Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2015
or
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition Period from _________ to _________
Commission file number: 333-167380
ENERGY TELECOM, INC.
(Exact name of registrant as specified in its charter)
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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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(I.R.S. Employer Identification No.)
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3501-B N. Ponce de Leon Blvd., #393
St. Augustine, Florida 32084
(Address of principal executive offices) (zip code)
(904) 819-8995
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes o No x
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
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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). Yes ¨ No x.
As of May 4, 2015, there were 10,879,540 and 600,000 shares of registrant’s class A and B common stock outstanding, respectively.
ENERGY TELECOM, INC.
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PART I – FINANCIAL INFORMATION
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ENERGY TELECOM, INC.
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March 31,
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December 31,
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2015
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2014
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(unaudited)
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ASSETS
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CURRENT ASSETS
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Cash
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$ | 631 | $ | 54,678 | ||||
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Lease deposit
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2,850 | 2,850 | ||||||
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Total current assets
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3,481 | 57,528 | ||||||
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Property and equipment, net
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555 | 804 | ||||||
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Total assets
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$ | 4,036 | $ | 58,332 | ||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES
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Accounts payable and accrued liabilities, including $32,073 and $47,844 related party as of March 31, 2015 and December 31, 2014, respectively
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$ | 88,855 | $ | 60,975 | ||||
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Total current liabilities
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88,855 | 60,975 | ||||||
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Commitments and contingencies
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- | - | ||||||
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STOCKHOLDERS' DEFICIT
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Preferred stock, $0.001 par value; 10,000,000 shares authorized
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Series A Convertible preferred stock, $0.001 par value, 5,790 shares designated, 3,947 shares issued and outstanding
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4 | 4 | ||||||
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Class A common stock, $0.0001 par value, 200,000,000 shares authorized, 10,879,540 shares issued and outstanding as of March 31, 2015 and December 31, 2014
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1,088 | 1,088 | ||||||
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Class B common stock, no par value, 10,000,000 shares authorized, 600,000 shares issued and outstanding
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300,000 | 300,000 | ||||||
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Additional paid in capital
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6,252,740 | 6,214,111 | ||||||
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Accumulated deficit
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(6,638,651 | ) | (6,517,846 | ) | ||||
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Total stockholders' deficit
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(84,819 | ) | (2,643 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 4,036 | $ | 58,332 | ||||
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The accompanying notes are an integral part of these unaudited condensed financial statements
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ENERGY TELECOM, INC.
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(unaudited)
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Three months ended March 31,
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2015
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2014
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OPERATING EXPENSES:
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Selling, general and administrative expenses
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$ | 119,580 | $ | 225,863 | ||||
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Depreciation
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249 | 350 | ||||||
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Total operating expenses:
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119,829 | 226,213 | ||||||
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Loss from operations
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(119,829 | ) | (226,213 | ) | ||||
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OTHER INCOME (EXPENSE):
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Interest income
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3 | 38 | ||||||
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Gain on change in fair value derivative liabilities
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- | 52,071 | ||||||
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Interest expense
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(979 | ) | (1,391 | ) | ||||
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Total other income (expense):
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(976 | ) | 50,718 | |||||
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Net loss before provision for income taxes
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(120,805 | ) | (175,495 | ) | ||||
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PROVISION FOR INCOME TAXES
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Income tax (benefit)
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- | - | ||||||
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NET LOSS
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$ | (120,805 | ) | $ | (175,495 | ) | ||
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Net loss per common share, basic and diluted
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$ | (0.01 | ) | $ | (0.02 | ) | ||
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Weighted average number of common shares outstanding, basic and diluted
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10,879,540 | 9,126,874 | ||||||
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The accompanying notes are an integral part of these unaudited condensed financial statements
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ENERGY TELECOM, INC.
