licensed and is considered the warranty period.  The software maintenance and support agreement provides free software updates, if any, and technical support the customer may need in deploying or changing the configuration of the software.  Generally, the Company does not license its software in multiple element arrangements whereby the customer purchases a combination of software and maintenance.  In a typical arrangement, software maintenance services are sold separately from the software product; are not considered essential to the functionality of the software and are purchased at the customer's option upon the completion of the first year licensed.

 

 

The Company does not offer any special payment terms or significant discount pricing.  Normal and customary payment terms require payment for the software license fees when the product is shipped.  Payment for software maintenance is due prior to the commencement of the maintenance period.  It is also the Company's policy to not provide customers the right to refund any portion of its license fees.  With respect to the sale of software license fees, the Company recognizes revenue in accordance with ”Accounting Standard Codification (ASC) 985-605 Software Revenue Recognition”, as amended, and generally recognizes revenue when all of the following criteria are met: (1) persuasive evidence of an arrangement exists generally evidenced by a signed, written purchase order from the customer, (2) delivery of the software product on Compact Disk (CD) or other means to the customer has occurred, (3) the perpetual license fee is fixed or determinable and (4) collectibility, which is assessed on a customer-by-customer basis, is probable.

 

With respect to customer support services, upon the completion of one year from the date of sale, considered to be the warranty period, the Company offers customers an optional annual software maintenance and support agreement for subsequent one-year periods.  Sales of purchased maintenance and support agreements are recorded as deferred revenue and recognized over the respective terms of the agreements.

 

Due to the nature of the business and one-time contracts, it is unlikely that any one customer will impact revenues in future periods.

 

 

 F-14

 

 

 

 

 
 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

d) Product Warranties

 

The Company estimates its warranty costs based on historical warranty claims experience in estimating potential warranty claims.  Due to the limited sales of the Company's products, management has determined that warranty costs are immaterial and has not included an accrual for potential warranty claims.  Presently, costs related to warranty coverage are expensed as incurred.  Warranty claims are reviewed quarterly to verify that warranty liabilities properly reflect any remaining obligation based on the anticipated expenditures over the balance of the obligation period.

 

e) Research and development costs

 

The Company accounts for research and development cost in accordance with Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). ASC 730-10, requires research and development costs to be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and developments costs

are expensed when the contracted work has been performed or as milestone results have been achieved. Total research and development cost charged to income was immaterial for both years ended December 31, 2008 and 2007.

 

f) Advertising Costs

 

Advertising costs are expensed as incurred and included in selling expenses.  For the years ended December 31, 2008 and 2007, advertising expense amounted to $541 and $1,914, respectively.

 

g)  Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. There were no cash equivalents at December 31, 2008 and 2007.

 

h) Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not of being sustained.

 

In accordance with 740-10, the Company recognizes the financial statement benefit of a tax position only after determining that the relevant tax authority would more likely than not sustain the position following an audit. For tax positions meeting this standard, the amount recognized in the financial statements is the largest benefit that has a greater than 50 percent likelihood of being realized upon

ultimate settlement with the relevant tax authority. 

 

i) Organization Costs

 

Organization costs consist primarily of professional and filing fees relating to the formation of the Company.  These costs have been expensed.

 

 

j) Intangible Assets

 

In May and December 2003, the Company was issued two patents by the U.S. Patent and Trademark Office for its Speech-Enabled Automatic Telephone Dialer.  The patents expire 20 years from the date of the original patent filings.  All accumulated costs incurred with respect to the Company's patent filings have been capitalized.  Costs related specifically to the awarded patents are now being amortized on a straight basis over the life of the patents.  All capitalized intangibles have been reviewed for impairment.  In doing so, management has determined there has been no impairment of the intangible assets at December 31, 2008.

 

F-15

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

 k) Long lived assets

 

The Company follows Accounting Standards Codification subtopic 360-10, Property, Plant and Equipment (“ASC 360-10”). ASC 360-10 requires those long-lived assets and certain identifiable intangibles held and used by the Company be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Events relating to recoverability may include significant unfavorable changes in business conditions, recurring losses, or a forecasted inability to achieve break-even operating results over an extended period. The Company evaluates the recoverability of long-lived assets based upon forecasted undiscounted cash flows. Should impairment in value be indicated, the carrying value of intangible assets will be adjusted, based on estimates of future discounted cash flows resulting from the use and ultimate disposition of the asset. ASC 360-10 also requires assets to be disposed of be reported at the lower of the carrying amount or the fair value less costs to sell.

 

 

l) Income (loss) per Share

 

Basic and diluted net income (loss) per share available to common stockholders is presented in conformity with ASC 260-10, “Earnings per Share.”  The Company’s basic income (loss) per common share is based on net income or loss for the relevant period, divided by the weighted average number of common shares outstanding during the period.  Diluted income or loss per common share is based on net income or loss, divided by the weighted average number of common shares outstanding during the year, including common share equivalents, such as outstanding stock options.  Diluted loss per share for the year ended December 31, 2007 does not include common stock equivalents, as these shares would be anti-dilutive. The computation of diluted loss per share also does not assume conversion, exercise or contingent exercise of securities due to the beneficial conversion of related party accounts as these shares that would have an anti-dilutive effect.

