Attached files
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2012
Commission File Number 333-167380
ENERGY TELECOM, INC.
(Exact name of registrant as specified in its charter)
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Florida
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65-0434332
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(State or other jurisdiction of incorporation
or organization)
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(IRS Employer Identification No.)
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3501-B N. Ponce de Leon Blvd., #393
St. Augustine, Florida
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32084
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(904) 819-8995
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(Address of principal executive office)
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(Zip Code)
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(Registrant’s telephone number, Including area code)
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Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined by Rule 405 of the Securities Act. Yes o No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes x No o
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No o
Note: The Company is a voluntary filer but has filed all reports it would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months if it was a mandatory filer.
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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company x
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(Do not check if a smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).Yeso Nox
The aggregate market value of the voting common equity held by non-affiliates as of June 29, 2012, based on the closing sales price of the Common Stock as quoted on the Over-the-Counter Bulletin Board was $2,562,699. For purposes of this computation, all officers, directors, and 5 percent beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed an admission that such directors, officers, or 5 percent beneficial owners are, in fact, affiliates of the registrant.
As of March 19, 2013, there were 8,834,541 and 600,000 shares of registrant’s class A and B common stock outstanding, respectively.
TABLE OF CONTENTS
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PAGE
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PART I
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Item 1.
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Business
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3
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Item 1A.
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Risk Factors
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13
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Item 1B.
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Unresolved Staff Comments
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20
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Item 2.
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Properties
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20
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Item 3.
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Legal Proceedings
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20
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Item 4.
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Mine Safety Disclosures
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20
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
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21
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Item 6.
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Selected Financial Data
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21
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 7A.
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Quantitative and Qualitative Disclosures about Market Risk
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27
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Item 8.
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Financial Statements and Supplementary Data
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F1-F15
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosures
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28
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Item 9A.
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Controls and Procedures
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28
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Item 9B.
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Other Information
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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30
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Item 11.
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Executive Compensation
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
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33
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Item 13.
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Certain Relationships and Related Transactions, and Director Independence
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33
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Item 14.
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Principal Accounting Fees and Services
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34
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PART IV
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Item 15.
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Exhibits
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35
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Signatures
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37
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2
PART I
ITEM 1 - BUSINESS
This Annual Report on Form 10-K (including the section regarding Management's Discussion and Analysis of Financial Condition and Results of Operations) contains forward-looking statements regarding our business, financial condition, results of operations and prospects. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates" and similar expressions or variations of such words are intended to identify forward-looking statements, but are not deemed to represent an all-inclusive means of identifying forward-looking statements as denoted in this Annual Report on Form 10-K. Additionally, statements concerning future matters are forward-looking
statements.
Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our Management, such statements can only be based on facts and factors currently known by us. Consequently, forward-looking statements are inherently subject to risks and uncertainties and actual results and outcomes may differ materially from the results and outcomes discussed in or anticipated by the forward-looking statements. Factors that could cause or contribute to such differences in results and outcomes include, without limitation, those specifically addressed under the heading "Risks Factors” below, as well as those discussed elsewhere in this Annual Report on Form 10-K. Readers
are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We file reports with the Securities and Exchange Commission ("SEC"). You can read and copy any materials we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, DC 20549. You can obtain additional information about the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an Internet site (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
We undertake no obligation to revise or update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this Annual Report on Form 10-K. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this annual Report, which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operations and prospects.
Overview
We were incorporated on September 7, 1993 under the laws of the State of Florida as The Energy Corp. On April 24, 2004, we changed our name to Energy Telecom, Inc. From inception through 1998, we designed, manufactured and sold products for heavy industrial markets to multi-national firms in six countries and the United States. While working in this market, he saw an opportunity to create a new type of personal communication systems and filed his first patent in September 1996. Once that first patent was awarded, the founder re-directed our focus and centered his activities on expanding our patent portfolio of personal communication systems which support the needs of the emergency,
security and industrial work environment, and the broader cellular and recreational eyewear markets. As a result, we ceased our prior operations and entered the development stage in August 2000 relating to our current line of business.
Our patent portfolio has since grown to consist of multiple issued United States and international Patent Cooperation Treaty (PCT) patents, and multiple pending U.S. and PCT applications. We intend to continue building our existing patent portfolio by filing additional patent claims. While many manufacturers of wireless headsets, novelty eyewear, industrial headwear and optical projection technology offer products with one or more of the features, we believe we offer the only next-generation solution protected by patent claims in all these areas.
We hold U.S. and foreign patents allowing for the manufacture, marketing and distribution of hands-free, wireless communication eyewear providing quality sound and noise attenuation. The targeted markets for our eyewear is police, fire, rescue, military and security personnel, as well as companies in bio-hazardous, mining, construction and heavy manufacturing that utilize VHF and UHF radio communication. Additionally, our products are marketed to multiple commercial retail sales channels for sight and hearing protection products, along with wireless telecommunication markets including cellular phone carriers and their suppliers.
Personal Protection Equipment Market
Overview
The Personal Protection Equipment ("PPE") market includes equipment and clothing worn for protection against bodily injury. Products include earmuffs and earplugs, communication headsets for noisy environments, safety eyewear and goggles, respirators, fall protection equipment, head protection equipment, protective clothing, gloves, footwear and other products. According to the Personal Protective Equipment Market Report, prepared by Global Industry Analysts I 2010, the global PPE market is anticipated to reach $33.3 billion in annual sales by 2015. Within this market, we aim to compete primarily in the segment of
the market represented by hearing, eye and face protection products.
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In many emergency rescue, industrial, mining, manufacturing or construction related applications, employees are generally required to wear and carry various types of PPE gear, such as boots, hard hats, or gloves, as well as vision and hearing safety equipment in the form of protective glasses and disposable ear plugs.
The ability to communicate easily is another important consideration in equipping workers. Generally, they carry a radio, or have some form of communication such as a computer or a telephone near their workstation. Unfortunately, however, workers can become quite isolated in many of these working environments, because their hearing protection blocks out all exterior noise including the phone or radio. In emergency situations, it is very important that all of the workers communicate with one another so as to properly alert one another of dangers, evacuations or other safety related events.
In addition to safety, businesses also need communicability to increase worker efficiency and productivity. For those reasons it is vital that a worker be in communication with other workers at all times. Presently, businesses address the various safety and communicability considerations by issuing employees individual radios, protective glasses and earplugs. Alternatively, some facilities attempt to use a computer workstation monitor to provide workers with a visual signal. Still, communication can be a great inconvenience because workers must often remove their hearing protection to properly communicate even though some external headphone-type ear covers, which provide for some
communicability, are available, due to the previously described expense, inconveniences and un-hygienic conditions associated with their use, those types of devices are not favored and businesses must look to many available alternatives.
Accordingly, safety glasses, hearing protection and communication devices are still commonly provided to workers separately, and the worker is called upon to manage all of the separate, and often incompatible, devices as well as possible. Unfortunately, users who are able to simultaneously wear two or three separate devices find their combined use very inconvenient, bulky and awkward on a day-to-day basis. To ensure that a worker does not forget or misplace the often expensive equipment, in many instances some or all of the safety equipment, and especially the more expensive equipment such as the communication equipment and exterior head phone type covers, must be turned in each day and reissued
the following morning. This practice frequently results in safety glasses, cell phones, microphones, transmitters and ear covers being lost, misplaced, or damaged during storage, as the use of several separate devices does not allow for easy convenient storage in one central location. As such, it is very difficult to keep track of all of the various types of safety equipment and a user still has no assurance that they are using all of their own equipment from day to day, a circumstance that is not only un-sanitary, but also can be quite inconvenient to a user who may have to re-size or otherwise adapt their equipment to their comfort requirements.
This is the state of the current market for providing what we estimate as 75 million police, fire, rescue, military, security, bio-hazard, mining, construction and heavy manufacturing workers worldwide, with various levels of protection and communication products.
Types of Products
The following are the types of products being used in today‘s marketplace. They include:
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Protective eyewear: generally a lightweight, wraparound frame that has durable, hard-coated, often wrap-around, polycarbonate lenses;
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Industrial wireless all-in-one communication headgear radios: two-way, portable radios built into headsets with noise-reducing earmuffs; generally requiring a base station for multiple user environments;
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Industrial headsets: industrial strength headsets with portable radios that can be connected to belt worn or handheld transceivers;
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Two-way handheld radios: a full range of products that use short-range wireless communication technologies;
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RF wireless ear worn Bluetooth radios: adoption of the Bluetooth RF protocol which now makes production of the eyewear radio both practical and economical; and
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Inductance wireless earpieces (buds): a component of the product offering a pathway to superior foam technologies.
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Future of the PPE Market
The convergence of voice, data and video communication technologies has produced a growing market for personal protection and telecommunication products. With the exponential growth in computational capabilities, intelligence and miniaturization, new technologies are being applied to old communications methodologies. The next generation of broad spectrum, small, intelligent digital audio and video communication devices can now be created based on the availability of advanced digital signal processing (DSP) technology (allowing for the conversion of analog information such as sound and pictures into digital information), single-chip radio construction and the miniaturization and commercialization
of optical projection technology. Convergence was inevitable, as the perceived need for “smaller, lighter, cheaper, smarter and hands-free” devices is now deep-seated in the modern consumer‘s buying habits.
We believe that our telecommunication eyewear is the type of convergence where the PPE market is heading. We consider telecommunication eyewear as a product delivering hands-free access to the full range of voice, stereo music, data and video (optical display) information, including text, multi-media and full screen and full color web-site views. This convergence is evidenced by the introduction of at least one type of wireless optical-display eyewear, the Google Glass product. The Google Glass eyewear delivers optical information to the wearer while he or she is connected wirelessly to the internet. We believe that other companies are planning on introducing
wireless optical display eyewear in the near future.
Key industry trends
The industry is experiencing significant advancements in various forms of technological advances, and thus evolving user requirements, including:
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Increasing interest and demand for small, hands-free, wireless and digital communication products;
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Increasing need and demand for real-time information delivery of text messages, and eventually full page, multi-media, full color displays;
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evolving capability to deliver smaller, full screen, full color, interactive displays;
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rapid advances in digital signal processing (DSP) chip technology providing for the conversion of analog signals to digital signals, allowing for smaller systems utilizing software controlled learning-capable operations;
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development of voice-recognition software for hands-free information appliances;
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development of speakers and microphones-on-a-chip allow for miniaturized sound systems within the ear;
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increasing need to organize and manage employee group and individual connectivity; and
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increasing need to increase productivity through use of individual safety glasses, hardhats, microphones, transmitters, ear covers, computer terminals, cell and smart phones.
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Limitations of current industry practices
Although various solutions are being offered to attempt to fill the void in the marketplace, they all have inherent limitations, including:
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combining communications with personal safety requires two or three separate products;
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current headsets normally require a wired connection from the headset to a radio worn elsewhere on the body;
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some current information appliances are hands-free, but because they are almost exclusively ear-muff type in design, do not find favor from those working in high-heat and humid work environments;
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current work-related radio products are finger-push activated – as they do not yet employ voice-recognition - thus are difficult for gloved fire and emergency personnel to use;
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current short-range walkie-talkie radio technology uses analog transmissions, therefore cannot provide digital data; and
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current state of bulky hardwired radios, versus printed-circuit-board mounted single chip radios.
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Our Product
We have produced the world's first hands-free two-way, sound attenuating wireless telecommunication eyewear, intended for use by police, fire, rescue, military and security personnel as well as bio-hazard, construction and heavy-manufacturing workers. In addition, we are designing our product to deliver comfortable, safe, economic, and aesthetic access to entertainment and cellular-phone networks through consumer-level recreational eyewear/accessory for use in various everyday situations including beach wear, casual shopping, sporting events, or other casual wear.
The 2.1 model of our eyewear was completed in 2012, with advanced materials used to enhance strength and durability. It has a new internal engineering design, and used Eastman copolyester plastics, new thermoplastic elastomer softening sections, and nylon parts in strategic areas for maximum resistance to impact.
Additionally, the Company is working on new benefits as protected in its newly issued patent, including wireless earpieces, and benefits stated in a newly filed patent, that establishes a ‘Zone of Safety’ around the wearer, using new technologies never before found on the human head. The innovative 'Zone of Safety' technology will benefit workers in hazardous locations, those enjoying sports outdoors, as well as a variety of other applications. The eyewear will receive and accumulate knowledge of the wearer's surroundings, including many environmental hazards, while simultaneous providing others with the eyewear wearer's condition and state, including physical condition,
location, and movements.
Finally, the Company is completing the software design and testing required for the eyewear to be consider a ‘Hearing protection’ product under some standards, by limiting its audio output to 82dB. The preliminary tests of the 82dB limited samples are complete, and testing on live models is scheduled for completion in 2013.
Safety Lenses
The lenses in our eyewear are manufactured and designed by Uvex, a division of Honeywell Safety Products, a leading manufacturer of safety eyewear products. The Genesis wraparound lenses provide vision impact protection to industry safety standards and block 99.9% of UVA and UVB radiation light. In order to provide for maximum usage and durability, the lenses are easily replaceable and come in different colors/shades. Our eyewear allows prescription lenses to be securely inserted behind the safety lenses and specifications for prescription lenses are also available. We are also working to provide eyewear that will provide a
heads-up optical display, although no release date is currently available. We previously tested 3-D lenses, but have decided not to move forward with them at this time, as we don’t believe it represents a significant enough segment of our potential market. We are also working to provide polarized lenses and eyewear that will provide a heads-up optical display, although no release dates are currently available.
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Noise Attenuation Earplugs
The eyewear contains soft ear plugs designed and manufactured by Howard Leight/Honeywell Safety Products, a leading global hearing protection device company. The earplugs are corded to the eyewear and are replaceable. Through the use of dual microphones and noise attenuating software designed by Samsin USA, the earplugs passively provide a Noise Reduction Rating (“NRR”) of 24 using SmartFit 300 plugs, and an NRR of 30 using ET-113 foam plugs, both types supplied by Howard Leight, a division of Honeywell Safety Products. OSHA regulations require that, when engineering controls and/or administrative controls cannot reduce noise levels in industry to an eight-hour
time-weighted average level of less than 85 dB, a hearing protection (or conservation) program must be established. OSHA requirements prohibit a worker from working more than eight hours per day with exposure to a sustained sound level of 90 dB, which decreases significantly to two hours per day at 100dB. Most industrial and construction noise is in the range of 90 – 110 dB.
Voice Communication
Our eyewear is equipped with wireless two-way Bluetooth v2.1 voice communication that is compatible with a cellular telephone that is Bluetooth enabled. In addition, our eyewear works with handheld Bluetooth- enabled VHF and UHF walkie-talkies and Bluetooth adaptors. This provides a user with hands-free use of their cell phones. Large push buttons are built into the frame to allow easy use even by users with gloved hands. The eyewear works at least 15 feet from the cell phone or other Bluetooth enabled device.
Music Playback
Our eyewear is capable of streaming stereo music from any Bluetooth enabled music device.
Industrial Certifications
We have obtained numerous certifications for our telecommunications eyewear. We have obtained the necessary certifications to sell our product as personal protective equipment. We contracted with Colts Laboratories, an independent testing facility that is accredited by the Safety Equipment Institute to complete and verify standards tests.
American National Standards Institute
The American National Standards Institute, or ANSI, is a not-for-profit organization that serves as administrator of the United States private sector voluntary standardization system. The primary objective of ANSI is to promote and facilitate voluntary consensus standards and conformity assessment systems. ANSI does not have authority to enforce such standards, but their standards are used by OSHA to be sure that certain safety devices, such as eyewear, provide adequate protection for workers.