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(unaudited)
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Three months ended March 31,
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2015
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2014
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net loss
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$ | (120,805 | ) | $ | (175,495 | ) | ||
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Adjustments to reconcile net loss to net cash used in operating activities:
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Depreciation expense
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249 | 351 | ||||||
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Common stock issued for services rendered
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- | 17,559 | ||||||
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Common stock issued or issuable for officer compensation
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38,629 | 138,141 | ||||||
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Change in fair value of derivative liability
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- | (52,071 | ) | |||||
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Changes in operating assets and liabilities:
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Prepaid supplies
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- | 238 | ||||||
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Accounts payable and accrued liabilities
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27,880 | 4,391 | ||||||
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Net cash used in operating activities
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(54,047 | ) | (66,886 | ) | ||||
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CASH FLOWS FROM INVESTING ACTIVITIES:
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- | - | ||||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from sale of common stock
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- | 21,000 | ||||||
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Net cash provided by financing activities
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- | 21,000 | ||||||
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Net decrease in cash
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(54,047 | ) | (45,886 | ) | ||||
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Cash beginning of period
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54,678 | 199,603 | ||||||
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Cash end of period
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$ | 631 | $ | 153,717 | ||||
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Supplemental disclosures of cash flow information:
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Interest paid
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$ | 16,750 | $ | - | ||||
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Income taxes paid
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$ | - | $ | - | ||||
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Supplemental disclosures for non-cash investing and financing activities:
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$ | - | $ | - | ||||
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The accompanying notes are an integral part of these unaudited condensed financial statements
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ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2015 and 2014 (unaudited)
Energy Telecom, Inc. (the “Company”) is an intellectual property exploitation Company providing patent protection to its manufacturing business partners so they may manufacture, market, distribute and sell worldwide a family of intelligent eyewear (IE) that is hands-free, has wireless communication and provides quality sound and noise attenuation. 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 OTC Markets under the symbol “ENRG”.
The accompanying unaudited condensed interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim condensed financial information and Rule 8-03 of Regulation S-X. Accordingly, these interim financial statements do not include all of the information and disclosures required by accounting principles generally accepted in the United States of America for complete financial statements.
All adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included in these unaudited interim condensed financial statements. Operating results for the three month period presented are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2014 has been derived from audited financial statements. The unaudited interim condensed financial statements should be read in conjunction with the financial statements and footnotes thereto for the year ended December 31, 2014.
NOTE 2 - GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
As of March 31, 2015, the Company had cash of $631 and working capital deficit of $85.374. During the three months ended March 31, 2015, the Company used net cash in operating activities of $54,047. The Company has not yet generated any significant, on-going revenues, and has incurred net losses since inception. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.
The Company will require additional financing in order to execute its operating plan. The Company cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. The Company may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, the Company may be unable to implement its current plans for expansion or respond to competitive pressures, any of these circumstances would have a material adverse effect on its business, prospects, financial condition and results of operations.
Accordingly, the accompanying financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”), which contemplate continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of assets and liabilities presented in the unaudited condensed financial statements do not necessarily purport to represent realizable or settlement values. The unaudited condensed financial statements do not include any adjustment that might result from the outcome of this uncertainty.
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. 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, 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 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.
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. During the three months ended March 31, 2015 and 2014, the Company did not generate revenue.
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2015 and 2014 (unaudited)
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.
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 consisted of reset provisions related to Series A Convertible Preferred Stock. These embedded derivatives included certain conversion features and reset provisions. During the year ended December 31, 2014, the reset features embedded in the Series A Convertible Preferred Stock expired. At the time of expiry, the fair value of the embedded derivative was nil.
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.
Net Earnings (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 Series A Convertible Preferred Stock and Class B common stock, stock options and warrants (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. 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 three months ended March 31, 2015 and 2014.
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 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.
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2015 and 2014 (unaudited)
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 three months ended March 31, 2015, the Company did not have any assets or liabilities that were required to be valued using level 3 inputs. The carrying amount of the Company's assets and liabilities approximated fair value as of March 31, 2015 and December 31, 2014.
NOTE 5 — DERIVATIVE LIABILITY
The Company identified embedded derivatives related to the Series A Convertible Preferred Stock issued during the years ended December 31, 2013 and 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 issuance date(s) of the Series A Convertible Preferred Stock, the Company determined a fair value in the aggregate of $532,869 for the embedded derivative. The initial fair value of the embedded debt derivative of $532,869 was reclassified from equity to liability at the date of inception.
During the year ended December 31, 2014, the embedded derivatives as described above expired. At the time of expiry, the Company adjusted the derivative to its determined fair value of nil.
At the time of expiry and at March 31, 2014, the Company adjusted the recorded fair value of the derivative liability to market resulting in non-cash, non-operating gains of $52,071 for the three months ended March 31, 2014.
NOTE 6 — STOCKHOLDER NOTES PAYABLE
The Company has received financing from the Company’s founder, Chief Executive Officer and majority stockholder (the “officer/director”). No formal repayment terms or arrangements exist. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand.
The following table summarizes stockholder loans payable as of March 31, 2015 and December 31, 2014:
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March 31,
2015
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December 31,
2014
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Due to officer, non-interest bearing
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$
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2,700
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$
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2,700
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Accrued interest on previous loan payable
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29,373
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45,144
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$
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32,073
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$
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47,844
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The Company recognized interest expense associated with the loans of $979 and $1,391 for the three months ended March 31, 2015 and 2014, respectively.