 

The computation of income (loss) per share is as follows:

 

    December 31, 2008     December 31, 2007  
Basic net income (loss) per share computation:            
  Net income (loss) attributable to common stockholders   $ 854,453     $ (2,321,233 )
  Weighted-average common shares outstanding     1,304,581       131,580  

  Basic net income (loss) per share attributable to common

       stockholders

  $ 0.65     $ (17.63 )
                 
Diluted net income (loss) per share computation:                
  Net income (loss) attributable to common stockholders   $ 854,453     $ (2,321,233 )
  Weighted-average common shares outstanding     1,304,581       131,580  

  Incremental shares attributable to the assumed conversion

    of convertible debenture and convertible promissory note

    12,322,798         --  
  Weighted-average common shares outstanding     13,627,379       131,580  

  Diluted net income (loss) per share attributable to common

       stockholders

  $ 0.06     $ (17.63 )

 

The Company had common stock equivalents of 12,322,798 at December 31, 2008.

 

m) Concentrations of Credit Risk, Significant Customers and Supplier Risk

 

Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of trade accounts receivable and cash.  For the year ended December 31, 2008 no customer accounted for more than 10% of the revenues or accounts receivable balance. It is the Company policy to collect an advance from the customer prior to delivery of the product or service. The Company maintains cash and cash equivalent balances at a financial institution that is insured by the Federal Deposit Insurance Corporation up to $100,000. The uninsured cash balances at December 31, 2008 and 2007 were $0 and $85,581, respectively.The Company believes it has no significant risk related to its concentration within its cash or accounts receivable.

 

F-16

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

n)    Derivative Liabilities

 

The Company accounts for its embedded conversion features in its convertible debentures in accordance ASC 815-10, "Derivatives and Hedging", which requires a periodic valuation of their fair value and a corresponding recognition of liabilities associated with such derivatives, and ASC 815-40, “Contracts in Entity’s Own Equity”. The recognition of derivative liabilities related to the issuance of convertible debt is applied first to the proceeds of such issuance as a debt discount, at the date of issuance, and the excess of derivative liabilities over the proceeds is recognized as “Loss on Valuation of Derivative” in other expense in the accompanying financial statements. Any subsequent increase or decrease in the fair value of the derivative liabilities is recognized as “Other expense” or “Other income”, respectively.

The financial statements for the years ended December 31, 2008 and 2007 include the recognition of the derivative liability on the underlying securities issuable upon conversion of the YA Global Investments (“YA Global”) Convertible Debentures and iVoice Convertible Promissory Notes.

 

o)    Fair Value of Financial Instruments

 

Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”) requires disclosure of the fair value of certain financial instruments. The carrying value of cash and cash equivalents, accounts payable and accrued liabilities, and short-term borrowings, as reflected in the balance sheets, approximate fair value because of the short-term maturity of these instruments. All other significant financial assets, financial liabilities and equity instruments of the Company are either recognized or disclosed in the financial statements together with other information relevant for making a reasonable assessment of future cash flows, interest rate risk and credit risk. Where practicable the fair values of financial assets and financial liabilities have been determined and disclosed; otherwise only available information pertinent to fair value has been disclosed.

 

The company follows Accounting Standards Codification subtopic 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”) and Accounting Standards Codification subtopic 825-10, Financial Instruments (“ASC 825-10”), which permits entities to choose to measure many financial instruments and certain other items at fair value.

p) Reclassification

 

Certain reclassifications have been made to conform the prior period data to the current presentation. These reclassifications had no effect on reported net loss.

 

q)    Recent Accounting Pronouncements

 

There were various other 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 consolidated financial position, results of operations or cash flows. 

 

NOTE 5  - FAIR VALUE MEASUREMENTS

 

ASC 825-10 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions, and risk of nonperformance. ASC 825-10 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 825-10 establishes three levels of inputs that may be used to measure fair value:

  
Level1 - Quoted prices in active markets for identical assets or liabilities.
  
Level2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.

 

F-17

 

 

 
 

 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.

 

To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed is determined based on the lowest level input that is significant to the fair value measurement.

 

Items recorded or measured at fair value on a recurring basis in the accompanying consolidated financial statements consisted of the following items as of December31, 2008: 

 

                 
      Level I        Level II       Level III        Total   
Derivative liabilities   $ -     $ -     $ 935,451     935,451  
Total Liabilities   $ -     $ -     $ 935,451     $ 935,451  
                                                       

 

NOTE 6 - INTANGIBLE ASSETS

 

Intangible assets consist of accumulated costs incurred with respect to the Company’s patent filings originally paid for by iVoice for $24,000 in May and December 2003. These assets were valued at $16,800 at the date of the spin-off from iVoice, Inc.  Additional filing costs of $225 were capitalized on August 26, 2005. These assets are reflected at cost, net of accumulated amortization of $14,710.  The net value of intangible assets was $2,315 and $5,720 at December 31, 2008 and 2007, respectively.

 

In accordance with ASC 360, goodwill and indefinite-lived intangible assets are reviewed for impairment at least annually, and whenever events or changes in circumstances indicate the carrying amounts of the assets may be impaired. We have elected to perform our impairment review during the fourth quarter of each year, in conjunction with our annual planning cycle. The Company has determined no impairment of indefinite-lived intangible assets was necessary at December 31, 2008.