The ANSI Z87.1 standard sets forth requirements for the design, construction, testing, and use of eye protection devices, including standards for impact and penetration resistance. All safety glasses, goggles, and face shields used by employees under OSHA jurisdiction must meet the ANSI Z87.1 standard. The eyewear standard includes the following minimum requirements:
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Provide adequate protection against the hazards for which they are designed;
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Be reasonably comfortable;
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Fit securely, without interfering with movement or vision;
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Be capable of being disinfected if necessary, and be easy to clean;
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Be durable; and
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Fit over, or incorporate, prescription eyewear.
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The ANSI Z87.1 standard requires that eyewear pass certain tests, including a high mass impact test and a high velocity impact test. In July 2012, our latest version of our telecommunications eyewear passed the ANSI Z87.1 testing requirements.
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FCC/CE Regulatory Certification
The Federal Communications Commission, or FCC, has adopted limits for safe exposure to radiofrequency (RF) energy. These limits are given in terms of a unit referred to as the Specific Absorption Rate (SAR), which is a measure of the amount of radio frequency energy absorbed by the body when using a mobile phone. The FCC requires cell phone manufacturers to ensure that their phones comply with these objective limits for safe exposure. Any cell phone at or below these SAR levels (that is, any phone legally sold in the U.S.) is a "safe" phone, as measured by these standards. The FCC limit for public exposure from cellular telephones is an SAR level of 1.6 watts per kilogram (1.6
W/kg). Our eyewear has been determined to be “safe” and has been certified by the FCC.
Similarly, a CE certification refers to a product’s eligibility to be sold in the European Union. The trading region defined by the EU is called the European Economic Area, or EEA. In order to sell our telecommunication eyewear to any of the countries in the EEA, it must obtain CE certification. A product bearing the CE Mark has been tested to all of the relevant standards that the EU demands.
In order to obtain CE certification, a product must satisfy the following obligations:
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Carry out a risk analysis and determine what solutions can be applied to reduce risks in compliance with the appropriate EEA directive;
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Write a user’s instruction manual that sets out the purpose for which the product is intended;
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Draft an EEA declaration of conformity, in which the manufacturer declares that the product complies with the specified EEA directives and norms; and
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Prepare a product dossier, which includes the documents mentioned above, as well as design data, drawings, calculations and test reports. In other words, it contains everything which makes it possible to demonstrate that the essential requirements relating to CE marking have been met.
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In September 2011, our telecommunications eyewear received CE certification and may be sold in the EEA.
Bluetooth Qualification
Bluetooth is an open wireless technology standard for exchanging data over short distances (using short length radio waves) from fixed and mobile devices, creating personal area networks with high levels of security. Bluetooth Qualification is the Bluetooth SIG certification process required for any product using Bluetooth wireless technology and is a necessary pre-condition of the intellectual property license for the Bluetooth technology. Qualification is also necessary in order to apply the Bluetooth trademark to a product. Bluetooth Qualification requires certain testing standards for all products that use Bluetooth wireless technology. Our telecommunication eyewear has received Bluetooth
Qualification as a v2.1 Bluetooth enabled device.
CSA International
CSA International is a provider of product testing and certification services for electrical products, whose certifications are recognized in the U.S., Canada and around the world. CSA International is accredited by national agencies including, OSHA, ANSI, National Voluntary Laboratory Accreditation Program, National Evaluation Service and Standards Council of Canada.
The CSA Z94.3 standard applies to eye and face protectors used in all occupational and educational operations or processes involving hazards to the eyes or face. Typical hazards include flying objects and particles, splashing liquids, molten metal, and ultraviolet, visible, and infrared radiation, but do not include X-rays, gamma rays, high-energy particulate radiation, radioactive materials, lasers, or masers. The CSA Z94.3 standard would be considered the Canadian equivalent of the ANSI Z87.1 standard although it has higher impact standards. The prior version of our eyewear passed the CSA Z94.3 standard. Our new eyewear is still undergoing internal testing
and has not yet been submitted for CSA certification, but we anticipate that the new version will pass all required testing to achieve the CSA Z94.3 standard.
Manufacturing Operations
Our telecom eyewear product is a manufactured product using various components constructed for the project, and assembled and shipped for distribution. Our exclusive contractual agreement with Samsin USA expired in October 2011, by which it develops, provide prototypes for, and manufactures our telecom eyewear products, which it does through Samsin Innotec in any of its three plants, located in South Korea, or mainland China. Although the agreement expired, we continue to operate with Samsin USA as our manufacturing partner under the same terms and conditions of the agreement, although if necessary, we
could utilize additional or other manufacturing partners if we decided.
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The UVEX lenses are manufactured by Honeywell Safety Products, located in Smithfield, Rhode Island. The eyewear's specially designed sound attenuating ear plugs are manufactured by Howard Leight Company, a division of Honeywell Safety Products, in a manufacturing plant in Mexico. Other than the purchase orders we place with Honeywell Safety Products or Howard Leight, we have no contractual obligations to use their products and we could use lenses or ear plugs produced by other companies if we decided.
All components are then shipped to South Korea for assembly of the eyewear. The completed eyewear is thoroughly tested in Samsin USA's own Quality Control facilities, then shipped directly to first or second tier distributors wishing to distribute the product.
Distribution
On February 21, 2012, we entered into a Distributor Agreement with Honeywell International Inc., acting through its Honeywell Safety Products business unit (“Honeywell”). Pursuant to the terms of the agreement, we appointed Honeywell as our distributor with regards to our products, which appointment was on a worldwide basis and exclusive only to the personal protective equipment market. All products are purchased from us by Honeywell for resale. Honeywell sells our eyewear under its branded ‘ICOM’ name in Europe and UVEX branded ‘AcccoustiMaxx’ in the United States. The Distributor Agreement had an initial term of one year, and
would automatically renew for successive one year terms after the initial term unless either party provides prior written cancellation. On December 26, 2012, we notified Honeywell that we elected to not review the Distributor Agreement beyond the initial term. We have had discussions with Honeywell regarding entering into a new Distributor Agreement, which we anticipate would be on substantially the same terms as the prior agreement, but would provide Honeywell with expanded exclusive rights and provide us with greater product, marketing and sales support. Although no agreement is currently in place, we continue to receive purchase orders from Honeywell and anticipate a significant increase in total sales by Honeywell in the fiscal year ending December 31, 2013.
Additionally, we believe that, similar to our agreement with Honeywell, one or more of the companies that produce the wireless headsets and industrial safety products will distribute the telecommunication eyewear product, probably under their own label, to gain new market share. For example, Samsin USA, which produces the frames for the eyewear and manufactures the completed eyewear, may desire to sell the eyewear through its distribution network. If they decided to do so, they would purchase them from us to be sold under their own brand name for the eyewear. Alternatively, a company such as Samsin Innotec, which has a long history of selling products to police and military
forces in Asia, could sell the eyewear and pay us a royalty rate based on the number of units sold.
We will seek to analyze the products being offered by other companies, evaluate which competitors could benefit from licensing our patents, and carefully determine which, if any, of their products may infringe on elements of our patented protection. Many of these companies hold patents on various elements of the products that they sell; however, none hold patents that protect the “means” for integrating additional functionality into their core product offerings like our patents do. For that reason, we believe that companies will be interested in licensing our technology to be able to incorporate multi-functionality into their current products.
The following are targeted licensees, potential competitors and prospective partners:
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Cellular Carriers
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In-Ear audio delivery systems
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AT&T Inc.
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Siemens AG
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Verizon Communications Inc.
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Plantronics Inc.
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Nokia Corp.
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GN US, Inc. (Jabra)
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Sprint Nextel Corp.
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Targeted PPE Markets
The personal protection equipment market includes equipment and clothing worn for protection against bodily injury. Products include earmuffs and earplugs, communication headsets for noisy environments, safety eyewear and goggles, respirators, fall protection equipment, head protection equipment, protective clothing, gloves, footwear and other products. Within this global market, our telecommunication eyewear will compete primarily in the markets represented by hearing and eye protection and communication headset products.
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Our telecommunication eyewear product will be targeted towards the following end-markets:
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Police and fire rescue, security services and military: To protect the eyes and ears during the use of firearms, explosives and other weaponry, to provide hands-free communication among personnel and allow for real-time viewing of intelligence;
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Manufacturing: To protect workers from plant hazards such as industrial noise and flying particles that may cause eye injuries;
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Construction, Mining and Logging Operations: To protect workers from airborne dust and debris and construction equipment noise and to provide two-way, instant communication;
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Video Game Players: To provide a better gaming experience with hands-free voice controls and streaming data; and
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Consumers: To protect consumers in home improvement and maintenance projects and to provide digital radio and cell phone communications.
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Currently, through our distribution partner, we are targeting the United States and Europe, which we believe are the two largest PPE markets and the markets in which we have the greatest intellectual property protection. In addition, we are planning to sell the eyewear in Australia in 2013. Thereafter, the markets that we decide to target will be based on receiving patent protection and which distribution partners, if any, we enter into agreements with.
Research and Development
Research and development of our telecom eyewear product is conducted at various locations simultaneously: our own offices (general layout, benefits, and ergonomics), research facilities at Howard Leight in San Diego, California (sound attenuation), at Samsin USA in Mason, Ohio (Bluetooth and other electronic design), and at Samsin Innotec's R&D facility (operating software system design, physical engineering) located in Seoul, South Korea.
Intellectual Property
We own and have obtained licenses to various domestic and foreign patents, patent applications and trademarks related to our products, processes and business. Our patents are often referred to as means plus function patents. Means plus function is the broadest type of patent protection and refers to a way of defining an invention in a patent claim that describes the element of the invention in terms of its function (i.e, the means by which a specific function is performed), rather than in terms of its specific structure. The use of a means plus function clause makes the claim harder to design around, since a patent on the means will then support all possible structures that can be performed by the
specific function. Our patents expire at various times in the future not exceeding 20 years.
Patents and Patent Applications
Proprietary protection for our products and technology are important to our business and we seek patent protection in the U.S. and internationally when we deem appropriate. We also rely on trade secrets, know-how and continuing technological advances to protect various aspects of our core technology.
We own numerous patents and have patent applications pending in the United States and abroad. In addition, we have two trademarks.
Our commercial success will largely depend on obtaining and maintaining patent protection and trade secret protection of our current and future products and technologies, as well as successfully defending these patents against third-party challenges. Our ability to stop third parties from making, using, selling, offering to sell or importing our products or products using our technology depends on the extent to which we have rights under valid and enforceable patents or trade secrets that cover these activities. We cannot assure you that our pending patent applications will result in issued patents.
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Approved Patents
Our current patents owned are as follows:
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Patent Number
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Name of Patent
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Jurisdiction
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Expiration Date
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5,717,479
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Industrial safety assembly including disposable ear protection and earphone
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USA
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September 6, 2016
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CA2314348
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Industrial safety assembly including disposable ear protection and ear phone
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Canada
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February 10, 2018
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AU759466
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Industrial safety assembly including disposable ear protection and ear phone
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Australia
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February 10, 2018
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6,012,812
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Industrial safety assembly
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USA
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September 6, 2016
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ZL988140675
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Industrial safety assembly including disposable ear protection and ear phone
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China
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February 10, 2018
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6,950,531
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Industrial hearing protection and communication assembly
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USA
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September 14, 2016
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7,133,532
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Hearing protection and communication assembly
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USA
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September 17, 2016
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EP 1060433
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Industrial safety assembly including disposable ear protection and ear phone
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European Patent Office, United Kingdom, Spain, Italy, Germany, France
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February 10, 2018
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8,243,973
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Communication eyewear assembly
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USA
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April 19, 2031
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Patent Applications
Our current patent applications that are pending are as follows:
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Application Number
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Name of Patent Application
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Jurisdiction
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Application Date
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108475823
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Communication eyewear assembly
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European Patent Office
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March 10, 2010
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2010347741
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Communication eyewear assembly
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Australia
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March 10, 2012
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13/585,430
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Communication eyewear assembly
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USA
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August 14, 2012
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2791531
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Communication eyewear assembly
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Canada
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August 29, 2012
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2010800652024
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Communication eyewear assembly
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China
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September 5, 2012
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1020127023357
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Communication eyewear assembly
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South Korea
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September 6, 2012
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2012557012
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Communication eyewear assembly
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Japan
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September 10, 2012
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2013/713,789
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Communication eyewear assembly with Zone of Safety capability
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USA
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December 13, 2012
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Trademarks
We have been granted two trademarks as follows:
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Name of Trademark Granted
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Date of Registration
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Registration Number
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Energytele.com
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December 11, 2007
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3354175
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Safe-Talk
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March 8, 2011
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3930119
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Competition
The global PPE market is highly fragmented. We estimate that there are several hundred manufacturers of PPE (other than safety clothing, gloves and shoes) in the United States, Europe and Southeast Asia. Participants in the industry range in size from small, independent, single-product companies with annual sales of a few million dollars, to a small number of multinational corporations with annual sales in excess of $100 million. We believe that participants in the PPE market compete primarily on the basis of product characteristics (such as design, style and functional performance), product quality, service, brand
name recognition and, to a lesser extent, price. From a competitive standpoint, we believe we are currently well situated, primarily because we believe our telecommunication eyewear will appeal to many different potential end-users in the PPE market.
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Government Regulation
As a manufacturer of safety products, we are subject to regulation by numerous governmental bodies. Principal among the federal regulatory agencies in the United States of America are the following: (i) Occupational Safety and Health Administration, which regulates the occupational usage of all PPE; (ii) the Environmental Protection Agency, which regulates labeling of hearing protection devices; and (iii) the Mine Safety and Health Administration, which regulates safety in mines. These agencies generally mandate that our products meet standards established by private groups, such as ANSI. Our products are also subject to foreign laws and regulations. In particular, they must comply
with the Canadian Standards Association, European Committee for Standardization and Standards Australia in order to be sold in these markets. Our products are also subject to the Export Administration Regulation administered by the Department of Commerce, and certain products may be subject to the International Traffic in Arms Regulations administered by the Department of State. We believe we are in compliance in all material respects with the regulations and standards of these governmental bodies.
Environmental, Health and Safety Matters
We are subject to various evolving federal, state, local and foreign environmental, health and safety laws and regulations governing, among other things, emissions to air, discharge to waters and the generation, handling, storage, transportation, treatment and disposal of hazardous substances and wastes. We believe that we are in substantial compliance with all such laws and regulations. We have an active program to ensure environmental compliance and achievement of environmental goals and objectives. We will continue to implement environmental management systems at our manufacturing facilities. The consequence for violating these laws and regulations can be material. We will likely have to make
capital and other expenditures to comply with environmental and health and safety requirements. In addition, certain environmental laws and regulations impose joint and several strict liability on responsible parties, including past and present owners and operators of sites, to clean up, or contribute to the cost of cleaning up, sites at which hazardous wastes or materials were disposed or released. For example, if a release of hazardous substances occurs on or from our property or any offsite disposal location where our wastes have been disposed, or if contamination from prior activities is discovered at our property or third-party owned properties that we or our predecessors formerly owned or operated, we may be subject to liability arising out of such conditions and the amount of such liability could be material. Liability can include, among other things, for example, costs of
investigation and cleanup of the contamination, natural resource damages, property damage to properties and personal injuries. Environmental laws and regulations are complex, change frequently and have tended to become more strict over time. If more stringent environmental laws or regulations are enacted, these future laws could have a material adverse effect on our results of operations.
Employees
As of March 19, 2013, we had one employee, our Chief Executive Officer. From time to time, we rely on consultants for various activities, including accounting, design, manufacturing and marketing. Currently we have three consultants: The Brussell Group, LLC, which is providing marketing and logistical consulting services, Mr. Tom Perszyk, who is providing electronic consulting services and Mr. Steven Chaussy, CPA, who is providing accounting services.