During the three months ended March 31, 2015, the Company repaid $16,750, comprising repayments of accrued interest.
NOTE 7 — STOCKHOLDERS’ EQUITY
Common stock
Shares due as compensation
During the three months ended March 31, 2015, the Company was obligated to issue 83,334 shares of Class A common stock with a fair value totaling $38,629 obligated under a 2014 employment contract as officer compensation. Accordingly, the fair value of the issuable shares was recorded in current period operations as compensation. See Note 9 - Commitments and Contingencies.
NOTE 8 — RELATED PARTY TRANSACTIONS
The Company has an operating lease agreement for office space with the Company's Chief Executive Officer and director who has agreed to sublet space to the Company for a fixed fee of $2,000 on a month-to-month basis. Total rent expense for the three months ended March 31, 2015 and 2014 was $6,000.
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 bore interest of 10% per annum, compounding annually and were due on demand. As of March 31, 2015, all principal loan amounts have been repaid but the accrued interest remains outstanding.
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2015 and 2014 (unaudited)
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Employment agreement
On March 1, 2014, 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 (the “Cash Salary”) and (ii) 500,000 shares of class A common stock (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 and the Stock Salary issuable in equal installments at the end of each three month period. In addition, Mr. Rickards received 375,000 shares of series A common stock as a signing bonus, which was fully earned upon issuance, and receives a $700 per month car allowance. As of February 28, 2015, the above contract expired. See Note 10 for Separation Agreement.
NOTE 10 — SUBSEQUENT EVENTS
Subsequent financing
On April 28, 2015 (the “Closing Date”), the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Kahuku Ventures LLC (the “Investor”), pursuant to which, the Company sold a $30,000 principal amount convertible note (the “Note”) to the Investor for gross proceeds of $30,000 (the “Financing”).
The Note will mature on the one year anniversary of the Closing Date and will bear interest at the rate of 8% per annum, which will be payable on the maturity date or any redemption date and may be paid, in certain conditions, through the issuance of shares, at the discretion of the Company. Upon an event of default, interest will accrue at 22% per annum.
So long as the Company is not currently in default, the Company may prepay the Note in full by paying off all principal, interest and any other amounts owing multiplied by (i) 115% if prepaid during the period commencing on the Closing Date through 30 days thereafter, (ii) 120% if prepaid between 31 days and 60 days following the Closing Date, (iii) 125% if prepaid between 61 days and 90 days following the Closing Date, (iv) 130% if prepaid between 91 days and 120 days following the Closing Date, (v) 135% if prepaid between 121 days and 150 days following the Closing Date, and (vi) 140% if prepaid between 151 days and 180 days following the Closing Date. After the expiration of 180 days following the Closing Date, the Company has no right of prepayment.
The Note will be convertible, at the Investor’s option starting 180 days after the Closing Date, into shares of the Company’s class A common stock, par value $0.0001 per share (“Common Stock”), at a conversion price equal to 61% of the average of the three lowest closing bid prices of the Common Stock during the 10 trading days prior to the conversion date.
If an event of default under the Notes occurs, the Company will be required to redeem all or any portion of the Note (including all accrued and unpaid interest), in cash, at a price equal to the greater of (i) 150% of the amount owed under the Note, including outstanding principal and accrued interest and (ii) the product of (a) the number of shares of Common Stock issuable upon conversion of the Note, times (b) the highest closing sale price of the Common Stock during the period beginning on the date immediately preceding such event of default and ending on the trading day that the redemption price is paid by the Company.
The convertibility of the Note may be limited if, upon conversion or exercise (as the case may be), the holder thereof or any of its affiliates would beneficially own more than 4.99% of the Common Stock.
Pursuant to the Purchase Agreement, the Company granted the Investor the right (the “Board Right”) to appoint one member to the board of directors of the Company (the “Board”). The Board Right exists so long as the Note is outstanding. Pursuant to the Board Right, the Company appointed Mohit Bhansali (“Bhansali”) to the Board, effective April 28, 2015.
So long as the Note or the existing shares of Series A Convertible Preferred Stock previously issued by the Company (the “Preferred Shares”) are outstanding, the Company is prohibited from (i) increasing the size of the Board to more than two members, (ii) redeeming, repaying, retiring, canceling or amending the Preferred Stock, (iii) redeeming, repaying, retiring, canceling or amending the Common Stock or class B common stock, (iv) approving the assignment, transfer, conveyance or conversion of any shares of Common Stock or class B common stock owned by Thomas Rickards, the Company’s chief executive officer or (v) issuing any shares of capital stock or any securities convertible in shares of capital stock.