 

NOTE 7: ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable and accrued expenses at December 31, 2008 and 2007 consisted of the following: 

   2007
    2008      2007
Accounts payable  $192,040   $248,280
Accrued interest   442,532    366,610
Accrued liabilities   47,794    55,637
          
   $682,366   $670,527

NOTE 8 - RELATED PARTY TRANSACTIONS

 

In conjunction with the Spin-off, the Company has entered into a temporary administrative services agreement with iVoice.  The administrative services agreement will continue on a month-to-month basis until the Company has found replacement services for those services being provided by iVoice or can provide these services for itself. Administrative services were $50,952 and $50,652, respectively, for the years ended December 31, 2008 and 2007.

 

The Company also assumed an outstanding promissory note in the amount of $190,000 payable to Jerry Mahoney, President and Chief Executive Officer of iVoice and was previously the non-executive Chairman of the Board of the Company. This amount is related to funds loaned to iVoice and is unrelated to the operations of the Company. The note will bear interest at the rate of Prime plus 2.0% per annum on the unpaid balance until paid.  Under the terms of the Promissory Note, at the option of the Promissory Note holder, principal and interest can be converted into either (i) one share of the Company Class B Common Stock, par value $.01 per share, for each dollar owed, (ii) the number of shares of the Company Class A Common Stock calculated by dividing (x) the sum of the principal and interest that the Note holder has requested to have prepaid by (y) eighty percent (80%) of the lowest issue price of Class A Common Stock since the first advance of funds under this Note, or (iii) payment of the principal of this Promissory Note, before any repayment of interest. During the year ended December 31, 2008, Mr. Mahoney received 245,000 shares of Class A common stock as a repayment of $21,512 and received cash payments of $31,000 to reduce the promissory note. As of December 31, 2008, the outstanding balance due to Mr. Mahoney is $71,756 plus accrued interest of $88,915. As of December 31, 2007, the outstanding balance due to Mr. Mahoney is $124,268 plus accrued interest of $62,553.

 

F-18

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

The Company entered into a five-year employment agreement with Mr. Mahoney as of August 1, 2004.  Mr. Mahoney will serve as the Company’s Non-Executive Chairman of the Board for a term of five years.  As consideration, the Company agreed to pay Mr. Mahoney the sum of $85,000 the first year with an annual increase based on the Consumer Price Index every year thereafter. The Company also agreed to pay Mr. Mahoney a bonus for each merger or acquisition completed by the Company equal to six percent (6%) of the gross consideration paid or received by the Company in a merger or acquisition completed by the Company during the term of the agreement. This bonus would be payable in the form of cash, debt, or shares of our Class B Common Stock at the option of Mr. Mahoney. On February 7, 2008, the Company announced that it had accepted the resignation of Mr. Jerry Mahoney as Non-Executive Chairman of the Company. For the one month ended January 31, 2008, Mr. Mahoney deferred $7,702 of his compensation. Effective February 1, 2008, Mr. Mahoney entered into a consulting arrangement with the Company and Mr. Mahoney will be paid $92,428 annually with an annual increase based upon the Consumer Price Index. Mr. Mahoney agrees to accept compensation in the form of Class B common stock in lieu of cash for as long as the Board of Directors decides in their sole discretion that the Company does not have the financial resources to pay Mr. Mahoney in cash. Mr. Mahoney deferred $84,726 of his consulting fees for the eleven months ended December 31, 2008. As of December 31, 2008 total deferred compensation and consulting fees due Mr. Mahoney was $319,910.

 

The Company entered into an employment agreement with Bruce Knef as of November 8, 2004.  Pursuant to the terms of the employment agreement, as amended on November 22, 2006, Mr. Knef will serve as the Company’s President and Chief Executive Officer until November 7, 2007. Mr. Knef continues to serve as President and Chief Executive Officer without a formal employment agreement. As consideration, the Company agreed to pay Mr. Knef a base salary of $85,000 during the term.  In addition, the Company agreed to pay Mr. Knef incentive compensation based on the amount of total revenues collected by the Company.  If the Company records and collects total revenues in an amount greater than $300,000 but less than $2,000,000, Mr. Knef will receive a bonus equal to 7.5% of the total revenues of the Company.  If the Company records and collects total revenues in an amount greater than $2,000,000, in addition to the 7.5% bonus, Mr. Knef will also receive a bonus equal to 3.5% of the total revenues of the Company in excess of $2,000,000.  However, if the Company’s pre-tax profit margin for the year is less than 35%, Mr. Knef’s aggregate bonus will be reduced by 35%.  Pursuant to an amendment to the employment agreement entered into on November 22, 2006, the Company also agreed to pay Mr. Knef additional compensation of $15,000 annually, which is payable in quarterly disbursements of the Company’s Class A common stock issued under the 2005 Directors’ and Officers’ Stock Incentive Plan.