We engaged the services of Benjamin Brussell, through The Brussell Group, LLC in December 2011. The Brussell Group provides marketing and business logistical services. We and The Brussell Group entered into a consulting agreement in December 2011, on a month-to-month basis, whereby The Brussell Group receives shares of common stock on a monthly basis for his services.
Mr. Tom Perszyk, our Bluetooth design engineer, formerly of Motorola, provides all technical guidance required on the design, implementation, and development of the Bluetooth (and other RF) protocols employed by the design engineers at Samsin USA. Mr. Perszyk is the Chief Executive Officer and a minority shareholder of Samsin USA. We and Mr. Perszyk entered into a consulting agreement in November 2011, on a month-to-month basis, whereby Mr. Perszyk receives shares of common stock on a monthly basis for his services.
Mr. Steven Chaussy, a CPA licensed in Florida, Virginia and California, was initially engaged in January 2011 and renewed in January 2013 to provide accounting services including the assemblage of financial data required for the Company's SEC filings. Mr. Chaussy receives shares of common stock on a monthly basis for his services.
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ITEM 1A - RISK FACTORS
Risks Relating to Our Business:
We have a short operating history and have not produced significant revenues. This makes it difficult to evaluate our future prospects and increases the risk that we will not be successful.
We have a short operating history with our current business model, which involves the manufacture, marketing and distribution of a hands-free, wireless communication eyewear. While we have been in existence since 1993, we have only started to generate revenues in the second half of 2010. No assurances can be given that we will generate any significant revenue, or any revenues at all, in the future. As a result, we have a very limited operating history for you to evaluate in assessing our future prospects. Our operations have not produced significant revenues, and may not produce significant revenues in the near term, or at all, which may harm our ability to obtain
additional financing and may require us to reduce or discontinue our operations. You must consider our business and prospects in light of the risks and difficulties we will encounter as an early-stage company in a new and rapidly evolving industry. We may not be able to successfully address these risks and difficulties, which could significantly harm our business, operating results, and financial condition.
We have a history of losses which may continue and which may negatively impact our ability to achieve our business objectives.
We incurred net losses of $1,055,625 and $459,373 for the years ended December 31, 2012 and 2011, respectively. In addition, at December 31, 2012, we had an accumulated deficit of $5,962,782. We cannot assure you that we can achieve or sustain profitability on a quarterly or annual basis in the future. Our operations are subject to the risks and competition inherent in the establishment of a business enterprise. There can be no assurance that future operations will be profitable. Revenues and profits, if any, will depend upon various factors, including whether we will be able to continue expansion of our revenue. We may not achieve our business objectives and the failure to
achieve such goals would have an adverse impact on us.
We received a modified report from our independent registered public accounting firm with an emphasis of matter paragraph for the year ended December 31, 2011 with respect to our ability to continue as a going concern. Although we did not receive a modified report for the year ended December 31, 2012, there is no assurance that we will receive a similar unmodified report for our year ended December 31, 2013.
In their report dated March 15, 2012, our independent registered public accounting firm expressed substantial doubt about our ability to continue as a going concern as we had incurred substantial losses and have minimal revenues to date. Although we incurred operating losses during the year ended December 31, 2012, we increased our revenues for the year ended 2012, were cash flow positive for the year ended December 31, 2012, had increased the amount of cash on hand at year end and further increased the amount of cash on hand prior to the date of this report. As a result, in their report dated March 22, 2013, our independent registered public accounting firm did not express
substantial doubt about our ability to continue as a going concern. If we are unable to generate a profit and/or obtain necessary funding from outside sources, our independent registered public accounting firm may express doubt about our ability to continue as a going concern in the future.
We face strong competition from other personal protection equipment companies.
The personal protection equipment market is highly competitive. Our competitors range in size from small companies focusing on single products to large multinational corporations that manufacture and supply many types of products. Our main competitors vary by region and product. We believe that participants in this industry compete primarily on the basis of product characteristics (such as design, style and functional performance), product quality, service, brand-name recognition and, to a lesser extent, price. Almost all of our competitors have greater financial and other resources than we do and may be able to grow more quickly through strategic acquisitions and may be able to better respond to
changing business and economic conditions. Our net income could be adversely affected by competitors’ product innovations and increased pricing pressure. Individual competitors have advantages and strengths in different sectors of our markets, in different products and in different areas, including manufacturing and distribution systems, geographic market presence, customer service and support, breadth of product, delivery time and price. Some of our competitors also have greater access to capital and technological resources and we may not be able to compete successfully with them.
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Our lack of diversification will increase the risk of an investment in us, and our financial condition and results of operations may deteriorate if we fail to diversify.
Our current business focuses on one product in the personal protection equipment market, our Telecommunication Eyewear. Larger companies have the ability to manage their risk by diversification. However, we currently lack diversification, in terms of both the nature and geographic scope of our business. As a result, we will likely be impacted more acutely by factors affecting our industry in which we operate, than we would if our business were more diversified, enhancing our risk profile.
If we fail to successfully introduce new products, we may lose market position.
New products, product improvements, line extensions or new packaging will be an important factor in our sales growth. If we fail to identify emerging consumer and technological trends, to maintain and improve the competitiveness of our existing products or to successfully introduce new products on a timely basis, we may lose market position. Continued product development and marketing efforts have all the risks inherent in the development of new products and line extensions, including development delays, the failure of new products and line extensions to achieve anticipated levels of market acceptance and the cost of failed product introductions.
Our continued success depends on our ability to protect our intellectual property. The failure to do so could impact our profitability and stock price.
Our success depends, in part, on our ability to obtain and enforce patents, maintain trade-secret protection and operate without infringing on the proprietary rights of third parties. Litigation can be costly and time consuming. Litigation expenses could be significant. In addition, we may decide to settle legal claims, including certain pending claims, despite our beliefs on the probability of success on the merits, to avoid litigation expenses as well as the diversion of management resources. While we have been issued patents and have registered trademarks with respect to our product and technology, our competitors may infringe upon our patents or trademarks, independently develop similar or
superior products or technologies, duplicate our designs, trademarks, processes or other intellectual property or design around any processes or designs on which we have or may obtain patents or trademark protection. In addition, it is possible that third parties may have or acquire other technology or designs that we may use or desire to use, so that we may need to acquire licenses to, or to contest the validity of, such third-party patents or trademarks. Such licenses may not be made available to us on acceptable terms, if at all, and we may not prevail in contesting the validity of such third-party rights.
In addition to patent and trademark protection, we also protect trade secrets, know-how and other confidential information against unauthorized use by others or disclosure by persons who have access to them, including our employees, through contractual arrangements. These agreements may not provide meaningful protection for our trade secrets, know-how or other proprietary information in the event of any unauthorized use, misappropriation or disclosure of such trade secrets, know-how or other proprietary information. If we are unable to maintain the proprietary nature of our technologies, we may lose market share to competing products using the same or similar technology.
Litigation brought by third parties claiming infringement of their intellectual property rights or trying to invalidate intellectual property rights owned or used by us may be costly and time consuming.
We may face lawsuits from time to time alleging that our products infringe on third-party intellectual property, and/or seeking to invalidate or limit our ability to use our intellectual property. If we become involved in litigation, we may incur substantial expense defending these claims and the proceedings may divert the attention of management, even if we prevail. An adverse determination in proceedings of this type could subject us to significant liabilities, allow our competitors to market competitive products without a license from us, prohibit us from marketing our products or require us to seek licenses from third parties that may not be available on commercially reasonable terms, if at
all.
Product liability claims could have a material adverse effect on our operating results and negatively impact our stock price.
We face an inherent business risk of exposure to product liability claims arising from the alleged failure of our products to prevent the types of personal injury or death against which they are designed to protect. Any material uninsured losses due to product liability claims that we experience could subject us to material losses.
We could be required to recall or redesign our products if they prove to be defective. We maintain insurance against product liability claims (with the exception of asbestosis and silicosis cases, for which coverage is not commercially available), but it is possible that our insurance coverage will not continue to be available on terms acceptable to us or that such coverage will not be adequate for liabilities actually incurred. A successful claim brought against us in excess of available insurance coverage, or any claim or product recall that results in significant expense or adverse publicity against us, could have a
material adverse effect on our business, operating results and financial condition.
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Environmental, health and safety requirements could expose us to material obligations and liabilities and affect our profitability.
We are subject to federal, state, local and foreign laws, regulations and ordinances relating to the protection of the environment, including those governing discharges to air and water, handling and disposal practices for solid and hazardous wastes, and occupational health and safety. The consequence for violating such requirements can be material. We have made and will continue to make capital and other expenditures to comply with environmental and health and safety requirements. In addition, if a release of hazardous substances occurs on or from our properties or any offsite disposal location where our wastes have been disposed, or if contamination from prior activities is discovered at any of
our properties or third-party owned properties that we or our predecessors formerly owned or operated, we may be subject to liability arising out of such conditions and the amount of such liability could be material. Liability can include, for example, costs of investigation and cleanup of the contamination, natural resource damages, damage to properties and personal injuries.
A significant portion of our income will come from individual purchases not long-term contracts; as a result, our revenue will not be guaranteed from quarter-to-quarter and we cannot always operate efficiently.
A large percentage of our customer base will involve individual purchases who do not enter into long-term purchase orders or commitments. Therefore, our customers may terminate their relationships with us at any time. We make significant decisions regarding staffing and component procurement, personnel and resource requirements, and the level of business we seek and accept based upon long-term estimates of our number of customers. The short-term nature of our customers’ commitments could result in large deviations from our estimates, resulting in severe excesses or shortages in staffing and resources. This makes it difficult for us to
maximize our potential efficiency.
Our results of operations and net sales are dependent on existing regulations and standards. If these regulations or standards are changed to our detriment, demand for our products could decrease.
Our products are and will continue to be subject to regulation by various federal, state, local and foreign regulatory authorities. Our net sales may be materially and adversely affected by changes in safety regulations and standards covering industrial workers in the United States, Canada and Europe, including those of the Occupational Safety and Health Administration, or OSHA, the National Institute for Occupational Safety and Health, or NIOSH, and the European Committee for Standardization, or CEN. Our net sales could also be adversely affected by a reduction in the level of enforcement of such regulations. Changes in regulations could reduce the demand for our products or require us to
reengineer our products, thereby creating opportunities for our competitors. If demand for our products is reduced, our results of operations and net sales could be materially and adversely affected.
If we are unable to retain senior executives and other qualified professionals, including sales and marketing personnel, our growth may be hindered, which could negatively impact our results of operations.
Our success depends to a significant extent upon the continued services of Mr. Thomas Rickards, our Founder, Chief Executive Officer and sole director. Loss of the services of Mr. Rickards would have a material adverse effect on our growth, revenues, and prospective business. We have not obtained key-man insurance on the life of Mr. Rickards. In order to successfully implement and manage our business plan, we will be dependent upon, among other things, our ability to attract, hire, train and retain qualified managerial, sales and marketing personnel. We rely on our sales and marketing teams to come up with innovative ways to generate demand for our products. Competition for these types
of personnel is intense. We may be unsuccessful in attracting and retaining the personnel we require to conduct and expand our operations successfully. Our results of operations could be materially and adversely affected if we are unable to attract, hire, train and retain qualified personnel. The loss of any member of the management team could have a material adverse effect on our business, results of operations and financial condition.
Our resources may not be sufficient to manage our expected growth; failure to properly manage our potential growth would be detrimental to our business.
We may fail to adequately manage our anticipated future growth. Any growth in our operations will place a significant strain on our administrative, financial and operational resources, and increase demands on our management and on our operational and administrative systems, controls and other resources. We cannot assure you that our existing personnel, systems, procedures or controls will be adequate to support our operations in the future or that we will be able to successfully implement appropriate measures consistent with our growth strategy. As part of this growth, we may have to implement new operational and
financial systems, procedures and controls to expand, train and manage our employee base, and maintain close coordination among our staff. We cannot guarantee that we will be able to do so, or that if we are able to do so, we will be able to effectively integrate them into our existing staff and systems.
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If we are unable to manage growth effectively, such as if our sales and marketing efforts exceed our capacity to perform our services and maintain our products or if new employees are unable to achieve performance levels, our business, operating results and financial condition could be materially adversely affected. As with all expanding businesses, the potential exists that growth will occur rapidly. If we are unable to effectively manage this growth, our business and operating results could suffer. Anticipated growth in future operations may place a significant strain on management systems and resources. In addition, the integration of new personnel will continue to result in some disruption to
ongoing operations. The ability to effectively manage growth in a rapidly evolving market requires effective planning and management processes. We will need to continue to improve operational, financial and managerial controls, reporting systems and procedures, and will need to continue to expand, train and manage our work force.
A manufacturer's inability to produce our goods on time and to our specifications could result in lost revenue and net losses.
We do not own or operate any manufacturing facilities and therefore depend upon independent third parties for the manufacture of all of our products. Our products are manufactured to our specifications by both domestic and international manufacturers. The inability of a manufacturer to ship orders of our products in a timely manner or to meet our quality standards could cause us to miss the delivery date requirements of our customers for those items, which could result in cancellation of orders, refusal to accept deliveries or a reduction in purchase prices, any of which could have a material adverse effect as our revenues would decrease and we would incur net losses as a result of sales of the
product, if any sales could be made. Because of the nature of our client’s business, the dates on which customers need and require shipments of products from us are critical, as personal protection equipment is required for our clients to conduct business, so they are unlikely to wait for replacement or late products. Further, because quality is a leading factor when customers accept or reject goods, any decline in quality by our third-party manufacturers could be detrimental not only to a particular order, but also to our future relationship with that particular customer.
To date, we have only placed small orders of eyewear with our manufacturer and anticipate placing larger orders as a result of our distribution agreement with Honeywell. While we believe that our manufacturer has the capacity to produce significant orders, if there are problems with these orders, it could result in cancelled orders and negative publicity just as we are trying to introduce our product to the new markets through Honeywell and the initial reactions will be critical to our future success.
If we need to replace manufacturers, our expenses could increase resulting in smaller profit margins.
We compete with other companies for the production capacity of our manufacturers and import quota capacity. Some of these competitors have greater financial and other resources than we have, and thus may have an advantage in the competition for production and import quota capacity. If we experience a significant increase in demand, or if an existing manufacturer of ours must be replaced, we may have to expand our third-party manufacturing capacity. We cannot assure you that this additional capacity will be available when required on terms that are acceptable to us or similar to existing terms which we have with our manufacturers, either from a production standpoint or a financial standpoint. None
of the manufacturers we use produces our products exclusively.
Should we be forced to replace one or more of our manufacturers, particularly a manufacturer that we may rely upon for a substantial portion of its production needs, then we may experience an adverse financial impact, or an adverse operational impact, such as being forced to pay increased costs for such replacement manufacturing or delays upon distribution and delivery of our products to our customers, which could cause us to lose customers or lose revenues because of late shipments.
Our financial performance would be harmed if we suffer disruptions in our ability to fulfill orders.
Our ability to provide effective customer service and efficiently fulfill orders depends, to a large degree, on the efficient and uninterrupted operation of the manufacturing and related distribution centers and management information systems run by third parties and on the timely performance of other third parties such as shipping companies. Any material disruption or slowdown in our manufacturing, order processing or fulfillment systems resulting from strikes or labor disputes, telephone down times, electrical outages, mechanical problems, human error or accidents, fire, natural disasters, adverse weather conditions or comparable events could cause delays in our ability to receive and distribute
orders and may cause orders to be lost or to be shipped or delivered late. As a result, customers may cancel orders or refuse to receive goods on account of late shipments that would result in a reduction of net sales and could mean increased administrative and shipping costs. Our success depends in part on our maintaining high quality customer service and any failure to do so could adversely affect our business, financial condition or results of operations.