In addition, if the Company enters into a change of control transaction (as defined in the Purchase Agreement) within one year from the Closing Date, the Investor has the right, exercisable for 30 days after the completion of the change in control transaction, to acquire all of the patents and patent applications of the Company immediately prior to the change in control transaction for $25,000 and the granting of a 1% net proceeds interest to the Company from the acquired patents and patent applications.
ENERGY TELECOM, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
MARCH 31, 2015 and 2014 (unaudited)
Appointment of Mohit Bhansali
On April 28, 2015, immediately upon closing of the Financing, the Company increased the size of the Board to two members and appointed Bhansali to the Board, fulfilling the Board Right granted to the Investor, as discussed above. In addition, effective April 28, 2015, the Board appointed Bhansali as the Company’s president, on a part-time, consulting basis.
On April 28, 2015, the Company and Bhansali entered into a one year consulting agreement, pursuant to which Bhansali agreed to serve as the Company’s president for consulting fees of $5,000 per month. The Company may terminate the consulting agreement upon 30 days prior written notice. If the Company terminates the consulting agreement prior to the end of the consulting period, the Company will be required to pay Bhansali, on the termination date, the consulting fee that would have been owed him through the end of the consulting period.
Separation Agreement with Thomas Rickards
On April 28, 2015, the Company entered into a resignation, separation and release agreement (the “Separation Agreement”) with Mr. Rickards, the Company’s chief executive officer and director. Pursuant to the Separation Agreement, Mr. Rickards will resign, effective the later of (i) May 31, 2015 or (ii) two business days after the Company’s quarterly report on Form 10-Q, for the fiscal quarter ended March 31, 2015 has been filed with the Securities and Exchange Commission, or such other date mutually agreed upon between the Company and Mr. Rickards, as the Chief Executive Officer of the Company.
Pursuant to the Separation Agreement, the Company issued Mr. Rickards a promissory note (the “Rickards Note”) in the amount of $225,000, which is due and payable 45 days from issuance, subject to certain additional conditions as more fully set forth in the Separation Agreement. On the date that the Rickards Note is repaid, Mr. Rickards will resign from the Board.
Repayment of Affiliate Debt
On April 28, 2015, the Company repaid $10,000 of accrued interest on an outstanding loan from Mr. Rickards, the Company’s Chief Executive Officer.
This Management's Discussion and Analysis of Financial Condition and Results of Operations includes a number of forward-looking statements that reflect Management's current views with respect to future events and financial performance. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. Those statements include statements regarding the intent, belief or current expectations of us and members of our management team as well as the assumptions on which such statements are based. Prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance and involve risk and uncertainties, and that actual results may differ materially from those contemplated by such forward-looking statements.
Readers are urged to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission. Important factors currently known to Management could cause actual results to differ materially from those in forward-looking statements. We undertake no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes in the future operating results over time. We believe that our assumptions are based upon reasonable data derived from and known about our business and operations. No assurances are made that actual results of operations or the results of our future activities will not differ materially from our assumptions. Factors that could cause differences include, but are not limited to, expected market demand for our products, fluctuations in pricing for materials, and competition.
Overview
We were incorporated on September 7, 1993 under the laws of the State of Florida as The Energy Corp. On April 24, 2004, we changed our name to Energy Telecom, Inc.
Our mission is to monetize our global utility patent portfolio with claims covering nearly all features of Intelligent Eyewear (IE) in the pipeline from major technology providers, including Google, Microsoft, Samsung and Sony. We have had preliminary discussions with, and continue to seek out, intellectual property (IP) management/exploitation firms and investment groups that are interested in discussing transactions that can exploit our IP to achieve maximum shareholder value.
We consider our IP in three tiers, with each tier building upon the successful claims in the prior tier, as follows:
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Tier
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Description
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I
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Hearing Protection and Communication Eyewear.
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II
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Communication Eyewear with Advanced Audio Control and Option for Wireless Earpieces.
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III
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Awareness, Connectivity, and Safety Eyewear Providing Advanced Biometric and Situational Awareness to Impart Knowledge and Entertainment to the Wearer.
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Our IP is owned outright by Energy Telecom and is not encumbered by royalties, licenses or liens.
The Problem
Modern society has developed so that people require constant access to the world of information they require, especially when mobile. The problem is those mobile users must still hold their information source to their ears with their hands, or use messy earplugs and cords, and then only to receive audio information. The current crude methods of people receiving information into their ears and eyes date back hundreds of years. Additionally, information users require a rapidly increasing awareness of the conditions around them, and their locational status, as do others far from the users.