 

NOTE 9 – CONVERTIBLE PROMISSORY NOTE AND DERIVATIVE LIABILITY

 

The Company has entered into a temporary administrative services agreement with iVoice. The administrative services agreement will continue on a month-to-month basis until the Company has found replacement services for those services being provided by iVoice or can provide these services for itself. In March 2008, the administrative services agreement was amended to provide that accrued and unpaid administrative services shall be aggregated and converted into a Convertible Promissory Note. The principal and interest shall be due and payable as follows: (a) interest shall accrue monthly on the unpaid balance and shall be paid annually, and (b) principal shall be payable on demand.

 

On March 5, 2008, the Company converted its outstanding accounts payable to iVoice, Inc. for unpaid administrative services in the amount of $50,652 into a convertible promissory note at the rate of prime plus 1 percent per annum. Additional amounts may be added to this note based on any unpaid administrative services, and will accrue interest at the above specified rate from date of advance until paid. For the period ended December 31, 2008, unpaid administrative services in the amount of $42,210 were added to the original convertible promissory note of $50,652.

 

iVoice, Inc. may elect payment of the principal and/or interest, at the its sole discretion, owed pursuant to this Note by requiring the Company to issue to iVoice, or its assigns either: (i) one Class B common stock share of the Company par value $.01 per share, for each dollar owed, (ii) the number of Class A common stock shares of the Company calculated by dividing (x) the sum of the principal and interest that the Note holder has decided to have paid by (y) eighty percent (80%) of the lowest issue price of Class A common stock since the first advance of funds under this Note, or (iii), payment of the principal of this Note, before any repayment of interest.

 

 

During the year ended December 31, 2008, the Company issued 188,750 shares of Class A common stock with a fair value of $18,875 to reduce the convertible promissory note in the amount of $12,080. The difference in the market value and the convertible promissory note reduction was charged to non-cash interest in the amount of $6,795.

 

As of December 31, 2008, the outstanding balance on the Convertible Promissory Note was $79,936.

 

Unless otherwise provided, this Note may be prepaid in full or in part at any time without penalty or premium. Partial prepayments shall be applied to installments due in reverse order of their maturity.

 

F-19

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

In the event of (a) default in payment of any installment of principal or interest hereof as the same becomes due and such default is not cured within ten (10) days from the due date, or (b) default under the terms of any instrument securing this Note, and such default is not cured within fifteen (15) days after written notice to maker, then in either such event the holder may, without further notice, declare the remainder of the principal sum, together with all interest accrued thereon, and the prepayment premium, if any, at once due and payable. Failure to exercise this option shall not constitute a waiver of the right to exercise the same at any other time. The unpaid principal of this Note and any part thereof, accrued interest and all other sums due under this Note shall bear interest at the rate of prime plus 2 percent per annum after default until paid.

 

The promissory note holders have a security interest in substantially all of the assets of the Company.

 

In accordance with ASC 815 (previously known as Statement of Financial Accounting Standards No. 133), "Accounting for Derivative Instruments and Hedging Activities", ("ASC 815"), the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a  derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 5 years; and volatility: 263.04%. The accounting guidance instructs that the conversion options are a derivative liability. At March 5, 2008 the Company recorded the conversion options as a liability of $118,182, recorded a debt discount of $50,652, and charged Other Expense - Loss on Valuation of Derivative for $67,530, resulting primarily from calculation of the conversion price. For the year ended December 31, 2008, the Company recorded a Loss on Valuation of Derivative in the amount of $37,827. The fair value of the embedded conversion was estimated at the December 31, 2008 using the Black-Scholes model with the following assumptions: risk free interest rate: 2.25%; expected dividend yield: 0%: expected life: 4.17 years; and volatility: 174.18%.

 

 The Company recorded amortization of debt discount amounting to $13,176 and $0 for the year ended December 31, 2008 and 2007, respectively.

 

NOTE 10 – CONVERTIBLE DEBENTURE AND DERIVATIVE LIABILITY

 

On March 30, 2007, the Company issued a Secured Convertible Debenture (the "Debenture") to YA Global Investments (f/k/a/ Cornell Capital Partners) (“YA Global”) for the sum of $1,000,000 in exchange for a previously issued notes payable for the same amount. The Debenture has a term of three years, and pays interest at the rate of 5% per annum. YA Global has the right to convert a portion or the entire outstanding principal into the Company's Class A Common Stock at a Conversion Price equal to eighty percent (80%) of the lowest closing Bid Price of the Common Stock during the five (5) trading days immediately preceding the Conversion Date. YA Global may not convert the Debenture into shares of Class A Common Stock if such conversion would result in YA Global beneficially owning in excess of 4.99% of the then issued and outstanding shares of Class A Common Stock. The Conversion Price and number of shares of Class A Common Stock issuable upon conversion of the Debenture are subject to certain exceptions and adjustment for stock splits and combinations and other dilutive events. Subject to the terms and conditions of the Debenture, the Company has the right to redeem ("Optional Redemption") a portion or all amounts outstanding under this Debenture prior to the Maturity Date at any time provided that as of the date of the Holder's receipt of a Redemption Notice (i) the Closing Bid Price of the of the Common Stock, as reported by Bloomberg, LP, is less than the Conversion Price and (ii) no Event of Default has occurred. The Company shall pay an amount equal to the principal amount being redeemed plus a redemption premium ("Redemption Premium") equal to twenty percent (20%) of the principal amount being redeemed, and accrued interest, (collectively referred to as the "Redemption Amount"). During the time that any portion of this Debenture is outstanding, if any Event of Default has occurred, the full principal amount of this Debenture, together with interest and other amounts owing in respect thereof, to the date of acceleration shall become at the Holder's election, immediately due and payable in cash, provided however, the Holder may request (but shall have no obligation to request) payment of such amounts in Common stock of the Company. Furthermore, on addition to any other remedies, the Holder shall have the right (but not the obligation) to convert this Debenture at any time after (x) an Event of Default or (y) the Maturity Date at the Conversion Price then in-effect.