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Our officer, director and control persons own a controlling interest in our voting stock and investors will not have any voice in our management.
Our officer, director and control persons, in the aggregate, beneficially own or control the votes of approximately 61.8% of our outstanding common stock, including votes of the outstanding class B common stock. As a result, these stockholders, acting together, will have the ability to control substantially all matters submitted to our stockholders for approval, including:
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election of our board of directors;
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removal of any of our directors;
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amendment of our certificate of incorporation or bylaws; and
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adoption of measures that could delay or prevent a change in control or impede a merger, takeover or other business combination involving us.
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As a result of their ownership and positions, our director and executive officers collectively are able to influence all matters requiring stockholder approval, including the election of directors and approval of significant corporate transactions. In addition, sales of significant amounts of shares held by our director or executive officers, or the prospect of these sales, could adversely affect the market price of our common stock. Our officers and director’s stock ownership may discourage a potential acquirer from making a tender offer or otherwise attempting to obtain control of us, which in turn could reduce our stock price or prevent our stockholders from realizing a premium over our
stock price.
Risks Relating to Our Common Stock:
If we fail to remain current on our reporting requirements, we could be removed from the OTC Bulletin Board which would limit the ability of broker-dealers to sell our securities and the ability of stockholders to sell their securities in the secondary market.
Companies trading on the Over-The-Counter Bulletin Board must be reporting issuers under the Securities Exchange Act of 1934, as amended, and must be current in their reports under Section 13, in order to maintain price quotation privileges on the OTC Bulletin Board. The lack of resources to prepare and file our reports, including the inability to pay our independent registered public accounting firm, could result in our failure to remain current on our reporting requirements, which could result in our being removed from the OTC Bulletin Board. As a result, the market liquidity for our securities could be severely adversely affected by limiting the ability of broker-dealers to sell our securities
and the ability of stockholders to sell their securities in the secondary market. In addition, we may be unable to get re-approved for quotation on the OTC Bulletin Board, which may have an adverse material effect on our company.
There has been a limited trading market for our common stock.
It is anticipated that there will be a limited trading market for our Common Stock on the NASD’s Over-the-Counter Bulletin Board for the foreseeable future. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair market value of your shares. An inactive market may also impair our ability to raise capital by selling shares of capital stock and may impair our ability to acquire other companies or technologies by using common stock as consideration.
You may have difficulty trading and obtaining quotations for our common stock.
Our common stock is not actively traded, and the bid and asked prices for our common stock on the NASD Over-the-Counter Bulletin Board may fluctuate widely. As a result, investors may find it difficult to dispose of, or to obtain accurate quotations of the price of, our securities. This severely limits the liquidity of the common stock, and would likely reduce the market price of our common stock and hamper our ability to raise additional capital.
Our common stock is not currently traded at high volume, and you may be unable to sell at or near ask prices or at all if you need to sell or liquidate a substantial number of shares at one time.
Our common stock is currently traded, but with very low, if any, volume, based on quotations on the “Over-the-Counter Bulletin Board”, meaning that the number of persons interested in purchasing our common stock at or near bid prices at any given time may be relatively small or non-existent. During the year ended December 31, 2012, trading occurred on only 102 out of 250 possible trading days, with an average of less than 2,600 shares per possible trading day and less than 6,300 shares trades on each day when shares actually traded. This situation is attributable to a number of factors, including the fact that we are a small company which is still relatively unknown to
stock analysts, stock brokers, institutional investors and others in the investment community that generate or influence sales volume, and that even if we came to the attention of such persons, they tend to be risk-averse and would be reluctant to follow an unproven company such as ours or purchase or recommend the purchase of our shares until such time as we became more seasoned and viable. As a consequence, there may be periods of several days or more when trading activity in our shares is minimal or non-existent, as compared to a seasoned issuer which has a large and steady volume of trading activity that will generally support continuous sales without an adverse effect on share price. We cannot give you any assurance that a broader or more active public trading market for our common stock will develop or be sustained, or that trading levels will be
sustained.
17
Shareholders should be aware that, according to Commission Release No. 34-29093, the market for “penny stocks” has suffered in recent years from patterns of fraud and abuse. Such patterns include (1) control of the market for the security by one or a few broker-dealers that are often related to the promoter or issuer; (2) manipulation of prices through prearranged matching of purchases and sales and false and misleading press releases; (3) boiler room practices involving high-pressure sales tactics and unrealistic price projections by inexperienced sales persons; (4) excessive and undisclosed bid-ask differential and markups by selling broker-dealers; and (5) the wholesale
dumping of the same securities by promoters and broker-dealers after prices have been manipulated to a desired level, along with the resulting inevitable collapse of those prices and with consequent investor losses. Our management is aware of the abuses that have occurred historically in the penny stock market. Although we do not expect to be in a position to dictate the behavior of the market or of broker-dealers who participate in the market, management will strive within the confines of practical limitations to prevent the described patterns from being established with respect to our securities. The occurrence of these patterns or practices could increase the future volatility of our share price.
The market price of our Common Stock may, and is likely to continue to be, highly volatile and subject to wide fluctuations.
The market price of our Common Stock is likely to be highly volatile and could be subject to wide fluctuations in response to a number of factors that are beyond our control, including:
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●
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dilution caused by our issuance of additional shares of Common Stock and other forms of equity securities, which we expect to make in connection with future capital financings to fund our operations and growth, to attract and retain valuable personnel and in connection with future strategic partnerships with other companies;
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●
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quarterly variations in our revenues and operating expenses;
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| ● | changes in the valuation of similarly situated companies, both in our industry and in other industries; | |
| ● | changes in analysts’ estimates affecting our company, our competitors and/or our industry; | |
| ● | changes in the accounting methods used in or otherwise affecting our industry; | |
| ● | additions and departures of key personnel; | |
| ● | announcements of technological innovations or new products available to the personal protective equipment industry; | |
| ● | fluctuations in interest rates and the availability of capital in the capital markets; and | |
| ● | significant sales of our common stock. |
These and other factors are largely beyond our control, and the impact of these risks, singly or in the aggregate, may result in material adverse changes to the market price of our Common Stock and/or our results of operations and financial condition.
We have not paid dividends in the past and do not expect to pay dividends in the future. Any return on investment may be limited to the value of our common stock.
We have never paid cash dividends on our common stock and do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition and other business and economic factors affecting it at such time as the Board of Directors may consider relevant.
Legislative actions, higher insurance costs and potential new accounting pronouncements may impact our future financial position and results of operations.
There have been regulatory changes, including the Sarbanes-Oxley Act of 2002, and there may potentially be new accounting pronouncements or additional regulatory rulings that will have an impact on our future financial position and results of operations. The Sarbanes-Oxley Act of 2002 and other rule changes as well as proposed legislative initiatives following the Enron bankruptcy are likely to increase general and administrative costs and expenses. In addition, insurers are likely to increase premiums as a result of high claims rates over the past several years, which we expect will increase our premiums for insurance policies. Further, there could be changes in certain accounting
rules. These and other potential changes could materially increase the expenses we report under generally accepted accounting principles, and adversely affect our operating results.
18
Efforts to comply with recently enacted changes in securities laws and regulations will increase our costs and require additional management resources.
As directed by Section 404 of the Sarbanes-Oxley Act of 2002, the SEC adopted rules requiring public companies to include a report of management on their internal controls over financial reporting in their annual reports on Form 10-K. In addition, in the event we are no longer a smaller reporting company, the independent registered public accounting firm auditing our financial statements would be required to attest to the effectiveness of our internal controls over financial reporting. Such attestation requirement by our independent registered public accounting firm would not be applicable to us until the report for the year ended December 31, 2013 at the earliest, if at all. If we are
unable to conclude that we have effective internal controls over financial reporting or if our independent registered public accounting firm is required to, but is unable to provide us with a report as to the effectiveness of our internal controls over financial reporting, investors could lose confidence in the reliability of our financial statements, which could result in a decrease in the value of our securities.
Our common stock is subject to the "penny stock" rules of the SEC and the trading market in our securities is limited, which makes transactions in our stock cumbersome and may reduce the value of an investment in our stock.
The SEC has adopted Rule 15g-9 which establishes the definition of a "penny stock," for the purposes relevant to us, as any equity security that has a market price of less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. For any transaction involving a penny stock, unless exempt, the rules require:
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●
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that a broker or dealer approve a person's account for transactions in penny stocks; and
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the broker or dealer receive from the investor a written agreement to the transaction, setting forth the identity and quantity of the penny stock to be purchased.
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In order to approve a person's account for transactions in penny stocks, the broker or dealer must:
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obtain financial information and investment experience objectives of the person; and
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make a reasonable determination that the transactions in penny stocks are suitable for that person and the person has sufficient knowledge and experience in financial matters to be capable of evaluating the risks of transactions in penny stocks.
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The broker or dealer must also deliver, prior to any transaction in a penny stock, a disclosure schedule prescribed by the SEC relating to the penny stock market, which, in highlight form:
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●
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sets forth the basis on which the broker or dealer made the suitability determination; and
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●
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that the broker or dealer received a signed, written agreement from the investor prior to the transaction.
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Generally, brokers may be less willing to execute transactions in securities subject to the "penny stock" rules. This may make it more difficult for investors to dispose of our common stock and cause a decline in the market value of our stock.
Disclosure also has to be made about the risks of investing in penny stocks in both public offerings and in secondary trading and about the commissions payable to both the broker-dealer and the registered representative, current quotations for the securities and the rights and remedies available to an investor in cases of fraud in penny stock transactions. Finally, monthly statements have to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stocks.
19
FINRA sales practice requirements may also limit a shareholder’s ability to buy and sell our stock.
In addition to the “penny stock” rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer’s financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The
FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
ITEM 1B – UNRESOLVED STAFF COMMENTS
None.
ITEM 2 – PROPERTIES
We maintain our mailing address at 3501-B N. Ponce de Leon Blvd., #393, St. Augustine, Florida 32084. Our principal office is located at 3406 Lands End Drive, St. Augustine, Florida 32084, which we sub-lease from our Chief Executive Officer. Our telephone number is (904) 819-8995 and our fax number is (904) 819-8181. Our current office space consists of approximately 2,000 square feet. The lease runs on a month-to-month basis at a cost of $2,000 per month. We believe that our existing facilities are suitable and adequate to meet our current business requirements. We maintain websites at www.energytele.com and www.energyeyewear.com and the information contained on those
websites is not deemed to be a part of this annual report.
ITEM 3 - LEGAL PROCEEDINGS
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 currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM 4 – MINE SAFETY DISCLOSURES
Not applicable.
20
PART II
ITEM 5 - MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Price Range of Common Stock
Our common stock is currently traded on the Over-the-Counter Bulletin Board under the symbol “ENRG.” Prior to February 4, 2011, our common stock was considered a grey market stock that trades from time to time under the symbol “ENRG”. A stock that is considered a grey market stock means there are no market makers in the stock and that it is not listed, traded or quoted on any stock exchange, the OTCBB or the Pink Sheets. Trades in grey market stocks are reported by broker-dealers to their self-regulatory organization (SRO) and the SRO distributes the trade data to market data vendors and financial websites so investors can track price and volume.
For the periods indicated, the following table sets forth the high and low bid prices per share of common stock. These prices represent inter-dealer quotations without retail markup, markdown, or commission and may not necessarily represent actual transactions.
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Fiscal Year 2012
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High
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Low
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|||||||
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First Quarter
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$
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0.77
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$
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0.20
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Second Quarter
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$
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2.40
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$
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0.30
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Third Quarter
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$
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0.65
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$
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0.25
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Fourth Quarter
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$
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1.00
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$
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0.25
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Fiscal Year 2011
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High
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Low
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|||||||
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First Quarter
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$
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0.79
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$
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0.15
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||||
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Second Quarter
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$
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1.01
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$
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0.51
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||||
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Third Quarter
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$
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1.05
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$
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0.51
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Fourth Quarter
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$
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0.75
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$
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0.35
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On March 19, 2013, the closing sale price of our common stock, as reported by the Over-the-Counter Bulletin Board, was $0.48 per share. On March 19, 2013, there were 143 holders of record of our common stock. On June 30, 2010, a one-for-five reverse stock split was effective for our common stock. All share prices herein reflect this reverse stock split.
Dividend Policy
We have never paid any cash dividends on our capital stock and do not anticipate paying any cash dividends on our common stock in the foreseeable future. We intend to retain future earnings to fund ongoing operations and future capital requirements of our business. Any future determination to pay cash dividends will be at the discretion of the Board and will be dependent upon our financial condition, results of operations, capital requirements and such other factors as the Board deems relevant.
Recent Sales of Unregistered Securities
On December 28, 2012, we issued an aggregate of 52,500 shares of our class A common stock to consultants pursuant to their consulting agreements. The securities were issued in an exempt transaction pursuant to Section 4(2) and/or Regulation D under the Securities Act of 1933, as amended.
On December 28, 2012, we issued 183,334 shares of our class A common stock to our President for services rendered. The securities were issued in an exempt transaction pursuant to Rule 4(2) and/or Regulation D under the Securities Act.
ITEM 6 – SELECTED FINANCIAL DATA
Not required under Regulation S-K for “smaller reporting companies.”
21
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of its management team as well as the assumptions on which such statements are based.
Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to us could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that its
assumptions are based upon reasonable data derived from and known about our business and operations and the business and operations of the Company. No assurances are made that actual results of operations or the results of our future activities will not differ materially from its assumptions. Factors that could cause differences include, but are not limited to, expected market demand for the Company’s services, fluctuations in pricing for materials, and competition.
Overview
We were incorporated on September 7, 1993 under the laws of the State of Florida as The Energy Corp. On April 24, 2004, we changed our name to Energy Telecom, Inc.
We hold U.S. and foreign patents allowing for the manufacture, marketing and distribution of a hands-free, wireless communication eyewear providing quality sound and noise attenuation. We have developed the world's first hands-free two-way, sound attenuating wireless telecommunication eyewear. The eyewear is designed for use on a recreational and professional basis. Our recreational eyewear is equipped with wireless two-way Bluetooth voice communication that is compatible with any cellular telephone that is Bluetooth enabled and is capable of streaming stereo music from any Bluetooth enabled music device. In addition, our eyewear works with handheld Bluetooth- enabled VHF and
UHF walkie-talkies and Bluetooth adaptors. It contains built-in dual microphones to cancel out background noise and noise-isolating ear plugs that reduce noise levels by up to 42 decibels. In addition, the safety lenses come in clear, gray and amber colors, allowing them to be used indoor and outside.
We have a professional model, which is similar to the recreational model, but contains additional safety features and is intended to be marketed to the PPE markets for use by police, fire, rescue, military and security personnel as well as companies in bio-hazardous, mining, construction and heavy manufacturing that utilize VHF and UHF radio communication. We have obtained numerous certifications for our telecommunications eyewear. We have obtained the necessary certifications to sell our product as personal protective equipment. We contracted with Colts Laboratories, an independent testing facility that is accredited by the Safety Equipment Institute to complete and
verify standard tests.
Within the PPE market, our telecommunication eyewear competes primarily in the markets represented by hearing and eye protection and communication headset products and will be targeted towards the following end-markets:
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Police and fire rescue, security services and military: To protect the eyes and ears during the use of firearms, explosives and other weaponry, to provide hands-free communication among personnel and allow for real-time viewing of intelligence;
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●
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Manufacturing: To protect workers from plant hazards such as industrial noise and flying particles that may cause eye injuries; and
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●
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Construction, Mining and Logging Operations: To protect workers from airborne dust and debris and construction equipment noise and to provide two-way, instant communication.