Solution
All of our issued and pending patents are utility patents and provide superior protection against possible infringement. Our Tier I and Tier II IP covers delivery of sound, communication and intelligence through the ear canal. Our Tier III issued and pending patents cover the delivery of a wide range of information, which can include environmental data, locational and situational status of the user, locational data of potentially hazardous objects near the user, as well as biometric data. IE protected by our patents also includes delivery of entertainment, and the exchange of optical and audio information to and from the wearer through optical display and audio means, including high-fidelity stereo music.
In connection with our Tier I and Tier II IP and as part of a pilot program to introduce on a wide-scale global basis the idea of IE, we independently developed the world's first hands-free two-way, sound attenuating wireless telecommunication eyewear. This professional eyewear is currently being licensed and distributed by Honeywell International, and has been available since 2012. The eyewear is designed for use on a recreational and professional basis. Our recreational eyewear (currently licensed and distributed by Blaupunkt Personal Audio) is equipped with wireless two-way Bluetooth voice communication capable of streaming high-fidelity stereo music from any Bluetooth enabled device. It contains built-in dual microphones to cancel out background noise and noise-isolating ear plugs. Our professional model is similar to the recreational model, but contains additional safety features and is intended to be marketed to the Personal Protective Equipment (PPE) markets for use by police, fire, rescue, military and security personnel as well as companies in bio-hazardous, mining, construction and heavy manufacturing.
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Honeywell International Inc., acting through its Honeywell Safety Products business unit, has been selling our communication eyewear, primarily in the PPE markets, under its branded ‘ICOM’ name in Europe and UVEX branded ‘AcccoustiMaxx’ in the United States.
In January 2014, Blaupunkt Personal Audio, LLC introduced a version of the eyewear optimized for consumer mobile entertainment and voice communications. The eyewear is being sold worldwide under the ‘Blaupunkt’ brand.
Eyewear sold under our Tier I and Tier II IP allowed us to prove our concept, take the product to market and engage in significant product testing and refinement. It should be noted that our IP is not limited to glasses or eyewear, but includes any type of lens of any type of see-through material in front of the wearer’s face, including goggles, shields and masks.
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However, with the issuance of the first utility patent for our Tier III IP in June 2014, and filing of our immediate continuation-in-part (CIP) patent application that enlarges the scope of IE covered by our claims, we began focusing on maximizing the opportunities this patent provides for the newly emerging IE market. We believe there is significant value therein and intend to monetize our IP.
Our Advantage
Our patents are “first rung” utility patents that cover eyewear of any kind with primary first claims describing “len(s), delivering of “sound to the ear” through the only viable method –to the ear canal-, “communication”, and now intelligence, i.e. the wearers condition and orientation, movements, the environment around the eyewear user, and, the ability to exchange the information bi-laterally with remote sources.
It should be noted that while many other possible competitors file patent applications describing and showing IE with in-ear delivery, they concentrate on an entire world of potential optical delivery, but do not include that delivery of in-ear audio in their claims. This issue has been overlooked by others to their detriment. Energy Telecom did not overlook this critical factor in its Tier II and III utility patents.
As a result, we believe that our IP will cover almost all conceivable intelligence being gathered and presented to the wearer, and to other people/systems on a remote basis.
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Competition
The IE market is quickly developing, and major technology companies are in various stages of producing products. While Google recently discontinued its early edition Google Glasstm, it is being redesigned and is expected to be re-launched, possibly as early as 2015; in addition, Microsoft, Samsung and Sony have announced IE products that are expected to be available in the near future. Other large companies are expanding into the larger wearable technology market.
There are also many start-ups and emerging companies that are attempting to combine the value of Intelligent Eyewear with other markets. For example, DAQRI has announced plans to merge IE with the PPE market with its Smart Helmet. This market segment, while new, is rapidly expanding as the PPE markets demand more intelligence, protection, and communication at work.
We have, through our IP counsel, put potential competitors on notice as to our intellectual property rights and made clear that we will enforce our rights against any infringing products. We and our IP counsel monitor the markets for Intelligent Eyewear that might possibly infringe on the Company’s IP, and enforce our rights accordingly. We have previously stopped companies from selling possibly infringing foreign-made communication eyewear. Previously, Google contacted us about helping with a PPE model of their Google Glass, which we declined to do.