 

 

During the year ended December 31, 2008, the Company issued 510,583 shares of Class A common stock with a fair value of $76,111 to reduce the convertible promissory note in the amount of $53,900. The difference in the market value and the convertible promissory note reduction was charged to non-cash interest in the amount of $22,211.

 

The debenture is secured by substantially all of the assets of the Company.  As of December 31, 2008 and 2007, the outstanding balance on the Convertible Debenture was $921,340 and $975,240, respectively.

 

F-20

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

In accordance with ASC 815 (previously known as Statement of Financial Accounting Standards No. 133), “Accounting for Derivative Instruments and Hedging Activities”, (“ASC 815”), the Company determined that the conversion feature of the Debenture met the criteria of an embedded derivative, and therefore the conversion feature of this Debenture needed to be bifurcated and accounted for as a derivative. The fair value of the embedded conversion was estimated at the date of issuance using the Black-Scholes model with the following assumptions: risk free interest rate: 5.6%; expected dividend yield: 0%: expected life: 3 years; and volatility: 165.62%. The accounting guidance instructs that the conversion options are a derivative liability. As such, in March 2007 the Company recorded the conversion options as a liability, recorded a debt discount of $1,000,000, and charged Other Expense - Loss on Valuation of Derivative for $124,479, resulting primarily from calculation of the conversion price. For the year ended December 31, 2008, the Company recorded a Gain on Valuation of Derivative in the amount of $1,718,958. For the year ended December 31, 2007, the Company recorded a Loss on Valuation of Derivative in the amount of $1,536,646.

 

The Company recorded amortization of debt discount amounting to $347,770 and $270,581 for the year ended December 31, 2008 and 2007, respectively.

 

Additionally, on March 30, 2007, the Company, YA Global and the Company's transfer agent, Fidelity Transfer Company, entered into an Irrevocable Transfer Agent Instructions related to the conversion of the Debenture.

 

NOTE 11 – STANDBY EQUITY DISTRIBUTION AGREEMENT

 

On August 31, 2005, the Company entered into a Standby Equity Distribution Agreement (the SEDA”) with YA Global Investments (f/k/a/ Cornell Capital Partners) (“YA Global”) (was amended and restated on December 12, 2005) whereby YA Global agrees to purchase up to $10 million of the Company’s Class A Common Stock (the “Common Stock”) over a two-year period.

 

The purchase price of the Common Stock shall be at ninety-five percent (95%) of the lowest trading price of the Company’s Common Stock during the five consecutive trading day period following the notification by the Company of its request for an advance from Cornell Capital Partners under the SEDA.  In connection with the SEDA, the Company entered into an Escrow Agreement, Registration Rights Agreement and Placement Agent Agreement. As of December 31, 2008, the Company has sold in the aggregate 448,578 shares of Class A Common Stock to YA Global for proceeds of $265,199, which are net of fees and discounts of $52,322.

 

NOTE 12 - CAPITAL STOCK

 

Pursuant to the Company's certificate of incorporation, as amended, the Company is authorized to issue 1,000,000 shares of Preferred Stock, par value of $1.00 per share, 625,000,000 shares of Class A Common Stock, no par value per share, 50,000,000 shares of Class B Common Stock, par value $0.01 per share, and 20,000,000 shares of Class C Common Stock, par value $0.01 per share. Below is a description of the Company’s outstanding securities, including Preferred Stock, Class A Common Stock, Class B Common Stock, and Class C Common Stock.

 

On May 5, 2011, the Company amended its Certificate of Incorporation to reflect the reverse stock split authorized by the Board of Directors and adopted by the shareholders on January 19, 2011. The retroactive effect of this amendment was: a) to reduce the authorized shares from 20,000,000,000 to 25,000,000; b) to reduce the outstanding shares from 1,400,096,193 to 1,750,120; and c) to reduce the unissued shares from 18,599,903,807 to 23,249,880.

 

On November 29, 2011, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 125,000,000, as authorized by the Board of Directors and adopted by the shareholders on November 17, 2011.

 

On March 5, 2012, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 625,000,000, as authorized by the Board of Directors and adopted by the shareholders on February 15, 2012.

 

 

a)Preferred Stock
  
TheCompany is authorized to issue 1,000,000 shares of Preferred Stock, par value $1.00 per share. As of December 31, 2008, the Company has not issued any shares of Preferred Stock.
  
b)Class A Common Stock
  
Asof December 31, 2008, there are 25,000,000 shares of Class A Common Stock authorized, no par value, and 1,750,120 shares were issued and outstanding.
  