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22
Current Operating Trends and Financial Highlights
Management currently considers the following events, trends and uncertainties to be important in understanding our results of operations and financial condition during the current fiscal year:
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●
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In December 2012, Honeywell Safety Products began officially marketing and accepting orders for its UVEX AcoustiMaxx Stereo Bluetooth eyewear within Europe. Since that time, we have received purchase orders for an aggregate of several thousand eyewear, which we are in the process of fulfilling;
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●
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We have multiple patent applications pending in the United States and with the European Patent Office, and the Company’s patent counsel responds to their comments on regular basis to insure timely actions and filings. In addition, we have made the necessary filings to allow us to file patent applications in certain European and Asian counties if our pending patent applications are granted by the USPTO; and
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●
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Escalating tensions between North Korea and South Korea could disrupt our operations. The telecommunication eyewear frames are manufactured by Samsin Innotec, which has plants in South Korea. In addition, all the components are shipped to South Korea, where they are assembled and tested, and then shipped out as a product ready for sale.
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Results of Operations
The following discussion of the financial condition and results of operations should be read in conjunction with the financial statements included herewith. This discussion should not be construed to imply that the results discussed herein will necessarily continue into the future, or that any conclusion reached herein will necessarily be indicative of actual operating results in the future.
Year ended December 31, 2012 compared to the year ended December 31, 2011
Revenue, Cost of Sales and Gross Profit
Revenue for the year ended December 31, 2011 was $34,535 as compared to $950 for the year ended December 31, 2011. Revenue for year ended December 31, 2012 was comprised of sales of $31,503 and earned royalties of $3,032 as compared to $950 in sales made to customers on a limited basis for the same period last year. We expect to have a significant increase in revenue in 2013 as the eyewear product is being distributed and sold in the United States and Europe. Planning is underway to sell the eyewear in Australia in 2013. Our cost of sales was $30,248 sales in 2012 netting us a gross profit of $4,287 compared to $Nil since our sales in 2011 were from sample products previously
expensed, netting us a gross profit of $950. Cost of sales relating to product sales include various product introduction costs, such as eyewear that was given away for free to potential vendors and distributors and sales made at a loss or at cost to obtain customer feedback.
Expenses
For the years ended December 31, 2012 and 2011, general and administrative expenses totaled $1,058,720 and $455,113, respectively, representing a year to year increase of $603,607. The primary increase in our general and administrative expenses was stock based (non-cash) compensation expense of $629,479 for the year ended December 31, 2012 compared to $220,057 for the year ended December 31, 2011, an increase of $409,422.
In addition, included in general and administrative expenses for the years ended December 31, 2012 and 2011 were professional fees totaling $127,787 and $90,301, respectively. The increase in accounting and legal professional fees of $37,486 resulted from increased accounting and legal fees related to our public filing obligations as well as fees incurred in connection with financing transactions during 2012. We also incurred patent maintenance, non- recurring engineering costs and prototype development costs in aggregate of $183,006 in 2012 as compared to $20,779 in 2011.
Other Income and Expenses
During the year ended December 31, 2012, we sold Series A convertible preferred stock that contained certain anti-dilutive provisions. As such, we are required to record the fair value of these anti-dilutive provisions at the time issuance as a liability and mark to market to each reporting period. For 2012, we recorded a gain on change in the fair value of these derivative liabilities of $5,130 as compared to $Nil in 2011.
We incurred interest expense of $5,125 and $5,079 for the years ended December 31, 2012 and 2011, respectively. The reduction is due to lower related party debt obligations resulting in less incurred interest.
Interest income was $316 and $562 for the years ended December 31, 2012 and 2011, respectively. Changes in interest income is a result of lower carrying balances in our interest bearing accounts coupled with interest rate changes paid on those balances from year to year.
23
Net Loss
For the year ended December 31, 2012, we incurred a net loss of $1,055,625 ($0.13 per share of common stock) as a result of the foregoing, compared to a net loss of $459,373 ($0.06 per share of common stock) for the year ended December 31, 2011.
Liquidity and Capital Resources
As of December 31, 2012, we had a working capital of $213,025. For the year ended December 31, 2012, we used $480,276 in cash in operating activities and $1,642 in investing activities. Cash provided by financing activities totaled $559,685, primarily from the issuance of Class A common stock and issuance of Series A convertible preferred stock, net with repayment of shareholder loans of $5,000. From time to time since our formation in 1993, we have sold shares to investors in private placement transactions. For the year ended December 31, 2012, we sold an aggregate of 960,000 shares of our Class A common stock for $349,790. In addition, for the year ended December
31, 2012, we sold an aggregate of 2,150 shares of our Series A convertible preferred stock for $214,895. Our Series A convertible preferred stock certain anti-dilution protection up to the first anniversary of the issuance date.
We expect capital expenditures during the next 12 months for marketing, advertising, inventory, equipment and overhead. We have sufficient funds to conduct our proposed operations for at least the next 12 months. However, depending on revenues, we may continue to seek additional equity investments. There can be no assurance that financing, if needed, will be available in amounts or on terms acceptable to us, if at all. During the year ended December 31, 2012, we raised $564,685 from the sale of securities compared with $329,958 for the year ended December 31, 2011. As we continue to increase operations and generate additional revenue, we believe it is more likely
that investors would be willing to fund operations in the short-term, if needed.
As of December 31, 2012, we had working capital of approximately $213,000. In March 2013, we received an additional $152,000 from the purchase of additional shares of preferred stock, as discussed below. We currently use about $21,000 per month for continuing operations, which includes general operating expenses (office lease, utilities, salary and insurance), promotion and marketing (travel, entertainment, meals and website development), prototype development (parts, engineering and testing), and professional services (accounting, legal, professional and state fees and intellectual property fees). We expect that our burn rate will remain relatively consistent for the
next twelve months. During the year ended December 31, 2012, we had approximately $62,000 in non-recurring expenses related to old inventory from prior eyewear models and engineering fees and certifications relating to redesigned eyewear and packaging. In addition, we spent approximately $28,000 as a deposit on eyewear components, which we anticipate will be recovered during 2013 from the sale of the new eyewear.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our historical operating losses, our operations have not been a source of liquidity. We may seek additional capital in order to develop operations and become profitable. In order to obtain capital, we may need to sell additional shares of common or preferred stock or borrow funds from private lenders pursuant to instruments which are junior to our outstanding secured debt instruments. There can be no assurance that we will be successful in obtaining additional funding.
Preferred Stock Financings
On November 5, 2012, we entered into a securities purchase agreement with Normandia Capital (“Normandia”) providing for the sale by us to Normandia of 1,150 shares of our series A convertible preferred stock (“Series A Preferred Stock”) at a price of $100 per share of Series A Preferred Stock for aggregate cash proceeds of $115,000 (the “November Financing”).
On January 9, 2013, but effective December 31, 2012, we entered into a securities purchase agreement with Tidal East Global Relief Fund 80160-0503-RR0001 (“Tidal East”) providing for the sale by us to Tidal East of 999.3 shares of Series A Preferred Stock at a price of $100 per share of Series A Preferred Stock for aggregate cash proceeds of $99,930 (the “December Financing”).
On February 11, 2013, we entered into exchange agreements with Normandia and Robert Kalfayan (“Kalfayan” and together with Normandia and Tidal East, the “Investors”), pursuant to which Normandia and Kalfayan exchanged an aggregate of 79,874 shares of our common stock for an aggregate of 277 shares of Series A Preferred Stock.
On March 11, 2013, we entered into a securities purchase agreement with Normandia providing for the sale by us to Normandia of 1,520 shares of Series A Preferred Stock at a price of $100 per share of Series A Preferred Stock for aggregate cash proceeds of $152,000 (the “February Financing” and together with the November Financing and December Financing, the “Financings”).
Each share of Series A Preferred Stock has a stated value of $100 (the “Stated Value”). The Investors may convert, at any time, shares of Series A Preferred Stock into the number of shares of our Common Stock obtained by dividing the Stated Value by the Conversion Price then in effect. The conversion price is $0.3468, subject to adjustment (the “Conversion Price”).
24
Upon the occurrence of certain triggering events, the Investors have the right to require us to redeem all or a portion of the shares of Series A Preferred Stock. The redemption price is the greater of (A) the number of shares of Common Stock that the Series A Preferred Stock being redeemed are convertible into multiplied by the average market price on the date of redemption or (B) the Stated Value of the Series A Preferred Stock being redeemed multiplied by a Redemption Premium. The “Redemption Premium” is (A) 125% in the event that we fail to have the Common Stock be quoted on the OTC-QB or OTC-PK for a period of 10 days during any period of 12 months; (B) 250%
in the event that we (1) fails to timely file an Annual Report on Form 10-K, an Quarterly Report on Form 10-Q or a Current Report on Form 8-K in the time periods that are required of a company with securities registered under Section 12 of the Securities Exchange Act of 1934 (a “Reporting Delinquency”) within the first year from the Investors acquiring Series A Preferred Stock or (2) we make any statement that we intend to not comply with proper requests for conversion of the Series A Preferred Stock; or (C) 200% in the event that we have a Reporting Delinquency after the first year from the closing date.
We have the right, at any time after two years from the closing date, to redeem all or a portion of the Series A Preferred Stock, upon 120 days prior written notice. The redemption price per share of Series A Preferred Stock shall equal 200% of the Stated Value. In addition, upon the occurrence of a change in control or a liquidation, dissolution or winding up of our company, the Investors have the right to receive, at their election, either 200% of the Stated Value per share of Series A Preferred Stock, or share in our assets being distributed on a pro rata basis as if the Series A Preferred Stock had been converted into shares of Common Stock.
Pursuant to the certificate of designation for the Series A Preferred Stock, the Investors may not convert Series A Preferred Stock if such conversion would result in such Investor beneficially owning in excess of 4.99% of our then issued and outstanding common stock. The Investors may, however, increase this limitation (but in no event exceed 9.99% of the number of shares of Common Stock issued and outstanding) by providing us with 61 days’ notice that such holder wishes to increase this limitation.
In connection with the Financings, we granted Normandian and Tidal East a right of first refusal on any proposed sale by us of any shares of common or preferred stock, except for certain exempted issuances. The right of first refusal is for the earlier of one year from the closing date of such Investor’s Financing or until such Investor no longer holds any of our securities. In addition, we granted Normandia and Tidal East piggyback registration rights for a period of two years from the closing date of such Investor’s Financing.
Loans Payable to Related Party
From time to time, we have received financing from Thomas Rickards, our Chief Executive Officer and sole Director. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand.
The following table summarizes stockholder loans payable as of December 31, 2012 and December 31, 2011:
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December 31, 2012
|
December 31, 2011
|
|||||||
|
Loans payable, due on demand, interest at 10%
|
$
|
13,486
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$
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18,486
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||||
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Accrued interest
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38,566
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33,441
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||||||
|
$
|
52,052
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$
|
51,927
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|||||
Critical Accounting Policies
Financial Reporting Release No. 60, published by the SEC, recommends that all companies include a discussion of critical accounting policies used in the preparation of their financial statements. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates.
We believe that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause a material effect on our results of operations, financial position or liquidity for the periods presented in this report.
The accounting policies identified as critical are as follows:
25
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts and disclosures in the financial statements. Actual results could differ from those estimates.
Revenue Recognition
We recognize revenue on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Revenue is generally recognized upon shipment.
Cash and Cash Equivalents
We consider financial instruments with an original maturity date of three months or less to be cash equivalents.
Patents
Our patents (U.S. 5,717,479, U.S. 6,012,812, U.S. 6,950,531, U.S. 7,133,532, U.S. 8,243,973 and other international patents) which describe the general means for delivering sound through disposable sound attenuating components, are capitalized at the original cost, if purchased, or at the carrying basis of the transferor if contributed by an entity under common control. Patent costs, if any, are amortized using the straight-line method over their estimated period of benefit remaining. We evaluate the recoverability of patents annually taking into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment
exists. Costs of developing patents that are not specifically identifiable, that have indeterminate lives, or that are inherent in the continuation of our business are recognized as an expense when incurred.
Share-Based Compensation
Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. We measure the fair value of the share-based compensation issued to non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the
counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
We measure the fair value of shares issued as share-based compensation using the stock price observed in the arms-length private placement transaction nearest the measurement date, which was considered to be a more reliably determinable measure of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
Income Taxes
We recognize deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available
evidence, it is more likely than not that some or all deferred tax assets will not be realized.
There are no unrecognized tax benefits at December 31, 2012 and 2011. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There are no accrued interest or penalties associated with any unrecognized tax benefits, nor was any interest expense recognized during the year. We have determined we have no uncertain tax positions.
Net Loss per Common Share
Basic loss per share computed by dividing the net loss attributable to the common stockholders (the numerator) by the weighted average number of shares of Class A common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into Class A common stock, such as stock options and warrants (using the “treasury stock” method), unless their effect on net loss per share is antidilutive. Class B common stock is not convertible into our Class A common stock. The effect of computing diluted
loss per share is antidilutive and, as such, basic and diluted loss per share is the same.
26
Derivative Financial Instruments
We account for derivative instruments in accordance with ASC 815, “Derivatives and Hedging”, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value. Accounting for changes in the fair value of derivative instruments depends on whether the derivatives qualify as hedge relationships, and the types of relationships designated are based on the exposures hedged. Our derivative financial instruments consist of reset provisions related to Series A
convertible preferred stock. These embedded derivatives include certain conversion features and reset provisions.
Recently Issued Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying financial statements.
Off-Balance Sheet Arrangements
We do not maintain off-balance sheet arrangements nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.
Inflation
The effect of inflation on our revenue and operating results was not significant.
ITEM 7A – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies.”
27
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ENERGY TELECOM, INC.
INDEX TO FINANCIAL STATEMENTS
|
Report of Independent Registered Public Accounting Firm
|
F-2
|
|
Balance sheets as of December 31, 2012 and 2011
|
F-3
|
|
Statements of operations for the years ended December 31, 2012 and 2011
|
F-4
|
|
Statements of changes in stockholders’ equity (deficiency) for two years ended December 31, 2012
|
F-5
|
|
Statements of cash flows for the years ended December 31, 2012 and 2011
|
F-6
|
|
Notes to financial statements
|
F-7 – F-15
|
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
Energy Telecom, Inc.