Potential Markets
Sight and Hearing Impaired
One particular market channel, out of many wearable technology markets covered by our patents, that we believe our Tier III IP can have a significant impact on is those who are sight or hearing impaired. We believe that our IE eyewear, alone or with applications from third parties, will have the ability to do the following:
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Read text of lectures or of ongoing conversations in a room without needing to have visual line of site;
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Speech to text processes;
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Real-time translation of foreign languages being spoken, with the earplugs blocking out the foreign language;
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Processors to alert to alarm noises, honking horns and the safety related volume, urgency, proximity and vector information can be sent to audio, vibratory, and/or visual inputs;
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Vibration devices in the eyewear can signal to blind people obstacle locations – left, right, front;
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IE at the side of the neck to have Braille words “imprinted” (by shifting mechanical or air-puff devices) and “read” against their skin; and
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A cell phone attachment to have a braille reader screen for text messages.
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Medical industry
Hospital/Doctor’s offices:
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Display of medical records through video or static display;
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Internet access to records and diagnosing aids;
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Determine presence of harmful radiation or gases, and notify wearer though sound or visual aids;
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Report unsafe conditions around the wearer to remote supervisory and/or monitoring locations;
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Determine condition and state of the wearer (prone for too long, as just one example) and reporting to remote locations, for assistance;
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Use in venues requiring ‘splash’ protection for the eyes;
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Maintain constant contact with supervisors and peers; and
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Display of important text messages.
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Dentistry (UVEX PPE eyewear already used in Dentist’s offices today):
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Dentist or technician can speak to the patient through the eyewear;
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Patients watch live video of procedure;
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Patients watch instructive videos or movies during lengthy procedures;
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Use by patients during cleaning and other work, to protect eyes; and
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Patients listen to soothing music.
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High Fidelity Stereo Music in Conjunction with Outdoors Activities
The Blaupunkt high-fidelity sound model currently available for sale already is able to deliver concert-hall quality through advanced audio drivers, more expensive disposable ear plugs, advanced noise suppression, and proprietary audio control software program.
Outdoors recreation, including:
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Biking;
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Jogging;
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Hiking;
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Beach use;
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Hunting;
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Skiing;
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Maintaining contact with others through display of text or video messaging;
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While in use in any of the above, receiving weather updates, and monitoring body output (heart, pulse, etc.) during use; and
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Determining condition and state of the wearer (prone for too long, as just one example) and reporting to remote locations, for assistance.
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Casual use, including:
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Outdoor casual ‘hanging out’ alone or with friends;
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Watching short videos; and
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Watching movies while outdoors.
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Recent Transactions
Financing
On April 28, 2015 (the “Closing Date”), we entered into a securities purchase agreement (the “Purchase Agreement”) with Kahuku Ventures LLC (the “Investor”), pursuant to which, we sold a $30,000 principal amount convertible note (the “Note”) to the Investor for gross proceeds of $30,000 (the “Financing”).
The Note will mature on the one year anniversary of the Closing Date and will bear interest at the rate of 8% per annum, which will be payable on the maturity date or any redemption date and may be paid, in certain conditions, through the issuance of shares, at our discretion. Upon an event of default, interest will accrue at 22% per annum.
So long as we are not currently in default, we may prepay the Note in full by paying off all principal, interest and any other amounts owing multiplied by (i) 115% if prepaid during the period commencing on the Closing Date through 30 days thereafter, (ii) 120% if prepaid between 31 days and 60 days following the Closing Date, (iii) 125% if prepaid between 61 days and 90 days following the Closing Date, (iv) 130% if prepaid between 91 days and 120 days following the Closing Date, (v) 135% if prepaid between 121 days and 150 days following the Closing Date, and (vi) 140% if prepaid between 151 days and 180 days following the Closing Date. After the expiration of 180 days following the Closing Date, we have no right of prepayment.
The Note will be convertible, at the Investor’s option starting 180 days after the Closing Date, into shares of our class A common stock at a conversion price equal to 61% of the average of the three lowest closing bid prices of the common stock during the 10 trading days prior to the conversion date.
If an event of default under the Notes occurs, we will be required to redeem all or any portion of the Note (including all accrued and unpaid interest), in cash, at a price equal to the greater of (i) 150% of the amount owed under the Note, including outstanding principal and accrued interest and (ii) the product of (a) the number of shares of common stock issuable upon conversion of the Note, times (b) the highest closing sale price of the common stock during the period beginning on the date immediately preceding such event of default and ending on the trading day that we pay the redemption price.
Pursuant to the Purchase Agreement, we granted the Investor the right (the “Board Right”) to appoint one member to our board of directors (the “Board”). The Board Right exists so long as the Note is outstanding. Pursuant to the Board Right, we appointed Mohit Bhansali (“Bhansali”) to the Board, effective April 28, 2015.