Asof December 31, 2007, there are 25,000,000 shares of Class A Common Stock authorized, no par value, and 479,824 shares were issued and outstanding.

 

 F-21

 

 

 

 
 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

Each holder of Class A Common Stock is entitled to receive ratably dividends, if any, as may be declared by the Board of Directors out of funds legally available for payment of dividends.  The Company has never paid any dividends on its common stock and does not contemplate doing so in the foreseeable future.  The Company anticipates that any earnings generated from operations will be used to finance its growth objectives.

 

For the year ended December 31, 2008, the Company had the following transactions in its Class A common stock:

 

·

The Company issued 157,500 shares of Class A common stock of the Company to a director and officer of the Company for payment compensation in the amount of $10,080. The difference in the market value of the shares issued of $16,380 and the amount of compensation was charged to non-cash interest in the amount of $6,300.

 

·

The Company issued 245,000 shares of Class A common stock, with a fair market value of $52,306 to an officer of the Company as repayment of $21,512 of a promissory note.  The difference in the market value of the shares issued and the reduction in the loan was charged to non-cash interest in the amount of $30,794.

 

·

Pursuant to the terms of the Standby Equity Distribution Agreement, the Company issued 168,463 shares of Class A common stock to Y A Global Investments for the net proceeds of $30,065.

 

·

The Company issued 510,583 shares of Class A common stock for repayment of convertible debenture in lieu of cash, valued at $76,111. The difference in the market value and the reduction in debt of $53,900 were charged to non-cash interest in the amount of $22,211.

 

·

The Company issued 188,750 shares of Class A common stock to iVoice, Inc. for repayment of convertible promissory note, valued at $18,875. The difference in the market value and the reduction in debt of $12,080 were charged to non-cash interest in the amount of $6,795.

 

For the year ended December 31, 2007, the Company had the following transactions in its Class A common stock:

 

·

The Company issued 9,875 shares of Class A common stock, with a fair market value of $14,436 for legal services valued at $5,688 as repayment of accrued legal fees.  The difference in the market value and the value of the services was charged to non-cash interest in the amount of $8,748.

 

·

The Company issued 55,250 shares of Class A common stock, with a fair market value of $26,771 to an officer of the Company as repayment of $12,108 of a promissory note.  The difference in the market value of the shares issued and the reduction in the loan was charged to non-cash interest in the amount of $14,663.

 

·

Pursuant to the terms of the Standby Equity Distribution Agreement, the Company issued 267,083 shares of Class A common stock to YA Global Investments (f/k/a/ Cornell Capital Partners) for the net proceeds of $106,332.

 

·

The Company issued 8,750 shares of Class A common stock of the Company as payment of Investor Relations fees, value of the stock was $21,000.

 

·

The Company issued 12,500 shares of Class A common stock of the Company as payment for consulting fees, value of the stock was $30,000.

 

·

The Company issued 8,954 shares of Class A common stock of the Company to a director and officer of the Company for payment compensation in the amount of $5,157. The difference in the market value of the shares issued and the amount of compensation was charged to non-cash interest in the amount of $6,424.

 

· The Company issued 79,111 shares of Class A common stock for repayment of convertible debenture in lieu of cash, valued at $32,425. The difference in the market value and the reduction in debt were charged to non-cash interest in the amount of $6,965.

F-22

 

 

 

 
 

 

 

 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

c)Class B Common Stock
  
Asof December 31, 2008, there are 50,000,000 shares of Class B Common Stock authorized, par value $.01 per share. Each holder of Class B Common Stock has voting rights equal to 100 shares of Class A Common Stock.  A holder of Class B Common Stock has the right to convert each share of Class B Common Stock into the number of shares of Class A Common Stock determined by dividing the number of Class B Common Stock being converted by a 20% discount of the lowest price that the Company had ever issued its Class A Common Stock. Upon liquidation, dissolution, or winding-up, holders of Class B Common Stock will be entitled to receive distributions.  As of December 31, 2008 and 2007, no shares were issued or outstanding.
  
d)Class C Common Stock
  
Asof December 31, 2008, there are 20,000,000 shares of Class C Common Stock authorized, par value $.01 per share. Each holder of Class C Common Stock is entitled to 1,000 votes for each share held of record.  Shares of Class C Common Stock are not convertible into Class A Common Stock.  Upon liquidation, dissolution or wind-up, the holders of Class C Common Stock are not entitled to receive the Company’s net assets pro rata.  As of December 31, 2008 and 2007, no shares were issued or outstanding.

 

NOTE 13 - STOCK OPTIONS

 

Stock Option Plans

 

During 2005, the Company adopted the 2005 Stock Incentive Plan and the 2005 Directors’ and Officers’ Stock Incentive Plan (“Plan”) in order to attract and retain qualified personnel.  Under the Plan, the Board of Directors, in its discretion may grant stock options (either incentive or non-qualified stock options) to officers, directors and employees.

 

The Company did not issue any stock options for the years ended December 31, 2008 and 2007.