We have audited the accompanying balance sheets of Energy Telecom, Inc. (the “Company”) as of December 31, 2012 and 2011 and the related statements of operations, changes in stockholders equity (deficiency) and cash flows for each of the two years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits 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 includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to the above present fairly, in all material respects, the financial position of Energy Telecom, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the two years ended December 31, 2012, in conformity with accounting principles generally accepted in the United States of America.
|
/s/ RBSM LLP
|
New York, New York
March 22, 2013
F-2
|
ENERGY TELECOM, INC.
|
||||||||
|
BALANCE SHEETS
|
||||||||
|
DECEMBER 31, 2012 AND 2011
|
||||||||
|
2012
|
2011
|
|||||||
|
ASSETS
|
||||||||
|
CURRENT ASSETS
|
||||||||
|
Cash
|
$ | 216,479 | $ | 138,712 | ||||
|
Accounts receivable, net
|
20,882 | - | ||||||
|
Advances to suppliers
|
33,300 | - | ||||||
|
Inventory
|
18,420 | - | ||||||
|
Total current assets
|
289,081 | 138,712 | ||||||
|
Property and equipment, net
|
3,507 | 3,378 | ||||||
|
Total assets
|
$ | 292,588 | $ | 142,090 | ||||
|
LIABILITIES AND STOCKHOLDERS' (DEFICIT) EQUITY
|
||||||||
|
CURRENT LIABILITIES
|
||||||||
|
Accounts payable and accrued liabilities
|
$ | 62,570 | $ | 40,481 | ||||
|
Stockholder notes payable
|
13,486 | 18,486 | ||||||
|
Total current liabilities
|
76,056 | 58,967 | ||||||
|
Derivative liability
|
345,875 | - | ||||||
|
STOCKHOLDERS' (DEFICIT) EQUITY
|
||||||||
|
Preferred stock, $0.001 par value; 10,000,000 shares authorized
|
||||||||
|
Series A Convertible preferred stock, $0.001 par value, 5,790 shares designated, 2,150 and -0- shares issued and outstanding as of December 31, 2012 and 2011, respectively
|
2 | - | ||||||
|
Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 8,884,415 and 7,432,748 shares issued and outstanding as of December 31, 2012 and 2011, respectively
|
888 | 743 | ||||||
|
Class B common stock, no par value, 10,000,000 shares authorized, 600,000 and 200,000 shares issued and outstanding as of December 31, 2012 and 2011, respectively
|
300,000 | - | ||||||
|
Additional paid in capital
|
5,532,549 | 4,989,537 | ||||||
|
Accumulated deficit
|
(5,962,782 | ) | (4,907,157 | ) | ||||
|
Total stockholders' (deficit) equity
|
(129,343 | ) | 83,123 | |||||
|
Total liabilities and stockholders' (deficit) equity
|
$ | 292,588 | $ | 142,090 | ||||
The accompanying notes are an integral part of these financial statements
F-3
|
ENERGY TELECOM, INC.
|
||||||||
|
STATEMENTS OF OPERATIONS
|
||||||||
|
Year ended December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
REVENUE:
|
||||||||
|
Sales
|
$ | 31,503 | $ | 950 | ||||
|
Royalties
|
3,032 | - | ||||||
|
Total revenue
|
34,535 | 950 | ||||||
|
COST OF GOODS SOLD
|
30,248 | - | ||||||
|
Gross profit
|
4,287 | 950 | ||||||
|
OPERATING EXPENSES:
|
||||||||
|
Selling, general and administrative expenses
|
1,058,720 | 455,113 | ||||||
|
Depreciation
|
1,513 | 693 | ||||||
|
Total operating expenses:
|
1,060,233 | 455,806 | ||||||
|
Loss from operations
|
(1,055,946 | ) | (454,856 | ) | ||||
|
OTHER INCOME (EXPENSE):
|
||||||||
|
Interest income
|
316 | 562 | ||||||
|
Gain on change in fair value of derivative liabilities
|
5,130 | - | ||||||
|
Interest expense
|
(5,125 | ) | (5,079 | ) | ||||
|
Total other income (expense):
|
321 | (4,517 | ) | |||||
|
Net loss before provision for income taxes
|
(1,055,625 | ) | (459,373 | ) | ||||
|
PROVISION FOR INCOME TAXES
|
||||||||
|
Income tax (benefit)
|
- | - | ||||||
|
NET LOSS
|
$ | (1,055,625 | ) | $ | (459,373 | ) | ||
|
Net loss per common share, basic and diluted
|
$ | (0.13 | ) | $ | (0.06 | ) | ||
|
Weighted average number of common shares outstanding, basic and diluted
|
8,359,469 | 7,109,592 | ||||||
The accompanying notes are an integral part of these financial statements
F-4
|
ENERGY TELECOM, INC.
|
||||||||||||||||||||||||||||||||||||
|
STATEMENT OF CHANGES IN STOCKHOLDERS' (DEFICIT) EQUITY
|
||||||||||||||||||||||||||||||||||||
|
TWO YEARS ENDED DECEMBER 31, 2012
|
||||||||||||||||||||||||||||||||||||
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Additional
|
Stockholders'
|
|||||||||||||||||||||||||||||||||||
|
Series A Convertible Preferred Stock
|
Class A Common Stock
|
Class B Common Stock
|
Paid in
|
Accumulated
|
Equity
|
|||||||||||||||||||||||||||||||
|
Shares
|
Amount
|
Shares
|
Amount
|
Shares
|
Amount
|
Capital
|
Deficit
|
(Deficiency)
|
||||||||||||||||||||||||||||
|
Balance, January 1, 2011
|
- | $ | - | 6,282,239 | $ | 628 | 200,000 | $ | - | $ | 4,444,637 | $ | (4,447,784 | ) | $ | (2,519 | ) | |||||||||||||||||||
|
Sale of common stock
|
- | - | 910,732 | 91 | - | - | 329,867 | - | 329,958 | |||||||||||||||||||||||||||
|
Repurchase and cancelation of common stock
|
- | - | (667 | ) | - | - | - | (5,000 | ) | - | (5,000 | ) | ||||||||||||||||||||||||
|
Common stock issued for services rendered
|
- | - | 90,444 | 9 | - | - | 68,548 | - | 68,557 | |||||||||||||||||||||||||||
|
Common stock issued for officer compensation
|
- | - | 150,000 | 15 | 151,485 | - | 151,500 | |||||||||||||||||||||||||||||
|
Net loss
|
- | - | - | - | - | - | - | (459,373 | ) | (459,373 | ) | |||||||||||||||||||||||||
|
Balance, December 31, 2011
|
- | - | 7,432,748 | 743 | 200,000 | - | 4,989,537 | (4,907,157 | ) | 83,123 | ||||||||||||||||||||||||||
|
Sale of common stock
|
- | - | 960,000 | 96 | - | - | 349,694 | - | 349,790 | |||||||||||||||||||||||||||
|
Common stock issued for services rendered
|
- | - | 175,000 | 17 | - | - | 115,402 | - | 115,419 | |||||||||||||||||||||||||||
|
Common stock issued as officer compensation
|
- | - | 316,667 | 32 | - | - | 214,028 | - | 214,060 | |||||||||||||||||||||||||||
|
Class B common stock issued as officer compensation
|
- | - | - | - | 400,000 | 300,000 | - | - | 300,000 | |||||||||||||||||||||||||||
|
Sale of Series A Convertible Preferred stock
|
2,150 | 2 | - | - | - | - | 214,893 | - | 214,895 | |||||||||||||||||||||||||||
|
Reclassify initial fair value of anti-dilution provisions of the Series A Convertible Preferred stock
|
- | - | - | - | - | - | (351,005 | ) | - | (351,005 | ) | |||||||||||||||||||||||||
|
Net loss
|
- | - | - | - | - | - | - | (1,055,625 | ) | (1,055,625 | ) | |||||||||||||||||||||||||
|
Balance, December 31, 2012
|
2,150 | $ | 2 | 8,884,415 | $ | 888 | 600,000 | $ | 300,000 | $ | 5,532,549 | $ | (5,962,782 | ) | $ | (129,343 | ) | |||||||||||||||||||
The accompanying notes are an integral part of these financial statements
F-5
|
ENERGY TELECOM, INC.
|
||||||||
|
STATEMENTS OF CASH FLOWS
|
||||||||
|
Year ended December 31,
|
||||||||
|
2012
|
2011
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$ | (1,055,625 | ) | $ | (459,373 | ) | ||
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
||||||||
|
Depreciation expense
|
1,513 | 693 | ||||||
|
Common stock issued for services rendered
|
115,419 | 68,557 | ||||||
|
Common stock issued or issuable for officer compensation
|
514,060 | 151,500 | ||||||
|
Change in fair value of derivative liability
|
(5,130 | ) | - | |||||
|
Changes in operating assets and liabilities:
|
||||||||
|
Increase in accounts receivable
|
(20,882 | ) | - | |||||
|
Increase in inventory
|
(18,420 | ) | - | |||||
|
Increase in advances to suppliers
|
(33,300 | ) | - | |||||
|
Increase (decrease) in accounts payable and accrued liabilities
|
22,089 | (11,195 | ) | |||||
|
Net cash used in operating activities
|
(480,276 | ) | (249,818 | ) | ||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Purchase of property and equipment
|
(1,642 | ) | (4,071 | ) | ||||
|
Net cash used in investing activities
|
(1,642 | ) | (4,071 | ) | ||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from sale of common stock
|
349,790 | 329,958 | ||||||
|
Proceeds from sale of Series A convertible preferred stock
|
214,895 | - | ||||||
|
Repurchase and cancellation of common stock
|
- | (5,000 | ) | |||||
|
Repayments of shareholder loans
|
(5,000 | ) | (20,000 | ) | ||||
|
Net cash provided by financing activities
|
559,685 | 304,958 | ||||||
|
Net increase in cash
|
77,767 | 51,069 | ||||||
|
Cash beginning of period
|
138,712 | 87,643 | ||||||
|
Cash end of period
|
$ | 216,479 | $ | 138,712 | ||||
|
Supplemental disclosures of cash flow information:
|
||||||||
|
Interest paid
|
$ | - | $ | - | ||||
|
Income taxes paid
|
$ | - | $ | - | ||||
The accompanying notes are an integral part of these financial statements
F-6
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
NOTE 1 – NATURE OF OPERATIONS AND BASIS OF PRESENTATION
Energy Telecom, Inc. (the "Company") was incorporated under the laws of the State of Florida as The Energy Corp. On April 24, 2004, the Company changed its name to Energy Telecom, Inc. The Company is an intellectual property exploitation company planning to provide patent protection to its manufacturing business partners so the Company may manufacture, market, distribute and sell worldwide a family of eyewear products delivering a full range of audio and optical information to mobile workers and recreational eyewear users. The Company also manages and coordinates the process of its manufacturing business partners in manufacturing the product. The Company’s
Class A common stock trades from time to time on the over-the-counter-bulletin-board ("OTCBB") under the symbol “ENRG.OB”.
During 2011, the Company transitioned from a development stage enterprise to an operating company. The Company’s eyewear is being sold in the United States and Europe, and the Company is planning for sales to be made in Australia during 2013.
The accompanying financial statements have been prepared in accordance 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”).
NOTE 2 - LIQUIDITY
The Company incurred various non-recurring expenses in 2012 in connection with non-recurring engineering costs and patent expenses. As of December 31, 2012, the Company had working capital of approximately $213,000. In March 2013, the Company received an additional $152,000 from the purchase of additional shares of preferred stock (See Note 14- Subsequent Events). As a result, the Company has sufficient capital resources to meet its projected cash flow requirements to conduct its proposed operations for at least the next 12 months. However, there can be no assurance that additional non-recurring expenses may be incurred during 2013 or that the Company
will be successful in completing its business development plan.
NOTE 3 – SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts and disclosures in the financial statements. Accordingly, actual results could differ from these estimates.
Concentration of Credit Risks
The Company’s financial instrument that is exposed to a concentration of credit risk is cash. Effective December 31, 2010 and extending through December 31, 2012, all non-interest-bearing transaction accounts are fully insured by the Federal Deposit Insurance Corporation (FDIC), regardless of the balance of the account. On occasion, the Company’s cash and cash equivalents in interest-bearing accounts may exceed FDIC insurance limits. The financial stability of these institutions is periodically reviewed by senior management.
Patents
The Company’s patents (U.S. 5,717,479, U.S. 6,012,812, U.S. 6,950,531, U.S. 7,133,532, 8,243,973 and other international patents) which describe the general means for delivering sound through disposable sound attenuating components, are capitalized at the original cost, if purchased, or at the carrying basis of the transferor if contributed by an entity under common control. Patent costs are amortized using the straight-line method over their estimated period of benefit remaining. The Company evaluates the recoverability of patents annually taking into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment
exists. Costs of developing patents that are not specifically identifiable, that have indeterminate lives, or that are inherent in the continuation of the Company’s business are recognized as an expense when incurred.
F-7
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Revenue Recognition
The Company recognizes revenue on four basic criteria that must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or services have been rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management’s judgments regarding the fixed nature of the fee charged for services rendered and products delivered and the collectability of those fees. Revenue is generally recognized upon shipment.
Revenue recognized in the year ended December 31, 2012 relates to sales of product of $31,503 and royalties earned of $3,032.
Revenue recognized in the year ended December 31, 2011 included to sales of product which had previously been expensed and used as sample units of $950; therefore, there is no cost of goods associated with these sales.
Accounts Receivable
The Company provides an allowance for doubtful accounts equal to the estimated uncollectible amounts. The Company’s estimate is based on historical collection experience and a review of the current status of trade accounts receivable. It is reasonably possible that the Company’s estimate of the allowance for doubtful accounts will change. At December 31, 2012 and 2011, the Company has deemed that no allowance for doubtful accounts was necessary.
Property and Equipment
Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. For financial statement purposes, property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives of three to five years.
Share-Based Compensation
The Company follows the fair value recognition provisions of Accounting Standards Codification subtopic 718-10, Compensation (“ASC 718-10”) using the modified-prospective transition method. Share-based compensation issued to employees is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period. The Company measures the fair value of the share-based compensation issued to non-employees using the stock price observed in the arms-length private placement transaction nearest the measurement date (for stock transactions) or the fair value of the award (for non-stock transactions), which were considered to
be more reliably determinable measures of fair value than the value of the services being rendered. The measurement date is the earlier of (1) the date at which commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
ASC 718-10 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. In the Company’s pro forma information required under ASC 718- 10 for the periods prior to fiscal 2006, the Company accounted for forfeitures as they occurred.
Research and Development
The Company accounts for research and development costs in accordance with the Accounting Standards Codification subtopic 730-10, Research and Development (“ASC 730-10”). Under ASC 730-10, all research and development costs must be charged to expense as incurred. Accordingly, internal research and development costs are expensed as incurred. Third-party research and development costs are expensed when the contracted work has been performed or as milestone results have been achieved. Company-sponsored research and development costs related to both present and future products are expensed in the period incurred. The Company did not incur research and
development expenses for the years ended December 31, 2012 and 2011.
F-8
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Derivative Financial Instruments
The Company accounts for derivative instruments in accordance with ASC 815, “Derivatives and Hedging”, which establishes accounting and reporting standards for derivative instruments and hedging activities, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value. Accounting for changes in the fair value of derivative instruments depends on whether the derivatives qualify as hedge relationships, and the types of relationships designated are based on the exposures hedged. The Company's derivative financial instruments consist of reset provisions
related to Series A Convertible preferred stock. These embedded derivatives include certain conversion features and reset provisions. During the year ended December 31, 2012, upon issuance, therefore, the initial determined fair values of the reset provisions of $351,005 were reclassified from equity to liability.
Income Taxes
The Company follows Accounting Standards Codification subtopic 740-10, Income Taxes (“ASC 740-10”) for recording the provision for income taxes. The Company recognizes deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. Deferred tax assets are recognized, net of a valuation allowance, for the estimated future tax effects of deductible
temporary differences and tax credit carry-forwards. A valuation allowance against deferred tax assets is recorded when, and if, based upon available evidence, it is more likely than not that some or all deferred tax assets will not be realized.
There are no unrecognized tax benefits at December 31, 2012 and 20101 The Company’s policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There are no accrued interests or penalties associated with any unrecognized tax benefits, nor were any interest expense recognized during the year. The Company has determined it has no uncertain tax positions at December 31, 2012. Currently, the Company’s federal and state income tax returns for the years 2009-2011 remain open to inspection by the IRS and various state taxing authorities. The Company believes that it has appropriate support for income tax
positions taken in its tax returns and that its accruals for tax liabilities are adequate for all open years based on an assessment of many factors including experience and interpretations of tax laws applied to the facts of each matter.