So long as the Note or the existing shares of Series A Convertible Preferred Stock we previously issued (the “Preferred Shares”) are outstanding, we are prohibited from (i) increasing the size of the Board to more than two members, (ii) redeeming, repaying, retiring, canceling or amending the Preferred Stock, (iii) redeeming, repaying, retiring, canceling or amending the class A or class B common stock, (iv) approving the assignment, transfer, conveyance or conversion of any shares of class A or class B common stock owned by Thomas Rickards, our chief executive officer or (v) issuing any shares of capital stock or any securities convertible in shares of capital stock.
In addition, if we enter into a change of control transaction (as defined in the Purchase Agreement) within one year from the Closing Date, the Investor has the right, exercisable for 30 days after the completion of the change in control transaction, to acquire all of our patents and patent applications immediately prior to the change in control transaction for $25,000 and the granting of a 1% net proceeds interest to us from the acquired patents and patent applications.
Appointment of Mohit Bhansali
On April 28, 2015, immediately upon closing of the Financing, we increased the size of the Board to two members and appointed Bhansali to the Board, fulfilling the Board Right granted to the Investor, as discussed above. In addition, effective April 28, 2015, the Board appointed Bhansali as our president, on a part-time, consulting basis.
On April 28, 2015, we and Bhansali entered into a one year consulting agreement, pursuant to which Bhansali agreed to serve as our president for consulting fees of $5,000 per month. We may terminate the consulting agreement upon 30 days prior written notice. If we terminate the consulting agreement prior to the end of the consulting period, we will be required to pay Bhansali, on the termination date, the consulting fee that would have been owed him through the end of the consulting period.
Separation Agreement with Thomas Rickards
On April 28, 2015, we entered into a resignation, separation and release agreement (the “Separation Agreement”) with Mr. Rickards, our chief executive officer and director. Pursuant to the Separation Agreement, Mr. Rickards will resign, effective the later of (i) May 31, 2015 or (ii) two business days after our quarterly report on Form 10-Q, for the fiscal quarter ended March 31, 2015 has been filed with the Securities and Exchange Commission, or such other date mutually agreed upon between us and Mr. Rickards, as our Chief Executive Officer.
Pursuant to the Separation Agreement, we issued Mr. Rickards a promissory note (the “Rickards Note”) in the amount of $225,000, which is due and payable 45 days from issuance, subject to certain additional conditions as more fully set forth in the Separation Agreement. On the date that the Rickards Note is repaid, Mr. Rickards will resign from the Board.
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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The Company is undertaking an initiative to seek to maximize and monetize the value of its intellectual property assets through a possible sale or license of its patent portfolio;
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We have multiple patent applications pending in the United States and with the European Patent Office, and our 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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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 unaudited condensed 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.
Three months ended March 31, 2015 compared to the three months ended March 31, 2014
Revenue, Cost of Sales and Gross Profit
During the three months ended March 31, 2015 and 2014, we did not generate revenue.
Operating Expenses
For the three months ended March 31, 2015 and 2014, general and administrative expenses totaled $119,580 and $225,863, respectively, representing a period to period decrease of $106,283. The primary decrease in our general and administrative expenses was stock-based compensation expense (non-cash) of $38,629 for the three months ended March 31, 2015 compared to $138,141 for the three months ended March 31, 2014, a decrease of $99,512 due to reduction in consultant and employee stock based compensation paid.
In addition, included in general and administrative expenses for the three months ended March 31, 2015 and 2014 were professional fees totaling $49,710 and $32,050, respectively. Of the professional fees, accounting fees increased to $28,130 for the three months ended March 31, 2015 from $8,000 for the three months ended March 31, 2014 primarily, due to the timing of completion of the year end audit. Legal fees increased by $16,048 to $20,930 for the three months ended March 31, 2015 from $4,882 from the three months ended March 31, 2014 due to additional strategic services provided, and other consulting fees decreased to $650 for the three months ended March 31, 2015 as compared to $19,168 for the same period last year due to reduction of consulting services required. We also incurred patent maintenance, non-recurring engineering costs and prototype development costs in aggregate of $13,395 for the three months ended March 31, 2015 as compared to $28,514 for the same period in 2014.
Other Income and Expenses
Previously, 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 three months ended March 31, 2014, we recorded a gain on change in the fair value of these derivative liabilities of $52,071, compared to $-0- for the current period. As of March 31, 2014, all anti-dilutive provisions had expired.
We incurred interest expense of $979 and $1,391 for the three months ended March 31, 2015 and 2014, respectively. The decrease is due to reductions in related party debt obligations resulting in lower incurred interest.
Interest income was $3 and $38 for the three months ended March 31, 2015 and 2014, respectively. The change in interest income is a result of lower carrying balances in our interest bearing accounts.