 

NOTE 14 -  INCOME TAXES

 

The reconciliation of the effective income tax rate to the Federal statutory rate is as follows:

   December 31,
   2008 2007
 Federal income tax rate   (34.0)%  (34.0)%
 State income tax, net of federal benefit   (4.1)%  (4.1)%
 Effect of valuation allowance   38.1%  38.1%
 Effect income tax rate   0.0%  0.0%

 

 Deferred income taxes will be determined using the liability method for the temporary differences between the financial reporting basis and income tax basis of the Company’s assets and liabilities.  Deferred income taxes will be measured based on the tax rates expected to be in effect when the temporary differences are included in the Company’s tax return.  Deferred tax assets and liabilities are recognized based on anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax bases.

 

At December 31, 2008 and 2007 deferred tax assets consist of the following:

   2008 2007
 Deferred tax assets  $598,000  $494,000 
 Less: Valuation allowance   (598,000)  (494,000)
 Net deferred tax assets  $-0-  $-0- 

 

At December 31, 2008 and 2007, the Company had federal net operating loss carryforwards in the approximate amount of $1,760,000 and $1,450,000, respectively, available to offset future taxable income.  The Company established valuation allowances equal to the full amount of the deferred tax assets due to the uncertainty of the utilization of the operating losses in future periods.

 

 

 

 

F-23

 

 

 

 
 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

NOTE 15 – SUBSEQUENT EVENTS

 

Departure of Directors or Certain Officers and Election of Directors

 

In 2009, Bruce Knef resigned as President of the Company and from the Board of Directors.

In 2009, Kenneth P. Glynn was elected as a member of the Board of Directors, the Chairman of the Board of Directors and was appointed President and Secretary of the company.

 

Capitalization of the Company.

 

On January 19, 2011, the Board of Directors and shareholders, through written consent representing a majority of the total voting Class A and Class B common stock, voted to change the name of the Company to Kenergy Scientific, Inc. (“Kenergy” or the “Company”) and to increase the number of authorized Class A common stock from 10 billion shares to 20 billion shares. On February 3, 2011, the Company filed an Amendment to the Certificate of Incorporation with the State of New Jersey to officially change the name of the Company and to increase the Class A common stock. On February 25, 2011, the Company’s new trading symbol was changed from SSWC to KNSC.

 

On May 5, 2011, the Company amended its Certificate of Incorporation to reflect the reverse stock split authorized by the Board of Directors and adopted by the shareholders on January 19, 2011. The retroactive effect of this amendment was: a) to reduce the authorized shares from 20,000,000,000 to 25,000,000; b) to reduce the outstanding shares from 1,400,096,193 to 1,750,120; and c) to reduce the unissued shares from 18,599,903,807 to 23,249,880.

 

On November 29, 2011, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 125,000,000, as authorized by the Board of Directors and adopted by the shareholders on November 17, 2011.

 

On March 5, 2012, the Company amended its Certificate of Incorporation to increase the number of authorized Class A Common Stock Shares to 625,000,000, as authorized by the Board of Directors and adopted by the shareholders on February 15, 2012.

 

Change in direction of the Company.

 

Due to the economy and/or product differentiation, the Company experienced its last sales in the field of speech recognition and autodialing systems and support in the first quarter of 2009. Concurrent with the change of management, the Company moved its headquarters from Matawan, NJ to Flemington, NJ and the Company entered into fields of development of various products relating to solar power generating systems; portable solar powered products, such as cell phone and PDA rechargers that are solar rechargeable; solar rechargeable lantern/flashlight devices; solar backpack rechargers; solar power audio devices, such as radios; wind power generating systems;

and, creative products based on proprietary positions, especially in the area of healthcare.

 

Financing of the Company.

 

In 2009, Kenneth P. Glynn acquired debt owed by the Company to third party creditors as follows: 

(1)   Promissory Note to Jerome Mahoney dated August 5, 2005 having a balance on December 31, 2008 of $71,756.27; 
(2) Deferred Compensation due to Jerome Mahoney as of December 31, 2008 equal to $319,910.26;
(3) Convertible promissory note due to iVoice, Inc. dated March 5, 2008 in the amount of $50,651.52; and a
(4)   Loan due to iVoice Technology, Inc. to the Company in the amount of $3,600.00.

In 2009, the Company issued an aggregate of $462,000 of Promissory Notes to GlynnTech, Inc. to replace $37,000 of current debt assumed by GlynnTech, Inc. and to acquire a cancer treatment drug delivery system of $425,000 being developed and patented by GlynnTech, Inc.

 

In 2010, the Company executed two wrap-around agreements, in an aggregate of $337,000, to assign amounts due under various Promissory Notes due to GlynnTech, Inc to EPIC Worldwide, Inc. The wrap-around agreements also modified the original terms to extend the due dates by one year, to include provisions to allow the Investor to convert the amounts due into common stock at a 50% discount of the average three deep bid on the day of conversion and to increase the interest rate to 15% after a 60 day interest free period.

 

F-24

 

 

 

 
 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

In 2010, YA Global Investments, LP assigned the debentures that it held to E-Lionheart Associates, LLC (“E-Lionheart”) with an aggregate value of $1,043,539. This was done in conjunction with the execution of a Securities Purchase Agreement with E-Lionheart whereby E-Lionheart will purchase from the Company up to $500,000 of convertible debentures, of which, $450,000 was received in 2010 and balance $50,000 was received in 2011, which will provide new financing for the Company. The new convertible debentures are due on August 9, 2011, pays interest at the rate of 5% per annum and have conversion rights essentially the same as YA Global.