Inventories
Inventories are valued at the lower of cost or market, using the first-in first-out cost method. The Company assesses the valuation of its inventories and reduces the carrying value of those inventories that are obsolete or in excess of the Company’s forecasted usage to their estimated net realizable value. The Company estimates the net realizable value of such inventories based on analysis and assumptions including, but not limited to, historical usage, expected future demand and market requirements. A change to the carrying value of inventories is recorded to cost of goods sold.
Net Loss Per Common Share
The Company computes earnings per share under Accounting Standards Codification subtopic 260-10, Earnings Per Share (“ASC 260-10”). Basic loss per share is computed by dividing the net loss attributable to the common stockholders (the numerator) by the weighted average number of shares of Class A common stock outstanding (the denominator) during the reporting periods. Diluted loss per share is computed by increasing the denominator by the weighted average number of additional shares that could have been outstanding from securities convertible into Class A common stock, such as stock options and warrants (using the “treasury stock” method), unless their effect on net
loss per share is anti-dilutive. Class B common stock is not convertible into the Company’s Class A common stock. The effect of computing diluted loss per share is anti-dilutive and, as such, basic and diluted loss per share is the same for the years ended December 31, 2012 and 2011.
F-9
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Segment information
The Company has one operating segment.
Recent Accounting Pronouncements
There were various updates recently issued, most of which represented technical corrections to the accounting literature or application to specific industries and are not expected to a have a material impact on the Company's financial position, results of operations or cash flows.
NOTE 4 — FINANCIAL INSTRUMENTS
Fair Value Measurements
The Company measures and discloses the fair value of assets and liabilities required to be carried at fair value in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 defines fair value, establishes a framework for measuring fair value, and enhances fair value measurement disclosure.
ASC 825 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 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 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices for identical assets or liabilities in active markets to which we have access at the measurement date.
Level 2 - Inputs other than quoted prices within Level 1 that are observable for the asset or liability, either directly or indirectly.
Level 3 - Unobservable inputs for the asset or liability.
The determination of where assets and liabilities fall within this hierarchy is based upon the lowest level of input that is significant to the fair value measurement.
For the year ended December 31, 2012, the Company has determined that the only asset or liability measured at fair value is the derivative instrument related to an anti-dilution provision contained in Series A Convertible preferred stock which was issued during the year ended December 31, 2012 and valued using level 3 inputs. The carrying amounts of the Company's other assets and liabilities approximate fair value as of December 31, 2012 and 2011.
NOTE 5 — DERIVATIVE LIABILITY
The Company identified embedded derivatives related to the Series A Convertible preferred stock issued during year ended December 31, 2012. These embedded derivatives included certain reset features. The accounting treatment of derivative financial instruments requires that the Company record the fair value of the derivatives as of the inception date of the Series A Convertible preferred stock and to adjust the fair value as of each subsequent balance sheet date. At the inception of the Series A Convertible preferred stock, the Company determined a fair value of $351,005 of the embedded derivative. The fair value of the embedded derivative was determined
using the Binomial Lattice Model based on the following assumptions:
|
Dividend yield:
|
-0- | % | ||
|
Volatility
|
198.12%to 201.31 % | |||
|
Risk free rate:
|
0.16% to 0.19 % | |||
F-10
The initial fair value of the embedded debt derivative of $351,005 was reclassified from equity to liability at the date of inception.
The fair value of the described embedded derivative of $345,875 at December 31, 2012 was determined using the Binomial Lattice Model with the following assumptions:
|
Dividend yield:
|
-0-
|
%
|
||
|
Volatility
|
201.31
|
%
|
||
|
Risk free rate:
|
0.16
|
%
|
At December 31, 2012, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gain of $5,130 for the year ended December 31, 2012.
NOTE 6 — STOCKHOLDER NOTES PAYABLE
The Company has received financing from the Company’s founder, Chief Executive Officer, President and majority stockholder (the “officer/director”). No formal repayment terms or arrangements exist. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand.
The following table summarizes stockholder loans payable as of December 31, 2012 and 2011:
|
2012
|
2011
|
|||||||
|
Loans payable, due on demand, interest at 10%
|
$
|
13,486
|
$
|
18,486
|
||||
|
Accrued interest
|
38,566
|
33,441
|
||||||
|
$
|
52,052
|
$
|
51,927
|
|||||
The Company recognized interest expense associated with the loans of $5,125 and $5,079 for the years ended December 31, 2012 and 2011, respectively.
NOTE 7 — STOCKHOLDERS’ EQUITY
Preferred stock
During the year ended December 31, 2012, the Company designated 5,790 shares of authorized preferred stock as Series A Convertible Preferred Stock.
Each share of Series A Convertible Preferred Stock, par value of $0.001, has stated value of $100 per share, is nonvoting and is convertible into the Company's Class A common stock determined by dividing by the conversion price. The initial conversion price is $0.3468 subject to certain anti-dilutive (reset) provisions until the first anniversary of the issuance date.
Upon the occurrence of certain triggering events, the holder of the Series A Convertible Preferred Stock has the right to require the Company to redeem all or a portion of the shares of Series A Preferred Stock. The redemption price is the greater of (A) the number of shares of Common Stock that the Series A Preferred Stock being redeemed are convertible into multiplied by the average market price on the date of redemption or (B) the Stated Value of the Series A Preferred Stock being redeemed multiplied by a Redemption Premium. The “Redemption Premium” is (A) 125% in the event that the Company fails to have the Common Stock be quoted on the OTC-QB or OTC-PK for a period of 10
days during any period of 12 months; (B) 250% in the event that the Company (1) fails to timely file an Annual Report on Form 10-K, an Quarterly Report on Form 10-Q or a Current Report on Form 8-K in the time periods that are required of a company with securities registered under Section 12 of the Securities Exchange Act of 1934 (a “Reporting Delinquency”) within the first year from the closing date or (2) the Company makes any statement that it intends to not comply with proper requests for conversion of the Series A Preferred Stock; or (C) 200% in the event that the Company has a Reporting Delinquency after the first year from the closing date.
F-11
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
The Company has the right, at any time after two years from the closing date, to redeem all or a portion of the Series A Preferred Stock, upon 120 days prior written notice. The redemption price per share of Series A Preferred Stock shall equal 200% of the Stated Value. In addition, upon the occurrence of a change in control or a liquidation, dissolution or winding up of the Company, the holder has the right to receive, at its election, either 200% of the Stated Value per share of Series A Preferred Stock, or share in the assets of the Company being distributed on a pro rata basis as if the Series A Preferred Stock had been converted into shares of Common Stock.
During the year ended December 31, 2012, the Company sold an aggregate of 2,150 shares of Series A Convertible Preferred Stock for net proceeds of $214,895.
Recapitalizations
On June 2, 2010, the Company filed amended articles of incorporation with the Secretary of the State of Florida to effect a 1:5 reverse split of its common stock, which amendment was effective as of June 28, 2010. All share and per share amounts contained in these audited financial statements have been adjusted to reflect the effects of the aforementioned stock splits in accordance with ASC 260.
As of December 31, 2012 and 2011, 8,884,415 and 7,432,748 shares of Class A common stock, respectively, and 600,000 and 200,000 shares of Class B common stock, respectively were issued and outstanding.
Private placements
During the year ended December 31, 2012 and 2011 the Company completed private placements of 960,000 and 910,732 shares of Class A common stock and has received proceeds totaling $349,790 and $329,958, respectively.
Shares Repurchased
During the year ended December 31, 2011, the Company re-acquired and canceled 667 shares of its Class A common stock for $5,000.
Shares Issued as Compensation
During the year ended December 31, 2012 and 2011, the Company issued 316,667 and 150,000 shares of Class A common stock as officer compensation with a fair value totaling $214,060 and $151,500, respectively. In addition, during the year ended December 31, 2012, the Company issued 400,000 shares of Class B common stock with a fair value of $300,000.
Shares issued to consultants
During the year ended December 31, 2012 and 2011, the Company issued 175,000 and 90,444 shares of Class A common stock to consultants in exchange for services rendered with a fair value totaling $115,419 and $68,557, respectively.
NOTE 8 – SHARE BASED COMPENSATION
2012 Incentive Stock Option Plan
On December 21, 2012, the Company’s shareholders approved the 2012 Incentive Stock Option Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of options and stock grants up to 4,000,000 shares of the Company’s common stock to officers, directors, employees and consultants of the Company. Under the terms of the 2012 Plan, the Company may issue Incentive Stock Options as defined by the Internal Revenue Code to employees of the Company only and nonstatutory options. The Board of Directors of the Company determines the exercise price, vesting and expiration period of the grants under
the 2012 Plan. However, the Company shall not grant an Incentive Stock Option under the Plan to any employee if such grant would result in such employee holding the right to exercise for the first time in any one calendar year, under all Incentive Stock Options granted under the Plan or any other plan maintained by the Company, with respect to shares of Stock having an aggregate fair market value, determined as of the date of the Option is granted, in excess of $100,000. The exercise price of an Incentive Stock Option should not be less than 110% of fair value of the common stock at the date of the grant for a 10% or more stockholder and 100% of fair value for a grantee who is not 10% stockholder.
F-12
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
The fair value of the common stock is determined based on quoted market price or in absence of such quoted market price, by the Board of Directors in good faith. Additionally, the vesting period of the grants under the 2012 Plan shall be immediate unless the Board determine and no Incentive Stock Option granted to a 10% holder shall be exercisable after five year, otherwise the and expiration period not more than ten years. The Company reserved 4,000,000 shares of its common stock for future issuance under the terms of the 2012 Plan.
As of December 31, 2012, there were no issued or outstanding options.
NOTE 9 — COMMITMENTS AND CONTINGENCIES
EMPLOYMENT AGREEMENT-TOM RICKARDS
On May 3, 2011, the Company entered into a one year employment agreement with Tom Rickards, Chief Executive Officer, director and founder whereby Mr. Rickards received an annual salary of $36,000. In addition, Mr. Rickards received 200,000 shares of series A common stock that was paid in equal installments at the end of each calendar quarter and a $600 per month car allowance. The employment agreement expired on May 31, 2012.
On June 1, 2012, the Company entered into a one year employment agreement with Tom Rickards, Chief Executive Officer, director and founder whereby Mr. Rickards shall receive (i) an annual salary of $36,000 which may be increased up to $72,000 by mutual agreement by Mr. Rickards and the Board of Directors and dependent on the financial strength of the Company and (ii) 400,000 shares of class A common stock and (the “Stock Salary”), with the Cash Salary payable in equal installments at the end of such regular payroll accounting periods as are established by Employer, or in such other installments upon which the parties shall mutually agree. In addition, Mr. Rickards received
400,000 shares of series B common stock as a signing bonus, which was fully earned upon issuance, and receives a $600 per month car allowance.
LITIGATION
The Company may, from time to time, become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The Company is currently not aware of any such legal proceedings that it believes will have, individually or in the aggregate, a material adverse effect on its business, financial condition or operating results.
NOTE 10 — RELATED PARTY TRANSACTIONS
The Company has an operating lease agreement for office space with the Company's Chief Executive Officer and director who has agreed to sublet space to the Company for a fixed fee of $2,750 (reduced to $2,000 beginning July 1, 2012) on a month-to-month basis. Total rent expense for the year ended December 31, 2012 and 2011 was $28,500 and $26,000, respectively.
As discussed in Note 6, the Company has received financing from the Company’s Chief Executive Officer, director, founder and majority stockholder. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand.
F-13
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
NOTE 11 — CONCENTRATIONS
The Company’s revenues earned from sale of products and services for the year ended December 31, 2012 and 2011 included an aggregate of 100% from one customer of the Company's total revenues.
NOTE 12 — DEPENDENCY ON KEY MANAGEMENT
The future success or failure of the Company is dependent primarily upon the continued services and efforts of its Chief Executive Officer, director and founder. The ability of the Company to pursue its business strategy effectively will also depend upon, among other factors, the successful recruitment and retention of additional highly skilled and experienced managerial, marketing, engineering and technical personnel. There can be no assurance that the Company will be able to retain or recruit such personnel.
NOTE 13 — INCOME TAXES
At December 31, 2012, the Company had accumulated taxable losses of approximately $1,885,000 available to offset future taxable income, if any, which begin to expire in 2026.
The actual provision for income taxes differs from the amount computed by applying the federal statutory rate to losses before income taxes at December 31, 2012 and 2011, as follows:
|
2012
|
2011
|
|||||||
|
Federal income taxes at statutory rate
|
(34
|
)%
|
(34
|
)%
|
||||
|
State income tax, net of federal benefit
|
(3.6
|
)
|
(3.6
|
)
|
||||
|
Permanent differences
|
22.4
|
22.4
|
||||||
|
Valuation allowance
|
15.2%
|
15.2%
|
||||||
The components of the net deferred tax asset (liability) at December 31, 2012 and 2011 are as follows:
|
2012
|
2011
|
|||||||
|
Net operating losses
|
$
|
426,000
|
$
|
524,000
|
||||
|
Valuation allowance
|
(426,000
|
)
|
(524,000
|
)
|
||||
|
Net deferred tax assets
|
$
|
-
|
$
|
-
|
||||
The Company evaluates a variety of factors in determining the amount of the deferred income taxes to be recognized, including the Company’s earnings history. As of December 31, 2012 and 2011, the Company has fully reserved the value of its deferred tax assets as it cannot determine that the ultimate realization of those assets is more likely than not.
NOTE 14 — SUBSEQUENT EVENTS
Class A common stock:
On January 30, 2013, the Company issued an aggregate of 15,000 shares of its Class A common stock to consultants for services rendered valued at $7,500.
On March 6, 2013, the Company issued an aggregate of 15,000 shares of its Class A common stock to consultants for services rendered valued at $7,500.
F-14
ENERGY TELECOM, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2012 AND 2011
Series A Convertible Preferred Stock:
On February 11, 2013, the Company entered into exchange agreements with investors pursuant to which the investors exchanged an aggregate of 79,874 shares of the Company’s Class A common stock for an aggregate of 277 shares of Series A Convertible Preferred Stock.
On March 11, 2013, the Company entered into a securities purchase agreement with an investor providing for the sale 1,520 shares of Series A Convertible Preferred Stock at a price of $100 per share for aggregate cash proceeds of $152,000.
F-15
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES.
None.
ITEM 9A – CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our chief executive officer and chief financial officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures
relative to their costs.
Based on management’s evaluation, our chief executive officer and chief financial officer concluded that, as a result of the material weaknesses described below, as of December 31, 2012, our disclosure controls and procedures are not designed at a reasonable assurance level and are ineffective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms, and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate,
to allow timely decisions regarding required disclosure. The material weaknesses, which relate to internal control over financial reporting, that were identified are:
|
a)
|
We did not have sufficient personnel in our accounting and financial reporting functions. As a result we were not able to achieve adequate separation of duties and were not able to provide for adequate reviewing of the financial statements. This control deficiency, which is pervasive in nature, results in a reasonable possibility that material misstatements of the financial statements will not be prevented or detected on a timely basis; and
|
|
|
b)
|
We did not maintain sufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of U.S. GAAP commensurate with out complexity and our financial accounting and reporting requirements. This control deficiency is pervasive in nature. Further, there is a reasonable possibility that material misstatements of the financial statements including disclosures will not be prevented or detected on a timely basis as a result.
|
We are committed to improving our accounting and financial reporting functions. As part of this commitment, we will create a segregation of duties consistent with control objectives and will look to increase our personnel resources and technical accounting expertise within the accounting function as soon as our finances allow for additional personnel to appropriately address non-routine or complex accounting matters. In addition, we have engaged an outside consultant to provide additional knowledgeable personnel with technical accounting expertise to further support the current accounting personnel at the Company.