Net Income (Loss)
For the three months ended March 31, 2015, we had net loss of $(120,805) (($0.01) per share of common stock) as a result of the foregoing, compared to a net loss of ($175,495) (($0.02) per share of common stock) for the three month ended March 31, 2014.
Liquidity and Capital Resources
As of March 31, 2015, we had working capital deficit of $85,374. For the three months ended March 31, 2015, we used $54,047 in cash in operating activities and $nil in investing or financing activities.
We expect capital expenditures during the next 12 months for marketing, advertising, inventory, equipment and overhead. We do not have sufficient capital resources to meet our projected cash flow requirements in order to conduct our proposed operations. Therefore, we will require additional financing in order to execute our operating plan. We cannot predict whether this additional financing will be in the form of equity or debt, or be in another form. We may not be able to obtain the necessary additional capital on a timely basis, on acceptable terms, or at all. In any of these events, we may be unable to implement our current plans for expansion or respond to competitive pressures, any of these circumstances would have a material adverse effect on our business, prospects, financial condition and results of operations.
As of March 31, 2015, we had working capital deficit of approximately $85,374. We currently use about $18,000 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 decrease over the next twelve months as we expend less money on prototype development. In addition, $32,073 of our current liabilities of $88,855 represents accrued interest due to our founder and Chief Executive Officer, Thomas Rickards.
Going Concern Consideration
As of March 31, 2015, we had cash of $631 and working capital deficit of $85.374. During the three months ended March 31, 2015, we used net cash in operating activities of $54,047. We have not yet generated any significant, on-going revenues, and have incurred net losses since inception. These conditions raise substantial doubt about our ability to continue as a going concern.
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our historical operating losses, our operations have not been a source of liquidity. We may seek additional capital in order to develop operations and become profitable. In order to obtain capital, we may need to sell additional shares of common or preferred stock or borrow funds from private lenders pursuant to instruments which are junior to our outstanding secured debt instruments. There can be no assurance that we will be successful in obtaining additional funding.
Loans Payable to Related Party
From time to time, we have received financing from Thomas Rickards, our Chief Executive Officer and sole Director. The stockholder loans bear interest of 10% per annum, compounding annually and are due on demand.
The following table summarizes stockholder loans payable as of March 31, 2015 and December 31, 2014:
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March 31,
2015
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December 31,
2014
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Due to officer, non-interest bearing
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$
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2,700
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$
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2,700
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Accrued interest on previous loan payable
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29,373
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45,144
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$
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32,073
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$
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47,844
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During the three months ended March 31, 2015, we repaid $16,750 of accrued interest.
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:
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 were no unrecognized tax benefits at March 31, 2015 and December 31, 2014. Our policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. There were 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 Series A Convertible Preferred Stock and Class B common stock, stock options and warrants (using the “treasury stock” method), unless their effect on net loss per share is anti-dilutive. 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 three months ended March 31, 2015.
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 consisted of reset provisions related to Series A convertible preferred stock. These embedded derivatives included certain conversion features and reset provisions. As of March 31, 2014, these embedded derivatives expired.
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 have a material impact on our 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.
Not required under Regulation S-K for “smaller reporting companies.”
a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 under the Securities Exchange Act of 1934 as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as a result of the material weaknesses described below, as of March 31, 2015, 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:
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a)
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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
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b)
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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.
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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 consultant, additional personnel will also ensure the proper segregation of duties and provide more checks and balances within the department. Additional personnel will also provide the cross training needed to support us if personnel turnover issues within the department occur. We believe this will greatly decrease any control and procedure issues we may encounter in the future.
We will continue to monitor and evaluate the effectiveness of our disclosure controls and procedures and our internal controls over financial reporting on an ongoing basis and are committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
(b) Changes in internal control over financial reporting.
There were no changes in our internal control over financial reporting that occurred during the quarter ended March 31, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
We are currently not a party to any material legal proceedings or claims.
Not required under Regulation S-K for “smaller reporting companies.”
None.
None.
None.
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31.01
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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.
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31.02
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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.
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32.01
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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.
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101 INS
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XBRL Instance Document
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101 SCH
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XBRL Taxonomy Extension Schema Document
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101 CAL
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XBRL Taxonomy Calculation Linkbase Document
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101 LAB
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XBRL Taxonomy Labels Linkbase Document
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101 PRE
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XBRL Taxonomy Presentation Linkbase Document
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101 DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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ENERGY TELECOM, INC.
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Date: May 8, 2015
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By:
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/s/ THOMAS RICKARDS
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Thomas Rickards
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Chief Executive Officer (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer)
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