 

 

In 2011 and 2012, the Company issued four convertible promissory notes, in an aggregate of $102,500, to Asher Enterprises, Inc. (“Asher”). Amounts due under these notes are due at various dates between May 30, 2012 and December 19, 2012, and pays interest at the rate of 8% per annum.

 

In 2011, the Company issued various promissory notes, in an aggregate of $140,000, to unrelated parties. Amounts due under this note are due from January 15, 2012 and March 22, 2012 and pay interest at the rate of between 7% and 9% per annum.

 

In 2012, the Company consented to the cancelation of the wrap around agreement with EPIC Worldwide and the reassignment of a new wrap around agreement with ATG, Inc. for $50,000 plus accrued interest of $26,050.

 

On July 16, 2012, the Company finalized an equity facility with Southridge Partners II, LP, a Delaware limited partnership (“Southridge”), whereby the parties entered into (i) an equity purchase agreement and (ii) a registration rights agreement. Pursuant to the terms of the Equity Agreement, for a period of twenty-four (24) months commencing on the effective date of the initial Registration Statement covering the Registrable Securities, Southridge shall commit to purchase up to $17,500,000 of the Company’s Class A common stock, no par value per share (the “Put Shares”). The purchase price of the Put Shares under the Equity Agreement is equal to ninety-one percent (91%) of the lowest closing price of the stock following the five (5) trading days after which a put notice is deemed delivered to Southridge in the manner provided by the Equity Agreement. The Company also entered into the Registration Rights Agreement with Southridge. Pursuant to the terms of the Registration Rights Agreement, the Company is obligated to file a registration statement with the U.S. Securities and Exchange Commission to cover the Registrable Securities within 90 days of closing and thereafter the Company shall use its commercially reasonable efforts to cause the Registration Statement to be declared effective by the SEC within five (5) business days after notice from the SEC that the Registration Statement may be declared effective.

 

Commitments and contingencies.

Starting in 2009, the Company entered into an Administrative Services Agreement with GlynnTech, Inc to provide back office administrative support to the Company. Each administrative services agreement is for a term of one year and may be extended for additional one-year periods at the Company’s request. The initial fees are $4,300 per month and was increased to $7,500 per month in subsequent annual extensions.

 

Starting in 2009, the Company entered into a series of one (1) year employment agreements with Mr. Glynn to serve as President and CEO of the Company at an annual base salary of $96,000 for the 1st year. Subsequent renewals of Mr. Glynn’s employment agreements increased his salary to $144,000 per year.

 

Equity transactions of the Company’s unregistered securities.

In 2010, the Company issued an aggregate of 7,057,330 (5,645,862,500 pre-reverse split) shares of Class A common stock and 10,000 shares of Class B common stock to Mr. Glynn in partial settlement of $509,425 of promissory notes and accrued interest that Mr. Glynn acquired in June 2009. These shares contain a restrictive legend which will limit Mr. Glynn from liquidating these into the open market.

 

In 2012, the Company issued 202,057,500 shares of Class A common stock to Mr. Glynn as repayment of $80,823 of deferred compensation that Mr. Glynn earned in 2009 and 2010. These shares contain a restrictive legend which will limit Mr. Glynn’s ability to liquidate these into the open market.

 

In 2010, 2011 and 2012, the Company issued an aggregate of 15,400,750 shares of Class A common stock for repayment of convertible debenture in lieu of cash, with a market value of $2,338,157 and a reduction of debt of $749,015.

 

 

 

 F-25

 
 

KENERGY SCIENTIFIC, INC.

(FORMERLY KNOWN AS SPEECHSWITCH, INC.)

NOTES TO FINANCIAL STATEMENTS (CONTINUED)

DECEMBER 31, 2008 and 2007

 

NOTE 16 - COMMITMENTS AND CONTINGENCIES

 

 Administrative Service Agreements

 

In conjunction with the Spin-off, SpeechSwitch has entered into a temporary administrative services agreement with iVoice. The administrative services agreement will continue on a month-to-month basis until SpeechSwitch has found replacement services for those services being provided by iVoice or can provide these services for itself. Administrative services is currently billed at $4,264 a month until SpeechSwitch has found replacement services.

 

Employment and Consulting Agreements

 

SpeechSwitch entered into an employment agreement with Bruce Knef as of November 8, 2004. Pursuant to the terms of the employment agreement, as amended on November 22, 2006, Mr. Knef will serve as SpeechSwitch’s President and Chief Executive Officer until November 7, 2007. Mr. Knef continues to serve as President and Chief Executive Officer without a formal employment agreement.

 

 

SpeechSwitch entered into a consulting agreement on February 1, 2008, for an annual compensation of $92, 428, with an outside contractor, whom is also Company stockholder. The agreement expires on February 1, 2013 and is automatically renewal for one additional year.

 

Litigation

 

From time to time, we may 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. We are not aware of any such legal proceedings that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.

 

 

 

 

 

F-26