Management believes that hiring additional knowledgeable personnel with technical accounting expertise will remedy the following material weaknesses: (A) lack of sufficient personnel in our accounting and financial reporting functions to achieve adequate segregation of duties; and (B) insufficient personnel with an appropriate level of technical accounting knowledge, experience, and training in the application of US GAAP commensurate with our complexity and our financial accounting and reporting requirements.
Management believes that the hiring of additional personnel who have the technical expertise and knowledge with the non-routine or technical issues we have encountered in the past will result in both proper recording of these transactions and a much more knowledgeable finance department as a whole. Due to the fact that our accounting staff consists of a Chief Financial Officer and an accounting clerk, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel
turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.
28
We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
(c) Management’s report on internal control over financial reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2012 for the reasons discussed above.
This annual report does not include an attestation report by RBSM LLP, our independent registered public accounting firm regarding internal control over financial reporting. As a smaller reporting company, our management's report was not subject to attestation by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide only management's report in this annual report.
ITEM 9B – OTHER INFORMATION
None.
29
PART III
ITEM 10 – DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The names of our sole director and executive officer and his age, titles, and biography as of December 31, 2012 are set forth below:
|
NAME
|
AGE
|
OFFICES HELD
|
||
|
Thomas Rickards
|
65
|
Chief Executive Officer and Director
|
Directors are elected annually and hold office until the next annual meeting of the stockholders of the Company and until their successors are elected. Officers are elected annually and serve at the discretion of the Board of Directors. There is no family relationship between any of our executive officers or directors.
Thomas Rickards has been our Chief Executive Officer and a member of the Board of Directors since founding Energy Telecom in 1993. Mr. Rickards has more than twenty-five years of experience in the research, development, and exploitation of state-of-the-art manufacturing and technology-related intellectual property. Mr. Rickards was educated at Mercer University in Macon, GA, and after managing the physical testing section of Pittsburgh Testing Laboratory in Miami, Florida for ten years, independently applied his engineering experience in hundreds of major manufacturing plants around the world. Mr. Rickards has traveled worldwide,
designing and implementing several types of process control equipment/systems.
Among his numerous credits, Mr. Rickards is the original designer of several high speed, intelligent continuous-web control systems, and, industrial information transfer systems. Mr. Rickards is the inventor of record on numerous patents in the United States and other countries. Mr. Rickards is a member of the GAVI Alliance, a global health alliance, a member of the Chief Executive Officer group, and a member of the Chairmen and Chairwomen of the Board group. Mr. Rickards was selected to serve as a director due to his deep familiarity with our business, his history as the founder of our company and developer of our patents and his extensive entrepreneurial background.
Board Committees and Independence
We are not required to have any independent members of the Board of Directors. The board of directors has determined that (i) Mr. Rickards has a relationship which, in the opinion of the board of directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director and is not an “independent director” as defined in the Marketplace Rules of The NASDAQ Stock Market. As we do not have any board committees, the board as a whole carries out the functions of audit, nominating and compensation committees, and such “independent director” determination has been made pursuant to the committee independence
standards.
Involvement in Certain Legal Proceedings
Our Directors and Executive Officers have not been involved in any of the following events during the past ten years:
|
1.
|
any bankruptcy petition filed by or against such person or any business of which such person was a general partner or executive officer either at the time of the bankruptcy or within two years prior to that time;
|
|
|
2.
|
any conviction in a criminal proceeding or being subject to a pending criminal proceeding (excluding traffic violations and other minor offenses);
|
|
|
3.
|
being subject to any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from or otherwise limiting his involvement in any type of business, securities or banking activities or to be associated with any person practicing in banking or securities activities;
|
30
|
4.
|
being found by a court of competent jurisdiction in a civil action, the Securities and Exchange Commission or the Commodity Futures Trading Commission to have violated a federal or state securities or commodities law, and the judgment has not been reversed, suspended, or vacated;
|
|
| 5. | being subject of, or a party to, any federal or state judicial or administrative order, judgment decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of any federal or state securities or commodities law or regulation, any law or regulation respecting financial institutions or insurance companies, or any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or | |
| 6. | being subject of or party to any sanction or order, not subsequently reversed, suspended, or vacated, of any self-regulatory organization, any registered entity or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member. |
Section 16(a) Beneficial Owner Reporting Compliance
Since we are governed under Section 15(d) of the Exchange Act, we are not required to file reports of executive officers and directors and persons who own more than 10% of a registered class of our equity securities pursuant to Section 16(a) of the Exchange Act.
Code of Business Conduct and Ethics/Business Conduct Policy
We intend to adopt a Code of Business Conduct and Ethics in the future when we have additional officers, directors and/or employees that will apply to all of our directors, officers, employees and consultants.
ITEM 11 - EXECUTIVE COMPENSATION
Summary Compensation Table
The following table provides certain summary information concerning compensation awarded to, earned by or paid to our Chief Executive Officer and the highest paid executive officer whose total annual salary and bonus exceeded $100,000 for fiscal years 2012 and 2011.
|
Name &
Principal
Position
|
Year
|
Salary ($)
|
Bonus ($)
|
Stock
Awards
($)
|
Option Awards ($)
|
Non-Equity
Incentive Plan
Compensation
($)
|
Change in Pension Value and Non-Qualified Deferred Compensation Earnings ($)
|
All Other
Compensation ($)
|
Total
($)
|
||||||||||||||
|
Thomas Rickards, CEO
|
2012
|
$
|
36,000
|
--
|
$
|
514,060
|
(a)
|
--
|
--
|
--
|
$
|
7,200
|
(c)
|
$
|
557,260
|
||||||||
|
2011
|
$
|
36,000
|
--
|
$
|
151,500
|
(b)
|
--
|
--
|
--
|
$
|
7,200
|
(c)
|
$
|
194,700
|
|||||||||
(a) Pursuant to the employment agreement, Mr. Rickards received an aggregate of 316,667 shares of the Company’s Class A common stock and 400,000 shares of the Company’s Class B common stock
(b) Pursuant to the employment agreement, Mr. Rickards received an aggregate of 150,000 shares of the Company's Class A common stock.
(c) Mr. Rickards received an automobile allowance of $7,200 ($600 per month) for business use of his personal automobile.
31
Option/SAR Grants in Fiscal Year Ended December 31, 2012
None.
Outstanding Equity Awards at Fiscal Year-End Table
None.
Equity Compensation Plan Information
On December 21, 2012, our shareholders approved the 2012 Incentive Stock Option Plan (the “2012 Plan”). The 2012 Plan provides for the issuance of options and stock grants up to 4,000,000 shares of our common stock to officers, directors, employees and consultants. Under the terms of the 2012 Plan, we may issue Incentive Stock Options as defined by the Internal Revenue Code to our employees only and nonstatutory options. Our Board of Directors determines the exercise price, vesting and expiration period of the grants under the 2012 Plan. However, we shall not grant an Incentive Stock Option under the Plan to any employee if such grant would result in such employee holding the right to
exercise for the first time in any one calendar year, under all Incentive Stock Options granted under the Plan or any other plan we maintain, with respect to shares of common stock having an aggregate fair market value, determined as of the date of the Option is granted, in excess of $100,000. The exercise price of an Incentive Stock Option should not be less than 110% of fair value of the common stock at the date of the grant for a 10% or more stockholder and 100% of fair value for a grantee who is not 10% stockholder.
|
Plan category
|
Number of
securities to
be issued
upon
exercise of
outstanding
options
(a)
|
Weighted-
average
exercise
price of
outstanding
options
(b)
|
Securities remaining
available for future
issuance under equity
compensation plans
(excluding securities
reflected in column (a))
(c)
|
|||||||||
|
Equity compensation plans approved by security holders
|
-
|
$
|
-
|
3,674,166
|
||||||||
|
Equity compensation plans not approved by security holders
|
-
|
-
|
-
|
|||||||||
|
Total
|
-
|
$
|
-
|
3,674,166
|
||||||||
Employment Agreements
On June 1, 2012, we entered into a one year employment agreement with Tom Rickards, Chief Executive Officer, director and founder whereby Mr. Rickards shall receive (i) an annual salary of $36,000 which may be increased up to $72,000 by mutual agreement by Mr. Rickards and the Board of Directors and dependent on the financial strength of the Company and (ii) 400,000 shares of class A common stock and (the “Stock Salary”), with the Cash Salary payable in equal installments at the end of such regular payroll accounting periods as are established by Employer, or in such other installments upon which the parties shall mutually agree. In addition, Mr. Rickards received 400,000
shares of series B common stock as a signing bonus, which was fully earned upon issuance, and receives a $600 per month car allowance.
Director Compensation
None.
32
ITEM 12- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information regarding beneficial ownership of our common stock as of March 19, 2013:
|
●
|
by each person who is known by us to beneficially own more than 5% of our common stock;
|
|
|
●
|
by each of our officers and directors; and
|
|
|
●
|
by all of our officers and directors as a group.
|
|
NAME AND ADDRESS
OF OWNER (1)
|
TITLE OF
CLASS
|
NUMBER OF
SHARES OWNED (2)
|
PERCENTAGE OF
CLASS (3)
|
|||||||
|
Thomas Rickards
|
Class A Common Stock
|
2,626,805 | (4) | 29.73 | % | |||||
|
All Officers and Directors As a Group (1 person)
|
Class A Common Stock
|
2,626,805 | (4) | 29.73 | % | |||||
|
George Bickerstaff (5)
|
Class A Common Stock
|
540,657 | 6.12 | % | ||||||
|
Thomas Rickards
|
Class B Common Stock
|
600,000 | 100 | % | ||||||
(1) Unless otherwise noted, the mailing address of each beneficial owner is 3501-B N. Ponce de Leon Blvd., #393, St. Augustine, Florida 32084.
(2) Beneficial Ownership is determined in accordance with the rules of the SEC and generally includes voting or investment power with respect to securities. Shares of common stock subject to options or warrants currently exercisable or convertible, or exercisable or convertible within 60 days of March 19, 2013 are deemed outstanding for computing the percentage of the person holding such option or warrant but are not deemed outstanding for computing the percentage of any other person.
(3) Percentage based upon 8,834,541 shares of class A common stock and 600,000 shares of class B common stock issued and outstanding as of March 19, 2013.
(4) Does not include the shares of class B common stock, which are entitled to 10 votes per share.
(5) Mailing address is c/o CRT Investment Banking LLC, 262 Harbor Drive, 3rd Floor, Stamford, Connecticut 06902.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Other than as disclosed below, during the last two fiscal years, there have been no transactions, or proposed transactions, which have materially affected or will materially affect us in which any director, executive officer or beneficial holder of more than 5% of the outstanding common or preferred stock, or any of their respective relatives, spouses, associates or affiliates, has had or will have any direct or material indirect interest. We have no policy regarding entering into transactions with affiliated parties.
We have an operating lease agreement for office space with our Chief Executive Officer and sole director who has agreed to sublet space to us for a fixed fee on a month-to-month basis, which was $1,750 a month through July 2011, $2,750 a month from August 2011 through June 2012 and $2,000 per month from July 1, 2012. Total rent expense for the years ended December 31, 2012 and 2011 was $28,500 and $26,000, respectively.
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We have received financing from Thomas Rickards. The stockholder notes bear interest of 10% per annum, compounding annually and are due on demand.
The following table summarizes stockholder loans payable as of December 31, 2012 and 2011:
|
2012
|
2011
|
|||||||
|
Loans payable, due on demand, interest at 10%
|
$
|
13,486
|
$
|
18,486
|
||||
|
Accrued interest
|
38,566
|
33,441
|
||||||
|
$
|
52,052
|
$
|
51,927
|
|||||
We recognized interest expense associated with the loans of $5,125 and $5,079 for the years ended December 31, 2012 and 2011, respectively.
ITEM 14 – PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees. The aggregate fees billed by our independent auditors, for professional services rendered for the audit of our annual financial statements for the years ended December 31, 2012 and 2011, and for the reviews of the financial statements included in our Quarterly Reports on Form 10-Q during the fiscal years were $43,046 and $63,075, respectively.
Audit Related Fees. We incurred fees to our independent auditors of $-0- for audit related fees during the fiscal years ended December 31, 2012 and 2011.
Tax and Other Fees. We incurred fees to our independent auditors of $-0- for tax and fees during the fiscal years ended December 31, 2012 and 2011.
The Board of Directors has considered whether the provision of non-audit services is compatible with maintaining the principal accountant's independence.
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PART IV
ITEM 15 – EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits:
|
3.01
|
Amended and Restated Articles of Incorporation, filed as an exhibit to the Registration Statement on Form S-1/A, filed with the Securities and Exchange Commission (“Commission”) on July 23, 2010 and incorporated herein by reference.
|
|
3.02
|
Bylaws, filed as an exhibit to the Registration Statement on Form S-1, filed with the Commission on June 8, 2010 and incorporated herein by reference.
|
|
3.03
|
Certificate of Designation, Rights and Preferences of the Series A Convertible Preferred Stock, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on November 9, 2012 and incorporated herein by reference.
|
|
10.01
|
Employment Agreement, dated as of May 1, 2011, by and between Energy Telecom, Inc. and Thomas Rickards, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on May 4, 2011 and incorporated herein by reference.
|
|
10.02
|
Distributor Agreement, dated January 27, 2012 and effective as of February 21, 2012, by and between Energy Telecom, Inc. and Honeywell International Inc., filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on February 27, 2012 and incorporated herein by reference.
|
|
10.03
|
Employment Agreement, effective as of June 1, 2012, by and between Energy Telecom, Inc. and Thomas Rickards, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on June 1, 2012 and incorporated herein by reference.
|
|
10.04
|
Form of Securities Purchase Agreement, dated as of November 5, 2012, by and between Energy Telecom Inc. and Normandia Capital, filed as an exhibit to the Current Report on Form 8-K, filed with the Commission on November 9, 2012 and incorporated herein by reference.
|
|
10.05
|
Form of Securities Purchase Agreement, dated as of January 9, 2013 but effective as of December 31, 2012, by and between Energy Telecom Inc. and Tidal East Global Relief Fund 80160-0503-RR0001.
|
|
10.06
|
Form of Exchange Agreement, dated as of February 11, 2013, by and between Energy Telecom Inc. and Normandia Capital.
|
35
|
10.07
|
Form of Exchange Agreement, dated as of February 11, 2013, by and between Energy Telecom Inc. and Robert Kalfayan.
|
|
10.08
|
Form of Securities Purchase Agreement, dated as of March 11, 2013, by and between Energy Telecom Inc. and Normandia Capital.
|
|
31.01
|
Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
31.02
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
32.01
|
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
|
|
101 INS
|
XBRL Instance Document*
|
|
101 SCH
|
XBRL Taxonomy Extension Schema Document*
|
|
101 CAL
|
XBRL Taxonomy Calculation Linkbase Document*
|
|
101 LAB
|
XBRL Taxonomy Labels Linkbase Document*
|
|
101 PRE
|
XBRL Taxonomy Presentation Linkbase Document*
|
|
101 DEF
|
XBRL Taxonomy Extension Definition Linkbase Document*
|
___________
* Users of this data are advised pursuant to Rule 406T of Regulation S-T that this interactive data file is deemed not filed or part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, and otherwise is not subject to liability under these sections.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ENERGY TELECOM, INC.
|
Date: March 22, 2013
|
By: /s/ THOMAS RICKARDS
|
|
Thomas Rickards
|
|
|
Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting 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.
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Name
|
Position
|
Date
|
|
/s/ THOMAS RICKARDS
Thomas Rickards
|
Director
|
March 22, 2013
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37